Company Quick10K Filing
Norwood Financial
Price31.28 EPS2
Shares6 P/E19
MCap197 P/FCF13
Net Debt15 EBIT20
TEV213 TEV/EBIT11
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-08
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8-K 2020-07-22 Earnings, Exhibits
8-K 2020-07-07 M&A, Officers, Other Events, Exhibits
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8-K 2018-01-16

NWFL 10Q Quarterly Report

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 d927014dex3.htm
EX-31.1 d927014dex311.htm
EX-31.2 d927014dex312.htm
EX-32 d927014dex32.htm

Norwood Financial Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
1.31.00.80.50.30.02012201420172020
Assets, Equity
0.10.10.10.00.00.02018201820192020
Rev, G Profit, Net Income
0.10.10.0-0.0-0.1-0.12012201420172020
Ops, Inv, Fin

10-Q 1 d927014d10q.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, 2020

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 0-28364

 

 

Norwood Financial Corp.

(Exact name of registrant as specified in its charter)

 

 

 

Pennsylvania   23-2828306

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. employer

identification no.)

717 Main Street, Honesdale, Pennsylvania   18431
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (570) 253-1455

N/A

Former name, former address and former fiscal year, if changed since last report.

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

symbol(s)

 

Name of each exchange

on which registered

Common Stock, par value $0.10 per share   NWFL   The Nasdaq Stock Market LLC

Indicate by check (x) whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    ☐  Yes    ☒  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding as of May 1, 2020

Common stock, par value $0.10 per share   6,328,790

 

 

 


Table of Contents

NORWOOD FINANCIAL CORP.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2020

 

        

Page

Number

 

PART I -

 

CONSOLIDATED FINANCIAL INFORMATION OF NORWOOD FINANCIAL CORP.

  

Item 1.

 

Financial Statements (unaudited)

     3  

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     33  

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     44  

Item 4.

 

Controls and Procedures

     45  

PART II -

 

OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     45  

Item 1A.

 

Risk Factors

     46  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     46  

Item 3.

 

Defaults Upon Senior Securities

     47  

Item 4.

 

Mine Safety Disclosures

     47  

Item 5.

 

Other Information

     47  

Item 6.

 

Exhibits

     47  

Signatures

       49  

 

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,     December 31,  
             2020                     2019          

ASSETS

    

Cash and due from banks

   $ 14,712     $ 15,038  

Interest-bearing deposits with banks

     23,706       377  
  

 

 

   

 

 

 

Cash and cash equivalents

     38,418       15,415  

Securities available for sale, at fair value

     196,998       210,205  

Loans receivable

     928,565       924,581  

Less: Allowance for loan losses

     9,088       8,509  
  

 

 

   

 

 

 

Net loans receivable

     919,477       916,072  

Regulatory stock, at cost

     3,770       4,844  

Bank premises and equipment, net

     14,071       14,228  

Bank owned life insurance

     38,971       38,763  

Accrued interest receivable

     3,669       3,719  

Foreclosed real estate owned

     1,077       1,556  

Goodwill

     11,331       11,331  

Other intangibles

     212       235  

Other assets

     14,297       14,242  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 1,242,291     $ 1,230,610  
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Non-interest bearing demand

   $ 213,359     $ 207,299  

Interest-bearing

     776,801       750,230  
  

 

 

   

 

 

 

Total deposits

     990,160       957,529  

Short-term borrowings

     40,656       62,256  

Other borrowings

     51,350       56,438  

Accrued interest payable

     2,895       2,432  

Other liabilities

     15,043       14,527  
  

 

 

   

 

 

 

TOTAL LIABILITIES

     1,100,104       1,093,182  
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

Preferred stock, no par value per share, authorized: 5,000,000 shares; issued: none

     —         —    

Common stock, $0.10 par value per share, authorized: 20,000,000 shares, issued: 2020: 6,342,568 shares, 2019: 6,340,563 shares

     634       634  

Surplus

     49,644       49,471  

Retained earnings

     88,032       86,536  

Treasury stock at cost: 2020 and 2019: 12,007 shares

     (400     (400

Accumulated other comprehensive income

     4,277       1,187  
  

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     142,187       137,428  
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 1,242,291     $ 1,230,610  
  

 

 

   

 

 

 

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,  
             2020                      2019          

INTEREST INCOME

     

Loans receivable, including fees

   $ 10,683      $ 9,970  

Securities

     1,179        1,441  

Other

     6        15  
  

 

 

    

 

 

 

Total interest income

     11,868        11,426  
  

 

 

    

 

 

 

INTEREST EXPENSE

     

Deposits

     1,790        1,729  

Short-term borrowings

     111        123  

Other borrowings

     302        303  
  

 

 

    

 

 

 

Total interest expense

     2,203        2,155  
  

 

 

    

 

 

 

NET INTEREST INCOME

     9,665        9,271  

PROVISION FOR LOAN LOSSES

     700        450  
  

 

 

    

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     8,965        8,821  
  

 

 

    

 

 

 

OTHER INCOME

     

Service charges and fees

     1,063        1,031  

Income from fiduciary activities

     153        142  

Net realized gains on sales of securities

     38        —    

Gain on sale of loans, net

     56        42  

Earnings and proceeds on bank owned life insurance

     208        202  

Other

     136        143  
  

 

 

    

 

 

 

Total other income

     1,654        1,560  
  

 

 

    

 

 

 

OTHER EXPENSES

     

Salaries and employee benefits

     3,777        3,649  

Occupancy, furniture & equipment, net

     968        924  

Data processing and related operations

     437        448  

Taxes, other than income

     214        161  

Professional fees

     218        250  

Federal Deposit Insurance Corporation insurance

     —          71  

Foreclosed real estate

     16        23  

Amortization of intangibles

     23        29  

Other

     1,406        1,093  
  

 

 

    

 

 

 

Total other expenses

     7,059        6,648  
  

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     3,560        3,733  

INCOME TAX EXPENSE

     481        543  
  

 

 

    

 

 

 

NET INCOME

   $ 3,079      $ 3,190  
  

 

 

    

 

 

 

BASIC EARNINGS PER SHARE

   $ 0.49      $ 0.51  
  

 

 

    

 

 

 

DILUTED EARNINGS PER SHARE

   $ 0.49      $ 0.51  
  

 

 

    

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

4


Table of Contents

NORWOOD FINANCIAL CORP.

Consolidated Statements of Comprehensive Income (unaudited)

(dollars in thousands)

 

     Three Months Ended  
     March 31,  
             2020                     2019          

Net income

   $ 3,079     $ 3,190  
  

 

 

   

 

 

 

Other comprehensive income:

    

Investment securities available for sale:

    

Unrealized holding gain

     3,949       3,725  

Tax effect

     (829     (782

Reclassification of investment securities gains recognized in net income

     (38     —    

Tax effect

     8       —    
  

 

 

   

 

 

 

Other comprehensive income

     3,090       2,943  
  

 

 

   

 

 

 

Comprehensive Income

   $ 6,169     $ 6,133  
  

 

 

   

 

 

 

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, 2020 and 2019

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

 

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

Balance, December 31, 2019

     6,340,563      $ 634    $ 49,471    $ 86,536     12,007      $ (400   $ 1,187    $ 137,428

Net Income

     —          —          —          3,079     —          —         —          3,079

Other comprehensive income

     —          —          —          —         —          —         3,090      3,090

Cash dividends declared ($0.25 per share)

     —          —          —          (1,583     —          —         —          (1,583

Compensation expense related to restricted stock

     —          —          84      —         —          —         —          84

Stock options exercised

     2,005      —          38      —         —          —         —          38

Compensation expense related to stock options

     —          —          51      —         —          —         —          51
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Balance, March 31, 2020

     6,342,568      $ 634      $ 49,644      $ 88,032       12,007      $ (400   $ 4,277      $ 142,187  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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

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 loss

     —          —          —          —         —          —         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  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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,  
     2020     2019  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net Income

   $ 3,079     $ 3,190  

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

    

Provision for loan losses

     700       450  

Depreciation

     281       241  

Amortization of intangible assets

     23       29  

Deferred income taxes

     (250     (40

Net amortization of securities premiums and discounts

     320       371  

Net realized gain on sales of securities

     (38     —    

Earnings and proceeds on life insurance policies

     (208     (202

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

     (3     (8

Net gain on sale of loans

     (56     (42

Loans originated for sale

     (1,535     (732

Proceeds from sale of loans originated for sale

     1,545       758  

Compensation expense related to stock options

     51       52  

Compensation expense related to restricted stock

     84       72  

Decrease (increase) in accrued interest receivable

     50       (313

Increase in accrued interest payable

     463       651  

Other, net

     38       (201
  

 

 

   

 

 

 

Net cash provided by operating activities

     4,544       4,276  
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Securities available for sale:

    

Proceeds from sales

     8,224       327  

Proceeds from maturities and principal reductions on mortgage-backed securities

     15,646       5,684  

Purchases

     (7,034     —    

Purchase of regulatory stock

     (1,305     (1,112

Redemption of regulatory stock

     2,379       1,906  

Net increase in loans

     (4,208     (15,352

Purchase of premises and equipment

     (124     (560

Proceeds from sales of foreclosed real estate owned

     482       44  
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     14,060       (9,063
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net increase in deposits

     32,631       27,635  

Net decrease in short-term borrowings

     (21,600     (15,222

Repayments of other borrowings

     (5,088     (4,329

Stock options exercised

     38       113  

Purchase of treasury stock

     —         (374

Cash dividends paid

     (1,582     (1,510
  

 

 

   

 

 

 

Net cash provided by financing activities

     4,399       6,313  
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     23,003       1,526  

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     15,415       18,348  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 38,418     $ 19,874  
  

 

 

   

 

 

 

 

7


Table of Contents

NORWOOD FINANCIAL CORP.

Consolidated Statements of Cash Flows (Unaudited) (continued)

(dollars in thousands)

 

     Three Months Ended March 31,  
     2020      2019  

Supplemental Disclosures of Cash Flow Information

     

Cash payments for:

     

Interest on deposits and borrowings

   $ 1,740      $ 1,504  

Income taxes paid, net of refunds

   $ 53      $ 46  

Supplemental Schedule of Noncash Investing Activities:

     

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

   $ 99      $ 822  

Dividends payable

   $ 1,583      $ 1,509  

Right of use for operating leases

   $ —        $ 5,335  

Lease liability for operating leases

   $ —        $ 5,335  

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 accounts and 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, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 or any other future interim period.

 

2.

Revenue Recognition

Under ASC Topic 606, management determined that the primary sources of revenue emanating from interest and dividend income on loans and investments along with noninterest revenue resulting from investment security gains, loan servicing, gains on the sale of loans sold and earnings on bank-owned life insurance are not within the scope of this Topic.

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:

 

     Three months ended  
     March 31,  
(dollars in thousands)            2020                      2019          

Noninterest Income

     

In-scope of Topic 606:

     

Service charges on deposit accounts

   $ 96      $ 67  

ATM fees

     95        90  

Overdraft fees

     344        351  

Safe deposit box rental

     29        26  

Loan related service fees

     100        129  

Debit card fees

     344        326  

Fiduciary activities

     153        142  

Commissions on mutual funds and annuities

     38        55  

Other income

     132        115  
  

 

 

    

 

 

 

Noninterest Income (in-scope of Topic 606)

     1,331        1,301  
  

 

 

    

 

 

 

Out-of-scope of Topic 606:

     

Net realized gains on sales of securities

     38        —    

Loan servicing fees

     21        15  

Gains on sales of loans

     56        42  

Earnings on and proceeds from bank-owned life insurance

     208        202  
  

 

 

    

 

 

 

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

     323        259  
  

 

 

    

 

 

 

Total Noninterest Income

   $ 1,654      $ 1,560  
  

 

 

    

 

 

 

 

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3.

Earnings Per Share

Basic earnings per share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and restricted stock, and are determined using the treasury stock method.

The following table sets forth the weighted average shares outstanding used in the computations of basic and diluted earnings per share.

 

     Three Months Ended  
     March 31,  
(in thousands)    2020      2019  

Weighted average shares outstanding

     6,330        6,293  

Less: Unvested restricted shares

     (36      (34
  

 

 

    

 

 

 

Basic EPS weighted average shares outstanding

     6,294        6,259  
  

 

 

    

 

 

 

Basic EPS weighted average shares outstanding

     6,294        6,259  

Add: Dilutive effect of stock options and restricted shares

     29        50  
  

 

 

    

 

 

 

Diluted EPS weighted average shares outstanding

     6,323        6,309  
  

 

 

    

 

 

 

For the three month period ended March 31, 2020, there were 82,600 stock options that were anti-dilutive and thereby excluded from the earnings per share calculations based upon the closing price of Norwood common stock of $26.70 per share as of March 31, 2020.

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.

 

4.

Stock-Based Compensation

No awards were granted during the three-month period ended March 31, 2020. As of March 31, 2020, there was $153,000 of total unrecognized compensation cost related to non-vested options granted in 2019 under the 2014 Equity Incentive Plan, which will be fully amortized by December 31, 2020. Compensation costs related to stock options amounted to $51,000 and $52,000 during the three-month periods ended March 31, 2020 and 2019, respectively.

A summary of the Company’s stock option activity for the three-month period ended March 31, 2020 is as follows:

 

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

Outstanding at January 1, 2020

     199,825      $ 24.78        5.9 Yrs.      $ 2,822  

Granted

     —          —          —          —    

Exercised

     (2,005      19.25        5.8 Yrs.        33  

Forfeited

     —          —             —    
  

 

 

          

Outstanding at March 31, 2020

     197,820      $ 24.83        5.7 Yrs.      $ 370  
  

 

 

          

Exercisable at March 31, 2020

     171,070      $ 23.08        5.0 Yrs.      $ 620  
  

 

 

          

 

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Intrinsic value represents the amount by which the market price of the stock on the measurement date exceeded the exercise price of the option. The market price was $26.70 per share as of March 31, 2020 and $38.90 per share as of December 31, 2019.

A summary of the Company’s restricted stock activity for the three-month periods ended March 31, 2020 and 2019 is as follows:

 

     2020      2019  
            Weighted-Average             Weighted-Average  
     Number of      Grant Date      Number of      Grant Date  
     Restricted Stock      Fair Value      Restricted Stock      Fair Value  

Non-vested, January 1,

     36,195      $ 36.23        34,615      $ 27.82  

Granted

     —          —          —          —    

Vested

     —          —          —          —    

Forfeited

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-vested, March 30,

     36,195      $ 36.23        34,615      $ 27.82  
  

 

 

    

 

 

    

 

 

    

 

 

 

The expected future compensation expense relating to the 36,195 shares of non-vested restricted stock outstanding as of March 31, 2020 is $1,062,000. This cost will be recognized over the remaining vesting period of 4.75 years. Compensation costs related to restricted stock amounted to $84,000 and $72,000 during the three-month periods ended March 31, 2020 and 2019, respectively.

 

5.

Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in accumulated other comprehensive income (loss) (in thousands) by component net of tax for the three months ended March 31, 2020 and 2019:

 

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

Balance as of December 31, 2019

   $ 1,187  

Other comprehensive income before reclassification

     3,120  

Amount reclassified from accumulated other comprehensive income

     (30
  

 

 

 

Total other comprehensive income

     3,090  
  

 

 

 

Balance as of March 31, 2020

   $ 4,277  
  

 

 

 

 

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

Balance as of December 31, 2018

   $ (5,020

Other comprehensive loss before reclassification

     2,943  

Amount reclassified from accumulated other comprehensive loss

     —    
  

 

 

 

Total other comprehensive loss

     2,943  
  

 

 

 

Balance as of March 31, 2019

   $ (2,077
  

 

 

 

 

(a)

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

 

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The following table presents significant amounts reclassified out of each component of accumulated other comprehensive income (loss) (in thousands) for the three months ended March 31, 2020 and 2019:

 

     Amount Reclassified      
     From Accumulated     Affected Line Item in
     Other     Consolidated
     Comprehensive     Statements

Details about other comprehensive income

   Income (Loss) (a)    

of Income

     Three months ended      
     March 31,      
     2020      2019      

Unrealized gains on available for sale securities

   $ 38      $ —       Net realized gains on sales of securities
     (8      —       Income tax expense
  

 

 

    

 

 

   
   $ 30      $ —      
  

 

 

    

 

 

   

 

(a)

Amounts in parentheses indicate debits to net income

 

6.

Off-Balance Sheet Financial Instruments and Guarantees

The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

A summary of the Bank’s financial instrument commitments is as follows:

 

     March 31,  
(in thousands)    2020      2019  

Commitments to grant loans

   $ 55,036      $ 40,322  

Unfunded commitments under lines of credit

     68,530        77,573  

Standby letters of credit

     4,065        4,183  
  

 

 

    

 

 

 
   $ 127,631      $ 122,078  
  

 

 

    

 

 

 

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.

 

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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, 2020 for guarantees under standby letters of credit issued is not material.

 

7.

Securities

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

 

     March 31, 2020  
            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  
     (In Thousands)  

Available for Sale:

           

States and political subdivisions

   $ 58,182      $ 1,340      $ (1    $ 59,521  

Corporate obligations

     3,076        —          (11      3,065  

Mortgage-backed securities-government sponsored entities

     131,382        3,030        —          134,412  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

   $ 192,640      $ 4,370      $ (12    $ 196,998  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Available for Sale:

           

States and political subdivisions

   $ 70,015      $ 1,293      $ (3    $ 71,305  

Corporate obligations

     4,097        3        —          4,100  

Mortgage-backed securities-government sponsored entities

     135,646        238        (1,084      134,800  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

   $ 209,758      $ 1,534      $ (1,087    $ 210,205  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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

   $ 1,195      $ (1    $ —        $ —        $ 1,195      $ (1

Corporate obligations

     3,065        (11      —          —          3,065        (11
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 4,260      $ (12    $ —        $ —        $ 4,260      $ (12
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 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

   $ 1,296      $ (2    $ 481      $ (1    $ 1,777      $ (3

Mortgage-backed securities-government sponsored entities

     32,415        (241      61,096        (843      93,511        (1,084
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 33,711      $ (243    $ 61,577      $ (844    $ 95,288      $ (1,087
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2020, the Company had five debt securities in an unrealized loss position in the less than twelve months category and no 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 2020. 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, 2020 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

   $ 2,742      $ 2,747  

Due after one year through five years

     10,370        10,377  

Due after five years through ten years

     20,876        21,091  

Due after ten years

     27,270        28,371  
  

 

 

    

 

 

 
     61,258        62,586  

Mortgage-backed securities-government sponsored entities

     131,382        134,412  
  

 

 

    

 

 

 
   $ 192,640      $ 196,998  
  

 

 

    

 

 

 

 

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

 

     Three Months  
     Ended March 31,  
             2020                      2019          

Gross realized gains

   $ 38      $ —    

Gross realized losses

     —          —    
  

 

 

    

 

 

 

Net realized gain

   $ 38      $ —    
  

 

 

    

 

 

 

Proceeds from sales of securities

   $ 8,224      $ 327  
  

 

 

    

 

 

 

Securities with a carrying value of $177,342,000 and $196,137,000 at March 31, 2020 and 2019, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.    

 

8.

Loans Receivable and Allowance for Loan Losses

Set forth below is selected data relating to the composition of the loan portfolio at the dates indicated (dollars in thousands):

 

     March 31, 2020     December 31, 2019  

Real Estate Loans:

          

Residential

   $ 227,373        24.5   $ 229,781        24.9

Commercial

     398,492        42.9       391,327        42.3  

Construction

     16,622        1.8       17,732        1.9  

Commercial, financial and agricultural

     132,716        14.3       134,150        14.5  

Consumer loans to individuals

     153,394        16.5       151,686        16.4  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

     928,597        100.0     924,676        100.0
     

 

 

      

 

 

 

Deferred fees, net

     (32        (95   
  

 

 

      

 

 

    

Total loans receivable

     928,565          924,581     

Allowance for loan losses

     (9,088        (8,509   
  

 

 

      

 

 

    

Net loans receivable

   $ 919,477        $ 916,072     
  

 

 

      

 

 

    

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

 

     March 31, 2020      December 31, 2019  

Outstanding Balance

   $ 777      $ 793  

Carrying Amount

   $ 680      $ 696  

 

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Table of Contents

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.

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, 2020 and December 31, 2019, foreclosed real estate owned totaled $1,077,000 and $1,556,000, respectively. During the three months ended March 31, 2020, there were no additions to the foreclosed real estate category. The Company partially disposed of one property that was previously transferred to foreclosed real estate owned with a carrying value of $479,000 through the sale of the property. The remaining proceeds from the sale of this property are being held in escrow pending final disposition. As of March 31, 2020, the Company has initiated formal foreclosure proceedings on three properties classified as consumer residential mortgages with an aggregate carrying value of $296,000.

The following table shows the amount of loans in each category that were individually and collectively evaluated for impairment at the dates indicated:

 

     Real Estate Loans                       
                          Commercial      Consumer         
     Residential      Commercial      Construction      Loans      Loans      Total  
     (In thousands)  

March 31, 2020

                 

Individually evaluated for impairment

   $ —        $ 2,096      $ —        $ —        $ —        $ 2,096  

Loans acquired with deteriorated credit quality

     467        213        —          —          —          680  

Collectively evaluated for impairment

     226,906        396,183        16,622        132,716        153,394        925,821  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 227,373      $ 398,492      $ 16,622      $ 132,716      $ 153,394      $ 928,597  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Real Estate Loans                       
                          Commercial      Consumer         
     Residential      Commercial      Construction      Loans      Loans      Total  
     (In thousands)  

December 31, 2019

                 

Individually evaluated for impairment

   $ —        $ 2,144      $ —        $ —        $ —        $ 2,144  

Loans acquired with deteriorated credit quality

     476        220        —          —          —          696  

Collectively evaluated for impairment

     229,305        388,963        17,732        134,150        151,686        921,836  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 229,781      $ 391,327      $ 17,732      $ 134,150      $ 151,686      $ 924,676  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

            Unpaid         
     Recorded      Principal      Associated  
     Investment      Balance      Allowance  
     (in thousands)  

March 31, 2020

        

With no related allowance recorded:

        

Real Estate Loans:

        

Commercial

   $ 173      $ 173      $ —    
  

 

 

    

 

 

    

 

 

 

Subtotal

     173        173        —    
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

        

Real Estate Loans

        

Commercial

     1,923        1,923        392  
  

 

 

    

 

 

    

 

 

 

Subtotal

     1,923        1,923        392  
  

 

 

    

 

 

    

 

 

 

Total:

        

Real Estate Loans:

        

Commercial

     2,096        2,096        392  
  

 

 

    

 

 

    

 

 

 

Total Impaired Loans

   $ 2,096      $ 2,096      $ 392  
  

 

 

    

 

 

    

 

 

 

 

            Unpaid         
     Recorded      Principal      Associated  
     Investment      Balance      Allowance  
     (in thousands)  

December 31, 2019

        

With no related allowance recorded:

        

Real Estate Loans:

        

Commercial

   $ 143      $ 394      $ —    
  

 

 

    

 

 

    

 

 

 

Subtotal

     143        394        —    
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

        

Real Estate Loans

        

Commercial

     2,001        2,001        417  
  

 

 

    

 

 

    

 

 

 

Subtotal

     2,001        2,001        417  
  

 

 

    

 

 

    

 

 

 

Total:

        

Real Estate Loans:

        

Commercial

     2,144        2,395        417  
  

 

 

    

 

 

    

 

 

 

Total Impaired Loans

   $ 2,144      $ 2,395      $ 417  
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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, 2020 and 2019, respectively (in thousands):

 

     Average Recorded      Interest Income  
     Investment      Recognized  
             2020                      2019                      2020                      2019          

Real Estate Loans:

           

Commercial

     2,098        885        3        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,098      $ 885      $ 3      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 2020 and December 31, 2019, troubled debt restructured loans totaled $96,000 and $99,000, respectively, with no specific reserve. For the three-month period ended March 31, 2020 and 2019, there were no new loans identified as troubled debt restructurings nor did the Company recognized any charge-off on a loan that was 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.

On April 7, 2020, federal banking regulators issued a revised interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.

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.

 

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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, 2020 and December 31, 2019 (in thousands):

 

            Special             Doubtful         
     Pass      Mention      Substandard      or Loss      Total  

March 31, 2020

              

Commercial real estate loans

   $ 384,948      $ 10,633      $ 2,911      $ —        $ 398,492  

Commercial loans

     132,248        240        228        —          132,716  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 517,196      $ 10,873      $ 3,139      $ —        $ 531,208  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

            Special             Doubtful         
     Pass      Mention      Substandard      or Loss      Total  

December 31, 2019

              

Commercial real estate loans

   $ 376,109      $ 12,268      $ 2,950      $ —        $ 391,327  

Commercial loans

     133,695        248        207        —          134,150  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 509,804      $ 12,516      $ 3,157      $ —        $ 525,477  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2020 and December 31, 2019 (in thousands):

 

     Performing      Nonperforming      Total  

March 31, 2020

        

Residential real estate loans

   $ 226,894      $ 479      $ 227,373  

Construction

     16,622        —          16,622  

Consumer loans

     153,226        168        153,394  
  

 

 

    

 

 

    

 

 

 

Total

   $ 396,742      $ 647      $ 397,389  
  

 

 

    

 

 

    

 

 

 

 

     Performing      Nonperforming      Total  

December 31, 2019

        

Residential real estate loans

   $ 229,214      $ 567      $ 229,781  

Construction

     17,732        —          17,732  

Consumer loans

     151,607        79        151,686  
  

 

 

    

 

 

    

 

 

 

Total

   $ 398,553      $ 646      $ 399,199  
  

 

 

    

 

 

    

 

 

 

 

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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, 2020 and December 31, 2019 (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, 2020

                    

Real Estate loans

                    

Residential

   $ 225,840      $ 849      $ 205      $ —        $ 479      $ 1,533      $ 227,373  

Commercial

     395,516        784        149        —          2,043        2,976        398,492  

Construction

     16,622        —          —          —          —          —          16,622  

Commercial loans

     132,623        —          40        —          53        93        132,716  

Consumer loans

     152,770        342        114        —          168        624        153,394  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 923,371      $ 1,975      $ 508      $ —        $ 2,743      $ 5,226      $ 928,597  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     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, 2019

                    

Real Estate loans

                    

Residential

   $ 228,242      $ 727      $ 245      $ —        $ 567      $ 1,539      $ 229,781  

Commercial

     388,117        176        2,935        —          99        3,210        391,327  

Construction

     17,695        —          37        —          —          37        17,732  

Commercial loans

     134,018        82        —          —          50        132        134,150  

Consumer loans

     151,309        233        65        —          79        377        151,686  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 919,381      $ 1,218      $ 3,282      $ —        $ 795      $ 5,295      $ 924,676  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2020, the allocation of the allowance pertaining to each major category of loans is higher than the allocation as of December 31, 2019. This increase is due primarily to an increase in the qualitative factor for economic conditions which worsened as a result of the COVID-19 pandemic. The increase in this factor added $1,742,000 to the allowance for loan losses. This was offset partially by a decrease in the qualitative factor relating to loan growth which decreased by $1,087,000 due to a reduction in loan growth from 8.75% in 2019 to 1.72% in the first quarter of 2020.

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, 2019

   $ 1,552     $ 4,687     $ 95     $ 949      $ 1,226     $ 8,509  

Charge Offs

     (1     (33     —         —          (116     (150

Recoveries

     2       4       —         10        13       29  

Provision for loan losses

     91       257       (8     105        255       700  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance, March 31, 2020

   $ 1,644     $ 4,915     $ 87     $ 1,064      $ 1,378     $ 9,088  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance individually evaluated for impairment

   $ —       $ 392     $ —       $ —        $ —       $ 392  

Ending balance collectively evaluated for impairment

   $ 1,644     $ 4,523     $ 87     $ 1,064      $ 1,378     $ 8,696  

 

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Table of Contents
(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  

The Company’s primary business activity as of March 31, 2020 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, 2020, the Company considered its concentration of credit risk to be acceptable. The highest concentrations are in commercial rentals with $88.8 million of loans outstanding, or 9.6% of total loans outstanding, and the hospitality/lodging industry with loans outstanding of $65.3 million, or 7.1% of loans outstanding. During 2020, the Company recognized a charge off of $33,000 on one property in the named concentrations.

 

9.

Operating Leases

The Company leases seven office locations under operating leases. Several assumptions and judgments were made when applying the requirements of Topic 842 to the Company’s existing lease commitments, including the allocation of consideration in the contracts between lease and nonlease components, determination of the lease term, and determination of the discount rate used in calculating the present value of the lease payments.

The Company has elected to account for the variable nonlease components, such as common area maintenance charges, utilities, real estate taxes, and insurance, separately from the lease component. Such variable nonlease components are reported in net occupancy expense on the Consolidated Statements of Income when paid. These variable nonlease components were excluded from the calculation of the present value of the remaining lease payments, therefore, they are not included in other assets and other liabilities on the Consolidated Balance Sheets. The lease cost associated with the operating leases for the three-month periods ending March 31, 2020 and 2019, amounted to $140,000 and $128,000, respectively.

Certain of the Company’s leases contain options to renew the lease after the initial term. Management considers the Company’s historical pattern of exercising renewal options on leases and the positive performance of the leased locations, when determining whether it is reasonably certain that the leases will be renewed. If management concludes that there is reasonable certainty about the renewal option, it is included in the calculation of the remaining term of each applicable lease. The discount rate utilized in calculating the present value of the remaining lease payments for each lease was the Federal Home Loan Bank of Pittsburgh advance rate corresponding to the remaining maturity of the lease. The following table presents the weighted-average remaining lease term and discount rate for the leases outstanding at December 31, 2019.

 

     Operating  

Weighted-average remaining term

     12.9  

Weighted-average discount rate

     3.21

 

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The following table presents the undiscounted cash flows due related to operating leases as of March 31, 2020, along with a reconciliation to the discounted amount recorded on the Consolidated Balance Sheets:

 

Undiscounted cash flows due (in thousands)    Operating  

2020

   $ 401

2021

     535

2022

     535

2023

     535

2024

     544

2025 and thereafter

     3,879
  

 

 

 

Total undiscounted cash flows

     6,429

Discount on cash flows

     (1,204
  

 

 

 

Total lease liabilities

   $ 5,225
  

 

 

 

 

10.

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 15 of the Company’s 2019 Form 10-K.

 

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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, 2020 and December 31, 2019 are as follows:

 

     Fair Value Measurement Using  
     Reporting Date  

Description

   Total      Level 1      Level 2      Level 3  
     (In thousands)  

March 31, 2020

           

Available for Sale:

           

States and political subdivisions

   $ 59,521      $ —        $ 59,521      $ —    

Corporate obligations

     3,065        —          3,065        —    

Mortgage-backed securities-government sponsored entities

     134,412        —          134,412        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 196,998      $ —        $ 196,998      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Description

   Total      Level 1      Level 2      Level 3  
     (In thousands)  

December 31, 2019

           

Available for Sale:

           

States and political subdivisions

   $ 71,305      $ —        $ 71,305      $ —    

Corporate obligations

     4,100        —          4,100        —    

Mortgage-backed securities-government sponsored entities

     134,800        —          134,800        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 210,205      $ —        $ 210,205      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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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, 2020 and December 31, 2019 are as follows:

 

            Fair Value Measurement Using Reporting Date  
(In thousands)                            

Description    

   Total      Level 1      Level 2      Level 3  

March 31, 2020

           

Impaired Loans

   $ 1,531      $ —        $ —        $ 1,531  

Foreclosed Real Estate Owned

     1,077        —          —          1,077  

December 31, 2019

           

Impaired Loans

   $ 1,584      $ —        $ —        $ 1,584  

Foreclosed Real Estate Owned

     1,556        —          —          1,556  

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, 2020, the fair value investment in impaired loans totaled $1,531,000 which included one loan relationship that required a valuation allowance of $392,000 since the estimated realizable value of the collateral was not sufficient to cover the recorded investment in the loan. As of March 31, 2020, the Company has recognized a charge-off against the allowance for loan losses on this impaired loan in the amount of $33,000.

As of December 31, 2019, the fair value investment in impaired loans totaled $1,584,000 which included two loans that required a valuation allowance of $417,000 since the estimated realizable value of the collateral or the discounted cash flows were not sufficient to cover the recorded investment in the loans. As of December 31, 2019, the Company had not recognized any charge-offs against the allowance for loan losses on these impaired loans.

Foreclosed real estate owned (carried at fair value):

Real estate properties acquired through loan foreclosures, or by deed in lieu of loan foreclosure are to be sold and are carried at fair value less estimated cost to sell. Fair value is based upon independent market prices, appraised value of the collateral or management’s estimation of the value of the collateral. These assets are included in Level 3 fair value based upon the lowest level of input that is significant to the fair value measurement.

 

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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, 2020

           

Impaired loans

   $ 1,531      Appraisal of collateral(1)    Appraisal adjustments(2)    10.00% (10.00%)

Foreclosed real estate owned

   $ 1,077      Appraisal of collateral(1)    Liquidation Expenses(2)    0-7.00% (6.27%)

 

     Quantitative Information about Level 3 Fair Value Measurements

(dollars in thousands)

   Fair Value
Estimate
    

Valuation Techniques

  

Unobservable Input

  

Range (Weighted Average)

December 31, 2019

           

Impaired loans

   $ 1,531      Appraisal of collateral(1)    Appraisal adjustments(2)    10.00% (10.00%)

Impaired loans

   $ 53      Present value of future cash flows    Loan discount rate    4.00-6.97% (5.55%)
         Probability of default    0%

Foreclosed real estate owned

   $ 1,556      Appraisal of collateral(1)    Liquidation Expenses(2)    0-7.00% (4.34%)

 

(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, 2020 and December 31, 2019.

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.

 

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Table of Contents

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.

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, 2020 and December 31, 2019. (In thousands)

 

     Fair Value Measurements at March 31, 2020  
     Carrying Amount      Fair Value      Level 1      Level 2      Level 3  

Financial assets:

              

Cash and cash equivalents (1)

   $ 38,418      $ 38,418      $ 38,418      $ —        $ —    

Loans receivable, net

     919,477        969,839        —          —          969,839  

Mortgage servicing rights

     190        226        —          —          226  

Regulatory stock (1)

     3,770        3,770        3,770        —          —    

Bank owned life insurance (1)

     38,971        38,971        38,971        —          —    

Accrued interest receivable (1)

     3,669        3,669        3,669        —          —    

Financial liabilities:

              

Deposits

     990,160        994,357        612,778        —          381,579  

Short-term borrowings (1)

     40,656        40,656        40,656        —          —    

Other borrowings

     51,350        52,410        —          —          52,410  

Accrued interest payable (1)

     2,895        2,895        2,895        —          —    

Off-balance sheet financial instruments:

              

Commitments to extend credit and outstanding letters of credit

     —          —          —          —          —    

 

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Table of Contents
     Fair Value Measurements at December 31, 2019  
     Carrying Amount      Fair Value      Level 1      Level 2      Level 3  

Financial assets:

              

Cash and cash equivalents (1)

   $ 15,415      $ 15,415      $ 15,415      $ —        $ —    

Loans receivable, net

     916,072        943,143        —          —          943,143  

Mortgage servicing rights

     187        226        —          —          226  

Regulatory stock (1)

     4,844        4,844        4,844        —          —    

Bank owned life insurance (1)

     38,763        38,763        38,763        —          —    

Accrued interest receivable (1)

     3,719        3,719        3,719        —          —    

Financial liabilities:

              

Deposits

     957,529        961,120        596,811        —          364,309  

Short-term borrowings (1)

     62,256        62,256        62,256        —          —    

Other borrowings

     56,438        56,618        —          —          56,618  

Accrued interest payable (1)

     2,432        2,432        2,432        —          —    

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.

 

11.

New and Recently Adopted Accounting Pronouncements

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. 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. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. 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

 

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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 unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), which deferred the effective date for ASC 350, Intangibles – Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. 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 April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Derivatives and Hedging (Topic 815), and Financial Instruments (Topic 825), which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. Topic 326, Financial Instruments – Credit Losses, amendments are effective for SEC registrants for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other public business entities, the effective date is for fiscal years beginning after December 15, 2020, and for all other entities, the effective date is for fiscal years beginning after December 15, 2021. Topic 815, Derivatives and Hedging, amendments are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. For entities that have adopted the amendments in Update 2017-12, the effective date is as of the beginning of the first annual period beginning after the issuance of this Update. Topic 825, Financial Instruments, amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Furthermore, the ASU provides a one-year deferral of the effective dates of the ASUs on derivatives and hedging for companies that are not public business entities. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses (Topic 326), which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for applying the fair value option in ASC 825-10. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be

 

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recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted ASU 2016-13, the effective dates and transition requirements are the same as those in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted once ASU 2016-13 has been adopted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). The Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt ASU 2016-13.

In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). The Update defers the effective dates of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. This Update also amends the mandatory effective date for the elimination of Step 2 from the goodwill impairment test under ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (Goodwill), to align with those used for credit losses. Furthermore, the ASU provides a one-year deferral of the effective dates of the ASUs on derivatives and hedging and leases for companies that are not public business entities. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. The effective dates in this Update are the same as those applicable for ASU 2019-10. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), to simplify the accounting for income taxes, change the accounting for certain tax transactions, and make minor improvements to the codification. This Update provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax and provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or was a separate transaction. The Update also changes current guidance for making an intraperiod allocation if there is a loss in continuing operations and gains outside of continuing operations, determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity method of accounting, accounting for tax law changes and year-to-date losses in interim periods, and determining how to apply the income tax guidance to franchise taxes that are partially based on income. 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, 2020. 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 January 2020, the FASB issued ASU 2020-2, Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842), February 2020, to add and amend SEC paragraphs in the Accounting Standards Codification to reflect the

 

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issuance of SEC Staff Accounting Bulletin No. 119, related to the new credit losses standard, and comments by the SEC staff related to the revised effective date of the new leases standard. This ASU is effective upon issuance. This did not have a significant impact on the Company’s financial statements.

In March 2020, the FASB issued ASU 2020-3, Codification Improvements to Financial Instruments. This ASU was issued to improve and clarify various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven issues that describe the areas of improvement and the related amendments to GAAP; they are intended to make the standards easier to understand and apply and to eliminate inconsistencies, and they are narrow in scope and are not expected to significantly change practice for most entities. Among its provisions, the ASU clarifies that all entities, other than public business entities that elected the fair value option, are required to provide certain fair value disclosures under ASC 825, Financial Instruments, in both interim and annual financial statements. It also clarifies that the contractual term of a net investment in a lease under Topic 842 should be the contractual term used to measure expected credit losses under Topic 326. Amendments related to ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is not permitted before an entity’s adoption of ASU 2016-01. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Amendments related to ASU 2016-13 for entities that have adopted that guidance are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Other amendments are effective upon issuance of this ASU. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In January 2020, the FASB issued ASU 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

 

12.

Proposed Acquisition of UpState New York Bancorp, Inc.

On January 8, 2020, Norwood Financial Corp. (“Norwood”) and its wholly owned subsidiary, Wayne Bank, and UpState New York Bancorp, Inc. (“UpState”), and its wholly owned subsidiary, USNY Bank entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which UpState will merge with and into Norwood, with Norwood as the surviving corporation. Concurrent with the merger, it is expected that USNY Bank will merge with and into Wayne Bank.

USNY Bank conducts its business from its two Bank of the Finger Lakes offices in Geneva and Penn Yan, New York, and two Bank of Cooperstown offices in Cooperstown and Oneonta, New York. As of December 31, 2019, UpState had total assets of $439.6 million, total net loans of $380.7 million, total deposits of $387.9 million and total stockholders’ equity of $46.4 million.

 

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Pursuant to the terms of the Merger Agreement, shareholders of UpState will have the opportunity to elect to receive for each share of UpState common stock they own, either 0.9390 shares of Norwood common stock or $33.33 in cash, or a combination of both. All shareholder elections will be subject to the allocation and proration procedures set forth in the Merger Agreement which are intended to ensure that 90% of the shares of UpState will be exchanged for Norwood common stock and 10% of the shares of UpState will be exchanged for cash. In addition to the purchase price per share, UpState may also be permitted, under certain performance conditions, to distribute at the closing of the merger, a special cash dividend of up to an additional $0.67 per share to UpState’s shareholders. In the event of a greater than 20% decline in market value of Norwood’s common stock, UpState may, in certain circumstances, be able to terminate the Merger Agreement unless Norwood increases the number of shares into which UpState common stock may be converted.

The senior management of Norwood and Wayne Bank will remain the same following the merger. UpState directors Jeffrey S. Gifford and Alexandra K. Nolan will be appointed to the boards of directors of Norwood and Wayne Bank. In addition, the other directors of UpState will be invited to join a regional advisory board. UpState President and CEO R. Michael Briggs will enter into a consulting agreement with Wayne Bank. Norwood will retain the brand names of USNY’s two units, Bank of the Finger Lakes and Bank of Cooperstown, and will also retain USNY’s administration center in Geneva, New York. Scott D. White, unit President of Bank of Cooperstown, and Jeffrey E. Franklin, unit President of Bank of the Finger Lakes, will also remain in place as executives of their units.

The merger is subject to customary closing conditions, including the receipt of regulatory approvals and approval by the shareholders of Norwood and UpState. The merger is expected to be completed in the third quarter of 2020.

 

13.

Risks and Uncertainties

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and provides over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”).

As a qualified SBA lender, we were automatically authorized to originate PPP loans.

An eligible business can apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly payroll costs; or (2) $10.0 million. PPP loans will have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount

under the PPP so long as employee and compensation levels of the business are maintained and 75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used for other qualifying expenses. As of April 30, 2020, we approved 472 applications for $59.2 million of loans under the PPP.

Since the opening of the PPP, several larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. Norwood may be exposed to the risk of similar litigation, from both customers and non-customers that approached the bank regarding PPP loans, regarding the process and procedures used in processing applications for the PPP. If any such litigation is filed against and is not resolved in a manner favorable to Norwood, it may result in significant financial liability or adversely affect reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial condition and results of operations.

 

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The Company also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by Norwood , the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

Owner-Occupied Residential Mortgage & Consumer Loans. For residential mortgage and consumer loans, CARES Act Section 4013 forbearance agreements are available to qualified borrowers. As of April 30, 2020, we had processed 151 residential mortgage payment deferrals of $10.4 million. None of the deferrals granted were to non-owner-occupied loans. Due to the widespread impact of the State of Pennsylvania and the State of New York Stay At Home orders, we expect that additional residential loan borrowers will seek loan forbearance or loan modification agreements in the second quarter of 2020.

Deferrals

As of April 30, 2020, we received requests to modify 754 loans aggregating $165.4 million primarily consisting of the deferral of principal and interest payments and the extension of the maturity date.

Details with respect to actual loan modifications are as follows:

COVID-19 Loan Forbearance Programs. Section 4013 of the CARES Act provides that banks may elect not to categorize a loan modification as a TDR if the loan modification is (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date on which the national emergency concerning the novel coronavirus disease (COVID–19) outbreak declared by the President on March 13, 2020, under the National Emergencies Act terminates, or (B) December 31, 2020. According to the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) issued by the federal bank regulatory agencies on April 7, 2020, short-term loan modifications not otherwise eligible under Section 4013 that are made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. See Note 8 of the financial statements for additional disclosure of TDRs at March 31, 2020.

The following table presents a summary of loan forbearance by type of loan as of April 30, 2020:

 

     Number of         

Loan Type

   Loans      Balance (in thousands)  

Real Estate Loans:

     

Residential

     152      $ 10,359  

Commercial

     167        129,851  

Construction

     14        5,005  

Commercial, financial and agricultural

     60        11,797  

Consumer loans to individuals

     361        8,348  
  

 

 

    

 

 

 

Total

     754      $ 165,360  

 

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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

 

   

the impact of the COVID-19 pandemic on us

 

   

risks inherent in commercial lending

 

   

real estate collateral which is subject to declines in value

 

   

potential other-than-temporary impairments

 

   

soundness of other financial institutions

 

   

interest rate risks

 

   

potential liquidity risk

 

   

deposits acquired through competitive bidding

 

   

availability of capital

 

   

regional economic factors

 

   

loss of senior officers

 

   

comparatively low legal lending limits

 

   

risks of new capital requirements

 

   

potential impact of Tax Cuts and Jobs Act

 

   

limited market for the Company’s stock

 

   

restrictions on ability to pay dividends

 

   

common stock may lose value

 

   

insider ownership

 

   

issuing additional shares may dilute ownership

 

   

competitive environment

 

   

certain anti-takeover provisions

 

   

extensive and complex governmental regulation and associated cost

 

   

cybersecurity

Norwood Financial Corp. undertakes no obligation to publicly release the results of any revisions to those forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Critical Accounting Policies

Note 2 to the Company’s consolidated financial statements for the year ended December 31, 2019 (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, 2020 and December 31, 2019 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, 2020 were $1.242 billion compared to $1.231 billion as of December 31, 2019. The increase reflects a $23.3 million increase in interest-bearing deposits with banks which was 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, 2020 was $197.0 million compared to $210.2 million as of December 31, 2019. The decrease in the securities portfolio is the result of sales, calls, maturities and principal reductions of securities. The fair value of the portfolio increased $3.9 million due to an increase in unrealized gains on securities related to the decrease in interest rates during the first three months of 2020.

The carrying value of the Company’s securities portfolio (Available-for Sale) consisted of the following:

 

     March 31, 2020     December 31, 2019  
(dollars in thousands)    Amount      % of portfolio     Amount      % of portfolio  

States and political subdivisions

   $ 59,521        30.2   $ 71,305        33.9

Corporate obligations

     3,065        1.6       4,100        2.0  

Mortgage-backed securities-government sponsored entities

     134,412        68.2       134,800        64.1  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 196,998        100.0   $ 210,205        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 $928.6 million at March 31, 2020 compared to $924.6 million as of December 31, 2019. The increase in loans receivable includes a $5.8 million increase in commercial loans which was partially offset by a $1.8 million decrease in retail loans. Loan growth for the three-month period ended March 31, 2020 was negatively impacted by the effects of the COVID-19 pandemic as social distancing constraints and business closures resulted in a significant slowing of new loan closings.

The allowance for loan losses totaled $9,088,000 as of March 31, 2020, and represented 0.98% of total loans outstanding, compared to $8,509,000, or 0.92% of total loans, at December 31, 2019. The Company had net charge-offs for the three months ended March 31, 2020 of $121,000 compared to $553,000 in the corresponding period in 2019. The Company’s management assesses the adequacy of the allowance for loan losses on a quarterly basis. The process includes an analysis of the risks inherent in the loan portfolio. It includes an analysis of impaired loans and a historical review of credit losses by loan type. Other factors considered include concentration of credit in specific industries, economic and industry conditions, trends in delinquencies and loan classifications, and loan growth. Management considers the allowance adequate at March 31, 2020 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, 2020, non-performing loans totaled $2.7 million, or 0.30% of total loans compared to $795,000, or 0.09%, of total loans at December 31, 2019. At March 31, 2020, non-performing assets totaled $3.8 million, or 0.31%, of total assets, compared to $2.4 million, or 0.19%, of total assets at December 31, 2019.

 

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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, 2020     December 31, 2019  

Loans accounted for on a non-accrual basis:

    

Real Estate

    

Residential

   $ 479     $ 567  

Commercial

     2,043       99  

Construction

     —         —    

Commercial, financial and agricultural

     53       50  

Consumer loans to individuals

     168       79  
  

 

 

   

 

 

 

Total non-accrual loans *

     2,743       795  

Accruing loans which are contractually past due 90 days or more

     —         —    
  

 

 

   

 

 

 

Total non-performing loans

     2,743       795  

Foreclosed real estate

     1,077       1,556  
  

 

 

   

 

 

 

Total non-performing assets

   $ 3,820     $ 2,351  
  

 

 

   

 

 

 

Allowance for loans losses

   $ 9,088     $ 8,509  

Coverage of non-performing loans

     331     1070

Non-performing loans to total loans

     0.30     0.09

Non-performing loans to total assets

     0.22     0.06

Non-performing assets to total assets

     0.31     0.19

 

*

Includes non-accrual TDRs of $96,000 as of March 31, 2020 and $99,000 on December 31, 2019. There were no accruing TDRs as of March 31, 2020 or as of December 31, 2019.

As of March 31, 2020, over 100 of our loan customers had requested loan payment deferrals or payments of interest only on loans totaling $52.8 million. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings (“TDRs”) unless the borrower was previously experiencing financial difficulty.

In addition, the risk-rating on COVID-19 modified loans did not change, and these loans will not be considered past due until after the deferral period is over and scheduled payments resume. The credit quality of these loans will be reevaluated after the deferral period ends.

Through April 30, 2020, we have modified more than 750 loans totaling $165.4 million which includes both retail and commercial loans.

Deposits

During the three-month period ended March 31, 2020, total deposits increased $32.6 million due primarily to a $16.7 million increase in time deposits, which includes a $9.7 million increase in time deposits over $100,000. These large deposits reflect seasonal activity in municipal account relationships. All other deposits increased $15.9 million, net.

 

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

 

(dollars in thousands)    March 31, 2020      December 31, 2019  

Non-interest bearing demand

   $ 213,359      $ 207,299  

Interest-bearing demand

     93,056        99,366  

Money market deposit accounts

     135,127        128,441  

Savings

     171,235        161,705  

Time deposits <$100,000

     150,894        143,940  

Time deposits >$100,000

     226,489        216,778  
  

 

 

    

 

 

 

Total

   $ 990,160      $ 957,529  
  

 

 

    

 

 

 

Borrowings

Other borrowings as of March 31, 2020, totaled $51.4 million compared to $56.4 million as of December 31, 2019. Short-term borrowings, which consist of securities sold under agreements to repurchase and overnight borrowings from the FHLB, decreased $21.6 million due to a $31.8 million reduction in overnight borrowings, which was partially offset by a $10.2 million increase in repurchase agreements.

Other borrowings consisted of the following:

(dollars in thousands)

 

     March 31, 2020      December 31, 2019  

Notes with the FHLB:

     

Fixed rate term borrowing due May 2020 at 1.85%

   $ 5,000      $ 5,000  

Amortizing fixed rate borrowing due June 2020 at 1.490%

     518        1,034  

Amortizing fixed rate borrowing due July 2020 at 2.77%

     1,705        2,974  

Amortizing fixed rate borrowing due December 2020 at 1.706%

     777        2,538  

Amortizing fixed rate borrowing due December 2020 at 3.06%

     1,911        1,034  

Amortizing fixed rate borrowing due March 2022 at 1.748%

     1,790        2,009  

Amortizing fixed rate borrowing due August 2022 at 1.94%

     4,861        5,351  

Amortizing fixed rate borrowing due October 2022 at 1.88%

     4,227        4,626  

Amortizing fixed rate borrowing due October 2023 at 3.24%

     7,329        7,809  

Amortizing fixed rate borrowing due December 2023 at 3.22%

     3,824        4,063  

Fixed rate term borrowing due December 2023 at 1.95%

     10,000        10,000  

Amortizing fixed rate borrowing due December 2023 at 1.73%

     9,408        10,000  
  

 

 

    

 

 

 
   $ 51,350      $ 56,438  
  

 

 

    

 

 

 

Stockholders’ Equity and Capital Ratios

As of March 31, 2020, stockholders’ equity totaled $142.2 million, compared to $137.4 million as of December 31, 2019.    The net change in stockholders’ equity included $3.1 million of net income that was partially offset by $1.6 million of dividends declared. In addition, total equity increased $3.1 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 could materially fluctuate for each interim and year-end period.

 

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A comparison of the Company’s consolidated regulatory capital ratios is as follows:

 

     March 31, 2020     December 31, 2019  

Tier 1 Capital
(To average assets)

     10.32     10.18

Tier 1 Capital
(To risk-weighted assets)

     13.23     13.11

Common Equity Tier 1 Capital
(To risk-weighted assets)

     13.23     13.11

Total Capital
(To risk-weighted assets)

     14.19     14.01

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, 2020.

Liquidity

As of March 31, 2020, the Company had cash and cash equivalents of $38.4 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 $197.0 million which could be used for liquidity needs. This totals $235.4 million of liquidity and represents 18.9% of total assets compared to $225.6 million and 18.3% of total assets as of December 31, 2019. The Company also monitors other liquidity measures, all of which were within the Company’s policy guidelines as of March 31, 2020 and December 31, 2019. Based upon these measures, the Company believes its liquidity is adequate.    

Capital Resources

The Company has a line of credit commitment from Atlantic Community Bankers Bank for $7,000,000 which expires June 30, 2020. There were no borrowings under this line as of March 31, 2020 and December 31, 2019.

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, 2020 and December 31, 2019.

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, 2020 and December 31, 2019.

 

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The Bank’s maximum borrowing capacity with the Federal Home Loan Bank was approximately $425,045,000 as of March 31, 2020, of which $51,350,000 was outstanding in the form of borrowings. As of December 31, 2019, the maximum borrowing capacity was $425,226,000, of which $88,189,000 of borrowings was outstanding. Additionally, as of March 31, 2020, the Bank had secured Letters of Credit from the Federal Home Loan Bank in the amount of $66.0 million as collateral for specific municipal deposits. These Letters of Credit reduce the availability under the maximum borrowing capacity. There was $56.0 million outstanding in the form of Letters of Credit as of December 31, 2019. Advances and Letters of Credit from the Federal Home Loan Bank are secured by qualifying assets of the Bank.

Non-GAAP Financial Measures

This report contains or references fully taxable-equivalent (fte) interest income and net interest income, which are non-GAAP financial measures. Interest income (fte) and net interest income (fte) are derived from GAAP interest income and net interest income using an assumed tax rate of 21%. We believe the presentation of interest income (fte) and net interest income (fte) ensures comparability of interest income and net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Net interest income (fte) is reconciled to GAAP net interest income on page 40. 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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Table of Contents

Results of Operations

NORWOOD FINANCIAL CORP.

Consolidated Average Balance Sheets with Resultant Interest and Rates

 

(Tax-Equivalent Basis,    Three Months Ended March 31,  
dollars in thousands)    2020     2019  
     Average           Average     Average           Average  
     Balance     Interest     Rate     Balance     Interest     Rate  
     (2)     (1)     (3)     (2)     (1)     (3)  

Assets

            

Interest-earning assets:

            

Interest-bearing deposits with banks

   $ 4,616     $ 6       0.52   $ 2,389     $ 15       2.51

Securities available for sale:

            

Taxable

     146,414       795       2.17       156,224       874       2.24  

Tax-exempt (1)

     60,248       486       3.23       94,883       718       3.03  
  

 

 

   

 

 

     

 

 

   

 

 

   

Total securities available for sale (1)

     206,662       1,281       2.48       251,107       1,592       2.54  

Loans receivable (1) (4) (5)

     927,186       10,819       4.67       857,438       10,084       4.70  
  

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets

     1,138,464       12,106       4.25       1,110,934       11,691       4.21  

Non-interest earning assets:

            

Cash and due from banks

     14,722           14,024      

Allowance for loan losses

     (8,601         (8,614    

Other assets

     85,521           74,910      
  

 

 

       

 

 

     

Total non-interest earning assets

     91,642           80,320      
  

 

 

       

 

 

     

Total Assets

   $ 1,230,106         $ 1,191,254      
  

 

 

       

 

 

     

Liabilities and Stockholders’ Equity

            

Interest-bearing liabilities:

            

Interest-bearing demand and money market

   $ 226,632     $ 150       0.26     $ 225,813     $ 147       0.26  

Savings

     166,504       22       0.05       172,863       24       0.06  

Time

     371,855       1,618       1.74       359,168       1,558       1.74  
  

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing deposits

     764,991       1,790       0.94       757,844       1,729       0.91  

Short-term borrowings

     44,892       111       0.99       45,400       123       1.08  

Other borrowings

     53,821       302       2.24       49,939       303       2.43  
  

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities

     863,704       2,203       1.02       853,183       2,155       1.01  

Non-interest bearing liabilities:

            

Demand deposits

     209,488           200,273      

Other liabilities

     15,952           13,052      
  

 

 

       

 

 

     

Total non-interest bearing liabilities

     225,440           213,325      

Stockholders’ equity

     140,962           124,746      
  

 

 

       

 

 

     

Total Liabilities and Stockholders’ Equity

   $ 1,230,106         $ 1,191,254      
  

 

 

       

 

 

     

Net interest income/spread (tax equivalent basis)

       9,903       3.23       9,536       3.20
      

 

 

       

 

 

 

Tax-equivalent basis adjustment

       (238         (265  
    

 

 

       

 

 

   

Net interest income

     $ 9,665         $ 9,271    
    

 

 

       

 

 

   

Net interest margin (tax equivalent basis)

         3.48         3.43
      

 

 

       

 

 

 

 

(1)

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

(2)

Average balances have been calculated based on daily balances.

(3)

Annualized

(4)

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

(5)

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

 

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Rate/Volume Analysis. The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense.

 

     Increase/(Decrease)  
     Three months ended March 31, 2020 Compared to  
     Three months ended March 31, 2019  
     Variance due to  
     Volume      Rate      Net  
     (dollars in thousands)  

Interest-earning assets:

        

Interest-bearing deposits with banks

   $ 4      $ (13    $ (9

Securities available for sale:

        

Taxable

     (53      (26      (79

Tax-exempt securities

     (264      32        (232
  

 

 

    

 

 

    

 

 

 

Total securities

     (317      6        (311

Loans receivable

     806        (71      735  
  

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     493        (78      415  
  

 

 

    

 

 

    

 

 

 

Interest-bearing liabilities:

        

Interest-bearing demand and money market

     3        —          3  

Savings

     (1      (1      (2

Time

     60        —          60  
  

 

 

    

 

 

    

 

 

 

Total interest-bearing deposits

     62        (1      61  

Short-term borrowings

     (1      (11      (12

Other borrowings

     22        (23      (1
  

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     83        (35      48  
  

 

 

    

 

 

    

 

 

 

Net interest income (tax-equivalent basis)

   $ 410      $ (43    $ 367  
  

 

 

    

 

 

    

 

 

 

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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Table of Contents

Comparison of Operating Results for the Three Months Ended March 31, 2020 to March 31, 2019

General

For the three months ended March 31, 2020, net income totaled $3,079,000 compared to $3,190,000 earned in the similar period in 2019. The decrease in net income for the three months ended March 31, 2020 was due primarily to a $250,000 increase in the provision for loan losses. A $394,000 increase in net interest income was offset by increased operating expenses. Earnings per share for the three-months ended March 31, 2020 were $0.49 per share for basic shares and fully diluted shares compared to $0.51 per share for basic shares and fully diluted shares for the three months ended March 31, 2019. The resulting annualized return on average assets and annualized return on average equity for the three months ended March 31, 2020 were 1.01% and 8.79%, respectively, compared to 1.09% and 10.37%, respectively, for the same period in 2019.

The following table sets forth changes in net income:

 

(dollars in thousands)    Three months ended  
     March 31, 2020 to March 31, 2019  

Net income three months ended March 31, 2019

   $ 3,190  

Change due to:

  

Net interest income

     394  

Provision for loan losses

     (250

Net gains on sales

     52  

Other income

     42  

Salaries and employee benefits

     (128

Occupancy, furniture and equipment

     (44

Taxes, other than income

     (53

FDIC insurance assessment

     71  

All other expenses

     (257

Income tax expense

     62  
  

 

 

 

Net income three months ended March 31, 2020

   $ 3,079  
  

 

 

 

Net Interest Income

Net interest income on a fully taxable equivalent basis (fte) for the three months ended March 31, 2020 totaled $9,903,000 which was $367,000 higher than the comparable period in 2019. The increase in net interest income was due primarily to a $735,000 increase in interest income (fte) on loans. Tax-equivalent interest income was negatively impacted by a $311,000 decrease in securities income. The fte net interest spread and net interest margin were 3.23% and 3.48%, respectively, for the three months ended March 31, 2020 compared to 3.20% and 3.43%, respectively, for the same period in 2019. The increase in the net interest spread reflects the improved yield on earning assets.

For the three-months ended March 31, 2020, interest income (fte) totaled $12,106,000 with a yield on average earning assets of 4.25% compared to $11,691,000 and 4.21% for the 2019 period. Average loans increased $69.7 million during the three-months ended March 31, 2020, over the comparable period of 2019, while average securities decreased $44.4 million as portfolio runoff was utilized to fund loan growth. Average earning assets totaled $1.138 billion for the three months ended March 31, 2020, an increase of $27.5 million over the average for the same period in 2019.

 

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Table of Contents

Interest expense for the three months ended March 31, 2020 totaled $2,203,000 at an average cost of 1.02% compared to $2,155,000 and 1.01% for the same period in 2019. The increase in average cost during the 2020 quarter reflects the $12.7 million increase in average certificates of deposit. The average cost of time deposits, which is the most significant component of funding, remained steady at 1.74% during the periods.

Provision for Loan Losses

The Company’s provision for loan losses for the three months ended March 31, 2020 was $700,000 compared to $450,000 for the three months ended March 31, 2019. The increased provision includes the increased risk related to the COVID-19 pandemic. The Company makes provisions for loan losses in an amount necessary to maintain the allowance for loan losses at an acceptable level. Net charge-offs were $121,000 for the quarter ended March 31, 2019, compared to $553,000 for the similar period in 2019. At March 31, 2020, the allowance for loan losses represented 0.98% of loans receivable and 331% of non-performing loans.

Other Income

Other income totaled $1,654,000 for the three months ended March 31, 2020, compared to $1,560,000 for the same period in 2019. The increase was due primarily to a $32,000 increase in in service charges and fees combined with a $52,000 increase over the comparable period in 2019 on gains recognized on the sales of loans and securities.

Other Expense

Other expense for the three months ended March 31, 2020 totaled $7,059,000, which was $411,000 higher than the same period of 2019, due primarily to a $128,000 increase in salaries and benefits expenses and a $314,000 increase in all other operating expenses, net. The efficiency ratio was 61.08% and 59.91%, respectively, during the three months ended March 31, 2020 and 2019.

Income Tax Expense

Income tax expense totaled $481,000 for an effective tax rate of 13.5% for the period ended March 31, 2020 compared to $543,000 for an effective tax rate of 14.6% for the similar period in 2019.

 

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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, 2020, 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, 2020, the Company had a positive 90-day interest sensitivity gap of $37.1 million or 2.99% of total assets, compared to the $5.9 million interest sensitivity gap, or 0.48% of total assets, as of December 31, 2019. Rate-sensitive assets repricing within 90 days increased $38.6 million due primarily to a $23.3 million increase in interest-bearing deposits and a $13.4 million increase in loans. Rate-sensitive liabilities repricing within 90 days increased $7.4 million since year end due to a $30.2 million increase in time deposits repricing which was partially offset by a $24.5 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, yield on interest-earning assets in the 90-day time frame could increase faster than the cost of interest-bearing liabilities. The repricing intervals are managed by ALCO strategies, including adjusting the average life of the investment portfolio, pricing of deposit liabilities to attract longer term time deposits, loan pricing to encourage variable rate products and evaluation of loan sales of long-term fixed rate mortgages.

Certain interest-bearing deposits with no stated maturity dates are included in the interest-sensitivity table below. The balances allocated to the respective time periods represent an estimate of the total outstanding balance that has the potential to migrate through withdrawal or transfer to time deposits, thereby impacting the interest-sensitivity position of the Company. The estimates were derived from an independently prepared non-maturity deposit study for 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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Table of Contents

March 31, 2020

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

   $ 23,706     $ —       $ —       $ —       $ 23,706  

Securities

     18,469       29,952       58,255       90,322       196,998  

Loans Receivable

     150,987       177,871       293,967       305,740       928,565  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total RSA

   $ 193,162     $ 207,823     $ 352,222     $ 396,062     $ 1,149,269  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-maturity interest-bearing deposits

   $ 59,735     $ 59,825     $ 158,136     $ 121,722     $ 399,418  

Time Deposits

     77,336       202,539       62,004       35,504       377,383  

Borrowings

     18,971       23,669       35,535       13,831       92,006  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total RSL

   $ 156,042     $ 286,033     $ 255,675     $ 171,057     $ 868,807  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest Sensitivity Gap

   $ 37,120     $ (78,210   $ 96,547     $ 225,005     $ 280,462  

Cumulative Gap

     37,120       (41,090     55,457       280,462    

RSA/RSL-cumulative

     123.8     90.7     107.9     132.3  

December 31, 2019

          

Interest Sensitivity Gap

   $ 5,884     $ (82,454   $ 110,264     $ 232,545     $ 266,239  

Cumulative Gap

     5,884       (76,570     33,694       266,239    

RSA/RSL-cumulative

     104.0     82.8     104.8     130.6  

 

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.

Part II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

Not applicable.

 

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Item 1A.

Risk Factors

The Global Outbreak of the COVID-19 Coronavirus May Pose Risks and Uncertainties to the Company’s Results of Operations, Financial Condition and Cash Flows

The outbreak of COVID-19 has caused significant disruptions in the U.S. economy and has created disruption within the markets where the Company primarily operates. While there has been no material impact to the Company’s operations, COVID-19 could potentially create a business continuity issue for the Company. If the global response to contain COVID-19 escalates further or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows.

Congress, the President, and the Federal Reserve have taken actions to help with the economic fallout. The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations.

Other than the foregoing, 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 fiscal year ended December 31, 2019.

 

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, 2020.

 

     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, 2020

     —        $