Norwood Financial Corp 10-K, filed Mar 13, 2020
Norwood Financial Corp (NWFL)
About this 10-K
Norwood Financial Corp filed this 10-K on March 13, 2020, covering the fiscal year ended December 31, 2019.
Headline figures
Fiscal year ended December 31, 2019, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $5.45M
- down 3.8% from $5.66M a year earlier
- Net income
- $14.22M
- up 4.1% from net income of $13.65M a year earlier
- Diluted EPS
- $2.25
- up 3.7% from $2.17 a year earlier
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One):
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2019
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 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
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class |
Ticker Symbols |
Name of Each Exchange on Which Registered | ||
| Common Stock, $.10 par value | NWFL | The Nasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ YES ☒ NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ YES ☒ NO
Indicate by check mark 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 Act). ☐ Yes ☒ No
The registrant’s voting stock trades on the NASDAQ Global Market under the symbol “NWFL.” The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing price of the registrant’s Common Stock as of June 28, 2019, $34.81 per share, was $206.9 million based on 5,943,335 shares of Common Stock held by non-affiliates on that date. For purposes of this calculation, the term “affiliate” refers to all directors and executive officers of the registrant, and all persons beneficially owning more than 5% of the registrant’s common stock.
As of March 1, 2020, there were 6,330,561 shares outstanding of the registrant’s Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
| 1. | Portions of the Annual Report to Stockholders for the Fiscal Year Ended December 31, 2019. (Parts I, II, and IV) |
| 2. | Portions of the definitive Proxy Statement for the 2020 Annual Meeting of Shareholders. (Part III) |
Table of Contents
NORWOOD FINANCIAL CORP.
ANNUAL REPORT ON FORM 10-K
Table of Contents
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, as detailed in Item 1A hereof, include:
| • | possible future impairment of intangible assets; |
| • | our ability to effectively manage future growth; |
| • | loan losses in excess of our allowance; |
| • | risks inherent in commercial lending; |
| • | real estate collateral which may be subject to declines in value; |
| • | potential other-than-temporary impairments; |
| • | soundness of other financial institutions; |
| • | interest rate risks; |
| • | potential liquidity risks; |
| • | rate sensitivity of municipal deposits; |
| • | availability of capital; |
| • | geographical concentration of business; |
| • | 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 common stock; |
| • | restrictions on ability to pay dividends; |
| • | common stock may lose value; |
| • | insider ownership; |
| • | issuing additional shares may dilute ownership; |
| • | certain anti-takeover provisions; |
| • | competitive environment; |
| • | extensive and complex governmental regulation and associated cost; and |
| • | 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.
General
Norwood Financial Corp. (the “Company”), a Pennsylvania corporation, was incorporated in 1995 to become the holding company for Wayne Bank (the “Bank”). The Company is a registered bank holding company subject to regulation and supervision by the Board of Governors of the Federal Reserve System (“Federal Reserve”). As of December 31, 2019, the Company had total consolidated assets of $1.231 billion, consolidated deposits of $957.5 million, and consolidated stockholders’ equity of $137.4 million.
Table of Contents
The Company’s ratio of average equity to average assets was 10.86%, 10.15%, and 10.34% for fiscal years 2019, 2018 and 2017, respectively.
Wayne Bank is a Pennsylvania chartered bank and trust company headquartered in Honesdale, Pennsylvania. The Bank was originally chartered on February 17, 1870, as Wayne County Savings Bank and changed its name to Wayne County Bank and Trust in December 1943. In September 1993, the Bank adopted the name Wayne Bank. The Bank’s deposits are currently insured to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”) and the Bank is a member of the Federal Home Loan Bank (“FHLB”) of Pittsburgh. The Bank is regulated and examined by the Pennsylvania Department of Banking and Securities (“Department”) and the FDIC.
The Bank is an independent community bank with 27 offices in Northeastern Pennsylvania and the Southern Tier of New York. The Bank has five offices in Wayne County, two offices in Pike County, four offices in Monroe County, two offices in Lackawanna County and two offices in Luzerne County, Pennsylvania. As a result of the acquisition of Delaware Bancshares, Inc., Wayne Bank now has six offices in Delaware County, New York, and six offices in Sullivan County, New York.
The Bank offers a wide variety of personal and business credit services and trust and investment products and real estate settlement services to the consumers, businesses, nonprofit organizations, and municipalities in each of the communities that the Bank serves. The Bank primarily serves the northeastern Pennsylvania counties of Wayne, Pike, Monroe, Lackawanna and Luzerne and, to a much lesser extent, Susquehanna County and the Southern Tier New York counties of Delaware and Sullivan. In addition, the Bank operates 28 automated teller machines, each one located at a branch facility.
The Company’s main office is located at 717 Main Street, Honesdale, Pennsylvania and its main telephone number is (570) 253-1455. The Company maintains a website at www.waynebank.com. Information on our website should not be treated as part of this Annual Report on Form 10-K. The Company makes copies of its SEC filings available free of charge as soon as reasonably practicable after they are filed, through a link on its website to the SEC’s website.
Proposed Acquisition of UpState New York Bancorp, Inc.
On January 8, 2020, the Company and its wholly owned subsidiary, Wayne Bank, and UpState New York Bancorp, Inc. (“UpState”), and its wholly owned subsidiary, USNY Bank (“USNY Bank”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which UpState will merge with and into the Company, with the Company 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 September 30, 2019, UpState had total assets of $435.9 million, total net loans of $379.2 million, total deposits of $387.1 million and total stockholders’ equity of $45.3 million.
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 the Company’s common stock, UpState may, in certain circumstances, be able to terminate the Merger Agreement unless the Company increases the number of shares into which UpState common stock may be converted.
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The senior management of the Company 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.
Completed Acquisitions
Delaware Bancshares, Inc. On July 31, 2016, the Company completed the acquisition of Delaware Bancshares, Inc. (“Delaware”) and its wholly owned subsidiary, The National Bank of Delaware County (“NBDC”). At the time of acquisition, Delaware had approximately $375.6 million in assets and 12 banking offices in Delaware and Sullivan Counties, New York. Pursuant to the terms of the Agreement and Plan of Merger, dated March 10, 2016, by and among the Company, Wayne Bank, Delaware and NBDC (the “Delaware Agreement”), Delaware was merged with and into the Company, with the Company as the surviving corporation of the merger (the “Merger”) and NBDC was merged with and into Wayne Bank immediately thereafter. At the effective time of the Merger, each outstanding share of the common stock of Delaware was converted, at the election of the holder but subject to the limitations and allocation and proration provisions set forth in the Delaware Agreement, into either $16.68 in cash or 0.6221 of a share of the Company’s common stock, par value $0.10 per share (the “Common Stock”). In the aggregate, the merger consideration paid to Delaware shareholders consisted of approximately $3,860,000 in cash and 431,605 shares of the Common Stock.
North Penn Bancorp, Inc. On May 31, 2011, the Company completed its acquisition of North Penn Bancorp, Inc. (“North Penn”) and its wholly owned subsidiary, North Penn Bank, as contemplated by the Agreement and Plan of Merger, dated as of December 14, 2010, by and among the Company, Wayne Bank, North Penn and North Penn Bank (the “North Penn Agreement”). At the time of acquisition, North Penn had approximately $168.3 million in assets and five banking offices in Lackawanna and Monroe Counties, Pennsylvania. The Company acquired all of the outstanding shares of North Penn for an aggregate cash consideration of approximately $12.2 million and 532,000 shares of the Common Stock. The cash and stock transaction was valued at approximately $26.9 million based on the closing price of the Common Stock on May 31, 2011. In accordance with the North Penn Agreement, each outstanding share of North Penn common stock was converted, at the election of the holder, into either the right to receive $19.12 in cash or 0.6829 shares of the Common Stock, subject to the election and allocation procedures in the North Penn Agreement, including the requirement that $12,194,000 of the merger consideration (which included amounts paid in cancellation of existing stock options, for the unallocated shares held by the North Penn Employee Stock Ownership Plan (“ESOP”) and any shares as to which the holders exercised dissenters’ rights) be paid in cash and that the remainder be paid in the Common Stock.
Competition
The competition for deposit products comes from other insured financial institutions such as commercial banks, thrift institutions, credit unions, and multi-state regional banks in the Company’s market area of Wayne, Pike, Monroe, Lackawanna and Luzerne Counties, Pennsylvania and Delaware and Sullivan Counties, New York as well as from on-line banks. Based on data compiled by the FDIC as of June 30,
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2019 (the latest date for which such data is available), the Bank had the third largest share of FDIC-insured deposits in Wayne County with approximately 21.2%, the second largest share in Pike County with 18.3%, seventh largest share in Monroe County with 3.6%, the eleventh largest share in Lackawanna County with 1.2% and the nineteenth largest share in Luzerne County with 0.01%.. At June 30, 2019, the Bank had the second largest share of FDIC-insured deposits in Delaware County, New York, with 28.2% and the sixth largest share in Sullivan County, New York, with 7.3%. This data does not reflect deposits held by credit unions with which the Bank also competes. Deposit competition also includes a number of insurance products sold by local agents and investment products such as mutual funds and other securities sold by local and regional brokers. Loan competition varies depending upon market conditions and comes from other insured financial institutions such as commercial banks, thrift institutions, credit unions, multi-state regional banks, and mortgage bankers.
Personnel
As of December 31, 2019, the Bank had 213 full-time and 7 part-time employees. None of the Bank’s employees are represented by a collective bargaining group.
Lending Activities
The Bank’s loan products include loans for personal and business use. Personal lending includes mortgage lending to finance principal residences and, to a lesser extent, second home dwellings. The Bank’s loan products include fixed-rate mortgage products with terms up to 30 years which may be sold in the secondary market through the Federal National Mortgage Association (“Fannie Mae”) or the FHLB, or held in the Bank’s portfolio to the extent consistent with our asset/liability management strategies. Fixed-rate home equity loans are originated on terms up to 180 months. Home equity lines of credit tied to the prime rate are also offered. The Bank also offers indirect dealer financing of automobiles (new and used), boats, and recreational vehicles through a limited network of dealers in Northeast Pennsylvania and the Southern Tier of New York. At December 31, 2019, there were $141.1 million of indirect loans in the portfolio. In connection with the acquisition of Delaware Bancshares, Inc., the Company acquired approximately $116.7 million in loans, including $68.7 million in residential real estate loans, $22.5 million in commercial real estate loans, $13.6 million in commercial, financial and agricultural loans, $6.5 million in consumer loans and $5.4 in construction loans. As of December 31, 2019, the approximate outstanding balance of these acquired loans was $57.9 million. In connection with the acquisition of North Penn Bancorp, Inc., the Company acquired approximately $119.7 million in loans, including $36.2 million in residential real estate loans, $70.8 million in commercial real estate loans, $10.5 million in commercial, financial and agricultural loans, $1.8 million in consumer loans and $358,000 in construction loans. As of December 31, 2019, the approximate outstanding balance of these acquired loans was $21.1 million.
Commercial loans and commercial mortgages are provided to local small and mid-sized businesses at a variety of terms and rate structures. Commercial lending activities include lines of credit, revolving credit, term loans, mortgages, various forms of secured lending and a limited amount of letter of credit facilities. The rate structure may be fixed, immediately repricing tied to the prime rate or adjustable at set intervals. Also included in commercial loans are municipal finance lending in which the Bank has been active in recent years. Municipal lending includes both general obligations of local taxing authorities and revenue obligations of specific revenue producing projects such as sewer authorities and educational units. At December 31, 2019, the Bank had approximately $84.6 million in loans on commercial rentals, as well as $64.6 million of loans outstanding to the hospitality lodging industry, which are its largest lending concentrations.
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The Bank’s construction lending has primarily involved lending for commercial construction projects and for single-family residences. All loans for the construction of speculative sale homes have a loan-to-value ratio of not more than 80%. For both commercial and single-family projects, loan proceeds are disbursed during the construction phase according to a draw schedule based on the stage of completion. Construction projects are inspected by contracted inspectors or bank personnel. Construction loans are underwritten on the basis of the estimated value of the property as completed. For commercial projects, the Bank typically also provides the permanent financing after the construction period, as a commercial mortgage.
The Bank also, from time to time, originates loans secured by undeveloped land. Land loans granted to individuals have a term of up to five years. Land loans granted to developers may have an interest only period during development. The substantial majority of land loans have a loan-to-value ratio not exceeding 75%. The Bank has limited its exposure to land loans but may expand its lending on raw land, as market conditions allow, to qualified borrowers experienced in the development and sale of raw land.
Loans involving construction financing and loans on raw land have a higher level of risk than loans for the purchase of existing homes since collateral values, land values, development costs and construction costs can only be estimated at the time the loan is approved. The Bank has sought to minimize its risk in construction lending and in lending for the purchase of raw land by offering such financing primarily to builders and developers to whom the Bank has loaned funds in the past and to persons who have previous experience in such projects. The Bank also limits construction lending and loans on raw land to its market area, with which management is familiar.
Adjustable-rate loans decrease the risks associated with changes in interest rates by periodically repricing, but involve other risks because as interest rates increase, the underlying payments by the borrower increase, thus increasing the potential for payment default. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustment of the contractual interest rate may also be limited by the maximum periodic interest rate adjustment permitted in certain adjustable-rate mortgage loan documents, and, therefore is potentially limited in effectiveness during periods of rapidly rising interest rates. These risks have not had an adverse effect on the Bank.
The Bank’s adjustable-rate loan portfolio includes approximately $11.7 million in loan participations indexed to the London Interbank Offered Rate (“LIBOR”) which is expected to be phased out by the end of 2021. The Bank anticipates that the terms of LIBOR-based loans, which have not matured prior to the phase-out of LIBOR will be negotiated to incorporate a to-be-determined substitute reference rate. The Bank must rely on the lead bank to renegotiate the terms of loans in which the Bank has a participation. There can be no assurance that the lead bank will be able to successfully renegotiate the loans in which the Bank has participations or that the substitute reference rate will perform as satisfactorily as LIBOR.
Consumer lending, including indirect financing, provides benefits to the Bank’s asset/liability management program by reducing the Bank’s exposure to interest rate changes, due to their generally shorter terms. Such loans may entail additional credit risks compared to owner-occupied residential mortgage lending especially when unsecured or secured by collateral such as automobiles that depreciate rapidly.
Commercial lending including real-estate related loans entail significant additional risks when compared with residential real estate and consumer lending. For example, commercial loans typically involve larger loan balances to single borrowers or groups of related borrowers. The payment experience on such loans typically is dependent on the successful operation of the project and these risks can be significantly impacted by the cash flow of the borrowers and market conditions for commercial office, retail, and warehouse space. In periods of decreasing cash flows, the commercial borrower may permit a lapse in general maintenance of the property causing the value of the underlying collateral to deteriorate.
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The liquidation of commercial property is often more costly and may involve more time to sell than residential real estate. The Bank offsets such factors with requiring more owner equity, a lower loan to value ratio and by obtaining the personal guaranties of the principals. In addition, a majority of the Bank’s commercial real estate portfolio is owner-occupied property.
Commercial loans and leases are considered to have a higher degree of credit risk than secured real estate lending. The repayment of unsecured commercial business loans is wholly dependent on the success of the borrower’s business, while secured commercial business loans may be secured by collateral that may not be readily marketable in the event of default. Municipal financing includes lending to local taxing authorities and revenue-producing projects. Such loans may constitute the general obligation of the taxing authority or may rely on a specific revenue source which is responsible for the repayment of the debt. General obligations are considered to carry a lower level of risk than other loan types since they are backed by the full faith and credit of the taxing authority. Revenue obligations are backed solely by revenues generated by the project financed and repayment may be affected by the success of the project.
Due to the type and nature of the collateral, consumer lending generally involves more credit risk when compared with residential real estate lending. Consumer lending collections are typically dependent on the borrower’s continuing financial stability, and thus, are more likely to be adversely affected by job loss, divorce, illness and personal bankruptcy. In most cases, any repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan balance. The remaining deficiency is usually turned over to a collection agency.
There are additional risks associated with indirect lending since we must rely on the dealer to provide accurate information to us and accurate disclosures to the borrowers. These loans are principally done on a non-recourse basis. We seek to mitigate these risks by only dealing with dealers with whom we have a long-standing relationship.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) prohibits lenders from making residential mortgages unless the lender makes a reasonable and good faith determination that the borrower has a reasonable ability to repay the mortgage loan according to its terms. A borrower may recover statutory damages equal to all finance charges and fees paid within three years of a violation of the ability-to-repay rule and may raise a violation as a defense to foreclosure at any time. As authorized by the Dodd-Frank Act, the Consumer Financial Protection Bureau (“CFPB”) has adopted regulations defining “qualified mortgages” that are presumed to comply with the Dodd-Frank Act’s ability-to-repay rules. Under the CFPB regulations, qualified mortgages must satisfy the following criteria: (i) no negative amortization, interest-only payments, balloon payments, or term greater than 30 years; (ii) no points or fees in excess of 3% of the loan amount for loans over $100,000; (iii) borrower’s income and assets are verified and documented; and (iv) the borrower’s debt-to-income ratio generally may not exceed 43%. Qualified mortgages are conclusively presumed to comply with the ability-to-pay rule unless the mortgage is a “higher cost” mortgage, in which case the presumption is rebuttable. Under the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”), enacted in 2018, residential mortgages originated for portfolio by insured depository institutions, like the Bank, with less than $10 billion in total consolidated assets will be treated as qualified mortgages; provided that the mortgage terms do not include interest-only payments or negative amortization, total points and fees do not exceed 3% of the loan amount, prepayment penalties are not in excess of those permitted for qualified mortgages under Regulation Z and the lender has considered and documented the debt, income and financial resources of the borrower.
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Loan Solicitation and Processing
The Bank has established various lending limits for its officers and also maintains an Officer Loan Committee to approve higher loan amounts. The Officer Loan Committee is comprised of the President and Chief Executive Officer, Chief Lending Officer and other Bank officers. The Officer Loan Committee has the authority to approve all loans up to set limits based on the type of loan and the collateral. Requests in excess of these limits must be submitted to the Directors’ Loan Committee or Board of Directors for approval. Additionally, the President and Chief Executive Officer, and the Chief Lending Officer and other officers have the authority to approve secured and unsecured loans up to amounts approved by the Board of Directors and maintained in the Bank’s Loan Policy. Notwithstanding individual lending authority, certain loan policy exceptions must be submitted to the Officer Loan Committee for approval.
Hazard insurance coverage is required on all properties securing loans made by the Bank. Flood insurance is also required, when applicable.
Loan applicants are notified of the credit decision by letter. If the loan is approved, the loan commitment specifies the terms and conditions of the proposed loan including the amount, interest rate, amortization term, a brief description of the required collateral, and the required insurance coverage. The borrower must provide proof of fire, flood (if applicable) and casualty insurance on the property serving as collateral and title insurance, and these applicable insurances must be maintained during the full term of the loan.
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Loan Portfolio Composition. Set forth below is selected data relating to the composition of the Bank’s loan portfolio at the dates indicated.
| As of December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||||||||
| $ | % | $ | % | $ | % | $ | $ | $ | % | |||||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
| Commercial loans |
$ | 134,150 | 14.5 | $ | 110,542 | 13.0 | $ | 97,461 | 12.7 | $ | 85,508 | 12.0 | $ | 71,090 | 12.7 | |||||||||||||||||||||||||
| Real Estate-Construction |
17,732 | 1.9 | 17,445 | 2.0 | 17,228 | 2.3 | 19,709 | 2.8 | 18,987 | 3.4 | ||||||||||||||||||||||||||||||
| Real Estate-Residential |
229,781 | 24.9 | 235,523 | 27.7 | 235,759 | 30.8 | 237,177 | 33.2 | 161,820 | 28.9 | ||||||||||||||||||||||||||||||
| Real Estate-Commercial |
391,327 | 42.3 | 374,790 | 44.1 | 342,934 | 44.9 | 320,187 | 44.8 | 279,123 | 49.8 | ||||||||||||||||||||||||||||||
| Consumer loans |
151,686 | 16.4 | 112,002 | 13.2 | 70,953 | 9.3 | 51,524 | 7.2 | 29,231 | 5.2 | ||||||||||||||||||||||||||||||
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| 924,676 | 100.0 | 850,302 | 100.0 | 764,335 | 100.0 | 714,105 | 100.0 | 560,251 | 100.0 | |||||||||||||||||||||||||||||||
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| Deferred fees, net |
(95 | ) | (120 | ) | (243 | ) | (216 | ) | (326 | ) | ||||||||||||||||||||||||||||||
| Allowance for loan losses |
(8,509 | ) | (8,452 | ) | (7,634 | ) | (6,463 | ) | (7,298 | ) | ||||||||||||||||||||||||||||||
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| Loans receivable, net |
$ | 916,072 | $ | 841,730 | $ | 756,458 | $ | 707,426 | $ | 552,627 | ||||||||||||||||||||||||||||||
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Maturities and Sensitivities of Loans to Changes in Interest Rates. The following table sets forth maturities and interest rate sensitivity for selected categories of loans as of December 31, 2019. Scheduled repayments are reported in the maturity category in which payment is due. Demand loans, loans having no stated schedule of repayments and no stated maturity and overdrafts are reported as due in one year or less.
| One Year or Less |
After One to Five Years |
Over Five Years |
Total | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Commercial loans |
$ | 16,105 | $ | 29,136 | $ | 88,909 | $ | 134,150 | ||||||||
| Real Estate – Construction |
6,676 | 2,814 | 8,242 | 17,732 | ||||||||||||
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| Total |
$ | 22,781 | $ | 31,950 | $ | 97,151 | $ | 151,882 | ||||||||
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| Loans with fixed rates |
$ | 9,789 | $ | 22,906 | $ | 66,009 | $ | 98,704 | ||||||||
| Loans with floating rates |
15,283 | 13,390 | 24,505 | 53,178 | ||||||||||||
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| Total |
$ | 25,072 | $ | 36,296 | $ | 90,514 | $ | 151,882 | ||||||||
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Non-Performing Assets. The following table sets forth information regarding non-accrual loans, foreclosed real estate owned and loans 90 days or more delinquent on which the Bank was accruing interest at the dates indicated. At December 31, 2019, 2018, 2017, 2016, and 2015, the Company also had $99,000, $1.1 million, $1.1 million, $1.5 million, and $6.8 million, respectively, in troubled debt restructurings. For the year ended December 31, 2019, interest income that would have been recorded on loans accounted for on a non-accrual basis under the original terms of such loans was $101,000 of which $30,000 was collected. For those loans classified as troubled debt restructurings, interest income that would have been recorded under the original terms of the loans for fiscal year 2019 was $19,000 of which $5,000 was collected. Of those loans classified as troubled debt restructurings at December 31, 2019, one loan with a balance of $99,000 is included in non-accrual loans.
| As of December 31, | ||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
| Non-accrual loans: |
||||||||||||||||||||
| Real Estate loans |
||||||||||||||||||||
| Residential |
$ | 567 | $ | 798 | $ | 1,706 | $ | 1,136 | $ | 440 | ||||||||||
| Commercial |
99 | 342 | 277 | 762 | 6,649 | |||||||||||||||
| Construction |
— | — | — | 28 | — | |||||||||||||||
| Commercial |
50 | — | — | — | 43 | |||||||||||||||
| Consumer loans |
79 | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total non-accrual loans* |
795 | 1,140 | 1,983 | 1,926 | 7,132 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Accruing loans which are contractually past-due 90 days or more |
— | — | 496 | 1 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total non-performing loans |
795 | 1,140 | 2,479 | 1,927 | 7,132 | |||||||||||||||
| Foreclosed real estate |
1,556 | 1,115 | 1,661 | 5,302 | 2,847 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total non-performing assets |
$ | 2,351 | $ | 2,255 | $ | 4,140 | $ | 7,229 | $ | 9,979 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total non-performing loans to total loans |
0.09 | % | 0.13 | % | 0.32 | % | 0.27 | % | 1.27 | % | ||||||||||
| Total non-performing loans to total assets |
0.06 | % | 0.10 | % | 0.22 | % | 0.17 | % | 0.95 | % | ||||||||||
| Total non-performing assets to total assets |
0.19 | % | 0.19 | % | 0.37 | % | 0.65 | % | 1.33 | % | ||||||||||
| * | Includes non-accrual TDRs of $99,000, $110,000, $144,000, $477,000, and $5.7 million as of December 31, 2019, 2018, 2017, 2016 and 2015, respectively. The Company also had $0, $977,000, $996,000, $1.0 million, and $1.1 million in accruing TDRs, respectively, on those dates. |
9
Table of Contents
The recorded investment in impaired loans, not requiring an allowance for loan losses was $143,000 (net of a charge-off against the allowance for loan losses of $251,000) and $1,319,000 (net of a charge-off against the allocation for loan losses of $428,000) at December 31, 2019 and 2018, respectively. The recorded investment in impaired loans, requiring an allowance for loan losses was $2.0 million (net of a charge-off against the allowance for loan losses of $0) at December 31, 2019. There were no impaired loans requiring an allowance on December 31, 2018. The specific reserve related to impaired loans was $417,000 for 2019 and $0 for 2018. For the years ended December 31, 2019 and 2018, the average recorded investment in these impaired loans was $1,036,000 and $1,220,000, respectively, and the interest income recognized on these impaired loans was $233,000 and $67,000, respectively. In connection with the Delaware Bancshares acquisition, the Company acquired loans with deteriorated credit quality with an unpaid balance of $2.6 million, which are being carried at their fair value of $476,000. In connection with the North Penn acquisition, the Company acquired loans with deteriorated credit quality with an unpaid balance of $1.9 million, which are being carried at their fair value of $220,000.
As of December 31, 2019, there were no loans not previously disclosed in the above table, where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms.
Troubled Debt Restructured Loans. 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. During 2019, there were no new loan relationships identified as troubled debt restructures.
Classified Assets. Management has instituted an internal loan review program, whereby weaker credits are classified as special mention, substandard, doubtful or loss. When a loan is classified as substandard or doubtful, management is required to establish a valuation reserve for loan losses in an amount that is deemed prudent. When management classifies a loan as a loss asset, a reserve equal to 100% of the loan balance is required to be established or the loan is to be charged-off. The allowance for loan losses is composed of an allowance for both inherent risk associated with lending activities and particular problem assets.
An asset is considered substandard if it is inadequately protected by the paying capacity and net worth of the obligor or the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses present make collection or liquidation in full, highly questionable and improbable, on the basis of currently existing facts, conditions, and values. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a loss reserve is not warranted. Assets which do not currently expose the insured institution to a sufficient degree of risk to warrant classification in one of the aforementioned categories but possess credit deficiencies or potential weaknesses are required to be designated special mention by management.
Management’s evaluation of the classification of assets and the adequacy of the allowance for loan losses is reviewed by the Board on a regular basis and by the regulatory agencies as part of their examination process.
10
Table of Contents
The following table sets forth at the dates indicated the Bank’s classified assets in accordance with its asset classification system:
| As of December 31, | ||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Special mention |
$ | 12,516 | $ | 8,000 | $ | 9,696 | $ | 6,317 | $ | 1,837 | ||||||||||
| Substandard |
3,803 | 6,620 | 5,536 | 4,346 | 9,437 | |||||||||||||||
| Doubtful |
— | — | — | — | — | |||||||||||||||
| Loss |
— | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
$ | 16,319 | $ | 14,620 | $ | 15,232 | $ | 10,663 | $ | 11,274 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Analysis of the Allowance for Loan Losses. The following table sets forth information with respect to the Bank’s allowance for loan losses for the years indicated:
| As of December 31, | ||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
| Total loans receivable net of deferred fees |
$ | 924,581 | $ | 850,182 | $ | 764,092 | $ | 713,889 | $ | 559,925 | ||||||||||
| Average loans receivable |
885,742 | 800,957 | 737,765 | 626,907 | 529,989 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Allowance balance at beginning of period |
$ | 8,452 | $ | 7,634 | $ | 6,463 | $ | 7,298 | $ | 5,875 | ||||||||||
| Charge-offs: |
||||||||||||||||||||
| Commercial |
(911 | ) | (246 | ) | — | (15 | ) | — | ||||||||||||
| Real Estate – residential, commercial and construction |
(102 | ) | (480 | ) | (1,013 | ) | (2,834 | ) | (3,107 | ) | ||||||||||
| Consumer |
(420 | ) | (263 | ) | (207 | ) | (102 | ) | (91 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
(1,433 | ) | (989 | ) | (1,220 | ) | (2,951 | ) | (3,198 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Recoveries: |
||||||||||||||||||||
| Commercial |
173 | 8 | — | — | — | |||||||||||||||
| Real Estate – residential, commercial and construction |
24 | 42 | 165 | 21 | 20 | |||||||||||||||
| Consumer |
43 | 32 | 26 | 45 | 21 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
240 | 82 | 191 | 66 | 41 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Net Charge-offs |
(1,193 | ) | (907 | ) | (1,029 | ) | (2,885 | ) | (3,157 | ) | ||||||||||
| Provision Expense |
1,250 | 1,725 | 2,200 | 2,050 | 4,580 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Allowance balance at end of period |
$ | 8,509 | $ | 8,452 | $ | 7,634 | $ | 6,463 | $ | 7,298 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Allowance for loan losses as a percent of total loans outstanding |
0.92 | % | 0.99 | % | 1.00 | % | 0.91 | % | 1.30 | % | ||||||||||
| Net loans charged off as a percent of average loans outstanding |
0.13 | % | 0.11 | % | 0.14 | % | 0.46 | % | 0.60 | % | ||||||||||
11
Table of Contents
Allocation of the Allowance For Loan Losses. The following table sets forth the allocation of the Bank’s allowance for loan losses by loan category and the percent of loans in each category to total loans at the date indicated. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which credit losses may occur. The total allowance is available to absorb losses from any type of loan.
| As of December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||||||||
| % of | % of | % of | % of | % of | ||||||||||||||||||||||||||||||||||||
| Loans | Loans | Loans | Loans | Loans | ||||||||||||||||||||||||||||||||||||
| to Total | to Total | to Total | to Total | to Total | ||||||||||||||||||||||||||||||||||||
| Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | |||||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
| Commercial |
$ | 949 | 14.5 | % | $ | 712 | 13.0 | % | $ | 463 | 12.7 | % | $ | 307 | 12.0 | % | $ | 397 | 12.7 | % | ||||||||||||||||||||
| Real estate – construction |
95 | 1.9 | 93 | 2.0 | 90 | 2.3 | 78 | 2.8 | 90 | 3.4 | ||||||||||||||||||||||||||||||
| Real estate – residential |
1,552 | 24.9 | 1,328 | 27.7 | 1,272 | 30.8 | 1,092 | 33.2 | 1,069 | 28.9 | ||||||||||||||||||||||||||||||
| Real estate – commercial |
4,687 | 42.3 | 5,455 | 44.1 | 5,265 | 44.9 | 4,623 | 44.8 | 5,506 | 49.8 | ||||||||||||||||||||||||||||||
| Consumer |
1,226 | 16.4 | 864 | 13.2 | 544 | 9.3 | 363 | 7.2 | 236 | 5.2 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| Total |
$ | 8,509 | 100.0 | % | $ | 8,452 | 100.0 | % | $ | 7,634 | 100.0 | % | $ | 6,463 | 100.0 | % | $ | 7,298 | 100.0 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
12
Table of Contents
Investment Activities
General. The Company maintains a portfolio of investment securities consisting of obligations of the U.S. Government and its agencies, including mortgage-backed securities, and obligations of states, counties and municipalities including school districts. The Company also has corporate debt obligations in the portfolio. All such securities are classified as available-for-sale and carried at their fair value. The Company considers its investment portfolio a source of earnings and liquidity. Investment securities may also be pledged to secure public deposits and customer repurchase agreements.
Securities Portfolio. Amortized cost and fair values of securities, all of which are classified as available-for-sale, at the dates indicated are as follows:
| As of December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| (in thousands) | ||||||||||||
| U.S. Treasury securities |
$ | — | $ | — | $ | 2,001 | ||||||
| State and political subdivisions |
70,015 | 99,218 | 120,000 | |||||||||
| Corporate obligations |
4,097 | 8,896 | 10,068 | |||||||||
| Mortgage-backed securities – government sponsored entities |
135,646 | 142,197 | 152,901 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total Securities |
$ | 209,758 | $ | 250,311 | $ | 284,970 | ||||||
|
|
|
|
|
|
|
|||||||
| Fair Value of Securities |
$ | 210,205 | $ | 243,277 | $ | 281,121 | ||||||
|
|
|
|
|
|
|
|||||||
13
Table of Contents
Maturity Distribution of Securities. The following table sets forth certain information regarding carrying values, weighted average yields, and maturities of the Company’s securities portfolio as of December 31, 2019. Yields on tax-exempt securities are stated on a fully taxable equivalent basis using a Federal tax rate of 21%. Actual maturities may differ from contractual maturities as certain instruments have call features which allow prepayment of obligations. Maturity on the mortgage-backed securities is based upon contractual terms, the average life may differ as a result of changes in cash flow.
| After One | After Five | Total Investment | ||||||||||||||||||||||||||||||||||||||
| One Year or Less | Through Five Years | Through Ten Years | After Ten Years | Securities | ||||||||||||||||||||||||||||||||||||
| Carrying | Average | Carrying | Average | Carrying | Average | Carrying | Average | Carrying | Average | |||||||||||||||||||||||||||||||
| Value | Yield | Value | Yield | Value | Yield | Value | Yield | Value | Yield | |||||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
| State and political subdivision |
$ | 3,261 | 2.43 | % | $ | 10,990 | 2.17 | % | $ | 28,413 | 2.57 | % | $ | 28,641 | 3.92 | % | $ | 71,305 | 3.04 | % | ||||||||||||||||||||
| Corporate obligations |
1,003 | 2.55 | 3,097 | 2.04 | — | — | — | — | 4,100 | 2.16 | ||||||||||||||||||||||||||||||
| Mortgage-backed securities-government sponsored entities |
— | — | — | — | — | — | 134,800 | 2.01 | 134,800 | 2.01 | ||||||||||||||||||||||||||||||
| Total Investment Securities |
$ | 4,264 | 2.46 | % | $ | 14,087 | 2.14 | % | $ | 28,413 | 2.57 | % | $ | 163,441 | 2.34 | % | $ | 210,205 | 2.36 | % | ||||||||||||||||||||
14
Table of Contents
Deposit Activities
General. The Bank provides a full range of deposit products to its retail and business customers. These include interest-bearing and noninterest bearing transaction accounts, statement savings and money market accounts. Certificate of deposit terms range up to five years for retail instruments. The Bank has no current brokered deposits through its participation in the Certificate of Deposit Account Registry Service (“CDARS”). The Bank participates in the Jumbo CD ($100,000 and over) markets with local municipalities and school districts which are typically priced on a competitive bid basis. Other services the Bank offers its customers include cash management, direct deposit, Remote Deposit Capture, mobile deposit capture, PopMoney® mobile payments and Automated Clearing House (ACH) activity. The Bank operates twenty-eight automated teller machines and is affiliated with the MoneyPass® ATM network. Internet banking including bill-pay is offered through the website at www.waynebank.com. Other services, such as eStatements and mobile banking are available online.
The following table sets forth information regarding deposit categories of the Company.
| Years Ended December 31, | ||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Balance | Rate Paid | Balance | Rate Paid | Balance | Rate Paid | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| Non-interest bearing demand |
$ | 213,165 | — | % | $ | 208,222 | — | % | $ | 200,368 | — | % | ||||||||||||
| Interest-bearing demand |
95,333 | 0.16 | 91,782 | 0.10 | 89,881 | 0.07 | ||||||||||||||||||
| Money Market |
134,579 | 0.38 | 142,147 | 0.26 | 155,836 | 0.22 | ||||||||||||||||||
| Savings |
170,167 | 0.06 | 178,203 | 0.05 | 189,548 | 0.05 | ||||||||||||||||||
| Time |
356,282 | 1.79 | 322,768 | 1.27 | 293,641 | 0.98 | ||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||
| Total |
$ | 969,526 | $ | 943,122 | $ | 929,274 | ||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||
Maturities of Time Deposits. The following table indicates the amount of the Bank’s time deposits of $100,000 or more by time remaining until maturity as of December 31, 2019.
| Amount | ||||
| Maturity Period |
(in thousands) | |||
| Within three months |
$ | 26,567 | ||
| Over three through six months |
45,043 | |||
| Over six through twelve months |
95,269 | |||
| Over twelve months |
49,899 | |||
|
|
|
|||
| $ | 216,778 | |||
|
|
|
|||
15
Table of Contents
Short-Term Borrowings
The following table sets forth information concerning the Bank’s short-term borrowings (those with original maturities within one year) which consist principally of securities sold under agreements to repurchase, short-term fixed-rate FHLB advances and federal funds purchased during the periods indicated. Securities sold under repurchase agreements consist of commercial and municipal customers’ funds invested in overnight securities for cash management purposes.
| Years Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| (dollars in thousands) | ||||||||||||
| Short-term borrowings: |
||||||||||||
| Average balance during the year |
$ | 48,945 | $ | 41,963 | $ | 39,170 | ||||||
| Maximum month-end balance during the year |
$ | 62,256 | $ | 53,046 | $ | 54,286 | ||||||
| Average interest rate during the year |
0.96 | % | 0.77 | % | 0.51 | % | ||||||
| Total short-term borrowings at end of the year |
$ | 62,256 | $ | 53,046 | $ | 42,530 | ||||||
| Weighted average interest rate at the end of the year |
1.30 | % | 1.27 | % | 0.87 | % | ||||||
Trust Activities
The Bank operates a Wealth Management/Trust Department which provides estate planning, investment management and financial planning to customers for which it is generally compensated based on a percentage of assets under management. As of December 31, 2019, the Bank had $170.7 million of assets under management compared to $151.2 million as of December 31, 2018. The increase is partially due to stock market performance which can affect the value of a customer’s investment portfolio.
Subsidiary Activities
The Bank, a Pennsylvania chartered bank, is the only wholly owned subsidiary of the Company. Norwood Investment Corp. (“NIC”), a Pennsylvania corporation incorporated in 1996 and a Pennsylvania licensed insurance agency, is a wholly owned subsidiary of the Bank. NIC’s business is annuity and mutual fund sales and discount brokerage activities primarily to customers of the Bank. The annuities, mutual funds and other investment products are not insured by the FDIC or any other government agency. They are not deposits, obligations of or guaranteed by any bank. Until February 16, 2018, securities were offered through Invest Financial, a registered broker/dealer. Effective February 16, 2018, the broker/dealer relationship transitioned to LPL Financial LLC (“LPL”) as a result of the sale of Invest to LPL in 2017. LPL is a registered broker/dealer and a member of FINRA and the SIPC. NIC generated gross revenues for the Company of $141,000 and $185,000 in 2019 and 2018, respectively, which is included in Other Income.
WCB Realty Corp., a Pennsylvania corporation, is a wholly owned real estate subsidiary of the Bank whose principal asset is the administrative offices of the Company, which also includes the Main Office of the Bank.
WTRO Properties Inc., a Pennsylvania corporation, is a wholly owned real estate subsidiary of the Bank established to hold title to certain real estate upon which the Bank has foreclosed. As of December 31, 2019 and 2018, the outstanding balance of foreclosed properties on which WTRO held title totaled $1,556,000 and $1,070,000, respectively.
16
Table of Contents
Regulation
Set forth below is a brief description of certain laws which relate to the regulation of the Company and the Bank. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations.
Regulation of the Company
General. The Company, as a bank holding company registered under the Bank Holding Company Act of 1956, as amended (“BHCA”), is subject to regulation and supervision by the Federal Reserve. The Company is required to file periodic reports of its operations with, and is subject to examination by, the Federal Reserve. This regulation and oversight is generally intended to ensure that the Company limits its activities to those allowed by law and that it operates in a safe and sound manner without endangering the financial health of its subsidiary bank.
Under the BHCA, the Company generally must obtain the prior approval of the Federal Reserve before it may acquire control of another bank or bank holding company, merge or consolidate with another bank holding company, acquire all or substantially all of the assets of another bank or bank holding company, or acquire direct or indirect ownership or control of any voting shares of any bank or bank holding company if, after such acquisition, the Company would directly or indirectly own or control more than 5% of such shares.
Federal statutes impose restrictions on the ability of a bank holding company and its nonbank subsidiaries to obtain extensions of credit from its subsidiary bank, on the subsidiary bank’s investments in the stock or securities of the holding company, and on the subsidiary bank’s taking of the holding company’s stock or securities as collateral for loans to any borrower. A bank holding company and its subsidiaries are also prevented from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services by the subsidiary bank.
Source of Strength Doctrine. A bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the policy of the Federal Reserve that a bank holding company should stand ready to use available resources to provide adequate capital to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve regulations, or both.
Non-Banking Activities. The business activities of the Company, as a bank holding company, are restricted by the BHCA. Under the BHCA and the Federal Reserve’s bank holding company regulations, the Company may only engage in, or acquire or control voting securities or assets of a company engaged in, (1) banking or managing or controlling banks and other subsidiaries authorized under the BHCA and (2) any business activity the Federal Reserve has determined to be so closely related to banking or managing or controlling banks to be a proper incident thereto. These include any incidental activities necessary to carry on those activities, as well as a lengthy list of activities that the Federal Reserve has determined to be so closely related to the business of banking as to be a proper incident thereto.
17
Table of Contents
Financial Modernization. The Gramm-Leach-Bliley Act permits greater affiliation among banks, securities firms, insurance companies, and other companies under a new type of financial services company known as a “financial holding company.” A financial holding company essentially is a bank holding company with significantly expanded powers. Financial holding companies are authorized by statute to engage in a number of financial activities previously impermissible for bank holding companies, including securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; and merchant banking activities. The Act also permits the Federal Reserve and the Treasury Department to authorize additional activities for financial holding companies if they are “financial in nature” or “incidental” to financial activities. A bank holding company may become a financial holding company if it and each of its subsidiary banks is well capitalized and well managed, and each of its subsidiary banks has at least a “satisfactory” CRA rating. A financial holding company must provide notice to the Federal Reserve within 30 days after commencing activities previously determined by statute or by the Federal Reserve and Department of the Treasury to be permissible. The Company has not submitted notice to the Federal Reserve of its intent to be deemed a financial holding company.
Regulatory Capital Requirements. The Federal Reserve has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the BHCA. The Federal Reserve’s capital adequacy guidelines are similar to those imposed on the Bank by the FDIC. See “Regulation of the Bank-Regulatory Capital Requirements.” As directed by EGRRCPA, the Federal Reserve has amended its Small Bank Holding Company Policy Statement to exempt from the regulatory capital requirements bank holding companies with less than $3.0 billion in consolidated assets that are not engaged in significant non-banking or off-balance sheet activities and that do not have a material amount of debt or equity securities registered with the SEC. As long as their bank subsidiaries are well capitalized, such bank holding companies need only maintain a pro forma debt to equity ratio of less than 1.0 in order to pay dividends and repurchase stock and to be eligible for expedited treatment on applications.
Regulation of the Bank
General. As a Pennsylvania chartered, FDIC-insured commercial bank which is not a member of the Federal Reserve System, the Bank is subject to extensive regulation and examination by the Department and by the FDIC, which insures its deposits to the maximum extent permitted by law. The federal and state laws and regulations applicable to banks regulate, among other things, the scope of their business, their investments, the reserves required to be kept against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for certain loans. The laws and regulations governing the Bank generally have been promulgated to protect depositors and not for the purpose of protecting stockholders. This regulatory structure also gives the federal and state banking agencies extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulation, whether by the Department, the FDIC or the United States Congress, could have a material impact on the Company, the Bank and their operations.
Pennsylvania Banking Law. The Pennsylvania Banking Code (“Banking Code”) contains detailed provisions governing the organization, location of offices, rights and responsibilities of directors, officers, and employees, as well as corporate powers, savings and investment operations and other aspects of the Bank and its affairs. The Banking Code delegates extensive rule-making power and administrative discretion to the Department so that the supervision and regulation of state-chartered banks may be flexible and readily responsive to changes in economic conditions and in savings and lending practices.
The Federal Deposit Insurance Act (“FDIA”), however, prohibits state-chartered banks from making new investments, loans, or becoming involved in activities as principal and equity investments which are not permitted for national banks unless (1) the FDIC determines the activity or investment does not pose a significant risk of loss to the Deposit Insurance Fund and (2) the bank meets all applicable capital requirements. Accordingly, the additional operating authority provided to the Bank by the Banking Code is significantly restricted by the FDIA.
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Interstate Banking. As a result of the acquisition of Delaware Bancshares, Inc., Wayne Bank now operates branches in Pennsylvania and New York. Under the federal Riegle-Neal Interstate Banking and Branching Efficiency Act (the “Riegle-Neal Act”), an insured state bank that establishes a branch in another state may conduct any activity at such branch that is permissible under the laws of its home state to the extent that such activity is permissible either for a bank chartered by the host state or for a branch of an out-of-state national bank in the host state. The laws of the host state, including laws regarding community reinvestment, consumer protection, fair lending and branching within the host state, apply to any branch of an out-of-state bank to the same extent as such laws apply to a branch of an out-of-state national bank. The Riegle-Neal Act prohibits out-of-state banks from using their interstate branches primarily for purposes of deposit production. If a federal banking regulator reasonably determines from available information that an out-of-state bank’s level of lending in a host state is less than half the loan-to-deposit ratio for all banks in the host state, the regulator may order the closure of the out-of-state branches or prohibit the opening of new branches in the host state unless the out-of-state bank has an acceptable plan or can give reasonable assurances that it will reasonably help meet the credit needs of the communities served in the host state.
Federal Deposit Insurance. The Bank’s deposits are insured to applicable limits by the FDIC. The general maximum deposit insurance amount is $250,000.
The FDIC assesses insured depository institutions to maintain the Deposit Insurance Fund. Under the FDIC’s risk-based assessment system, banks that are deemed to be less risky pay lower assessments. Assessments for institutions with assets of less than $10 billion of assets, such as the Bank, are now based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of failure of an institution’s failure within three years. That system, effective July 1, 2016, replaced the previous system under which institutions were placed into risk categories.
By FDIC rule effective April 1, 2011, the deposit insurance assessment range was set at 2.5 to 45 basis points of total assets less tangible equity. In conjunction with the Deposit Insurance Fund’s reserve ratio reaching 1.15%, effective July 1, 2016, the assessment range was reduced for insured institutions of less than $10 billion of total assets to 1.5 basis points to 30 basis points.
Federal legislation increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC was required to achieve the 1.35% ratio by September 30, 2020. The law required insured institutions with assets of $10 billion or more to fund the increase from 1.15% to 1.35% and, effective July 1, 2016, such institutions were subjected to a surcharge to achieve that goal. The 1.35% ratio was reached effective September 30, 2018. As a result, the surcharges ceased and institutions with less than $10 billion of assets received credits for assessment payments made that contributed to achieving the 1.35% ratio. The legislation eliminated the 1.5% statutory maximum ratio for the Deposit Insurance Fund and delegated to the FDIC the authority to set a maximum ratio. The FDIC has established a long-term target reserve ratio of 2.0% for the Deposit Insurance Fund, and it is expected that the current deposit insurance assessment structure will continue until the target reserve ratio is attained.
In addition, all FDIC-insured institutions have been required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation (“FICO”), an agency of the Federal government established to recapitalize the Federal Savings and Loan Insurance Corporation. The FICO assessment rates averaged approximately 0.0013% of insured deposits on an annualized basis for the first two calendar quarters of 2019. With the maturing of the final FICO bonds, the FICO assessments were terminated after the second quarter of 2019.
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Regulatory Capital Requirements. The FDIC has promulgated capital adequacy requirements for state-chartered banks that, like the Bank, are not members of the Federal Reserve System. Effective January 1, 2015, the capital adequacy requirements were substantially revised to conform to the international regulatory standards agreed to by the Basel Committee on Banking Supervision in the accord often referred to as “Basel III”. The final rule applies to all depository institutions as well as to all top-tier bank and savings and loan holding companies that are not subject to the Federal Reserve Board’s Small Bank Holding Company Policy Statement.
Under the FDIC’s revised capital adequacy regulations, banks are required to meet four minimum capital standards: (1) a “Tier 1” or “core” capital leverage ratio equal to at least 4% of total adjusted assets; (2) a common equity Tier 1 capital ratio equal to 4.5% of risk-weighted assets; (3) a Tier 1 risk-based ratio equal to 6% of risk-weighted assets; and (4) a total capital ratio equal to 8% of total risk-weighted assets. Common equity Tier 1 capital is defined as common stock instruments, retained earnings, any common equity Tier 1 minority interest and, unless the bank has made an “opt-out” election, accumulated other comprehensive income, net of goodwill and certain other intangible assets. Tier 1 or core capital is defined as common equity Tier 1 capital plus certain qualifying subordinated interests and grandfathered capital instruments. Total capital consists of Tier 1 capital plus Tier 2 or supplementary capital items, which include allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, qualifying subordinated instruments and certain grandfathered capital instruments. An institution’s risk-based capital requirements are measured against risk-weighted assets, which equal the sum of each on-balance-sheet asset and the credit-equivalent amount of each off-balance-sheet item after being multiplied by an assigned risk weight. Risk weightings range from 0% for cash to 100% for property acquired through foreclosure, commercial loans, and certain other assets to 150% for exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that finance the acquisition, development or construction of real property. Pursuant to EGRRCPA, the federal banking agencies may only apply a heightened risk weight to a higher volatility commercial real estate exposure that constitutes a higher volatility commercial real estate acquisition, development or construction loan as defined in EGRRCPA and which was originated on or after January 1, 2015.
In addition to higher capital requirements, the new capital rules require banks and covered financial institution holding companies to maintain a capital conservation buffer of at least 2.5% of risk-weighted assets over and above the minimum risk-based capital requirements. Institutions that do not maintain the required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement will be phased in over four years beginning January 1, 2016. The fully phased-in capital buffer requirement will effectively raise the minimum required risk-based capital ratios to 7% for Common Equity Tier 1 Capital, 8.5% for Tier 1 Capital and 10.5% for Total Capital on a fully phased-in basis.
In assessing an institution’s capital adequacy, the FDIC takes into consideration not only these numeric factors but also qualitative factors, and has the authority to establish higher capital requirements for individual institutions where necessary.
EGRRCPA directed the federal banking agencies to develop a community bank leverage ratio of tangible capital to average total consolidated assets of between 8% and 10% as an alternative to the current leverage and risk-based capital rules for qualifying community banks and satisfying any other leverage or capital requirements to which they are subject. Qualifying community banks meeting the community bank leverage ratio would also be deemed well-capitalized for purposes of the prompt corrective action rules. A qualifying community bank is a depository institution or holding company with total consolidated assets of
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less than $10 billion that is not excluded from qualification by the federal banking regulators based on the institution’s risk profile. The federal banking agencies have issued a final rule, effective January 1, 2020, under which a qualifying community bank may opt in to the community bank leverage ratio framework if its community bank leverage ratio exceeds 9%. The Bank has not determined to date whether it will opt into community bank leverage ratio framework.
The Bank is also subject to minimum capital requirements imposed by the Department on Pennsylvania-chartered depository institutions. Under the Department’s capital requirements, a Pennsylvania bank or savings bank must maintain a minimum leverage ratio of Tier 1 capital (as defined under the FDIC’s capital regulations) to total assets of 4%. In addition, the Department has the supervisory discretion to require higher leverage ratio for any institutions based on the institution’s substandard performance in any of a number of areas. The Bank was in compliance with both the FDIC and Pennsylvania capital requirements in effect as of December 31, 2019.
Prompt Corrective Regulatory Action. Under applicable federal statutes, the federal bank regulatory agencies are required to take “prompt corrective action” with respect to institutions that do not meet specified minimum capital requirements. For these purposes, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Under the FDIC’s prompt corrective action regulations, an institution is deemed to be “well capitalized” if it has a Total Risk-Based Capital Ratio of 10.0% or greater, a Tier 1 Risk-Based Capital Ratio of 8.0% or greater, a Common Equity Tier 1 risk-based capital ratio of 6.5% or better and a leverage ratio of 5.0% or greater. Under the final community bank leverage ratio regulations, a qualifying community bank will be deemed well capitalized if it maintains a community bank leverage ratio greater than 9.0%. In addition, a bank that has elected to use the community bank leverage ratio framework will continue to be considered well capitalized during a two-quarter grace period after its leverage ratio falls below 9.0%, provided that the leverage ratio remains above 8.0%.
An institution is “adequately capitalized” if it has a Total Risk-Based Capital Ratio of 8.0% or greater, a Tier 1 Risk-Based Capital Ratio of 6.0% or greater, a Common Equity Tier 1 Capital Ratio of 4.5% or better and a Leverage Ratio of 4.0% or greater. An institution is “undercapitalized” if it has a Total Risk-Based Capital Ratio of less than 8.0%, a Tier 1 Risk-Based Capital ratio of less than 6.0%, a Common Equity Tier 1 ratio of less than 4.5% or a Leverage Ratio of less than 4.0%. An institution is deemed to be “significantly undercapitalized” if it has a Total Risk-Based Capital Ratio of less than 6.0%, a Tier 1 Risk-Based Capital Ratio of less than 4.0%, a Common Equity Tier 1 ratio of less than 3.0% or a Leverage Ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%
The prompt corrective action regulations provide for the imposition of a variety of requirements and limitations on institutions that fail to meet the above capital requirements. In particular, the FDIC may require any state non-member bank that is not “adequately capitalized” to take certain action to increase its capital ratios. If the non-member bank’s capital is significantly below the minimum required levels of capital or if it is unsuccessful in increasing its capital ratios, the bank’s activities may be restricted.
At December 31, 2019, the Bank qualified as “well capitalized” under the prompt corrective action rules.
Affiliate Transaction Restrictions. Federal laws strictly limit the ability of banks to engage in transactions with their affiliates, including their bank holding companies. In particular, loans by a subsidiary bank and its parent company or the nonbank subsidiaries of the bank holding company are limited to 10% of a bank subsidiary’s capital and surplus and, with respect to such parent company and all such nonbank subsidiaries, to an aggregate of 20% of the bank subsidiary’s capital and surplus. Further, loans and other extensions of credit generally are required to be secured by eligible collateral in specified amounts. Transactions with non-affiliates may be treated as transactions with an affiliate to the extent that proceeds from the transaction are used to benefit the affiliate. Federal law also requires that all transactions between a bank and its affiliates be on terms as favorable to the bank as transactions with non-affiliates.
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Loans to One Borrower. Under Pennsylvania law, commercial banks have, subject to certain exemptions, lending limits to one borrower in an amount equal to 15% of the institution’s capital accounts. An institution’s capital account includes the aggregate of all capital, surplus, undivided profits, capital securities and general reserves for loan losses. Pursuant to the national bank parity provisions of the Pennsylvania Banking Code, the Bank may also lend up to the maximum amounts permissible for national banks, which are allowed to make loans to one borrower of up to 25% of capital and surplus in certain circumstances. As of December 31, 2019, the Bank’s loans-to-one-borrower limitation was $19.5 million and the Bank was in compliance with such limitation.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Pittsburgh, which is one of 11 regional FHLBs. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Trustees of the FHLB.
As a member, the Bank is required to purchase and maintain restricted stock in the FHLB of Pittsburgh in an amount equal to the greater of 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5% of the Bank’s outstanding advances from the FHLB. At December 31, 2019, the Bank was in compliance with this requirement. The FHLB incurred losses in both 2009 and 2010 and suspended the payment of dividends. However, the FHLB has shown positive results since 2011 which includes stock redemptions and resumed dividend payments. The losses were primarily attributable to impairment of investment securities associated with the extreme economic conditions in place during the previous several years. Management evaluated the stock and concluded that the stock was not impaired for the periods presented herein. More consideration was given to the long-term prospects for the FHLB as opposed to the recent stress caused by the extreme economic conditions that the world is facing. Management also considered that the FHLB’s regulatory capital ratios have increased from the prior year, liquidity appears adequate, and new shares of FHLB stock continue to change hands at the $100 par value.
Federal Reserve System. The Federal Reserve requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking and NOW accounts) and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy the liquidity requirements that are imposed by the Department. At December 31, 2019, the Bank met its reserve requirements.
Restrictions on Dividends. The Pennsylvania Banking Code states, in part, that dividends may be declared and paid only out of accumulated net earnings and may not be declared or paid unless surplus (retained earnings) is at least equal to contributed capital. The Bank has not declared or paid any dividends which cause the Bank’s retained earnings to be reduced below the amount required. Finally, dividends may not be declared or paid if the Bank is in default in payment of any assessment due the FDIC.
The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve’s view that a bank holding company should pay cash dividends only to the extent that the holding company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company’s capital needs, asset quality and overall financial condition. The Federal Reserve also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, Federal Reserve staff guidance states that, as a general matter, bank holding companies should
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eliminate cash dividends if net income available to shareholders for the past four quarters, net of dividends previously paid, is not sufficient to fully fund the dividend. Finally, under the federal prompt corrective action regulations, the Federal Reserve may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized.”
In determining whether to invest in our securities, investors should consider, among other factors, the following:
Risks Related to Our Business
We may not realize the anticipated benefits from our proposed acquisition of UpState New York Bancorp, Inc.
On January 8, 2020, the Company, Wayne Bank, UpState and USNY Bank entered into the Merger Agreement pursuant to which UpState will merge with and into the Company, with the Company as the surviving corporation. Concurrent with the merger, it is expected that USNY Bank will merge with and into Wayne Bank.
The acquisition of UpState will extend the Company’ footprint into Ontario, Otsego and Yates Counties, New York. The success of this transaction, however, will depend on, among other things, our ability to realize anticipated cost savings and to combine the businesses of Wayne Bank and USNY Bank in a manner that permits growth opportunities and does not materially disrupt the existing customer relationships of USNY Bank nor result in decreased revenues resulting from any loss of customers. If we are not able to successfully achieve these objectives, the anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected.
The Company and UpState have operated and, until the completion of the transactions, will continue to operate, independently. Certain UpState employees may not be employed by us after the transaction. In addition, UpState employees that we wish to retain may elect to terminate their employment as a result of the acquisition, which could delay or disrupt the integration process. It is possible that the integration process could result in the disruption of UpState’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with customers and employees or to achieve the anticipated benefits of the acquisition.
We hold certain intangible assets that could be classified as impaired in the future. If these assets are considered to be either partially or fully impaired in the future, our earnings would decrease.
At December 31, 2019, we had approximately $11.6 million in goodwill and identifiable intangible assets on our balance sheet. We are required to test our goodwill and identifiable intangible assets for impairment on a periodic basis. The impairment testing process considers a variety of factors, including the current market price of our common stock, the estimated net present value of our assets and liabilities, and information concerning the terminal valuation of similarly situated insured depository institutions. If an impairment determination is made in a future reporting period, our earnings and the book value of these intangible assets will be reduced by the amount of the impairment. If an impairment loss is recorded, it will have little or no impact on the tangible book value of our common stock or our regulatory capital levels, but such an impairment loss could significantly restrict the Bank’s ability to make dividend payments to us.
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Our success will depend upon our ability to effectively manage our future growth.
We believe that we have in place the management and systems, including data processing systems, internal controls and a strong credit culture, to support continued growth. However, our continued growth and profitability depend on the ability of our officers and key employees to manage such growth effectively, to attract and retain skilled employees and to maintain adequate internal controls and a strong credit culture. Accordingly, there can be no assurance that we will be successful in managing our expansion, and the failure to do so would adversely affect our financial condition and results of operations.
If we experience loan losses in excess of our allowance, our earnings will be adversely affected.
The risk of credit losses on loans varies with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the value and marketability of the collateral for the loan. Management maintains an allowance for loan losses based upon, among other things, historical experience, an evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality. Based upon such factors, management makes various assumptions and judgments about the ultimate collectability of the loan portfolio and provides an allowance for loan losses based upon a percentage of the outstanding balances and for specific loans when their ultimate collectability is considered questionable. If management’s assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb future losses, or if the bank regulatory authorities require us to increase the allowance for loan losses as a part of their examination process, our earnings and capital could be significantly and adversely affected.
As of December 31, 2019, our allowance for loan losses was $8,509,000 which represented 0.92% of outstanding loans. At such date, we had fourteen nonperforming loans totaling $795,000 and four impaired loans totaling $2.1 million. We actively manage our nonperforming loans in an effort to minimize credit losses. Although management believes that its allowance for loan losses is adequate, there can be no assurance that the allowance will prove sufficient to cover future loan losses. Further, although management uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ substantially from the assumptions used or adverse developments arise with respect to our non-performing or performing loans. Material additions to our allowance for loan losses would result in a decrease in our net income and capital, and could have a material adverse effect on our financial condition and results of operations.
A new accounting standard will likely require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations.
The Financial Accounting Standards Board has adopted a new accounting standard that will be effective for us for our first fiscal year after December 15, 2022. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses. This will change the current method of providing allowances for loan losses that are probable, which would likely require us to increase our allowance for loan losses, and to greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for loan losses. Any increase in our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses may have a material adverse effect on our financial condition and results of operations.
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Most of our loans are to commercial borrowers, which have a higher degree of risk than other types of loans.
Commercial loans are often larger and may involve greater risks than other types of lending. Because payments on such loans are often dependent on the successful operation of the property or business involved, repayment of such loans may be more sensitive than other types of loans due to adverse conditions in the real estate market or the economy. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial loans typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may be substantially dependent on the success of the business itself and the general economic environment. If the cash flow from business operations is reduced, the borrower’s ability to repay the loan may be impaired.
Most of our loans are secured, in whole or in part, with real estate collateral which may be subject to declines in value.
In addition to the financial strength and cash flow characteristics of the borrower in each case, we often secure our loans with real estate collateral. As of December 31, 2019, approximately 73.8% of our loans had real estate as a primary or secondary component of collateral. In addition, approximately 56.3% of our securities portfolio consisted of mortgage-backed securities issued by Fannie Mae, Freddie Mac or the Government National Mortgage Association (GNMA). Real estate values and real estate markets are generally affected by, among other things, changes in national, regional or local economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies, and acts of nature. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower. If real estate prices in our markets decline, the value of the real estate collateral securing our loans could be reduced. If we are required to liquidate the collateral securing a loan during a period of reduced real estate values to satisfy the debt, our earnings and capital could be adversely affected.
We may be required to record other-than-temporary impairment charges with respect to our investment securities portfolio and restricted stock.
As of December 31, 2019, we had approximately $210.2 million in investments, including mortgage-backed securities, on which we had unrealized losses of $1.1 million. In addition, we had $4.8 million of regulatory stock in the FHLB of Pittsburgh. We may be required to record impairment charges on our investments and FHLB stock if they suffer a decline in value that is considered other-than-temporary. Numerous factors, including lack of liquidity for resales of certain investment securities, absence of reliable pricing information for investment securities, adverse changes in the business climate, or adverse actions by regulators could have a negative effect on the value of our investments and mortgage backed securities. If an impairment charge is significant enough to result in a loss for the period, it could affect the ability of our bank subsidiary to upstream dividends to us, which could have a material adverse effect on our liquidity and our ability to pay dividends to stockholders and could also negatively impact our regulatory capital ratios and result in us not being classified as “well capitalized” for regulatory purposes.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. There is no assurance that any such losses would not materially and adversely affect our results of operations.
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Our business is subject to interest rate risk, and variations in interest rates may materially and adversely affect our financial performance.
Changes in the interest rate environment may reduce our profits. We realize income primarily from the differential or “spread” between the interest earned on loans, securities and other interest-earning assets, and the interest paid on deposits, borrowings and other interest-bearing liabilities. Net interest spreads are affected by the difference between the maturities and repricing characteristics of interest-earning assets and interest-bearing liabilities. Changes in market interest rates generally affect loan volume, loan yields, funding sources and funding costs. Our net interest spread depends on many factors that are partly or completely out of our control, including competition, federal economic, monetary and fiscal policies, and general economic conditions.
In order to mitigate the risks from increases in interest rates, we emphasize the origination of loans with variable rates of interest so that loan yields increase with the general level of interest rates. Since many of the variable-rate loans in our portfolio specify minimum or floor rates of interest that borrowers must pay, however, the effective rates on these loans will not increase until the index rate exceeds the floor rate, which may initially reduce the sensitivity of these loans to increases in general interest rates. An increase in the general level of interest rates may adversely affect the ability of certain borrowers with variable-rate loans to pay the interest on and principal of their obligations. In addition, an increase in market interest rates on loans is generally associated with a lower volume of loan originations, which may reduce earnings. Following an increase in the general level of interest rates, our ability to maintain a positive net interest spread is dependent on our ability to increase our loan offering rates, replace loan maturities with new originations, minimize increases on our deposit rates, and maintain an acceptable level and mix of funding. Our ability to maintain a positive net interest spread will also be impacted by the slope of the yield curve. In the event of a flattening of the yield curve in which short-term rates and long-term rates converge, it will be even more difficult to maintain an acceptable interest rate spread between our asset yields and funding costs. We cannot provide assurances that we will be able to increase our loan offering rates and continue to originate loans due to the competitive landscape in which we operate. Additionally, we cannot provide assurances that we can minimize the increases in our deposit rates while maintaining an acceptable level of deposits. Finally, we cannot provide any assurances that we can maintain our current levels of non-interest-bearing deposits as customers may seek higher yielding products when rates increase.
Following a decline in the general level of interest rates, our ability to maintain a positive net interest spread is dependent on our ability to reduce the interest paid on deposits, borrowings, and other interest-bearing liabilities. We cannot provide assurance that we would be able to lower the rates paid on deposit accounts to support our liquidity requirements as lower rates may result in deposit outflows.
Accordingly, changes in levels of market interest rates could materially and adversely affect our net interest spread, asset quality, loan origination volume, liquidity, and overall profitability. We cannot assure you that we can minimize our interest rate risk.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and investments and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities or on terms which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the
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level of our business activity as a result of a downturn in the markets in which our loans are concentrated or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets.
A significant proportion of our time deposits have been acquired through competitive bidding and may be more sensitive to increases in interest rates than other deposits.
At December 31, 2019, approximately $102.9 million, or 28.5% of our time deposits consisted of deposits from local governments and governmental units which we acquired through competitive bidding. These time deposits generally consist of short-term certificates of deposit with balances in excess of $250,000 which local governments use in order to obtain a higher return on excess funds. Since these deposits are put out to bid again as each certificate matures, the interest rates on these deposits have the potential to rapidly adjust to market rates. In the event of an increase in market rates, the Bank may need be required to raise the interest rates on these deposits in order to retain them. In bidding for municipal deposits, the Bank considers its funding needs, its asset/liability management position, rates being paid for comparable funding and anticipated changes in interest rates. The Bank also considers the amount, if any, of collateral that it will be required to post for the deposit, the overall mix of obligations to the municipality and the extent of the Bank’s total relationship with the municipality. In the event management does not deem it prudent to pay higher rates for these deposits, the Bank may be required to find a replacement for this form of funding.
We may elect or be compelled to seek additional capital in the future, but that capital may not be available when it is needed.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. In addition, we may elect to raise additional capital to support our business or to finance acquisitions, if any, or we may otherwise elect or be required to raise additional capital. In that regard, a number of financial institutions have recently raised considerable amounts of capital in response to a deterioration in their results of operations and financial condition arising from the turmoil in the mortgage loan market, deteriorating economic conditions, declines in real estate values and other factors. Should we be required by regulatory authorities to raise additional capital, we may seek to do so through the issuance of, among other things, our common stock or preferred stock.
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital if needed or on terms acceptable to us. If we cannot raise additional capital when needed, it may have a material adverse effect on our financial condition, results of operations and prospects.
Our business is geographically concentrated and is subject to regional economic factors that could have an adverse impact on our business.
Substantially all of our business is with customers in our market area of Northeastern Pennsylvania and the Southern Tier of New York. Most of our customers are consumers and small and medium-sized businesses which are dependent upon the regional economy. Adverse changes in economic and business conditions in our markets could adversely affect our borrowers, their ability to repay their loans and to borrow additional funds, and consequently our financial condition and performance.
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Additionally, we often secure our loans with real estate collateral, most of which is located in Northeastern Pennsylvania or the Southern Tier of New York. A decline in local economic conditions could adversely affect the values of such real estate. Consequently, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically diverse.
The loss of senior executive officers and certain other key personnel could hurt our business.
Our success depends, to a great extent, upon the services of Lewis J. Critelli, our President and Chief Executive Officer. Although we have an employment agreement with non-compete provisions with Mr. Critelli, the existence of such agreement does not assure that we will retain his services. The unexpected loss of Mr. Critelli could have a material adverse effect on our operations. From time to time, we also need to recruit personnel to fill vacant positions for experienced lending officers and branch managers. Competition for qualified personnel in the banking industry is intense, and there can be no assurance that we will continue to be successful in attracting, recruiting and retaining the necessary skilled managerial, marketing and technical personnel for the successful operation of our existing lending, operations, accounting and administrative functions or to support the expansion of the functions necessary for our future growth. Our inability to hire or retain key personnel could have a material adverse effect on our results of operations.
Our legal lending limits are relatively low and restrict our ability to compete for larger customers.
At December 31, 2019, our lending limit per borrower was approximately $19.5 million, or 15% of our capital plus the allowance for loan losses. Accordingly, the size of loans that we can offer to potential borrowers is less than the size of loans that many of our competitors with larger capitalization are able to offer. We may engage in loan participations with other banks for loans in excess of our legal lending limits. However, there can be no assurance that such participations will be available at all or on terms which are favorable to us and our customers.
Risks Related to Our Common Stock
There is a limited trading market for our common stock, which may adversely impact your ability to sell your shares and the price you receive for your shares.
Although our common stock is quoted on the Nasdaq Global Market, there has been limited trading activity in our stock and an active trading market is not expected to develop. This means that there may be limited liquidity for our common stock, which may make it difficult to buy or sell our common stock, may negatively affect the price of our common stock and may cause volatility in the price of our common stock.
There are restrictions on our ability to pay cash dividends.
Although we have paid cash dividends on a quarterly basis since 1996, and the Bank paid dividends for many previous years, there is no assurance that we will continue to pay cash dividends. Future payment of cash dividends, if any, will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as the Board may deem relevant and will be subject to applicable federal and state laws that impose restrictions on our ability to pay dividends.
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Our common stock is not insured and you could lose the value of your entire investment.
An investment in shares of our common stock is not a deposit and is not insured against loss by the government.
Our management controls a substantial percentage of our stock and therefore have the ability to exercise substantial control over our affairs.
As of December 31, 2019, our directors and executive officers beneficially owned approximately 433,569 shares, or approximately 6.7% of our common stock, including options to purchase 73,650 shares, in the aggregate, of our common stock at exercise prices ranging from $16.65 to $36.02 per share (share and per share amounts have been adjusted for the 50% stock dividend declared on August 8, 2017). Because of the large percentage of stock held by our directors and executive officers, these persons could influence the outcome of any matter submitted to a vote of our shareholders.
We may issue additional shares of common or preferred stock, which may dilute the ownership and voting power of our shareholders and the book value of our common stock.
We are currently authorized to issue up to 20,000,000 shares of common stock of which 6,328,556 shares are currently outstanding and up to 5,000,000 shares of preferred stock of which no shares are outstanding. Our Board of Directors has authority, without action or vote of the shareholders, to issue all or part of the authorized but unissued shares and to establish the terms of any series of preferred stock. These authorized but unissued shares could be issued on terms or in circumstances that could dilute the interests of other stockholders. In addition, a total of 787,500 shares of common stock have been reserved for issuance under the Norwood Financial Corp 2006 Stock Option Plan and the 2014 Equity Incentive Plan, of which 603,631 were issued as of December 31, 2019. As of December 31, 2019, options to purchase a total of 173,075 shares were exercisable and had exercise prices ranging from $16.65 to $32.81. Any such issuance will dilute the percentage ownership interest of shareholders and may further dilute the book value per share of our common stock.
Provisions of our Articles of Incorporation and the Pennsylvania Business Corporation Law could deter takeovers which are opposed by the Board of Directors.
Our articles of incorporation require the approval of 80% of our outstanding shares for any merger or consolidation unless the transaction meets certain fair price criteria or the business combination has been approved or authorized by the Board of Directors. In addition, our articles of incorporation may require the disgorgement of profits realized by any person who attempts to acquire control of the Company. As a Pennsylvania corporation with a class of securities registered with the Securities and Exchange Commission, the Company is governed by certain provisions of the Pennsylvania Business Corporation Law that, inter alia, permit the disparate treatment of certain shareholders; prohibit calls of special meetings by shareholders; require unanimous written consent for shareholder action in lieu of a meeting; require shareholder approval for certain transactions in which a shareholder has an interest; and impose additional requirements on business combinations with persons who are the beneficial owners of more than 20% of the Company’s stock.
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Risks Related to Our Industry
We operate in a competitive market which could constrain our future growth and profitability.
We operate in a competitive environment, competing for deposits and loans with commercial banks, savings associations and other financial entities. Competition for deposits comes primarily from other commercial banks, savings associations, credit unions, money market and mutual funds and other investment alternatives. Competition for loans comes primarily from other commercial banks, savings associations, mortgage banking firms, credit unions and other financial intermediaries. Many of the financial intermediaries operating in our market area offer certain services, such as international banking services, which we do not offer. Moreover, banks with a larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the needs of larger customers.
We are required to comply with extensive and complex governmental regulation which can adversely affect our business.
Our operations are and will be affected by current and future legislation and by the policies established from time to time by various federal and state regulatory authorities. We are subject to supervision and periodic examination by the Federal Reserve, FDIC and the Pennsylvania Department of Banking and Securities. Banking regulations, designed primarily for the safety of depositors, may limit a financial institution’s growth and the return to its investors by restricting such activities as the payment of dividends, mergers with or acquisitions by other institutions, investments, loans and interest rates, interest rates paid on deposits, expansion of branch offices, and the offering of securities or trust services. We are also subject to capitalization guidelines established by federal law and could be subject to enforcement actions to the extent that we are found by regulatory examiners to be undercapitalized. It is not possible to predict what changes, if any, will be made to existing federal and state legislation and regulations or the effect that any such changes may have on our future business and earnings prospects. Further, the cost of compliance with regulatory requirements may adversely affect our ability to operate profitability.
In addition, the monetary policies of the Federal Reserve have had a significant effect on the operating results of banks in the past and are expected to continue to do so in the future. Among the instruments of monetary policy used by the Federal Reserve to implement its objectives are changes in the discount rate charged on bank borrowings and changes in the reserve requirements on bank deposits. It is not possible to predict what changes, if any, will be made to the monetary policies of the Federal Reserve or to existing federal and state legislation or the effect that such change may have on our future business and earnings prospects.
During the past several years, significant legislative attention has been focused on the regulation and deregulation of the financial services industry. Non-bank financial institutions, such as securities brokerage firms, insurance companies and money market funds, have been permitted to engage in activities which compete directly with traditional bank business.
We may bear costs associated with the proliferation of computer theft and cybercrime.
As part of our banking business, we collect, use and hold sensitive data concerning individuals and businesses with whom we have a banking relationship. Threats to data security, including unauthorized access and cyber-attacks, rapidly emerge and change, exposing us to additional costs for protection or remediation and competing time constraints to secure our data in accordance with customer expectations and statutory and regulatory requirements. The increasing sophistication of cyber-criminals and terrorists makes it extremely difficult to keep up with new threats and could result in a breach of our data security. Patching and other measures to protect existing systems and servers could be inadequate, especially on systems that are being retired. Controls employed by our information technology department and third-party vendors could prove inadequate. We could also experience a breach by intentional or negligent conduct on the part of our employees or other internal sources or by merchants using our customers’ debit and credit cards, software bugs or other technical malfunctions, or other causes. As a result of any of these threats, our customer accounts may become vulnerable to account takeover schemes or cyber-fraud. Our systems and those of our third-party vendors may become vulnerable to damage or disruption due to circumstances beyond our or their control, such as from catastrophic events, power anomalies or outages, natural disasters, network failures, and viruses and malware.
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A breach of our security that results in unauthorized access to our data could expose us to a disruption or challenges relating to our daily operations as well as to data loss, litigation, damages, fines and penalties, customer notification requirements, significant increases in compliance costs, and reputational damage, any of which could individually or in the aggregate have a material adverse effect on our business, results of operations, financial condition and prospects.
The Company maintains insurance coverage for losses caused by cybersecurity data breaches. Coverage includes, but is not limited to, losses related to electronic funds, cyber liability, social networking and public relations expenses. The total policy limit for each policy year is $1,000,000.
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Item 1B. Unresolved Staff Comments
None.
The Bank operates from its main office located at 717 Main Street, Honesdale, Pennsylvania and twenty-six additional branch offices in Northeastern Pennsylvania and the Southern Tier of New York. The Bank’s total investment in office property and equipment is $28.9 million with a net book value of $14.2 million as of December 31, 2019. The Bank currently operates automated teller machines at all of its facilities. The Bank leases seven of its locations with minimum lease commitments of $6.6 million through 2037. Five of the locations have renewal options.
Neither the Company nor its subsidiaries are involved in any other pending legal proceedings, other than routine legal matters occurring in the ordinary course of business, which in the aggregate involve amounts which are believed by management to be immaterial to the consolidated financial condition or results of operations of the Company.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
| (a) | Market Information. Information relating to the market for Registrant’s common equity and related stockholder matters appears under “Capital and Dividends” in the Registrant’s Annual Report to Stockholders for the fiscal year ended December 31, 2019 (the “Annual Report”) and is incorporated herein by reference. |
| (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 fourth quarter of the fiscal year ended December 31, 2019. |
| Issuer Purchases of Equity Securities | ||||||||||||||||
| Total Number of Shares (or Units) purchased |
Average Price Paid Per Share (or Unit) |
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs * |
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet be Purchased Under the Plans or Programs |
|||||||||||||
| October 1 – 31, 2019 |
— | $ | — | — | 129,025 | |||||||||||
| November 1 – 30, 2019 |
— | — | — | 129,025 | ||||||||||||
| December 1 – 31, 2019 |
1,460 | 36.76 | 1,460 | 127,565 | ||||||||||||
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| Total |
1,460 | $ | 36,76 | 1,460 | 127,565 | |||||||||||
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| * | On March 19, 2008, the Registrant announced its intention to repurchase up to 5% of its outstanding common stock (approximately 226,050 split-adjusted shares) in the open market. On November 10, 2011, the Registrant announced that the Company had increased the number of shares which may be repurchased under its open-market program to 5% of its currently outstanding shares, or approximately 270,600 split-adjusted shares. |
Item 6. Selected Financial Data
The above-captioned information appears under “Summary of Selected Financial Data” in the Annual Report, and is incorporated herein by reference.
Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations
The above-captioned information appears under “Management’s Discussion and Analysis” in the Annual Report and is incorporated herein by reference from the Annual Report.
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Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The above-captioned information appears under “Management’s Discussion and Analysis — Market Risk” in the Annual Report and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Company’s consolidated financial statements listed in Item 15 and the Summary of Quarterly Results (unaudited) are incorporated herein by reference from the Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
(a) Disclosure 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 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.
(b) Internal Control over Financial Reporting. Management’s Report on Internal Control over Financial Reporting and the Report of the Company’s Independent Registered Public Accounting Firm are incorporated herein by reference from the Annual Report. 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.
None.
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Item 10. Directors, Executive Officers and Corporate Governance
The information contained under the sections captioned “Proposal I — Election of Directors” and “Corporate Governance” in the Proxy Statement for the 2020 Annual Meeting of Shareholders (the “Proxy Statement”) are incorporated herein by reference.
The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer and principal accounting officer or controller. The Code of Ethics is posted on the stockholder services page of Wayne Bank’s website at www.waynebank.com/stockholder-services. The Company intends to report any waiver or amendment to its Code of Ethics on its website at www.waynebank.com/stockholder-services.
Item 11. Executive Compensation
The information contained under the sections captioned “Executive Compensation” and “Director Compensation” in the Proxy Statement are incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
| (a) | Security Ownership of Certain Beneficial Owners |
Information required by this item is incorporated herein by reference to the Section captioned “Principal Holders of Our Common Stock” of the Proxy Statement.
| (b) | Security Ownership of Management |
Information required by this item is incorporated herein by reference to the section captioned “Proposal I — Election of Directors” of the Proxy Statement.
| (c) | Changes in Control |
Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant.
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| (d) | Equity Compensation Plan Information |
EQUITY COMPENSATION PLAN INFORMATION
| (a) | (b) | (c) | ||||||||||
| Number of Securities to be issued upon exercise of outstanding options, warrants and rights* |
Weighted-average exercise price of outstanding options, warrants and rights * |
Number of securities remaining available for future issuance under equity compensation plans, (excluding securities reflected in column (a)) * |
||||||||||
| Equity compensation plans approved by security holders |
||||||||||||
| 2006 Stock Option Plan |
81,475 | $ | 17.54 | — | ||||||||
| 2014 Equity Incentive Plan |
118,350 | 29.75 | 177,785 | |||||||||
| Equity compensation plans not approved by security holders |
— | — | — | |||||||||
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| TOTAL |
199,825 | $ | 24.77 | 177,785 | ||||||||
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| * | Share and per share data adjusted for the 50% stock dividend declared on August 8, 2017. |
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by this item is incorporated herein by reference to the sections in the Proxy Statement captioned “Related Party Transactions” and “Corporate Governance”.
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated herein by reference to the section in the Proxy Statement captioned “Proposal III — Ratification of Appointment of Independent Auditors.”
Item 15. Exhibits, Financial Statement Schedules
| (a) | Listed below are all financial statements, schedules and exhibits filed as part of this report, and are incorporated by reference. |
| 1. | The consolidated balance sheets of Norwood Financial Corp. and subsidiary as of December 31, 2019 and 2018, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2019, together with the related notes and the independent registered public accounting firm reports of S.R. Snodgrass, P.C., independent registered public accounting firm. |
| 2. | Schedules omitted as they are not applicable. |
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3. Exhibits
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| † | Management contract or compensatory plan or arrangement. | |
| (1) | Incorporated by reference into this document from the identically numbered exhibit to the Registrant’s Form 10-Q filed with the Commission on August 8, 2014. | |
| (2) | Incorporated herein by reference into this document from the identically numbered Exhibit to the Registrant’s Form 10, Registration Statement initially filed in paper with the Commission on April 29, 1996, Registration No. 0-28364. | |
| (3) | Incorporated herein by reference from the identically numbered exhibits to the Registrant’s Form 10-K filed with the Commission on March 15, 2010. | |
| (4) | Incorporated by reference into this document from Exhibit 10.4 to the Registrant’s Form 10-K filed with the Commission on March 14, 2013. File No 0-28364. | |
| (5) | Incorporated herein by reference into this document from Exhibit 10.1 to the Registrant’s Form 10-K filed with the Commission on March 23, 2000, File No. 0-28364. | |
| (6) | Incorporated by reference from the exhibits to the Current Report on Form 8-K filed with the Commission on September 5, 2017. | |
| (7) | Incorporated by reference into this document from Exhibit 10.11 to the Registrant’s Form 10-K filed with the Commission on March 22, 2004, File No. 0-28364. | |
| (8) | Incorporated herein by reference from Exhibit 4.1 to Registrant’s Registration Statement on Form S-8 (File No. 333-134831) filed with the Commission on June 8, 2006. | |
| (9) | Incorporated herein by reference from Exhibits 10.1 and 10.5 to the Registrant’s Current Report on Form 8-K filed April 4, 2006. | |
| (10) | Incorporated herein by reference from Exhibit 10.13 to the Registrant’s Form 10-Q filed with the Commission on November 7, 2013. | |
| (11) | Incorporated by reference to Exhibit 10.1 to Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-8 (File No. 333-195643) filed with the Commission on May 4, 2018. | |
| (12) | Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed February 18, 2015. | |
| (13) | Incorporated by reference into this document from the exhibits to the Registrant’s Current Report on Form 8-K filed with the Commission on January 16, 2018 |
None.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| NORWOOD FINANCIAL CORP. | ||||||
| Dated: March 13, 2020 | By: | /s/ Lewis J. Critelli | ||||
| Lewis J. Critelli President and Chief Executive Officer (Duly Authorized Representative) | ||||||
Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on March 13, 2020 on behalf of the Registrant and in the capacities indicated.
| /s/ Lewis J. Critelli |
/s/ William W. Davis, Jr. | |||
| Lewis J. Critelli President, Chief Executive Officer and Director (Principal Executive Officer) |
William W. Davis, Jr. Director | |||
| /s/ Dr. Andrew A. Forte |
/s/ Susan Campfield | |||
| Dr. Andrew A. Forte Director |
Susan Campfield Director | |||
| /s/ Joseph W. Adams |
/s/ Kevin M. Lamont | |||
| Joseph W. Adams Director |
Kevin M. Lamont Director | |||
| /s/ Ralph A. Matergia |
/s/ Dr. Kenneth A. Phillips | |||
| Ralph A. Matergia Director |
Dr. Kenneth A. Phillips Director | |||
| /s/ William S. Lance |
/s/ Meg L. Hungerford | |||
| William S. Lance Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
Meg L. Hungerford Director | |||
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Exhibit 3(i)
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
NORWOOD FINANCIAL CORP.
Article 1. Name. The name of the corporation is Norwood Financial Corp. (hereinafter, the “Company”).
Article 2. Registered Office. The address of the initial registered office of the Company in the Commonwealth of Pennsylvania is 717 Main Street, Honesdale, Pennsylvania 18431.
Article 3. Nature of Business. The Company is organized under the Business Corporation Law of 1988, as amended, of the Commonwealth of Pennsylvania (the “BCL”) for the purpose of engaging in any lawful act or activity for which a corporation may be organized under the laws of the Commonwealth of Pennsylvania.
Article 4. Duration. The term of the existence of the Company shall be perpetual.
Article 5. Capital Stock.
A. Authorized Amount. The total number of shares of capital stock that the Company has authority to issue is 25,000,000 of which 5,000,000 shall be serial preferred stock, no par value (hereinafter, the “Preferred Stock”) and 20,000,000 shall be common stock, par value $0.10 per share (hereinafter, the “Common Stock”). Except to the extent required by governing law, rule, or regulation, the shares of capital stock may be issued from time to time by the board of directors of the Company (hereinafter, the “Board of Directors”) without further approval of stockholders. The Company shall have the authority to purchase its capital stock out of funds lawfully available therefor.
B. Common Stock. Except as provided in this Article 5 (or in any resolution or resolutions adopted by the Board of Directors pursuant hereto), the exclusive voting power shall be vested in the Common Stock, with each holder thereof being entitled to one vote for each share of such Common Stock standing in the holder’s name on the books of the Company. Subject to any rights and preferences of any class of stock having preference over the Common Stock, holders of Common Stock shall be entitled to such dividends as may be declared by the Board of Directors out of funds lawfully available therefor. Upon any liquidation, dissolution, or winding up of the affairs of the Company, whether voluntary or involuntary, holders of Common Stock shall be entitled to receive pro rata the remaining assets of the Company after the holders of any class of stock having preference over the Common Stock have been paid in full any sums to which they may be entitled.
C. Authority of Board to Fix Terms of Preferred Stock. A description of each class of shares and a statement of the voting rights, designations, preferences, qualifications, privileges, limitations, options, conversion rights, and other special rights granted to or imposed upon the shares of each class and of the authority vested in the Board of Directors to establish series of Preferred Stock or to determine that Preferred Stock will be issued as a class without series and to fix and determine the voting rights, designations, preferences, and other special rights of the Preferred Stock as a class or of the series thereof are as follows:
Preferred Stock may be issued from time to time as a class without series or in one or more series. Each series shall be designated in supplementary sections or amendments to these Articles of Incorporation by the Board of Directors so as to distinguish the shares thereof from the shares of all other series and classes. The Board of Directors may by resolution and amendment to these Articles of Incorporation from time to time divide shares of Preferred Stock into series, or determine that the Preferred Stock shall be issued as a class without series, fix and determine the number of shares in a series and the terms and conditions of the issuance of the class or the series, and, subject to the provisions of this Article 5, fix and determine the rights, preferences, qualifications, privileges, limitations, and other special rights, if any, of the class (if none of such shares of the class have been issued) or of any series so established, including but not limited to, voting rights (which may be limited, multiple, fractional, or non-voting rights), the rate of dividend, if any, and whether or to what extent, if any, such dividends shall be cumulative (including the date from which dividends shall be cumulative, if any), the price at and the terms and conditions on which shares may be redeemed, if any, the preference and the amounts payable on shares in the event of voluntary or involuntary liquidation, sinking fund provisions for the redemption or purchase of shares in the event shares of the class or of any series are issued with sinking fund provisions, and the terms and conditions on which the shares of the class or of any series may be converted in the event the shares of the class or of any series are issued with the privilege of conversion.
The Board of Directors may, in its discretion, at any time or from time to time, issue or cause to be issued all or any part of the authorized and unissued shares of Preferred Stock for consideration of such character and value as the Board of Directors shall from time to time fix or determine.
D. Repurchase of Shares. The Company may, from time to time, pursuant to authorization by the Board of Directors and without action by the stockholders, purchase or otherwise acquire shares of any class, bonds, debentures, notes, scrip, warrants, obligations, evidences of indebtedness, or other securities of the Company in such manner, upon such terms, and in such amounts as the Board of Directors shall determine; subject, however, to such limitations or restrictions, if any, as are contained in the express terms of any class of shares of the Company outstanding at the time of the purchase or acquisition in question or as are imposed by law or regulation.
Article 6. Incorporator. The name and mailing address of the sole incorporator is as follows:
|
Name |
Address | |||
| Lewis J. Critelli | 717 Main Street | |||
| Honesdale, Pennsylvania 18431 |
Article 7. Directors. The business and affairs of the Company shall be managed by or under the direction of the Board of Directors.
A. Number. The number of directors of the Company shall be such number, not less than 5 nor more than 15 (exclusive of directors, if any, to be elected by holders of Preferred Stock, voting separately as a class), as shall be provided from time to time in accordance with the bylaws, provided that no decrease in the number of directors shall have the effect of shortening the term of any incumbent director, and provided further that no action shall be taken to decrease or increase the number of directors from time to time unless at least eighty percent (80%) of the directors then in office shall concur in said action.
B. Classified Board. The Board of Directors shall be divided into three classes of directors that shall be designated Class I, Class II, and Class III. The members of each class shall be elected for a term of three years and until their successors are elected and qualified. Such classes shall be as nearly equal in number as the then total number of directors constituting the entire Board of Directors shall permit, with the term of office of Class I to expire at the first annual meeting of stockholders, the term of office of Class II to expire at the annual meeting of stockholders one year thereafter and the term of office of Class III to expire at the annual meeting of stockholders two years thereafter. At each annual meeting of stockholders following such initial classification and election, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election.
Should the number of directors of the Company be reduced, the directorship(s) eliminated shall be allocated among the classes so that the number of directors in each class is as specified in the immediately preceding paragraph. The Board of Directors shall designate, by the name of the incumbent(s), the position(s) to be abolished. Should the number of directors of the Company be increased, the additional directorships shall be allocated among such classes so that the number of directors in each class is as specified in the immediately preceding paragraph.
Whenever the holders of any one or more series of Preferred Stock of the Company shall have the right, voting separately as a class, to elect one or more directors of the Company, the Board of Directors shall consist of said directors so elected in addition to the number of directors fixed as provided above in this Article 7. Notwithstanding the foregoing, and except as otherwise may be required by law, whenever the holders of any one or more series of Preferred Stock of the Company shall have the right, voting separately as a class, to elect one or more directors of the Company, the terms of the director or directors elected by such holders shall expire at the next succeeding annual meeting of stockholders.
C. No Cumulative Voting. Stockholders of the Company shall not be permitted to cumulate their votes for the election of directors.
D. Vacancies. Subject to the rights of the holders of any series of Preferred Stock then outstanding, any vacancy occurring in the Board of Directors, including any vacancy created by reason of an increase in the number of directors, shall be filled by a majority vote of the directors then in office, whether or not a quorum is present, or by a sole remaining director, and any director so chosen shall serve until the term of the class to which such director was appointed shall expire and until a successor is elected and qualified. When the number of directors is changed, the Board of Directors shall determine the class or classes to which the increased or decreased number of directors shall be appointed.
E. Removal. Unless otherwise required by law, a director (including persons elected by directors to fill vacancies in the Board of Directors) may be removed from office only for cause by an affirmative vote of not less than a majority of the total votes eligible to be cast by stockholders. Cause for removal shall exist only if the director whose removal is proposed has been either declared of unsound mind by an order of a court of competent jurisdiction, convicted of a felony or of an offense punishable by imprisonment for a term of more than one year by a court of competent jurisdiction, or deemed liable by a court of competent jurisdiction for gross negligence or misconduct in the performance of such director’s duties to the Company. At least 30 days prior to such meeting of stockholders, written notice shall be sent to the director whose removal will be considered at the meeting. Directors may also be removed from office in the manner provided in Sections 1726(b) and 1726(c) of the BCL, or any successors to such sections.
F. Nominations of Directors. Nominations of candidates for election as directors at any annual meeting of stockholders may be made (a) by, or at the direction of, a majority of the Board of Directors or (b) by any stockholder entitled to vote at such annual meeting. Only persons nominated in accordance with the procedures set forth in this Article 7.F shall be eligible for election as directors at an annual meeting. Ballots bearing the names of all the persons who have been nominated for election as directors at an annual meeting in accordance with the procedures set forth in this Article 7.F shall be provided for use at the annual meeting.
Nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Company as set forth in this Article 7.F. To be timely, a stockholder’s notice shall be delivered to, or mailed and received at, the principal executive offices of the Company not less than 60 days prior to the anniversary date of the immediately preceding annual meeting of stockholders of the Company; provided, however, that with respect to the first scheduled annual meeting, notice by the stockholder must be so delivered or received no later than the close of business on the tenth day following the day on which notice of the date of the scheduled meeting was mailed and must be delivered or received no later than the close of business on the fifth day preceding the date of the meeting. Such stockholder’s notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director and as to the stockholder giving the notice (i) the name, age, business address, and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of Company stock that are Beneficially Owned (as defined in Article 13.A.5) by such person on the date of such stockholder notice, and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies with respect to nominees for election as directors, pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or any successor thereto; and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the Company’s books, of such stockholder and any other stockholders known by such stockholder to be supporting such nominees and (ii) the class and number of shares of Company stock that are Beneficially Owned by such stockholder on the date of such stockholder notice and, to the extent known, by any other stockholders known by such stockholder to be supporting such nominees on the date of such stockholder notice. At the request of the Board of Directors, any person nominated by, or at the direction of, the Board of Directors for election as a director at an annual meeting shall furnish to the Secretary of the Company the same information required to be set forth in a stockholder’s notice of nomination which pertains to the nominee.
The Board of Directors may reject any nomination by a stockholder not timely made in accordance with the requirements of this Article 7.F. If the Board of Directors, or a designated committee thereof, determines that the information provided in a stockholder’s notice does not satisfy the informational requirements of this Article 7.F in any material respect, the Secretary of the Company shall notify such stockholder of the deficiency in the notice. The stockholder shall have an opportunity to cure the deficiency by providing additional information to the Secretary within such period of time, not to exceed five days from the date such deficiency notice is given to the stockholder, as the Board of Directors or such committee shall reasonably determine. If the deficiency is not cured within such period, or if the Board of Directors or such committee reasonably determines that the additional information provided by the stockholder, together with information previously provided, does not satisfy the requirements of this Article 7.F in any material respect, then the Board of Directors may reject such stockholder’s nomination. The Secretary of the Company shall notify a stockholder in writing whether such person’s nomination has been made in accordance with the time and informational requirements of this Article 7.F. Notwithstanding
the procedures set forth in this paragraph, if neither the Board of Directors nor such committee makes a determination as to the validity of any nominations by a stockholder, the presiding officer of the annual meeting shall determine and declare at the annual meeting whether the nomination was made in accordance with the terms of this Article 7.F. If the presiding officer determines that a nomination was made in accordance with the terms of this Article 7.F, such person shall so declare at the annual meeting and ballots shall be provided for use at the meeting with respect to such nominee. If the presiding officer determines that a nomination was not made in accordance with the terms of this Article 7.F, such person shall so declare at the annual meeting and the defective nomination shall be disregarded.
Notwithstanding the foregoing, and except as otherwise required by law, whenever the holders of any one or more series of Preferred Stock shall have the right, voting separately as a class, to elect one or more directors of the Company, the provisions of this Article 7.F shall not apply with respect to the director or directors elected by such holders of Preferred Stock.
Article 8. Preemptive Rights. No holder of any of the shares of any class or series of stock or of options, warrants, or other rights to purchase shares of any class or series or of other securities of the Company shall have any preemptive right to purchase or subscribe for any unissued stock of any class or series, any unissued bonds, certificates of indebtedness, debentures, or other securities convertible into or exchangeable for stock of any class or series or carrying any right to purchase stock of any class or series, or any shares of any class, bonds, debentures, notes, scrip, warrants, obligations, evidences of indebtedness, or other securities of the Company purchased by the Company pursuant to Article 5.D; but any such unissued, or issued but not outstanding, stock, bonds, certificates of indebtedness, debentures, or other securities convertible into or exchangeable for stock or carrying any right to purchase stock may be issued pursuant to resolution of the Board of Directors to such persons, firms, corporations, or associations, whether or not holders thereof, and upon such terms as may be deemed advisable by the Board of Directors in the exercise of its sole discretion.
Article 9. Elimination of Directors’ Liability. A director of the Company shall not be personally liable, as such, for monetary damages for any action taken unless: (i) the director has breached or failed to perform such director’s fiduciary duties, or other duties under Chapter 17, Subchapter B of the BCL, of such director’s office, and (ii) the breach or failure to perform constitutes self-dealing, willful misconduct, or recklessness; provided, however, that the foregoing shall not apply to (i) the responsibility or liability of a director pursuant to any criminal statute; or (ii) the liability of a director for the payment of taxes pursuant to federal, state, or local law. If the laws of the Commonwealth of Pennsylvania are amended after the effective date of these Articles of Incorporation to eliminate further or limit the personal liability of directors, then the liability of a director of the Company shall be eliminated or limited to the fullest extent permitted by law.
Any repeal or modification of the foregoing paragraph by the stockholders of the Company shall not adversely affect any right or protection of a director of the Company existing at the time of such repeal or modification.
Article 10. Indemnification, etc. of Officers, Directors, Employees, and Agents.
A. Persons. The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, including actions by or in the right of the Company, whether civil, criminal, administrative, or investigative, by reason of the fact that such person is or was a director, officer, employee, fiduciary, trustee, or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee, fiduciary, trustee, or agent of another corporation, partnership, joint venture, trust, or other enterprise.
B. Extent — Derivative Actions. In the case of a threatened, pending, or completed action or suit by or in the right of the Company against a person named in paragraph A by reason of such person holding a position named in paragraph A, the Company shall indemnify such person if such person satisfies the standard in paragraph C, for expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of the action or suit.
C. Standard — Derivative Suits. In the case of a threatened, pending, or completed action or suit by or in the right of the Company, a person named in paragraph A shall be indemnified only if:
1. such person is successful on the merits or otherwise; or
2. such person acted in good faith in the transaction that is the subject of the suit or action, and in a manner reasonably believed to be in, or not opposed to, the best interest of the Company, including, but not limited to, the taking of any and all actions in connection with the Company’s response to any tender offer or any offer or proposal of another party to engage in a Business Combination (as defined in Article 13 of these Articles) not approved by the Board of Directors. However, such person shall not be indemnified in respect of any claim, issue, or matter as to which such person has been adjudged liable to the Company unless (and only to the extent that) the court of common pleas or the court in which the suit was brought shall determine, upon application, that despite the adjudication of liability but in view of all the circumstances, such person is fairly and reasonably entitled to indemnity for such expenses as the court shall deem proper.
D. Extent — Nonderivative Suits. In case of a threatened, pending, or completed suit, action, or proceeding (whether civil, criminal, administrative, or investigative), other than a suit by or in the right of the Company, together hereafter referred to as a nonderivative suit, against a person named in paragraph A by reason of such person holding a position named in paragraph A, the Company shall indemnify such person if such person satisfies the standard in paragraph E, for amounts actually and reasonably incurred by such person in connection with the defense or settlement of the nonderivative suit, including, but not limited to (i) expenses (including attorneys’ fees), (ii) amounts paid in settlement, (iii) judgments, and (iv) fines.
E. Standard — Nonderivative Suits. In case of a nonderivative suit, a person named in paragraph A shall be indemnified only if:
1. such person is successful on the merits or otherwise; or
2. such person acted in good faith in the transaction that is the subject of the nonderivative suit and in a manner such person reasonably believed to be in, or not opposed to, the best interests of the Company, including, but not limited to, the taking of any and all actions in connection with the Company’s response to any tender offer or
any offer or proposal of another party to engage in a Business Combination (as defined in Article 13 of these Articles) not approved by the Board of Directors and, with respect to any criminal action or proceeding, such person had no reasonable cause to believe such person’s conduct was unlawful. The termination of a nonderivative suit by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent shall not, in itself, create a presumption that the person failed to satisfy the standard of this paragraph E.2.
F. Determination That Standard Has Been Met. A determination that the standard of paragraph C or E has been satisfied may be made by a court, or, except as stated in paragraph C.2 (second sentence), the determination may be made by:
1. the Board of Directors by a majority vote of a quorum consisting of directors of the Company who were not parties to the action, suit, or proceeding;
2. if such a quorum is not obtainable or if obtainable and a majority of a quorum of disinterested directors so directs, by independent legal counsel in a written opinion; or
3. the stockholders of the Company.
G. Proration. Anyone making a determination under paragraph F may determine that a person has met the standard as to some matters but not as to others, and may reasonably prorate amounts to be indemnified.
H. Advancement of Expenses. Reasonable expenses incurred by a director, officer, employee, or agent of the Company in defending a civil or criminal action, suit, or proceeding described in Article 10.A may be paid by the Company in advance of the final disposition of such action, suit, or proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that the person is not entitled to be indemnified by the Company.
I. Other Rights. The indemnification and advancement of expenses provided by or pursuant to this Article 10 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any insurance or other agreement, vote of stockholders or directors, or otherwise, both as to actions in their official capacity and as to actions in another capacity while holding an office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such person.
J. Insurance. The Company shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the Company would have the power to indemnify such person against such liability under the provisions of this Article 10.
K. Security Fund; Indemnity Agreements. By action of the Board of Directors (notwithstanding their interest in the transaction), the Company may create and fund a trust fund or fund of any nature, and may enter into agreements with its officers, directors, employees, and agents for the purpose of securing or insuring in any manner its obligation to indemnify or advance expenses provided for in this Article 10.
L. Modification. The duties of the Company to indemnify and to advance expenses to any person as provided in this Article 10 shall be in the nature of a contract between the Company and each such person, and no amendment or repeal of any provision of this Article 10, and no amendment or termination of any trust or other fund created pursuant to Article 10.K hereof, shall alter to the detriment of such person the right of such person to the advancement of expenses or indemnification related to a claim based on an act or failure to act which took place prior to such amendment, repeal, or termination.
M. Proceedings Initiated by Indemnified Persons. Notwithstanding any other provision in this Article 10, the Company shall not indemnify a director, officer, employee, or agent for any liability incurred in an action, suit, or proceeding initiated by (which shall not be deemed to include counter-claims or affirmative defenses) or participated in as an intervenor or amicus curiae by the person seeking indemnification unless such initiation of or participation in the action, suit, or proceeding is authorized, either before or after its commencement, by the affirmative vote of a majority of the directors then in office.
N. Savings Clause. If this Article 10 or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify each director, officer, employee, and agent of the Company as to costs, charges, and expenses (including attorneys’ fees), judgments, fines, and amounts paid in settlement with respect to any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, including an action by or in the right of the Company to the fullest extent permitted by any applicable portion of this Article 10 that shall not have been invalidated and to the fullest extent permitted by applicable law.
If the laws of the Commonwealth of Pennsylvania are amended to permit further indemnification of the directors, officers, employees, and agents of the Company, then the Company shall indemnify such persons to the fullest extent permitted by law. Any repeal or modification of this Article by the stockholders of the Company shall not adversely affect any right or protection of a director, officer, employee, or agent existing at the time of such repeal or modification.
Article 11. Meetings of Stockholders and Stockholder Proposals.
A. Special Meetings of Stockholders. Special meetings of the stockholders of the Company may be called only by (i) the Board of Directors pursuant to a resolution approved by the affirmative vote of a majority of the directors then in office, (ii) the Chairman of the Board, (iii) the President, or stockholders entitled to cast at least 50% of the votes that all stockholders are entitled to cast at the particular meeting.
B. Action Without a Meeting. Any action required to be taken or which may be taken at any annual or special meeting of stockholders of the Company may be taken without a meeting upon the consent of stockholders who would have been entitled to cast the minimum number of votes that would be necessary to authorized the action at a meeting at which all stockholders entitled to vote thereon were present and voting. The consents shall be filed with the Secretary of the Company. If the action taken without a meeting is by less than unanimous consent, such action shall not become effective until after at least ten (10) days written notice of the action has been given to each stockholder entitled to vote thereon who has not consented thereto.
C. Stockholder Proposals. At an annual meeting of stockholders, only such new business shall be conducted, and only such proposals shall be acted upon, as shall have been brought before the annual meeting by, or at the direction of, (1) the Board of Directors or (2) any stockholder of the Company who complies with all the requirements set forth in this Article 11.C.
Proposals, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Company as set forth in this Article 11.C. For stockholder proposals to be considered at the annual meeting of stockholders, the stockholder’s notice shall be delivered to, or mailed and received at, the principal executive offices of the Company not less than 60 days prior to the anniversary date of the immediately preceding annual meeting of stockholders of the Company. Such stockholder’s notice shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the proposal desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Company’s books, of the stockholder proposing such business and, to the extent known, any other stockholders known by such stockholder to be supporting such proposal, (c) the class and number of shares of the Company stock that are Beneficially Owned (as defined in Article 13.A) by the stockholder on the date of such stockholder notice and, to the extent known, by any other stockholders known by such stockholder to be supporting such proposal on the date of such stockholder notice, and (d) any financial interest of the stockholder in such proposal (other than interests which all stockholders would have).
The Board of Directors may reject any stockholder proposal not timely made in accordance with the terms of this Article 11.C. If the Board of Directors, or a designated committee thereof, determines that the information provided in a stockholder’s notice does not satisfy the informational requirements of this Article 11.C in any material respect, the Secretary of the Company shall promptly notify such stockholder of the deficiency in the notice. The stockholder shall have an opportunity to cure the deficiency by providing additional information to the Secretary within such period of time, not to exceed five days from the date such deficiency notice is given to the stockholder, as the Board of Directors or such committee shall reasonably determine. If the deficiency is not cured within such period, or if the Board of Directors or such committee determines that the additional information provided by the stockholder, together with information previously provided, does not satisfy the requirements of this Article 11.C in any material respect, then the Board of Directors may reject such stockholder’s proposal. The Secretary of the Company shall notify a stockholder in writing whether such stockholder’s proposal has been made in accordance with the time and informational requirements of this Article 11.C. Notwithstanding the procedures set forth in this paragraph, if neither the Board of Directors nor such committee makes a determination as to the validity of any stockholder proposal, the presiding officer of the annual meeting shall determine and declare at the annual meeting whether the stockholder proposal was made in accordance with the terms of this Article 11.C. If the presiding officer determines that a stockholder proposal was made in accordance with the terms of this Article 11.C, such person shall so declare at the annual meeting and ballots shall be provided for use at the meeting with respect to any such proposal. If the presiding officer determines that a stockholder proposal was not made in accordance with the terms of this Article 11.C, such person shall so declare at the annual meeting and any such proposal shall not be acted upon at the annual meeting.
This provision shall not prevent the consideration and approval or disapproval at the annual meeting of report of officers, directors, and committees of the Board of Directors, but in connection with such reports, no new business shall be acted upon at such annual meeting unless stated, filed, and received as herein provided.
Article 12. Stockholder Approval of Business Combinations
A. Definitions. The definitions and other provisions set forth in Articles 13.A, 13.B, and 13.C are also applicable to this Article 12.
B. Stockholder Vote. Any “Business Combination,” including merger, consolidation, liquidation, or dissolution of the Company or any action that would result in the sale or other disposition of all or substantially all of the assets of the Company shall require the affirmative vote of the holders of at least eighty percent (80%) of the outstanding shares of capital stock of the Company eligible to vote at a legal meeting.
C. Fair Price. The provisions of Article 12.B. shall not apply to a particular Business Combination, and such Business Combination shall require only such stockholder vote (if any) as would be required by Pennsylvania law, if the conditions specified in Article 12.C. are met or all of the conditions set forth in Subparagraphs (1) and (2) below are satisfied:
(1) The ratio of (A) the aggregate amount of the cash and the fair market value of other consideration to be received per share of capital stock of the Company in such Business Combinations by holders of capital stock other than the Controlling person involved in such Business Combination, to (B) the market price per share of the capital stock immediately prior to the announcement of the proposed Business Combination, is at least as great as the ratio of (X) the highest per share price (including brokerage commissions, transfer taxes and soliciting dealers’ fees) which such Controlling person has theretofore paid in acquiring any capital stock prior to such to (Y) the market price per share of capital stock immediately prior to the initial acquisition by such Controlling person of any shares of capital stock; and
(2) The aggregate amount of the cash and the fair market value of other consideration to be received per share of capital stock in such Business Combination by holders of capital stock, other than the Controlling person involved in such Business Combination, is not less than the highest per shares price (including brokerage commissions, transfer taxes and soliciting dealers’ fees) paid by such Controlling person in acquiring any of its holdings of capital stock.
D. Board Approval. The provisions of Article 12.B shall not apply to a particular Business Combination, and such Business Combination shall require only such stockholder vote, if any, as would be required by Pennsylvania law, if such Business Combination is approved by (i) two thirds of the entire Board of Directors of the Company at a time prior to acquisition of 10% or more of the outstanding Voting Shares of the Company by the Controlling person, or (ii) a majority of the Continuing Directors after acquisition of 10% or more of the outstanding Voting Shares by the Controlling person but before consummation of the particular Business Combination.
E. Additional Provisions. Nothing contained in this Article 12 shall be construed to relieve a Controlling person from any fiduciary obligation imposed by law. In addition, nothing contained in this Article 12 shall prevent any stockholders of the Company from objecting to any Business Combination and from demanding any appraisal rights that may be available to such shareholders.
Notwithstanding Article 14 or any other provisions of these Articles of Incorporation or the Bylaws of the Company (and notwithstanding the fact that a lesser percentage may be specified by law, these Articles of Incorporation, or the Bylaws of the Company), the affirmative vote of the holders of at least eighty percent (80%) of the outstanding shares entitled to vote thereon (and, if any class or series is entitled to vote thereon separately, the affirmative vote of the holders of at least eighty percent (80%) of the outstanding shares of each such class or series) shall be required to amend or repeal or adopt any provisions inconsistent with this Article.
Article 13. Disgorgement by Certain Controlling Shareholders Following Attempts to Acquire Control.
A. Definitions.
1. Acquire. The term “Acquire” includes every type of acquisition, whether effected by purchase, exchange, operation of law, or otherwise.
2. Acting in Concert. The term “Acting in Concert” means (a) knowing participation in a joint activity or conscious parallel action towards a common goal whether or not pursuant to an express agreement, or (b) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement, or other arrangement, whether written or otherwise.
3. Affiliate. An “Affiliate” of, or a Person “affiliated with,” a specified Person, means a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Person specified.
4. Associate. The term “Associate” when used to indicate a relationship with any Person means:
(a) Any corporation or organization (other than the Company or a Subsidiary of the Company), or any subsidiary or parent thereof, of which such Person is a director, officer, or partner or is, directly or indirectly, the Beneficial Owner of 10% or more of any class of equity securities;
(b) Any trust or other estate in which such Person has a 10% or greater beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity, provided, however, such term shall not include any employee stock benefit plan of the Company or a Subsidiary of the Company in which such Person has a 10% or greater beneficial interest or serves as a trustee or in a similar fiduciary capacity;
(c) Any relative or spouse of such Person (or any relative of such spouse) who has the same home as such Person or who is a director or officer of the Company or a Subsidiary of the Company (or any subsidiary or parent thereof); or
(d) Any investment company registered under the Investment Company Act of 1940 for which such Person or any Affiliate or Associate of such Person serves as investment advisor.
5. Beneficial Owner (including Beneficially Owned). A Person shall be considered the “Beneficial Owner” of any shares of stock (whether or not owned of record):
(a) Which such Person or any Affiliate or Associate of such Person directly or indirectly has or shares (i) voting power, including the power to vote or to direct the voting of such shares of stock, and/or (ii) investment power, including the power to dispose of or to direct the disposition of such shares of stock;
(b) Which such Person or any Affiliate or Associate of such Person has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, and/or (ii) the right to vote pursuant to any agreement, arrangement or understanding (whether such right is exercisable immediately or only after the passage of time) (but shall not be deemed to be the beneficial owner of any voting shares solely by reason of a revocable proxy granted for a particular meeting of stockholders pursuant to a public solicitation of proxies for such meeting, with respect to shares which neither such person nor any such affiliate is otherwise deemed the beneficial owner); or
(c) Which such Person or any Affiliates or Associates of such Person either (i) has any agreement, arrangement or understanding, written or oral, with respect to acquiring, holding, voting or disposing of any shares of stock of the Company or any Subsidiary of the Company or acquiring, holding, or disposing of all or substantially all, or any Substantial Part, of the assets or business of the Company or a Subsidiary of the Company, or (ii) is Acting in Concert. For the purpose only of determining whether a Person is the Beneficial Owner of a percentage specified in this Article 14 of the outstanding Voting Shares, such shares shall be deemed to include any Voting Shares that may be issuable pursuant to any agreement, arrangement, or understanding or upon the exercise of conversion rights, exchange rights, warrants, options, or otherwise and which are deemed to include any Voting Shares that may be issuable pursuant to any agreement, arrangement, or understanding or upon the exercise of conversion rights, exchange rights, warrants, options, or otherwise and which are deemed to be Beneficially Owned by such Person pursuant to the foregoing provisions of this Article 14.A.5, but shall not include any other Voting Shares which may be issuable in such manner.
Provided, however, that (1) no director or officer of the Company (or any Affiliate of any such director or officer) shall, solely by reason of any or all of such directors or officers acting in their capacities as such, be deemed, for any purposes hereof, to beneficially own any stock beneficially owned by any other such director or officer (or any Affiliate thereof), and (2) neither any employee stock ownership, stock option, or similar plan of the Company or any subsidiary of the Company, nor any trustee with respect thereto or any Affiliate of such trustee (solely by reason of such capacity of such trustee), shall be deemed, for any purposes hereof, to beneficially own any stock held under any such plan.
6. Control. The term “Control” shall mean the power, whether or not exercised, to direct or cause the directions of the management and policies of a Person, whether through the ownership of Voting Shares, by contract, or otherwise.
7. Controlling Person or Group. The term “Controlling person or group” shall mean
(a)(i) A Person or group who has acquired, offered to acquire, or directly or indirectly, publicly disclosed or caused to be disclosed the intention of acquiring voting power over Voting Shares of the Company that would entitle the holder thereof to cast at least 10% of the votes that all stockholders would be entitled to cast in an election of directors of the Company; or (ii) a Person or group who has otherwise, directly or indirectly, publicly disclosed or caused to be disclosed that it may seek to acquire control of the Company through any means.
(b) Two or more Persons acting in concert, whether or not pursuant to an express agreement, arrangement, relationship, or understanding, including a partnership, limited partnership, syndicate, or through any means of affiliation whether or not formally organized, for the purpose of acquiring, holding, voting, or disposing of equity securities of the Company shall be deemed a group for the purposes of this Article 16. Regardless of whether a group has been deemed to acquire Beneficial Ownership of an equity security under this Article, each person who participates in a group, where such group is a Controlling person or group as defined above, shall also be deemed to be a Controlling person or group for the purpose of this Article 16.
(c) For the purposes of this Article 16, a Person or group shall not be deemed a Controlling person or group
(i) absent significant other activities indicating that a person or group should be deemed a controlling person or group, by reason of voting or giving a proxy or consent as a stockholder of the Company if the Person or group is one who or which: (a) did not acquire any voting shares of the Company with the purpose of changing or influencing control of the Company or seeking to acquire control of the Company or in connection with or as a participant in any agreement, arrangement, relationship, understanding, or otherwise having any such purpose; (b) if control were acquired, would not be a Person or group or a participant in a group that has control over the Company and will not receive, directly or indirectly, any consideration from a Person or group that has control over the Company other than consideration offered proportionately to all holders of Voting Shares of the Company; and (c) if a proxy or consent is given, executes a revocable proxy or consent given without consideration in response to a proxy or consent solicitation made in accordance with the applicable rules and regulations under the Exchange Act under circumstances not then reportable under Schedule 13d (or any comparable or successor report) by the person or group who gave the proxy or consent.
(ii) if such Person or group holds voting power: (a) in good faith and not for the purpose of circumventing this Article 16, as an agent, bank, broker, nominee, or trustee for one or more Beneficial Owners who do not individually, or if they are a group acting in concert, as a group have the voting power of subparagraph A.2.a of this Article 16; (b) in connection with the solicitation of proxies or consents by or on behalf of the Company in connection with stockholder meetings or actions of the Company; or (c) in the amount specified in subparagraph A.2.a of this Article 16 as a result of the solicitation of revocable proxies or consents with respect to Voting Shares if such proxies and consents both: are given without consideration in response to a proxy or consent solicitation made in accordance with the applicable rules and regulations of the Exchange Act and do not empower the holder thereof, whether or not this power is shared with any other Person, to vote such shares except on the specific matters described in such proxy or consent and in accordance with the instructions of the giver of such proxy or consent.
8. Person. The term “Person” shall mean any individual, partnership, corporation, association, trust, group, or other entity. When two or more Persons act as a partnership, limited partnership, syndicate, association, or other group for the purpose of acquiring, holding, or disposing of shares of stock, such partnership, syndicate, associate or group shall be deemed a “Person.”
9. Profit. The term “Profit” shall mean the positive value, if any, of the difference between: (a) the consideration received from the disposition of equity securities less only the usual and customary broker’s commissions actually paid in connection with such disposition; and (b) the consideration actually paid for the acquisition of such equity securities plus only the usual and customary broker’s commissions actually paid in connection with such disposition.
10. Subsidiary. “Subsidiary” means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Person in question.
11. Substantial Part. The term “Substantial Part” as used with reference to the assets of the Company or of any Subsidiary means assets having a value of more than 10% of the total consolidated assets of the Company and its Subsidiaries as of the end of the Company’s most recent fiscal year prior to the time the determination is being made.
12. Transfer. The term “Transfer” shall include any acquisition or disposition.
13. Voting Shares. “Voting Shares” shall mean shares of the Company entitled to vote generally in an election of directors.
B. Certain Determinations With Respect to Article 14. A majority of the directors shall have the power to determine for the purposes of this Article 14, on the basis of information known to them and acting in good faith: (1) the number of Voting Shares of which any Person is the Beneficial Owner, (2) whether a Person is an Affiliate or Associate of another, (3) whether a Person has an agreement, arrangement, or understanding with another as to the matters referred to in the definition of “Beneficial Owner” as hereinabove defined, and (4) such other matters with respect to which a determination is required under this Article.
C. Directors, Officers, or Employees. Directors, officers, or employees of the Company or any Subsidiary thereof shall not be deemed to be a group with respect to their individual acquisitions of any class of equity securities of the Company solely as a result of their capacities as such.
D. Ownership of Profits Resulting from Certain Transactions. Any profit realized by any Person or group who is or was a Controlling person or group with Respect to the Company from the disposition of any equity security of the Company shall belong to and be recoverable by the Company where the profit is realized by such person or group:
1. from the disposition of the equity securities within eighteen (18) months after the person or group obtained the status of a Controlling person or group; and
2. the equity security had been acquired by the Controlling person or group within 24 months prior to the eighteen (18) months subsequent to the obtaining by the Person or group of the status as a Controlling person or group.
Any transfer by a Controlling person or group of the ownership of any equity security may be suspended on the books of the Company, and certificates representing such securities may be duly legended, to enforce the rights of the Company under this Article 14.
Article 14. Amendment of Articles and Bylaws.
A. Articles. The Company reserves the right to amend, alter, change, or repeal any provision contained in these Articles of Incorporation, in the manner now or hereafter prescribed by law, and all rights conferred upon stockholders herein are granted subject to this reservation. No amendment, addition, alteration, change, or repeal of these Articles of Incorporation shall be made unless such amendment addition, alternation, change, or repeal is first proposed and approved by the Board of Directors pursuant to a resolution proposed and adopted by the affirmative vote of a majority of the directors then in office, and thereafter is approved by the holders of a majority (except as provided below) of the shares of the Company entitled to vote generally in an election of directors, voting together as a single class, as well as such additional vote of the Preferred Stock as may be required by the provisions of any series thereof. Notwithstanding anything contained in these Articles of Incorporation to the contrary, the affirmative vote of the holders of at least eighty percent (80%) of the shares of the Company entitled to vote generally in an election of directors, voting together as a single class, as well as such additional vote of the Preferred Stock as may be required by the provisions of any series thereof, shall be required to amend, adopt, alter, change, or repeal any provision inconsistent with Articles 7, 8, 9, 10, 11, 12, 13, and 14.
B. Bylaws. The Board of Directors or stockholders may adopt, alter, amend, or repeal the Bylaws of the Company. Such action by the Board of Directors shall require the affirmative vote of a majority of the directors then in office at any regular or special meeting of the Board of Directors. Such action by the stockholders shall require the affirmative vote of the holders of at least eighty percent (80%) of the shares of the Company entitled to vote generally in an election of directors, voting together as a single class, as well as such additional vote of the Preferred Stock as may be required by the provisions of any series thereof.
Article 15. Control Share Acquisitions. Subchapter G, “Control-Share Acquisitions,” of Chapter 25 of the BCL shall not apply to the Company.
Exhibit 4.2
NORWOOD FINANCIAL CORP.
DESCRIPTION OF CAPITAL STOCK
Norwood Financial Corp. (“Norwood”) is authorized to issue 20,000,000 shares of common stock, par value $0.10 per share, and 5,000,000 shares of preferred stock no par value. Each share of Norwood common stock has the same relative rights as, and is identical in all respects with, each other share of common stock.
The common stock of Norwood represents nonwithdrawable capital, is not an account of an insurable type, and is not insured by the FDIC or any other government agency.
Common Stock
Dividends. Norwood may pay dividends out of statutory surplus or from net earnings if, as and when declared by its board of directors. The payment of dividends by Norwood is subject to limitations that are imposed by law and applicable regulation. The holders of common stock of Norwood will be entitled to receive and share equally in dividends as may be declared by the board of directors of Norwood out of funds legally available therefor. If Norwood issues shares of preferred stock, the holders thereof may have a priority over the holders of the common stock with respect to dividends.
Voting Rights. The holders of common stock of Norwood have exclusive voting rights in Norwood. They elect Norwood’s board of directors and act on other matters as are required to be presented to them under Pennsylvania law, or as are otherwise presented to them by the board of directors. Generally, each holder of common stock is entitled to one vote per share and will not have any right to cumulate votes in the election of directors. If Norwood issues shares of preferred stock, holders of the preferred stock may also possess voting rights. Certain matters require an 80% shareholder vote.
Liquidation. In the event of liquidation, dissolution or winding up of Norwood, the holders of its common stock would be entitled to receive, after payment or provision for payment of all its debts and liabilities, all of the assets of Norwood available for distribution. If preferred stock is issued, the holders thereof may have a priority over the holders of the common stock in the event of liquidation or dissolution.
Preemptive Rights. Holders of the common stock of Norwood will not be entitled to preemptive rights with respect to any shares that may be issued. The common stock is not subject to redemption.
Preferred Stock
None of the shares of Norwood’s authorized preferred stock are outstanding. Preferred stock may be issued with preferences and designations as the board of directors may from time to time determine. Norwood’s board of directors may, without shareholder approval, issue shares of preferred stock with voting, dividend, liquidation and conversion rights that could dilute the voting strength of the holders of the common stock and may assist management in impeding an unfriendly takeover or attempted change in control.
CERTAIN ANTI-TAKEOVER PROVISIONS OF NORWOOD’S
ARTICLES OF INCORPORATION AND BYLAWS
The following discussion is a general summary of the material provisions of Norwood’s articles of incorporation and bylaws and certain other provisions under the Pennsylvania Business Corporation Law and regulatory provisions that may be deemed to have an “anti-takeover” effect. The following description of certain of these provisions is necessarily general and, with respect to provisions contained in Norwood’s articles of incorporation and bylaws, reference should be made in each case to the document in question.
Norwood’s articles of incorporation and bylaws contain a number of provisions relating to corporate governance and rights of shareholders that might discourage future takeover attempts. As a result, shareholders who might desire to participate in such transactions may not have an opportunity to do so. In addition, these provisions will also render the removal of the board of directors or management of Norwood more difficult.
The following description is a summary of the provisions of the articles of incorporation and bylaws.
Directors. The board of directors is divided into three classes. The members of each class will be elected for a term of three years and only one class of directors will be elected annually. Thus, it would take at least two annual elections to replace a majority of Norwood’s board of directors. Further, the bylaws impose notice and information requirements in connection with the nomination by shareholders of candidates for election to the board of directors or the proposal by shareholders of business to be acted upon at an annual meeting of shareholders.
Prohibition of Cumulative Voting. The articles of incorporation prohibit cumulative voting for the election of directors.
Restrictions on Removing Directors from Office. The articles of incorporation provide that directors may only be removed for cause. “Cause” is defined in the articles of incorporation as being declared of unsound mind by an order of a court, convicted of a felony or of an offense punishable by imprisonment for a term of more than one year, or being deemed liable by a court for gross negligence or misconduct in the director’s duties to Norwood. At least 30 days’ prior notice to the director must be given.
Authorized but Unissued Shares. Norwood has authorized but unissued shares of common and preferred stock. The articles of incorporation authorize 5,000,000 shares of serial preferred stock. Norwood is authorized to issue preferred stock from time to time in one or more series subject to applicable provisions of law, and the board of directors is authorized to fix the designations, and relative preferences, limitations, voting rights, if any, including, without limitation, offering rights of such shares (which could be multiple or as a separate class). In the event of a proposed merger, tender offer or other attempt to gain control of Norwood that the board of directors does not approve, it might be possible for the board of directors to authorize the issuance of a series of preferred stock with rights and preferences that would impede the completion of the transaction. An effect of the possible issuance of preferred stock, therefore, may be to deter a future attempt to gain control of Norwood. Norwood’s board of directors has no present plan or understanding to issue any preferred stock.
Amendments to Articles of Incorporation and Bylaws. Amendments to the articles of incorporation must be approved by Norwood’s board of directors and also by a majority of the outstanding shares of Norwood’s voting stock; provided, however, that approval by at least 80% of the outstanding voting stock is generally required to amend the following provisions:
| • | The provision establishing the board of directors, the classified terms, procedures for removal and procedures for nomination of directors; |
| • | Preemptive rights; |
| • | Elimination of director liability; |
| • | Indemnification; |
| • | Meetings of shareholders and shareholder proposals; |
| • | Approval of business combinations; |
| • | Disgorgement of profits by certain controlling persons following a takeover attempt; and |
| • | The requisite shareholder vote to approve amendments to the articles of incorporation and bylaws. |
Anti-takeover Provisions Under the Pennsylvania Business Corporation Law
Under the Pennsylvania Business Corporation Law, certain anti-takeover provisions apply to Pennsylvania registered corporations (e.g., publicly traded companies) including those relating to (1) control share acquisitions, (2) disgorgement of profits by certain controlling persons, (3) business combination transactions with interested shareholders, and (4) the rights of shareholders to demand fair value for their stock following a control transaction. Pennsylvania law allows corporations to opt-out of these anti-takeover sections. Norwood is a registered corporation and has opted out only of the control share acquisition provisions. A general summary of the applicable anti-takeover provisions is set forth below.
Disgorgement of Profits by Certain Controlling Persons. Pennsylvania law regarding disgorgement of profits by certain controlling persons applies in the event that (1) any person or group publicly discloses that the person or group may acquire control of the corporation, or (2) a person or group acquires (or publicly discloses an intent to acquire) 20% or more of the voting power of the corporation and, in either case, sells shares within 18 months thereafter. Any profits from sales of equity securities of the corporation received by the person or group during such 18-month period will belong to the corporation if the securities that were sold were acquired during the 18-month period or within 24 months prior thereto.
Business Combination Transactions with Interested Shareholders. Pennsylvania law regarding business combination transactions with interested shareholders provides that a person who acquires the direct or indirect beneficial ownership of shares entitled to cast at least 20% of the votes entitled to be cast for the election of directors or who is an affiliate or associate of such corporation and was the beneficial owner, directly or indirectly, of shares entitling that person to cast at least 20% of the votes at any time within the five year period immediately prior to the date in question becomes an “interested shareholder.” A corporation subject to this provision may not effect mergers or certain other business combinations with the interested shareholder for a period of five years, unless:
| • | the business combination or the acquisition of stock by means of which the interested shareholder became an interested shareholder is approved by the corporation’s board of directors prior to such stock acquisition; |
| • | the business combination is approved by the affirmative vote of the holders of all the outstanding common shares of the corporation; or |
| • | the business combination is approved by the affirmative vote of the holders of a majority of all shares entitled to vote, excluding votes of shares held by the interested shareholders, and at the time of such vote, the interested shareholder is the beneficial owner of at least 80% of the voting shares of the corporation. This exception applies only if the value of the consideration to be paid by the interested shareholder in connection with the business combination satisfies certain fair price requirements. |
After the five-year restricted period, an interested shareholder of the corporation may engage in a business combination with the corporation if (1) the business combination is approved by the affirmative vote of a majority of the shares other than those beneficially owned by the interested shareholder and its affiliates, or (2) the merger is approved at a shareholders meeting and certain fair price requirements are met.
Change in Control Regulations
The Change In Bank Control Act provides that no person, acting directly or indirectly or through or in concert with one or more other persons, may acquire control of a bank holding company unless the FRB has been given 60 days prior written notice. For this purpose, the term “control” means the acquisition of the ownership, control or holding of the power to vote 25% or more of any class of a bank holding company’s voting stock, and the term “person” includes an individual, corporation, partnership, and various other entities. In addition, an acquiring person is presumed to acquire control if the person acquires the ownership, control or holding of the power to vote of 10% or more of any class of the holding company’s voting stock if (a) the bank holding company’s shares are registered pursuant to Section 12 of the Exchange Act or (b) no other person will own, control or hold the power to vote a greater percentage of that class of voting securities. Accordingly, the prior approval of the Board of Governors of the Federal Reserve System (“FRB”) would be required before any person could acquire 10% or more of the common stock of Norwood.
The Bank Holding Company Act provides that no company may acquire control of a bank directly or indirectly without the prior approval of the FRB. Any company that acquires control of a bank becomes a “bank holding company” subject to registration, examination and regulation by the FRB. Pursuant to federal regulations, the term “company” is defined to include banks, corporations, partnerships, associations, and certain trusts and other entities, and “control” of a bank is deemed to exist if a company has voting control, directly or indirectly of at least 25% of any class of a bank’s voting stock, and may be found to exist if a company controls in any manner the election of a majority of the directors of the bank or has the power to exercise a controlling influence over the management or policies of the bank. In addition, a bank holding company must obtain FRB approval prior to acquiring voting control of more than 5% of any class of voting stock of a bank or another bank holding company.
An acquisition of control of a bank that requires the prior approval of the FRB under the Bank Holding Company Act is not subject to the notice requirements of the Change In Bank Control Act. Accordingly, the prior approval of the FRB under the Bank Holding Company Act would be required (a) before any bank holding company could acquire 5% or more of the common stock of Norwood and (b) before any other company could acquire 25% or more of the common stock of Norwood.
EXHIBIT 10.19
Wayne Bank
Executive Annual Incentive Plan
Approved 2-26-19 By Board of Directors
Wayne Bank
EXECUTIVE ANNUAL INCENTIVE PLAN
I. Introduction
A vital component of Wayne Bank’s success is the ability of the executive management team to meet and exceed performance objectives consistent with the financial and strategic objectives of the bank and the best interests of the shareholders. The compensation plans at Wayne Bank are a critical component to ensuring the Bank’s ability to attract, hire, motivate and retain executive team members who will maximize successful performance.
Wayne Bank intends to provide executives with a balanced mix of fixed and variable pay. The intention of all incentive plans is to motivate, reward and reinforce performance and achievement of team and/or individual goals in support of the Bank’s strategic objective for growth and profitability. They provide the opportunity for reward for meeting and exceeding established financial goals as well as recognition of individual achievements.
While risk is an inherent aspect of business, our compensation plans are designed to reward employees for certain levels of performance without encouraging undue risk-taking which could materially threaten the safety and soundness of the organization or business unit.
The following Executive Annual Incentive Plan has been developed as a meaningful compensation tool to encourage the growth and proper management of the Bank. The major purposes of the plan are:
| • | To motivate and reward executives for positive Bank performance on an annual basis without encouraging undue risk-taking |
| • | To provide a form of variable compensation to executives, which is directly linked to their individual and collective performance |
| • | To emphasize the growth and profitability of the Bank in conjunction with the strategic direction of the Bank |
| February 2019 | Page 1 |
Wayne Bank
EXECUTIVE ANNUAL INCENTIVE PLAN
The focus of this plan is to have the executive team achieve annual performance objectives which are coordinated with the long term objectives of the Bank. This plan exists in conjunction with a long-term incentive plan which focuses on awards for performance consistent with the strategic plan and direction. The focus of this annual plan is to motivate and reward participants to meet and exceed annual budgets and financial plans.
II. Plan Year
The plan year for this program will be the calendar year. The effective date of the plan is January 1, 2019. The performance measures for this plan will be determined, calculated and approved annually.
Ill. Participation
Participation in the plan will be determined at the beginning of each plan year by the President & CEO, and approved by the Board Compensation Committee and the Board of Directors. The President & CEO’s participation will be determined annually by the Board Compensation Committee and the Board of Directors. To participate, an executive must be a regular employee of the bank with ongoing position responsibilities, which are executive in nature and have a meaningful impact on the Bank’s results. Generally, participants will include executive officers.
Exhibit A will list participants each year and may include multiple levels of participation. These levels will generally be based upon position responsibility.
An executive may become a new participant during the plan year if newly hired or promoted into an executive level. Any awards are pro-rated for the portion of the year in which participation occurs. The President & CEO makes final determination (with Board approval) of new participation during the plan year for any non-CEO position.
| February 2019 | Page 2 |
Wayne Bank
EXECUTIVE ANNUAL INCENTIVE PLAN
A participant’s eligibility ceases at termination of employment (other than death, retirement, or disability) and the executive will not receive any awards under the plan for the year of termination. Termination as a result of death, retirement, or disability will provide pro-rated awards in the plan through the last working date for the year in which termination occurred.
IV. Performance Factors
The annual portion of the plan is based upon company financial performance factors which may change from year to year. In general, these factors may be measures such as return on assets, return on equity, net income, earnings per share or similar indicators. The factors and weighing of the factors are determined at the beginning of each plan year. Each factor has quantifiable objectives consisting of threshold, target and maximum goals. Additionally, a portion of each participant’s award may be based on unit, team, functional area, and/or individual performance objectives which are determined by management at the beginning of each year. Generally, the President & CEO position may have most or all of his or her performance based on Bank performance and other executives may have a portion of their award based on functional area/individual performance.
The Bank’s performance factors for each year’s annual portion of the plan are found in Exhibit B. Individual objectives are established and recorded between the executive and the executive’s manager (usually the President & CEO).
While every effort has been made to ensure that this and all Bank incentive plans do not motivate or reward undue risk taking, any results deemed to have been the result of inappropriate risk will be excluded from incentive payments. The Board of Directors has the discretion to lever incentive payments down by as much as 100% if it is determined that excessive risk has been taken. The Board of Directors may also decrease payments if any significant regulatory issue has been identified by any regulatory agency. This can be done on an individual or overall basis, as appropriate.
| February 2019 | Page 3 |
Wayne Bank
EXECUTIVE ANNUAL INCENTIVE PLAN
V. Award Calculation and Distribution
Awards under the plan are calculated according to determination of the established performance factors at year end. Company performance between the threshold and target, and target and maximum is interpolated for award calculations. Unit, team, and/or functional area performance, if applicable, is determined by management. Individual performance is determined by each participant’s manager according to the achievement of objectives and approved by successive levels of management. Individual employee performance which is not meeting the position’s requirements (an annual performance evaluation which is less than satisfactory) will result in no award granted to that individual for that year even though Company performance is above threshold.
Performance above the defined maximum levels, while not necessarily undesirable or unrealistic, has the potential of requiring increased risk, therefore incentive opportunity will not increase for performance above maximum.
Company performance below threshold will result in no award for that particular performance metric under the plan.
All awards are paid through the payroll system less normal payroll tax withholding. Payment will be within 75 days after year end. The Bank shall deduct from all payments under this Plan any federal, state or local taxes required by law to be withheld from such payments. Income from this Plan is subject to the provisions of the 401(k) deferral plan if the Participant has elected to participate in the 401(k) plan. As such, this income is subject to deferral, taxing and matching provisions. Beyond this, there is no deferral feature nor is there any vesting feature of awards under this plan. Any participant terminating employment (except death, retirement, or disability) prior to actual payment of award will forfeit that award. The award schedule for each year is found with the performance factors in Exhibit B.
| February 2019 | Page 4 |
Wayne Bank
EXECUTIVE ANNUAL INCENTIVE PLAN
VI. Clawback
Awards will be recalculated if the relevant company performance measures upon which they are based are materially restated or otherwise adjusted within the 36-month period following the public release of the financial information. Any material overpayments or adjustments required by law will be owed back to the company.
VII. Administration
At least annually, the highest ranking risk officer will review this plan and provide a detailed report including a detailed assessment regarding any risk issues inherent in the plan. This risk report and the plan document in full will be reviewed by the Compensation Committee of the Board of Directors to ensure that the plan design is consistent with the compensation philosophy of the Bank and that the plan does not motivate undue risk taking. The annual review will also include the market competitiveness of the plan, the plan’s alignment with the bank’s strategic plan, an assessment of how the plan meets the objectives in the Introduction of this document, plus the plan’s impact on the overall safety and soundness of the bank. The Compensation Committee will then provide a report and recommendations to the full Board of Directors who are responsible to approve the plan. The Board of Directors of the bank may amend the plan at any time.
Once established, performance factors are intended to remain in place for the year.
Participation, performance factors, thresholds, targets, maximums and any other participation features are established each plan year and may change from year to year according to the strategic objectives of the company.
The plan does not constitute a contract of employment, and participation in the plan does not give any employee the right to be retained in the service of the bank or any right or claim to an award under the plan unless specifically accrued under the terms of this plan. Designation as a plan participant conveys the opportunity, but not the right, to any awards conferred under the Plan.
| February 2019 | Page 5 |
Wayne Bank
EXECUTIVE ANNUAL INCENTIVE PLAN
Any right of a participant or his or her beneficiary to the payment of an award under this plan may not be assigned, transferred, pledged or encumbered.
Any adjustments to the financial performance results utilized in this plan because of extraordinary gains or losses or other items must be approved by the Board of Directors.
VIII. Governing Law
Except as preempted under federal law, the provisions of the Plan shall be construed, administered and enforced in accordance with the domestic internal law of the Commonwealth of Pennsylvania.
IX. Plan Approval
This plan has been approved by the Board of Directors of Wayne Bank on February 26, 2019.
| By | ||
| Board of Directors | ||
| Wayne Bank | ||
| February 2019 | Page 6 |
Wayne Bank
EXECUTIVE ANNUAL INCENTIVE PLAN
| Exhibit | A | — | Participation | |||
| Plan Year 2019 |
(Participating employees and their participant categories should be listed at the beginning of each year and adjusted for changes in participation throughout the year.)
Category A — President & CEO — Lewis J. Critelli
Category B — Chief Financial Officer — William S. Lance
Chief Operations Officer — Robert J. Mancuso
Chief Credit Officer — John F. Carmody
Chief Lending Officer — James F. Burke
| February 2019 | Page 7 |
Wayne Bank
EXECUTIVE ANNUAL INCENTIVE PLAN
Exhibit B — Bank Performance Factors and Award Schedule
Plan Year 2019 — Performance measures at target below are based on the approved 2019 annual budget.
Category A
COMPANY GOALS
Performance Measures
Net Income (50%)
| Threshold |
Target | Maximum | ||||
| $11,612,000 |
$14,515,000 | $ | 17,418,000 | |||
Earnings Per Share (50%)
| Threshold |
Target | Maximum | ||||
| $1.86 |
$2.32 | $ | 2.68 | |||
AWARDS
(% of Base Pay)
| Threshold |
Target | Maximum | ||||
| 10% |
30% | 45 | % | |||
Individual Performance Lever
+/- 20% of the award based on individual performance as determined by BOD
POTENTIAL AWARD RANGE
(% of Base Pay)
| Threshold |
Target |
Maximum |
||||
| 8-12% |
24-36% | 36-54 | % | |||
Parameters
1. Company Measures will be 50% Net Income and 50% Earnings Per Share.
2. Either Financial Measure must meet threshold to initiate an award in the plan.
3. Will interpolate awards between threshold, target, and maximum.
4. Performance above maximum will be paid at maximum award level.
5. Board of Directors has the discretion to lever incentive payments down by as much as 100% if it is determined that excessive risk has been taken or if significant regulatory issues exist. This can be done on an individual or overall basis, as appropriate.
6. Pay is defined as total actual base pay for the applicable plan year.
| February 2019 | Page 8 |
Wayne Bank
EXECUTIVE ANNUAL INCENTIVE PLAN
Exhibit B - Bank Performance Factors and Award Schedule
Plan Year 2019 - Performance measures at target below are based on the approved 2019 annual budget.
Category B
COMPANY GOALS
Performance Measures
Net Income (50%)
| Threshold |
Target | Maximum | ||||
| $11,612,000 |
$14,515,000 | $ | 17,418,000 | |||
Earnings Per Share (50%)
| Threshold |
Target | Maximum | ||||
| $1.86 |
$2.32 | $ | 2.68 | |||
AWARDS
(% of Base Pay)
| Threshold |
Target |
Maximum |
||||
| 10% |
25% | 35 | % | |||
Individual Performance Lever
+1- 20% of the award based on individual performance as determined by Pres.& CEO
POTENTIAL AWARD RANGE
(% of Base Pay)
| Threshold |
Target |
Maximum |
||||
| 8-12% |
20-30% | 28-42 | % | |||
Parameters
| 1. | Company Measures will be 50% Net Income and 50% Earnings Per Share. |
| 2. | Either Financial Measure must meet threshold to initiate an award in the plan. |
| 3. | Will interpolate awards between threshold, target, and maximum. |
| 4. | Performance above maximum will be paid at maximum award level. |
| 5. | Board of Directors has the discretion to lever incentive payments down by as much as 100% if it is determined that excessive risk has been taken or if significant regulatory issues exist. This can be done on an individual or overall basis, as appropriate. |
| 6. | Pay is defined as total actual base pay for the applicable plan year. |
| 7. | Individual goals will be established at the beginning of each year. |
| February 2019 | Page 9 |
Exhibit 13
NORWOOD FINANCIAL CORP SUMMARY OF SELECTED FINANCIAL DATA (dollars in thousands except per share data) FOR THE YEARS ENDED DECEMBER 31, 2019 2018 2017 2016 2015 Net interest income $38,606 $36,839 $34,908 $28,590 $24,521 Provision for loan losses 1,250 1,725 2,200 2,050 4,580 Other income 6,355 6,837 6,496 4,841 3,969 Net realized gains on sales of loans and securities 423 228 415 338 730 Other expenses 27,311 25,975 24,870 23,124 17,100 Income before income taxes 16,823 16,204 14,749 8,595 7,540 Income tax expense 2,608 2,553 6,551 1,884 1,632 NET INCOME $14,215 $13,651 $8,198 $6,711 $5,908 Net income per share -Basic* $2.27 $2.19 $1.32 $1.16 $1.07 -Diluted* $2.25 $2.17 $1.31 $1.15 $1.07 Cash dividends declared* $0.97 $0.90 $0.87 $0.83 $0.83 Dividend pay-out ratio 42.73% 41.10% 65.91% 71.84% 77.50% Return on average assets 1.18% 1.19% 0.73% 0.74% 0.80% Return on average equity 10.83% 11.71% 7.04% 6.17% 5.83% BALANCES AT YEAR-END Total assets $1,230,610 $1,184,559 $1,132,916 $1,111,183 $750,505 Loans receivable 924,581 850,182 764,092 713,889 559,925 Allowance for loan losses 8,509 8,452 7,634 6,463 7,298 Total deposits 957,529 946,780 929,384 925,385 550,909 Stockholders’ equity 137,428 122,285 115,739 111,079 100,998 Trust assets under management 170,685 151,224 157,838 138,167 131,690 Book value per share* $21.67 $19.43 $18.61 $17.43 $18.26 Tier 1 Capital to risk-adjusted assets 13.08% 13.04% 13.16% 13.27% 15.86% Total Capital to risk-adjusted assets 13.98% 14.00% 14.11% 14.12% 17.09% Allowance for loan losses to total loans 0.92% 0.99% 1.00% 0.91% 1.30% Non-performing assets to total assets 0.19% 0.19% 0.37% 0.64% 1.33% *Per share information has been restated to reflect the 50% stock dividend declared in 2017.
2019 CONSOLIDATED FINANCIAL REPORT Management’s Discussion & Analysis 2 Management’s Report On Internal Control Over Financial Reporting ..20 Reports Of Independent Registered Public Accounting Firm 21 23 Consolidated Statements Of Income 24 Consolidated Statements Of Comprehensive Income 25 Consolidated Statements Of Stockholders’ Equity 26 Consolidated Statements Of Cash Flows 27 Notes To Consolidated Financial Statements 29 Investor Information 77
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS INTRODUCTION This Management’s Discussion and Analysis and related financial data are presented to assist in the understanding and evaluation of the financial condition and results of operations for Norwood Financial Corp (the “Company”), and its subsidiary Wayne Bank (the Bank), as of December 31, 2019 and 2018, and for the years ended December 31, 2019 and 2018. This section should be read in conjunction with the consolidated financial statements and related footnotes. 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 changes in Federal and State laws, changes in interest rates, the ability to control costs and expenses, demand for real estate, government fiscal and trade policies, cybersecurity and general economic conditions. The Company 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 (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. 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 determination of other-than-temporary impairment on securities, the determination of goodwill impairment and the fair value of financial instruments. Please refer to the discussion of the allowance for loan losses calculation under “Allowance for Loan Losses and Non-performing Assets” in the “Financial Condition” section. The 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 it is more likely than not that all deferred tax assets will be realized.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT In estimating other-than-temporary impairment losses on securities, the Company considers 1) the length of time and extent to which the fair value has been less than cost and 2) the financial condition of the issuer The Company does not have the intent to sell these securities and it is more likely than not that it will not sell the securities before recovery of their cost basis. The Company believes that any unrealized losses at December 31, 2019 and 2018 represent temporary impairment of the securities. 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 overtime. In connection with the acquisition of North Penn Bancorp, Inc. in 2011, we recorded goodwill in the amount of $9.7 million, representing the excess of amounts paid over the fair value of the net assets of the institution acquired at the date of acquisition. In connection with the acquisition of Delaware Bancshares, Inc. in 2016, we recorded goodwill in the amount of $1.6 million, representing the excess of amounts paid over the fair value of the net assets of the institution acquired at the date of acquisition. Goodwill is tested annually and deemed impaired when the carrying value of goodwill exceeds its implied fair value. RESULTS OF OPERATIONS—SUMMARY Net income for the Company for the year ended December 31, 2019 was $14,215,000, which was $564,000 higher than the $13,651,000 earned in 2018. Earnings per share on a fully diluted basis were $2.25 for 2019 compared to $2.17 in 2018. The return on average assets for the year was 1.18%, with a return on average equity of 10.83%, compared to 1.19% and 11.71%, respectively, in 2018. Net interest income increased $1,767,000 and the provision for loan losses decreased $475,000, to offset the $482,000 reduction in other income and the $1,336,000 increase in other expenses. Net interest income (fully taxable equivalent, or fte) totaled $39,612,000, which was an increase of $1,713,000 from the 2018 total. Average loans outstanding increased $84.8 million in 2019, which resulted in an increase in fte interest income of $5,540,000. Total average securities decreased $35.9 million in 2019 as proceeds were utilized to fund loan growth, resulting in an $814,000 decrease in fte interest income on securities. Average interest-bearing deposits increased $21.5 million due to growth in time deposits, and resulted in a $2,495,000 increase in interest expense. The cost of borrowed funds increased $526,000 compared to the prior year due primarily to a $14.4 million increase in average borrowings and an increase in the cost of borrowings. The resulting fte net interest spread decreased eight basis points to 3.28% in 2019 as a 24 basis point improvement in the yield earned was offset by a 32 basis point increase in the cost of funds. Loans receivable increased $74.3 million from the prior year-end. Loan growth included a $40.1 million increase in commercial loans due to a $23.6 million increase in commercial, financial and agriculture loans, and a $16.5 million increase in commercial real estate loans. Retail loans increased $34.2 million in 2019 due to a $39.7 million increase in indirect auto and marine financing. Residential mortgage loans and construction loans decreased $5.5 million, net, due to the sale of $4.7 million residential mortgage loans. Total non-performing loans decreased from $1.1 million, or 0.13% of total loans at the end of 2018, to $795,000, or 0.09% of total loans on December 31, 2019. Net charge-offs totaled $1,193,000 in 2019, which was an increase from the $907,000 recorded in 2018. Based on management’s analysis, the Company
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT determined that it would be appropriate to allocate $1,250,000 to the allowance for loan losses in 2019, which resulted in a decrease in the ratio of the allowance for loan losses to total loans outstanding of 0.92% in 2019 compared to 0.99% on December 31, 2018. The allowance for loan losses represented 1,070% of total non-performing loans on December 31, 2019 compared to 741% as of December 31, 2018. Total other income for the year ended December 31, 2019 totaled $6,778,000 compared to $7,065,000 in the prior year, a decrease of $287,000. Gains on the sale of loans and investment securities increased $195,000 in the aggregate, while service charges and fees increased $155,000. Earnings and proceeds on life insurance policies decreased $658,000 compared to 2018. Other expenses were $27,311,000 in 2019 compared to $25,975,000 for the similar period in 2018, an increase of $1,336,000. Salaries and benefits costs increased $635,000 in 2019, while data processing costs increased $442,000. Foreclosed real estate expense decreased $127,000 in 2019, while all other operating expenses increased $386,000, net. Income tax expense for the year totaled $2,608,000, which was an increase of $55,000 from the prior year The effective tax rate in 2019 was 15.5% compared to 15.8% in 2018. The following table sets forth changes in net income (in thousands): Net income 2018 $ 13,651 Net interest income 1,767 Provision for loan losses 475 Net gains on sales of loans and securities 195 Other income (482) Salaries and employee benefits (635) Occupancy, furniture and equipment (24) Data processing and related operations (442) Foreclosed real estate owned 127 Other expenses (362) Income tax expense (55) Net income 2019 $ 14,215
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT FINANCIAL CONDITION TOTAL ASSETS Total assets as of December 31, 2019 were $1.231 billion compared to $1.185 billion as of year-end 2018, an increase of $46.1 million. The increase in assets was primarily attributable to organic loan growth. LOANS RECEIVABLE As of December 31, 2019, loans receivable totaled $924.5 million compared to $850.2 million as of year-end 2018, an increase of $74.3 million. Commercial loans, including commercial real estate, grew $40.1 million, while retail loans increased $34.2 million during the year. Residential real estate loans, which include home equity lending, totaled $229.8 million as of December 31, 2019, compared to $235.5 million as of year-end 2018, a decrease of $5.7 million. Home equity loans decreased $1.2 million to $51.2 million in 2019, from $52.4 million at December 31, 2018. The Company does not originate any non-traditional mortgage products such as interest-only loans or option adjustable rate mortgages and has no sub-prime mortgage exposure. The Company evaluates sales of its long-term, fixed-rate residential loan production for interest rate risk management. During 2019, the Company sold residential real estate loans totaling $4.7 million. Commercial loans consist principally of loans made to small businesses within the Company’s market and are usually secured by real estate or other assets of the borrower Commercial real estate loans totaled $391.3 million as of December 31, 2019, increasing from $374.8 million as of December 31, 2018. The terms for commercial real estate loans are typically 15 to 20 years, with adjustable rates based on a spread over the prime rate, or fixed for the initial three to five year period then adjusting to a spread to the prime rate. The majority of the Company’s commercial real estate portfolio is owner occupied and includes the personal guarantees of the principals. Commercial loans consisting principally of lines of credit and term loans secured by equipment or other assets and loans to municipalities increased $23.6 million to $134.2 million as of December 31, 2019. The Company’s indirect lending portfolio (included in consumer loans to individuals) increased $39.8 million to $141.2 million as of December 31, 2019. ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS The allowance for loan losses totaled $8,509,000 as of December 31, 2019 and represented 0.92% of total loans receivable compared to $8,452,000 and 0.99% of total loans as of year-end 2018. Net charge-offs for 2019 totaled $1,193,000 and represented 0.13% of average loans compared to $907,000 and 0.11% of average loans in 2018. Non-performing assets consist of non-performing loans and real estate owned as a result of foreclosure, which is held for sale. Loans are placed on non-accrual status when management believes that a borrower’s financial condition is such that collection of interest is doubtful. Commercial and real estate related loans are generally placed on non-accrual when interest is 90 days delinquent. When loans are placed on non-accrual, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT As of December 31, 2019, non-performing loans totaled $795,000 and represented 0.09% of total loans compared to $1,140,000 or 0.13% as of December 31, 2018. The decrease in the level of non-performing loans reflects the resolution of loan workout efforts on several residential real estate properties. Based on management’s analysis, the Company added $1,250,000 to the allowance for loan losses for the year ended December 31, 2019 compared to $1,725,000 in 2018. Foreclosed real estate owned totaled $1,556,000 as of December 31, 2019 and $1,115,000 as of December 31, 2018. During 2019, seven properties with a carrying value of $454,000 were disposed of through sales. The Company recorded a net gain of $94,000 from the sale of the properties. Management assesses the adequacy of the allowance for loan losses on a quarterly basis. The process includes a review of the risks inherent in the loan portfolio. It also includes an analysis of impaired loans and a historical review of losses. Other factors considered in the analysis include: concentrations of credit in specific industries in the commercial portfolio, the local and regional economic conditions, trends in delinquencies, internal risk rating classifications, total growth in the portfolio and fluctuations in large balance credits. For loans acquired, including those that are not deemed impaired at acquisition, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value. Subsequent to the purchase date, the methods utilized to estimate the required allowance for credit losses for these loans is similar to originated loans; however, the Company records a provision for loan losses only when the required allowance exceeds any remaining credit discounts. The Company has limited exposure to higher-risk loans. The Company does not originate option ARM products, interest only loans, sub-prime loans or loans with initial teaser rates in its residential real estate portfolio. The Company has $10.7 million of junior lien home equity loans. For 2019, there were no charge-offs for this portfolio. As of December 31, 2019, the Company considered its concentration of credit risk profile to be acceptable. The highest concentrations are in commercial rentals and the hospitality lodging industry. During 2019, the Company recognized an increase in its adversely classified loans due primarily to the transfer of one loan relationship with a balance of $4.1 million to special mention during 2019. Based on current analysis, the loans appear to be adequately collateralized, but were classified due to a debt service ratio below Company standards. The Company assesses a loss factor against the classified loans, which is based on prior experience. Classified loans that are considered impaired are measured on a loan-by-loan basis. The Company values such loans by either the present value of expected cash flows, the loan’s obtainable market price or the fair value of collateral if the loan is collateral dependent. At December 31, 2019, the recorded investment in impaired loans, not requiring an allowance for loan losses, was $143,000 (net of charge-offs against the allowance for loan losses of $251,000). The recorded investment in impaired loans, requiring an allowance for loan losses, was $2,001,000 (net of charge-offs against the allowance for loan losses of $0). The recorded investment in impaired loans, not requiring an allowance for loan losses, was $1,319,000 (net of charge-offs of $428,000) and there were no loans requiring an allowance as of December 31, 2018.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT As a result of its analysis, after applying these factors, management considers the allowance as of December 31, 2019, adequate. However, there can be no assurance that the allowance for loan losses will be adequate to cover significant losses that might be incurred in the future. The following table sets forth information with respect to the Company’s allowance for loan losses at the dates indicated: Year-ended December 31, (dollars in thousands) 2019 2018 2017 2016 2015 Allowance balance at beginning of period $ 8,452 $ 7,634 $ 6,463 $ 7,298 $ 5,875 Charge-offs: Real Estate loans Residential (102) (197) (83) (123) (224) Commercial (627) (283) (902) (2,711) (2,883) Construction — (28) — Commercial loans (284) (246)—(15)—Consumer loans (420) (263) (207) (102) (91) Total (1,433) (989) (1,220) (2,951) (3,198) Recoveries: Real Estate loans Residential 24 9 6 6 20 Commercial 125 33 159 15—Construction — ——Commercial loans 48 8 ——Consumer loans 43 32 26 45 21 Total 240 82 191 66 41 Provision expense 1,250 1,725 2,200 2,050 4,580 Allowance balance at end of period $ 8,509 $ 8,452 $ 7,634 $ 6,463 $ 7,298 Allowance for loan losses as a percent of total loans outstanding 0.92% 0.99% 1.00% 0.91% 1.30% Net loans charged off as a percent of average loans outstanding 0.13% 0.11% 0.14% 0.46% 0.60% Allowance coverage of non-performing loans 10.7x 7.4x 3.1x 3.4x l.Ox
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT The following table sets forth information regarding non-performing assets: December 31, (dollars in thousands) 2019 2018 2017 2016 2015 Non-accrual loans: Real Estate loans Residential Commercial Construction Commercial loans Consumer loans $ 567 99 50 79 $ 798 342 $ 1,706 277 $ 1,136 762 28 $ 440 6,649 43 Total 795 1,140 1,983 1,926 7,132 Accruing loans which are contractually past due 90 days or more 496 1 Total non-performing loans 795 1,140 2,479 1,927 7,132 Foreclosed real estate 1,556 1,115 1,661 5,302 2,847 Total non-performing assets $ 2,351 $ 2,255 $ 4,140 $ 7,229 $ 9,979 Non-performing loans to total loans 0.09% 0.13% 0.32% 0.27% 1.27% Non-performing loans to total assets 0.06% 0.10% 0.22% 0.17% 0.95% Non-performing assets to total assets 0.19% 0.19% 0.37% 0.65% 1.33% SECURITIES The securities portfolio consists of mortgage-backed securities issued by government sponsored entities, municipal obligations, and corporate debt. The Company classifies its investments into two categories: held to maturity (HTM) and available for sale (AFS). The Company does not have trading securities. Securities classified as HTM are those in which the Company has the ability and the intent to hold the security until contractual maturity. As of December 31, 2019, there were no securities carried in the HTM portfolio. Securities classified as AFS are eligible to be sold due to liquidity needs or interest rate risk management. These securities are adjusted to and carried at their fair value with any unrealized gains or losses recorded net of deferred income taxes, as an adjustment to capital and reported in the equity section of the Consolidated Balance Sheet as other comprehensive income. As of December 31, 2019, $210.2 million of securities were so classified and carried at their fair value, with unrealized gains, net of tax, of $354,000 included in accumulated other comprehensive income as a component of stockholders’ equity. As of December 31, 2019, the average life of the portfolio was 3.7 years. The Company has maintained a relatively short average life in the portfolio in order to generate cash flow to support loan growth and maintain liquidity levels. Purchases for the year totaled $21.5 million, while maturities and principal reductions totaled $33.7 million and proceeds from sales were $27.2 million. The purchases were funded principally by cash flow generated from the portfolio and excess overnight liquidity.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT The carrying value of the securities portfolio at December 31 is as follows: 2019 2018 (dollars in thousands) Carrying Value % of portfolio Carrying Value % of portfolio States and political subdivisions $ 71,305 33.9% $ 97,613 40.1% Corporate obligations 4,100 2.0% 8,640 3.6% Mortgage-backed securities -government sponsored entities 134,800 64.1% 137,024 56.3% Total $ 210,205 100.0% $ 243,277 100.0% The portfolio had no adjustable-rate instruments as of December 31, 2019 and 2018. The portfolio contained no private label mortgage-backed securities, collateralized debt obligations (CDOs), or trust preferred securities, and no off-balance sheet derivatives were in use. As of December 31, 2019, the portfolio did not contain any step-up bonds. The mortgage-backed securities portfolio includes pass-through bonds and collateralized mortgage obligations (CMO’s) issued by Fannie Mae, Freddie Mac and the Government National Mortgage Association (GNMA). The Company evaluates the securities in its portfolio for other-than-temporary-impairment (OTTI) as fair value declines below cost. In estimating OTTI, management considers (1) the length of time and the extent of the decline in fair value and (2) the financial condition and near-term prospects of the issuer As of December 31, 2019, the Company held 90 investment securities in a loss position, which had a combined unrealized loss of $1.1 million. Management believes that these losses are principally due to changes in interest rates and represent temporary impairment as the Company does not have the intent to sell these securities and it is more likely than not that it will not have to sell the securities before recovery of their cost basis. No impairment charges were recognized in 2019 or 2018. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company uses fair value measurements to record fair value adjustments to certain financial instruments and determine fair value disclosures (see Note 14 of Notes to the Consolidated Financial Statements). Approximately $210.2 million, which represents 17.1% of total assets at December 31, 2019, consisted of financial instruments recorded at fair value on a recurring basis. This amount consists entirely of the Company’s available for sale securities portfolio. The Company uses valuation methodologies involving market-based or market-derived information, collectively Level 1 and 2 measurements, to measure fair value. There were no transfers into or out of Level 3 for any instruments for the years ended December 31, 2019 and 2018. The Company utilizes a third party provider to perform valuations of the investments. Methods used to perform the valuations include: pricing models that vary based on asset class, available trade and bid information, actual transacted prices, and proprietary models for valuations of state and municipal obligations. In addition, the Company has a sample of fixed-income securities valued by another independent source. The Company does not adjust values received from its providers, unless it is evident that fair value measurement is not consistent with the Company’s policies.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT The Company also utilizes a third party provider to provide 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. The fair value of mortgage servicing rights as of December 31, 2019 and 2018 was $226,000 and $220,000, respectively. DEPOSITS The Company, through the Community Offices of the Bank, provides a full range of deposit products to its retail and business customers. These products include interest-bearing and non-interest bearing transaction accounts, statement savings and money market accounts. Time deposits consist of certificates of deposit (CDs) with terms of up to five years and include Individual Retirement Accounts. The Bank participates in the Jumbo CD ($100,000 and over) markets with local municipalities and school districts, which are typically awarded on a competitive bid basis. At December 31, 2019, the Company did not have any brokered deposits through its participation in the Certificate of Deposit Account Registry Service (CDARS). Total deposits as of December 31, 2019, totaled $957.5 million, increasing $10.7 million from year-end 2018. Deposit growth included a $15.5 million increase in certificates of deposit and a $16.3 million increase in demand deposits. The large increase in certificates of deposit includes deposits of local municipalities and school districts, which offset an $8.5 million decrease in CDARS deposits. Money market and savings deposits decreased $21.0 million during 2019, which includes the transfer of funds to time deposits. Time deposits over $250,000, which consist principally of school district funds, other public funds and short-term deposits from large commercial customers with maturities generally less than one year, totaled $133.9 million as of December 31, 2019, compared to $112.7 million at year-end 2018. These deposits are subject to competitive bid and the Company bases its bid on current interest rates, loan demand, investment portfolio structure and the relative cost of other funding sources. As of December 31, 2019, non-interest bearing demand deposits totaled $207.3 million compared to $201.5 million at year-end 2018. Cash management accounts in the form of securities sold under agreements to repurchase included in short-term borrowings, totaled $30.5 million at year end 2019 compared to $37.5 million as of December 31, 2018. These balances represent commercial and municipal customers’ funds invested in overnight securities. The Company considers these accounts as a source of core funding. 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 the 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 should 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 December 31, 2019, the level of net interest income at risk in a ± 200 basis points increase was within the Company’s policy limit of a decline less than 10% of net interest income.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT Imbalances in repricing opportunities at a given point in time reflect interest-sensitivity gaps measured as the difference between rate-sensitive assets and rate-sensitive liabilities. These are static gap measurements that do not take into account any future activity, and as such are principally used as early indicators of potential interest rate exposures over specific intervals. At December 31, 2019, the Bank had a positive 90-day interest sensitivity gap of $5.9 million or 0.5% of total assets. A positive gap indicates that the balance sheet has a higher level of rate-sensitive assets (RSA) than rate-sensitive liabilities (RSL) at the specific time interval. This would indicate that in an increasing rate environment, the yield on interest-earning assets would increase faster than the cost of interest-bearing liabilities in the 90-day period. The level of RSA and RSL for an interval is managed by ALCO strategies, including adjusting the average life of the investment portfolio through purchases and sales, pricing of deposit liabilities to attract long or short-term time deposits, utilizing borrowings to fund loan growth, loan pricing to encourage variable-rate products and evaluation of loan sales of long-term, fixed-rate mortgages. The Company analyzes and measures the time periods in which RSA and RSL will mature or reprice in accordance with their contractual terms and assumptions. Management believes that the assumptions used are reasonable. The interest rate sensitivity of assets and liabilities could vary substantially if differing assumptions were used or if actual experience differs from the assumptions used in the analysis. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in differing degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Interest rates may change at different rates changing the shape of the yield curve. The level of rates on the investment securities may also be affected by the spread relationship between different investments. Further, in the event of a significant change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed. Finally, the ability of borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase. It should be noted that the operating results of the Company are not subject to foreign currency exchange or commodity price risk.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT The following table displays interest-sensitivity as of December 31, 2019 (dollars in thousands): 3 Months or Less 3-12 Months 1-3 Years Over 3 Years Total Federal funds sold and interest-bearing deposits $ 377 $ $ $ $ 377 Securities 16,536 33,273 61,460 98,936 210,205 Loans Receivable 137,625 180,917 299,218 306,821 924,581 Total Rate Sensitive Assets (RSA) $ 154,538 $ 214,190 $ 360,678 $ 405,757 $1,135,163 Non-maturity interest-bearing deposits $ 58,036 $ 57,651 $ 152,979 $ 120,846 $ 389,512 Time Deposits 47,169 211,477 64,974 37,098 360,718 Borrowings 43,449 27,516 32,461 15,268 118,694 Total Rate Sensitive Liabilities (RSL) $ 148,654 $ 296,644 $ 250,414 $ 173,212 $ 868,924 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% As of December 31, 2018 Interest sensitivity gap $ (18,749) $ (60,791) $ 18,852 $ 303,804 $ 243,116 Cumulative gap (18,749) (79,540) (60,688) 243,116 RSA/RSL-cumulative 88.4% 79.8% 91.1% 128.6% Certain interest-bearing deposits with no stated maturity dates are included in the interest-sensitivity table above. The balances allocated to the respective time periods represent an estimate of the total outstanding balance that has the potential to migrate either through withdrawal or transfer to time deposits, thereby impacting the interest-sensitivity position of the Company. The estimates were derived from a non-maturity deposit study, which was prepared by an independent third party provider The purpose of the study was to estimate the average lives of various deposit types and their pricing sensitivity to movements in market interest rates. LIQUIDITY Liquidity is the ability to fund customers’ borrowing needs and their deposit withdrawal requests while supporting asset growth. The Company’s primary sources of liquidity include deposit generation, asset maturities, cash flow from payments on loans and securities and access to borrowing from the Federal Home Loan Bank and other correspondent banks. As of December 31, 2019, the Company had cash and cash equivalents of $15.4 million in the form of cash, due from banks, balances with the Federal Reserve Bank, and short-term deposits with other institutions. In addition, the Company had total securities available for sale of $210.2 million, which could be used for liquidity needs. This totals $225.6 million and represents 18.3% of total assets compared to $261.6 million and 22.1% of total assets as of December 31, 2018. The Company also monitors other liquidity measures for compliance with Company policy guidelines. Based upon these measures, the Company believes its liquidity position is adequate.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT The Company maintains established lines of credit with the Federal Home Loan Bank of Pittsburgh (FHLB), the Atlantic Community Bankers Bank (ACBB) and other correspondent banks, which support liquidity needs. The total available under all lines was $190.0 million, with $31.8 million outstanding at December 31, 2019 and $15.6 million outstanding at December 31, 2018. The maximum borrowing capacity from FHLB was $425.2 million. As of December 31, 2019, the Company had $56.4 million in term borrowings from the FHLB, compared to $52.3 million at December 31, 2018. OFF-BALANCE SHEET ARRANGEMENTS The Company’s financial statements do not reflect various commitments that are made in the normal course of business, which may involve some liquidity risk. These commitments consist mainly of unfunded loans and letters of credit made under the same standards as on-balance sheet instruments. Unused commitments, as of December 31, 2019 totaled $104.8 million. They consisted of $44.3 million of commitments for residential and commercial real estate, construction and land development loans; $25.9 million in unused home equity lines of credit; $3.7 million in performance and standby letters of credit; and $30.9 million in other unused commitments, principally commercial lines of credit. Because these instruments have fixed maturity dates and many of them will expire without being drawn upon, management believes they do not represent any significant liquidity risk. Management believes that any amounts actually drawn upon can be funded in the normal course of operations. The Company has no investment in or financial relationship with any unconsolidated entities that are reasonably likely to have a material effect on liquidity or the availability of capital resources. RESULTS OF OPERATIONS NET INTEREST INCOME Net interest income is the most significant source of revenue for the Company and represented 85.1% of total revenue for the year ended December 31, 2019. Net interest income (fte) totaled $39,612,000 for the year ended December 31, 2019 compared to $37,899,000 for 2018, an increase of $1,713,000. The resulting fte net interest spread and net interest margin were 3.28% and 3.53%, respectively, in 2019 compared to 3.36% and 3.53%, respectively, in 2018. Interest income (fte) for the year ended December 31, 2019 totaled $48,290,000 compared to $43,556,000 in 2018. The fte yield on average earning assets was 4.30%, increasing 24 basis points from the 4.06% reported last year The tax-equivalent yield on total loans improved 18 basis points to 4.78% in 2019, while average loans outstanding increased $84.8 million, resulting in an increase in interest income (fte) from loans of $5.5 million. The yield on securities increased three basis points in 2019 due primarily to repositioning of the portfolio into higher yielding securities. Average securities outstanding decreased $35.9 million as cash flow from the portfolio was utilized to fund loan growth, and interest income (fte) from the portfolio decreased $814,000.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT Interest expense was $8,678,000 in 2019 which resulted in an average cost of inteest-bearing liabilities of 1.02% compared to total interest expense of $5,657,000 in 2018 with an average cost of 0.70%. Total interest-bearing deposits cost was 0.94% in 2019, which was an increase of 31 basis points over the prior year. Non-maturity deposit rates increased slightly, but time certificates of deposit repriced to current market rates upon maturity, resulting in an increase in the rate paid from 1.27% in 2018 to 1.79%. Long-term borrowings also repriced upward in 2019 reflecting the impact from higher cost borrowings added in 2019. OTHER INCOME Total other income was $6,778,000 for the year ended December 31, 2019 compared to $7,065,000 in 2018, a decrease of $287,000. Gains on the sale of loans and investment securities increased $195,000 in the aggregate, while service charges and fees increased $155,000. Earnings on and proceeds from bank-owned life insurance decreased $296,000 from the prior year, while all other items of other income increased $9,000, net. Other Income (dollars in thousands) For the year-ended December 31 2019 2018 Service charges on deposit accounts $ 301 $ 263 ATM Fees 384 398 Overdraft Fees 1,380 1,505 Safe deposit box rental 94 96 Loan related service fees 691 563 Debit card 1,424 1,330 Fiduciary activities 610 589 Commissions on mutual funds & annuities 141 185 Gains on sales of loans 169 15 Earnings on and proceeds from bank-owned life insurance 830 1,126 Other income 500 782 6,524 6,852 Net realized gains on sales of securities 254 213 Total $ 6,778 $ 7,065 OTHER EXPENSES Other expenses totaled $27,311,000 for the year ended December 31, 2019 compared to $25,975,000 in the prior year The $1,336,000 increase in costs reflects a higher level of salaries and employee benefits costs, which increased $635,000 in 2019, and increased data processing expenses, which increased $442,000. All other operating expenses increased $259,000, net. The Company’s efficiency ratio, which measures total other expenses as a percentage of net interest income (fte) plus other income, was 58.9% in 2019 compared to 57.8% in 2018. The increase reflects the reduced level of other income combined with the increase in other expenses.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT Other Expenses (dollars in thousands) For the year ended December 31 2019 2018 Salaries $ 9,208 $ 8,695 Employee benefits 5,447 5,325 Occupancy 2,936 2,889 Furniture and equipment 783 806 Data processing and related operations 1,869 1,427 Federal Deposit Insurance Corporation insurance assessment 153 347 Advertising 267 257 Professional fees 1,113 993 Postage and telephone 834 705 Office supplies 396 413 Taxes, other than income 751 572 Foreclosed real estate 45 172 Amortization of intangible assets 101 126 Other 3,408 3,248 Total $ 27,311 $ 25,975 INCOME TAXES Income tax expense for the year ended December 31, 2019 totaled $2,608,000, which resulted in an effective tax rate of 15.5% compared to $2,553,000 and 15.8% for 2018. CAPITAL AND DIVIDENDS Total stockholders’ equity as of December 31, 2019, was $137.4 million, compared to $122.3 million as of year-end 2018. The increase was due primarily to earnings retention net of a $6.1 million reduction resulting from cash dividends declared. As of December 31, 2019 the Company had a leverage capital ratio of 10.33%, a Tier 1 risk-based capital ratio and a common equity Tier 1 risk-based capital ratio of 13.08%, and a total risk-based capital ratio of 13.98%, compared to 9.82%, 13.04% and 14.00%, respectively, at December 31, 2018. The Company’s common stock is traded on the Nasdaq Global Market under the symbol, NWFL. As of December 31, 2019, there were approximately 2,600 shareholders based on the records of our transfer agent.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT The following table sets forth the price range and cash dividends declared per share regarding common stock for the periods indicated: Closing Price Range Cash dividends Declared per share High Low Year 2019 First Quarter $ 33.00 $ 28.08 $ 0.24 Second Quarter 34.97 31.00 0.24 Third Quarter 35.90 29.76 0.24 Fourth Quarter 39.25 30.39 0.25 Year 2018 First Quarter $ 33.00 $ 28.85 $ 0.22 Second Quarter 38.86 29.02 0.22 Third Quarter 40.41 34.51 0.22 Fourth Quarter 39.06 30.30 0.24 The book value of the common stock was $21.67 per share as of December 31, 2019 compared to $19.43 per share as of December 31, 2018. As of year-end 2019, the closing stock price was $38.90 per share, compared to $33.00 as of December 31, 2018. NON-GAAP FINANCIAL MEASURES This annual report contains or references tax-equivalent interest income and net interest income, which are non-GAAP financial measures. Tax-equivalent interest income and net interest income are derived from GAAP interest income and net interest income using a marginal tax rate of 21%. We believe the presentation of interest income and net interest income on a tax-equivalent basis ensures comparability of interest income and net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. The following table reconciles net interest income to net interest income on a tax-equivalent basis: (dollars in thousands) Three months ended December 31 Year Ended December 31 2019 2018 2019 2018 Net interest income $ 9,833 $ 9,429 $ 38,606 $ 36,839 Tax-equivalent basis adjustment using 21% marginal tax rate 233 258 1,006 1,060 Net interest income on a fully taxable equivalent basis $ 10,066 $ 9,687 $ 39,612 $ 37,899
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT STOCK PERFORMANCE GRAPH Set forth below is a stock performance graph comparing the cumulative total shareholder return on the Common Stock with (a) the cumulative total stockholder return on stocks included in the Nasdaq Stock Market index and (b) the cumulative total stockholder return on stocks included in the Nasdaq Bank index, as prepared by Zack’s Investment Research, Inc. using data from the Center for Research in Securities Prices (CRSP) at the University of Chicago. All three investment comparisons assume the investment of $100 at the market close on December 31, 2014 and the reinvestment of dividends paid. The graph provides comparison at December 31, 2014 and each fiscal year through December 31, 2019. There can be no assurance that the Company’s future stock performance will be the same or similar to the historical performance shown in the above graph. The Company neither makes nor endorses any predictions as to stock performance. Legend Symbol CRSP Total Returns Index for; 12/31/14 12/31/15 12/31/16 12/31/17 12/31/18 12/31/19 Norwood Financial Corp $100.00 $103.28 $124.41 $192.07 $197.18 $239.51 CRSP Nasdaq U.S. Index 100.00 107.71 118.26 152.92 150.42 204.72 A Nasdaq Bank Index 100.00 108.91 147.47 157.10 130.44 163.98 Notes: A. Data complete through last fiscal year. B. Corporate Performance Graph with peer group only performance (excludes only company). C Peer group indices use beginning of period market capitalization weighting. D. Prepared by Zacks Investment Research, Inc. Used with permission. All rights reserved. Copyright 1980-2019. E. Index Data: Calculated (or Derived) based from CRSP NASDAQ Stock Market (US Companies) and CRSP NASDAQ Banks Index, Center for Research in Security Prices (CRSP®), Graduate School of Business, The University of Chicago. Copyright 2020. Used with permission. All rights reserved.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT CONSOLIDATED AVERAGE BALANCE SHEETS WITH RESULTANT INTEREST AND RATES (Tax-Equivalent Basis, dollars in thousands) Year Ended December 31 2019 2018 Average Balance (2) Interest (1) Average Rate Average Balance (2) Interest (1) Average Rate ASSETS Interest-earning assets: Interest-bearing deposits with banks $ 3,469 $ 81 2.33% $ 3,978 $ 73 1.84% Securities available for sale: Taxable 148,825 3,277 2.20 167,443 3,573 2.13 Tax-exempt 84,225 2,578 3.06 101,525 3,096 3.05 Total securities available for sale 233,050 5,855 2.51 268,968 6,669 2.48 Loans receivable (3)(4) 885,741 42,354 4.78 800,957 36.814 4.60 Total interest-earning assets 1,122,260 48,290 4.30 1,073,903 43,556 4.06 Noninterest earning assets: Cash and due from banks 14,630 14,583 Allowance for loan losses (8,465) (8,259) Other assets 80,828 67,441 Total noninterest-earning assets 86,993 73,765 TOTAL ASSETS $1,209,253 $ 1,147,668 LIABILITIES AND STOCKHOLDERS’ EQUITY Interest-bearing liabilities: Interest-bearing demand and money market $ 229,912 655 0.28 $ 233,929 466 0.20 Savings 170,167 100 0.06 178,203 90 0.05 Time 356,282 6,384 1.79 322,768 4,088 1.27 Total interest-bearing deposits 756,361 7,139 0.94 734,900 4,644 0.63 Short-term borrowings 48,945 468 0.96 41,963 323 0.77 Other borrowings 43,743 1,071 2.45 36,606 690 1.88 Total interest-bearing liabilities 849,049 8,678 1.02 813,469 5,657 0,70 Noninterest-bearing liabilities: Noninterest-bearing demand deposits 213,165 208,222 Other liabilities 15,767 9,439 Total noninterest-bearing liabilities 228,932 217,661 Stockholders’ equity 131,272 116,538 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $1,209,253 $ 1,147,668 Net Interest Income/spread (tax equivalent basis) 39,612 3.28% 37,899 3.36% Tax-equivalent basis adjustment (1,006) (1,060) Net Interest Income $ 38,606 $ 36,839 Net interest margin (tax equivalent basis) 3.53% 3.53% 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. Loan balances include non-accrual loans and are net of unearned income. 4. Loan yields include the effect of amortization of purchased credit marks and deferred fees net of costs. 4.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT RATE/VOLUME ANALYSIS The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense. (dollars in thousands) In crease/(Decrease) 2019 compared to 2018 Volume Variance due to Rate Net INTEREST EARNING ASSETS: Interest-bearing deposits $ (11) $ 19 $ 8 Securities available for sale: Taxable (403) 107 (296) Tax-exempt securities (526) 8 (518) Total securities available for sale (929) 115 (814) Loans receivable 3,976 1,564 5,540 Total interest-earning assets 3,036 1,698 4,734 INTEREST BEARING LIABILITIES: Interest-bearing demand and money market (10) 199 189 Savings (5) 15 10 Time 562 1,734 2,296 Total interest-bearing deposits 547 1,948 2,495 Short-term borrowings 61 84 145 Other borrowings 157 224 381 Total interest-bearing 1iabilities 765 2,256 3,021 Net interest income (tax-equivalent basis) $2,271 $ (558) $ 1,713 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.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT REPORT ON MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING TO THE STOCKHOLDERS OF NORWOOD FINANCIAL CORP Management of Norwood Financial Corp and its subsidiary (Norwood) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Norwood’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Norwood’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Norwood; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of Norwood’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Norwood’s assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of Norwood’s internal control over financial reporting as of December 31, 2019. In making this assessment, management used the criteria established in Internal Control—Integrated Framework as set forth by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based upon its assessment, management has concluded that, as of December 31, 2019, the Company’s internal control over financial reporting, including controls over the preparation of regulatory financial statements in accordance with all federal and state laws and regulations, is effective based on the criteria established in the Internal Control—Integrated Framework. Norwood’s independent registered certified public accounting firm has audited the effectiveness of Norwood’s internal control over financial reporting. Their report appears on page 22. Lewis J. Critelli President and Chief Executive Officer William S. Lance Executive Vice President and Chief Financial Officer
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Norwood Financial Corp. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Norwood Financial Corp. and subsidiaries (the “Company”) as of December 31, 2019 and 2018; the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended; and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 12, 2020, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent, with respect to the Company, in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. We have served as the Company’s auditor since 2009. Cranberry Township, Pennsylvania March 12, 2020
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Norwood Financial Corp. Opinion on Internal Control over Financial Reporting We have audited Norwood Financial Corp. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018; the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended, of the Company; and our report dated March 12, 2020, expressed an unqualified opinion. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Report on Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent, with respect to the Company, in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Cranberry Township, Pennsylvania March 12, 2020
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT CONSOLIDATED BALANCE SHEETS December 31, 2019 2018 (In Thousands, Except Share and Per Share Data) ASSETS Cash and due from banks $ 15,038 $ 18,039 Interest-bearing deposits with banks 377 3 09 Cash and cash equivalents 15,415 18,348 Securities available for sale 210,205 243,277 Loans receivable (net of allowance for loan losses 2019: $8,509; 2018: $8,452) 916,072 841,730 Regulatory stock, at cost 4,844 3,926 Premises and equipment, net 14,228 13,846 Bank owned life insurance 38,763 37,932 Accrued interest receivable 3,719 3,776 Foreclosed real estate owned 1,556 1,115 Goodwill 11,331 11,331 Other intangibles 235 336 Other assets 14,242 8,942 Total Assets $ 1,230,610 $ 1,184,559 LIABILITIES AND STOCKHOLDERS’ EQUITY LIABILITIES Deposits: Noninterest-bearing demand $ 207,299 $ 201,457 Interest-bearing demand 99,366 88,917 Money market deposit accounts 128,441 137,636 Savings 161,705 173,593 Time 360,718 345,177 Total Deposits 957,529 946,780 Short-term borrowings 62,256 53,046 Other borrowings 56,438 52,284 Accrued interest payable 2,432 1,8 06 Other liabilities 14,527 8,358 Total Liabilities 1,093,182 1,062,274 STOCKHOLDERS’ EQUITY Preferred stock, no par value, authorized 5,000,000 shares, Common stock, $.10 par value, authorized: 2019: 20,000,000 shares, 2018: 10,000,000 shares, issued: 2019: 6,340,563 shares; 2018: 6,295,113 shares 634 630 Surplus 49,471 48,322 Retained earnings 86,536 78,434 Treasury stock at cost: 2019: 12,007 shares; 2018: 2,470 shares (400) (81) Accumulated other comprehensive income (loss) 1,187 (5,020) Total Stockholders’ Equity 137,428 122,285 Total Liabilities and Stockholders’ Equity $ 1,230,610 $ 1,184,559 See notes to consolidated financial statements.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2019 2018 (In Thousands, Except Share and Per Share Data) INTEREST INCOME Loans receivable, including fees $ 41,889 $ 36,404 Securities Taxable 3,277 3,573 Tax exempt 2,037 2,446 Interest-bearing deposits with banks 81 73 Total Interest Income 47,284 42,496 INTEREST EXPENSE Deposits 7,139 4,644 Short-term borrowings 468 323 Other borrowings 1,071 690 Total Interest Expense 8,678 5,657 Net Interest Income 38,606 36,839 PROVISION FOR LOAN LOSSES 1,250 1,725 Net Interest Income After Provision for Loan Losses 37,356 35,114 OTHER INCOME Service charges and fees 4,450 4,295 Income from fiduciary activities 610 589 Net realized gains on sales of securities 254 213 Net gain on sale of loans 169 15 Earnings and proceeds on life insurance policies 830 1,126 Other 465 827 Total Other Income 6,778 7,065 OTHER EXPENSES Salaries and employee benefits 14,655 14,020 Occupancy 2,936 2,889 Furniture and equipment 783 806 Data processing and related operations 1,869 1,427 Federal Deposit Insurance Corporation insurance assessment 153 347 Advertising 267 257 Professional fees 1,113 993 Postage and telephone 834 705 Taxes, other than income 751 572 Foreclosed real estate 45 172 Amortization of intangible assets 101 126 Other 3,804 3,661 Total Other Expenses 27,311 25,975 Income before Income Taxes 16,823 16,204 INCOME TAX EXPENSE 2,608 2,553 Net income $ 14.215 $ 13.651 EARNINGS PER SHARE BASIC $ 2.27 $ 2.19 DILUTED $ 2.25 $ 2.17 See notes to consolidated financial statements.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Years Ended December 31, 2019 2018 NET INCOME $ 14,215 $ 13,651 Other comprehensive income (loss): Unrealized gain on pension liability 375 207 Tax Effect (79) (43) Investment securities available for sale: Unrealized holding gains (losses) 7,736 (2,973) Tax Effect (1,624) 624 Reclassification of gains from sale of securities (2 54) (213) Tax Effect 53 45 Other comprehensive income (loss) 6,207 (2,353) COMPREHENSIVE INCOME $ 20,422 $ 11,298 See notes to consolidated financial statements.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Years Ended December 31, 2019 and 2018 Accumulated Other Comprehensive Loss Common Stock Surplus Retained Earnings Treasury Stock Total Shares Amount Shares Amount (Dollars in Thousands, Except Per Share Data) BALANCE—DECEMBER 31, 2017 6,256,063 $ 626 $ 47,431 $ 70,426 2,608 $ (77) $ (2,667) $ 115,739 Net Income 13,651 13,651 Other comprehensive loss (2,353) (2,353) Cash dividends declared ($0.90 per share) ——(5,643) (5,643) Acquisition of treasury stock 5,921 (194) (194) Stock options exercised 25,950 3 449—(2,325) 68 520 Sale of treasury stock for ESOP 1 (3,734) 122 123 Compensation expense related to stock options 237 237 Restricted stock awards 13,100 1 204 205 BALANCE—DECEMBER 31, 2018 6,295,113 630 48,322 78,434 2,470 (81) (5,020) 122,285 Net Income 14,215 14,215 Other comprehensive income 6,207 6,207 Cash dividends declared ($0.97 per share) ——(6,113) (6,113) Acquisition of treasury stock 12,797 (428) (428) Stock options exercised 32,350 3 635 638 Sale of treasury stock for ESOP 18 (3,260) 109 127 Compensation expense related to stock options 208 208 Restricted stock awards 13,100 1 288 289 BALANCE—DECEMBER 31, 2019 6,340,563 $ 634 $ 49,471 $ 86,536 12,007 $ (400) $ 1,187 $ 137,428 See notes to consolidated financial statements.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2019 2018 (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 14,215 $ 13,651 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,250 1,725 Depreciation 1,005 895 Amortization of intangible assets 101 126 Deferred income taxes 988 24 Net amortization of securities premiums and discounts 1,448 1,711 Net realized gains on sales of securities (2 54) (213) Earnings and proceeds on life insurance policies (830) (1,126) (Gain) loss on sales of fixed assets and foreclosed real estate owned (97) 26 Net gain on sale of loans (169) (15) Mortgage loans originated for sale (4,715) (752) Proceeds from sale of loans originated for sale 4,838 767 Compensation expense related to stock options 208 237 Compensation expense related to restricted stock 289 205 Decrease (increase) in accrued interest receivable 57 (60) Increase in accrued interest payable 626 372 Other, net (522) (275) Net Cash Provided by Operating Activities 18,438 17,298 CASH FLOWS FROM INVESTING ACTIVITIES Securities available for sale: Proceeds from sales 27,247 17,745 Proceeds from maturities and principal reductions on mortgage-backed securities 33,656 30,873 Purchases (21,543) (15,458) Purchase of regulatory stock (6,595) (6,155) Redemption of regulatory stock 5,677 5,734 Net increase in loans (77,401) (87,480) Purchase of premises and equipment (1,623) (873) Proceeds from sales of foreclosed real estate owned 556 776 Proceeds from sales of bank premises and fixed assets 246—Net Cash Used for Investing Activities (39,780) (54,838) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 10,749 17,396 Net increase in short-term borrowings 9,210 10,516 Repayments of other borrowings (26,846) (13,661) Proceeds from other borrowings 31,000 30,000 Stock options exercised 638 520 Sale of treasury stock for ESOP 127 123 Acquisition of treasury stock (428) (194) Cash dividends paid (6,041) (5,509) Net Cash Provided by Financing Activities 18,409 39,191 Net (Decrease) Increase in Cash and Cash Equivalents (2,933) 1,651 CASH AND CASH EQUIVALENTS—BEGINNING 18,348 16,697 CASH AND CASH EQUIVALENTS—ENDING $ 15,415 $ 18,348 See notes to consolidated financial statements.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Years Ended December 31, 2019 2018 (In Thousands) Supplemental Disclosures of Cash Flow Information Cash payments for: Interest paid $ 8,052 $ 5,285 Income taxes paid, net of refunds $ 2,407 $ 2,239 Supplemental Schedule of Noncash Investing Activities Transfers of loans to foreclosed real estate owned and repossession of other assets $ 1,865 $ 553 Dividends payable $ 1,582 $ 1,510 Right of use for operating leases $ 5,335 $ Lease liability for operating leases $ 5,335 $ See notes to consolidated financial statements.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1—NATURE OF OPERATIONS Norwood Financial Corp (Company) is a one bank holding company. Wayne Bank (Bank) is a wholly-owned subsidiary of the Company The Bank is a state-chartered bank headquartered in Honesdale, Pennsylvania. The Company derives substantially all of its income from bank-related services which include interest earnings on commercial mortgages, residential real estate mortgages, commercial and consumer loans, as well as interest earnings on investment securities and fees from deposit services to its customers. The Company is subject to regulation and supervision by the Federal Reserve Board while the Bank is subject to regulation and supervision by the Federal Deposit Insurance Corporation and the Pennsylvania Department of Banking and Securities. 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 securities gains, loans servicing, gains on 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 year ended December 31: (dollars in thousands) 2019 2018 Noninterest Income In-scope of Topic 606: Service charges on deposit accounts $ 301 $ 263 ATM Fees 384 398 Overdraft Fees 1,380 1,505 Safe deposit box rental 94 96 Loan related service fees 614 515 Debit card 1,424 1,330 Fiduciary activities 610 589 Commissions on mutual funds & annuities 141 185 Other income 500 782 Noninterest Income (in-scope of Topic 606) 5,448 5,663 Out-of-scope of Topic 606: Net realized gains on sales of securities 254 213 Loan servicing fees 77 48 Gain on sales of loans 169 15 Earnings on and proceeds from bank-owned life insurance 830 1,126 Noninterest Income (out-of-scope of Topic 606) 1,330 1,402 Total Noninterest Income $ 6,778 $ 7,065 NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank, and the Bank’s wholly-owned subsidiaries, WCB Realty Corp., Norwood Investment Corp., Norwood Settlement Services, LLC and WTRO Properties. In June 2017, the Bank adopted a plan of dissolution for Norwood Settlement Services, LLC. Effective May 29, 2018, the existence of Norwood Settlement Services, LLC, was terminated. All significant intercompany accounts and transactions have been eliminated in consolidation.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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 determination of other-than-temporary impairment on securities, the determination of goodwill impairment and the fair value of financial instruments. Significant Group Concentrations of Credit Risk Most of the Company’s activities are with customers located within its markets in Northeastern Pennsylvania and the Southern Tier of New York. Note 3 discusses the types of securities that the Company invests in. Note 4 discusses the types of lending that the Company engages in. The Company does not have any significant concentrations to any one industry or customer Concentrations of Credit Risk The Bank operates primarily in Wayne, Pike, Lackawanna, Luzerne and Monroe Counties, Pennsylvania and Delaware and Sullivan Counties, New York. Accordingly, the Bank has extended credit primarily to commercial entities and individuals in these areas whose ability to honor their contracts is influenced by the region’s economy. These customers are also the primary depositors of the Bank. The Bank is limited in extending credit by legal lending limits to any single borrower or group of related borrowers. Securities Securities classified as available for sale are those securities that the Company intends to hold for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movement in interest rates, changes in maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Securities available for sale are carried at fair value. Unrealized gains and losses are reported in other comprehensive income, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of the specific securities sold, are included in earnings. Premiums and discounts are recognized in interest income using a method which approximates the interest method over the term of the security. Bonds, notes and debentures for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the term of the security. 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, management 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 it is more likely than not that it will not have to sell the securities before recovery of their cost basis.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Regulatory Stock The Company, as a member of the Federal Home Loan Bank (FHLB) system is required to maintain an investment in capital stock of its district FHLB according to a predetermined formula. This regulatory stock has no quoted market value and is carried at cost. Management evaluates the regulatory stock for impairment. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB. Management considers the FHLB’s regulatory capital ratios, liquidity, and the fact that new shares of FHLB stock continue to change hands at the $100 par value. Management believes no impairment charge is necessary related to FHLB stock as of December 31, 2019. Loans Receivable Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees. Interest income is accrued on the unpaid principal balance. Loan origination fees are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Company is generally amortizing these amounts over the contractual life of the loan. The accrual of interest is generally discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt. Troubled Debt Restructurings A loan is considered to be a troubled debt restructuring (TDR) loan when the Company grants a concession to the borrower because of the borrower’s financial condition that it would not otherwise consider Such concessions include the reduction of interest rates, forgiveness of principal or interest, or other modifications of interest rates that are less than the current market rate for new obligations with similar risk. Loans Acquired Loans acquired including loans that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable, are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance. Loans are evaluated individually to determine if there is evidence of
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) deterioration of credit quality since origination. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield,” is recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment or as a loss accrual or a valuation allowance. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining estimated life. Decreases in expected cash flows are recognized immediately as impairment. Any valuation allowances on these impaired loans reflect only losses incurred after the acquisition. For purchased loans acquired that are not deemed impaired at acquisition, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value. Loans may be aggregated and accounted for as a pool of loans if the loans being aggregated have common risk characteristics. Subsequent to the purchase date, the methods utilized to estimate the required allowance for credit losses for these loans is similar to originated loans; however, the Company records a provision for loan losses only when the required allowance exceeds any remaining credit discounts. The remaining differences between the purchase price and the unpaid principal balance at the date of acquisition are recorded in interest income over the life of the loans. Mortgage Servicing Rights Servicing assets are recognized as separate assets when rights are acquired through purchase or through the sale of financial assets. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon a third party appraisal. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance to the extent that fair value is less than the capitalized amount. The Company’s loan servicing assets at December 31, 2019 and 2018, respectively, were not impaired. Total servicing assets included in other assets as of December 31, 2019 and 2018, were $187,000 and $178,000, respectively. Allowance for Loan Losses The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. The allowance consists of specific and general components. The specific component relates to loans that are classified as substandard. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either 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 real estate loans for impairment disclosures, unless such loans were acquired with impairment or are the subject of a restructuring agreement. Premises and Equipment Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation expense is calculated principally on the straight-line method over the respective assets estimated useful lives as follows: Buildings and improvements 10-40 Furniture and equipment 3-10 Leases The Company applies a right-of-use (ROU) model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease payments. For leases with a term of 12 months or less, a practical expedient is available whereby a lessee may elect, by class of underlying asset, not to recognize an ROU asset or lease liability. At inception, lessees must classify all leases as either finance or operating based on five criteria. Balance sheet recognition of finance and operating leases is similar, but the pattern of expense recognition in the income statement, as well as the effect on the statement of cash flows, differs depending on the lease classification. See Note 8 for related disclosures. Transfers of Financial Assets Transfers of financial assets, including loan and loan participation sales, are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Foreclosed Real Estate Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value less cost to sell at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of its carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in other expenses. Bank Owned Life Insurance The Company invests in bank owned life insurance (BOLI) as a source of funding for employee benefit expenses. BOLI involves the purchasing of life insurance by the Bank on a select group of employees. The Company is the owner and beneficiary of the policies. This life insurance investment is carried at the cash surrender value of the underlying policies. Income from the increase in cash surrender value of the policies or from death benefits realized is included in other income on the Consolidated Statements of Income. Goodwill In connection with two 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. 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 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. No impairment was recognized for the years ended December 31, 2019 and 2018. Other Intangible Assets At December 31, 2019, the Company had other intangible assets of $235,000, which is net of accumulated amortization of $1,110,000. These intangible assets will continue to be amortized using the sum-of-the-years digits method of amortization over ten years. At December 31, 2018, the Company had other intangible assets of $336,000 which was net of accumulated amortization of $1,008,000. Amortization expense related to other intangible assets was $101,000 and $126,000 for the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019, the estimated future amortization expense for the core deposit intangible is as follows (in thousands): 2020 $ 77 2021 52 2022 38 2023 29 2024 21 Thereafter 18 $ 235
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income Taxes Deferred income tax assets and liabilities are determined based on the differences between financial statement carrying amounts and the tax basis of existing assets and liabilities. These differences are measured at the enacted tax rates that will be in effect when these differences reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Company and its subsidiary file a consolidated federal income tax return. The Company recognizes interest and penalties on income taxes as a component of income tax expense. The Company analyzes each tax position taken in its tax returns and determines the likelihood that the position will be realized. Only tax positions that are “more-likely-than-not” to be realized can be recognized in an entity’s financial statements. For tax positions that do not meet this recognition threshold, an entity will record an unrecognized tax benefit for the difference between the position taken on the tax return and the amount recognized in the financial statements. The Company does not have any unrecognized tax benefits at December 31, 2019 or 2018, or during the years then ended. No unrecognized tax benefits are expected to arise within the next twelve months. Advertising Costs Advertising costs are expensed as incurred. 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 less any unvested restricted shares. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method. Treasury shares are not deemed outstanding for earnings per share calculations. Employee Benefit Plans The Company has a defined contributory profit-sharing plan which includes provisions of a 401(k) plan. The Company’s contributions are expensed as the cost is incurred. The Company has several supplemental executive retirement plans. To fund the benefits under these plans, the Company is the owner of single premium life insurance policies on the participants. The Company provides pension benefits to eligible employees. The Company’s funding policy is to contribute at least the minimum required contributions annually.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Stock Option Plans The Company recognizes the value of share-based payment transactions as compensation costs in the financial statements over the period that an employee provides service in exchange for the award. The fair value of the share-based payments for stock options is estimated using the Black-Scholes option-pricing model. The Company used the modified-prospective transition method to record compensation expense. Under the modified-prespective method, companies are required to record compensation cost for new and modified awards over the related vesting period of such awards and record compensation cost prospectively for the unvested portion, at the date of adoption, of previously issued and outstanding awards over the remaining vesting period of such awards. No change to prior periods presented is permitted under the modified-prospective method. Restricted Stock The Company recognizes compensation cost related to restricted stock based on the market price of the stock at the grant date over the vesting 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 under the Company’s 2014 Equity Incentive Plan. The Company recognizes compensation expense for the fair value of the restricted stock on a straight-line basis over the requisite service period for the entire award. Cash Flow Information For the purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits with banks and federal funds sold. Off-Balance Sheet Financial Instruments In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit, letters of credit and commitments to sell loans. Such financial instruments are recorded on the balance sheets when they become receivable or payable. Trust Assets Assets held by the Company in a fiduciary capacity for customers are not included in the financial statements since such items are not assets of the Company. Trust income is reported on the accrual method. Treasury Stock Common shares repurchased are recorded as treasury stock at cost. Comprehensive Income Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities and defined benefit pension obligations, are reported as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income as presented in the Consolidated Statement of Comprehensive Income.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Segment Reporting The Company acts as an independent community financial services provider and offers traditional banking related financial services to individual, business and government customers. Through its Community Office and automated teller machine network, the Company offers a full array of commercial and retail financial services, including the taking of time, savings and demand deposits; the making of commercial, consumer and mortgage loans; and the providing of safe deposit services. The Company also performs personal, corporate, pension and fiduciary services through its Trust Department. Management does not separately allocate expenses, including the cost of funding loan demand, between the commercial, retail, mortgage banking and trust operations of the Company. As such, discrete information is not available and segment reporting would not be meaningful. Reclassification of Comparative Amounts Certain comparative amounts for the prior year have been reclassified to conform to current-year classifications. Such reclassifications had no material effect on net income or stockholders’ equity. New and Recently Adopted Accounting Pronouncements Recently Adopted Accounting Pronouncements In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this Update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Upon adoption on January 1, 2018, we have included the related new disclosure requirements in Note 1. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. Upon adoption of ASU 2016-02 on January 1, 2019, we recorded right-of-use assets and related lease liabilities totaling $5.3 million each, which are recorded in other assets and other liabilities, respectively.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) New Accounting Pronouncements Not Yet Adopted In june 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. 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 test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. All other entities, including not-for-profit entities, that are adopting the amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. 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
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 February 2017, the FASB issued ASU 2017-06, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), and Health and Welfare Benefit Plans (Topic 965). This Update relates primarily to the reporting by an employee benefit plan for its interest in a master trust, which is a trust for which a regulated financial institution serves as a trustee or custodian and in which assets of more than one plan sponsored by a single employer or by a group of employers under common control are held. For each master trust in which a plan holds an interest, the amendments in this Update require a plan’s interest in that master trust and any change in that interest to be presented in separate line items in the statement of net assets available for benefits and in the statement of changes in net assets available for benefits, respectively. The amendments in this Update remove the requirement to disclose the percentage interest in the master trust for plans with divided interests and require that all plans disclose the dollar amount of their interest in each of those general types of investments, which supplements the existing requirement to disclose the master trusts balances in each general type of investments. There are also increased disclosure requirements for investments in master trusts. The amendments in this Update are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. This Update is not expected to have a significant impact on the Company’s financial statements. In August 2018, the FASB issued ASU 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. This Update is intended to improve financial reporting for insurance companies that issue long-duration contracts, such as life insurance, disability income, long-term care, and annuities, by requiring updated assumptions for liability measurement, standardizing the liability discount rate, simplifying and improving the accounting for certain market-based options or guarantees associated with deposit (or account balance) contracts by requiring those benefits to be measured at fair value instead of using two different measurement models, simplifying the amortization of deferred acquisition costs, and increasing transparency by improving the effectiveness of disclosures. This Update is effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. 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 944, Financial Services—Insurance, for public business entities that are SEC filers, except for smaller reporting companies, to fiscal years beginning after December 15, 2021, and interim periods within those fiscal years and for all other entities, including smaller reporting companies, to fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. This Update is not expected to have a significant impact on the Company’s financial statements. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework -Changes the Disclosure Requirements for Fair Value Measurements. The Update removes the requirement to disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level III fair value measurements.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Update requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This Update is not expected to have a significant impact on the Company’s financial statements. In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits (Topic 715-20). This Update amends ASC 715 to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The Update eliminates the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost over the next year The Update also removes the disclosure requirements for the effects of a one-percentage-point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost and the benefit obligation for postretirement health care benefits. This Update is effective for public business entities for fiscal years ending after December 15, 2020, and must be applied on a retrospective basis. For all other entities, this Update is effective for fiscal years ending after December 15, 2021. This Update is not expected to have a significant impact on the Company’s financial statements. In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40). This Update addresses customers’ accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This Update is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The amendments in this Update can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. This Update is not expected to have a significant impact on the Company’s financial statements. In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815). The amendments in this Update permit use of the Overnight Index Swap (OIS) rate based on the Secured Overnight Financing Rate (SOFR) as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to the interest rates on direct Treasury obligations of the U.S. government, the London Interbank Offered Rate (LIBOR) swap rate, the OIS rate based on the Fed Funds Effective Rate, and the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate. For entities that have not already adopted Update 2017-12, the amendments in this Update are required to be adopted concurrently with the amendments in Update 2017-12. For public business entities that already have adopted the amendments in Update 2017-12, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities that already have adopted the amendments in Update 2017-12, the amendments are effective for fiscal years beginning after December 15, 2019, and interim
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) periods within those fiscal years. Early adoption is permitted in any interim period upon issuance of this Update if an entity already has adopted Update 2017-12. This Update is not expected to have a significant impact on the Company’s financial statements. In October, 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810), which made improvements in 1) applying the variable interest entity (VIE) guidance to private companies under common control and 2) considering indirect interests held through related parties under common control for determining whether fees paid to decision makers and service providers are variable interests. Under the amendments in this Update, a private company may elect not to apply VIE guidance to legal entities under common control (including common control leasing arrangements) if both the parent and the legal entity being evaluated for consolidation are not public business entities. In addition, indirect interests held through related parties in common control arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. For entities other than private companies, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments in this Update are effective for a private company for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. This Update is not expected to have a significant impact on the Company’s financial statements. In November, 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808), which made the following targeted improvements to generally accepted accounting principles (GAAP) for collaborative arrangements (1) clarified that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account, (2) add unit-of-account guidance in Topic 808 to align with the guidance in Topic 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606, and (3) require that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. This Update is not expected to have a significant impact on the Company’s financial statements. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to To pic 326, Financial Instruments -Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. Topic 326, Financial Instruments—Credit Losses amendments are effective for SEC registrants for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other public business entities, the effective date is for fiscal years beginning after December 15, 2020, and for all other entities, the effective date is for fiscal years beginning after December 15, 2021. Topic 815, Derivatives and Hedging amendments are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. For
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 the applying the fair value option in ASC 825-10.3. 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 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 20. In July 2019, the FASB issued ASU 2019-07, Codification Updates to SEC Sections, Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates. This ASU amends various SEC paragraphs pursuant to the issuance of SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization. Other miscellaneous updates to agree to the electronic Code of Federal Regulations also have been incorporated. 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
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations. 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 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 2020-1, Investments—Equity Securities (Topic 321), Investments -Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), to clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments also clarify that, for the purpose of applying paragraph 815-10-15-141(a) an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, individually or with existing
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) investments, the underlying securities would be accounted for under the equity method in Topic 323 or the fair value option, in accordance with the financial instruments guidance in Topic 825. An entity also would evaluate the remaining characteristics in paragraph 815-10-15-141 to determine the accounting for those forward contracts and purchased options. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements. NOTE 3—SECURITIES The amortized cost, gross unrealized gains and losses, and fair value of securities were as follows: Amortized Cost December Gross Unrealized Gains (In Thousends) â– 31,2019 Gross Unrealized Losses Fair Value 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 Amortized Cost December Gross Unrealized Gains (In Thousands) •31,2018 Gross Unrealized Losses Fair Value AVAILABLE FOR SALE: States and political subdivisions $ 99,218 $ 385 $ (1,990) $ 97,613 Corporate obligations 8,896 (2561 8,640 Mortgage-backed securities- government sponsored entities 142,197 25 (5,198) 137,024 Total debt securities $ 250,311 $ 410 $ (7,444) $ 243,277
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 3—SECURITIES (CONTINUED) The following tables show the Company’s investments’ gross unrealized losses and fair value aggregated by security type and length of time that individual securities have been in a continuous unrealized loss position (in thousands): December 31,2019 Less than 12 Months 12 Months or More Total Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value 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) December 31,2018 Less than 12 Months 12 Months or More Total Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses States and political subdivisions $ 19,140 $ (390) $ 56,740 $ (1,600) $ 75,880 $ (1,990) Corporate obligations 2,045 (21) 6,595 (235) 8,640 (256) Mortgage-backed securities- government sponsored entities 8,444 (22) 122,950 (5,176) 131,394 (5,198) $ 29,629 $ (433) $ 186,285 $ (7,011) $ 215,914 $ (7,444) The Company has 33 debt securities in the less than twelve month category and 57 debt securities in the twelve months or more category as of December 31, 2019. In management’s opinion, the unrealized losses on securities reflect changes in interest rates subsequent to the acquisition of specific securities. No other-than-temporary-impairment charges were recorded in 2 019. Management believes that all other unrealized losses represent temporary impairment of the securities, and it is more likely than not that it will not have to sell the securities before recovery of their cost basis. The amortized cost and fair value of debt securities as of December 31, 2019 by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties. Amortized Fair Cost Value (In Thousands) Due in one year or less $ 4,252 $ 4,264 Due after one year through five years 14,048 14,087 Due after five years through ten years 28,259 28,413 Due after ten years 27,553 28,641 74,112 75,405 Mortgage-backed securities—government sponsored entities 135,646 134,800 $ 209,758 $ 210,205
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 3—SECURITIES (CONTINUED) Gross realized gains and gross realized losses on sales of securities available for sale were $254,000 and $0, respectively, in 2019, compared to $213,000 and $0, respectively, in 2018. The proceeds from the sales of securities totaled $27,247,000 and $17,745,000 for the years ended December 31, 2019 and 2018, respectively. Securities with a carrying value of $157,233,000 and $193,918,000 at December 31, 2019 and 2018, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law. NOTE 4—LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES Set forth below is selected data relating to the composition of the loan portfolio (in thousands): Types of loans (dollars in thousands) December 31,2019 December 31,2018 Real Estate: Residential $ 229,781 24.9% $ 235,523 27.7% Commercial 391,327 42.3 374,790 44.1 Construction 17,732 1.9 17,445 2.0 Commercial, financial and agricultural 134,150 14.5 110,542 13.0 Consumer loans to individuals 151,686 16.4 112,002 13.2 Total loans 924,676 100.0% 850,302 100.0% Deferred fees, net (95) (120) Total loans receivable 924,581 850,182 Allowance for loan losses (8,509) (8,452) Net loans receivable $ 916,072 $ 841,730 Changes in the accretable yield for purchased credit-impaired loans were as follows for the twelve months ended December 31: (In thousands) 2019 2018 Balance at beginning of period $ 29 $ 108 Additions — Accretion (29) (56) Reclassification and other—(23) Balance at end of period $ $ 29 The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30 (in thousands): December 31,2019 December 31,2018 Outstanding Balance $ 793 $ 1055 Car lying Amount $ 696 $ 886
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 4—LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) There were no material increases or decreases in the expected cash flows of these loans since the acquisition date. There has been no allowance for loan losses recorded for acquired loans with specific evidence of deterioration in credit quality. As of December 31, 2019, for loans that were acquired prior to 2019 with or without specific evidence of deterioration in credit quality, adjustments to the allowance for loan losses have been accounted for 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. The 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. The Company does 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. The following tables show 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 December 31, 2019 Individually evaluated for impairment $ (In thousands) $ 2,144 $—$—$—i $ 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 Real Estate Loans Commercial Consumer Residential Commercial Construction Loans Loans Total December 31, 2018 Individually evaluated for impairment $ (In thousands) $ 1,319 $—$—$—$ 1,319 Loans acquired with deteriorated credit quality 630 256 — 886 Collectively evaluated for impairment 234,893 373,215 17,445 110,542 112,002 848,097 Total Loans $ 235,523 $ 374,790 $ 17,445 $ 110,542 $ 112,002 $ 850,302
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 4—LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable. Recorded Investment Unpaid Principal Balance Associated Allowance December 31, 2019 With
no related allowance recorded: Real Estate Loans Commercial $ 143 (In thousands) $ 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 Recorded Investment Unpaid Principal Balance Associated Allowance December 31, 2018 With no related allowance recorded: Real Estate Loans Commercial $ 1,319 (In thousands) $ 1,747 $
Subtotal 1,319 1,747—Total: Real Estate Loans Commercial 1,319 1,747 Total Impaired Loans $ 1,319 $ 1,747 $ The following information for impaired loans is presented for the years ended December 31, 2019 and 2018:
Average Recorded Interest Income Investment Recognized 2019 2018 2019 2018 (In thousands) Total: Real Estate Loans Commercial $ 1,036 $ 1,220 $ 233 $ 67 Total Loans $ 1,036 $ 1,220
$ 233 $ 67
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 4—LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) 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 December 31, 2019, troubled debt restructured loans totaled $99,000 and did not require a specific reserve. During 2019, there were no new loan relationships identified as troubled debt restructurings, while one loan identified as a troubled debt restructuring with a balance of $977,000 as of December 31, 2018 was transferred to foreclosed real estate during 2019. During 2019, there was a charge-off in the amount of $451,000 on loans classified as troubled debt restructurings. As of December 31, 2018, troubled debt restructured loans totaled $1.1 million and resulted in specific reserves of $0. During 2018, there were no new loan relationships identified as troubled debt restructurings, while one loan identified as a troubled debt restructuring with a balance of $23,000 as of December 31,2017 was paid in full during 2018. During 2018, there were no charge-offs on loans classified as troubled debt restructurings. 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 December 31, 2019 and 2018, foreclosed real estate owned totaled $1,556,000 and $1,115,000, respectively. As of December 31, 2019, included within foreclosed real estate owned are two commercial properties that were foreclosed on or received via a deed in lieu. As of December 31, 2019, the Company has initiated formal foreclosure proceedings on three consumer residential mortgage loans with an outstanding balance of $299,000. 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. Loans greater than 90 days past due are considered Substandard unless full payment is expected. Any portion of a loan that has been charged off is placed in the Loss category. To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company 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.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 4—LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) 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 December 31, 2019 and December 31, 2018 (in thousands): Pass Special Mention Substandard Doubtful Loss Total December 31, 2019 Commercial real estate loans $ 376,109 $ 12,268 $ 2,950 $ i—$—$ 391,327 Commercial 133,695 248 207 — 134,150 Total $ 509,804 $ 12,516 $ 3,157 $—$—$ 525,477 Pass Special Mention Substandard Doubtful Loss Total December 31, 2018 Commercial real estate loans $ 360,838 $ 7,918 $ 6,034 $—$—$ 374,790 Commercial 109,966 82 494 — 110,542 Total $ 470,804 $ 8,000 $ 6,528 $—$—$ 485,332 For residential real estate loans, construction loans and consumer loans, the Company evaluates credit quality based on the performance of the individual credits. Nonperforming loans include loans that have been placed on nonaccrual status and loans remaining in accrual status on which the contractual payment of principal and interest has become 90 days past due. The following table presents the recorded investment in the loan classes based on payment activity as of December 31, 2019 and December 31, 2018 (in thousands): December 31, 2019 Performing Nonperforming Total Residential real estate loans $ 229,214 $ 567 $ 229,781 Construction 17,732—17,732 Consumer loans to individuals 151,607 79 151,686 Total $ 398,553 $ 646 $ 399,199 December 31, 2018 Performing Nonperforming Total Residential real estate loans $ 234,725 $ 798 $ 235,523 Construction 17,445—17,445 Consumer loans to individuals 112,002—112,002 Total $ 364,172 $ 798 $ 364,970 Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of December 31, 2019 and December 31, 2018 (in thousands):
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 4—LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) December 31,2019 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 Real Estate loans Residential $5228,242 $ 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 $5919,381 $ 1,218 $ 3,282 $—$ 795 $ 5,295 $ 924,676 December 31,2018 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 Real Estate loans Residential $ 234,201 $ 373 $ 151 $—$ 798 $ 1,322 $ 235,523 Commercial 372,617 1,043 788—342 2,173 374,790 Construction 17,445 — ——17,445 Commercial loans 110,191 320 31 — 351 110,542 Consumer loans 111,796 171 35 — 206 112,002 Total $ 846,250 $ 1,907 $ 1,005 $ $ 1,140 $ 4,052 $ 850,302
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 4—LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) The following table presents the allowance for loan losses by the classes of the loan portfolio: (In thousands) Residential Real Estate Commercial Real Estate Construction Commercial Consumer Total Beginning balance, December 31, 2018 Charge Offs Recoveries Provision for loan losses $ 1,328 (102) 24 302 $ 5,455 (627) 125 (266) $ 93 $ 2 712 $ (284) 48 473 864 $ (420) 43 739 8,452 (1,433) 240 1,250 Ending balance, December 31, 2019 $ 1,552 $ 4,687 $ 95 $ 949 $ 1,226 $ 8,509 Ending balance individually evaluated for impairment $ $ 417 $—$—$—$ 417 Ending balance collectively evaluated for impairment $ 1,552 $ 4,270 $ 95 $ 949 $ 1,226 $ 8,092 (In thousands) Residential Real Estate Commercial Real Estate Construction Commercial Consumer Total Beginning balance, December 31, 2017 Charge Offs Recoveries Provision for loan losses $ 1,272 (197) 9 244 $ 5,265 (283) 33 440 $ 90 $ 3 463 $ (246) 8 487 544 $ (263) 32 551 7,634 (989) 82 1,725 Ending balance, December 31, 2018 $ 1,328 $ 5,455 $ 93 $ 712 $ 864 $ 8,452 Ending balance individually evaluated for impairment $ $—$—$—$—$—Ending balance collectively evaluated for impairment $ 1,328 $ 5,455 $ 93 $ 712 $ 864 $ 8,452
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 4—LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) During the period ended December 31, 2019, the allowance for loan losses increased from $8,452,000 to $8,509,000. This $57,000 increase in the required allowance was due primarily to a $417,000 specific reserve for impaired loans and a $447,000 increase in the qualitative factor related to economic conditions. This increase was partially offset by a reduction in the historical loss factor from 0.26% at December 31, 2018 to 0.15% on December 31, 2019. During the period ended December 31, 2018, the allowance for loan losses increased from $7,634,000 to $8,452,000. This $818,000 increase in the required allowance was due primarily to an $86.1 million increase in loan balances and an additional qualitative factor to allocate reserves for potential risk in large balance loans. This increase was partially offset by a reduction in the historical loss factor from 0.41% at December 31, 2017 to 0.26% on December 31, 2018. Interest income that would have been recorded on loans accounted for on a non-accrual basis under the original terms of the loans was $101,000 and $98,000 for 2019 and 2018, respectively. As of December 31, 2019 and 2018, the Company considered its concentration of credit risk to be acceptable. As of December 31, 2019, the highest concentrations are in commercial rentals and the hospitality lodging industry, with loans outstanding of $84.6 million, or 65.0% of bank capital, to commercial rentals, and $64.6 million, or 49.6% of bank capital to the hospitality lodging industry. There were no charge-offs on loans within these concentrations for the years ended December 31, 2019 and 2018, respectively. During 2019, the Company sold residential mortgage loans totaling $4,715,000. During 2018, the Company sold residential mortgage loans totaling $752,000. Gross realized gains and gross realized losses on sales of residential mortgage loans were $123,000 and $0, respectively, in 2019 and $15,000 and $0, respectively, in 2018. The proceeds from the sales of residential mortgage loans totaled $4,838,000 and $767,000 for the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019 and 2018, the outstanding value of loans serviced for others totaled $28.5 million and $26.8 million, respectively. NOTE 5—PREMISES AND EQUIPMENT Components of premises and equipment at December 31 are as follows: 2019 (In Thousands) 2018 Land and improvements $ 2,806 $ 2,832 Buildings and improvements 17,914 17,788 Furniture and equipment 8,164 7,171 28,884 27,791 Accumulated depreciation (14,656) (13,945) $ 14,228 $ 13,846 Depreciation expense totaled $1,005,000 and $895,000 for the years ended December 31, 2019 and 2018, respectively.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 6—DEPOSITS Aggregate time deposits in denominations of $250,000 or greater were $137,108,000 and $116,147,000 at December 31, 2019 and 2018, respectively. At December 31, 2019, the scheduled maturities of time deposits are as follows (in thousands): 2020 $ 258,645 2021 38,394 2022 26,580 2023 24,162 2024 12,937 $ 360,718 NOTE 7—BORROWINGS Short-term borrowings at December 31 consist of the following: 2019 2018 (In Thousands) Securities sold under agreements to repurchase $ 30,505 $ 37,457 Federal Home Loan Bank short-term borrowings 31,751 15,589 $ 62,256 $ 53,046 The outstanding balances and related information of short-term borrowings are summarized as follows: Average balance during the year Years Ended 2019 (In Thousands) $ 48,945 December 31, 2018 $ 41,963 Average interest rate during the year 0.96% 0.77% Maximum month-end balance during the year $ 62,256 $ 53,046 Weighted average interest rate at the end of the year 1.30% 1.27% Securities sold under agreements to repurchase generally mature within one day to one year from the transaction date. Securities with an amortized cost and fair value of $36,313,000 and $36,195,000 at December 31, 2019 and $41,587,000 and $40,161,000 at December 31, 2018, respectively, were pledged as collateral for these agreements. The securities underlying the agreements were under the Company’s control. The collateral pledged for repurchase agreements that are classified as secured borrowings is summarized as follows (in thousands): As of December 31,2019 Remaining Contractual Maturity of the Agreements Overnight Greater and Up to 30-90 than 90 continuous 30 days days days Total Repurchase Agreements: Mortgage-backed securities—government sponsored entities $ 36,195 $—$ $ $ 36,195 Total liability recognized for repurchase agreements $30,505
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT
NOTE 7—BORROWINGS (CONTINUED) As of December 31,2018 Remaining Contractual Maturity of the Agreements Overnight Greater and Up to
30-90 than 90 continuous 3 0 days days days Total Repurchase Agreements: Mortgage-backed securities—government sponsored entities $ 40,161 $—$ $—$ 40,161 Total liability recognized for
repurchase agreements $ 37,457 The Company has aline of credit commitment available from the FHLB of Pittsburgh for borrowings of up to $150,000,000, which renews annually in June. At December 31, 2019, there were $31,751,000 of borrowings
outstanding on this line. There were $15,589,000 of borrowings outstanding on this line of credit at December 31, 2018. The Company has a line of credit commitment available from Atlantic Community Bankers Bank for $7,000,000, which expires on
June 30, 2020. There were no borrowings under this line of credit at December 31, 2019 and 2018. The Company has a line of credit commitment available from PNC Bank for $16,000,000 at December 31, 2019. There were no borrowings under
this line of credit at December 31, 2019 and December 31, 2018. The Company also has a line of credit commitment from Zions Bank for $17,000,000. There were no borrowings under this line of credit at December 31, 2019 and
December 31, 2018. Other borrowings consisted of the following at December 31, 2019 and 2018: 2019 (In Thou. 2018 sands) Amortizing fixed rate borrowing due January 2019 at 1.39% $ $ 423 Fixed rate term borrowing due August 2019 at
1.61%—10,000 Fixed rate term borrowing due May 2020 at 1.85% 5,000—Amortizing fixed rate borrowing due June 2020 at 1.49% 1,034 3,079 Amortizing fixed rate borrowing due July 2020 at 2.77% 2,974 7,962 Amortizing fixed rate borrowing due
December 2020 at 1.71% 2,538 5,000 Amortizing fixed rate borrowing due December 2020 at 3.06% 1,034 2,051 Amortizing fixed rate borrowing due March 2022 at 1.75% 2,009 2,877 Amortizing fixed rate borrowing due August 2022 at 1.94%
5,351—Amortizing fixed rate borrowing due October 2022 at 1.88% 4,626 6,200 Amortizing fixed rate borrowing due October 2023 at 3.24% 7,809 9,692 Amortizing fixed rate borrowing due December 2023 at 3.22% 4,063 5,000 Fixed rate term borrowing
due December 2023 at 1.95% 10,000—Amortizing fixed rate borrowing due December 2023 at 1.73% 10,000 $ 56,438 $ 52,284
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 7—BORROWINGS (CONTINUED) Contractual maturities and scheduled cash flows of other borrowings at December 31, 2019 are as follows (in thousands): 2020 $ 22,435 2021 10,080 2022 8,654 2023 15,269 $ 56,438 The Bank’s maximum borrowing capacity with the FHLB was $425,226,000 of which $88,189,000 was outstanding in the form of advances and $56,000,000 was outstanding in the form of letters of credit at December 31, 2019. Advances from the FHLB are secured by qualifying assets of the Bank. NOTE 8—OPERATING LEASES Due to the adoption of ASU 2016-02, Leases (Topic 842), the Company completed a comprehensive review and analysis of all its property contracts. As a result of this review, it was determined that 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 occupance 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 year ended December 31, 2019 amounted to $518,000. 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 as of January 1, 2019. 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 (years) 13.2 Weighted-average discount rate 3.21%
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 8—OPERATING LEASES (CONTINUED) The following table presents the undiscounted cash flows due related to operating leases as of December 31, 2019, along with a reconciliation to the discounted amount recorded on the Consolidated Balance Sheets: Undiscounted cash flows due (in thousands): Operating 2020 $ 535 2021 535 2022 535 2023 535 2024 544 2025 and thereafter 3,879 Total undiscounted cash flows 6,563 Discount on cash flows (1,247) Total lease liabilities $ 5,316 Under Topic 842, the lessee can elect to not record on the Consolidated Balance Sheets a lease whose term is twelve months or less and does not include a purchase option that the lessee is reasonably certain to exercise. As of December 31, 2019, the Company had no leases that had a term of twelve months or less. Certain facilities are leased under various operating leases. Rental expense for these leases was $518,000 and $470,000, respectively, for the years ended December 31, 2019 and 2018. NOTE 9—EMPLOYEE BENEFIT PLANS The Company has a defined contributory profit-sharing plan which includes provisions of a 401(k) plan. The plan permits employees to make pre-tax contributions of up to 15% of the employee’s compensation, not to exceed the limits set by the Internal Revenue Service. The amount of contributions to the plan, including matching contributions, is at the discretion of the Board of Directors. All employees over the age of 21 are eligible to participate in the plan and receive Company contributions after one year of employment. Eligible employees are able to contribute to the Plan at the beginning of the first quarterly period after their date of employment. Employee contributions vest immediately, and any Company contributions are fully vested after five years. The Company’s contributions are expensed as the cost is incurred, funded currently, and amounted to $730,000 and $738,000 for the years ended December 31, 2019 and 2018, respectively. The Company has several non-qualified supplemental executive retirement plans for the benefit of certain executive officers and former officers. At December 31, 2019 and 2018, other liabilities include $3,428,000 and $3,362,000 accrued under the Plan. Compensation expense includes approximately $491,000 and $434,000 relating to the supplemental executive retirement plan for 2019 and 2018, respectively. To fund the benefits under this plan, the Company is the owner of single premium life insurance policies on participants in the non-qualified retirement plan. At December 31, 2019 and 2018, the cash value of these policies was $38,763,000 and $37,932,000, respectively. The Company provides postretirement benefits in the form of split-dollar life arrangements to employees who meet the eligibility requirements. The net periodic postretirement benefit expense included in salaries and employee benefits was $101,000 and $149,000 for the years ended December 31, 2019 and 2018, respectively.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 9—EMPLOYEE BENEFIT PLANS (CONTINUED) FASB authoritative guidance on accounting for deferred compensation and postretirement benefit aspects of endorsement split-dollar life insurance arrangements requires the recognition of a liability and related compensation expense for endorsement split-dollar life insurance that provides a benefit to an employee that extends to postretirement periods. The life insurance policies purchased for the purpose of providing such benefits do not effectively settle an entity’s obligation to the employee. Accordingly, the entity must recognize a liability and related compensation expense during the employee’s active service period based on the future cost of insurance to be incurred during the employee’s retirement. This expense is included in the SERP plan expense for 2018 discussed above. If the entity has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the FASB authoritative guidance on employer’s accounting for postretirement benefits other than pensions. The accumulated postretirement benefit obligation was $1,392,000 and $1,291,000 at December 31, 2019 and 2018, respectively. Through its acquisition of Delaware, the Company also has certain director fee deferral and continuation plans. These plans allowed directors to defer director fees and provide a benefit payment for a period of five to fifteen years. The Company expensed $3,000 and $6,000 under these plans in 2019 and 2018, respectively. At December 31, 2019 and 2018, the liability under these plans was $166,000 and $249,000, respectively. Certain key executives have change in control agreements with the Company. These agreements provide certain potential benefits in the event of termination of employment following a change in control. The Company participates in the Pentegra Mulitemployer Defined Benefit Pension Plan (EIN 13-5645888 and Plan # 333) as a result of its acquisition of North Penn. As of December 31, 2019 and 2018, the Company’s Plan was 95.0% and 91.4% funded, respectively, and total contributions made are not more than 5% of the total contributions to the Plan. The Company’s expense related to the Plan was $29,000 in 2019 and $46,000 in 2018. During the plan years ending December 31, 2019 and 2018, the Company made contributions of $29,000 and $46,000, respectively. As a result of its acquisition of Delaware, the Company is a member of the New York State Bankers Retirement System. Substantially all full-time employees who were former employees of Delaware are covered under this defined benefit pension plan (the “Delaware Plan”). The Company’s funding policy is to contribute at least the minimum required contribution annually. Pension cost is computed using the projected unit credit actuarial cost method. Effective December 31, 2012, the Delaware Plan was closed to new participants and accrued benefits were frozen.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 9—EMPLOYEE BENEFIT PLANS (CONTINUED) The following table sets forth the projected benefit obligation and change in plan assets for the Delaware Plan at December 31: (in Thousands of Dollars) 2019 2018 Change in projected benefit obligation: Projected benefit obligation at beginning of year $ (7,186) $ $ (8,465) Service cost (55) (64) Interest cost (312) (279) Actuarial gain (loss) (515) 1,040 Benefits paid 553 582 Benefit obligation at end of year $ (7,515) $ $ (7,186) Change in plan assets: Fair value of plan assets at beginning of year $ 6,136 $ $ 7,110 Actual return on plan assets 1,275 (401) Benefits paid (558) (573) Fair value of assets at end of year 6,853 6,136 Funded status at end of year $ (662) $ $ (1,050) The Delaware Plan paid $553,000 and $582,000 in benefit payments in 2019 and 2018, respectively Estimated benefit payments under the Delaware Plan are expected to be approximately $477,000, $466,000, $467,0000, $453,000 and $438,000 for the next five years. Payments are expected to be approximately $2,115,000 in total for the five-year period ending December 31, 2029. The Company was not required to make any contributions to the Delaware Plan in 2019 or 2018. The decrease in the projected discount rate contributed approximately $801,000 to the overall increase in the projected benefit obligation for the year ended December 31, 2019. The accumulated benefit obligation for the Delaware Plan was $7,515,000 and $7,186,000 at December 31, 2019 and 2018, respectively. The following table sets forth the amounts recognized in accumulated other comprehensive income for the years ended December 31 (in thousands): 2019 2018 Transition asset $—Prior service credit — Gain 375 207 Total $ 375 J $ 207
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 9—EMPLOYEE BENEFIT PLANS (CONTINUED) Net pension cost (income) included the following components (in thousands): 2019 2018 Service cost benefits earned during the period $ 55 $ 64 Interest cost on projected benefit obligation 312 279 Actual return on assets (379) (441) Net amortization and deferral — NET PERIODIC PENSION COST (INCOME) $ (12) $ (98) The weighted average assumptions used to determine the benefit obligation at December 31 are as follows: 2019 2018 Discount rate 3.55% 4.54% The weighted average assumptions used to determine the net periodic pension cost at December 31 are as follows: 2019 2018 Discount rate 4.54% 3.43% Expected long-term return on plan assets 6.50% 6.50% Rate of compensation increase 0.00% 0.00% The expected long-term return on plan assets was determined based upon expected returns on individual asset types included in the asset portfolio. The Delaware Plan’s weighted-average asset allocations at December 31, by asset category, are as follows: 2019 2018 Cash equivalents 0.0% 4.2% Equity securities 31.7% 46.1% Fixed income securities 57.7% 45.8% Other 10.6% 3.9% 100.0% 100.0% The Delaware Plan’s overall investment strategy is to invest in a diversified portfolio while managing the variability between the assets and projected liabilities of underfunded pension plans. In 2019, the New York Bankers Retirement System (“System”) Board Members approved a migration of substantially all of the System’s assets to one fund, Commingled Pensions Trust Fund (LDI Diversified Balanced) of JPMorgan Chase Bank, N.A The growth-oriented portion of the Fund invests in a mix of asset classes that the Fund’s Trustee believes will collectively maximize total risk-adjusted return through a combination of capital appreciation and income. This portion of the Fund will comprise between 35% and 90% of the portfolio and will invest directly or indirectly via underlying funds in a broad mix of global equity, global fixed income, real estate and cash-plus strategies. The remaining portion of the Fund, between 10% and 65% of the portfolio, is used to minimize volatility relative to a plan’s projected liabilities.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 9—EMPLOYEE BENEFIT PLANS (CONTINUED) The fair value of the Delaware Plan’s assets, by asset category, is as follows: December 31,2019 Total Quoted Market Price in Active Markets (Level 1) Other Observable Inputs (Level 2) Unobservable Inputs (Level 3) fin thousands of dollars Cash equivalents: Cash (including foreign currencies) $ 6 $ 6 $ $ Equity securities: Common stock 2,765 2,765—Depository receipts 47 47 — Preferred stock 22 22 — Fixed income securities: Corporate bonds 678 _ 678 Government issue 2,490—2,490—Collateralized mortgage obligations 174—174—Other 671 — 671 Total $ 6,853 $ 2,840 $ 3,342 $ 671 December 31,2018 Total Quoted Market Price in Active Markets (Level 1) Other Observable Inputs (Level 2) Unobservable Inputs (Level 3) fin thou: thousands of dollars. Cash equivalents: Cash (including foreign currencies) $ 6 $ 6 $ $ Equity securities: Common stock 2,475 2,475 Depository receipts 42 42 — Preferred stock 20 20 — Fixed income securities: Corporate bonds 608 608 Government issue 2,228—2,228—Collateralized mortgage obligations 156—156—Other 601 — 601 Total $ 6,136 $ 2,543 $ 2,992 $ 601
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 9—EMPLOYEE BENEFIT PLANS (CONTINUED) The following table sets forth a summary of the changes in the Level 3 assets for the year ended December 31, 2019 and 2018 (in thousands of dollars): Balance, January 1 $ 601 $ 255 Realized gain 187—Purchase — Sales (6101—Unrealized gain (loss) (178) 346 Balance, December 31 $ $ 601 NOTE 10—INCOME TAXES The components of the provision for federal income taxes are as follows: Years Ended December 31, 2019 2018 (In Thou: (In Thousands) Current $ 1,620 $ 2,529 Deferred 988 24 $ 2,608 $ 2,553 Deferred income taxes reflect temporary differences in the recognition of revenue and expenses for tax reporting and financial statement purposes, principally because certain items, such as the allowance for loan losses and loan fees are recognized in different periods for financial reporting and tax return purposes. As of December 31, 2019, the Company has a $4,611,000 net operating loss carryforward that will begin to expire in 2035. A valuation allowance has not been established for deferred tax assets. Realization of the deferred tax assets is dependent on generating sufficient taxable income. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized. Deferred tax assets are recorded in other assets. Income tax expense of the Company is less than the amounts computed by applying statutory federal income tax rates to income before income taxes because of the following: Percentage before Income of Income Taxes Years Ended C 2019 December 31, 2018 Tax at statutory rates 21.0% 21.0% Tax exempt interest income, net of interest expense disallowance (4.4) [4.9] Earnings and proceeds on life insurance (1.0) [1.1] Other (0.1) 0.8 15.5% 15.8%
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 10—INCOME TAXES (CONTINUED) The net deferred tax asset included in other assets in the accompanying Consolidated Balance Sheets includes the following amounts of deferred tax assets and liabilities: 2019 (In Thousands) 2018 Deferred tax assets: Allowance for loan losses $ 1,787 $ 1,775 Deferred compensation 797 766 Core deposit intangible 141 278 Prepaid expenses 55 90 Pension liability 360 363 Foreclosed real estate valuation allowance 17 20 AMT tax credit carryforward—260 Net operating loss carryforward 968 1,173 Net unrealized loss on securities—1,477 Other 122 95 Total Deferred Tax Assets 4,247 6,297 Deferred tax liabilities: Premises and equipment 598 223 Deferred loan fees 220 186 Net unrealized gain on pension liability 221 143 Purchase price adjustment 327 321 Net unrealized gain on securities 94—Total Deferred Tax Liabilities 1,460 873 Net Deferred Tax Asset $ 2,787 $ 5,424 The Company’s federal and state income tax returns for taxable years through 2016 have been closed for purposes of examination by the Internal Revenue Service and the Pennsylvania Department of Revenue. NOTE 11—REGULATORY MATTERS AND STOCKHOLDERS’ EQUITY The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total, Tier 1 and Common Equity Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2019 and 2018, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 11—REGULATORY MATTERS AND STOCKHOLDERS’ EQUITY (CONTINUED) As of December 31, 2019, the most recent notification from the regulators has categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category. The Company’s actual capital amounts and ratios are presented in the following table: Act ml For Capital Purposes Adequacy )ses To Be Well under Corrective Provisions Capitalized Prompt Action Amount Ratio Amount Ratio Amount Ratio (Dollars) in Thousands As of December 31, 2019: Total capital (to risk-weighted assets) $132,507 14.01% >$75,674 >8.00% >$94,593 > 10.00% Tier 1 capital (to risk-weighted assets) 123,999 13.11 >56,756 >6.00 >75,674 >8.00 Common Equity Tier 1 capital (to risk-weighted assets) 123,999 13.11 >42,567 >4.50 >61,485 >6.50 Tier 1 capital (to average assets) 123,999 10.18 >48,735 >4.00 >60,918 >5.00 As of December 31,2018: Total capital (to risk-weighted assets) $122,917 14.00% >$70,248 >8.00% > $87,810 >10.00% Tier 1 capital (to risk-weighted assets) Common Equity Tier 1 capital (to risk-weighted assets) 114,465 114,465 13.04 13.04 >52,686 >39,515 >6.00 >4.50 >70,248 >57,077 >8.00 >6.50 Tier 1 capital (to average assets) 114,465 9.82 >46,619 >4.00 >58,273 >5.00 The Bank’s ratios do not differ significantly from the Company’s ratios presented above. The Company and the Bank are subject to regulatory capital rules which, among other things, impose a common equity Tier 1 minimum capital requirement of 4.50% of risk-weighted assets; set the minimum leverage ratio for all banking organizations at a uniform 4.00% of total assets; set the minimum Tier 1 capital to risk-based assets requirement at 6.00% of risk-weigh ted assets; and assign a risk-weight of 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 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 rule also 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 2.50% of common equity Tier 1 capital to risk-weighted assets above regulatory minimum risk-based requirements. The Company and the Bank are in compliance with their respective capital requirements, including the capital conservation buffer, as of December 31, 2019.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 11—REGULATORY MATTERS AND STOCKHOLDERS’ EQUITY (CONTINUED) The Bank is required to maintain average cash reserve balances in vault cash or with the Federal Reserve Bank. The amount of these restricted cash reserve balances at December 31, 2019 and 2018 was approximately $1,074,000 and $1,018,000, respectively. Under Pennsylvania banking law, the Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. At December 31, 2019, $65,096,000 of retained earnings were available for dividends without prior regulatory approval, subject to the regulatory capital requirements discussed above. Under Federal Reserve regulations, the Bank is limited as to the amount it may lend affiliates, including the Company, unless such loans are collateralized by specific obligations. NOTE 12—STOCK BASED COMPENSATION The Company’s shareholders approved the Norwood Financial Corp 2006 Stock Option Plan at the Annual Meeting on April 26, 2006. An aggregate of 412,500 shares of authorized but unissued Common Stock of the Company were reserved for future issuance under the Plan. This includes up to 66,000 shares for awards to outside directors. Under this plan, the Company granted 11,135 options to employees in 2015,18,750 options to employees in 2014, and 42,900 options, which included 6,000 options granted to outside directors in 2013. No options were granted under this plan in 2019 or 2018. As of December 31, 2019, there were no shares available for future awards under this plan. All share information has been restated to reflect the 50% stock dividend declared in 2 017. At the Annual Meeting held on April 22, 2014, the Company’s shareholders approved the Norwood Financial Corp 2014 Equity Incentive Plan. An aggregate of 375,000 shares of authorized but unissued Common Stock of the Company were reserved for future issuance under the Plan. This includes up to 60,000 shares for awards to outside directors. The Plan also authorized the Company to award restricted stock to officers and outside directors, limited to 63,000 shares of restricted stock awards for officers and 12,000 shares of restricted stock awards for outside directors. At the Annual Meeting held on April 24, 2018, the Company’s shareholders approved an amendment to the 2014 Equity Incentive Plan to ease certain restrictions on restricted stock awards to outside directors. As a result of this amendment, the number of shares available for restricted stock awards to officers was reduced by 300 shares to 62,700, while the number of shares available for restricted stock awards to outside directors was increased by 20,300 to 32,300 shares. Under this plan, the Company granted 39,850 shares in 2019 which included 26,750 options to employees, 7,500 shares of restricted stock to officers and 5,600 shares of restricted stock to directors. In 2018, the Company granted 42,000 shares which included 26,500 options to employees, 7,500 shares of restricted stock to officers, 2,400 options to directors and 5,600 shares of restricted stock to directors. In 2017, the Company granted 44,150 shares which included 26,750 options to employees, 9,000 shares of restricted stock to officers, 8,000 options to directors and 400 shares of restricted stock to directors. In 2016, the Company granted 36,675 shares which included 24,000 options to employees, 9,000 shares of restricted stock to officers and 3,675 shares of restricted stock to directors. In 2015, the Company granted 20,591 shares which included 10,616 options to employees, 6,375 shares of restricted stock to officers and 3,600 shares of restricted stock to directors. In 2014, the Company granted 13,950 shares, which included 9,750 shares of restricted stock to officers and 4,200 shares of restricted stock to outside directors. All shares granted in 2014 were for restricted stock. The 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 determine the fair value of restricted stock under the company’s restricted stock plan. Management recognizes compensation expense for the fair value of restricted stock on a
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 12—STOCK BASED COMPENSATION (CONTINUED) straight-line basis over the requisite service period for the entire award. As of December 31, 2019, there were 177,785 shares available for future awards under this plan, which includes 151,260 shares available for officer awards and 26,525 shares available for awards to outside directors. Included in these totals are 13,575 shares available for restricted stock awards to officers and 9,225 shares available for restricted stock awards to outside directors. All share information has been restated to reflect the 50% stock dividend declared in 2017. Total unrecognized compensation cost related to stock options was $203,000 as of December 31, 2019 and $207,000 as of December 31, 2018. Salaries and employee benefits expense includes $207,000 and $237,000 of compensation costs related to options for the years ended December 31, 2019 and 2018, respectively. Compensation costs related to restricted stock amounted to $289,000 and $205,000 for the years ended December 31, 2019 and 2018, respectively. The expected future compensation expense relating to non-vested restricted stock outstanding as of December 31, 2019 and 2018 was $1,146,000 and $963,000, respectively A summary of the Company’s stock option activity and related information for the years ended December 31 follows: 2019 2018 Options Weighted Average Exercise Price Average Intrinsic Value Options Weighted Average Exercise Price Average Intrinsic Value Outstanding, beginning of year 208,700 $ 22.54 212,725 $ 20.76 Granted 26,750 36.02 28,900 32.34 Exercised (32,350) 19.71 (28,275) 18.39 Forfeited (3,275) 24.31 (4,650) 27.08 Outstanding, end of year 199,825 $ 24.78 5 2,822,470 208,700 $ 22.54 $ 2,182,537 Exercisable, end of year 173,075 $ 23.04 $ 2,745,430 179,800 $ 20.97 $ 2,163,463 Exercise prices for options outstanding as of December 31, 2019 ranged from $16.65 to $36.02 per share. The weighted average remaining contractual life is 5.9 years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: Years Ended December 31, 2019 2018 Dividend yield 3.59% 3.72% Expected life 10 years 10 years Expected volatility 29.08% 29.10% Risk-free interest rate 1.92% 2.68% Weighted average fair value of options granted $7.61 $7.18
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 13—EARNINGS PER SHARE The expected volatility is based on historical volatility. The risk-free interest rates for periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on historical exercise experience. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. Proceeds from stock option exercises totaled $638,000 in 2019. Shares issued in connection with stock option exercises are issued from available treasury shares or from available authorized shares. During 2019, for the shares issued in connection with stock option exercises, 32,350 shares in total, all shares were issued from available authorized shares. All share information has been adjusted to reflect the 50% stock dividend declared in 2017. As of December 31, 2019, outstanding stock options consist of the following: Options Outstanding Average Exercise Price Remaining Life, Years Options Exercisable Average Exercise Price 13,200 $ 16.83 1.0 13,200 $ 16.83 18,825 16.65 2.0 18,825 16.65 23,925 18.03 3.0 23,925 18.03 1,650 18.36 3.0 1,650 18.36 3,000 19.30 3.8 3,000 19.30 20,875 17.93 4.0 20,875 17.93 8,250 19.39 4.9 8,250 19.39 11,250 19.03 5.9 11,250 19.03 16,250 22.37 7.0 16,250 22.37 29,500 32.81 8.0 29,500 32.81 26,350 32.34 9.0 26,350 32.34 26,750 36.02 10.0 — Total 199,825 173,075 A summary of the Company’s restricted stock activity and related information for the years ended December 31 is as follows: 2019 2018 Number of Shares Weighted Average Grant Date Fair Value Number of Shares Weighted Average Grant Date Fair Value Non-vested, beginning of year 34,615 $ 27.82 30,415 $ 24.46 Granted 13,100 36.02 13,100 32.34 Vested (11,520) 25.12 (8,900) 23.00 Forfeited — — Non-vested at December 31 36,195 $ 31.65 34,615 $ 27.82
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 13—EARNINGS PER SHARE (CONTINUED) The following table sets forth the computations of basic and diluted earnings per share: Years Ended December 31, 2019 2018 (In Thousands, Except Per Share Data) Numerator, net income $ 14,215 $ 13,651 Denominator: Weighted average shares outstanding 6,295 6,263 Less: Weighted average unvested restricted shares (35) (31) Denominator: Basic earnings per share 6,260 6,232 Weighted average shares outstanding, basic 6,260 6,232 Add: Dilutive effect of stock options and restricted stock 72 58 Denominator: Diluted earnings per share 6,332 6,290 Basic earnings per common share $ 2.27 $ 2.19 Diluted earnings per common share $ 2.25 $ 2.17 Stock options which had no intrinsic value because their effect would be anti-dilutive, and therefore would not be included in the diluted EPS calculation, were zero for both years ended December 31, 2019 and 2018, based on the closing price of the Company’s common stock which was $38.90 and $33.00 as of December 31, 2019 and 2018, respectively. All share and per share information has been restated to reflect the 50% stock dividend declared in 2017. NOTE 14—OFF-BALANCE SHEET FINANCIAL INSTRUMENTS 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: December 31, 2019 2018 (In Thousands) Commitments to grant loans $ 44,246 $ 45,246 Unfunded commitments underlines of credit 56,840 71,906 Standby letters of credit 3,668 4,269 $ 104,754 $ 121,421
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 14—OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (CONTINUED) 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. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The majority of these standby letters of credit expire within the next twelve months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Bank requires collateral supporting these letters of credit when deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. NOTE 15—FAIR VALUES OF FINANCIAL INSTRUMENTS Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In accordance with fair value accounting guidance, the Company measures, records, and reports various types of assets and liabilities at fair value on either a recurring or non-recurring basis in the Consolidated Financial Statements. Those assets and liabilities are presented in the sections entitled “Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis” and “Assets and Liabilities Required to be Measured and Reported at Fair Value on a Non-Recurring Basis”. There are three levels of inputs that may be used to measure fair values: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The methods of determining the fair value of assets and liabilities presented in this note are consistent with our methodologies disclosed in Note 14 of the Company’s 2017 Form 10-K, except for the valuation of loans which was impacted by the adoption of ASU 2016-01. In accordance with ASU 2016-01, the fair value of loans, excluding previously presented impaired loans measured at fair value on a non-recurring basis, is estimated using discounted cash flow analyses. The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, credit and nonperformance risk. Loans are considered a Level 3 classification.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 15—FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) 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 December 31, 2019 and 2018 are as follows (in thousands): Fair Value Measurement Reporting Date using Description Total Level 1 Level 2 Level 3 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 available for sale $ 210,205 $ $ 210,205 $ December 31, 2018 Available for Sale: U.S. Treasury securities $ $ $ $ States and political subdivisions 97,613—97,613—Corporate obligations 8,640—8,640—Mortgage-backed securities-government sponsored entities 137,024 137,024 Total available for sale $ 243,277 $ $ 243,277 $ Securities: The fair value of securities available for sale (carried at fair value) 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.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 15—FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) 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 December 31, 2019 and 2018 are as follows (in thousands): Description Fair Value Measurement Reporting Date using Total Level 1 Level 2 Level 3 December 31, 2019 Impaired Loans $ 1,584 $ $ $ 1,584 Foreclosed real estate 1,556 — 1,556 December 31, 2018 Impaired Loans $ 1,319 $ $ $ 1,319 Foreclosed real estate 1,115 — 1,115 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 December 31, 2019, the fair value investment in impaired loans totaled $2,144,000, which included two loan relationships that did not require a valuation allowance since either the estimated realizable value of the collateral or the discounted cash flows exceeded the recorded investment in the loan. As of December 31, 2019, the Company has recognized charge-offs against the allowance for loan losses on these impaired loans in the amount of $251,000 over the life of the loans. Additionally, there were two loan relationships which totaled $2,001,000 which required a valuation allowance of $417,000 since either the estimated realizable value of the collateral or the discounted cash flows were below the recorded investment in the loan. As of December 31, 2019, the Company has not recognized a charge-off against the allowance for loan losses on these impaired loans. As of December 31, 2018, the fair value investment in impaired loans totaled $1,319,000 which included six loan relationships that did not require a valuation allowance since either the estimated realizable value of the collateral or the discounted cash flows exceeded the recorded investment in the loan. As of December 31, 2018, the Company has recognized charge-offs against the allowance for loan losses on these impaired loans in the amount of $428,000 over the life of the loans. Foreclosed real estate owned (carried at fair value): Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are carried at fair value less estimated cost to sell. Fair value is based upon independent market prices, appraised value of the collateral or management’s estimation of the value of the collateral. These assets are included in Level 3 fair value based upon the lowest level of input that is significant to the fair value measurement.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 15—FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value: Quantitative Information about Level 3 Fair Value Measurements (In thousands) Fair Value Estimate Valuation Techniques Unobservable Input Range (Weighted Average) December 31, 2019 Impaired loans $ 1,531 Appraisal of collateral(l) 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%) Quantitative Information about Level 3 Fair Value Measurements (In thousands) Fair Value Estimate Valuation Techniques Unobservable Input Range (Weighted Average) December 31, 2018 Impaired loans $ 232 Appraisal of collateral(l) Appraisal adjustments (2] 10.00-81.54% (56.06%) Impaired loans $ 1,087 Present value of future cash flows Loan discount rate 4.00-6.00% (5.80%) Probability of default 0% Foreclosed real estate owned $ 1,115 Appraisal of collateral(1) Liquidation Expenses(2) 7.00-85.71% (7.80%) 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. 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.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 15—FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) The estimated fair values of the Bank’s financial instruments not required to be measured or reported at fair value were as follows at December 31, 2019 and December 31, 2018. (In thousands): 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 — ——Fair Value Measurements at December 31, 2018 Carrying Amount Fair Value Level 1 Level 2 Level 3 Financial assets: Cash and cash equivalents (1) $ 18,348 $ 18,348 $ 18,348 $ $ Loans receivable, net 841,730 840,134 — 840,134 Mortgage servicing rights 178 220 — 220 Regulatory stock (1) 3,926 3,926 3,926 — Bank owned life insurance (1) 37,932 37,932 37,932 — Accrued interest receivable (1) 3,776 3,776 3,776 — Financial liabilities: Deposits 946,780 945,773 601,604—344,169 Short-term borrowings (1) 53,046 53,046 53,046 — Other borrowings 52,284 52,043 — 52,043 Accrued interest payable (1) 1,806 1,806 1,806 — Off-balance sheet financial instruments: Commitments to extend credit and outstanding letters of credit (1) This financial instrument is carried at cost, which approximates the fair value of the instrument.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 16—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The following tables present the changes in accumulated other comprehensive income (loss) (in thousands) by component, net of tax, for the years ended December 31, 2019 and 2018: Unrealized gains (losses) on available for sale securities (a) Unrealized gain (loss) on pension liability (a) Total (a) Balance as of December 31, 2018 $ (5,558) $ 538 $ (5,020) Other comprehensive income (loss) before reclassification 6,113 295 6,408 Amount reclassified from accumulated other comprehensive loss (201) (201) Total other comprehensive income 5,912 295 6,207 Balance as of December 31, 2019 $ 354 $ 833 $ 1,187 Unrealized gains (losses) on available for sale securities (a) Unrealized gain (loss) on pension liability (a) Total (a) Balance as of December 31, 2017 $ (3,041) $ 374 $ (2,667) Other comprehensive income (loss) before reclassification (2,349) 164 (2,185) Amount reclassified from accumulated other comprehensive loss (168) (168) Total other comprehensive income (loss) (2,517) 164 (2,353) Balance as of December 31, 2018 $ (5,558) $ 538 $ (5,020) (a) All amounts are net of tax. Amounts in parentheses indicate debits. The following table presents significant amounts reclassified out of each component of accumulated other comprehensive income (loss) (in thousands) for the years ended December 31, 2019 and 2018: Details about other comprehensive income Amount Reclassified From Accumulated Other Comprehensive Income (Loss) (a) Affected Line Item in the Consolidated Statement of Income Twelve months ended December 31, 2019 Twelve months ended December 31, 2018 Unrealized gains on available for sale securities $ 254 $ 213 Net realized gains on sales of securities Income tax expense (53) (45) $ 201 $ 168 (a) Amounts in parentheses indicate debits to net income.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 17—PROPOSED ACQUISITION OF UPSTATE NEW YORK BANCORP, INC. On January 8, 2020, Norwood Financial Corp. (“Norwood”) and its wholly owned subsidiary, Wayne Bank, and Up State New York Bancorp, Inc. (“Up State”), 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. 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 transaction 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. Each of the directors and executive officers of Norwood and UpState have agreed to vote their shares in favor of the approval of the Merger Agreement at the shareholders’ meetings to be held to vote on the proposed transaction. If the merger is not consummated under certain circumstances, UpState has agreed to pay Norwood a termination fee of $3.2 million. The Merger Agreement also contains usual and customary representations and warranties that Norwood and UpState made to each other as of specific dates. The assertions embodied in those representations and warranties were made solely for purposes of the contract between Norwood and UpState, and may be subject to important qualifications and limitations agreed to by the parties in connection with negotiating its terms. Moreover, the representations and warranties are subject to a contractual standard of materiality that may be different from what may be viewed as material to shareholders, and the representations and warranties may have been used to allocate risk between Norwood and UpState rather than establishing matters as facts.
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE 18—NORWOOD FINANCIAL CORP (PARENT COMPANY ONLY) FINANCIAL INFORMATION BALANCE SHEETS December 31, 2019 2018 (In Thousands) ASSETS Cash on deposit in bank subsidiary $ 2,848 $ 2,509 Investment in bank subsidiary 135,433 120,511 Other assets 1,875 1,739 Total assets $ 140,156 $ 124,759 LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities $ 2,728 $ 2,474 Stockholders’ equity 137,428 122,285 Total liabilities and stockholders’ equity $ 140.156 $ 124.759 STATEMENTS OF INCOME Years Ended December 31. 2019 2018 (In Thousands) Income: Dividends from bank subsidiary $ 6,113 $ 5,643 Expenses 637 618 5,476 5,025 Income tax benefit (232) (217) 5,708 5,242 Equity in undistributed earnings of subsidiary 8,507 8,409 Net Income $ 14,215 $ 13,651 Comprehensive Income $ 20.422 $ 11.298 STATEMENTS OF CASH FLOWS Years Ended December 31, 2019 2018 (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 14,215 $ 13,651 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed earnings of bank subsidiary (8,507) (8,409) Decrease in deferred income tax—1,158 Other, net 335 387 Net Cash Provided by Operating Activities 6,043 6,787 CASH FLOWS FROM INVESTING ACTIVITIES Investment in bank subsidiary—(4,000) Net Cash (Used in) Provided by Investing Activities—(4,000) CASH FLOWS FROM FINANCING ACTIVITIES Stock options exercised 638 520 Sale of treasury stock for ESOP 127 123 Acquisition of treasury stock (428) (194) Cash dividends paid f6,0411 (5,5091 Net Cash Used in Financing Activities (5,704) (5,0601 Net (Decrease) Increase in Cash and Cash Equivalents 339 (2,273) CASH AND CASH EQUIVALENTS—BEGINNING 2,509 4,782 CASH AND CASH EQUIVALENTS—ENDING $ 2,848 $ 2,509
NORWOOD FINANCIAL CORP—2019 CONSOLIDATED FINANCIAL REPORT NOTE INVESTOR INFORMATION STOCK LISTING Norwood Financial Corp stock is traded on the Nasdaq Global Market under the symbol NWFL. The following firms are known to make a market in the Company’s stock: Boenning & Scattergood, Inc. RBC Capital Markets West Conshohocken, PA 19428 800-883-1212 Philadelphia, PA 19103 888-848-4677 Janney Montgomery Scott, LLC Stifel Nicolaus Scranton, PA 18503 800-638-4417 St. Louis, MO 63102 314-342-2000 TRANSFER AGENT Computershare provides Transfer Agent services for the Company. Stockholders who may have questions regarding their stock ownership should contact the Transfer Agent at 800-662-7232, by regular mail at P.O. Box 50500, Louisville, KY 40233-5000, or by overnight delivery at 462 South 4th Street Suite 1600, Louisville, KY 40202. DIVIDEND CALENDAR Dividends on Norwood Financial Corp common stock, if approved by the Board of Directors, are customarily paid on or about February 1, May 1, August 1 and November 1. AUTOMATIC DIVIDEND REINVESTMENT PLAN The Plan, open to all shareholders, provides the opportunity to have dividends automatically reinvested into Norwood stock. Participants in the Plan may also elect to make cash contributions to purchase additional shares of common stock. Please contact the transfer agent for additional information. SEC REPORTS AND ADDITIONAL INFORMATION A copy of the Company’s annual report on Form 10-K for its fiscal year ended December 31, 2019, including financial statements and schedules thereto, required to be filed with the Securities and Exchange Commission is available on the Company’s website at www.waynebank.com under the Stockholder Services tab. A copy of the report may be obtained upon written request of any stockholder, investor or analyst by contacting William S. Lance, Executive Vice President, Chief Financial Officer and Secretary, Norwood Financial Corp, 717 Main Street, PO Box 269, Honesdale, PA 18431, 570-253-1455.
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NORWOOD FINANCIAL CORP DIRECTORY OF OFFICERS NORWOOD FINANCIAL CORP William W. Davis, Jr Chairman of the Board Dr. Andrew A. Forte Vice Chairman of the Board Lewis J. Critelli President & Chief Executive Officer William S. Lance Executive Vice President, Chief Financial Officer & Secretary James F. Burke Executive Vice President John F. Carmody Executive Vice President Robert J. Mancuso Executive Vice President John H. Sanders Senior Vice President WAYNE BANK William W. Davis, Jr Chairman of the Board Dr. Andrew A. Forte Vice Chairman of the Board Lewis J. Critelli President & Chief Executive Officer William S. Lance Executive Vice President, Chief Financial Officer & Secretary James F. Burke Executive Vice President, Chief Lending Officer John F. Carmody Executive Vice President, Chief Credit Officer Robert J. Mancuso Executive Vice President, Chief Operating Officer Ryan J. French Senior Vice President, Director of Human Resources John H. Sanders... Senior Vice President, Retail Lending Manager Diane M. Wylam Senior Vice President, Senior Trust Officer Thomas A. Byrne Senior Vice President Joseph A. Castrogiovanni Senior Vice President Kenneth C. Doolittle Senior Vice President John Ford Senior Vice President Karen R. Gasper Senior Vice President Nancy A. Hart Senior Vice President, Controller & Assistant Secretary Dawnette Hotaling Senior Vice President Julie R. Kuen Senior Vice President Linda D. Mader Senior Vice President Vincent O’Bell Senior Vice President F. Jeffrey Reimer Senior Vice President Eli T. Tomlinson Senior Vice President John Veleber Senior Vice President Barbara A. Ridd Vice President & Assistant Secretary Robert J. Behrens, Jr Vice President Pilar Cueva Vice President Steven R. Daniels Vice President Amanda Hall Vice President Jill A. Hessling Vice President John E. Koczwara Vice President Paul Kosiba Vice President Kristine Malti Vice President Frank J. Sislo Vice President Kara R. Suchy Vice President Gerald J. Arnese Assistant Vice President Douglas W. Atherton Assistant Vice President John Baker Assistant Vice President Derek Bellinger Assistant Vice President Craig D. Grimm Assistant Vice President Teresa Hynes Assistant Vice President Stacey L. Kuhn Assistant Vice President Vonnie Lewis Assistant Vice President Bonnie Lockett Assistant Vice President Eileen Mershon Assistant Vice President Gerry Moore Assistant Vice President Christine Routledge Assistant Vice President Tanyia Vannatta Assistant Vice President Michele Bailey Community Office Manager Karen Beissel Community Office Manager Kristen Bolin Community Office Manager Nicola Folina Community Office Manager Brenda Gessell Community Office Manager Timothy Gutliph Community Office Manager Sandra C. Mruczkewycz Community Office Manager Madeline Portugal Community Office Manager AnnaMae Rechtorovic Community Office Manager Debra Renwick Community Office Manager Jessica Santiago Community Office Manager Denise Seman Community Office Manager Julie Shenyo Community Office Manager Cheryl Wilkerson Community Office Manager Krystin Woodcock Community Office Manager Laurie J. Bishop Assistant Community Office Manager Kimberly Charner Assistant Community Office Manager Kimberly Crellin Assistant Community Office Manager Denise R. Kern Assistant Community Office Manager Joelyn Lee Assistant Community Office Manager Wendy Olsen Assistant Community Office Manager Diane L. Richter Assistant Community Office Manager Stacey Stephenson Assistant Community Office Manager Ronald DePasquale Facilities/Security Officer Kimberly Gola Residential Mortgage Underwriter Annette Jurkowski Assistant BSA/Compliance Officer Kristen E. Lancia Marketing Officer Marianne McConeghy Trust Operations Officer Linda A. Meskey Credit Analyst Amanda R. Miller Commercial Loan Documentation Officer Corissa O’Malley Loan Documentation Officer Jamie Padula Human Resources Administrative Officer Elaine Reuthe Retail Training and Development Officer Kathryn A. Serniak Mortgage Loan Officer Briana Scholl Credit Analyst Manager Gary Steich Resource Recovery Officer Bonnie Rutledge Assistant Trust Officer NORWOOD INVESTMENT CORP Lewis J. Critelli President & Chief Executive Officer William S. Lance Treasurer Scott C. Rickard Investment Executive, LPL Financial MONROE COUNTY ASSOCIATE BOARD Michael J. Baxter James H. Ott Sara Cramer Marvin Papillon Dr. Andrew A. Forte Ray Price Ralph A. Matergia, Esq. Ron Sarajian
Exhibit 21
Subsidiaries of the Registrant
Parent
Norwood Financial Corp.
| Subsidiaries |
State or Other Jurisdiction of Incorporation | Percentage Ownership | ||
| Wayne Bank |
Pennsylvania | 100% | ||
| Subsidiaries of Wayne Bank |
||||
| Norwood Investment Corp. |
Pennsylvania | 100% | ||
| WCB Realty Corp. |
Pennsylvania | 100% | ||
| WTRO Properties, Inc. |
Pennsylvania | 100% | ||
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statements File Nos. 333-61487, 333-134831, and 333-195643 on Form S-8 of Norwood Financial Corp. of our report dated March 12, 2020, relating to our audit of the consolidated financial statements and internal control over financial reporting, which appears in the Annual Report to Stockholders, which is incorporated in this Annual Report on Form 10-K of Norwood Financial Corp. for the year ended December 31, 2019. Cranberry Township, Pennsylvania March 12, 2020
Exhibit 31.1
CERTIFICATION
I, Lewis J. Critelli, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Norwood Financial Corp.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: March 13, 2020 | By: | /s/ Lewis J. Critelli | ||||
| Lewis J. Critelli President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, William S. Lance, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Norwood Financial Corp.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: March 13, 2020 | By: | /s/ William S. Lance | ||||
| William S. Lance Executive Vice President & Chief Financial Officer |
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Norwood Financial Corp. (the Company) on Form 10-K for the year ending December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the Report), we, Lewis J. Critelli, President and Chief Executive Officer and William S. Lance, Executive Vice President and Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Lewis J. Critelli | /s/ William S. Lance | |||||
| Lewis J. Critelli | William S. Lance | |||||
| President and Chief Executive Officer | Executive Vice President and Chief Financial Officer |
March 13, 2020