Norwood Financial Corp 10-Q, filed May 8, 2020
Norwood Financial Corp (NWFL)
About this 10-Q
Norwood Financial Corp filed this 10-Q on May 8, 2020, covering the quarter ended March 31, 2020.
Headline figures
Quarter ended March 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.33M
- up 2.3% from $1.3M a year earlier
- Net income
- $3.08M
- down 3.5% from net income of $3.19M a year earlier
- Diluted EPS
- $0.49
- down 3.9% from $0.51 a year earlier
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2020
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-28364
Norwood Financial Corp.
(Exact name of registrant as specified in its charter)
| Pennsylvania | 23-2828306 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. employer identification no.) | |
| 717 Main Street, Honesdale, Pennsylvania | 18431 | |
| (Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code (570) 253-1455
N/A
Former name, former address and former fiscal year, if changed since last report.
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Trading symbol(s) |
Name of each exchange on which registered | ||
| Common Stock, par value $0.10 per share | NWFL | The Nasdaq Stock Market LLC |
Indicate by check (x) whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☒ | |||
| Non-accelerated filer | ☐ | Smaller reporting company | ☒ | |||
| Emerging growth company | ☐ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): ☐ Yes ☒ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class |
Outstanding as of May 1, 2020 | |
| Common stock, par value $0.10 per share | 6,328,790 |
Table of Contents
NORWOOD FINANCIAL CORP.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2020
| Page Number |
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| PART I - |
CONSOLIDATED FINANCIAL INFORMATION OF NORWOOD FINANCIAL CORP. |
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| Item 1. |
3 | |||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
33 | ||||
| Item 3. |
44 | |||||
| Item 4. |
45 | |||||
| PART II - |
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| Item 1. |
45 | |||||
| Item 1A. |
46 | |||||
| Item 2. |
46 | |||||
| Item 3. |
47 | |||||
| Item 4. |
47 | |||||
| Item 5. |
47 | |||||
| Item 6. |
47 | |||||
| 49 | ||||||
2
Table of Contents
| Item 1. | Financial Statements |
NORWOOD FINANCIAL CORP.
Consolidated Balance Sheets (unaudited)
(dollars in thousands, except share and per share data)
| March 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| ASSETS |
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| Cash and due from banks |
$ | 14,712 | $ | 15,038 | ||||
| Interest-bearing deposits with banks |
23,706 | 377 | ||||||
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| Cash and cash equivalents |
38,418 | 15,415 | ||||||
| Securities available for sale, at fair value |
196,998 | 210,205 | ||||||
| Loans receivable |
928,565 | 924,581 | ||||||
| Less: Allowance for loan losses |
9,088 | 8,509 | ||||||
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| Net loans receivable |
919,477 | 916,072 | ||||||
| Regulatory stock, at cost |
3,770 | 4,844 | ||||||
| Bank premises and equipment, net |
14,071 | 14,228 | ||||||
| Bank owned life insurance |
38,971 | 38,763 | ||||||
| Accrued interest receivable |
3,669 | 3,719 | ||||||
| Foreclosed real estate owned |
1,077 | 1,556 | ||||||
| Goodwill |
11,331 | 11,331 | ||||||
| Other intangibles |
212 | 235 | ||||||
| Other assets |
14,297 | 14,242 | ||||||
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| TOTAL ASSETS |
$ | 1,242,291 | $ | 1,230,610 | ||||
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| LIABILITIES |
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| Deposits: |
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| Non-interest bearing demand |
$ | 213,359 | $ | 207,299 | ||||
| Interest-bearing |
776,801 | 750,230 | ||||||
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| Total deposits |
990,160 | 957,529 | ||||||
| Short-term borrowings |
40,656 | 62,256 | ||||||
| Other borrowings |
51,350 | 56,438 | ||||||
| Accrued interest payable |
2,895 | 2,432 | ||||||
| Other liabilities |
15,043 | 14,527 | ||||||
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| TOTAL LIABILITIES |
1,100,104 | 1,093,182 | ||||||
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| STOCKHOLDERS’ EQUITY |
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| Preferred stock, no par value per share, authorized: 5,000,000 shares; issued: none |
— | — | ||||||
| Common stock, $0.10 par value per share, authorized: 20,000,000 shares, issued: 2020: 6,342,568 shares, 2019: 6,340,563 shares |
634 | 634 | ||||||
| Surplus |
49,644 | 49,471 | ||||||
| Retained earnings |
88,032 | 86,536 | ||||||
| Treasury stock at cost: 2020 and 2019: 12,007 shares |
(400 | ) | (400 | ) | ||||
| Accumulated other comprehensive income |
4,277 | 1,187 | ||||||
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| TOTAL STOCKHOLDERS’ EQUITY |
142,187 | 137,428 | ||||||
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| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
$ | 1,242,291 | $ | 1,230,610 | ||||
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See accompanying notes to the unaudited consolidated financial statements.
3
Table of Contents
NORWOOD FINANCIAL CORP.
Consolidated Statements of Income (unaudited)
(dollars in thousands, except per share data)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2020 | 2019 | |||||||
| INTEREST INCOME |
||||||||
| Loans receivable, including fees |
$ | 10,683 | $ | 9,970 | ||||
| Securities |
1,179 | 1,441 | ||||||
| Other |
6 | 15 | ||||||
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| Total interest income |
11,868 | 11,426 | ||||||
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| INTEREST EXPENSE |
||||||||
| Deposits |
1,790 | 1,729 | ||||||
| Short-term borrowings |
111 | 123 | ||||||
| Other borrowings |
302 | 303 | ||||||
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| Total interest expense |
2,203 | 2,155 | ||||||
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| NET INTEREST INCOME |
9,665 | 9,271 | ||||||
| PROVISION FOR LOAN LOSSES |
700 | 450 | ||||||
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| NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |
8,965 | 8,821 | ||||||
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| OTHER INCOME |
||||||||
| Service charges and fees |
1,063 | 1,031 | ||||||
| Income from fiduciary activities |
153 | 142 | ||||||
| Net realized gains on sales of securities |
38 | — | ||||||
| Gain on sale of loans, net |
56 | 42 | ||||||
| Earnings and proceeds on bank owned life insurance |
208 | 202 | ||||||
| Other |
136 | 143 | ||||||
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| Total other income |
1,654 | 1,560 | ||||||
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| OTHER EXPENSES |
||||||||
| Salaries and employee benefits |
3,777 | 3,649 | ||||||
| Occupancy, furniture & equipment, net |
968 | 924 | ||||||
| Data processing and related operations |
437 | 448 | ||||||
| Taxes, other than income |
214 | 161 | ||||||
| Professional fees |
218 | 250 | ||||||
| Federal Deposit Insurance Corporation insurance |
— | 71 | ||||||
| Foreclosed real estate |
16 | 23 | ||||||
| Amortization of intangibles |
23 | 29 | ||||||
| Other |
1,406 | 1,093 | ||||||
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| Total other expenses |
7,059 | 6,648 | ||||||
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| INCOME BEFORE INCOME TAXES |
3,560 | 3,733 | ||||||
| INCOME TAX EXPENSE |
481 | 543 | ||||||
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| NET INCOME |
$ | 3,079 | $ | 3,190 | ||||
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| BASIC EARNINGS PER SHARE |
$ | 0.49 | $ | 0.51 | ||||
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| DILUTED EARNINGS PER SHARE |
$ | 0.49 | $ | 0.51 | ||||
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See accompanying notes to the unaudited consolidated financial statements.
4
Table of Contents
NORWOOD FINANCIAL CORP.
Consolidated Statements of Comprehensive Income (unaudited)
(dollars in thousands)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2020 | 2019 | |||||||
| Net income |
$ | 3,079 | $ | 3,190 | ||||
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| Other comprehensive income: |
||||||||
| Investment securities available for sale: |
||||||||
| Unrealized holding gain |
3,949 | 3,725 | ||||||
| Tax effect |
(829 | ) | (782 | ) | ||||
| Reclassification of investment securities gains recognized in net income |
(38 | ) | — | |||||
| Tax effect |
8 | — | ||||||
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| Other comprehensive income |
3,090 | 2,943 | ||||||
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| Comprehensive Income |
$ | 6,169 | $ | 6,133 | ||||
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See accompanying notes to the unaudited consolidated financial statements.
5
Table of Contents
NORWOOD FINANCIAL CORP.
Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
Three Months Ended March 31, 2020 and 2019
(dollars in thousands, except share and per share data)
| Accumulated | ||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||
| Common Stock | Retained | Treasury Stock | Comprehensive | |||||||||||||||||||||||||||||
| Shares | Amount | Surplus | Earnings | Shares | Amount | Income | Total | |||||||||||||||||||||||||
| Balance, December 31, 2019 |
6,340,563 | $ | 634 | $ | 49,471 | $ | 86,536 | 12,007 | $ | (400 | ) | $ | 1,187 | $ | 137,428 | |||||||||||||||||
| Net Income |
— | — | — | 3,079 | — | — | — | 3,079 | ||||||||||||||||||||||||
| Other comprehensive income |
— | — | — | — | — | — | 3,090 | 3,090 | ||||||||||||||||||||||||
| Cash dividends declared ($0.25 per share) |
— | — | — | (1,583 | ) | — | — | — | (1,583 | ) | ||||||||||||||||||||||
| Compensation expense related to restricted stock |
— | — | 84 | — | — | — | — | 84 | ||||||||||||||||||||||||
| Stock options exercised |
2,005 | — | 38 | — | — | — | — | 38 | ||||||||||||||||||||||||
| Compensation expense related to stock options |
— | — | 51 | — | — | — | — | 51 | ||||||||||||||||||||||||
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| Balance, March 31, 2020 |
6,342,568 | $ | 634 | $ | 49,644 | $ | 88,032 | 12,007 | $ | (400 | ) | $ | 4,277 | $ | 142,187 | |||||||||||||||||
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| Accumulated | ||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||
| Common Stock | Retained | Treasury Stock | Comprehensive | |||||||||||||||||||||||||||||
| Shares | Amount | Surplus | Earnings | Shares | Amount | Loss | Total | |||||||||||||||||||||||||
| Balance, December 31, 2018 |
6,295,113 | $ | 630 | $ | 48,322 | $ | 78,434 | 2,470 | $ | (81 | ) | $ | (5,020 | ) | $ | 122,285 | ||||||||||||||||
| Net Income |
— | — | — | 3,190 | — | — | — | 3,190 | ||||||||||||||||||||||||
| Other comprehensive loss |
— | — | — | — | — | — | 2,943 | 2,943 | ||||||||||||||||||||||||
| Cash dividends declared ($0.24 per share) |
— | — | — | (1,509 | ) | — | — | — | (1,509 | ) | ||||||||||||||||||||||
| Compensation expense related to restricted stock |
— | — | 72 | — | — | — | — | 72 | ||||||||||||||||||||||||
| Acquisition of treasury stock |
— | — | — | — | 11,337 | (374 | ) | — | (374 | ) | ||||||||||||||||||||||
| Stock options exercised |
6,150 | — | 113 | — | — | — | — | 113 | ||||||||||||||||||||||||
| Compensation expense related to stock options |
— | — | 52 | — | — | — | — | 52 | ||||||||||||||||||||||||
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| Balance, March 31, 2019 |
6,301,263 | $ | 630 | $ | 48,559 | $ | 80,115 | 13,807 | $ | (455 | ) | $ | (2,077 | ) | $ | 126,772 | ||||||||||||||||
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See accompanying notes to the unaudited consolidated financial statements.
6
Table of Contents
NORWOOD FINANCIAL CORP.
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
| Three Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
| Net Income |
$ | 3,079 | $ | 3,190 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Provision for loan losses |
700 | 450 | ||||||
| Depreciation |
281 | 241 | ||||||
| Amortization of intangible assets |
23 | 29 | ||||||
| Deferred income taxes |
(250 | ) | (40 | ) | ||||
| Net amortization of securities premiums and discounts |
320 | 371 | ||||||
| Net realized gain on sales of securities |
(38 | ) | — | |||||
| Earnings and proceeds on life insurance policies |
(208 | ) | (202 | ) | ||||
| Gain on sales and write-downs of fixed assets and foreclosed real estate owned, net |
(3 | ) | (8 | ) | ||||
| Net gain on sale of loans |
(56 | ) | (42 | ) | ||||
| Loans originated for sale |
(1,535 | ) | (732 | ) | ||||
| Proceeds from sale of loans originated for sale |
1,545 | 758 | ||||||
| Compensation expense related to stock options |
51 | 52 | ||||||
| Compensation expense related to restricted stock |
84 | 72 | ||||||
| Decrease (increase) in accrued interest receivable |
50 | (313 | ) | |||||
| Increase in accrued interest payable |
463 | 651 | ||||||
| Other, net |
38 | (201 | ) | |||||
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| Net cash provided by operating activities |
4,544 | 4,276 | ||||||
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| CASH FLOWS FROM INVESTING ACTIVITIES |
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| Securities available for sale: |
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| Proceeds from sales |
8,224 | 327 | ||||||
| Proceeds from maturities and principal reductions on mortgage-backed securities |
15,646 | 5,684 | ||||||
| Purchases |
(7,034 | ) | — | |||||
| Purchase of regulatory stock |
(1,305 | ) | (1,112 | ) | ||||
| Redemption of regulatory stock |
2,379 | 1,906 | ||||||
| Net increase in loans |
(4,208 | ) | (15,352 | ) | ||||
| Purchase of premises and equipment |
(124 | ) | (560 | ) | ||||
| Proceeds from sales of foreclosed real estate owned |
482 | 44 | ||||||
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| Net cash provided by (used in) investing activities |
14,060 | (9,063 | ) | |||||
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| CASH FLOWS FROM FINANCING ACTIVITIES |
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| Net increase in deposits |
32,631 | 27,635 | ||||||
| Net decrease in short-term borrowings |
(21,600 | ) | (15,222 | ) | ||||
| Repayments of other borrowings |
(5,088 | ) | (4,329 | ) | ||||
| Stock options exercised |
38 | 113 | ||||||
| Purchase of treasury stock |
— | (374 | ) | |||||
| Cash dividends paid |
(1,582 | ) | (1,510 | ) | ||||
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| Net cash provided by financing activities |
4,399 | 6,313 | ||||||
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| Increase in cash and cash equivalents |
23,003 | 1,526 | ||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
15,415 | 18,348 | ||||||
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| CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 38,418 | $ | 19,874 | ||||
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7
Table of Contents
NORWOOD FINANCIAL CORP.
Consolidated Statements of Cash Flows (Unaudited) (continued)
(dollars in thousands)
| Three Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Supplemental Disclosures of Cash Flow Information |
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| Cash payments for: |
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| Interest on deposits and borrowings |
$ | 1,740 | $ | 1,504 | ||||
| Income taxes paid, net of refunds |
$ | 53 | $ | 46 | ||||
| Supplemental Schedule of Noncash Investing Activities: |
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| Transfers of loans to foreclosed real estate and repossession of other assets |
$ | 99 | $ | 822 | ||||
| Dividends payable |
$ | 1,583 | $ | 1,509 | ||||
| Right of use for operating leases |
$ | — | $ | 5,335 | ||||
| Lease liability for operating leases |
$ | — | $ | 5,335 | ||||
See accompanying notes to the unaudited consolidated financial statements.
8
Table of Contents
Notes to the Unaudited Consolidated Financial Statements
| 1. | Basis of Presentation |
The unaudited consolidated financial statements include the accounts of Norwood Financial Corp. (Company) and its wholly-owned subsidiary, Wayne Bank (Bank) and the Bank’s wholly-owned subsidiaries, WCB Realty Corp., Norwood Investment Corp., and WTRO Properties, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles for interim financial statements and with instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. The financial statements reflect, in the opinion of management, all normal, recurring adjustments necessary to present fairly the consolidated financial position and results of operations of the Company. The operating results for the three month period ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 or any other future interim period.
| 2. | Revenue Recognition |
Under ASC Topic 606, management determined that the primary sources of revenue emanating from interest and dividend income on loans and investments along with noninterest revenue resulting from investment security gains, loan servicing, gains on the sale of loans sold and earnings on bank-owned life insurance are not within the scope of this Topic.
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months ended March 31:
| Three months ended | ||||||||
| March 31, | ||||||||
| (dollars in thousands) | 2020 | 2019 | ||||||
| Noninterest Income |
||||||||
| In-scope of Topic 606: |
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| Service charges on deposit accounts |
$ | 96 | $ | 67 | ||||
| ATM fees |
95 | 90 | ||||||
| Overdraft fees |
344 | 351 | ||||||
| Safe deposit box rental |
29 | 26 | ||||||
| Loan related service fees |
100 | 129 | ||||||
| Debit card fees |
344 | 326 | ||||||
| Fiduciary activities |
153 | 142 | ||||||
| Commissions on mutual funds and annuities |
38 | 55 | ||||||
| Other income |
132 | 115 | ||||||
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| Noninterest Income (in-scope of Topic 606) |
1,331 | 1,301 | ||||||
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| Out-of-scope of Topic 606: |
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| Net realized gains on sales of securities |
38 | — | ||||||
| Loan servicing fees |
21 | 15 | ||||||
| Gains on sales of loans |
56 | 42 | ||||||
| Earnings on and proceeds from bank-owned life insurance |
208 | 202 | ||||||
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| Noninterest Income (out-of-scope of Topic 606) |
323 | 259 | ||||||
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| Total Noninterest Income |
$ | 1,654 | $ | 1,560 | ||||
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9
Table of Contents
| 3. | Earnings Per Share |
Basic earnings per share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and restricted stock, and are determined using the treasury stock method.
The following table sets forth the weighted average shares outstanding used in the computations of basic and diluted earnings per share.
| Three Months Ended | ||||||||
| March 31, | ||||||||
| (in thousands) | 2020 | 2019 | ||||||
| Weighted average shares outstanding |
6,330 | 6,293 | ||||||
| Less: Unvested restricted shares |
(36 | ) | (34 | ) | ||||
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| Basic EPS weighted average shares outstanding |
6,294 | 6,259 | ||||||
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| Basic EPS weighted average shares outstanding |
6,294 | 6,259 | ||||||
| Add: Dilutive effect of stock options and restricted shares |
29 | 50 | ||||||
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| Diluted EPS weighted average shares outstanding |
6,323 | 6,309 | ||||||
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|||||
For the three month period ended March 31, 2020, there were 82,600 stock options that were anti-dilutive and thereby excluded from the earnings per share calculations based upon the closing price of Norwood common stock of $26.70 per share as of March 31, 2020.
As of March 31, 2019, there were 60,650 stock options that would be anti-dilutive to the earnings per share calculations based upon the closing price of Norwood common stock of $30.84 per share on March 31, 2019.
| 4. | Stock-Based Compensation |
No awards were granted during the three-month period ended March 31, 2020. As of March 31, 2020, there was $153,000 of total unrecognized compensation cost related to non-vested options granted in 2019 under the 2014 Equity Incentive Plan, which will be fully amortized by December 31, 2020. Compensation costs related to stock options amounted to $51,000 and $52,000 during the three-month periods ended March 31, 2020 and 2019, respectively.
A summary of the Company’s stock option activity for the three-month period ended March 31, 2020 is as follows:
| Weighted | ||||||||||||||||
| Average Exercise | Weighted Average | Aggregate | ||||||||||||||
| Price | Remaining | Intrinsic Value | ||||||||||||||
| Options | Per Share | Contractual Term | ($000) | |||||||||||||
| Outstanding at January 1, 2020 |
199,825 | $ | 24.78 | 5.9 Yrs. | $ | 2,822 | ||||||||||
| Granted |
— | — | — | — | ||||||||||||
| Exercised |
(2,005 | ) | 19.25 | 5.8 Yrs. | 33 | |||||||||||
| Forfeited |
— | — | — | |||||||||||||
|
|
|
|||||||||||||||
| Outstanding at March 31, 2020 |
197,820 | $ | 24.83 | 5.7 Yrs. | $ | 370 | ||||||||||
|
|
|
|||||||||||||||
| Exercisable at March 31, 2020 |
171,070 | $ | 23.08 | 5.0 Yrs. | $ | 620 | ||||||||||
|
|
|
|||||||||||||||
10
Table of Contents
Intrinsic value represents the amount by which the market price of the stock on the measurement date exceeded the exercise price of the option. The market price was $26.70 per share as of March 31, 2020 and $38.90 per share as of December 31, 2019.
A summary of the Company’s restricted stock activity for the three-month periods ended March 31, 2020 and 2019 is as follows:
| 2020 | 2019 | |||||||||||||||
| Weighted-Average | Weighted-Average | |||||||||||||||
| Number of | Grant Date | Number of | Grant Date | |||||||||||||
| Restricted Stock | Fair Value | Restricted Stock | Fair Value | |||||||||||||
| Non-vested, January 1, |
36,195 | $ | 36.23 | 34,615 | $ | 27.82 | ||||||||||
| Granted |
— | — | — | — | ||||||||||||
| Vested |
— | — | — | — | ||||||||||||
| Forfeited |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Non-vested, March 30, |
36,195 | $ | 36.23 | 34,615 | $ | 27.82 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The expected future compensation expense relating to the 36,195 shares of non-vested restricted stock outstanding as of March 31, 2020 is $1,062,000. This cost will be recognized over the remaining vesting period of 4.75 years. Compensation costs related to restricted stock amounted to $84,000 and $72,000 during the three-month periods ended March 31, 2020 and 2019, respectively.
| 5. | Accumulated Other Comprehensive Income (Loss) |
The following table presents the changes in accumulated other comprehensive income (loss) (in thousands) by component net of tax for the three months ended March 31, 2020 and 2019:
| Unrealized gains (losses) on | ||||
| available for sale | ||||
| securities (a) | ||||
| Balance as of December 31, 2019 |
$ | 1,187 | ||
| Other comprehensive income before reclassification |
3,120 | |||
| Amount reclassified from accumulated other comprehensive income |
(30 | ) | ||
|
|
|
|||
| Total other comprehensive income |
3,090 | |||
|
|
|
|||
| Balance as of March 31, 2020 |
$ | 4,277 | ||
|
|
|
|||
| Unrealized gains (losses) on | ||||
| available for sale | ||||
| securities (a) | ||||
| Balance as of December 31, 2018 |
$ | (5,020 | ) | |
| Other comprehensive loss before reclassification |
2,943 | |||
| Amount reclassified from accumulated other comprehensive loss |
— | |||
|
|
|
|||
| Total other comprehensive loss |
2,943 | |||
|
|
|
|||
| Balance as of March 31, 2019 |
$ | (2,077 | ) | |
|
|
|
|||
| (a) | All amounts are net of tax. Amounts in parentheses indicate debits. |
11
Table of Contents
The following table presents significant amounts reclassified out of each component of accumulated other comprehensive income (loss) (in thousands) for the three months ended March 31, 2020 and 2019:
| Amount Reclassified | ||||||||||
| From Accumulated | Affected Line Item in | |||||||||
| Other | Consolidated | |||||||||
| Comprehensive | Statements | |||||||||
| Details about other comprehensive income |
Income (Loss) (a) | of Income | ||||||||
| Three months ended | ||||||||||
| March 31, | ||||||||||
| 2020 | 2019 | |||||||||
| Unrealized gains on available for sale securities |
$ | 38 | $ | — | Net realized gains on sales of securities | |||||
| (8 | ) | — | Income tax expense | |||||||
|
|
|
|
|
|||||||
| $ | 30 | $ | — | |||||||
|
|
|
|
|
|||||||
| (a) | Amounts in parentheses indicate debits to net income |
| 6. | Off-Balance Sheet Financial Instruments and Guarantees |
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
A summary of the Bank’s financial instrument commitments is as follows:
| March 31, | ||||||||
| (in thousands) | 2020 | 2019 | ||||||
| Commitments to grant loans |
$ | 55,036 | $ | 40,322 | ||||
| Unfunded commitments under lines of credit |
68,530 | 77,573 | ||||||
| Standby letters of credit |
4,065 | 4,183 | ||||||
|
|
|
|
|
|||||
| $ | 127,631 | $ | 122,078 | |||||
|
|
|
|
|
|||||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the customer and generally consists of real estate.
12
Table of Contents
The Bank does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Bank, generally, holds collateral and/or personal guarantees supporting these commitments. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of March 31, 2020 for guarantees under standby letters of credit issued is not material.
| 7. | Securities |
The amortized cost, gross unrealized gains and losses, and fair value of securities available for sale were as follows:
| March 31, 2020 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| (In Thousands) | ||||||||||||||||
| Available for Sale: |
||||||||||||||||
| States and political subdivisions |
$ | 58,182 | $ | 1,340 | $ | (1 | ) | $ | 59,521 | |||||||
| Corporate obligations |
3,076 | — | (11 | ) | 3,065 | |||||||||||
| Mortgage-backed securities-government sponsored entities |
131,382 | 3,030 | — | 134,412 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total debt securities |
$ | 192,640 | $ | 4,370 | $ | (12 | ) | $ | 196,998 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| December 31, 2019 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| (In Thousands) | ||||||||||||||||
| Available for Sale: |
||||||||||||||||
| States and political subdivisions |
$ | 70,015 | $ | 1,293 | $ | (3 | ) | $ | 71,305 | |||||||
| Corporate obligations |
4,097 | 3 | — | 4,100 | ||||||||||||
| Mortgage-backed securities-government sponsored entities |
135,646 | 238 | (1,084 | ) | 134,800 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total debt securities |
$ | 209,758 | $ | 1,534 | $ | (1,087 | ) | $ | 210,205 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
13
Table of Contents
The following tables show the Company’s investments’ gross unrealized losses and fair value aggregated by length of time that individual securities have been in a continuous unrealized loss position (in thousands):
| March 31, 2019 | ||||||||||||||||||||||||
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Fair Value | Unrealized Losses |
Fair Value | Unrealized Losses |
Fair Value | Unrealized Losses |
|||||||||||||||||||
| States and political subdivisions |
$ | 1,195 | $ | (1 | ) | $ | — | $ | — | $ | 1,195 | $ | (1 | ) | ||||||||||
| Corporate obligations |
3,065 | (11 | ) | — | — | 3,065 | (11 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| $ | 4,260 | $ | (12 | ) | $ | — | $ | — | $ | 4,260 | $ | (12 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Fair Value | Unrealized Losses |
Fair Value | Unrealized Losses |
Fair Value | Unrealized Losses |
|||||||||||||||||||
| States and political subdivisions |
$ | 1,296 | $ | (2 | ) | $ | 481 | $ | (1 | ) | $ | 1,777 | $ | (3 | ) | |||||||||
| Mortgage-backed securities-government sponsored entities |
32,415 | (241 | ) | 61,096 | (843 | ) | 93,511 | (1,084 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| $ | 33,711 | $ | (243 | ) | $ | 61,577 | $ | (844 | ) | $ | 95,288 | $ | (1,087 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
At March 31, 2020, the Company had five debt securities in an unrealized loss position in the less than twelve months category and no debt securities in the twelve months or more category. In Management’s opinion the unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. No other-than-temporary-impairment charges were recorded in 2020. Management believes that all unrealized losses represent temporary impairment of the securities as the Company does not have the intent to sell the securities and it is more likely than not that it will not have to sell the securities before recovery of its cost basis.
The amortized cost and fair value of debt securities as of March 31, 2020 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.
| Available for Sale | ||||||||
| Amortized Cost | Fair Value | |||||||
| (In Thousands) | ||||||||
| Due in one year or less |
$ | 2,742 | $ | 2,747 | ||||
| Due after one year through five years |
10,370 | 10,377 | ||||||
| Due after five years through ten years |
20,876 | 21,091 | ||||||
| Due after ten years |
27,270 | 28,371 | ||||||
|
|
|
|
|
|||||
| 61,258 | 62,586 | |||||||
| Mortgage-backed securities-government sponsored entities |
131,382 | 134,412 | ||||||
|
|
|
|
|
|||||
| $ | 192,640 | $ | 196,998 | |||||
|
|
|
|
|
|||||
14
Table of Contents
Gross realized gains and gross realized losses on sales of securities available for sale were as follows (in thousands):
| Three Months | ||||||||
| Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Gross realized gains |
$ | 38 | $ | — | ||||
| Gross realized losses |
— | — | ||||||
|
|
|
|
|
|||||
| Net realized gain |
$ | 38 | $ | — | ||||
|
|
|
|
|
|||||
| Proceeds from sales of securities |
$ | 8,224 | $ | 327 | ||||
|
|
|
|
|
|||||
Securities with a carrying value of $177,342,000 and $196,137,000 at March 31, 2020 and 2019, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.
| 8. | Loans Receivable and Allowance for Loan Losses |
Set forth below is selected data relating to the composition of the loan portfolio at the dates indicated (dollars in thousands):
| March 31, 2020 | December 31, 2019 | |||||||||||||||
| Real Estate Loans: |
||||||||||||||||
| Residential |
$ | 227,373 | 24.5 | % | $ | 229,781 | 24.9 | % | ||||||||
| Commercial |
398,492 | 42.9 | 391,327 | 42.3 | ||||||||||||
| Construction |
16,622 | 1.8 | 17,732 | 1.9 | ||||||||||||
| Commercial, financial and agricultural |
132,716 | 14.3 | 134,150 | 14.5 | ||||||||||||
| Consumer loans to individuals |
153,394 | 16.5 | 151,686 | 16.4 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total loans |
928,597 | 100.0 | % | 924,676 | 100.0 | % | ||||||||||
|
|
|
|
|
|||||||||||||
| Deferred fees, net |
(32 | ) | (95 | ) | ||||||||||||
|
|
|
|
|
|||||||||||||
| Total loans receivable |
928,565 | 924,581 | ||||||||||||||
| Allowance for loan losses |
(9,088 | ) | (8,509 | ) | ||||||||||||
|
|
|
|
|
|||||||||||||
| Net loans receivable |
$ | 919,477 | $ | 916,072 | ||||||||||||
|
|
|
|
|
|||||||||||||
The following table presents information regarding loans acquired and accounted for in accordance with ASC 310-30 (in thousands):
| March 31, 2020 | December 31, 2019 | |||||||
| Outstanding Balance |
$ | 777 | $ | 793 | ||||
| Carrying Amount |
$ | 680 | $ | 696 | ||||
15
Table of Contents
As a result of the acquisition of Delaware Bancshares, Inc. (“Delaware”), the Company added $1,397,000 of loans that were accounted for in accordance with ASC 310-30. Based on a review of the loans acquired by senior lending management, which included an analysis of credit deterioration of the loans since origination, the Company recorded a specific credit fair value adjustment of $499,000. For loans that were acquired with specific evidence of deterioration in credit quality, loan losses will be accounted for through a reduction of the specific reserve and will not impact the allowance for loan losses until actual losses exceed the allotted reserves. For loans acquired without a deterioration of credit quality, losses incurred will result in adjustments to the allowance for loan losses through the allowance for loan loss adequacy calculation.
The Company maintains a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers. Specific loan loss allowances are established for identified losses based on a review of such information. A loan evaluated for impairment is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans identified as impaired are evaluated independently. We do not aggregate such loans for evaluation purposes. Impairment is measured on a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential mortgage loans for impairment disclosures, unless such loans are part of a larger relationship that is impaired, or are classified as a troubled debt restructuring.
Foreclosed assets acquired in settlement of loans are carried at fair value less estimated costs to sell and are included in foreclosed real estate owned on the Consolidated Balance Sheets. As of March 31, 2020 and December 31, 2019, foreclosed real estate owned totaled $1,077,000 and $1,556,000, respectively. During the three months ended March 31, 2020, there were no additions to the foreclosed real estate category. The Company partially disposed of one property that was previously transferred to foreclosed real estate owned with a carrying value of $479,000 through the sale of the property. The remaining proceeds from the sale of this property are being held in escrow pending final disposition. As of March 31, 2020, the Company has initiated formal foreclosure proceedings on three properties classified as consumer residential mortgages with an aggregate carrying value of $296,000.
The following table shows the amount of loans in each category that were individually and collectively evaluated for impairment at the dates indicated:
| Real Estate Loans | ||||||||||||||||||||||||
| Commercial | Consumer | |||||||||||||||||||||||
| Residential | Commercial | Construction | Loans | Loans | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| March 31, 2020 |
||||||||||||||||||||||||
| Individually evaluated for impairment |
$ | — | $ | 2,096 | $ | — | $ | — | $ | — | $ | 2,096 | ||||||||||||
| Loans acquired with deteriorated credit quality |
467 | 213 | — | — | — | 680 | ||||||||||||||||||
| Collectively evaluated for impairment |
226,906 | 396,183 | 16,622 | 132,716 | 153,394 | 925,821 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Loans |
$ | 227,373 | $ | 398,492 | $ | 16,622 | $ | 132,716 | $ | 153,394 | $ | 928,597 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
16
Table of Contents
| Real Estate Loans | ||||||||||||||||||||||||
| Commercial | Consumer | |||||||||||||||||||||||
| Residential | Commercial | Construction | Loans | Loans | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| December 31, 2019 |
||||||||||||||||||||||||
| Individually evaluated for impairment |
$ | — | $ | 2,144 | $ | — | $ | — | $ | — | $ | 2,144 | ||||||||||||
| Loans acquired with deteriorated credit quality |
476 | 220 | — | — | — | 696 | ||||||||||||||||||
| Collectively evaluated for impairment |
229,305 | 388,963 | 17,732 | 134,150 | 151,686 | 921,836 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Loans |
$ | 229,781 | $ | 391,327 | $ | 17,732 | $ | 134,150 | $ | 151,686 | $ | 924,676 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable.
| Unpaid | ||||||||||||
| Recorded | Principal | Associated | ||||||||||
| Investment | Balance | Allowance | ||||||||||
| (in thousands) | ||||||||||||
| March 31, 2020 |
||||||||||||
| With no related allowance recorded: |
||||||||||||
| Real Estate Loans: |
||||||||||||
| Commercial |
$ | 173 | $ | 173 | $ | — | ||||||
|
|
|
|
|
|
|
|||||||
| Subtotal |
173 | 173 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| With an allowance recorded: |
||||||||||||
| Real Estate Loans |
||||||||||||
| Commercial |
1,923 | 1,923 | 392 | |||||||||
|
|
|
|
|
|
|
|||||||
| Subtotal |
1,923 | 1,923 | 392 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total: |
||||||||||||
| Real Estate Loans: |
||||||||||||
| Commercial |
2,096 | 2,096 | 392 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total Impaired Loans |
$ | 2,096 | $ | 2,096 | $ | 392 | ||||||
|
|
|
|
|
|
|
|||||||
| Unpaid | ||||||||||||
| Recorded | Principal | Associated | ||||||||||
| Investment | Balance | Allowance | ||||||||||
| (in thousands) | ||||||||||||
| December 31, 2019 |
||||||||||||
| With no related allowance recorded: |
||||||||||||
| Real Estate Loans: |
||||||||||||
| Commercial |
$ | 143 | $ | 394 | $ | — | ||||||
|
|
|
|
|
|
|
|||||||
| Subtotal |
143 | 394 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| With an allowance recorded: |
||||||||||||
| Real Estate Loans |
||||||||||||
| Commercial |
2,001 | 2,001 | 417 | |||||||||
|
|
|
|
|
|
|
|||||||
| Subtotal |
2,001 | 2,001 | 417 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total: |
||||||||||||
| Real Estate Loans: |
||||||||||||
| Commercial |
2,144 | 2,395 | 417 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total Impaired Loans |
$ | 2,144 | $ | 2,395 | $ | 417 | ||||||
|
|
|
|
|
|
|
|||||||
17
Table of Contents
The following table presents the average recorded investment in impaired loans and the related amount of interest income recognized during the three-month periods ended March 31, 2020 and 2019, respectively (in thousands):
| Average Recorded | Interest Income | |||||||||||||||
| Investment | Recognized | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Real Estate Loans: |
||||||||||||||||
| Commercial |
2,098 | 885 | 3 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 2,098 | $ | 885 | $ | 3 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Troubled debt restructured loans are those loans whose terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of financial difficulties experienced by the borrower, who could not obtain comparable terms from alternate financing sources. As of March 31, 2020 and December 31, 2019, troubled debt restructured loans totaled $96,000 and $99,000, respectively, with no specific reserve. For the three-month period ended March 31, 2020 and 2019, there were no new loans identified as troubled debt restructurings nor did the Company recognized any charge-off on a loan that was previously identified as a troubled debt restructuring.
Management uses an eight point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first four categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category.
On April 7, 2020, federal banking regulators issued a revised interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as nonperformance, repossession, or death occurs to raise awareness of a possible credit event. The Company’s Loan Review Department is responsible for the timely and accurate risk rating of the loans on an ongoing basis. Every credit which must be approved by Loan Committee or the Board of Directors is assigned a risk rating at time of consideration. Loan Review also annually reviews relationships of $1,500,000 and over to assign or re-affirm risk ratings. Loans in the Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.
18
Table of Contents
The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard, Doubtful and Loss within the internal risk rating system as of March 31, 2020 and December 31, 2019 (in thousands):
| Special | Doubtful | |||||||||||||||||||
| Pass | Mention | Substandard | or Loss | Total | ||||||||||||||||
| March 31, 2020 |
||||||||||||||||||||
| Commercial real estate loans |
$ | 384,948 | $ | 10,633 | $ | 2,911 | $ | — | $ | 398,492 | ||||||||||
| Commercial loans |
132,248 | 240 | 228 | — | 132,716 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
$ | 517,196 | $ | 10,873 | $ | 3,139 | $ | — | $ | 531,208 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Special | Doubtful | |||||||||||||||||||
| Pass | Mention | Substandard | or Loss | Total | ||||||||||||||||
| December 31, 2019 |
||||||||||||||||||||
| Commercial real estate loans |
$ | 376,109 | $ | 12,268 | $ | 2,950 | $ | — | $ | 391,327 | ||||||||||
| Commercial loans |
133,695 | 248 | 207 | — | 134,150 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
$ | 509,804 | $ | 12,516 | $ | 3,157 | $ | — | $ | 525,477 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
For residential real estate loans, construction loans and consumer loans, the Company evaluates credit quality based on the performance of the individual credits. The following table presents the recorded investment in the loan classes based on payment activity as of March 31, 2020 and December 31, 2019 (in thousands):
| Performing | Nonperforming | Total | ||||||||||
| March 31, 2020 |
||||||||||||
| Residential real estate loans |
$ | 226,894 | $ | 479 | $ | 227,373 | ||||||
| Construction |
16,622 | — | 16,622 | |||||||||
| Consumer loans |
153,226 | 168 | 153,394 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 396,742 | $ | 647 | $ | 397,389 | ||||||
|
|
|
|
|
|
|
|||||||
| Performing | Nonperforming | Total | ||||||||||
| December 31, 2019 |
||||||||||||
| Residential real estate loans |
$ | 229,214 | $ | 567 | $ | 229,781 | ||||||
| Construction |
17,732 | — | 17,732 | |||||||||
| Consumer loans |
151,607 | 79 | 151,686 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 398,553 | $ | 646 | $ | 399,199 | ||||||
|
|
|
|
|
|
|
|||||||
19
Table of Contents
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of March 31, 2020 and December 31, 2019 (in thousands):
| Current | 31-60 Days Past Due |
61-90 Days Past Due |
Greater than 90 Days Past Due and still accruing |
Non-Accrual | Total Past Due and Non- Accrual |
Total Loans |
||||||||||||||||||||||
| March 31, 2020 |
||||||||||||||||||||||||||||
| Real Estate loans |
||||||||||||||||||||||||||||
| Residential |
$ | 225,840 | $ | 849 | $ | 205 | $ | — | $ | 479 | $ | 1,533 | $ | 227,373 | ||||||||||||||
| Commercial |
395,516 | 784 | 149 | — | 2,043 | 2,976 | 398,492 | |||||||||||||||||||||
| Construction |
16,622 | — | — | — | — | — | 16,622 | |||||||||||||||||||||
| Commercial loans |
132,623 | — | 40 | — | 53 | 93 | 132,716 | |||||||||||||||||||||
| Consumer loans |
152,770 | 342 | 114 | — | 168 | 624 | 153,394 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total |
$ | 923,371 | $ | 1,975 | $ | 508 | $ | — | $ | 2,743 | $ | 5,226 | $ | 928,597 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Current | 31-60 Days Past Due |
61-90 Days Past Due |
Greater than 90 Days Past Due and still accruing |
Non-Accrual | Total Past Due and Non- Accrual |
Total Loans | ||||||||||||||||||||||
| December 31, 2019 |
||||||||||||||||||||||||||||
| Real Estate loans |
||||||||||||||||||||||||||||
| Residential |
$ | 228,242 | $ | 727 | $ | 245 | $ | — | $ | 567 | $ | 1,539 | $ | 229,781 | ||||||||||||||
| Commercial |
388,117 | 176 | 2,935 | — | 99 | 3,210 | 391,327 | |||||||||||||||||||||
| Construction |
17,695 | — | 37 | — | — | 37 | 17,732 | |||||||||||||||||||||
| Commercial loans |
134,018 | 82 | — | — | 50 | 132 | 134,150 | |||||||||||||||||||||
| Consumer loans |
151,309 | 233 | 65 | — | 79 | 377 | 151,686 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total |
$ | 919,381 | $ | 1,218 | $ | 3,282 | $ | — | $ | 795 | $ | 5,295 | $ | 924,676 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the allowance for loan losses. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the allowance.
As of March 31, 2020, the allocation of the allowance pertaining to each major category of loans is higher than the allocation as of December 31, 2019. This increase is due primarily to an increase in the qualitative factor for economic conditions which worsened as a result of the COVID-19 pandemic. The increase in this factor added $1,742,000 to the allowance for loan losses. This was offset partially by a decrease in the qualitative factor relating to loan growth which decreased by $1,087,000 due to a reduction in loan growth from 8.75% in 2019 to 1.72% in the first quarter of 2020.
The following table presents the allowance for loan losses by the classes of the loan portfolio:
| (In thousands) | Residential Real Estate |
Commercial Real Estate |
Construction | Commercial | Consumer | Total | ||||||||||||||||||
| Beginning balance, December 31, 2019 |
$ | 1,552 | $ | 4,687 | $ | 95 | $ | 949 | $ | 1,226 | $ | 8,509 | ||||||||||||
| Charge Offs |
(1 | ) | (33 | ) | — | — | (116 | ) | (150 | ) | ||||||||||||||
| Recoveries |
2 | 4 | — | 10 | 13 | 29 | ||||||||||||||||||
| Provision for loan losses |
91 | 257 | (8 | ) | 105 | 255 | 700 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Ending balance, March 31, 2020 |
$ | 1,644 | $ | 4,915 | $ | 87 | $ | 1,064 | $ | 1,378 | $ | 9,088 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Ending balance individually evaluated for impairment |
$ | — | $ | 392 | $ | — | $ | — | $ | — | $ | 392 | ||||||||||||
| Ending balance collectively evaluated for impairment |
$ | 1,644 | $ | 4,523 | $ | 87 | $ | 1,064 | $ | 1,378 | $ | 8,696 | ||||||||||||
20
Table of Contents
| (In thousands) | Residential Real Estate |
Commercial Real Estate |
Construction | Commercial | Consumer | Total | ||||||||||||||||||
| Beginning balance, December 31, 2018 |
$ | 1,328 | $ | 5,455 | $ | 93 | $ | 712 | $ | 864 | $ | 8,452 | ||||||||||||
| Charge Offs |
(65 | ) | (469 | ) | — | (1 | ) | (63 | ) | (598 | ) | |||||||||||||
| Recoveries |
11 | 10 | — | 10 | 14 | 45 | ||||||||||||||||||
| Provision for loan losses |
181 | (49 | ) | 15 | 90 | 213 | 450 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Ending balance, March 31, 2019 |
$ | 1,455 | $ | 4,947 | $ | 108 | $ | 811 | $ | 1,028 | $ | 8,349 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Ending balance individually evaluated for impairment |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
| Ending balance collectively evaluated for impairment |
$ | 1,455 | $ | 4,947 | $ | 108 | $ | 811 | $ | 1,028 | $ | 8,349 | ||||||||||||
The Company’s primary business activity as of March 31, 2020 was with customers located in northeastern Pennsylvania and the New York counties of Delaware and Sullivan. Accordingly, the Company has extended credit primarily to commercial entities and individuals in this area whose ability to honor their contracts is influenced by the region’s economy.
As of March 31, 2020, the Company considered its concentration of credit risk to be acceptable. The highest concentrations are in commercial rentals with $88.8 million of loans outstanding, or 9.6% of total loans outstanding, and the hospitality/lodging industry with loans outstanding of $65.3 million, or 7.1% of loans outstanding. During 2020, the Company recognized a charge off of $33,000 on one property in the named concentrations.
| 9. | Operating Leases |
The Company leases seven office locations under operating leases. Several assumptions and judgments were made when applying the requirements of Topic 842 to the Company’s existing lease commitments, including the allocation of consideration in the contracts between lease and nonlease components, determination of the lease term, and determination of the discount rate used in calculating the present value of the lease payments.
The Company has elected to account for the variable nonlease components, such as common area maintenance charges, utilities, real estate taxes, and insurance, separately from the lease component. Such variable nonlease components are reported in net occupancy expense on the Consolidated Statements of Income when paid. These variable nonlease components were excluded from the calculation of the present value of the remaining lease payments, therefore, they are not included in other assets and other liabilities on the Consolidated Balance Sheets. The lease cost associated with the operating leases for the three-month periods ending March 31, 2020 and 2019, amounted to $140,000 and $128,000, respectively.
Certain of the Company’s leases contain options to renew the lease after the initial term. Management considers the Company’s historical pattern of exercising renewal options on leases and the positive performance of the leased locations, when determining whether it is reasonably certain that the leases will be renewed. If management concludes that there is reasonable certainty about the renewal option, it is included in the calculation of the remaining term of each applicable lease. The discount rate utilized in calculating the present value of the remaining lease payments for each lease was the Federal Home Loan Bank of Pittsburgh advance rate corresponding to the remaining maturity of the lease. The following table presents the weighted-average remaining lease term and discount rate for the leases outstanding at December 31, 2019.
| Operating | ||||
| Weighted-average remaining term |
12.9 | |||
| Weighted-average discount rate |
3.21 | % | ||
21
Table of Contents
The following table presents the undiscounted cash flows due related to operating leases as of March 31, 2020, along with a reconciliation to the discounted amount recorded on the Consolidated Balance Sheets:
| Undiscounted cash flows due (in thousands) | Operating | |||
| 2020 |
$ | 401 | ||
| 2021 |
535 | |||
| 2022 |
535 | |||
| 2023 |
535 | |||
| 2024 |
544 | |||
| 2025 and thereafter |
3,879 | |||
|
|
|
|||
| Total undiscounted cash flows |
6,429 | |||
| Discount on cash flows |
(1,204 | ) | ||
|
|
|
|||
| Total lease liabilities |
$ | 5,225 | ||
|
|
|
|||
| 10. | Fair Value of Assets and Liabilities |
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In accordance with fair value accounting guidance, the Company measures, records, and reports various types of assets and liabilities at fair value on either a recurring or non-recurring basis in the Consolidated Financial Statements. Those assets and liabilities are presented in the sections entitled “Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis” and “Assets and Liabilities Required to be Measured and Reported at Fair Value on a Non-Recurring Basis”. There are three levels of inputs that may be used to measure fair values:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The methods of determining the fair value of assets and liabilities presented in this note are consistent with our methodologies disclosed in Note 15 of the Company’s 2019 Form 10-K.
22
Table of Contents
Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2020 and December 31, 2019 are as follows:
| Fair Value Measurement Using | ||||||||||||||||
| Reporting Date | ||||||||||||||||
| Description |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| (In thousands) | ||||||||||||||||
| March 31, 2020 |
||||||||||||||||
| Available for Sale: |
||||||||||||||||
| States and political subdivisions |
$ | 59,521 | $ | — | $ | 59,521 | $ | — | ||||||||
| Corporate obligations |
3,065 | — | 3,065 | — | ||||||||||||
| Mortgage-backed securities-government sponsored entities |
134,412 | — | 134,412 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 196,998 | $ | — | $ | 196,998 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Description |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| (In thousands) | ||||||||||||||||
| December 31, 2019 |
||||||||||||||||
| Available for Sale: |
||||||||||||||||
| States and political subdivisions |
$ | 71,305 | $ | — | $ | 71,305 | $ | — | ||||||||
| Corporate obligations |
4,100 | — | 4,100 | — | ||||||||||||
| Mortgage-backed securities-government sponsored entities |
134,800 | — | 134,800 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 210,205 | $ | — | $ | 210,205 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Securities:
The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) are used to support fair values of certain Level 3 investments, if applicable.
23
Table of Contents
Assets and Liabilities Required to be Measured and Reported at Fair Value on a Non-Recurring Basis
For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2020 and December 31, 2019 are as follows:
| Fair Value Measurement Using Reporting Date | ||||||||||||||||
| (In thousands) | ||||||||||||||||
| Description |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| March 31, 2020 |
||||||||||||||||
| Impaired Loans |
$ | 1,531 | $ | — | $ | — | $ | 1,531 | ||||||||
| Foreclosed Real Estate Owned |
1,077 | — | — | 1,077 | ||||||||||||
| December 31, 2019 |
||||||||||||||||
| Impaired Loans |
$ | 1,584 | $ | — | $ | — | $ | 1,584 | ||||||||
| Foreclosed Real Estate Owned |
1,556 | — | — | 1,556 | ||||||||||||
Impaired loans (generally carried at fair value):
The Company measures impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the lowest level of input that is significant to the fair value measurements.
As of March 31, 2020, the fair value investment in impaired loans totaled $1,531,000 which included one loan relationship that required a valuation allowance of $392,000 since the estimated realizable value of the collateral was not sufficient to cover the recorded investment in the loan. As of March 31, 2020, the Company has recognized a charge-off against the allowance for loan losses on this impaired loan in the amount of $33,000.
As of December 31, 2019, the fair value investment in impaired loans totaled $1,584,000 which included two loans that required a valuation allowance of $417,000 since the estimated realizable value of the collateral or the discounted cash flows were not sufficient to cover the recorded investment in the loans. As of December 31, 2019, the Company had not recognized any charge-offs against the allowance for loan losses on these impaired loans.
Foreclosed real estate owned (carried at fair value):
Real estate properties acquired through loan foreclosures, or by deed in lieu of loan foreclosure are to be sold and are carried at fair value less estimated cost to sell. Fair value is based upon independent market prices, appraised value of the collateral or management’s estimation of the value of the collateral. These assets are included in Level 3 fair value based upon the lowest level of input that is significant to the fair value measurement.
24
Table of Contents
The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
| Quantitative Information about Level 3 Fair Value Measurements | ||||||||||
| (dollars in thousands) |
Fair Value Estimate |
Valuation Techniques |
Unobservable Input |
Range (Weighted Average) | ||||||
| March 31, 2020 |
||||||||||
| Impaired loans |
$ | 1,531 | Appraisal of collateral(1) | Appraisal adjustments(2) | 10.00% (10.00%) | |||||
| Foreclosed real estate owned |
$ | 1,077 | Appraisal of collateral(1) | Liquidation Expenses(2) | 0-7.00% (6.27%) | |||||
| Quantitative Information about Level 3 Fair Value Measurements | ||||||||||
| (dollars in thousands) |
Fair Value Estimate |
Valuation Techniques |
Unobservable Input |
Range (Weighted Average) | ||||||
| December 31, 2019 |
||||||||||
| Impaired loans |
$ | 1,531 | Appraisal of collateral(1) | Appraisal adjustments(2) | 10.00% (10.00%) | |||||
| Impaired loans |
$ | 53 | Present value of future cash flows | Loan discount rate | 4.00-6.97% (5.55%) | |||||
| Probability of default | 0% | |||||||||
| Foreclosed real estate owned |
$ | 1,556 | Appraisal of collateral(1) | Liquidation Expenses(2) | 0-7.00% (4.34%) | |||||
| (1) | Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable, less any associated allowance. |
| (2) | Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal. |
Assets and Liabilities Not Required to be Measured or Reported at Fair Value
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at March 31, 2020 and December 31, 2019.
Loans receivable (carried at cost):
The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.
25
Table of Contents
Mortgage servicing rights (generally carried at cost)
The Company utilizes a third party provider to estimate the fair value of certain loan servicing rights. Fair value for the purpose of this measurement is defined as the amount at which the asset could be exchanged in a current transaction between willing parties, other than in a forced liquidation.
Deposit liabilities (carried at cost):
The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Other borrowings (carried at cost):
Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a fair value that is deemed to represent the transfer price if the liability were assumed by a third party.
The estimated fair values of the Bank’s financial instruments not required to be measured or reported at fair value were as follows at March 31, 2020 and December 31, 2019. (In thousands)
| Fair Value Measurements at March 31, 2020 | ||||||||||||||||||||
| Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| Financial assets: |
||||||||||||||||||||
| Cash and cash equivalents (1) |
$ | 38,418 | $ | 38,418 | $ | 38,418 | $ | — | $ | — | ||||||||||
| Loans receivable, net |
919,477 | 969,839 | — | — | 969,839 | |||||||||||||||
| Mortgage servicing rights |
190 | 226 | — | — | 226 | |||||||||||||||
| Regulatory stock (1) |
3,770 | 3,770 | 3,770 | — | — | |||||||||||||||
| Bank owned life insurance (1) |
38,971 | 38,971 | 38,971 | — | — | |||||||||||||||
| Accrued interest receivable (1) |
3,669 | 3,669 | 3,669 | — | — | |||||||||||||||
| Financial liabilities: |
||||||||||||||||||||
| Deposits |
990,160 | 994,357 | 612,778 | — | 381,579 | |||||||||||||||
| Short-term borrowings (1) |
40,656 | 40,656 | 40,656 | — | — | |||||||||||||||
| Other borrowings |
51,350 | 52,410 | — | — | 52,410 | |||||||||||||||
| Accrued interest payable (1) |
2,895 | 2,895 | 2,895 | — | — | |||||||||||||||
| Off-balance sheet financial instruments: |
||||||||||||||||||||
| Commitments to extend credit and outstanding letters of credit |
— | — | — | — | — | |||||||||||||||
26
Table of Contents
| Fair Value Measurements at December 31, 2019 | ||||||||||||||||||||
| Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| Financial assets: |
||||||||||||||||||||
| Cash and cash equivalents (1) |
$ | 15,415 | $ | 15,415 | $ | 15,415 | $ | — | $ | — | ||||||||||
| Loans receivable, net |
916,072 | 943,143 | — | — | 943,143 | |||||||||||||||
| Mortgage servicing rights |
187 | 226 | — | — | 226 | |||||||||||||||
| Regulatory stock (1) |
4,844 | 4,844 | 4,844 | — | — | |||||||||||||||
| Bank owned life insurance (1) |
38,763 | 38,763 | 38,763 | — | — | |||||||||||||||
| Accrued interest receivable (1) |
3,719 | 3,719 | 3,719 | — | — | |||||||||||||||
| Financial liabilities: |
||||||||||||||||||||
| Deposits |
957,529 | 961,120 | 596,811 | — | 364,309 | |||||||||||||||
| Short-term borrowings (1) |
62,256 | 62,256 | 62,256 | — | — | |||||||||||||||
| Other borrowings |
56,438 | 56,618 | — | — | 56,618 | |||||||||||||||
| Accrued interest payable (1) |
2,432 | 2,432 | 2,432 | — | — | |||||||||||||||
| Off-balance sheet financial instruments: |
||||||||||||||||||||
| Commitments to extend credit and outstanding letters of credit |
— | — | — | — | — | |||||||||||||||
| (1) | This financial instrument is carried at cost, which approximates the fair value of the instrument. |
| 11. | New and Recently Adopted Accounting Pronouncements |
New Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. With certain exceptions, transition to the new requirements will be through a cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We expect to recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment
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test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), which deferred the effective date for ASC 350, Intangibles – Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits (Topic 715-20). This Update amends ASC 715 to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The Update eliminates the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost over the next year. The Update also removes the disclosure requirements for the effects of a one percentage point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost, and the benefit obligation for postretirement health care benefits. This Update is effective for public business entities for fiscal years ending after December 15, 2020, and must be applied on a retrospective basis. For all other entities, this Update is effective for fiscal years ending after December 15, 2021. This Update is not expected to have a significant impact on the Company’s financial statements.
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Derivatives and Hedging (Topic 815), and Financial Instruments (Topic 825), which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. Topic 326, Financial Instruments – Credit Losses, amendments are effective for SEC registrants for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other public business entities, the effective date is for fiscal years beginning after December 15, 2020, and for all other entities, the effective date is for fiscal years beginning after December 15, 2021. Topic 815, Derivatives and Hedging, amendments are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. For entities that have adopted the amendments in Update 2017-12, the effective date is as of the beginning of the first annual period beginning after the issuance of this Update. Topic 825, Financial Instruments, amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Furthermore, the ASU provides a one-year deferral of the effective dates of the ASUs on derivatives and hedging for companies that are not public business entities. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.
In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses (Topic 326), which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for applying the fair value option in ASC 825-10. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be
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recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted ASU 2016-13, the effective dates and transition requirements are the same as those in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted once ASU 2016-13 has been adopted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). The Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt ASU 2016-13.
In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). The Update defers the effective dates of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. This Update also amends the mandatory effective date for the elimination of Step 2 from the goodwill impairment test under ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (Goodwill), to align with those used for credit losses. Furthermore, the ASU provides a one-year deferral of the effective dates of the ASUs on derivatives and hedging and leases for companies that are not public business entities. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.
In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. The effective dates in this Update are the same as those applicable for ASU 2019-10. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), to simplify the accounting for income taxes, change the accounting for certain tax transactions, and make minor improvements to the codification. This Update provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax and provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or was a separate transaction. The Update also changes current guidance for making an intraperiod allocation if there is a loss in continuing operations and gains outside of continuing operations, determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity method of accounting, accounting for tax law changes and year-to-date losses in interim periods, and determining how to apply the income tax guidance to franchise taxes that are partially based on income. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. This Update is not expected to have a significant impact on the Company’s financial statements.
In January 2020, the FASB issued ASU 2020-2, Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842), February 2020, to add and amend SEC paragraphs in the Accounting Standards Codification to reflect the
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issuance of SEC Staff Accounting Bulletin No. 119, related to the new credit losses standard, and comments by the SEC staff related to the revised effective date of the new leases standard. This ASU is effective upon issuance. This did not have a significant impact on the Company’s financial statements.
In March 2020, the FASB issued ASU 2020-3, Codification Improvements to Financial Instruments. This ASU was issued to improve and clarify various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven issues that describe the areas of improvement and the related amendments to GAAP; they are intended to make the standards easier to understand and apply and to eliminate inconsistencies, and they are narrow in scope and are not expected to significantly change practice for most entities. Among its provisions, the ASU clarifies that all entities, other than public business entities that elected the fair value option, are required to provide certain fair value disclosures under ASC 825, Financial Instruments, in both interim and annual financial statements. It also clarifies that the contractual term of a net investment in a lease under Topic 842 should be the contractual term used to measure expected credit losses under Topic 326. Amendments related to ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is not permitted before an entity’s adoption of ASU 2016-01. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Amendments related to ASU 2016-13 for entities that have adopted that guidance are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Other amendments are effective upon issuance of this ASU. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.
In January 2020, the FASB issued ASU 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.
| 12. | Proposed Acquisition of UpState New York Bancorp, Inc. |
On January 8, 2020, Norwood Financial Corp. (“Norwood”) and its wholly owned subsidiary, Wayne Bank, and UpState New York Bancorp, Inc. (“UpState”), and its wholly owned subsidiary, USNY Bank entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which UpState will merge with and into Norwood, with Norwood as the surviving corporation. Concurrent with the merger, it is expected that USNY Bank will merge with and into Wayne Bank.
USNY Bank conducts its business from its two Bank of the Finger Lakes offices in Geneva and Penn Yan, New York, and two Bank of Cooperstown offices in Cooperstown and Oneonta, New York. As of December 31, 2019, UpState had total assets of $439.6 million, total net loans of $380.7 million, total deposits of $387.9 million and total stockholders’ equity of $46.4 million.
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Pursuant to the terms of the Merger Agreement, shareholders of UpState will have the opportunity to elect to receive for each share of UpState common stock they own, either 0.9390 shares of Norwood common stock or $33.33 in cash, or a combination of both. All shareholder elections will be subject to the allocation and proration procedures set forth in the Merger Agreement which are intended to ensure that 90% of the shares of UpState will be exchanged for Norwood common stock and 10% of the shares of UpState will be exchanged for cash. In addition to the purchase price per share, UpState may also be permitted, under certain performance conditions, to distribute at the closing of the merger, a special cash dividend of up to an additional $0.67 per share to UpState’s shareholders. In the event of a greater than 20% decline in market value of Norwood’s common stock, UpState may, in certain circumstances, be able to terminate the Merger Agreement unless Norwood increases the number of shares into which UpState common stock may be converted.
The senior management of Norwood and Wayne Bank will remain the same following the merger. UpState directors Jeffrey S. Gifford and Alexandra K. Nolan will be appointed to the boards of directors of Norwood and Wayne Bank. In addition, the other directors of UpState will be invited to join a regional advisory board. UpState President and CEO R. Michael Briggs will enter into a consulting agreement with Wayne Bank. Norwood will retain the brand names of USNY’s two units, Bank of the Finger Lakes and Bank of Cooperstown, and will also retain USNY’s administration center in Geneva, New York. Scott D. White, unit President of Bank of Cooperstown, and Jeffrey E. Franklin, unit President of Bank of the Finger Lakes, will also remain in place as executives of their units.
The merger is subject to customary closing conditions, including the receipt of regulatory approvals and approval by the shareholders of Norwood and UpState. The merger is expected to be completed in the third quarter of 2020.
| 13. | Risks and Uncertainties |
The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and provides over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”).
As a qualified SBA lender, we were automatically authorized to originate PPP loans.
An eligible business can apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly payroll costs; or (2) $10.0 million. PPP loans will have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount
under the PPP so long as employee and compensation levels of the business are maintained and 75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used for other qualifying expenses. As of April 30, 2020, we approved 472 applications for $59.2 million of loans under the PPP.
Since the opening of the PPP, several larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. Norwood may be exposed to the risk of similar litigation, from both customers and non-customers that approached the bank regarding PPP loans, regarding the process and procedures used in processing applications for the PPP. If any such litigation is filed against and is not resolved in a manner favorable to Norwood, it may result in significant financial liability or adversely affect reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial condition and results of operations.
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The Company also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by Norwood , the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.
Owner-Occupied Residential Mortgage & Consumer Loans. For residential mortgage and consumer loans, CARES Act Section 4013 forbearance agreements are available to qualified borrowers. As of April 30, 2020, we had processed 151 residential mortgage payment deferrals of $10.4 million. None of the deferrals granted were to non-owner-occupied loans. Due to the widespread impact of the State of Pennsylvania and the State of New York Stay At Home orders, we expect that additional residential loan borrowers will seek loan forbearance or loan modification agreements in the second quarter of 2020.
Deferrals
As of April 30, 2020, we received requests to modify 754 loans aggregating $165.4 million primarily consisting of the deferral of principal and interest payments and the extension of the maturity date.
Details with respect to actual loan modifications are as follows:
COVID-19 Loan Forbearance Programs. Section 4013 of the CARES Act provides that banks may elect not to categorize a loan modification as a TDR if the loan modification is (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date on which the national emergency concerning the novel coronavirus disease (COVID–19) outbreak declared by the President on March 13, 2020, under the National Emergencies Act terminates, or (B) December 31, 2020. According to the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) issued by the federal bank regulatory agencies on April 7, 2020, short-term loan modifications not otherwise eligible under Section 4013 that are made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. See Note 8 of the financial statements for additional disclosure of TDRs at March 31, 2020.
The following table presents a summary of loan forbearance by type of loan as of April 30, 2020:
| Number of | ||||||||
| Loan Type |
Loans | Balance (in thousands) | ||||||
| Real Estate Loans: |
||||||||
| Residential |
152 | $ | 10,359 | |||||
| Commercial |
167 | 129,851 | ||||||
| Construction |
14 | 5,005 | ||||||
| Commercial, financial and agricultural |
60 | 11,797 | ||||||
| Consumer loans to individuals |
361 | 8,348 | ||||||
|
|
|
|
|
|||||
| Total |
754 | $ | 165,360 | |||||
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| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words “believes,” “anticipates,” “contemplates,” “expects,” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Those risks and uncertainties include:
| • | possible future impairment of intangible assets |
| • | our ability to effectively manage future growth |
| • | loan losses in excess of our allowance |
| • | the impact of the COVID-19 pandemic on us |
| • | risks inherent in commercial lending |
| • | real estate collateral which is subject to declines in value |
| • | potential other-than-temporary impairments |
| • | soundness of other financial institutions |
| • | interest rate risks |
| • | potential liquidity risk |
| • | deposits acquired through competitive bidding |
| • | availability of capital |
| • | regional economic factors |
| • | loss of senior officers |
| • | comparatively low legal lending limits |
| • | risks of new capital requirements |
| • | potential impact of Tax Cuts and Jobs Act |
| • | limited market for the Company’s stock |
| • | restrictions on ability to pay dividends |
| • | common stock may lose value |
| • | insider ownership |
| • | issuing additional shares may dilute ownership |
| • | competitive environment |
| • | certain anti-takeover provisions |
| • | extensive and complex governmental regulation and associated cost |
| • | cybersecurity |
Norwood Financial Corp. undertakes no obligation to publicly release the results of any revisions to those forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Critical Accounting Policies
Note 2 to the Company’s consolidated financial statements for the year ended December 31, 2019 (incorporated by reference in Item 8 of the Form 10-K) lists significant accounting policies used in the development and presentation of its financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations.
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Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, the fair value of financial instruments, the determination of other-than-temporary impairment on securities and the determination of goodwill impairment. Please refer to the discussion of the allowance for loan losses calculation under “Loans” in the “Changes in Financial Condition” section.
The Company uses the modified prospective transition method to account for stock options. Under this method companies are required to record compensation expense, based on the fair value of options over the vesting period. Restricted shares vest over a five-year period. The product of the number of shares granted and the grant date market price of the Company’s common stock determines the fair value of restricted stock.
Deferred income taxes reflect temporary differences in the recognition of the revenue and expenses for tax reporting and financial statement purposes, principally because certain items are recognized in different periods for financial reporting and tax return purposes. Although realization is not assured, the Company believes that it is more likely than not that all deferred tax assets will be realized.
The fair value of financial instruments is based upon quoted market prices, when available. For those instances where a quoted price is not available, fair values are based upon observable market based parameters as well as unobservable parameters. Any such valuation is applied consistently over time.
Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each Consolidated Balance Sheet date.
Declines in the fair value of available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, the Company considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent of the Company to not sell the securities and whether it is more likely than not that it will not have to sell the securities before recovery of their cost basis. The Company believes that all unrealized losses on securities at March 31, 2020 and December 31, 2019 represent temporary impairment of the securities, related to changes in interest rates.
In connection with acquisitions, the Company recorded goodwill in the amount of $11.3 million, representing the excess of amounts paid over the fair value of net assets of the institutions acquired in purchase transactions, at its fair value at the date of acquisition. Goodwill is tested and deemed impaired when the carrying value of goodwill exceeds its implied fair value. The value of the goodwill can change in the future. We expect the value of the goodwill to decrease if there is a significant decrease in the franchise value of the Company or the Bank. If an impairment loss is determined in the future, we will reflect the loss as an expense for the period in which the impairment is determined, leading to a reduction of our net income for that period by the amount of the impairment loss.
Changes in Financial Condition
General
Total assets as of March 31, 2020 were $1.242 billion compared to $1.231 billion as of December 31, 2019. The increase reflects a $23.3 million increase in interest-bearing deposits with banks which was funded by an increase in deposits and cash flows from securities.
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Securities
The fair value of securities available for sale as of March 31, 2020 was $197.0 million compared to $210.2 million as of December 31, 2019. The decrease in the securities portfolio is the result of sales, calls, maturities and principal reductions of securities. The fair value of the portfolio increased $3.9 million due to an increase in unrealized gains on securities related to the decrease in interest rates during the first three months of 2020.
The carrying value of the Company’s securities portfolio (Available-for Sale) consisted of the following:
| March 31, 2020 | December 31, 2019 | |||||||||||||||
| (dollars in thousands) | Amount | % of portfolio | Amount | % of portfolio | ||||||||||||
| States and political subdivisions |
$ | 59,521 | 30.2 | % | $ | 71,305 | 33.9 | % | ||||||||
| Corporate obligations |
3,065 | 1.6 | 4,100 | 2.0 | ||||||||||||
| Mortgage-backed securities-government sponsored entities |
134,412 | 68.2 | 134,800 | 64.1 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 196,998 | 100.0 | % | $ | 210,205 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The Company has securities in an unrealized loss position. In management’s opinion, the unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. Management believes that the unrealized losses on all holdings represent temporary impairment of the securities, as the Company has the intent and ability to hold these investments until maturity or market price recovery.
Loans
Loans receivable totaled $928.6 million at March 31, 2020 compared to $924.6 million as of December 31, 2019. The increase in loans receivable includes a $5.8 million increase in commercial loans which was partially offset by a $1.8 million decrease in retail loans. Loan growth for the three-month period ended March 31, 2020 was negatively impacted by the effects of the COVID-19 pandemic as social distancing constraints and business closures resulted in a significant slowing of new loan closings.
The allowance for loan losses totaled $9,088,000 as of March 31, 2020, and represented 0.98% of total loans outstanding, compared to $8,509,000, or 0.92% of total loans, at December 31, 2019. The Company had net charge-offs for the three months ended March 31, 2020 of $121,000 compared to $553,000 in the corresponding period in 2019. The Company’s management assesses the adequacy of the allowance for loan losses on a quarterly basis. The process includes an analysis of the risks inherent in the loan portfolio. It includes an analysis of impaired loans and a historical review of credit losses by loan type. Other factors considered include concentration of credit in specific industries, economic and industry conditions, trends in delinquencies and loan classifications, and loan growth. Management considers the allowance adequate at March 31, 2020 based on the Company’s criteria. However, there can be no assurance that the allowance for loan losses will be adequate to cover significant losses, if any that might be incurred in the future.
As of March 31, 2020, non-performing loans totaled $2.7 million, or 0.30% of total loans compared to $795,000, or 0.09%, of total loans at December 31, 2019. At March 31, 2020, non-performing assets totaled $3.8 million, or 0.31%, of total assets, compared to $2.4 million, or 0.19%, of total assets at December 31, 2019.
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The following table sets forth information regarding non-performing loans and foreclosed real estate at the dates indicated:
| (dollars in thousands) | March 31, 2020 | December 31, 2019 | ||||||
| Loans accounted for on a non-accrual basis: |
||||||||
| Real Estate |
||||||||
| Residential |
$ | 479 | $ | 567 | ||||
| Commercial |
2,043 | 99 | ||||||
| Construction |
— | — | ||||||
| Commercial, financial and agricultural |
53 | 50 | ||||||
| Consumer loans to individuals |
168 | 79 | ||||||
|
|
|
|
|
|||||
| Total non-accrual loans * |
2,743 | 795 | ||||||
| Accruing loans which are contractually past due 90 days or more |
— | — | ||||||
|
|
|
|
|
|||||
| Total non-performing loans |
2,743 | 795 | ||||||
| Foreclosed real estate |
1,077 | 1,556 | ||||||
|
|
|
|
|
|||||
| Total non-performing assets |
$ | 3,820 | $ | 2,351 | ||||
|
|
|
|
|
|||||
| Allowance for loans losses |
$ | 9,088 | $ | 8,509 | ||||
| Coverage of non-performing loans |
331 | % | 1070 | % | ||||
| Non-performing loans to total loans |
0.30 | % | 0.09 | % | ||||
| Non-performing loans to total assets |
0.22 | % | 0.06 | % | ||||
| Non-performing assets to total assets |
0.31 | % | 0.19 | % | ||||
| * | Includes non-accrual TDRs of $96,000 as of March 31, 2020 and $99,000 on December 31, 2019. There were no accruing TDRs as of March 31, 2020 or as of December 31, 2019. |
As of March 31, 2020, over 100 of our loan customers had requested loan payment deferrals or payments of interest only on loans totaling $52.8 million. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings (“TDRs”) unless the borrower was previously experiencing financial difficulty.
In addition, the risk-rating on COVID-19 modified loans did not change, and these loans will not be considered past due until after the deferral period is over and scheduled payments resume. The credit quality of these loans will be reevaluated after the deferral period ends.
Through April 30, 2020, we have modified more than 750 loans totaling $165.4 million which includes both retail and commercial loans.
Deposits
During the three-month period ended March 31, 2020, total deposits increased $32.6 million due primarily to a $16.7 million increase in time deposits, which includes a $9.7 million increase in time deposits over $100,000. These large deposits reflect seasonal activity in municipal account relationships. All other deposits increased $15.9 million, net.
36
Table of Contents
The following table sets forth deposit balances as of the dates indicated:
| (dollars in thousands) | March 31, 2020 | December 31, 2019 | ||||||
| Non-interest bearing demand |
$ | 213,359 | $ | 207,299 | ||||
| Interest-bearing demand |
93,056 | 99,366 | ||||||
| Money market deposit accounts |
135,127 | 128,441 | ||||||
| Savings |
171,235 | 161,705 | ||||||
| Time deposits <$100,000 |
150,894 | 143,940 | ||||||
| Time deposits >$100,000 |
226,489 | 216,778 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 990,160 | $ | 957,529 | ||||
|
|
|
|
|
|||||
Borrowings
Other borrowings as of March 31, 2020, totaled $51.4 million compared to $56.4 million as of December 31, 2019. Short-term borrowings, which consist of securities sold under agreements to repurchase and overnight borrowings from the FHLB, decreased $21.6 million due to a $31.8 million reduction in overnight borrowings, which was partially offset by a $10.2 million increase in repurchase agreements.
Other borrowings consisted of the following:
(dollars in thousands)
| March 31, 2020 | December 31, 2019 | |||||||
| Notes with the FHLB: |
||||||||
| Fixed rate term borrowing due May 2020 at 1.85% |
$ | 5,000 | $ | 5,000 | ||||
| Amortizing fixed rate borrowing due June 2020 at 1.490% |
518 | 1,034 | ||||||
| Amortizing fixed rate borrowing due July 2020 at 2.77% |
1,705 | 2,974 | ||||||
| Amortizing fixed rate borrowing due December 2020 at 1.706% |
777 | 2,538 | ||||||
| Amortizing fixed rate borrowing due December 2020 at 3.06% |
1,911 | 1,034 | ||||||
| Amortizing fixed rate borrowing due March 2022 at 1.748% |
1,790 | 2,009 | ||||||
| Amortizing fixed rate borrowing due August 2022 at 1.94% |
4,861 | 5,351 | ||||||
| Amortizing fixed rate borrowing due October 2022 at 1.88% |
4,227 | 4,626 | ||||||
| Amortizing fixed rate borrowing due October 2023 at 3.24% |
7,329 | 7,809 | ||||||
| Amortizing fixed rate borrowing due December 2023 at 3.22% |
3,824 | 4,063 | ||||||
| Fixed rate term borrowing due December 2023 at 1.95% |
10,000 | 10,000 | ||||||
| Amortizing fixed rate borrowing due December 2023 at 1.73% |
9,408 | 10,000 | ||||||
|
|
|
|
|
|||||
| $ | 51,350 | $ | 56,438 | |||||
|
|
|
|
|
|||||
Stockholders’ Equity and Capital Ratios
As of March 31, 2020, stockholders’ equity totaled $142.2 million, compared to $137.4 million as of December 31, 2019. The net change in stockholders’ equity included $3.1 million of net income that was partially offset by $1.6 million of dividends declared. In addition, total equity increased $3.1 million due to an increase in the fair value of securities in the available for sale portfolio, net of tax. This increase in fair value is the result of a change in interest rates and spreads, which may impact the value of the securities. Because of interest rate volatility, the Company’s accumulated other comprehensive income could materially fluctuate for each interim and year-end period.
37
Table of Contents
A comparison of the Company’s consolidated regulatory capital ratios is as follows:
| March 31, 2020 | December 31, 2019 | |||||||
| Tier 1 Capital |
10.32 | % | 10.18 | % | ||||
| Tier 1 Capital |
13.23 | % | 13.11 | % | ||||
| Common Equity Tier 1 Capital |
13.23 | % | 13.11 | % | ||||
| Total Capital |
14.19 | % | 14.01 | % | ||||
Effective January 1, 2015, the Company and the Bank became subject to new regulatory capital rules, which, among other things, impose a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), set the minimum leverage ratio for all banking organizations at a uniform 4% of total assets, increase the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assign a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The new rules also require unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt out is exercised which the Company and the Bank have done. The final rule limits a banking organization’s dividends, stock repurchases and other capital distributions, and certain discretionary bonus payments to executive officers, if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above regulatory minimum risk-based requirements. The capital conservation buffer requirement was phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement became effective. The Company and the Bank are in compliance with their respective new capital requirements, including the capital conservation buffer, as of March 31, 2020.
Liquidity
As of March 31, 2020, the Company had cash and cash equivalents of $38.4 million in the form of cash, due from banks and short-term deposits with other institutions. In addition, the Company had total securities available for sale of $197.0 million which could be used for liquidity needs. This totals $235.4 million of liquidity and represents 18.9% of total assets compared to $225.6 million and 18.3% of total assets as of December 31, 2019. The Company also monitors other liquidity measures, all of which were within the Company’s policy guidelines as of March 31, 2020 and December 31, 2019. Based upon these measures, the Company believes its liquidity is adequate.
Capital Resources
The Company has a line of credit commitment from Atlantic Community Bankers Bank for $7,000,000 which expires June 30, 2020. There were no borrowings under this line as of March 31, 2020 and December 31, 2019.
The Company has a line of credit commitment available which has no stated expiration date from PNC Bank for $16,000,000. There were no borrowings under this line as of March 31, 2020 and December 31, 2019.
The Company has a line of credit commitment available which has no stated expiration date from Zions Bank for $17,000,000. There were no borrowings under this line as of March 31, 2020 and December 31, 2019.
38
Table of Contents
The Bank’s maximum borrowing capacity with the Federal Home Loan Bank was approximately $425,045,000 as of March 31, 2020, of which $51,350,000 was outstanding in the form of borrowings. As of December 31, 2019, the maximum borrowing capacity was $425,226,000, of which $88,189,000 of borrowings was outstanding. Additionally, as of March 31, 2020, the Bank had secured Letters of Credit from the Federal Home Loan Bank in the amount of $66.0 million as collateral for specific municipal deposits. These Letters of Credit reduce the availability under the maximum borrowing capacity. There was $56.0 million outstanding in the form of Letters of Credit as of December 31, 2019. Advances and Letters of Credit from the Federal Home Loan Bank are secured by qualifying assets of the Bank.
Non-GAAP Financial Measures
This report contains or references fully taxable-equivalent (fte) interest income and net interest income, which are non-GAAP financial measures. Interest income (fte) and net interest income (fte) are derived from GAAP interest income and net interest income using an assumed tax rate of 21%. We believe the presentation of interest income (fte) and net interest income (fte) ensures comparability of interest income and net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Net interest income (fte) is reconciled to GAAP net interest income on page 40. Although the Company believes that these non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP measures.
39
Table of Contents
Results of Operations
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
| (Tax-Equivalent Basis, | Three Months Ended March 31, | |||||||||||||||||||||||
| dollars in thousands) | 2020 | 2019 | ||||||||||||||||||||||
| Average | Average | Average | Average | |||||||||||||||||||||
| Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
| (2) | (1) | (3) | (2) | (1) | (3) | |||||||||||||||||||
| Assets |
||||||||||||||||||||||||
| Interest-earning assets: |
||||||||||||||||||||||||
| Interest-bearing deposits with banks |
$ | 4,616 | $ | 6 | 0.52 | % | $ | 2,389 | $ | 15 | 2.51 | % | ||||||||||||
| Securities available for sale: |
||||||||||||||||||||||||
| Taxable |
146,414 | 795 | 2.17 | 156,224 | 874 | 2.24 | ||||||||||||||||||
| Tax-exempt (1) |
60,248 | 486 | 3.23 | 94,883 | 718 | 3.03 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total securities available for sale (1) |
206,662 | 1,281 | 2.48 | 251,107 | 1,592 | 2.54 | ||||||||||||||||||
| Loans receivable (1) (4) (5) |
927,186 | 10,819 | 4.67 | 857,438 | 10,084 | 4.70 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total interest-earning assets |
1,138,464 | 12,106 | 4.25 | 1,110,934 | 11,691 | 4.21 | ||||||||||||||||||
| Non-interest earning assets: |
||||||||||||||||||||||||
| Cash and due from banks |
14,722 | 14,024 | ||||||||||||||||||||||
| Allowance for loan losses |
(8,601 | ) | (8,614 | ) | ||||||||||||||||||||
| Other assets |
85,521 | 74,910 | ||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| Total non-interest earning assets |
91,642 | 80,320 | ||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| Total Assets |
$ | 1,230,106 | $ | 1,191,254 | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| Liabilities and Stockholders’ Equity |
||||||||||||||||||||||||
| Interest-bearing liabilities: |
||||||||||||||||||||||||
| Interest-bearing demand and money market |
$ | 226,632 | $ | 150 | 0.26 | $ | 225,813 | $ | 147 | 0.26 | ||||||||||||||
| Savings |
166,504 | 22 | 0.05 | 172,863 | 24 | 0.06 | ||||||||||||||||||
| Time |
371,855 | 1,618 | 1.74 | 359,168 | 1,558 | 1.74 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total interest-bearing deposits |
764,991 | 1,790 | 0.94 | 757,844 | 1,729 | 0.91 | ||||||||||||||||||
| Short-term borrowings |
44,892 | 111 | 0.99 | 45,400 | 123 | 1.08 | ||||||||||||||||||
| Other borrowings |
53,821 | 302 | 2.24 | 49,939 | 303 | 2.43 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total interest-bearing liabilities |
863,704 | 2,203 | 1.02 | 853,183 | 2,155 | 1.01 | ||||||||||||||||||
| Non-interest bearing liabilities: |
||||||||||||||||||||||||
| Demand deposits |
209,488 | 200,273 | ||||||||||||||||||||||
| Other liabilities |
15,952 | 13,052 | ||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| Total non-interest bearing liabilities |
225,440 | 213,325 | ||||||||||||||||||||||
| Stockholders’ equity |
140,962 | 124,746 | ||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| Total Liabilities and Stockholders’ Equity |
$ | 1,230,106 | $ | 1,191,254 | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| Net interest income/spread (tax equivalent basis) |
9,903 | 3.23 | % | 9,536 | 3.20 | % | ||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| Tax-equivalent basis adjustment |
(238 | ) | (265 | ) | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| Net interest income |
$ | 9,665 | $ | 9,271 | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| Net interest margin (tax equivalent basis) |
3.48 | % | 3.43 | % | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| (1) | Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 21%. |
| (2) | Average balances have been calculated based on daily balances. |
| (3) | Annualized |
| (4) | Loan balances include non-accrual loans and are net of unearned income. |
| (5) | Loan yields include the effect of amortization of deferred fees, net of costs. |
40
Table of Contents
Rate/Volume Analysis. The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense.
| Increase/(Decrease) | ||||||||||||
| Three months ended March 31, 2020 Compared to | ||||||||||||
| Three months ended March 31, 2019 | ||||||||||||
| Variance due to | ||||||||||||
| Volume | Rate | Net | ||||||||||
| (dollars in thousands) | ||||||||||||
| Interest-earning assets: |
||||||||||||
| Interest-bearing deposits with banks |
$ | 4 | $ | (13 | ) | $ | (9 | ) | ||||
| Securities available for sale: |
||||||||||||
| Taxable |
(53 | ) | (26 | ) | (79 | ) | ||||||
| Tax-exempt securities |
(264 | ) | 32 | (232 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Total securities |
(317 | ) | 6 | (311 | ) | |||||||
| Loans receivable |
806 | (71 | ) | 735 | ||||||||
|
|
|
|
|
|
|
|||||||
| Total interest-earning assets |
493 | (78 | ) | 415 | ||||||||
|
|
|
|
|
|
|
|||||||
| Interest-bearing liabilities: |
||||||||||||
| Interest-bearing demand and money market |
3 | — | 3 | |||||||||
| Savings |
(1 | ) | (1 | ) | (2 | ) | ||||||
| Time |
60 | — | 60 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total interest-bearing deposits |
62 | (1 | ) | 61 | ||||||||
| Short-term borrowings |
(1 | ) | (11 | ) | (12 | ) | ||||||
| Other borrowings |
22 | (23 | ) | (1 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Total interest-bearing liabilities |
83 | (35 | ) | 48 | ||||||||
|
|
|
|
|
|
|
|||||||
| Net interest income (tax-equivalent basis) |
$ | 410 | $ | (43 | ) | $ | 367 | |||||
|
|
|
|
|
|
|
|||||||
Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated proportionately to changes in volume and changes in rate.
41
Table of Contents
Comparison of Operating Results for the Three Months Ended March 31, 2020 to March 31, 2019
General
For the three months ended March 31, 2020, net income totaled $3,079,000 compared to $3,190,000 earned in the similar period in 2019. The decrease in net income for the three months ended March 31, 2020 was due primarily to a $250,000 increase in the provision for loan losses. A $394,000 increase in net interest income was offset by increased operating expenses. Earnings per share for the three-months ended March 31, 2020 were $0.49 per share for basic shares and fully diluted shares compared to $0.51 per share for basic shares and fully diluted shares for the three months ended March 31, 2019. The resulting annualized return on average assets and annualized return on average equity for the three months ended March 31, 2020 were 1.01% and 8.79%, respectively, compared to 1.09% and 10.37%, respectively, for the same period in 2019.
The following table sets forth changes in net income:
| (dollars in thousands) | Three months ended | |||
| March 31, 2020 to March 31, 2019 | ||||
| Net income three months ended March 31, 2019 |
$ | 3,190 | ||
| Change due to: |
||||
| Net interest income |
394 | |||
| Provision for loan losses |
(250 | ) | ||
| Net gains on sales |
52 | |||
| Other income |
42 | |||
| Salaries and employee benefits |
(128 | ) | ||
| Occupancy, furniture and equipment |
(44 | ) | ||
| Taxes, other than income |
(53 | ) | ||
| FDIC insurance assessment |
71 | |||
| All other expenses |
(257 | ) | ||
| Income tax expense |
62 | |||
|
|
|
|||
| Net income three months ended March 31, 2020 |
$ | 3,079 | ||
|
|
|
|||
Net Interest Income
Net interest income on a fully taxable equivalent basis (fte) for the three months ended March 31, 2020 totaled $9,903,000 which was $367,000 higher than the comparable period in 2019. The increase in net interest income was due primarily to a $735,000 increase in interest income (fte) on loans. Tax-equivalent interest income was negatively impacted by a $311,000 decrease in securities income. The fte net interest spread and net interest margin were 3.23% and 3.48%, respectively, for the three months ended March 31, 2020 compared to 3.20% and 3.43%, respectively, for the same period in 2019. The increase in the net interest spread reflects the improved yield on earning assets.
For the three-months ended March 31, 2020, interest income (fte) totaled $12,106,000 with a yield on average earning assets of 4.25% compared to $11,691,000 and 4.21% for the 2019 period. Average loans increased $69.7 million during the three-months ended March 31, 2020, over the comparable period of 2019, while average securities decreased $44.4 million as portfolio runoff was utilized to fund loan growth. Average earning assets totaled $1.138 billion for the three months ended March 31, 2020, an increase of $27.5 million over the average for the same period in 2019.
42
Table of Contents
Interest expense for the three months ended March 31, 2020 totaled $2,203,000 at an average cost of 1.02% compared to $2,155,000 and 1.01% for the same period in 2019. The increase in average cost during the 2020 quarter reflects the $12.7 million increase in average certificates of deposit. The average cost of time deposits, which is the most significant component of funding, remained steady at 1.74% during the periods.
Provision for Loan Losses
The Company’s provision for loan losses for the three months ended March 31, 2020 was $700,000 compared to $450,000 for the three months ended March 31, 2019. The increased provision includes the increased risk related to the COVID-19 pandemic. The Company makes provisions for loan losses in an amount necessary to maintain the allowance for loan losses at an acceptable level. Net charge-offs were $121,000 for the quarter ended March 31, 2019, compared to $553,000 for the similar period in 2019. At March 31, 2020, the allowance for loan losses represented 0.98% of loans receivable and 331% of non-performing loans.
Other Income
Other income totaled $1,654,000 for the three months ended March 31, 2020, compared to $1,560,000 for the same period in 2019. The increase was due primarily to a $32,000 increase in in service charges and fees combined with a $52,000 increase over the comparable period in 2019 on gains recognized on the sales of loans and securities.
Other Expense
Other expense for the three months ended March 31, 2020 totaled $7,059,000, which was $411,000 higher than the same period of 2019, due primarily to a $128,000 increase in salaries and benefits expenses and a $314,000 increase in all other operating expenses, net. The efficiency ratio was 61.08% and 59.91%, respectively, during the three months ended March 31, 2020 and 2019.
Income Tax Expense
Income tax expense totaled $481,000 for an effective tax rate of 13.5% for the period ended March 31, 2020 compared to $543,000 for an effective tax rate of 14.6% for the similar period in 2019.
43
Table of Contents
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Market Risk
Interest rate sensitivity and the repricing characteristics of assets and liabilities are managed by the Asset and Liability Management Committee (ALCO). The principal objective of ALCO is to maximize net interest income within acceptable levels of risk, which are established by policy. Interest rate risk is monitored and managed by using financial modeling techniques to measure the impact of changes in interest rates.
Net interest income, which is the primary source of the Company’s earnings, is impacted by changes in interest rates and the relationship of different interest rates. To manage the impact of the rate changes, the balance sheet must be structured so that repricing opportunities exist for both assets and liabilities at approximately the same time intervals. The Company uses net interest simulation to assist in interest rate risk management. The process includes simulating various interest rate environments and their impact on net interest income. As of March 31, 2020, the level of net interest income at risk in a rising or declining 200 basis point change in interest rates was within the Company’s policy limits. The Company’s policy allows for a decline of no more than 10% of net interest income for a ± 200 basis point shift in interest rates.
Imbalance in repricing opportunities at a given point in time reflects interest-sensitivity gaps measured as the difference between rate-sensitive assets (RSA) and rate-sensitive liabilities (RSL). These are static gap measurements that do not take into account any future activity, and as such are principally used as early indications of potential interest rate exposures over specific intervals.
As of March 31, 2020, the Company had a positive 90-day interest sensitivity gap of $37.1 million or 2.99% of total assets, compared to the $5.9 million interest sensitivity gap, or 0.48% of total assets, as of December 31, 2019. Rate-sensitive assets repricing within 90 days increased $38.6 million due primarily to a $23.3 million increase in interest-bearing deposits and a $13.4 million increase in loans. Rate-sensitive liabilities repricing within 90 days increased $7.4 million since year end due to a $30.2 million increase in time deposits repricing which was partially offset by a $24.5 million decrease in borrowings. A positive gap means that rate-sensitive assets are greater than rate-sensitive liabilities at the time interval. This would indicate that in a rising rate environment, yield on interest-earning assets in the 90-day time frame could increase faster than the cost of interest-bearing liabilities. The repricing intervals are managed by ALCO strategies, including adjusting the average life of the investment portfolio, pricing of deposit liabilities to attract longer term time deposits, loan pricing to encourage variable rate products and evaluation of loan sales of long-term fixed rate mortgages.
Certain interest-bearing deposits with no stated maturity dates are included in the interest-sensitivity table below. The balances allocated to the respective time periods represent an estimate of the total outstanding balance that has the potential to migrate through withdrawal or transfer to time deposits, thereby impacting the interest-sensitivity position of the Company. The estimates were derived from an independently prepared non-maturity deposit study for Wayne Bank which addressed the various deposit types and their pricing sensitivity to movements in market interest rates. The process involved analyzing correlations between product rates and market rates over a ten-year period. The Company believes the study provides pertinent data to support the assumptions used in modeling non-maturity deposits.
44
Table of Contents
March 31, 2020
Rate Sensitivity Table
(dollars in thousands)
| 3 Months | 3-12 Months | 1 to 3 Years | Over 3 Years | Total | ||||||||||||||||
| Federal funds sold and interest-bearing deposits |
$ | 23,706 | $ | — | $ | — | $ | — | $ | 23,706 | ||||||||||
| Securities |
18,469 | 29,952 | 58,255 | 90,322 | 196,998 | |||||||||||||||
| Loans Receivable |
150,987 | 177,871 | 293,967 | 305,740 | 928,565 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total RSA |
$ | 193,162 | $ | 207,823 | $ | 352,222 | $ | 396,062 | $ | 1,149,269 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Non-maturity interest-bearing deposits |
$ | 59,735 | $ | 59,825 | $ | 158,136 | $ | 121,722 | $ | 399,418 | ||||||||||
| Time Deposits |
77,336 | 202,539 | 62,004 | 35,504 | 377,383 | |||||||||||||||
| Borrowings |
18,971 | 23,669 | 35,535 | 13,831 | 92,006 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total RSL |
$ | 156,042 | $ | 286,033 | $ | 255,675 | $ | 171,057 | $ | 868,807 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Interest Sensitivity Gap |
$ | 37,120 | $ | (78,210 | ) | $ | 96,547 | $ | 225,005 | $ | 280,462 | |||||||||
| Cumulative Gap |
37,120 | (41,090 | ) | 55,457 | 280,462 | |||||||||||||||
| RSA/RSL-cumulative |
123.8 | % | 90.7 | % | 107.9 | % | 132.3 | % | ||||||||||||
| December 31, 2019 |
||||||||||||||||||||
| Interest Sensitivity Gap |
$ | 5,884 | $ | (82,454 | ) | $ | 110,264 | $ | 232,545 | $ | 266,239 | |||||||||
| Cumulative Gap |
5,884 | (76,570 | ) | 33,694 | 266,239 | |||||||||||||||
| RSA/RSL-cumulative |
104.0 | % | 82.8 | % | 104.8 | % | 130.6 | % | ||||||||||||
| Item 4. | Controls and Procedures |
The Company’s management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| Item 1. | Legal Proceedings |
Not applicable.
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| Item 1A. | Risk Factors |
The Global Outbreak of the COVID-19 Coronavirus May Pose Risks and Uncertainties to the Company’s Results of Operations, Financial Condition and Cash Flows
The outbreak of COVID-19 has caused significant disruptions in the U.S. economy and has created disruption within the markets where the Company primarily operates. While there has been no material impact to the Company’s operations, COVID-19 could potentially create a business continuity issue for the Company. If the global response to contain COVID-19 escalates further or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows.
Congress, the President, and the Federal Reserve have taken actions to help with the economic fallout. The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations.
Other than the foregoing, there have been no material changes in the risk factors affecting the Company that were identified in Item 1A of Part 1 of the Company’s Form 10-K for the fiscal year ended December 31, 2019.
| Item 2. | Unregistered Sales of Equity Sales and Use of Proceeds |
(a) Unregistered Sales of Equity Securities. Not Applicable.
(b) Use of Proceeds. Not Applicable
(c) Issuer Purchases of Equity Securities. Set forth below is information regarding the Company’s stock repurchases during the quarter ended March 31, 2020.
| Issuer Purchases of Equity Securities | ||||||||||||||||
| Total Number of Shares (or Units) Purchased |
Average Price Paid Per Share (or Unit) |
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs * |
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
|||||||||||||
| January 1 – 31, 2020 |
— | $ | — | — | 127,565 | |||||||||||
| February 1 – 29, 2020 |
— | — | — | 127,565 | ||||||||||||
| March 1 – 31, 2020 |
— | — | — | 127,565 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total |
— | $ | — | — | 127,565 | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| * | On March 19, 2008, the Registrant announced its intention to repurchase up to 5% of its outstanding common stock (approximately 226,050 split-adjusted shares) in the open market. On November 10, 2011, the Registrant announced that the Company had increased the number of shares which may be repurchased under its open-market program to 5% of its currently outstanding shares, or approximately 270,600 split-adjusted shares. There is no expiration date for this plan. |
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| Item 3. | Defaults Upon Senior Securities |
Not applicable
| Item 4. | Mine Safety Disclosures |
Not applicable
| Item 5. | Other Information |
None
| Item 6. | Exhibits |
| (1) | Incorporated by reference into this document from Exhibit 3(i) to the Registrant’s Form 10-K filed with the Commission on March 13, 2020. |
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| (2) | Incorporated herein by reference into this document from the identically numbered Exhibits to the Registrant’s Form 10, Registration Statement initially filed in paper with the Commission on April 29, 1996, Registration No. 0-28364. |
| (3) | Incorporated by reference into this document from the identically numbered exhibits to the Registrant’s Form 10-K filed with the Commission on March 15, 2010. |
| (4) | Incorporated by reference into this document from Exhibit 10.4 to the Registrant’s Form 10-K filed with the Commission on March 14, 2013, File No. 0-28364. |
| (5) | Incorporated by reference to Exhibit 10.6 to the Registrant’s Form 10-K filed with the Commission on March 23, 2000. |
| (6) | Incorporated by reference from the exhibits to the Current Report on Form 8-K filed with the Commission on September 5, 2017. |
| (7) | Incorporated herein by reference to Exhibit 10.11 to the Registrant’s Form 10-K filed with the Commission on March 22, 2004. |
| (8) | Incorporated by reference to this document from Exhibit 4.1 to Registrant’s Registration Statement on Form S-8 (File No. 333-134831) filed with the Commission on June 8, 2006. |
| (9) | Incorporated herein by reference from Exhibit 10.1 and 10.5 to the Registrant’s Current Report on Form 8-K filed on April 4, 2006. |
| (10) | Incorporated by reference from Exhibit 10.13 to the Registrant’s Form 10-Q filed with the Commission on November 7, 2013. |
| (11) | Incorporated by reference to Exhibit 10.1 to Post-Effective No. 1 to the Registrant’s Registration Statement on Form S-8 (File No. 333-195643) filed with the Commission on May 4, 2018. |
| (12) | Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on February 18, 2015. |
| (13) | Incorporated by reference into this document from the exhibits to the Registrant’s Current Report on Form 8-K filed with the Commission on January 16, 2018. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| NORWOOD FINANCIAL CORP. | ||||||
| Date: May 8, 2020 | By: | /s/ Lewis J. Critelli | ||||
| Lewis J. Critelli | ||||||
| President and Chief Executive Officer | ||||||
| (Principal Executive Officer) | ||||||
| Date: May 8, 2020 | By: | /s/ William S. Lance | ||||
| William S. Lance | ||||||
| Executive Vice President and | ||||||
| Chief Financial Officer | ||||||
| (Principal Financial Officer) | ||||||
49
BYLAWS
OF
NORWOOD FINANCIAL CORP.
as amended*
ARTICLE I. OFFICES
1.1 Registered Office and Registered Agent. The registered office of Norwood Financial Corp. (the “Company”) shall be located in the Commonwealth of Pennsylvania at such place as may be fixed from time to time by the board of directors of the Company (the “Board” or “Board of Directors”) upon filing of such notices as may be required by law, and the registered agent shall have a business office identical with such registered office.
1.2 Other Offices. The Company may have other offices within or outside the Commonwealth of Pennsylvania at such place or places as the Board of Directors may from time to time determine.
ARTICLE II. STOCKHOLDERS’ MEETING
2.1 Meeting Place. All meetings of the stockholders shall be held at the principal place of business of the Company, or at such other place within or without the Commonwealth of Pennsylvania as shall be determined by the Board of Directors and stated in the notice of such meeting.
2.2 Annual Meeting Time. The annual meeting of the stockholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held each year on such date and time as may be determined by the Board of Directors and stated in the notice of such meeting.
2.3 Organization and Conduct. Each meeting of the stockholders shall be presided over by the Chairman of the Board, or in the Chairman’s absence by the President, or if neither the Chairman nor the President is present, by any Vice President. The Secretary, or in the Secretary’s absence a temporary Secretary, shall act as secretary of each meeting of the stockholders. In the absence of the Secretary and any temporary Secretary, the chairman of the meeting may appoint any person present to act as secretary of the meeting. The chairman of any meeting of the stockholders, unless prescribed by law or regulation or unless the Board of Directors has otherwise determined, shall determine the order of the business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussions as shall be deemed appropriate by such chairman in the chairman’s sole discretion.
2.4 Notice.
(a) Notice of the date, time, and place of, and the general business to be conducted at, an annual or special meeting of stockholders shall be given by delivering personally, by facsimile transmission, or by mailing a written or printed notice of the same, at least ten (10) days prior to the meeting, to each stockholder of record entitled to vote at such meeting. When any stockholders’ meeting, either annual or special, is adjourned and a new record date is fixed for an adjourned meeting of stockholders, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the time and place of any meeting adjourned unless new business is to be transacted thereat or a new record date is fixed therefor, other than an announcement at the meeting at which such adjournment is taken.
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2.5 Voting Lists. The officer or agent having charge of the transfer books for shares of the Company shall make a complete list of the shareholders entitled to vote at any meeting of shareholders, arranged in alphabetical order, with the address of and the number of shares held by each. The list shall be produced and kept open at the time and place of the meeting and shall be subject to inspection of any shareholder during the whole time of the meeting for the purposes thereof.
2.6 Quorum. Except as otherwise required by law:
(a) A quorum at any annual or special meeting of stockholders shall consist of stockholders representing, either in person or by proxy, a majority of the outstanding capital stock of the Company entitled to vote at such meeting without regard to any shares for which a broker indicates on a proxy that it does not have discretionary authority as to such shares to vote on such matter (“Broker Non-votes”).
(b) The votes of a majority of those present, without regard to Broker Non-votes or votes of abstention, at any properly called meeting or adjourned meeting of stockholders, at which a quorum as defined above is present, shall be sufficient to transact business, unless such greater vote is required by these Bylaws, the Articles of Incorporation, or the laws of the Commonwealth of Pennsylvania.
2.7 Voting of Shares.
(a) Except as otherwise provided in these Bylaws or to the extent that voting rights of the shares of any class or classes are limited or denied by the Articles of Incorporation, each stockholder, on each matter submitted to a vote at a meeting of stockholders, shall have one vote for each share of capital stock registered in such person’s name on the books of the Company.
(b) Directors are to be elected by a plurality of votes cast by the shares entitled to vote in the election of directors at a meeting at which a quorum is present. Stockholders shall not be permitted to cumulate their votes for the election of directors. If, at any meeting of the stockholders, due to a vacancy or vacancies or otherwise, directors of more than one class of the Board of Directors are to be elected, each class of directors to be elected at the meeting shall be elected in a separate election by a plurality vote.
2.8 Fixing Record Date. The Board of Directors may fix a time prior to the date of any meeting of shareholders as a record date for the determination of the shareholders entitled to notice of, or to vote at, the meeting, which time, except in the case of an adjourned meeting, shall be not more than 90 days prior to the date of the meeting of shareholders. Only shareholders of record on the date fixed shall be so entitled notwithstanding any transfer of shares on the books of the Company after any record date fixed as provided in this subsection. The Board of Directors may similarly fix a record date for the determination of shareholders of record for any other purpose. When a determination of shareholders of record has been made as provided in this section for purposes of a meeting, the determination shall apply to any adjournment thereof unless the Board fixes a new record date for the adjourned meeting.
2.9 Proxies. A stockholder may vote either in person or by proxy executed or authenticated by the stockholder, or such person’s duly authorized attorney-in-fact and filed with or transmitted to the Secretary or his designated agent. A stockholder or his duly authorized attorney-in-fact may execute or authenticate a writing or transmit an electronic message authorizing another to act for him by proxy. A telegram, telex, cablegram, datagram, email, telephone or internet communication, or other means of electronic transmission from a shareholder or attorney-in-fact, or a photographic, facsimile, or similar reproduction of a writing executed by a shareholder or attorney-in-fact may be treated as properly executed or authenticated for purposes of this section and shall be so treated if it sets forth or utilizes a confidential and unique identification number or other mark furnished by the Company to the shareholder for the purposes of a particular meeting or transaction. No proxy shall be valid after three years from the date of its execution, unless otherwise provided in the proxy.
2
2.10 Voting of Shares in the Name of Two or More Persons. Where shares are held jointly or as tenants in common by two or more persons as fiduciaries or otherwise, if only one or more of such persons is present in person or by proxy, all of the shares standing in the names of such persons shall be deemed to be represented for the purpose of determining a quorum and the Company shall accept as the vote of all such shares the votes cast by such person or a majority of them and if in any case such persons are equally divided upon the manner of voting the shares held by them, the vote of such shares shall be divided equally among such persons, without prejudice to the rights of such joint owners or the beneficial owners thereof among themselves, except that, if there shall have been filed with the Secretary of the Company a copy, certified by an attorney-at-law to be correct, of the relevant portions of the agreements under which such shares are held or the instrument by which the trust or estate was created or the decree of court appointing them, or of a decree of court directing the voting of such shares, the persons specified as having such voting power in the latest such document so filed, and only such persons, shall be entitled to vote such shares but only in accordance therewith.
2.11 Voting of Shares by Certain Holders. Shares standing in the name of another corporation may be voted by an officer, agent, or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian, or conservator may be voted by such person, either in person or by proxy, without a transfer of such shares into such person’s name. Shares standing in the name of a trustee may be voted by the trustee, either in person or by proxy. Shares standing in the name of a receiver may be voted by such receiver without the transfer thereof into the receiver’s name if authority to do so is contained in an appropriate order of the court or other public authority by which such receiver was appointed. A stockholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee or nominee, and thereafter the pledgee or nominee shall be entitled to vote the shares so transferred.
2.12 Inspectors. For each meeting of stockholders, the Board of Directors may appoint the inspectors of election. If for any meeting the inspector(s) appointed by the Board of Directors shall be unable to act or the Board of Directors shall fail to appoint any inspector, one or more inspectors may be appointed at the meeting by the chairman thereof. The number of inspectors shall be one or three. Except for such duties as may be designated in the Articles of Incorporation to another person, such inspectors determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity, and effect of proxies, receive votes or ballots, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes, determine the result and do such acts as may be proper to conduct the election or vote with fairness to all shareholders. If there are three inspectors, the decision, act, or certificate of a majority shall be effective in all respects as the decision, act, or certificate of all. Inspectors need not be stockholders.
2.13 Action By Shareholders Without a Meeting. 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 as set forth in the Articles of Incorporation, which provisions are incorporated herein with the same effect as if they were set forth herein.
Section 2.14 Meetings Of Stockholders By Internet or Electronic Communications.
(a) Notwithstanding anything in these Bylaws to the contrary, the Company may allow stockholders to participate in an annual meeting of stockholders or a special meeting of
3
stockholders by means of the Internet or other electronic communications technology in a fashion pursuant to which the stockholders have the opportunity to read or hear the proceedings substantially concurrently with their occurrence, vote on matters submitted to the stockholders, pose questions to the directors and make appropriate motions and comment on the business of the meeting.
(b) Participation in a meeting of stockholders by the means authorized by subsection (a) of this section constitutes presence in person at the meeting for quorum and voting purposes.
(c) Notwithstanding anything herein to the contrary, the Board of Directors may determine that a meeting of stockholders will not be held at any particular geographic location, but instead may be held solely by means of the Internet or other electronic communications technology in a fashion pursuant to which the stockholders have the opportunity to read or hear the proceedings substantially concurrently with their occurrence, vote on matters submitted to the stockholders, pose questions to the directors and make appropriate motions and comment on the business of the meeting.
(d) The presence or participation, including voting and taking other action, at a meeting of shareholders or the expression of consent or dissent to corporate action by a shareholder by conference telephone or other electronic means, including, without limitation, the Internet, shall constitute the presence of, or vote or action by, or consent or dissent of the shareholder.
ARTICLE III. CAPITAL STOCK
3.1 Certificates. The shares of the Company’s capital stock may be represented by certificates or uncertificated. Certificates of stock shall be issued in numerical order, and shall be signed by the President or a Vice President, and the Secretary or the Treasurer, and may be sealed with the seal of the Company or a facsimile thereof. The signatures of such officers may be facsimiles if the certificate is signed (which signatures may be manual or by facsimile) on behalf of a transfer agent, or registered by a registrar, other than the Company itself or an employee of the Company. If an officer who has signed or whose facsimile signature has been placed upon such certificate ceases to be an officer of the Company before the certificate is issued, it may be issued by the Company with the same effect as if the person were an officer on the date of issue. Each certificate of stock shall state:
(a) that the Company is incorporated under the laws of the Commonwealth of Pennsylvania;
(b) the name of the person to whom issued;
(c) the number and class of shares and the designation of the series, if any, which such certificate represents;
(d) the par value of each share represented by such certificate, or a statement that such shares are without par value; and
(e) that the Company will furnish to any shareholder upon request and without charge, a full statement of the designations, preferences, limitations, and relative rights of each class authorized to be issued.
3.2. Uncertificated Shares. The Board of Directors may authorize the issuance of uncertificated shares by the Company, and may prescribe procedures for the issuance and registration of transfer thereof, and with respect to such other matters relating to uncertificated shares as the Board of Directors
4
may deem appropriate. No such authorization shall affect previously issued and outstanding shares represented by certificates until such certificates shall have been surrendered to the Company. Within a reasonable time after the issuance or transfer of any uncertificated shares, the Company shall issue or cause to be issued to the holder of such shares a written statement of the information required to be included on stock certificates under the laws of the Commonwealth of Pennsylvania and these Bylaws. Notwithstanding the adoption of any resolution providing for uncertificated shares, each registered holder of stock represented by uncertificated shares shall be entitled, upon request to the custodian of the stock transfer books of the Company, or other person designated as the custodian of the records of uncertificated shares, to have physical certificates representing such shares registered in such holder’s name.
3.3 Transfers.
(a) Transfers of stock shall be made only upon the stock transfer books of the Company, kept at the registered office of the Company or at its principal place of business, or at the office of its transfer agent or registrar and, in the case of certificated shares, before a new certificate is issued, the old certificate shall be surrendered for cancellation. The Board of Directors may, by resolution, open a share register in any state of the United States, and may employ an agent or agents to keep such register, and to record transfers of shares therein.
(b) Certificated shares of stock shall be transferred by delivery of the certificates therefor, accompanied either by an assignment in writing on the back of the certificate or an assignment separate from the certificate, or by a written power of attorney to sell, assign, and transfer the same, signed by the holder of said certificate. No shares of certificated stock shall be transferred on the books of the Company until the outstanding certificates therefor have been surrendered to the Company.
3.4 Registered Owner. Registered stockholders shall be treated by the Company as the holders in fact of the stock standing in their respective names and the Company shall not be bound to recognize any equitable or other claim to or interest in any share on the part of any other person, whether or not it shall have express or other notice thereof, except as expressly provided below or by the laws of the Commonwealth of Pennsylvania. The Board of Directors may adopt by resolution a procedure whereby a stockholder of the Company may certify in writing to the Company that all or a portion of the shares registered in the name of such stockholder are held for the account of a specified person or persons. The resolution shall set forth:
(a) The classification of stockholders who may certify;
(b) The purpose or purposes for which the certification may be made;
(c) The form of certification and information to be contained therein;
(d) If the certification is with respect to a record date or closing of the stock transfer books, the date within which the certification must be received by the Company; and
(e) Such other provisions with respect to the procedure as are deemed necessary or desirable.
Upon receipt by the Company of a certification complying with a resolution meeting the above requirements, the persons specified in the certification shall be deemed, for the purpose or purposes set forth in the certification, to be the holders of record of the number of shares specified in place of the stockholder making the certification.
5
3.5 Mutilated, Lost, or Destroyed Certificates. In case of any mutilation, loss, or destruction of any certificate of stock, another may be issued in its place upon receipt of proof of such mutilation, loss, or destruction. The Board of Directors may impose conditions on such issuance and may require the giving of a satisfactory bond or indemnity to the Company in such sum as the Board might determine, or the Board may establish such other procedures as it deems necessary.
3.6 Fractional Shares or Scrip. The Company may (a) issue fractions of a share which shall entitle the holder a proportional interest to exercise voting rights, to receive dividends thereon, and to participate in any of the assets of the Company in the event of liquidation; (b) arrange for the disposition of fractional interests by those entitled thereto; (c) pay in cash the fair value of fractions of a share as of the time when those entitled to receive such shares are determined; or (d) issue scrip in registered or bearer form which shall entitle to holder to receive a certificate for a full share upon the surrender of such scrip aggregating a full share.
3.7 Shares of Another Company. Shares owned by the Company in another corporation, domestic or foreign, may be voted by such officer, agent, or proxy as the Board of Directors may determine or, in the absence of such determination, by the President of the Company.
ARTICLE IV. BOARD OF DIRECTORS
4.1 Number and Powers. The management of all the affairs, property, and interest of the Company shall be vested in a Board of Directors. The Board of Directors shall be divided into three classes as nearly equal in number as possible. The initial Board of Directors shall consist of nine (9) persons. The classification and term of the directors shall be as set forth in the Articles of Incorporation, which provisions are incorporated herein with the same effect as if they were set forth herein. Directors must own no less than twelve (12) shares of the voting stock of the Company. Such shares shall be kept on deposit in the vault of the Company. Any director shall cease to act when no longer holding such shares, which fact shall be reported to the Board by the Secretary, whereupon the Board shall declare the seat of such director vacant. Directors need not be residents of the Commonwealth of Pennsylvania. In addition to the powers, authorities, and duties expressly conferred upon it by these Bylaws and the Articles of Incorporation, the Board of Directors may exercise all such powers of the Company and do all such lawful acts and things as are not by statute or by the Articles of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders.
In discharging the powers and duties of their respective positions, the Board of Directors, committees of the Board of Directors, and individual directors may, in considering the best interests of the Company, consider to the extent they deem appropriate the effects of any action upon any and all groups affected by such action, including stockholders, employees, suppliers, customers, and creditor of the Company, and upon the communities in which offices or other establishments of the Company are located; the short-term and long-term interests of the Company; the resources, intent, and conduct (past, stated, and potential) of any person seeking to acquire control of the Company; and any and all other factors, provided however, the Board of Directors, committees of the Board of Directors, or any individual director shall not be required, in considering the best interests of the Company or the effects of any action, to regard any interest or interests of any particular group affected by the action as a dominant or controlling interest or factor.
4.2 Change of Number. The number of directors may at any time be increased or decreased by a vote of two-thirds of the Board of Directors, provided that no decrease shall have the effect of shortening the term of any incumbent director except as provided in Sections 4.4 and 4.5 hereunder. Notwithstanding anything to the contrary contained within these Bylaws, the number of directors may neither be less than five nor more than 15.
6
4.3 Resignation. Any director may resign at any time by sending a written notice of such resignation to the home office of the Company addressed to the Chairman or the President. Unless otherwise specified therein, such resignation shall take effect upon receipt thereof by the Chairman or the President.
4.4 Vacancies. All vacancies in the Board of Directors shall be filled in the manner provided in the Articles of Incorporation, which provisions are incorporated herein with the same effect as if they were set forth herein.
4.5 Removal of Directors. Directors may be removed in the manner provided in the Articles of Incorporation, which provisions are incorporated herein with the same effect as if they were set forth herein.
4.6 Regular Meetings. Regular meetings of the Board of Directors or any committee thereof may be held without notice at the principal place of business of the Company or at such other place or places, either within or without the Commonwealth of Pennsylvania, as the Board of Directors or such committee, as the case may be, may from time to time designate. The annual meeting of the Board of Directors shall be held without notice immediately after the adjournment of the annual meeting of stockholders.
4.7 Special Meetings.
(a) Special meetings of the Board of Directors may be called at any time by the Chairman, President, or by a majority of the authorized number of directors, to be held at the principal place of business of the Company or at such other place or places as the Board of Directors or the person or persons calling such meeting may from time to time designate. Notice of all special meetings of the Board of Directors shall be given to each director at least five (5) days prior to such meeting by telegram, telex, cablegram, courier, facsimile, or other similar communication, by letter, or personally. Such notice need neither specify the business to be transacted at, nor the purpose of, the meeting.
(b) Special meetings of any committee may be called at any time by such person or persons and with such notice as shall be specified for such committee by the Board of Directors, or in the absence of such specification, in the manner and with the notice required for special meetings of the Board of Directors.
4.8 Quorum. A majority of the Board of Directors shall be necessary at all meetings to constitute a quorum for the transaction of business.
4.9 Waiver of Notice. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. A waiver of notice signed by the director or directors, whether before, during, or after the time stated for the meeting, shall be equivalent to the giving of notice.
4.10 Registering Dissent. A director who is present at a meeting of the Board of Directors at which action on a corporate matter is taken shall be presumed to have assented to such action unless such director’s dissent is entered in the minutes of the meeting, or unless the director files a written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof, or unless the director delivers a dissent in writing to the Secretary of the Company immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action.
4.11 Executive, Audit, and Other Committees. Standing or special committees may be appointed by the Board of Directors from its own number from time to time, and the Board of Directors may from time to time invest such committees with such powers as it
7
may see fit, subject to such conditions as may be prescribed by the Board. An Executive Committee may be appointed by resolution passed by a majority of the full Board of Directors. It shall have and exercise all of the authority of the Board of Directors, except in reference to the submission of any action requiring the approval of stockholders, the creation or filling of vacancies on the Board of Directors, the adoption, amendment, or repeal of these Bylaws, the amendment or repeal of any resolution of the Board which, by its terms, is only amendable or repealable by the entire Board, or any action on matters committed by these Bylaws or resolution of the Board to another committee of the Board. An Audit Committee shall be appointed by resolution passed by a majority of the full Board of Directors, and at least a majority of the members of the Audit Committee shall be directors who are not also officers of the Company. The Audit Committee shall review the records and affairs of the Company to determine its financial condition, shall review the Company’s systems of internal control with management and the Company’s independent auditors, and shall monitor the Company’s adherence in accounting and financial reporting to generally accepted accounting principles, as well as such other duties as may be assigned to it by the Board of Directors. All committees appointed by the Board of Directors shall keep regular minutes of the transactions of their meetings and shall cause them to be recorded in books kept for that purpose in the office of the Company. The designation of any such committee, and the delegation of authority thereto, shall not relieve the Board of Directors, or any member thereof, of any responsibility imposed by law.
4.12 Remuneration. The Board of Directors, by the affirmative vote of a majority of the directors then in office, and irrespective of any personal interest of any of its members, shall have the authority to establish reasonable fee for all directors for services to the Company as directors, officers, or otherwise, or to delegate such authority to any appropriate committee; provided, that nothing herein contained shall be construed to preclude any director from serving the Company in any other capacity and receiving compensation therefor. Members of standing or special committees may be allowed like compensation for attending committee meetings.
4.13 Action by Directors Without a Meeting. Any action which may be taken at a meeting of the directors, or of a committee thereof, may be taken without a meeting if a consent in writing, setting forth the action so taken or to be taken, shall be signed by all of the directors, or all of the members of the committee, as the case may be. Such consent shall have the same effect as a unanimous vote.
4.14 Action of Directors by Communications Equipment. Any action which may be taken at a meeting of directors, or of a committee thereof, may be taken by means of a conference telephone or similar communications equipment by means of which persons participating in the meeting can hear each other at the same time. Participation in a meeting pursuant to this section shall constitute presence in person at the meeting
ARTICLE V. OFFICERS
5.1 Designations. The officers of the Company shall be the Chairman of the Board, a President, a Secretary, and a Treasurer, as well as such Vice Presidents (including Executive and Senior Vice Presidents), Assistant Secretaries, and Assistant Treasurers as the Board may designate, who shall be elected for one year by the directors at their first meeting after the annual meeting of stockholders, and who shall hold office until their successors are elected and qualify. Any two or more offices may be held by the same person, except that the offices of President and Secretary and President and Treasurer may not be held by the same person. The President and Chairman of the Board shall be members of the Board.
5.2 Powers and Duties. The officers of the Company shall have such authority and perform such duties as the Board of Directors may from time to time authorize or determine. In the absence of action by the Board of Directors, the officers shall have such powers and duties as generally pertain to their respective offices.
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5.3 Delegation. In the case of absence or inability to act of any officer of the Company and of any person herein authorized to act in such officer’s place, the Board of Directors may from time to time delegate the powers or duties of such officer to any other officer or any director or other person whom it may select.
5.4 Vacancies. Vacancies in any office arising from any cause may be filled by the Board of Directors at any regular or special meeting of the Board.
5.5 Other Officers. The Board may appoint such other officers and agents as it shall deem necessary or expedient, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors.
5.7 Term—Removal. The officers of the Company shall hold office until their successors are chosen and qualified. Any officer or agent elected or appointed by the Board of Directors may be removed at any time, with or without cause, by the affirmative vote of a majority of the whole Board of Directors, but such removal shall be without prejudice to the contractual rights, if any, of the person so removed. The election or appointment of an officer or agent shall not in itself create contractual rights.
ARTICLE VI. FISCAL YEAR; ANNUAL AUDIT
The fiscal year of the Company shall end on the 31st day of December of each year. The Company shall be subject to an annual audit as of the end of its fiscal year by independent public accountants appointed by and responsible to the Board of Directors. The appointment of such accountants shall be subject to annual ratification by the stockholders.
ARTICLE VII. DIVIDENDS AND FINANCE
7.1 Dividends. Dividends may be declared by the Board of Directors and paid by the Company out of retained earnings of the Company subject to the conditions and limitations imposed by the laws of the Commonwealth of Pennsylvania.
7.2. Reserves. Before making any distribution of earned surplus, there may be set aside out of the earned surplus of the Company such sum or sums as the directors from time to time in their absolute discretion deem expedient as a reserve fund to meet contingencies, or for equalizing dividends, or for maintaining any property of the Company, or for any other purpose. Any earned surplus of any year not distributed as dividends shall be deemed to have thus been set apart until otherwise disposed of by the Board of Directors.
7.3 Depositories. The monies of the Company shall be deposited in the name of the Company in such bank or banks or trust company or trust companies as the Board of Directors shall designate, and shall be drawn out only by check or other order for payment of money signed by such persons and in such manner as may be determined by resolution of the Board of Directors.
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ARTICLE VIII. NOTICES
Except as may otherwise be required by law, any notice to any stockholder or director may be delivered personally, by mail, by telegram, telex, or TWX (with answerback received), or by courier service or facsimile transmission. If sent by mail, telegraph, or courier service, the notice shall be deemed to have been given to the person when deposited in the United States mail or with a telegraph or courier service for delivery to that person or, in the case of telex or TWX, when dispatched to the address of the addressee at such persons last known address (or to such persons telex, TWX, or facsimile number) in the records of the Company, with postage or courier or other charges thereon prepaid.
ARTICLE IX. SEAL
The corporate seal of the Company shall be in such form and bear such inscription as may be adopted by resolution of the Board of Directors, or by usage of the officers on behalf of the Company.
ARTICLE X. BOOKS AND RECORDS
The Company shall keep correct and complete books and records of account and shall keep minutes and proceedings of meetings of its stockholders and Board of Directors; and it shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its stockholders, giving the names and addresses of all stockholders and the number and class of the shares held by each. Any books, records, and minutes may be in written form or any other form capable of being converted into written form within a reasonable time.
ARTICLE XI. AMENDMENTS
These Bylaws may be altered, amended or repealed only as set forth in the Articles of Incorporation, which provisions are incorporated herein with the same effect as if they were set forth herein.
* Amended on April 14, 2020
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Exhibit 31.1
CERTIFICATION
I, Lewis J. Critelli, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q 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 the 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: May 8, 2020 | /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 quarterly report on Form 10-Q 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 the 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: May 8, 2020 | /s/ William S. Lance | |||||
| William S. Lance | ||||||
| Executive Vice President and 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 Quarterly Report of Norwood Financial Corp. (the Company) on Form 10-Q for the period ending March 31, 2020 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 |
May 8, 2020