f10q_033116-0160.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016
OR
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________ to _________
 
Commission File No. 0-28364

NORWOOD FINANCIAL CORP.
(Exact Name of Registrant as Specified in its Charter)

Pennsylvania
 
23-2828306
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer Identification No.)

717 Main Street, Honesdale, Pennsylvania
   
18431
 
(Address of Principal Executive Offices)
   
(Zip Code)
 

Registrant’s Telephone Number, Including Area Code: (570) 253-1455

N/A
Former name, former address and former fiscal year, if changed since last report

    Indicate by check (x) whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]   No [  ]
 
    Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).Yes  [X]  No   [  ]

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

Large accelerated filer  [  ]                                                                Accelerated filer   [X]
Non-accelerated filer   [  ]                                                                Smaller reporting company   [  ]
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    [ ]  Yes[X]  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 2, 2016
          Common stock, par value $0.10 per share                                                3,691,224
 
 

 



NORWOOD FINANCIAL CORP.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2016
     
   
 
 Page
Number
PART I -
CONSOLIDATED FINANCIAL INFORMATION OF NORWOOD
FINANCIAL CORP.
 
     
Item 1.
Financial Statements (unaudited)
  3
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
32
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
43
Item 4.
Controls and Procedures
44
PART II -
OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
45
Item 1A.
Risk Factors
45
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
45
Item 3.
Defaults upon Senior Securities
45
Item 4.
Mine Safety Disclosures
45
Item 5.
Other Information
45
Item 6.
Exhibits
45
     
Signatures
 
47



 
2

 


PART I.  FINANCIAL INFORMATION
Item 1. Financial Statements
NORWOOD FINANCIAL CORP.
Consolidated Balance Sheets  (unaudited)
(dollars in thousands, except share and per share data)

             
             
   
March 31,
   
December 31,
 
   
2016
   
2015
 
ASSETS
           
Cash and due from banks
  $ 8,709     $ 9,744  
Interest bearing deposits with banks
    254       266  
Cash and cash equivalents
    8,963       10,010  
                 
Securities available for sale, at fair value
    143,948       138,851  
Loans receivable
    565,787       559,925  
Less:  Allowance for loan losses
    7,642       7,298  
Net loans receivable
    558,145       552,627  
Regulatory stock, at cost
    2,982       3,412  
Bank premises and equipment, net
    6,390       6,472  
Bank owned life insurance
    18,951       18,820  
Accrued interest receivable
    2,487       2,363  
Foreclosed real estate owned
    2,855       2,847  
Goodwill
    9,715       9,715  
Other intangibles
    260       285  
Deferred tax asset
    3,456       3,669  
Other assets
    1,952       1,434  
TOTAL ASSETS
  $ 760,104     $ 750,505  
                 
LIABILITIES
               
Deposits:
               
Non-interest bearing demand
  $ 113,225     $ 107,814  
Interest-bearing
    447,266       443,095  
Total deposits
    560,491       550,909  
Short-term borrowings
    52,672       53,235  
Other borrowings
    38,856       41,126  
Accrued interest payable
    925       957  
Other liabilities
    4,462       3,280  
TOTAL LIABILITIES
    657,406       649,507  
                 
STOCKHOLDERS’ EQUITY
               
Common stock, $.10 par value per share,
               
 authorized 10,000,000 shares; issued 3,724,668  shares
    373       373  
Surplus
    35,390       35,351  
Retained earnings
    66,143       65,412  
Treasury stock at cost: 2016: 35,649 shares,
               
   2015: 23,311 shares
    (987 )     (626 )
Accumulated other comprehensive income
    1,779       488  
TOTAL STOCKHOLDERS’ EQUITY
    102,698       100,998  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 760,104     $ 750,505  

See accompanying notes to the unaudited consolidated financial statements.

 
3

 


NORWOOD FINANCIAL CORP.
Consolidated Statements of Income  (unaudited)
(dollars in thousands, except per share data)
   
Three Months Ended
 
 
 
March 31,
 
   
2016
   
2015
 
INTEREST INCOME
           
Loans receivable, including fees
  $ 6,135     $ 6,061  
Securities
    890       1,023  
Other
    1       4  
Total interest income
    7,026       7,088  
                 
INTEREST EXPENSE
               
Deposits
    581       604  
Short-term borrowings
    39       12  
Other borrowings
    231       165  
Total interest expense
    851       781  
NET INTEREST INCOME
    6,175       6,307  
PROVISION FOR LOAN LOSSES
    450       620  
NET INTEREST INCOME AFTER
               
PROVISION FOR LOAN LOSSES
    5,725       5,687  
                 
OTHER INCOME
               
Service charges and fees
    574       572  
Income from fiduciary activities
    102       105  
Net realized gains on sales of securities
    64       311  
Gains on sale of loans and servicing rights, net
    30       18  
Earnings and proceeds on bank owned life insurance
    167       165  
Other
    130       108  
Total other income
    1,067       1,279  
                 
OTHER EXPENSES
               
Salaries and employee benefits
    2,303       2,137  
Occupancy, furniture & equipment, net
    495       556  
Data processing
    271       234  
Taxes, other than income
    205       175  
Professional fees
    151       183  
Federal Deposit Insurance Corporation insurance
    115       95  
Foreclosed real estate owned
    31       158  
Amortization of intangibles
    24       28  
Other
    754       621  
Total other expenses
    4,349       4,187  
                 
INCOME BEFORE INCOME TAXES
    2,443       2,779  
INCOME TAX EXPENSE
    567       738  
NET INCOME
  $ 1,876     $ 2,041  
                 
BASIC EARNINGS PER SHARE
  $ 0.51     $ 0.55  
                 
DILUTED EARNINGS PER SHARE
  $ 0.51     $ 0.55  

See accompanying notes to the unaudited consolidated financial statements.


 
4

 
NORWOOD FINANCIAL CORP.
Consolidated Statements of Comprehensive Income (unaudited)
(dollars in thousands)


   
Three Months Ended
 
   
March 31,
 
   
2016
   
2015
 
Net income
  $ 1,876     $ 2,041  
Other comprehensive income:
               
Investment securities available for sale:
               
Unrealized holding gains
    2,019       989  
Tax effect
    (686 )     (335 )
Reclassification of gains recognized in net income
    (64 )     (311 )
Tax effect
    22       106  
Other comprehensive income:
    1,291       449  
Comprehensive Income
  $ 3,167     $ 2,490  

See accompanying notes to the unaudited consolidated financial statements.

 
5

 


NORWOOD FINANCIAL CORP.
Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
Three Months Ended March 31, 2016
(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, 2015
    3,724,668     $ 373     $ 35,351     $ 65,412       23,311     $ (626 )   $ 488     $ 100,998  
Net Income
                            1,876                               1,876  
Other comprehensive income
                                                    1,291       1,291  
Cash dividends declared ($.31 per share)
                            (1,145 )                             (1,145 )
Compensation expense related to restricted stock
                    22                                       22  
Acquisition of  treasury  stock
                                    15,538       (447 )             (447 )
Stock options exercised
                    (3 )             (3,200 )     86               83  
Tax benefit of stock options
                    2                                       2  
Compensation expense related to stock options
                    18                                       18  
 
                                                               
Balance, March 31, 2016
    3,724,668     $ 373     $ 35,390     $ 66,143       35,649     $ (987 )   $ 1,779     $ 102,698  




See accompanying notes to the unaudited consolidated financial statements.

 
6

 


NORWOOD FINANCIAL CORP.
Consolidated Statements of Cash Flows (Unaudited)

             
(dollars in thousands)
           
 
 
Three Months Ended March 31,
 
   
2016
   
2015
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net Income
  $ 1,876     $ 2,041  
Adjustments to reconcile net income to net cash provided by operating  activities:
               
Provision for loan losses
    450       620  
Depreciation
    137       139  
Amortization of intangible assets
    24       28  
Deferred income taxes
    (452 )     (252 )
Net amortization of securities premiums and discounts
    236       233  
Net realized gain on sales of securities
    (64 )     (311 )
Earnings and proceeds on bank owned life insurance
    (167 )     (165 )
(Gain) loss on sales of fixed assets and foreclosed real estate owned
    (6 )     65  
Gain on sale of mortgage loans
    (32 )     (24 )
Mortgage loans originated for sale
    (981 )     (780 )
Proceeds from sale of mortgage loans originated for sale
    1,013       804  
Compensation expense related to stock options
    18       17  
Compensation expense related to restricted stock
    22       14  
Increase in accrued interest receivable and other assets
    (591 )     (341 )
Increase in accrued interest payable and other liabilities
    1,152       518  
Net cash provided by operating activities
    2,635       2,606  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Securities available for sale:
               
Proceeds from sales
    15,284       13,976  
Proceeds from maturities and principal reductions on mortgage-backed securities
    3,383       2,876  
Purchases
    (21,980 )     (15,375 )
Purchase of regulatory stock
    (994 )     (327 )
Redemption of regulatory stock
    1,424       203  
Net increase in loans
    (6,032 )     (18,387 )
Purchase of premises and equipment
    (55 )     (37 )
Proceeds from sales of fixed assets and foreclosed real estate owned
    48       2,031  
Net cash used in investing activities
    (8,922 )     (15,040 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net increase in deposits
    9,582       10,262  
Net (decrease)  increase in short-term borrowings
    (563 )     4,886  
Repayments of other borrowings
    (2,270 )     (393 )
Proceeds from other borrowings
    -       6,000  
Stock options exercised
    83       154  
Tax benefit of stock options exercised
    2       6  
Purchase of treasury stock
    (447 )     (127 )
Cash dividends paid
    (1,147 )     (1,103 )
Net cash  provided by financing activities
    5,240       19,685  
(Decrease) increase in cash and cash equivalents
    (1,047 )     7,251  
                 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    10,010       12,376  
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 8,963     $ 19,627  

See accompanying notes to the unaudited consolidated financial statements.


 
7

 

NORWOOD FINANCIAL CORP.
Consolidated Statements of Cash Flows (Unaudited) (continued)


             
(dollars in thousands)
           
 
Three Months Ended March 31,
 
 
2016
 
2015
 
Supplemental Disclosures of Cash Flow Information
           
Cash payments for:
           
Interest on deposits and borrowings
  $ 883     $ 792  
Income taxes paid, net of refunds
    -       201  
 Supplemental Schedule of Noncash Investing Activities
               
Transfers of loans to foreclosed real estate and repossession of other assets
  $ 50     $ 68  
Cash dividends declared
    1,145       1,141  


See accompanying notes to the unaudited consolidated financial statements.


 
8

 


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., Norwood Settlement Services, LLC,  and WTRO Properties, Inc.   All significant intercompany transactions have been eliminated in consolidation.

The accompanying unaudited consolidated  financial statements have been prepared in conformity with generally accepted accounting principles for interim financial statements and with instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period.  Actual results could differ from those estimates.  The financial statements reflect, in the opinion of management, all normal, recurring adjustments necessary to present fairly the financial position and results of operations of the Company.  The operating results for the three month period ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 or any other future interim period.

These statements should be read in conjunction with the consolidated financial statements and related notes which are incorporated by reference in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2015.
 
2.         Earnings Per Share
Basic earnings per share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the period.  Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.  Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.

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

(in thousands)
 
   
Three Months Ended
 
   
March 31,
 
   
2016
   
2015
 
Weighted average shares outstanding
    3,700       3,680  
Less: Unvested restricted shares
    14       -  
Basic EPS weighted average shares outstanding
    3,686       3,680  
                 
                 
Basic EPS weighted average shares outstanding
    3,686       3,680  
Add:  Dilutive effect of stock options
    4       6  
Diluted EPS weighted average shares outstanding
    3,690       3,686  
                 
 
 
 
9

 

 
Stock options with strike prices ranging from $27.55 to $29.08 which had no intrinsic value, because their effect would be anti-dilutive and therefore would not be included in the diluted EPS calculation, were 75,574 as of March 31, 2016 based upon the closing price of Norwood common stock of $27.36 per share on March 31, 2016. As of March 31, 2015 there were 49,700 stock options with strike prices ranging from $28.41 to $29.08 which were anti-dilutive based on the closing price of Norwood stock of $27.69 on March 31, 2015.

3.         Stock-Based Compensation

No awards were granted during the three month period ending March 31, 2016. As of March 31, 2016, there was $53,000 of total unrecognized compensation cost related to non-vested options granted in 2015 under the 2014 Equity Incentive Plan, which will be fully amortized by December 31, 2016. Compensation costs related to stock options amounted to $18,000 and $17,000 during the three-months periods ended March 31, 2016 and 2015, respectively.

A summary of stock options from all plans, adjusted for stock dividends declared, is shown below.

                     
                     
     
Weighted
         
     
Average Exercise
 
Weighted Average
 
Aggregate
     
Price
 
Remaining
 
Intrinsic Value
 
Options
 
Per Share
 
Contractual Term
 
($000)
                     
Outstanding at January 1, 2016
 194,521
 
$
 26.91
 
 5.2
Yrs.
 
$
 363
Granted
 -
   
 -
 
 -
     
 -
Exercised
 (3,200)
   
 25.80
 
 5.3
     
 83
Forfeited
 (1,000)
   
 29.08
 
 8.7
     
 29
Outstanding at March 31, 2016
 190,321
 
$
 26.91
 
 4.9
 Yrs.
 
$
 164
                     
Exercisable at March 31, 2016
 175,821
 
$
 26.78
 
 4.5
 Yrs.
 
$
 164

 
Intrinsic value represents the amount by which the market price of the stock on the measurement date exceeded the exercise price of the option.  The stock price was $27.36 as of March 31, 2016 and $28.75 as of December 31, 2015.

A summary of the Company’s restricted stock activity and related information for the three month period ended March 31, 2016 is as follows:


         
         
       
Weighted-Average
 
Number of
   
Grant Date
 
Restricted Stock
   
Fair Value
Outstanding, January 1, 2016
 13,810
 
$
 28.82
Granted
 -
   
 -
Vested
 -
   
 -
Forfeited
 -
   
 -
Non-vested at March 31, 2016
 13,810
 
$
 28.82


The expected future compensation expense relating to the 13,810 shares of non-vested restricted stock outstanding as of March 31, 2016 is $376,000.  This cost will be recognized over the remaining vesting period
 
 
10

 
 
of 4.75 years.  Compensation costs related to restricted stock amounted to $22,000 and $14,000 during the three-month periods ended March 31, 2016 and 2015, respectively.

4.         Accumulated Other Comprehensive Income

The following table presents the changes in accumulated other comprehensive income (in thousands) by component net of tax for the three months ended March 31, 2016 and 2015:

       
       
   
Unrealized gains (losses) on
 
   
available for sale
 
   
securities (a)
 
Balance as of December 31, 2015
  $ 488  
Other comprehensive income before reclassification
    1,333  
Amount reclassified from accumulated other comprehensive income
    (42 )
Total other comprehensive income
    1,291  
Balance as of March 31, 2016
  $ 1,779  
         
         
         
   
Unrealized gains (losses) on
 
   
available for sale
 
   
securities (a)
 
Balance as of  December 31, 2014
  $ 462  
Other comprehensive income before reclassification
    654  
Amount reclassified from accumulated other comprehensive
    (205 )
Total other comprehensive income
    449  
Balance as of March 31, 2015
  $ 911  

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

The following table presents significant amounts reclassified out of each component of accumulated other comprehensive income (in thousands) for the three months ended March 31, 2016 and 2015:


                   
                   
   
Amount Reclassified
   
   
From Accumulated
 
Affected Line Item in
   
Other
 
Consolidated
   
Comprehensive
 
Statements
Details about other comprehensive income
 
Income (a)
 
of Income
                   
     
Three months ended
   
     
March 31,
   
     
2016
     
2015
   
Unrealized gains on available for sale securities
 
$
 64
   
$
 311
 
Net realized gains on sales of securities
     
 (22)
     
 (106)
 
Income tax expense
   
$
 42
   
$
 205
 
 


(a)  Amounts in parentheses indicate debits to net income


 
11

 

 
5.         Off-Balance Sheet Financial Instruments and Guarantees

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

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


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


(in thousands)
March 31,
 
 
2016
 
2015
 
             
Commitments to grant loans
  $ 20,803     $ 25,951  
Unfunded commitments under lines of credit
    49,644       48,873  
Standby letters of credit
    5,321       5,776  
    $ 75,768     $ 80,600  

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since some of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.  The Bank evaluates each customer’s credit worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the customer and generally consists of real estate.

The Bank does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit.  Standby letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.  Generally, all letters of credit, when issued, have expiration dates within one year.  The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers.  The Bank, generally, holds collateral and/or personal guarantees supporting these commitments.  Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees.  The current amount of the liability as of March 31, 2016 for guarantees under standby letters of credit issued is not material.


 
12

 

6.         Securities

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

                         
                         
   
March 31, 2016
         
Gross
 
Gross
     
   
Amortized
 
Unrealized
 
Unrealized
 
Fair
   
Cost
 
Gains
 
Losses
 
Value
   
(In Thousands)
Available for Sale:
                       
States and political subdivisions
 
$
 59,563
 
$
 2,288
 
$
 (35)
 
$
 61,816
Corporate obligations
   
 4,906
   
 137
   
 -
   
 5,043
Mortgage-backed securities-
                       
government sponsored entities
   
 76,491
   
 466
   
 (217)
   
 76,740
Total debt securities
   
 140,960
   
 2,891
   
 (252)
   
 143,599
Equity securities-financial services
   
 292
   
 57
   
 -
   
 349
   
$
 141,252
 
$
 2,948
 
$
 (252)
 
$
 143,948
                         
                         


                         
                         
   
December 31, 2015
         
Gross
 
Gross
     
   
Amortized
 
Unrealized
 
Unrealized
 
Fair
   
Cost
 
Gains
 
Losses
 
Value
                         
   
(In Thousands)
Available for Sale:
                       
U.S. Government agencies
 
$
 9,275
 
$
 2
 
$
 (108)
 
$
 9,169
States and political subdivisions
   
 59,120
   
 1,747
   
 (112)
   
 60,755
Corporate obligations
   
 4,933
   
 45
   
 (4)
   
 4,974
Mortgage-backed securities-government
                       
sponsored entities
   
 64,491
   
 23
   
 (945)
   
 63,569
Total debt securities
   
 137,819
   
 1,817
   
 (1,169)
   
 138,467
Equity securities-financial services
   
 292
   
 92
   
 -
   
 384
   
$
 138,111
 
$
 1,909
 
$
 (1,169)
 
$
 138,851
                         
                         


 
13

 
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, 2016
 
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
$
 3,133
 
$
 (20)
 
$
 1,853
 
$
 (15)
 
$
 4,986
 
$
 (35)
Mortgage-backed securities-government sponsored agencies
 
 11,393
   
 (28)
   
 16,002
   
 (189)
   
 27,395
   
 (217)
 
$
 14,526
 
$
 (48)
 
$
 17,855
 
$
 (204)
 
$
 32,381
 
$
 (252)
 
 
                                   
                                   
 
December 31, 2015
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
U.S. Government agencies
$
 6,058
 
$
 (71)
 
$
 2,109
 
$
 (37)
 
$
 8,167
 
$
 (108)
States and political subdivisions
 
 9,086
   
 (99)
   
 1,417
   
 (13)
   
 10,503
   
 (112)
Corporate obligations
 
 2,221
   
 (4)
   
 -
   
 -
   
 2,221
   
 (4)
Mortgage-backed securities-government sponsored agencies
 
 40,300
   
 (432)
   
 16,595
   
 (513)
   
 56,895
   
 (945)
 
$
 57,665
 
$
 (606)
 
$
 20,121
 
$
 (563)
 
$
 77,786
 
$
 (1,169)


At March 31, 2016, the Company has 12 debt securities in an unrealized loss position in the less than twelve months category and 19 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 2016.  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, 2016 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
   
 (In Thousands)
 
Amortized Cost
 
Fair Value
       
                         
                         
Due in one year or less
 
$
 640
 
$
 642
           
Due after one year through five years
   
 5,130
   
 5,282
           
Due after five years through ten years
   
 8,469
   
 8,723
           
Due after ten years
   
 50,230
   
 52,212
           
                         
Mortgage-backed securities-government sponsored agencies
   
 76,491
   
 76,740
           
   
$
 140,960
 
$
 143,599
           


 
14

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


   
Three Months
   
Ended March 31,
   
2016
 
2015
Gross realized gains
 
$
 64
 
$
 311
Gross realized losses
   
 -
   
 -
Net realized gain
 
$
 64
 
$
 311
Proceeds from sales of securities
 
$
 15,284
 
$
 13,976

 

 
7.        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:


 
Types of loans
 
 
(dollars in thousands)
 
 
 
                   
 
March 31, 2016
   
December 31, 2015
 
Real Estate Loans:
                     
Residential
$
 160,013
 
28.3
%
 
$
 161,820
 
28.9
%
Commercial
 
 281,667
 
49.7
     
 279,123
 
49.8
 
Construction
 
 18,999
 
3.4
     
 18,987
 
3.4
 
Commercial, financial and agricultural
 
 72,970
 
12.9
     
 71,090
 
12.7
 
Consumer loans to individuals
 
 32,443
 
 5.7
     
 29,231
 
5.2
 
Total loans
 
 566,092
 
 100.0
%
   
 560,251
 
100.0
%
Deferred fees, net
 
 (305)
         
 (326)
     
Total loans receivable
 
 565,787
         
 559,925
     
Allowance for loan losses
 
 (7,642)
         
 (7,298)
     
Net loans receivable
$
 558,145
       
$
 552,627
     



 
15

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

 
           
           
 
March 31, 2016
 
December 31, 2015
           
Outstanding Balance
$
 482
 
$
 498
Carrying Amount
$
 482
 
$
 498

There were no material increases or decreases in the expected cash flows of these loans since the acquisition date.  Since December 31, 2014, for loans that were acquired with or without specific evidence of deterioration in credit quality, adjustments to the allowance for loan losses have been accounted for through the allowance for loan loss adequacy calculation.

The Company maintains a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential impaired loans.  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 probably 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.

A loan is considered to be a troubled debt restructuring (“TDR”) loan when the Company grants a concession to the borrower because of the borrower’s financial condition that it would not otherwise consider.  Such concessions include the reduction of interest rates, forgiveness of principal or interest, or other modifications of interest rates that are less than the current market rate for new obligations with similar risk.

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, 2016 and December 31, 2015, foreclosed real estate owned totaled $2,855,000 and $2,847,000, respectively.  As of March 31, 2016, included within foreclosed real estate owned is $345,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end.  As of March 31, 2016, the Company has initiated formal foreclosure proceedings on $95,000 of consumer residential mortgages.


 
16

 

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
March 31, 2016
(In thousands)
                                   
  Individually evaluated for impairment
$
 26
 
$
 8,124
 
$
 -
 
$
 -
 
$
 -
 
$
 8,150
  Loans acquired with deteriorated credit quality
 
 133
   
 349
   
 -
   
 -
   
 -
   
 482
  Collectively evaluated for impairment
 
 159,854
   
 273,194
   
 18,999
   
 72,970
   
 32,443
   
 557,460
Total Loans
$
 160,013
 
$
 281,667
 
$
 18,999
 
$
 72,970
 
$
 32,443
 
$
 566,092


                                   
                                   
 
Real Estate Loans
                 
                   
Commercial
 
Consumer
     
 
Residential
 
Commercial
 
Construction
 
Loans
 
Loans
 
Total
 
(In thousands)
December 31, 2015
                                 
                                   
Individually evaluated for impairment
$
 28
 
$
 8,660
 
$
-
 
$
 42
 
$
-
 
$
 8,730
Loans acquired with deteriorated credit quality
 
 140
 
 
 358
 
 
-
 
 
-
 
 
-
 
 
 498
Collectively evaluated for impairment
 
 161,652
 
 
 270,105
 
 
 18,987
 
 
 71,048
 
 
 29,231
 
 
 551,023
Total Loans
$
 161,820
 
$
 279,123
 
$
 18,987
 
$
 71,090
 
$
 29,231
 
$
 560,251


 
17

 



The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable.  Also presented are the average recorded investments in the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired.


                 
                 
       
Unpaid
     
 
Recorded
 
Principal
 
Associated
 
Investment
 
Balance
 
Allowance
March 31, 2016
       
 (in thousands)
   
With no related allowance recorded:
               
Real Estate Loans
               
  Residential
$
 159
 
$
 165
 
$
 -
  Commercial
 
 2,775
   
 3,169
   
 -
Subtotal
 
 2,934
   
 3,334
   
 -
With an allowance recorded:
               
Real Estate Loans
               
Commercial
 
 5,698
   
 7,199
   
 1,644
Subtotal
 
 5,698
   
 7,199
   
 1,644
Total:
               
Real Estate Loans
               
  Residential
 
 159
   
 165
   
 -
  Commercial
 
 8,473
   
 10,368
   
 1,644
Total Impaired Loans
$
 8,632
 
$
 10,533
 
$
 1,644


                 
                 
       
Unpaid
     
 
Recorded
 
Principal
 
Associated
 
Investment
 
Balance
 
Allowance
December 31, 2015
       
 (in thousands)
   
With no related allowance recorded:
               
Real Estate Loans
               
Residential
$
 168
 
$
 173
 
$
 -
Commercial
 
 2,644
   
 4,610
   
 -
Commercial, financial and agriculture
 
 43
   
 43
   
 -
Subtotal
 
 2,855
 
 
 4,826
 
 
 -
With an allowance recorded:
               
Real Estate Loans
               
Commercial
 
 6,373
   
 6,446
   
 1,613
Subtotal
 
 6,373
   
 6,446
   
 1,613
Total:
               
Real Estate Loans
               
Residential
 
 168
   
 173
   
 -
Commercial
 
 9,017
   
 11,056
   
 1,613
Commercial, financial and agriculture
 
 43
   
 43
   
 -
Total Impaired Loans
$
 9,228
 
$
 11,272
 
$
 1,613


 
18

 



The following information for impaired loans is presented (in thousands) for the three months ended March 31, 2016 and 2015:

 
Average Recorded
 
Interest Income
 
Investment
 
Recognized
 
2016
 
2015
 
2016
 
2015
 
                     
Real Estate Loans:
                     
Residential
$
 164
 
$
 223
 
$
 1
 
$
 1
Commercial
 
 8,640
   
 11,210
   
 32
   
 396
Total
$
 8,804
 
$
 11,433
 
$
 33
 
$
 397


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, 2016, troubled debt restructured loans totaled $6.5 million and resulted in specific reserves of $1,641,000.  As of December 31, 2015, troubled debt restructured loans totaled $6.8 million and resulted in specific reserves of $1,613,000.  For the period ended March 31, 2016, there were no new loans identified as troubled debt restructurings.  During 2016, the Company recognized a write-down of $100,000 on a loan that was previously identified as troubled debt restructurings with a carrying value of $432,000 as of March 31, 2016.

 For the period ended March 31, 2015, there were no new loans identified as troubled debt restructures. During the 2015 period, the Company recognized write-downs in the amount of $373,000 on two loans previously identified as troubled debt restructures with a carrying value of $2.4 million as of March 31, 2015.
       
Management uses an eight point internal risk rating system to monitor the credit quality of the overall loan portfolio.  The first four categories are considered not criticized, and are aggregated as “Pass” rated.  The criticized rating categories utilized by management generally follow bank regulatory definitions.  The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification.  Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected.  All loans greater than 90 days past due are considered Substandard.  Any portion of a loan that has been charged off is placed in the Loss category.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight.  Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as non performance, 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 $1,000,000 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.


 
19

 

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, 2016 and December 31, 2015 (in thousands):


                             
                             
      Special        Doubtful    
 
Pass
 
Mention
 
Substandard
 
or Loss
 
Total
March 31, 2016
                           
Commercial real estate loans
$
 269,575
 
$
 3,161
 
$
 8,931
 
$
 -
 
$
 281,667
Commercial loans
 
 72,970
   
 -
   
 -
   
 -
   
 72,970
Total
$
 342,545
 
$
 3,161
 
$
 8,931
 
$
 -
 
$
 354,637


                             
                             
      Special        Doubtful    
 
Pass
 
Mention
 
Substandard
 
or Loss
 
Total
December 31, 2015
                           
Commercial real estate loans
$
 267,892
 
$
 1,837
 
$
 9,394
 
$
 -
 
$
 279,123
Commercial loans
 
 71,047
   
 -
   
 43
   
 -
   
 71,090
Total
$
 338,939
 
$
 1,837
 
$
 9,437
 
$
 -
 
$
 350,213



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, 2016 and December 31, 2015 (in thousands):


                 
                 
 
Performing
 
Nonperforming
 
Total
March 31, 2016
               
Residential real estate loans
$
 159,540
 
$
 473
 
$
 160,013
Construction
 
 18,999
   
 -
   
 18,999
Consumer loans
 
 32,443
   
 -
   
 32,443
Total
$
 210,982
 
$
 473
 
$
 211,455


                 
                 
 
Performing
 
Nonperforming
 
Total
December 31, 2015
               
Residential real estate loans
$
 161,380
 
$
 440
 
$
 161,820
Construction
 
 18,987
   
 -
   
 18,987
Consumer loans
 
 29,231
   
 -
   
 29,231
Total
$
 209,598
 
$
 440
 
$
 210,038


 
20

 

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, 2016 and December 31, 2015 (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, 2016
                                         
Real Estate loans
                                         
Residential
  $ 159,082     $ 428     $ 30     $ -     $ 473     $ 931     $ 160,013  
Commercial
    275,062       211       -       -       6,394       6,605       281,667  
Construction
    18,999       -       -       -       -       -       18,999  
Commercial  loans
    72,970       -       -       -       -       -       72,970  
Consumer  loans
    32,391       38       14       -       -       52       32,443  
Total
  $ 558,504     $ 677     $ 44     $ -     $ 6,867     $ 7,588     $ 566,092  
                                                         
                                                         
 
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, 2015
                                                       
Real Estate loans
                                                       
Residential
  $ 160,683     $ 646     $ 51     $ -     $ 440     $ 1,137     $ 161,820  
Commercial
    272,125       310       39       -       6,649       6,998       279,123  
Construction
    18,959       28       -       -       -       28       18,987  
Commercial  loans
    71,043       4       -       -       43       47       71,090  
Consumer  loans
    29,179       41       11       -       -       52       29,231  
Total
  $ 551,989     $ 1,029     $ 101     $ -     $ 7,132     $ 8,262     $ 560,251  



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, 2015
  $ 1,069     $ 5,506     $ 90     $ 397     $ 236     $ 7,298  
Charge Offs
    -       (129 )     -       -       (7 )     (136 )
Recoveries
    1       2       -       -       27       30  
Provision for loan losses
    7       379       19       49       (4 )     450  
Ending balance, March 31, 2016
  $ 1,077     $ 5,758     $ 109     $ 446     $ 252     $ 7,642  
Ending balance individually evaluated
for impairment
  $ -     $ 1,644     $ -     $ -     $ -     $ 1,644  
Ending balance collectively evaluated
for impairment
  $ 1,077     $ 4,114     $ 109     $ 446     $ 252     $ 5,998  





 
21

 



 

                                   
                                   
(In thousands)
Residential
Real Estate
 
Commercial
Real Estate
 
Construction
 
 Commercial
 
Consumer
 
Total
Beginning balance, December 31, 2014
$
 1,323
 
$
 3,890
 
$
 222
 
$
 256
 
$
 184
 
$
 5,875
Charge Offs
 
 (87)
   
 (393)
   
 -
   
 -
   
 (15)
   
 (495)
Recoveries
 
 2
   
 -
   
-
   
-
   
 5
   
 7
Provision for loan losses
 
 115
   
 497
   
 (107)
   
 97
   
 18
   
 620
Ending balance, March 31, 2015
$
 1,353
 
$
 3,994
 
$
 115
 
$
 353
 
$
 192
 
$
 6,007
Ending balance individually evaluated
for impairment
$
 -
 
$
 284
 
$
-
 
$
-
 
$
-
 
$
 284
Ending balance collectively evaluated
for impairment
$
 1,353
 
$
 3,710
 
$
 115
 
$
 353
 
$
 192
 
$
 5,723

 
The Company’s primary business activity as of March 31, 2016 and December 31, 2015 is with customers located in northeastern Pennsylvania. 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, 2016, the Company considered its concentration of credit risk to be acceptable.  The highest concentrations are in the hospitality/lodging industry with loans outstanding of $66.5 million, or 11.7% of loans outstanding.  During the three-month period ended March 31, 2016, there were no write downs in the named concentrations.

Gross realized gains and gross realized losses on sales of residential mortgage loans were $32,000 and $0, respectively, in the first three months of 2016 compared to $24,000 and $0, respectively, in the same period in 2015.  The proceeds from the sales of residential mortgage loans totaled $1.0 million and $804,000 for the three months ended March 31, 2016 and 2015, respectively.

8.         Fair Value Measurements

Fair value estimates are based on quoted market prices, if available, quoted market prices of similar assets or liabilities, or the present value of expected future cash flows and other valuation techniques.  These valuations are significantly affected by discount rates, cash flow assumptions and risk assumptions used.  Therefore, fair value estimates may not be substantiated by comparison to independent markets and are not intended to reflect the proceeds that may be realizable in an immediate settlement of the instruments.

Fair value is determined at one point in time and is not representative of future value.  These amounts do not reflect the total value of a going concern organization.  Management does not have the intention to dispose of a significant portion of its assets and liabilities and therefore, the unrealized gains or losses should not be interpreted as a forecast of future earnings and cash flows.

The following is a discussion of assets and liabilities measured at fair value on a recurring basis and valuation techniques applied:

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
 
 
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(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.

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.

Foreclosed real estate owned (carried at fair value):

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

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, 2016 and December 31, 2015 are as follows:


   
Fair Value Measurement Using
 
      Reporting Date  
                           
                           
Description
 
Total
 
Level 1
 
Level 2
 
Level 3
 
   
(In thousands)
 
                           
March 31, 2016
                         
Available for Sale:
                         
States and political subdivisions
    $ 61,816     $ -     $ 61,816     $ -  
Corporate obligations
      5,043       -       5,043       -  
Mortgage-backed securities-government
                                 
  sponsored agencies
      76,740       -       76,740       -  
Equity securities-financial services
      349       349       -       -  
Total
    $ 143,948     $ 349     $ 143,599     $ -  
                                   
 
 
 
 
23

 
 
                                 
Description
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(In thousands)
 
                                 
December 31, 2015
                               
Available for Sale:
                               
U.S. Government agencies
  $ 9,169     $ -     $ 9,169     $ -  
States and political subdivisions
    60,755       -       60,755       -  
Corporate obligations
    4,974       -       4,974       -  
Mortgage-backed securities-government
                               
  sponsored agencies
    63,569       -       63,569       -  
Equity securities-financial services
    384       384       -       -  
Total
  $ 138,851     $ 384     $ 138,467     $ -  
 
 


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, 2016 and December 31, 2015 are as follows:

         
Fair Value Measurement Reporting Date using Reporting Date
                         
(In thousands)
                       
                         
Description
 
Total
 
 Level 1
 
Level 2
 
Level 3
March 31, 2016
                       
Impaired Loans
 
$
 6,988
 
$
 -
 
$
 -
 
$
 6,988
Foreclosed Real Estate Owned
   
 2,855
   
 -
   
 -
   
 2,855
                         
                         
December 31, 2015
                       
Impaired Loans
 
$
 7,615
 
$
 -
 
$
 -
 
$
 7,615
Foreclosed Real Estate Owned
   
 2,847
   
 -
   
 -
   
 2,847

The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:


   
Quantitative Information about Level 3 Fair Value Measurements
(dollars in thousands)
Fair Value Estimate
 
Valuation
Techniques
Unobservable
Input
 
Range (Weighted Average)
March 31, 2016
             
Impaired loans
$
 2,062
 
Appraisal of
collateral(1)
Appraisal
adjustments(2)
 
10% (10%)
               
Impaired loans
$
 4,926
 
Present value of
future cash flows
Loan discount rate
 
4-7% (5.61%)
               
Foreclosed real estate owned
$
 2,855
 
Appraisal of
collateral(1)
Liquidation
Expenses(2)
 
10%
 
 
 
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Quantitative Information about Level 3 Fair Value Measurements
(dollars in thousands)
Fair Value Estimate
 
Valuation
Techniques
Unobservable
Input
 
Range (Weighted Average)
December 31, 2015
             
Impaired loans
$
 2,574
 
Appraisal of
collateral(1)
Appraisal
adjustments(2)
 
10% (10%)
               
Impaired loans
$
 5,041
 
Present value of
future cash flows
Loan discount rate
 
4-7% (5.61%)
               
Foreclosed real estate owned
$
 2,847
 
Appraisal of
collateral(1)
Liquidation
Expenses(2)
 
10%

(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.

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, 2016 and December 31, 2015.

Cash and cash equivalents (carried at cost):
The carrying amounts reported in the consolidated balance sheet for cash and short-term instruments approximate those assets’ fair values.

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.

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.
 
 
 
25

 
Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

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, 2016, the fair value investment in impaired loans totaled $6,988,000 which included four loans for $5,698,000 for which a valuation allowance of $1,644,000 had been provided based on the estimated value of the collateral or the present value of estimated cash flows, and thirteen loans for $2,934,000 which did not require a valuation allowance since the estimated realizable value of the collateral exceeded the recorded investment in the loan.  As of March 31, 2016, the Company has recognized charge-offs against the allowance for loan losses on these impaired loans in the amount of $1,902,000 over the life of the loans.

As of December 31, 2015, the fair value investment in impaired loans totaled $7,615,000 which included three loans for $6,373,000 for which a valuation allowance of $1,613,000 had been provided based on the estimated value of the collateral or the present value of estimated cash flows, and seventeen loans for $2,855,000 which did not require a valuation allowance since the estimated realizable value of the collateral exceeded the recorded investment in the loan.  As of December 31, 2015, the Company had recognized charge-offs against the allowance for loan losses on these impaired loans in the amount of $2,044,000 over the life of the loans.

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.

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

Regulatory stock (carried at cost):
The Company, as a member of the Federal Home Loan Bank (FHLB) system is required to maintain an investment in capital stock of its district FHLB according to a predetermined formula. This regulatory stock has no quoted market value and is carried at cost.

Bank owned life insurance (carried at cost):
The fair value is equal to the cash surrender value of the Bank owned life insurance.

Accrued interest receivable and payable (carried at cost):
The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.

Deposit liabilities (carried at cost except certificates of deposit which are at fair value):
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
 
 
26

 
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.

Short-term borrowings (carried at cost):
The carrying amounts of short-term borrowings approximate their fair values.

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 market value that is deemed to represent the transfer price if the liability were assumed by a third party.

Off-balance sheet financial instruments (disclosed at cost):
Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.
The estimated fair values of the Bank’s financial instruments were as follows at March 31, 2016 and December 31, 2015. (In thousands)


   
Fair Value Measurements at March 31, 2016
 
   
Carrying Amount
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
Financial assets:
                             
Cash and cash equivalents
  $ 8,963     $ 8,963     $ 8,963     $ -     $ -  
Securities
    143,948       143,948       349       143,599       -  
Loans receivable, net
    558,145       561,670       -       -       561,670  
Mortgage servicing rights
    260       291       -       -       291  
Regulatory stock
    2,982       2,982       2,982       -       -  
Bank owned life insurance
    18,951       18,951       18,951       -       -  
Accrued interest receivable
    2,487       2,487       2,487       -       -  
                                         
Financial liabilities:
                                       
Deposits
    560,491       560,767       364,752       -       196,015  
Short-term borrowings
    52,672       52,672       52,672       -       -  
Other borrowings
    38,856       39,181       -       -       39,181  
Accrued interest payable
    925       925       925       -       -  
                                         
Off-balance sheet financial instruments:
                                       
  Commitments to extend credit and 
   
outstanding letters of credit
    -       -       -       -       -  


 
27

 

   
Fair Value Measurements at December 31, 2015
 
   
Carrying Amount
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
Financial assets:
                             
Cash and cash equivalents
  $ 10,010     $ 10,010     $ 10,010     $ -     $ -  
Securities
    138,851       138,851       384       138,467       -  
Loans receivable, net
    552,627       559,416       -       -       559,416  
Mortgage servicing rights
    261       291       -       -       291  
Regulatory stock
    3,412       3,412       3,412       -       -  
Bank owned life insurance
    18,820       18,820       18,820       -       -  
Accrued interest receivable
    2,363       2,363       2,363       -       -  
                                         
Financial liabilities:
                                       
Deposits
    550,909       551,175       354,162       -       197,013  
Short-term borrowings
    53,235       53,235       53,235       -       -  
Other borrowings
    41,126       41,260       -       -       41,260  
Accrued interest payable
    957       957       957       -       -  
                                         
Off-balance sheet financial instruments:
                                       
  Commitments to extend credit and 
   
outstanding letters of  credit
    -       -       -       -       -  


9.           New and Recently Adopted Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is evaluating the effect of adopting this new accounting Update.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40).  The amendments in this Update provide guidance in accounting principles generally accepted in the United States of America about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures.  The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.  This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30), as part of its initiative to reduce complexity in accounting standards.  To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update.  For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those
 
 
28

 
fiscal years.  For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016.  An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. This Update is not expected to have a significant impact on the Company’s financial statements.

In August 2015, the FASB issued ASU 2015-14, Revenue from Contract with Customers (Topic 606). The amendments in this Update defer the effective date of ASU 2014-09 for all entities by one year.  Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period.  All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019.  The Company is evaluating the effect of adopting this new accounting Update.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.  The amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this Update apply to all entities that present a classified statement of financial position.  For public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018.  Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period.  The amendments in this Update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. This Update is not expected to have a significant impact on the Company’s financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10):  Recognition and Measurement of Financial Assets and Financial Liabilities.  This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments.  Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (g) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (h) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.  For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  For all other entities including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the
 
 
29

 
amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. 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 February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet.  A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term.  A short-term lease is defined as one in which: (a) the lease term is 12 months or less, and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise.  For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis.  For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years.  For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020.  The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period.  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 March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815). The amendments in this Update apply to all reporting entities for which there is a change in the counterparty to a derivative instrument that has been designated as a heading instrument under Topic 815. The standards in this Update clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. An entity has an option to apply the amendments in this Update on either a prospective basis or a modified retrospective basis. Early adoption is permitted, including adoption in an interim period. This Update is not expected to have a significant impact on the Company’s financial statements.

In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815).  The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. The amendments in this update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt host. An entity performing the assessment under the amendments in this Update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For entities other than public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. This Update is not expected to have a significant impact on the Company’s financial statements.
 
 
 
30

 

 
In March 2016, the FASB issued ASU 2016-07, Investments Equity Method and Joint Ventures (Topic 323).  The Update affects all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments in this Update eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments in this Update require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718). The amendments in this Update affect all entities that issue share-based payment awards to their employees. The standards in this Update provide simplification for several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as with equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. In addition to those simplifications, the amendments eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. This should not result in a change in practice because the guidance that is being superseded was never effective. For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any entity in any interim or annual period. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

10.           Proposed Acquisition of Delaware Bancshares, Inc.

On March 10, 2016, Norwood Financial Corp. (“Norwood Financial”) and its wholly owned subsidiary, Wayne Bank, and Delaware Bancshares, Inc. (“Delaware Bancshares”), and its wholly owned subsidiary, The National Bank of Delaware County (“NBDC Bank”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which Delaware Bancshares will merge with and into Norwood Financial, with Norwood Financial as the surviving corporation. Concurrent with the merger, it is expected that NBDC Bank will merge with and into Wayne Bank.

Under the terms of the Merger Agreement, each outstanding share of Delaware Bancshares common stock will be converted into either the right to receive $16.68 in cash or 0.6221 shares of Norwood Financial common stock.  Not more than 25% of the outstanding shares of Delaware Bancshares common stock (including for this purpose, dissenters’ shares) may be paid in cash and the remainder will be paid in Norwood Financial common stock.   In the event of a greater than 20% decline in market value of Norwood Financial common stock, Delaware Bancshares may, in certain circumstances, be able to terminate the Merger Agreement
 
 
31

 
unless Norwood Financial increases the number of shares into which Delaware Bancshares common stock may be converted.

The senior management of Norwood Financial and Wayne Bank will remain the same following the merger.  The directors of NBDC Bank will be invited to join newly formed regional advisory board.  Within 18 months of the merger, Norwood Financial and Wayne Bank will invite one member of the advisory board to join their boards.

The transaction is subject to customary closing conditions, including the receipt of regulatory approvals and approval by the shareholders of Delaware Bancshares.  The merger is currently expected to be completed in the third quarter of 2016.

Each of the directors and executive officers of Delaware Bancshares have agreed to vote their shares in favor of the approval of the Merger Agreement at the shareholders’ meeting to be held to vote on the proposed transaction. If the merger is not consummated under certain circumstances, Delaware Bancshares has agreed to pay Norwood Financial a termination fee of $615,000.

The Merger Agreement also contains usual and customary representations and warranties that Norwood Financial and Delaware Bancshares made to each other as of specific dates. The assertions embodied in those representations and warranties were made solely for purposes of the contract between Norwood Financial and Delaware Bancshares, and may be subject to important qualifications and limitations agreed to by the parties in connection with negotiating its terms. Moreover, the representations and warranties are subject to a contractual standard of materiality that may be different from what may be viewed as material to shareholders, and the representations and warranties may have been used to allocate risk between Norwood Financial and Delaware Bancshares rather than establishing matters as facts.

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 are as follows:

     
 
our ability to realize the anticipated benefits from our acquisition of Delaware Bancshares, Inc.
 
possible future impairment of intangible assets
 
our ability to effectively manage future growth
 
loan losses in excess of our allowance
 
risks inherent in commercial lending
 
real estate collateral which is subject to declines in value
 
potential other-than-temporary impairments
 
higher deposit insurance premiums
 
soundness of other financial institutions
 
increased compliance burden under new financial reform legislation
 
current market volatility
 
potential liquidity risk
 
availability of capital
 
regional economic factors
 
 
 
32

 
 
 
 
loss of senior officers
 
comparatively low legal lending limits
 
risks of new capital requirements
 
limited market for the Company’s stock
 
restrictions on ability to pay dividends
 
common stock may lose value
 
competitive environment
 
issuing additional shares may dilute ownership
 
extensive and complex governmental regulation and associated cost
 
interest rate risks
 
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, 2015 (incorporated by reference in Item 8 of the Form 10-K) lists significant accounting policies used in the development and presentation of its financial statements.  This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations.
 
Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, the fair value of financial instruments, the determination of goodwill impairment and the determination of other-than-temporary impairment on securities.  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.

Bonds, notes and debentures for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the term of the security.

Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each Consolidated Balance Sheet date.

Declines in the fair value of held to maturity and 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-
 
 
33

 
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 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 the unrealized loss on all other securities at March 31, 2016 and December 31, 2015 represent temporary impairment of the securities, related to changes in interest rates.

The Company, as a member of the Federal Home Loan Bank (FHLB) system, is required to maintain an investment in capital stock of its district FHLB according to a predetermined formula.  This restricted stock has no quoted market value and is carried at cost.

Management evaluates the restricted stock for impairment. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB.

Management considered that the FHLB’s regulatory capital ratios have increased from prior years, liquidity appears adequate, and the new shares of FHLB stock continue to change hands at the $100 par value.  Management believes no impairment charge is necessary related to FHLB stock as of March 31, 2016.
 
In connection with the acquisition of North Penn Bancorp, Inc. (“North Penn”), the Company recorded goodwill in the amount of $9.7 million, representing the excess of amounts paid over the fair value of net assets of the institution acquired in a purchase transaction, 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, 2016 were $760.1 million compared to $750.5 million as of December 31, 2015, an increase of $9.6 million due primarily to an increase of $5.9 million in loans receivable and a $5.1 million increase in investment securities.

Securities

The fair value of securities available for sale as of March 31, 2016 was $143.9 million compared to $138.8 million as of December 31, 2015.  The Company purchased $22.0 million of securities principally using the proceeds from $18.7 million of sales, calls, maturities and principal reductions of securities.

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


                         
                         
   
March 31, 2016
   
December 31, 2015
 
(dollars in thousands)
 
Amount
   
% of portfolio
   
Amount
   
% of portfolio
 
                         
U.S. Government agencies
  $ -       - %   $ 9,169       6.6 %
States and political subdivisions
    61,816       43.0       60,755       43.8  
Corporate obligations
    5,043       3.5       4,974       3.5  
Mortgage-backed securities-
                               
  government sponsored entities
    76,740       53.3       63,569       45.8  
Equity securities-financial services
    349       0.2       384       0.3  
  Total
  $ 143,948       100.0 %   $ 138,851       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 $565.8 million at March 31, 2016 compared to $559.9 million as of December 31, 2015.  The $5.9 million increase recorded in the three-month period ending March 31, 2016 was attributed to a $3.2 million increase in consumer loans and a $2.5 million increase in commercial real estate loans.  Other commercial loans increased $1.9 million during the period while residential mortgage loans decreased $1.8 million due partially to the sale of $1.0 million.

The allowance for loan losses totaled $7,642,000 as of March 31, 2016 and represented 1.35% of total loans outstanding, compared to $7,298,000, or 1.30% of total loans, at December 31, 2015, and $6,007,000, or 1.16% of total loans, as of March 31, 2015.  The Company had net charge-offs for the three months ended March 31, 2016 of $106,000 compared to $488,000 in the corresponding period in 2015.  The Company’s loan review process 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, large dollar exposures and loan growth.  Management considers the allowance adequate at March 31, 2016 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, 2016, non-performing loans totaled $6.9 million, or 1.21% of total loans compared to $7.1 million, or 1.27% of total loans at December 31, 2015. At March 31, 2016, non-performing assets totaled $9.7 million, or 1.28%, of total assets compared to $10.0 million, or 1.33%, of total assets at December 31, 2015.  The decrease in non-performing assets principally reflects payments and write-downs on loans carried in nonaccrual assets.
 
 
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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, 2016
 
December 31, 2015
 
Loans accounted for on a non-accrual basis:
           
Real Estate
           
     Residential
$
 474
 
$
 440
 
     Commercial
 
 6,393
   
 6,649
 
Commercial , financial and agricultural
 
 -
 
 
 43
 
Total non-accrual loans *
 
 6,867
   
 7,132
 
             
Accruing loans which are contractually
           
past due 90 days or more
 
 -
   
 -
 
Total non-performing loans
 
 6,867
   
 7,132
 
Foreclosed real estate
 
 2,855
   
 2,847
 
Total non-performing assets
$
 9,722
 
$
 9,979
 
Allowance for loans losses
$
 7,642
 
$
 7,298
 
Coverage of non-performing loans
 
 111.29
%
 
 102.33
%
Non-performing loans to total loans
 
 1.21
%
 
 1.27
%
Non-performing loans to total assets
 
 0.90
%
 
 0.95
%
Non-performing assets to total assets
 
1.28
%
 
 1.33
%

*Includes non-accrual TDRs of $5.5 million as of March 31, 2016 and $5.7 million on December 31, 2015. The Company also had $1.1 million of accruing TDRs on March 31, 2016 and December 31, 2015.



Deposits

During the period, total deposits increased $9.6 million due primarily to a $5.4 million increase in non-interest bearing demand deposits and a $2.7 million net increase in NOW and money market accounts.  All other deposit products increased $1.5 million, net.

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

           
(dollars in thousands)
March 31, 2016
 
December 31, 2015
           
Non-interest bearing demand
$
 113,225
 
$
 107,814
Interest bearing demand
 
 52,231
   
 52,040
Money market deposit accounts
 
 121,567
   
 119,028
Savings
 
 77,729
   
 75,280
Time deposits <$100,000
 
 120,444
   
 121,211
Time deposits >$100,000
 
 75,295
   
 75,536
           
Total
$
 560,491
 
$
 550,909

Borrowings

Short-term borrowings as of March 31, 2016 totaled $52.7 million compared to $53.2 million as of December 31, 2015.  Short-term borrowings, which consist of securities sold under agreements to repurchase and overnight borrowings from the FHLB, decreased $500,000 due to a reduction in overnight borrowings.

 
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Other borrowings consisted of the following:

(dollars in thousands)
           
 
March 31, 2016
 
December 31, 2015
Notes with the FHLB:
         
Convertible note due January 2017 at 4.71%
$
 10,000
 
$
 10,000
Amortizing fixed rate borrowing due December 2017 at 1.275%
 
 7,011
   
 8,000
Amortizing fixed rate borrowing due January 2018 at 0.91%
 
 1,116
   
 1,267
Amortizing fixed rate borrowing due December 2018 at 1.425%
 
 2,235
   
 2,434
Amortizing fixed rate borrowing due June 2020 at 1.490%
 
 8,547
   
 9,033
Amortizing fixed rate borrowing due December 2020 at 1.706%
 
 4,760
   
 5,000
Amortizing fixed rate borrowing due March 2022 at 1.748%
 
 5,187
   
 5,392
 
$
 38,856
 
$
 41,126

The convertible note contains an option which allows the FHLB, at quarterly intervals to change the note to an adjustable-rate advance at three month LIBOR plus 17 basis points.  If the note is converted, the option allows the Bank to put the funds back to the FHLB at no charge. 
 
Off-Balance Sheet Arrangements
 
The Bank is 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 sheet.
 
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.  Commitments to grant loans totaled $20.8 million as of March 31, 2016 compared to $19.7 million as of December 31, 2015.

A summary of the contractual amount of the Company’s financial instrument commitments is as follows:


(in thousands)
         
 
March 31, 2016
 
December 31, 2015
           
Commitments to grant loans
$
 20,803
 
$
 19,704
Unfunded commitments under lines of credit
 
 49,644
   
 48,641
Standby letters of credit
 
 5,321
   
 5,352
           
 
$
 75,768
 
$
 73,697

Stockholders’ Equity and Capital Ratios

As of March 31, 2016, stockholders’ equity totaled $102.7 million, compared to $101.0 million as of December 31, 2015.   The net change in stockholders’ equity included $1.9 million of net income that was partially offset by $1.1 million of dividends declared, a $447,000 reduction due to an increase in Treasury Stock, and a $125,000 increase due to the exercise and vesting of stock options.  In addition, total equity increased $1.3 million due to an increase in the fair value of securities in the available for sale portfolio, net of
 
 
37

 
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.

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


 
March 31, 2016
 
December 31, 2015
Tier 1 Capital
     
(To average assets)
12.27%
 
12.40%
Tier 1 Capital
     
(To risk-weighted assets)
15.74%
 
15.86%
Common Equity Tier 1 Capital
     
(To risk-weighted assets)
15.74%
 
15.86%
Total Capital
     
(To risk-weighted assets)
16.99%
 
17.09%

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 will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.  The Company and the Bank are in compliance with their respective new capital requirements, including the capital conservation buffer, as of March 31, 2016.
 
Liquidity

As of March 31, 2016, the Company had cash and cash equivalents of $9.0 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 $143.9 million which could be used for liquidity needs.  This totals $152.9 million of liquidity and represents 20.1% of total assets compared to $148.9 million and 19.8% of total assets as of December 31, 2015.  The Company also monitors other liquidity measures, all of which were within the Company’s policy guidelines as of March 31, 2016 and December 31, 2015.  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, 2016.  There were no borrowings under this line as of March 31, 2016 and December 31, 2015.
 
 
 
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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, 2016 and December 31, 2015.
 
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, 2016 and December 31, 2015.

The Bank’s maximum borrowing capacity with the Federal Home Loan Bank was approximately $293,036,000 as of March 31, 2016, of which $54,480,000 and $60,798,000 was outstanding at March 31, 2016 and December 31, 2015, respectively.  Advances 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 34%.  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

 
 
Results of Operations
 
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates


                               
                               
(Tax-Equivalent Basis, dollars in thousands)
 
Three Months Ended March 31,
 
   
2016
   
2015
 
   
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
  $ 1,162   $ 1     0.34 %   $ 6,695   $ 4       0.24 %
   Securities available for sale:
                                         
     Taxable
    81,873     442     2.16       101,841     571       2.24  
     Tax-exempt (1)
    59,184     679     4.59       56,629     684       4.83  
        Total securities available for sale (1)
    141,057     1,121     3.18       158,470     1,255       3.17  
     Loans receivable (1) (4) (5)
    564,027     6,263     4.44       505,613     6,124       4.84  
        Total interest-earning assets
    706,246     7,385     4.18       670,778     7,383       4.40  
Non-interest earning assets:
                                         
   Cash and due from banks
    8,113                   8,044                
   Allowance for loan losses
    (7,517                 (6,008 )              
   Other assets
    47,269                   46,463                
        Total non-interest earning assets
    47,865                   48,499                
Total Assets
  $ 754,111                 $ 719,277                
Liabilities and Stockholders' Equity
                                         
Interest-bearing liabilities:
                                         
   Interest bearing demand and money market
  $ 173,636   $ 75     0.17     $ 171,873   $ 71       0.17  
   Savings
    76,689     10     0.05       73,867     9       0.05  
   Time
    199,088     496     1.00       221,483     524       0.95  
      Total interest-bearing deposits
    449,413     581     0.52       467,223     604       0.52  
Short-term borrowings
    49,065     39     0.32       24,576     12       0.20  
Other borrowings
    39,938     231     2.31       22,944     165       2.88  
   Total interest-bearing liabilities
    538,416     851     0.63       514,743     781       0.61  
Non-interest bearing liabilities:
                                         
   Demand deposits
    108,960                   99,663                
   Other liabilities
    3,877                   4,145                
      Total non-interest bearing liabilities
    112,837                   103,808                
   Stockholders' equity
    102,858                   100,726                
Total Liabilities and Stockholders' Equity
  $ 754,111                 $ 719,277                
                                           
Net interest income (tax equivalent basis)
          6,534     3.55 %           6,602       3.79 %
Tax-equivalent basis adjustment
          (359 )                 (295 )        
Net interest income
        $ 6,175                 $ 6,307          
Net interest margin (tax equivalent basis)
                3.70 %                   3.94 %
 
(1)  
Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 34%.
(2)  
Average balances have been calculated based on daily balances.
(3)  
Annualized
(4)  
Loan balances include non-accrual loans and are net of unearned income.
(5)  
Loan yields include the effect of amortization of deferred fees, net of costs.


 
40

 


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


   
Increase/(Decrease)
 
 
 
Three months ended March 31, 2106 Compared to
 
   
Three months ended March 31, 2015
 
   
Variance due to
 
   
Volume
   
Rate
   
Net
 
                   
   
(dollars in thousands)
 
                   
Interest earning assets:
                 
Interest bearing deposits with banks
  $ (4 )   $ 1     $ (3 )
Securities available for sale:
                       
Taxable
    (112 )     (17 )     (129 )
Tax-exempt securities
    30       (35 )     (5 )
Total securities
    (82 )     (52 )     (134 )
Loans receivable
    677       (538 )     139  
Total interest earning assets
    591       (589 )     2  
                         
Interest bearing liabilities:
                       
Interest-bearing demand and money market
    4       -       4  
Savings
    1       -       1  
Time
    (54 )     26       (28 )
Total interest bearing deposits
    (49 )     26       (23 )
Short-term borrowings
    15       12       27  
Other borrowings
    114       (48 )     66  
Total interest bearing liabilities
    80       (10 )     70  
Net interest income (tax-equivalent basis)
  $ 511     $ (579 )   $ (68 )

Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated proportionately to changes in volume and changes in rate.











 
41

 

Comparison of Operating Results for The Three Months Ended March 31, 2016 to March 31, 2015

General

For the three months ended March 31, 2016, net income totaled $1,876,000 compared to $2,041,000 earned in the similar period in 2015.  The decrease in net income for the three months ended March 31, 2016 was due primarily to a $132,000 decrease in net interest income and a $247,000 decrease in gains on the sale of  securities. Earnings per share for the current period were $.51 per share for basic and fully diluted compared to $.55 per share for basic and fully diluted shares for the three months ended March 31, 2015.  The resulting annualized return on average assets and annualized return on average equity for the three months ended March 31, 2016 was 1.00% and 7.33%, respectively, compared to 1.15% and 8.22%, respectively, for the similar period in 2015.
 
 
The following table sets forth changes in net income:


(dollars in thousands)
Three months ended
 
March 31, 2016 to March 31, 2015
Net income three months ended March 31, 2015
$
 2,041
Change due to:
   
Net interest income
 
 (132)
Provision for loan losses
 
 170
Net gain on sales of loans and securities
 
 (235)
Other income
 
 23
Salaries and employee benefits
 
 (166)
Occupancy, furniture and equipment
 
 61
Foreclosed real estate owned
 
 127
All other expenses
 
 (184)
Income tax expense
 
 171
     
Net income three months ended March 31, 2016
$
 1,876


Net Interest Income

Net interest income on a fully taxable equivalent basis (fte) for the three months ended March 31, 2016 totaled $6,534,000 which was $68,000 lower than the comparable period in 2015.  The decrease in net interest income largely reflects a $66,000 increase in interest expense related to other borrowings that were secured to manage interest rate risk.  The fte net interest spread and net interest margin were 3.55% and 3.70%, respectively, for the three months ended March 31, 2016 compared to 3.79% and 3.94%, respectively, for the similar period in 2015.

Interest income (fte) totaled $7,385,000 with a yield on average earning assets of 4.18% compared to $7,383,000 and 4.40% for the 2015 period. Average loans increased $58.4 million over the comparable period of last year but the yield earned declined forty basis points, resulting in a $139,000 increase in fte loan income.  Average earning assets totaled $706.2 million for the three months ended March 31, 2016, an increase of $35.5 million over the average for the similar period in 2015.
 
Interest expense for the three months ended March 31, 2016 totaled $851,000 at an average cost of 0.63% compared to $781,000 and 0.61% for the similar period in 2015.  The cost of time deposits, which is the most significant component of funding, increased to 1.00% from 0.95% for the similar period in the prior year.  As time deposits matured, they repriced at the current market rates resulting in the increase.

 
42

 
Provision for Loan Losses

The Company’s provision for loan losses for the three months ended March 31, 2016 was $450,000 compared to $620,000 for the three months ended March 31, 2015.  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 $106,000 for the quarter ended March 31, 2016 compared to $488,000 for the similar period in 2015.

Other Income

Other income totaled $1,067,000 for the three months ended March 31, 2016 compared to $1,279,000 for the similar period in 2015.  Net gains from the sale of loans and securities decreased $235,000 compared to the same period of 2015. The reduction in securities gains reflects the sales of securities for interest-rate risk management with minimal gains.  All other items of other income increased $23,000, net, compared to the same period of last year.

Other Expense

Other expense for the three months ended March 31, 2016 totaled $4,349,000 which was $162,000 higher than the same period of 2015.  Salaries and employee benefit costs increased $166,000 due to staffing adjustments and increased health care costs.  Foreclosed real estate costs decreased $127,000, while all other operating expenses increased $123,000, net.

Income Tax Expense

Income tax expense totaled $567,000 for an effective tax rate of 23.2% for the period ending March 31, 2016 compared to $738,000 for an effective tax rate of 26.6% for the similar period in 2015. The reduction in the effective tax rate reflects an increase in the level of tax-exempt income.

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, 2016, the level of net interest income at risk in a ±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 8% 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.

 
43

 
As of March 31, 2016, the Company had a positive 90-day interest sensitivity gap of $35.8 million or 4.7% of total assets, compared to the $38.8 million or 5.2% of total assets as of December 31, 2015.  Rate sensitive assets repricing within 90 days decreased $6.4 million due primarily to a $7.0 million decrease in loans.  Rate sensitive liabilities decreased $3.3 million since year end due primarily to a $3.5 million decrease in borrowed funds repricing within three months.  A positive gap means that rate-sensitive assets are greater than rate-sensitive liabilities at the time interval.  This would indicate that in a rising rate environment, the yield on interest-earning assets could increase faster than the cost of interest-bearing liabilities in the 90-day time frame.  The repricing intervals are managed by ALCO strategies, including adjusting the average life of the investment portfolio, pricing of deposit liabilities to attract longer term time deposits, loan pricing to encourage variable rate products and evaluation of loan sales of long-term fixed rate mortgages.

Certain interest-bearing deposits with no stated maturity dates are included in the interest-sensitivity table below.  The balances allocated to the respective time periods represent an estimate of the total outstanding balance that has the potential to migrate through withdrawal or transfer to time deposits, thereby impacting the interest-sensitivity position of the Company.  The estimates were derived from industry-wide statistical information and do not represent historical results.

March 31, 2016
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
  $ 254     $ -     $ -     $ -     $ 254  
Securities
    4,540       10,727       26,923       101,758       143,948  
Loans Receivable
    122,454       132,499       158,138       152,696       565,787  
  Total RSA
  $ 127,248     $ 143,226     $ 185,061     $ 254,454     $ 709,989  
                                         
Non-maturity interest-bearing deposits
  $ 40,107     $ 44,901     $ 119,740     $ 46,779     $ 251,527  
Time Deposits
    25,615       66,094       80,233       23,797       195,739  
Other
    25,761       29,846       28,892       7,029       91,528  
  Total RSL
  $ 91,483     $ 140,841     $ 228,865     $ 77,605     $ 538,794  
                                         
                                         
Interest Sensitivity Gap
  $ 35,765     $ 2,385     $ (43,804 )   $ 176,849     $ 171,195  
Cumulative Gap
    35,765       38,150       (5,654 )     171,195          
RSA/RSL-cumulative
    139.1 %     116.4 %     98.8 %     131.8 %        
                                         
December 31, 2015
                                       
                                         
Interest Sensitivity Gap
  $ 38,817     $ 11,614     $ (57,114 )   $ 168,269     $ 161,586  
Cumulative Gap
    38,817       50,431       (6,683 )     161,586          
RSA/RSL-cumulative
    140.9 %     122.8 %     98.5 %     130.1 %        



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
 
 
44

 
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

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

Part II.  OTHER INFORMATION

Item 1. Legal Proceedings

Not applicable

Item 1A. Risk Factors

There have been no material changes in the risk factors affecting the Company that were identified in Item 1A of Part 1 of the Company’s Form 10-K for the year ended December 31, 2015

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

None

Item 3.  Defaults Upon Senior Securities

Not applicable

Item 4.  Mine Safety Disclosures

Not applicable

Item 5.  Other Information

None

Item 6.  Exhibits

   
No.
Description
   
2.1
Agreement and Plan of Merger, dated March 10, 2016, by and among Norwood Financial Corp., Wayne Bank, Delaware Bancshares, Inc. and The National Bank of Delaware County(1)
3(i)
Articles of Incorporation of Norwood Financial Corp.(2)
3(ii)
Bylaws of Norwood Financial Corp. (3)
4.0
Specimen Stock Certificate of Norwood Financial Corp. (2)
10.1
Employment Agreement with Lewis J. Critelli (4)
10.2
Change in Control Severance Agreement with William S. Lance(4)
10.3
Norwood Financial Corp. Stock Option Plan (5)
10.4
Change in Control Severance Agreement with Robert J. Mancuso(6)
10.5
Salary Continuation Agreement between the Bank and William W. Davis, Jr. (7)
10.6
Salary Continuation Agreement between the Bank and Lewis J. Critelli (7)
10.7
1999 Directors Stock Compensation Plan (5)
10.8
Salary Continuation Agreement between the Bank and John H. Sanders (8)
 
 
 
45

 
 
10.9
2006 Stock Option Plan (9)
10.10
First and Second Amendments to Salary Continuation Agreement with William W. Davis, Jr. (10)
10.11
First and Second Amendments to Salary Continuation Agreement with Lewis J. Critelli (10)
10.12
First and Second Amendments to Salary Continuation Agreement with John H. Sanders (10)
10.13
Change In Control Severance Agreement with James F. Burke(11)
10.14
2014 Equity Incentive Plan(12)
10.15
Addendum to Change in Control Severance Agreement with William S. Lance (13)
31.1
Rule 13a-14(a)/15d-14(a) Certification of CEO
31.2
Rule 13a-14(a)/15d-14(a) Certification of CFO
32
Certification pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of Sarbanes Oxley Act of 2002
101
Interactive Data Files

(1)  
Incorporated by reference from the identically numbered exhibit to the Registrant’s Current Report on Form 8-K filed with the Commission on March 10, 2016
            
(2)  
Incorporated herein by reference into this document from the Exhibits to Form 10, Registration Statement initially filed with the Commission on April 29, 1996, Registration No. 0-28364

(3)  
Incorporated by reference into this document from the identically numbered exhibit to the Registrant’s Form 10-Q filed with the Commission on August 8, 2014.

(4)  
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.

(5)  
Incorporated herein by reference to the identically numbered exhibits of the Registrant’s Form 10-K filed with the Commission on March 23, 2000.

(6)  
Incorporated by reference into this document from the identically numbered exhibit to the Registrant’s Form 10-K filed with the Commission on March 14, 2013, File No. 0-28364.

(7)  
Incorporated by reference into this document from the Exhibits to Form S-8 filed with the Commission on August 14, 1998, File No. 333-61487.

(8)  
Incorporated herein by reference to the identically numbered exhibit to the Registrant’s Form 10-K filed with the Commission on March 22, 2004.

(9)  
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.

(10)  
Incorporated herein by reference from the Exhibits to the Registrant’s Current Report on Form 8-K filed on April 4, 2006.

(11)  
Incorporated by reference from the identically numbered exhibit to the Registrant’s Form 10-Q filed with the Commission on November 7, 2013.

(12)  
Incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-8 (File No. 333-195643) filed with the Commission on May 2, 2014.

(13)  
Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on February 18, 2015.


 
46

 
Signatures

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


           
         
NORWOOD FINANCIAL CORP.
 
           
Date:
May 10, 2016
 
By:
 
/s/ Lewis J. Critelli
 
         
Lewis J. Critelli
 
         
President and Chief Executive Officer
 
         
(Principal Executive Officer)
 
             
Date:
May 10, 2016
 
By:
 
/s/ William S. Lance
 
         
William S. Lance
 
         
Executive Vice President and
 
         
Chief Financial Officer
 
         
(Principal Financial Officer)
 


47