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NORWOOD FINANCIAL CORP - Quarter Report: 2015 March (Form 10-Q)

f10q_033115-0160.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, 2015
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________________ to ____________________

Commission file number   0-28366
 
                                             Norwood Financial Corp.                                                                                                                                          
       (Exact name of registrant as specified in its charter)
 
             Pennsylvania                                                                             23-2828306
(State or other jurisdiction of                                                 (I.R.S. employer identification no.)
incorporation or organization)

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 1, 2015
       Common stock, par value $0.10 per share                                          3,679,046

 
1

 



NORWOOD FINANCIAL CORP.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2015
     
   
 
 Page
Number
PART I -
CONSOLIDATED FINANCIAL INFORMATION OF NORWOOD
FINANCIAL CORP.
 
     
Item 1.
Financial Statements (unaudited)
  3
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
33
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
44
Item 4.
Controls and Procedures
45
PART II -
OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
46
Item 1A.
Risk Factors
46
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
46
Item 3.
Defaults upon Senior Securities
46
Item 4.
Mine Safety Disclosures
46
Item 5.
Other Information
46
Item 6.
Exhibits
46
     
Signatures
 
48




{DC011046.1}
 
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,
 
   
2015
   
2014
 
ASSETS
           
Cash and due from banks
  $ 7,658     $ 8,081  
Interest bearing deposits with banks
    11,969       4,295  
Cash and cash equivalents
    19,627       12,376  
                 
Securities available for sale, at fair value
    155,674       156,395  
Loans receivable
    518,961       501,135  
Less:  Allowance for loan losses
    6,007       5,875  
Net loans receivable
    512,954       495,260  
Regulatory stock, at cost
    1,838       1,714  
Bank premises and equipment, net
    6,632       6,734  
Bank owned life insurance
    18,417       18,284  
Accrued interest receivable
    2,329       2,339  
Foreclosed real estate owned
    1,698       3,726  
Goodwill
    9,715       9,715  
Other intangibles
    361       389  
Deferred tax asset
    3,308       3,285  
Other assets
    1,806       1,418  
TOTAL ASSETS
  $ 734,359     $ 711,635  
                 
LIABILITIES
               
Deposits:
               
Non-interest bearing demand
  $ 101,423     $ 98,064  
Interest-bearing
    468,783       461,880  
Total deposits
    570,206       559,944  
Short-term borrowings
    30,581       25,695  
Other borrowings
    27,807       22,200  
Accrued interest payable
    955       966  
Other liabilities
    4,359       3,789  
TOTAL LIABILITIES
    633,908       612,594  
                 
STOCKHOLDERS’ EQUITY
               
Common stock, $.10 par value per share,
               
 authorized 10,000,000 shares; issued 3,718,018  shares
    372       372  
Surplus
    35,239       35,206  
Retained earnings
    64,975       64,078  
Treasury stock at cost: 2015: 38,972 shares,
    (1,046 )     (1,077 )
   2014: 40,576 shares
               
Accumulated other comprehensive income
    911       462  
TOTAL STOCKHOLDERS’ EQUITY
    100,451       99,041  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 734,359     $ 711,635  

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,
 
   
2015
   
2014
 
INTEREST INCOME
           
Loans receivable, including fees
  $ 6,061     $ 5,980  
Securities
    1,023       987  
Other
    4       1  
Total interest income
    7,088       6,968  
                 
INTEREST EXPENSE
               
Deposits
    604       635  
Short-term borrowings
    12       22  
Other borrowings
    165       166  
Total interest expense
    781       823  
NET INTEREST INCOME
    6,307       6,145  
PROVISION FOR LOAN LOSSES
    620       420  
NET INTEREST INCOME AFTER
               
PROVISION FOR LOAN LOSSES
    5,687       5,725  
                 
OTHER INCOME
               
Service charges and fees
    572       576  
Income from fiduciary activities
    105       104  
Net realized gains on sales of securities
    311       95  
Gains on sale of loans and servicing rights, net
    18       39  
Earnings and proceeds on bank owned life insurance
    165       168  
Other
    108       71  
Total other income
    1,279       1,053  
                 
OTHER EXPENSES
               
Salaries and employee benefits
    2,137       2,165  
Occupancy, furniture & equipment, net
    556       578  
Data processing related
    234       212  
Taxes, other than income
    175       165  
Professional fees
    183       165  
Federal Deposit Insurance Corporation insurance assessment
    95       114  
Foreclosed real estate owned
    158       65  
Other
    649       668  
Total other expenses
    4,187       4,132  
                 
INCOME BEFORE INCOME TAXES
    2,779       2,646  
INCOME TAX EXPENSE
    738       682  
NET INCOME
  $ 2,041     $ 1,964  
                 
BASIC EARNINGS PER SHARE
  $ 0.55     $ 0.54  
                 
DILUTED EARNINGS PER SHARE
  $ 0.55     $ 0.54  

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,
 
   
2015
   
2014
 
Net income
  $ 2,041     $ 1,964  
Other comprehensive income:
               
Investment securities available for sale:
               
   Unrealized holding gains
    989       2,525  
   Tax effect
    (335 )     (860 )
   Reclassification of gains recognized in net income
    (311 )     (95 )
   Tax effect
    106       32  
Other comprehensive income:
    449       1,602  
Comprehensive Income
  $ 2,490     $ 3,566  

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, 2015
(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, 2014
    3,718,018     $ 372     $ 35,206     $ 64,078       40,576     $ (1,077 )   $ 462     $ 99,041  
Net Income
                            2,041                               2,041  
Other comprehensive income
                                                    449       449  
Cash dividends declared ($.31 per share)
                            (1,144 )                             (1,144 )
Compensation expense related to restricted stock
                    14                                       14  
Acquisition of  treasury  stock
                                    4,374       (127 )             (127 )
Stock options exercised
                    (4 )             (5,978 )     158               154  
Tax benefit of stock options
                    6                                       6  
Compensation expense related to stock options
                    17                                       17  
 
                                                               
Balance, March 31, 2015
    3,718,018     $ 372     $ 35,239     $ 64,975       38,972     $ (1,046 )   $ 911     $ 100,451  


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,
 
   
2015
   
2014
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net Income
  $ 2,041     $ 1,964  
Adjustments to reconcile net income to net cash provided by operating  activities:
               
Provision for loan losses
    620       420  
Depreciation
    139       147  
Amortization of intangible assets
    28       33  
Deferred income taxes
    (252 )     (303 )
Net amortization of securities premiums and discounts
    233       211  
Net realized gain on sales of securities
    (311 )     (95 )
Net increase in cash surrender value of life insurance
    (165 )     (168 )
Loss on foreclosed real estate
    65       19  
Gain on sale of mortgage loans
    (24 )     (41 )
Mortgage loans originated for sale
    (780 )     (1,110 )
Proceeds from sale of mortgage loans originated for sale
    804       1,151  
Compensation expense related to stock options
    17       40  
Compensation expense related to restricted stock
    14       -  
Increase in accrued interest receivable and other assets
    (341 )     (445 )
Increase in accrued interest payable and other liabilities
    518       701  
Net cash provided by operating activities
    2,606       2,524  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Securities available for sale:
               
Proceeds from sales
    13,976       12,080  
Proceeds from maturities and principal reductions on mortgage-backed securities
    2,876       3,150  
Purchases
    (15,375 )     (10,950 )
Purchase of regulatory stock
    (327 )     (504 )
Redemption of regulatory stock
    203       640  
Net (increase) decrease in loans
    (18,387 )     6,297  
Purchase of premises and equipment
    (37 )     (53 )
Proceeds from sale of foreclosed real estate
    2,031       9  
Net cash (used in) provided by investing activities
    (15,040 )     10,669  
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net increase (decrease)  in deposits
    10,262       (1,106 )
Net increase (decrease) in short-term borrowings
    4,886       (9,541 )
Repayments of other borrowings
    (393 )     (388 )
Proceeds from other borrowings
    6,000       -  
Stock options exercised
    154       -  
Tax benefit of stock options exercised
    6       -  
Purchase of treasury stock
    (127 )     (179 )
Cash dividends paid
    (1,103 )     (1,093 )
Net cash  provided by (used in) financing activities
    19,685       (12,307 )
Increase in cash and cash equivalents
    7,251       886  
                 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    12,376       7,863  
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 19,627     $ 8,749  

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,
 
 
2015
 
2014
 
Supplemental Disclosures of Cash Flow Information
           
Cash payments for:
           
Interest on deposits and borrowings
  $ 792     $ 872  
Income taxes paid, net of refunds
    201       204  
 Supplemental Schedule of Noncash Investing Activities
               
Transfers of loans to foreclosed real estate and repossession of other assets
  $ 68     $ 383  
Cash dividends declared
    1,141       1,091  


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, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015 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, 2014.
 
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,
 
   
2015
   
2014
 
Basic EPS weighted average shares outstanding
    3,680       3,643  
Dilutive effect of stock options
    6       10  
Diluted EPS weighted average shares outstanding
    3,686       3,653  

Stock options which had no intrinsic value, because their effect would be anti-dilutive and therefore would not be included in the diluted EPS calculation were 49,700 as of March 31, 2015 based upon the closing price of Norwood common stock of $27.69 per share on March 31, 2015. As of March 31, 2014 there were 20,700 stock options which were anti-dilutive based on the closing price of Norwood stock of $28.60 on March 31, 2014.

 
9

 

3.             Stock-Based Compensation

No awards were granted during the three month period ending March 31, 2015. As of March 31, 2015, there was $50,000 of total unrecognized compensation cost related to non-vested options granted in 2014 under the 2014 Stock Option Plan, which will be fully amortized by December 31, 2015.

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   Contrctual Term   ($000)  
                           
Outstanding at January 1, 2015
    206,463     $ 26.74     5.7  
Yrs.
     $478  
Granted
    -       -     -          -  
Exercised
    (5,978 )     25.87     5.1          -  
Forfeited
    -       -     -          -  
Outstanding at March 31, 2015
    200,485     $ 26.76     5.5          $235
                                         
Exercisable at March 31, 2015
    187,985     $ 26.61     5.2  
 Yrs.
     $235

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 $27.69 as of March 31, 2015 and $29.05 as of December 31, 2014.

A summary of the Company’s restricted stock activity and related information for the three month period ended March 31, 2015 is as follows:


             
             
         
Weighted-Average
 
   
Number of
   
Grant Date
 
   
Restricted Stock
   
Fair Value
 
Outstanding, January 1, 2015
    9,300     $ 29.08  
Granted
    -       -  
Vested
    -       -  
Forfeited
    -       -  
Non-vested at March 31, 2015
    9,300     $ 29.08  


The expected future compensation expense relating to the 9,300 shares of non-vested restricted stock outstanding as of March 31, 2015 is $257,000.


 
10

 

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, 2015 and 2014:

       
       
 
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 income
    (205 )
Total other comprehensive income
    449  
Balance as of March 31, 2015
  $ 911  
         
         
         
 
Unrealized gains (losses) on
 
 
available for sale
 
 
securities (a)
 
Balance as of  December 31, 2013
  $ (2,602 )
Other comprehensive income before reclassification
    1,665  
Amount reclassified from accumulated other comprehensive income
    (63 )
Total other comprehensive income
    1,602  
Balance as of March 31, 2014
  $ (1,000 )

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

The following table presents significant amounts reclassified out of each component of accumulated other comprehensive income (loss) (in thousands) for the three months ended March 31, 2015 and 2014:


                   
                   
   
Amount Reclassified
   
   
From Accumulated
 
Affected Line Item in
   
Other
 
the Statement Where
   
Comprehensive
 
Net Income is
Details about other comprehensive income
 
Income (a)
 
Presented
                   
     
Three months ended
   
     
March 31,
   
     
2015
     
2014
   
Unrealized gains on available for sale securities
 
$
 311
   
$
 95
 
Net realized gains on sales of securities
     
 (106)
     
 (32)
 
Income tax expense
   
$
 205
   
$
 63
 
Net of tax

(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,
 
 
2015
 
2014
 
             
Unfunded availability under loan commitments
  $ 25,951     $ 24,728  
Unfunded commitments under lines of credit
    48,873       46,360  
Standby letters of credit
    5,776       5,700  
    $ 80,600     $ 76,788  

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, 2015 for guarantees under standby letters of credit issued is not material.


 
12

 

6.         Securities

The amortized cost and fair value of securities were as follows:

 
March 31, 2015
 
       
Gross
 
Gross
       
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
 
Cost
 
Gains
 
Losses
 
Value
 
 
(In Thousands)
 
Available for Sale:
                       
U.S. Government agencies
  $ 27,100     $ 129     $ (97 )   $ 27,132  
States and political subdivisions
    57,831       1,522       (295 )     59,058  
Corporate obligations
    6,351       180       -       6,531  
Mortgage-backed securities-
                               
government sponsored entities
    62,713       364       (500 )     62,577  
Total debt securities
    153,995       2,195       (892 )     155,298  
Equity securities-financial services
    292       84       -       376  
    $ 154,287     $ 2,279     $ (892 )   $ 155,674  


 
December 31, 2014
 
       
Gross
 
Gross
       
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
 
Cost
 
Gains
 
Losses
 
Value
 
                         
 
(In Thousands)
 
Available for Sale:
                       
U.S. Government agencies
  $ 29,289     $ 42     $ (356 )   $ 28,975  
States and political subdivisions
    52,685       1,750       (103 )     54,332  
Corporate obligations
    6,387       110       (11 )     6,486  
Mortgage-backed securities-government
                               
sponsored entities
    67,032       109       (937 )     66,204  
Total debt securities
    155,393       2,011       (1,407 )     155,997  
Equity securities-financial services
    292       106       -       398  
    $ 155,685     $ 2,117     $ (1,407 )   $ 156,395  


 
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, 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
  $ 3,010     $ (12 )   $ 9,111     $ (85 )   $ 12,121     $ (97 )
States and political subdivisions
    12,141       (238 )     2,477       (57 )     14,618       (295 )
Mortgage-backed securities-government
sponsored agencies
    13,040       (118 )     20,029       (382 )     33,069       (500 )
    $ 28,191     $ (368 )   $ 31,617     $ (524 )   $ 59,808     $ (892 )
 
 
 
December 31, 2014
 
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
$
 4,965
 
$
 (17)
 
$
 15,051
 
$
 (339)
 
$
 20,016
 
$
 (356)
States and political subdivisions
 
 3,195
   
 (20)
   
 4,633
   
 (83)
   
 7,828
   
 (103)
Corporate obligations
 
 -
   
 -
   
 1,144
   
 (11)
   
 1,144
   
 (11)
Mortgage-backed securities-government
sponsored agencies
 
 22,090
   
 (189)
   
 26,050
   
 (748)
   
 48,140
   
 (937)
 
$
 30,250
 
$
 (226)
 
$
 46,878
 
$
 (1,181)
 
$
 77,128
 
$
 (1,407)


At March 31, 2015, the Company has 33 debt securities in an unrealized loss position in the less than twelve months category and 33 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 2015.  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, 2015 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
 
$
 1,250
 
$
 1,265
           
Due after one year through five years
   
 25,192
   
 25,391
           
Due after five years through ten years
   
 17,737
   
 17,827
           
Due after ten years
   
 47,103
   
 48,238
           
                         
Mortgage-backed securities-government sponsored agencies
   
 62,713
   
 62,577
           
   
$
 153,995
 
$
 155,298
           


 
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,
   
2015
 
2014
Gross realized gains
 
$
 311
 
$
 95
Gross realized losses
   
 -
   
 -
Net realized gain
 
$
 311
 
$
 95
Proceeds from sales of securities
 
$
 13,976
 
$
 12,080


 
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, 2015
   
December 31, 2014
 
Real Estate-Residential
$
 157,707
 
 30.4
%
 
$
 158,139
 
31.5
%
Commercial
 
 265,635
 
 51.1
     
 261,956
 
52.2
 
Construction
 
 20,180
 
 3.9
     
 19,221
 
3.9
 
Commercial, financial and agricultural
 
 55,353
 
 10.7
     
 42,514
 
8.5
 
Consumer loans to individuals
 
 20,474
 
 3.9
     
 19,704
 
3.9
 
Total loans
 
 519,349
 
 100.0
%
   
 501,534
 
100.0
%
Deferred fees, net
 
 (388)
         
 (399)
     
Total loans receivable
 
 518,961
         
 501,135
     
Allowance for loan losses
 
 (6,007)
         
 (5,875)
     
Net loans receivable
$
 512,954
       
$
 495,260
     

Changes in the accretable yield for purchased credit-impaired loans were as follows for the three months ended March 31 (in thousands):

 
2015
 
2014
 
Balance at beginning of period
  $ 8     $ 20  
Accretion
    -       (7 )
Reclassification and other
    -       -  
Balance at end of period
  $ 8     $ 13  


 
15

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


 
March 31, 2015
 
December 31, 2014
 
             
Outstanding Balance
  $ 1,045     $ 1,057  
Carrying Amount
  $ 1,038     $ 1,049  

There were no material increases or decreases in the expected cash flows of these loans since the acquisition date.  As of 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, 2015 and December 31, 2014, foreclosed real estate owned totaled $1,698,000 and $3,726,000, respectively.  As of March 31, 2015, included within foreclosed real estate owned is $225,000 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, 2015, the Company has initiated formal foreclosure proceedings on $1,055,000 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, 2015
(In thousands)
 
                                     
Individually evaluated for impairment
  $ -     $ 10,370     $ -     $ -     $ -     $ 10,370  
Loans acquired with deteriorated credit quality
    221       817       -       -       -       1,038  
Collectively evaluated for impairment
    157,486       254,448       20,180       55,353       20,474       507,941  
Total Loans
  $ 157,707     $ 265,635     $ 20,180     $ 55,353     $ 20,474     $ 519,349  


 
Real Estate Loans
                   
                   
Commercial
 
Consumer
       
 
Residential
 
Commercial
 
Construction
 
Loans
 
Loans
 
Total
 
 
(In thousands)
 
December 31, 2014
                                   
                                     
Individually evaluated for impairment
  $ -     $ 10,556     $ -     $ -     $ -     $ 10,556  
Loans acquired with deteriorated credit quality
    225       824       -       -       -       1,049  
Collectively evaluated for impairment
    157,914       250,576       19,221       42,514       19,704       489,929  
Total Loans
  $ 158,139     $ 261,956     $ 19,221     $ 42,514     $ 19,704     $ 501,534  


 
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, 2015
        (in thousands)      
With no related allowance recorded:
                 
Real Estate Loans
                 
  Residential
  $ 221     $ 228     $ -  
  Commercial
    10,531       11,063       -  
Subtotal
    10,752       11,291       -  
With an allowance recorded:
                       
Real Estate Loans
                       
Commercial
    656       1,520       284  
Subtotal
    656       1,520       284  
Total:
                       
Real Estate Loans
                       
  Residential
    221       228       -  
  Commercial
    11,187       12,583       284  
Total Impaired Loans
  $ 11,408     $ 12,811     $ 284  


         
Unpaid
       
   
Recorded
   
Principal
   
Associated
 
   
Investment
   
Balance
   
Allowance
 
December 31, 2014
        (in thousands)      
With no related allowance recorded:
                 
Real Estate Loans
                 
Residential
  $ 225     $ 233     $ -  
Commercial
    8,407       8,566       -  
Subtotal
    8,632       8,799       -  
With an allowance recorded:
                       
Real Estate Loans
                       
Commercial
    2,973       3,837       293  
Subtotal
    2,973       3,837       293  
Total:
                       
Real Estate Loans
                       
Residential
    225       233       -  
Commercial
    11,380       12,403       293  
Total Impaired Loans
  $ 11,605     $ 12,636     $ 293  


 
18

 



The following information for impaired loans is presented (in thousands) for the three months ended March 31, 2015 and 2014:

 
Average Recorded
 
Interest Income
 
Investment
 
Recognized
 
2015
 
2014
 
2015
 
2014
Total:
                     
Real Estate Loans
                     
Residential
$
 223
 
$
 240
 
$
 1
 
$
 1
Commercial
 
 11,210
   
 11,754
   
 396
   
 57
Total Loans
$
 11,433
 
$
 11,994
 
$
 397
 
$
 58


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, 2015, troubled debt restructured loans totaled $8.6 million and resulted in specific reserves of $33,000.  As of December 31, 2014, troubled debt restructured loans totaled $8.8 million and resulted in specific reserves of $293,000.  For the period ended March 31, 2015, there were no new loans identified as troubled debt restructurings.  During 2015, the Company recognized write-downs in the amount of $373,000 on two loans previously identified as troubled debt restructurings with a carrying value of $2.4 million as of March 31, 2015.

 For the period ended March 31, 2014, there were no new loans identified as troubled debt restructures, nor were there any loan modifications classified as troubled debt restructures that subsequently defaulted during the period.
 
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, 2015 and December 31, 2014 (in thousands):


         
Special
         
Doubtful
       
   
Pass
   
Mention
   
Substandard
   
and Loss
   
Total
 
March 31, 2015
                             
Commercial real estate loans
  $ 250,536     $ 1,957     $ 13,142     $ -     $ 265,635  
Commercial loans
    55,353       -       -       -       55,353  
Total
  $ 305,889     $ 1,957     $ 13,142     $ -     $ 320,988  
 
 
          Special            Doubtful         
    Pass     Mention     Substandard     and Loss     Total  
 December 31, 2014                                        
Commercial real estate loans
  $ 246,629     $ 1,983     $ 13,344     $ -     $ 261,956  
Commercial loans
    42,514       -       -       -       42,514  
Total
  $ 289,143     $ 1,983     $ 13,344     $ -     $ 304,470  



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, 2015 and December 31, 2014 (in thousands):


                 
                 
 
Performing
 
Nonperforming
 
Total
March 31, 2015
               
Residential real estate loans
$
 156,248
 
$
 1,459
 
$
 157,707
Construction
 
 20,180
   
 -
   
 20,180
Consumer loans
 
 20,472
   
 2
   
 20,474
Total
$
 196,900
 
$
 1,461
 
$
 198,361


                 
                 
 
Performing
 
Nonperforming
 
Total
December 31, 2014
               
Residential real estate loans
$
 156,464
 
$
 1,675
 
$
 158,139
Construction
 
 19,221
   
 -
   
 19,221
Consumer loans
 
 19,700
   
 4
   
 19,704
Total
$
 195,385
 
$
 1,679
 
$
 197,064

 
 
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, 2015 and December 31, 2014 (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, 2015
                                         
Real Estate loans
                                         
Residential
  $ 156,071     $ 177     $ -     $ -     $ 1,459     $ 1,636     $ 157,707  
Commercial
    261,211       147       -       -       4,277       4,424       265,635  
Construction
    20,180       -       -       -       -       -       20,180  
Commercial  loans
    55,329       24       -       -       -       24       55,353  
Consumer  loans
    20,403       57       12       -       2       71       20,474  
Total
  $ 513,194     $ 405     $ 12     $ -     $ 5,738     $ 6,155     $ 519,349  
 
 
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, 2014
                                       
Real Estate loans
                                       
Residential
$
 156,242
 
$
 222
 
$
 -
 
$
-
 
$
 1,675
 
$
 1,897
 
$
 158,139
Commercial
 
 252,495
   
 5,100
   
 440
   
-
   
 3,921
   
 9,461
   
 261,956
Construction
 
 19,221
   
 -
   
-
   
-
   
-
   
 -
   
 19,221
Commercial  loans
 
 42,500
   
 14
   
-
   
-
   
 -
   
 14
   
 42,514
Consumer  loans
 
 19,606
   
 94
   
 -
   
-
   
 4
   
 98
   
 19,704
Total
$
 490,064
 
$
 5,430
 
$
 440
 
$
-
 
$
 5,600
 
$
 11,470
 
$
 501,534


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, 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

 
 
21

 
 
 
(In thousands)
 
Residential
Real Estate
   
Commercial
Real Estate
   
Construction
   
Commercial
   
Consumer
   
Total
 
Beginning balance, December 31, 2013
  $ 1,441     $ 3,025     $ 898     $ 184     $ 160     $ 5,708  
Charge Offs
    (75 )     (329 )     -       -       (11 )     (415 )
Recoveries
    -       -       -       -       14       14  
Provision for loan losses
    (34 )     1,146       (667 )     -       (25 )     420  
Ending balance, March 31, 2014
  $ 1,332     $ 3,842     $ 231     $ 184     $ 138     $ 5,727  
Ending balance individually evaluated
for impairment
  $ -     $ 203     $ -     $ -     $ -     $ 203  
Ending balance collectively evaluated
for impairment
  $ 1,332     $ 3,639     $ 231     $ 184     $ 138     $ 5,524  

 
The Company’s primary business activity as of March 31, 2015 and December 31, 2014 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, 2015, the Company considered its concentration of credit risk to be acceptable.  The highest concentrations are in the hospitality lodging industry, automobile dealers, property owners associations and resorts with loans outstanding of $34.1 million, or 37.5% of capital, to the hospitality lodging industry, $15.1 million, or 16.6% of capital to automobile dealers, $13.2 million, or 14.5% of capital, to property owners associations and $9.6 million, or 10.6 % of capital, to the resort industry.  During the three-month period ended March 31, 2015, there were no write downs in the named concentrations.
 
Gross realized gains and gross realized losses on sales of residential mortgage loans were $24,000 and $0, respectively, in the first three months of 2015 compared to $42,000 and $0, respectively, in the same period in 2014.  The proceeds from the sales of residential mortgage loans totaled $804,000 and $1.2 million for the three months ended March 31, 2015 and 2014, 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.

 
 
22

 
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 (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 appli
cable.

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, 2015 and December 31, 2014 are as follows:


 
Fair Value Measurement Using
 
 
Reporting Date
 
                         
Description
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(In thousands)
 
                         
March 31, 2015
                       
Available for Sale:
                       
U.S. Government agencies
  $ 27,132     $ -     $ 27,132     $ -  
States and political subdivisions
    59,058       -       59,058       -  
Corporate obligations
    6,531       -       6,531       -  
Mortgage-backed securities-government
                               
  sponsored agencies
    62,577       -       62,577       -  
Equity securities-financial services
    376       376       -       -  
Total
  $ 155,674     $ 376     $ 155,298     $ -  
 
 
 
23

 
 
 
                         
December 31, 2014
                       
Available for Sale:
                       
U.S. Government agencies
  $ 28,975     $ -     $ 28,975     $ -  
States and political subdivisions
    54,332       -       54,332       -  
Corporate obligations
    6,486       -       6,486       -  
Mortgage-backed securities-government
                               
  sponsored agencies
    66,204       -       66,204       -  
Equity securities-financial services
    398       398       -       -  
Total
  $ 156,395     $ 398     $ 155,997     $ -  

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, 2015 and December 31, 2014 are as follows:

       
Fair Value Measurement Reporting Date using
 
                         
(In thousands)
                       
                         
Description
Total
 
Level 1
 
Level 2
 
Level 3
 
March 31, 2015
                       
Impaired Loans
  $ 11,124     $ -     $ -     $ 11,124  
Foreclosed Real Estate Owned
    1,698       -       -       1,698  
                                 
                                 
December 31, 2014
                               
Impaired Loans
  $ 11,312     $ -     $ -     $ 11,312  
Foreclosed Real Estate Owned
    3,726       -       -       3,726  

The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
               
   
Quantitative Information about Level 3 Fair Value Measurements
(In thousands)
Fair Value Estimate
 
Valuation Techniques
Unobservable Input
 
Range (Weighted Average)
March 31, 2015
             
Impaired loans
$
 10,682
 
Appraisal of collateral(1)
Appraisal adjustments(2)
 
10.00-32.50% (21.62%)
Impaired loans
$
 442
 
Present value of future cash flows
Loan discount rate
 
6.25-7.00% (6.71%)
               
Foreclosed real estate owned
$
 1,698
 
Appraisal of collateral(1)
Liquidation Expenses(2)
 
10%
 
 
 
 
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Quantitative Information about Level 3 Fair Value Measurements
(In thousands)
Fair Value Estimate
 
Valuation Techniques
Unobservable Input
 
Range (Weighted Average)
December 31, 2014
             
Impaired loans
$
 11,312
 
Appraisal of collateral(1)
Appraisal adjustments(2)
 
6-33% (23.35%)
               
Foreclosed real estate owned
$
 3,726
 
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, 2015 and December 31, 2014.

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

 
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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, 2015, the fair value investment in impaired loans totaled $11,124,000 which included two loans for $656,000 for which a valuation allowance of $284,000 had been provided based on the estimated value of the collateral or the present value of estimated cash flows, and fifteen loans for $10,752,000 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, 2015, the Company has recognized charge-offs against the allowance for loan losses on these impaired loans in the amount of $1,395,000 over the life of the loans.

As of December 31, 2014, the fair value investment in impaired loans totaled $11,312,000 which included three loans for $2,973,000 for which a valuation allowance of $293,000 had been provided based on the estimated value of the collateral or the present value of estimated cash flows, and fourteen loans for $8,632,000 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, 2014, the Company had recognized charge-offs against the allowance for loan losses on these impaired loans in the amount of $1,022,000 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.

Restricted investment in Federal Home Loan Bank 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):
The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.


 
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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.
 
 
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The estimated fair values of the Bank’s financial instruments were as follows at March 31, 2015 and December 31, 2014. (In thousands)


   
Fair Value Measurements at March 31, 2015
 
   
Carrying Amount
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
Financial assets:
                             
Cash and cash equivalents
  $ 19,627     $ 19,627     $ 19,627     $ -     $ -  
Securities
    155,674       155,674       376       155,298       -  
Loans receivable, net
    512,954       524,641       -       -       524,641  
Mortgage servicing rights
    265       265       265       -       -  
Regulatory Stock
    1,838       1,838       1,838       -       -  
Bank owned life insurance
    18,417       18,417       18,417       -       -  
Accrued interest receivable
    2,329       2,329       2,329       -       -  
                                         
Financial liabilities:
                                       
Deposits
    570,206       570,470       348,655       -       221,815  
Short-term borrowings
    30,581       30,581       30,581       -       -  
Other borrowings
    27,807       28,885       -       -       28,885  
Accrued interest payable
    955       955       955       -       -  
                                         
Off-balance sheet financial instruments:
                                       
 Commitments to extend credit and
outstanding letters of credit
    -       -       -       -       -  



   
Fair Value Measurements at December 31, 2014
 
   
Carrying Amount
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
Financial assets:
                             
Cash and cash equivalents
  $ 12,376     $ 12,376     $ 12,376     $ -     $ -  
Securities
    156,395       156,395       398       155,997       -  
Loans receivable, net
    495,260       507,833       -       -       507,833  
Mortgage servicing rights
    271       277       -       277       -  
Regulatory stock
    1,714       1,714       1,714       -       -  
Bank owned life insurance
    18,284       18,284       18,284       -       -  
Accrued interest receivable
    2,339       2,339       2,339       -       -  
                                         
Financial liabilities:
                                       
Deposits
    559,944       560,243       338,112       -       222,131  
Short-term borrowings
    25,695       25,695       25,695       -       -  
Other borrowings
    22,200       23,228       -       -       23,228  
Accrued interest payable
    966       966       966       -       -  
                                         
Off-balance sheet financial instruments:
                                       
 Commitments to extend credit and
outstanding letters of  credit
    -       -       -       -       -  


 
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9.             New and Recently Adopted Accounting Pronouncements
In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-01, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. The amendments in this Update permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit).  The amendments in this Update should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this Update are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014.  Early adoption is permitted. This Update did not have a significant impact on the Company’s financial statements.

In January 2014, the FASB issued ASU 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments in this Update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity can elect to adopt the amendments in this Update using either a modified retrospective transition method or a prospective transition method.  The Company has included the disclosures related to this Update in Note 7.

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.



 
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In June 2014, the FASB issued ASU 2014-10, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.  The amendments in this Update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting.  For repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement.  The amendments also require enhanced disclosures.  The accounting changes in this Update are effective for the first interim or annual period beginning after December 15, 2014.  An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application is prohibited.  The disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The disclosures are not required to be presented for comparative periods before the effective date.  This Update did not have a significant impact on the Company’s financial statements.

In June 2014, the FASB issued ASU 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments when the Terms of an Award Provide that a Performance Target Could Be Achieved After the Requisite Service Period.  The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply the amendments in this Update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost.  This Update is not expected to have a significant impact on the Company’s financial statements.


In August 2014, the FASB issued ASU 2014-14, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40).  The amendments in this Update require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met:  (1) the loan has a government guarantee that is not separable from the loan before foreclosure, (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed.  Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor.  The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014.  This Update did not have a significant impact on the Company’s financial statements.


 
30

 

 
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 November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task Force).  This ASU clarifies how current U.S. GAAP should be interpreted in subjectively evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Public business entities are required to implement the new requirements in fiscal years and interim periods within those fiscal years beginning after December 15, 2015. This Update is not expected to have a significant impact on the Company’s financial statements.

In November 2014, the FASB issued ASU 2014-17, Business Combinations (Topic 805): Pushdown Accounting. The amendments in this Update apply to the separate financial statements of an acquired entity and its subsidiaries that are a business or nonprofit activity (either public or nonpublic) upon the occurrence of an event in which an acquirer (an individual or an entity) obtains control of the acquired entity.  An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. If pushdown accounting is not applied in the reporting period in which the change-in-control event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting period to the acquired entity's most recent change-in-control event. The amendments in this Update are effective on November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. This Update is not expected to have a significant impact on the Company’s financial statements.

In January 2015, the FASB issued ASU 2015-01, Income Statement –Extraordinary and Unusual Items, as part of its initiative to reduce complexity in accounting standards.  This Update eliminates from GAAP the concept of extraordinary items.  The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption.  This Update is not expected to have a significant impact on the Company’s financial statements.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810). The amendments in this Update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.  The amendments in this Update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015.  For all other entities, the amendments in this Update are effective for fiscal years
 
 
31

 
beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017.  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 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 April 2015, the FASB issued ASU 2015-04, Compensation-Retirement Benefits (Topic 715), as part of its initiative to reduce complexity in accounting standards.  For an entity with a fiscal year-end that does not coincide with a month-end, the amendments in this Update provide a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity's fiscal year-end and apply that practical expedient consistently from year to year. The practical expedient should be applied consistently to all plans if an entity has more than one plan. The amendments in this Update are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, 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, 2016, and interim periods within fiscal years beginning after December 15, 2017. Earlier 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 2015-05, Intangible – Goodwill and Other Internal Use Software (Topic 350-40), as part of its initiative to reduce complexity in accounting standards. This guidance  will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The amendments in this Update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract.  For public business entities, the Board decided that the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. For all other entities, the amendments will be effective for annual periods beginning after December 15, 2015, and interim periods in annual periods beginning after December 15, 2016. Early adoption is permitted for all entities.  This Update is not expected to have a significant impact on the Company’s financial statements.


 
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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words “believes,” “anticipates,” “contemplates,” “expects,” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Those risks and uncertainties are as follows:

     
 
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
 
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, 2014 (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.

 
 
33

 


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-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, 2015 and December 31, 2014 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, 2015.
 
34

 
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, 2015 were $734.4 million compared to $711.6 million as of December 31, 2014, an increase of $22.8 million due primarily to an increase of $17.9 million in loans receivable which were funded by a $10.3 million increase in total deposits and a $10.5 million increase in borrowed funds.

Securities

The fair value of securities available for sale as of March 31, 2015 was $155.7 million compared to $156.4 million as of December 31, 2014.  The Company purchased $15.4 million of securities principally using the proceeds from $16.9 million of sales, calls, maturities and principal reductions of securities.

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


   
March 31, 2015
   
December 31, 2014
 
(dollars in thousands)
 
Amount
   
% of portfolio
   
Amount
   
% of portfolio
 
                         
U.S. Government agencies
  $ 27,132       17.4 %   $ 28,975       18.5 %
States and political subdivisions
    59,058       37.9       54,332       34.7  
Corporate obligations
    6,531       4.2       6,486       4.2  
Mortgage-backed securities-
                               
  government sponsored entities
    62,577       40.2       66,204       42.3  
Equity securities-financial services
    376       0.3       398       0.3  
  Total
  $ 155,674       100.0 %   $ 156,395       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.


 
35

 

Loans

Loans receivable totaled $519.0 million at March 31, 2015 compared to $501.1 million as of December 31, 2014.  The $17.9 million increase recorded in the three-month period ending March 31, 2015 was attributed to a $12.8 million increase in commercial loans and a $3.7 million increase in commercial real estate loans.  Construction loans increased $1.0 million during the period while all other retail loans increased $400,000, net.

The allowance for loan losses totaled $6,007,000 as of March 31, 2015 and represented 1.16% of total loans outstanding, compared to $5,875,000, or 1.17% of total loans, at December 31, 2014, and $5,727,000, or 1.15% of total loans, as of March 31, 2014.  The Company had net charge-offs for the three months ended March 31, 2015 of $488,000 compared to $400,000 in the corresponding period in 2014.  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, 2015 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, 2015, non-performing loans totaled $5.7 million, or 1.11% of total loans compared to $5.6 million, or 1.12% of total loans at December 31, 2014. At March 31, 2015, non-performing assets totaled $7.4 million, or 1.01%, of total assets compared to $9.3 million, or 1.31%, of total assets at December 31, 2014.  The decrease in non-performing assets principally reflects the sale of a property in the current period with a carrying value of $1.9 million on December 31, 2014.

The following table sets forth information regarding non-performing loans and foreclosed real estate at the dates indicated:
             
             
(dollars in thousands)
March 31, 2015
 
December 31, 2014
 
Loans accounted for on a non-accrual basis:
           
Commercial
$
 -
 
$
 -
 
Real Estate
 
 5,736
   
 5,596
 
Consumer
 
 2
   
 4
 
Total non-accrual loans *
 
 5,738
   
 5,600
 
             
Accruing loans which are contractually
           
past due 90 days or more
 
 -
   
 -
 
Total non-performing loans
 
 5,738
   
 5,600
 
Foreclosed real estate
 
 1,698
   
 3,726
 
Total non-performing assets
$
 7,436
 
$
 9,326
 
Allowance for loans losses
$
 6,007
 
$
 5,875
 
Coverage of non-performing loans
 
 104.69
x
 
 104.91
x
Non-performing loans to total loans
 
1.11
%
 
 1.12
%
Non-performing loans to total assets
 
0.78
%
 
 0.79
%
Non-performing assets to total assets
 
1.01
%
 
 1.31
%
 
*Includes non-accrual TDRs of $2.6 million as of March 31, 2015 and $2.2 million on December 31, 2014. The Company also had $6.0 million and $6.6 million of accruing TDRs on those dates.

 
36

 

Deposits

During the period, total deposits increased $10.3 million due primarily to a $4.6 million net increase in NOW and money market accounts and a $3.4 million increase in non-interest bearing demand deposits.  All other deposit products increased $2.3 million, net.

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

             
             
(dollars in thousands)
 
March 31, 2015
   
December 31, 2014
 
             
Non-interest bearing demand
  $ 101,423     $ 98,064  
Interest bearing demand
    51,482       46,441  
Money market deposit accounts
    120,121       120,603  
Savings
    75,629       73,004  
Time deposits <$100,000
    125,396       126,118  
Time deposits >$100,000
    96,155       95,714  
                 
Total
  $ 570,206     $ 559,944  

Borrowings

Short-term borrowings as of March 31, 2015 totaled $30.6 million compared to $25.7 million as of December 31, 2014.  Short-term borrowings, which consist of securities sold under agreements to repurchase and overnight borrowings from the FHLB, increased $4.9 million principally due to the seasonality of municipal cash management accounts.

Other borrowings consisted of the following:

(dollars in thousands)

             
             
   
March 31, 2015
   
December 31, 2014
 
Notes with the FHLB:
           
Convertible note due July 2015 at 4.34%
  $ 7,064     $ 7,111  
Convertible note due January 2017 at 4.71%
    10,000       10,000  
Amortizing fixed rate borrowing due January 2018 at 0.91%
    1,717       1,866  
Amortizing fixed rate borrowing due December 2018 at 1.425%
    3,026       3,223  
Amortizing fixed rate borrowing due March 2022 at 1.748%
    6,000       -  
    $ 27,807     $ 22,200  

The convertible notes contain an option which allows the FHLB, at quarterly intervals to change the note to an adjustable-rate advance at three month LIBOR plus 17 to 22 basis points.  If the notes are converted, the option allows the Bank to put the funds back to the FHLB at no charge.  The borrowing due July 2015 includes a $64,000 fair value adjustment recorded at the time of the North Penn acquisition.


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.
 
 
37

 
 
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 $26.0 million as of March 31, 2015 compared to $23.1 million as of December 31, 2014.

A summary of the contractual amount of the Company’s financial instrument commitments is as follows:
           
(in thousands)
         
 
March 31, 2015
 
December 31, 2014
           
Unfunded availability under loan commitments
$
 25,951
 
$
 23,070
Unfunded commitments under lines of credit
 
 48,873
   
 45,269
Standby letters of credit
 
 5,776
   
 5,660
           
 
$
 80,600
 
$
 73,999

Stockholders’ Equity and Capital Ratios

As of March 31, 2015, stockholders’ equity totaled $100.5 million, compared to $99.0 million as of December 31, 2014.   The net change in stockholders’ equity included $2.0 million of net income that was partially offset by $1.1 million of dividends declared, a $127,000 reduction due to an increase in Treasury Stock, and a $160,000 increase due to the exercise and vesting of stock options.  In addition, total equity increased $449,000 due to an increase in the fair value of securities in the available for sale portfolio, net of tax.  This increase in fair value is the result of a change in interest rates and spreads, which may impact the value of the securities. Because of interest rate volatility, the Company’s accumulated other comprehensive income could materially fluctuate for each interim and year-end period.

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


       
       
 
March 31, 2015
 
December 31, 2014
Tier 1 Capital
     
(To average assets)
12.67%
 
12.58%
Tier 1 Capital
     
(To risk-weighted assets)
17.01%
 
17.33%
Common Equity Tier 1 Capital
     
(To risk-weighted assets)
17.01%
 
N/A
Total Capital
     
(To risk-weighted assets)
18.15%
 
18.49%

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
 
 
38

 
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, 2015.
 
Liquidity

As of March 31, 2015, the Company had cash and cash equivalents of $19.6 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 $155.7 million which could be used for liquidity needs.  This totals $175.3 million of liquidity and represents 23.9% of total assets compared to $168.8 million and 23.7% of total assets as of December 31, 2014.  The Company also monitors other liquidity measures, all of which were within the Company’s policy guidelines as of March 31, 2015 and December 31, 2014.  Based upon these measures, the Company believes its liquidity is adequate.

Capital Resources

The Company has a line of credit commitment available from the Federal Home Loan Bank (FHLB) of Pittsburgh for borrowings of up to $20,000,000 which expires in December 2016.  There were no borrowings under this line as of March 31, 2015 and December 31, 2014.

The Company has a line of credit commitment from Atlantic Central Bankers Bank for $7,000,000 which expires June 30, 2015.  There were no borrowings under this line as of March 31, 2015 and December 31, 2014.

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, 2015 and December 31, 2014.

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, 2015 and December 31, 2014.

The Bank’s maximum borrowing capacity with the Federal Home Loan Bank was approximately $278,288,000 as of March 31, 2015, of which $27,807,000 and $22,200,000 was outstanding at March 31, 2015 and December 31, 2014, 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,
 
2015
 
2014
 
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
$
 6,695
 
$
 4
   
     0.24%
 
$
 854
 
$
 1
   
   0.47%
   Securities held-to-maturity (1)
 
 -
   
 -
   
 -
   
 175
   
 3
   
6.86
   Securities available for sale:
                                 
     Taxable
 
 101,841
   
 571
   
 2.24
   
 99,840
   
 488
   
1.96
     Tax-exempt (1)
 
 56,629
   
 684
   
 4.83
   
 59,990
   
 753
   
5.02
        Total securities available for sale (1)
 
 158,470
   
 1,255
   
 3.17
   
 159,830
   
 1,241
   
3.11
     Loans receivable (1) (4) (5)
 
 505,613
   
 6,124
   
 4.84
   
 500,182
   
 6,040
   
4.83
        Total interest earning assets
 
 670,778
   
 7,383
   
 4.40
   
 661,041
   
 7,285
   
4.41
Non-interest earning assets:
                                 
   Cash and due from banks
 
 8,044
               
 7,638
           
   Allowance for loan losses
 
 (6,008)
               
 (5,886)
           
   Other assets
 
 46,463
               
 42,204
           
        Total non-interest earning assets
 
 48,499
               
 43,956
           
Total Assets
$
 719,277
             
$
 704,997
           
Liabilities and Stockholders' Equity
                                 
Interest bearing liabilities:
                                 
   Interest bearing demand and money market
$
 171,873
 
$
 71
   
 0.17
 
$
 168,265
 
$
 79
   
0.19
   Savings
 
 73,867
   
 9
   
 0.05
   
 69,963
   
 9
   
0.05
   Time
 
 221,483
   
 524
   
 0.95
   
 210,543
   
 547
   
1.04
      Total interest bearing deposits
 
 467,223
   
 604
   
 0.52
   
 448,771
   
 635
   
0.57
Short-term borrowings
 
 24,576
   
 12
   
 0.20
   
 41,929
   
 22
   
0.21
Other borrowings
 
 22,944
   
 165
   
 2.88
   
 23,575
   
 166
   
2.82
   Total interest bearing liabilities
 
 514,743
   
 781
   
 0.61
   
 514,275
   
 823
   
0.64
Non-interest bearing liabilities:
                                 
   Demand deposits
 
 99,663
               
 92,593
           
   Other liabilities
 
 4,145
               
 3,995
           
      Total non-interest bearing liabilities
 
 103,808
               
 96,588
           
   Stockholders' equity
 
 100,726
               
 94,134
           
Total Liabilities and Stockholders' Equity
$
 719,277
             
$
 704,997
           
                                   
Net interest income (tax equivalent basis)
       
 6,602
   
3.79%
 
       
 6,462
   
3.77%
Tax-equivalent basis adjustment
       
 (295)
     
 
       
 (317)
     
Net interest income
     
$
 6,307
             
$
 6,145
     
Net interest margin (tax equivalent basis)
             
3.94%
 
             
3.91%
 
(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, 2015 Compared to
 
   
Three months ended March 31, 2014
 
   
Variance due to
 
   
Volume
   
Rate
   
Net
 
                   
   
(dollars in thousands)
 
                   
Interest earning assets:
                 
Interest bearing deposits with banks
  $ 6     $ (3 )   $ 3  
Securities held to maturity
    (3 )     -       (3 )
Securities available for sale:
                       
Taxable
    11       72       83  
Tax-exempt securities
    (41 )     (28 )     (69 )
Total securities
    (30 )     44       14  
Loans receivable
    66       18       84  
Total interest earning assets
    39       59       98  
                         
Interest bearing liabilities:
                       
Interest-bearing demand and money market
    2       (10 )     (8 )
Savings
    -       -       -  
Time
    26       (49 )     (23 )
Total interest bearing deposits
    28       (59 )     (31 )
Short-term borrowings
    (9 )     (1 )     (10 )
Other borrowings
    (4 )     3       (1 )
Total interest bearing liabilities
    15       (57 )     (42 )
Net interest income (tax-equivalent basis)
  $ 24     $ 116     $ 140  

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, 2015 to March 31, 2014

General

For the three months ended March 31, 2015, net income totaled $2,041,000 compared to $1,964,000 earned in the similar period in 2014.  The increase in net income for the three months ended March 31, 2015 was due primarily to a $162,000 increase in net interest income and a $195,000 net increase in gains on the sales of loans and securities which was partially offset by a $200,000 increase in the provision for loan losses and a $93,000 increase in foreclosed real estate expense.  Earnings per share for the current period were $.55 per share for basic and fully diluted compared to $.54 per share for basic and fully diluted shares for the three months ended March 31, 2014.  The resulting annualized return on average assets and annualized return on average equity for the three months ended March 31, 2015 were 1.15% and 8.22%, respectively, compared to 1.13% and 8.46%, respectively, for the similar period in 2014.
The following table sets forth changes in net income:
     
     
(dollars in thousands)
Three months ended
 
March 31, 2015 to March 31, 2014
Net income three months ended March 31, 2014
$
 1,964
Change due to:
   
Net interest income
 
 162
Provision for loan losses
 
 (200)
Net gain on sales of loans and securities
 
 195
Other income
 
 31
Salaries and employee benefits
 
 28
Occupancy, furniture and equipment
 
 22
Foreclosed real estate owned
 
 (93)
All other expenses
 
 (12)
Income tax expense
 
 (56)
     
Net income three months ended March 31, 2015
$
 2,041


Net Interest Income

Net interest income on a fully taxable equivalent basis (fte) for the three months ended March 31, 2015 totaled $6,602,000 which was $140,000 higher than the comparable period in 2014.  The increase in net interest income largely reflects earnings adjustments on loans that were returned to performing status.  The fte net interest spread and net interest margin were 3.79% and 3.94%, respectively, for the three months ended March 31, 2015 compared to 3.77% and 3.91%, respectively, for the similar period in 2014.

Interest income (fte) totaled $7,383,000 with a yield on average earning assets of 4.40% compared to $7,285,000 and 4.41% for the 2014 period. Average loans increased $5.4 million over the comparable period of last year and the yield earned improved one basis point, resulting in a $98,000 increase in fte loan income.  Average earning assets totaled $670.8 million for the three months ended March 31, 2015, an increase of $9.7 million over the average for the similar period in 2014.  This increase in average earning assets added to the improvement. Interest income also benefited from a special cash dividend from the Federal Home Loan Bank.

 
42

 


Interest expense for the three months ended March 31, 2015 totaled $781,000 at an average cost of 0.61% compared to $823,000 and 0.64% for the similar period in 2014.  The cost of time deposits, which is the most significant component of funding, declined to 0.95% from 1.04% for the similar period in the prior year.  As time deposits matured, they repriced at the current lower rates resulting in the decrease.

Provision for Loan Losses

The Company’s provision for loan losses for the three months ended March 31, 2015 was $620,000 compared to $420,000 for the three months ended March 31, 2014.  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 $488,000 for the quarter ended March 31, 2015 compared to $401,000 for the similar period in 2014.

Other Income

Other income totaled $1,279,000 for the three months ended March 31, 2015 compared to $1,053,000 for the similar period in 2014.  Net gains from the sale of loans and securities increased $195,000 compared to the same period of 2014 due to increased activity. All other items of other income increased $31,000, net, compared to the third quarter of last year.

Other Expense

Other expense for the three months ended March 31, 2015 totaled $4,187,000 which was $55,000 higher than the same period of 2014.  Costs associated with foreclosed real estate properties increased $93,000 primarily due to a $64,000 loss on the disposition of a commercial property.  All other operating expenses decreased $38,000, net.

Income Tax Expense

Income tax expense totaled $738,000 for an effective tax rate of 26.6% for the period ending March 31, 2015 compared to $682,000 for an effective tax rate of 25.8% for the similar period in 2014.


 
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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, 2015, the level of net interest income at risk in a 200 basis point increase in interest rates was within the Company’s policy limits, while a 200 basis point decrease in rates would result in a net interest fluctuation that exceeds the policy limit.  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. Based on the current level of interest rates, the risk in the declining 200 basis point scenario is considered acceptable.

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

As of March 31, 2015, the Company had a positive 90-day interest sensitivity gap of $52.2 million or 7.1% of total assets, compared to the $64.4 million or 9.0% of total assets as of December 31, 2014.  Rate sensitive assets repricing within 90 days increased $4.8 million due primarily to a $7.7 million increase in overnight liquidity and a $3.8 million increase in securities cashflow repricing within the period.  Loans receivable repricing with 90 days decreased $6.6 million.  Rate sensitive liabilities increased $17.1 million since year end due primarily to a $14.7 million increase in time deposits maturing 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.


 
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March 31, 2015
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
  $ 11,969     $ -     $ -     $ -     $ 11,969  
Securities
    8,906       13,273       27,209       106,286       155,674  
Loans Receivable
    116,682       128,498       157,032       116,749       518,961  
  Total RSA
  $ 137,557     $ 141,771     $ 184,241     $ 223,035     $ 686,604  
                                         
Non-maturity interest-bearing deposits
  $ 39,461     $ 44,385     $ 117,730     $ 45,656     $ 247,232  
Time Deposits
    38,601       72,774       78,061       32,115       221,551  
Other
    7,319       19,174       27,759       4,136       58,388  
  Total RSL
  $ 85,381     $ 136,333     $ 223,550     $ 81,907     $ 527,171  
                                         
                                         
Interest Sensitivity Gap
  $ 52,176     $ 5,438     $ (39,309 )   $ 141,128     $ 159,433  
Cumulative Gap
    52,176       57,614       18,305       159,433          
RSA/RSL-cumulative
    161.1 %     126.0 %     104.1 %     130.2 %        
                                         
December 31, 2014
                                       
                                         
Interest Sensitivity Gap
  $ 64,389     $ (9,788 )   $ (40,674 )   $ 138,122     $ 152,049  
Cumulative Gap
    64,389       54,601       13,927       152,049          
RSA/RSL-cumulative
    194.2 %     125.6 %     103.2 %     129.8 %        


Item 4.  Controls and Procedures

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

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


 
45

 


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, 2014.

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
   
3(i)
Articles of Incorporation of Norwood Financial Corp.(1)
3(ii)
Bylaws of Norwood Financial Corp. (2)
4.0
Specimen Stock Certificate of Norwood Financial Corp. (1)
10.1
Employment Agreement with Lewis J. Critelli (3)
10.2
Change in Control Severance Agreement with William S. Lance(3)
10.3
Norwood Financial Corp. Stock Option Plan (4)
10.4
Change in Control Severance Agreement with Robert J. Mancuso(5)
10.5
Salary Continuation Agreement between the Bank and William W. Davis, Jr. (6)
10.6
Salary Continuation Agreement between the Bank and Lewis J. Critelli (6)
10.7
1999 Directors Stock Compensation Plan (4)
10.8
Salary Continuation Agreement between the Bank and John H. Sanders (7)
10.9
2006 Stock Option Plan (8)
10.10
First and Second Amendments to Salary Continuation Agreement with William W. Davis, Jr. (9)
10.11
First and Second Amendments to Salary Continuation Agreement with Lewis J. Critelli (9)
10.12
First and Second Amendments to Salary Continuation Agreement with John H. Sanders (9)
10.13
Change In Control Severance Agreement with James F. Burke(10)
10.14
2014 Equity Incentive Plan(11)
10.15
Addendum to Change in Control Severance Agreement with William S. Lance (12)
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


 
46

 

(1)  
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

(2)  
Incorporated by reference into this document from the identically numbered exhibit to the Registrant’s Form 10-Q filed with the Commission on August 8, 2014.

(3)  
Incorporated by reference into this document from the identically numbered exhibits to the Registrant’s Form 10-K filed with the Commission on March 15, 2010.

(4)  
Incorporated herein by reference to the identically numbered exhibits of the Registrant’s Form 10-K filed with the Commission on March 23, 2000.

(5)  
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.

(6)  
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.

(7)  
Incorporated herein by reference to the identically numbered exhibit to the Registrant’s Form 10-K filed with the Commission on March 22, 2004.

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

(9)  
Incorporated herein by reference from the Exhibits to the Registrant’s Current Report on Form 8-K filed on April 4, 2006.

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

(11)  
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.

(12)  
Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on February 18, 2015.
 
 

 
47

 

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 8, 2015
 
By:
 
/s/ Lewis J. Critelli
 
         
Lewis J. Critelli
 
         
President and Chief Executive Officer
 
         
(Principal Executive Officer)
 
             
Date:
May 8, 2015
 
By:
 
/s/ William S. Lance
 
         
William S. Lance
 
         
Executive Vice President and
 
         
Chief Financial Officer
 
         
(Principal Financial Officer)
 

 
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