What changed in this filing

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Item 1. Financial Statements

2020-11-06 compared with 2020-08-07 · 293 added, 159 removed, 774 unchanged (37% of the section changed)

3 unchanged sentences

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

September 30,

Cash and due from banks

38 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

INTEREST INCOME

35 unchanged sentences

Three Months Ended

September 30,

Other comprehensive income:

Investment securities available for sale:

Unrealized holding gain

Unrealized holding gain (loss)

Reclassification of investment securities gains

recognized in net income

Other comprehensive income

Other comprehensive (loss) income

Comprehensive Income

Six Months Ended

Other comprehensive income (loss):

Nine Months Ended

September 30,

Other comprehensive income

Investment securities available for sale:

Unrealized holding gain (loss)

Unrealized holding gain

Reclassification of investment securities gains

recognized in net income

Other comprehensive income (loss)

Other comprehensive income

Comprehensive Income

2 unchanged sentences

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

Six Months Ended June 30, 2020 and 2019

Nine Months Ended September 30, 2020 and 2019

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

4 unchanged sentences

Cash dividends declared ($ 0.75 per share)

Acquisition of UpState New York Bancorp, Inc.

Acquisition of treasury stock

2 unchanged sentences

Compensation expense related to stock options

Balance, June 30, 2020

Balance, September 30, 2020

Treasury Stock

7 unchanged sentences

Compensation expense related to stock options

Balance, June 30, 2019

Balance, September 30, 2019

NORWOOD FINANCIAL CORP

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

Three Months Ended June 30, 2020 and 2019

Three Months Ended September 30, 2020 and 2019

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

2 unchanged sentences

Income (Loss)

Balance, March 31, 2020

Other comprehensive income

Balance, June 30, 2020

Other comprehensive loss

Cash dividends declared ($ 0.25 per share)

Acquisition of UpState New York Bancorp, Inc.

Compensation expense related to restricted stock

Acquisition of treasury stock

Stock options exercised

Compensation expense related to stock options

Balance, June 30, 2020

Balance, September 30, 2020

Treasury Stock

Comprehensive

Balance, March 31, 2019

Other comprehensive loss

Balance, June 30, 2019

Other comprehensive income

Cash dividends declared ($ 0.24 per share)

2 unchanged sentences

Compensation expense related to stock options

Balance, June 30, 2019

Balance, September 30, 2019

See accompanying notes to the unaudited consolidated financial statements.

2 unchanged sentences

(dollars in thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

CASH FLOWS FROM OPERATING ACTIVITIES

12 unchanged sentences

Compensation expense related to restricted stock

Increase in accrued interest receivable

Increase in accrued interest payable

(Increase) decrease in accrued interest receivable

(Decrease) increase in accrued interest payable

Net cash provided by operating activities

9 unchanged sentences

Proceeds from sales of bank premises and equipment

Acquisition, net of cash and cash equivalents acquired

Net cash used in investing activities

1 unchanged sentence

Net increase in deposits

Net decrease in short-term borrowings

Net increase (decrease) in short-term borrowings

Repayments of other borrowings

10 unchanged sentences

(dollars in thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Supplemental Disclosures of Cash Flow Information

5 unchanged sentences

Dividends payable

Merger with UpState New York Bancorp, Inc.

Noncash assets acquired:

Securities available-for-sale

Regulatory stock

Premises and equipment, net

Accrued interest receivable

Deferred tax assets

Liabilities assumed:

Time deposits

Deposits other than time deposits

Accrued interest payable

Other liabilities

Net Noncash Assets Acquired

Cash Acquired

See accompanying notes to the unaudited consolidated financial statements.

1 unchanged sentence

Basis of Presentation

The unaudited consolidated financial statements include the accounts of Norwood Financial Corp (Company) and its wholly-owned subsidiary, Wayne Bank (Bank) and the Bank’s wholly-owned subsidiaries, WCB Realty Corp., Norwood Investment Corp., and WTRO Properties, Inc.

The unaudited consolidated financial statements include the accounts of Norwood Financial Corp (the “Company”) and its wholly-owned subsidiary, Wayne Bank (the “Bank”) and the Bank’s wholly-owned subsidiaries, WCB Realty Corp., Norwood Investment Corp., and WTRO Properties, Inc.

All significant intercompany accounts and transactions have been eliminated in consolidation.

4 unchanged sentences

The financial statements reflect, in the opinion of management, all normal, recurring adjustments necessary to present fairly the consolidated financial position and results of operations of the Company.

The operating results for the three month and six month periods ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 or any other future interim period.

The operating results for the three-month and nine-month periods ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 or any other future interim period.

Revenue Recognition

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

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and six months ended June 30:

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine months ended September 30:

Three months ended

September 30,

(dollars in thousands)

16 unchanged sentences

Total Noninterest Income

Six months ended

Nine months ended

September 30,

(dollars in thousands)

23 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Weighted average shares outstanding

4 unchanged sentences

Diluted EPS weighted average shares outstanding

For the three and six month periods ended June 30, 2020, there were 82,600 stock options that were anti-dilutive and thereby excluded from the earnings per share calculations based upon the closing price of Norwood common stock of $ 24.79 per share as of June 30, 2020.

For the three and six month periods ending June 30, 2019, there were no stock options that would be anti-dilutive to the earnings per share calculations based upon the closing price of Norwood common stock of $ 34.81 per share on June 30, 2019.

For the three and nine month periods ended September 30, 2020, there were 112,600 stock options that were anti-dilutive and thereby excluded from the earnings per share calculations based upon the closing price of the Company’s common stock of $ 24.32 per share as of September 30, 2020.

For the three and nine month periods ending September 30, 2019, there were 60,650 stock options that were anti-dilutive and thereby excluded from the earnings per share calculations based upon the closing price of the Company’s common stock of $ 31.61 per share on September 30, 2019.

Stock-Based Compensation

No awards were granted during the six-month period ended June 30, 2020.

As of June 30, 2020, there was $ 102,000 of total unrecognized compensation cost related to non-vested options granted in 2019 under the 2014 Equity Incentive Plan, which will be fully amortized by December 31, 2020.

Compensation costs related to stock options amounted to $ 102,000 and $ 104,000 during the six-month periods ended June 30, 2020 and 2019, respectively.

A summary of the Company’s stock option activity for the six-month period ended June 30, 2020 is as follows:

No awards were granted during the nine-month period ended September 30, 2020.

As of September 30, 2020, there was $ 51,000 of total unrecognized compensation cost related to non-vested options granted in 2019 under the 2014 Equity Incentive Plan, which will be fully amortized by December 31, 2020.

Compensation costs related to stock options amounted to $ 153,000 and $ 156,000 during the nine-month periods ended September 30, 2020 and 2019, respectively.

A summary of the Company’s stock option activity for the nine-month period ended September 30, 2020 is as follows:

Average Exercise

3 unchanged sentences

Outstanding at January 1, 2020

Outstanding at June 30, 2020

Exercisable at June 30, 2020

Outstanding at September 30, 2020

Exercisable at September 30, 2020

Intrinsic value represents the amount by which the market price of the stock on the measurement date exceeded the exercise price of the option.

The market price was $ 24.79 per share as of June 30, 2020 and $ 38.90 per share as of December 31, 2019.

A summary of the Company’s restricted stock activity for the six-month periods ended June 30, 2020 and 2019 is as follows:

The market price was $ 24.32 per share as of September 30, 2020 and $ 38.90 per share as of December 31, 2019.

A summary of the Company’s restricted stock activity for the nine-month periods ended September 30, 2020 and 2019 is as follows:

Weighted-Average

3 unchanged sentences

Non-vested, January 1,

Non-vested, June 30,

The expected future compensation expense relating to the 36,195 shares of non-vested restricted stock outstanding as of June 30, 2020 is $ 979,000 .

Non-vested, September 30,

The expected future compensation expense relating to the 36,195 shares of non-vested restricted stock outstanding as of September 30, 2020 is $ 895,000 .

This cost will be recognized over the remaining vesting period of 4.25 years.

Compensation costs related to restricted stock amounted to $ 167,000 and $ 145,000 during the six-month periods ended June 30, 2020 and 2019, respectively.

Compensation costs related to restricted stock amounted to $ 250,000 and $ 217,000 during the nine-month periods ended September 30, 2020 and 2019, respectively.

Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in accumulated other comprehensive income (loss) (in thousands) by component net of tax for the three and six months ended June 30, 2020 and 2019:

The following table presents the changes in accumulated other comprehensive income (loss) (in thousands) by component net of tax for the three and nine months ended September 30, 2020 and 2019:

Unrealized gains (losses) on

1 unchanged sentence

securities (a)

Balance as of March 31, 2020

Other comprehensive income before reclassification

Amount reclassified from accumulated other comprehensive loss

Total other comprehensive income

Balance as of June 30, 2020

Unrealized gains (losses) on

available for sale

securities (a)

Balance as of March 31, 2019

Other comprehensive loss before reclassification

1 unchanged sentence

Total other comprehensive loss

Balance as of September 30, 2020

Unrealized gains (losses) on

available for sale

securities (a)

Balance as of June 30, 2019

Other comprehensive income before reclassification

Amount reclassified from accumulated other comprehensive income

Total other comprehensive income

Balance as of September 30, 2019

Unrealized gains (losses) on

5 unchanged sentences

Total other comprehensive income

Balance as of June 30, 2020

Balance as of September 30, 2020

Unrealized gains (losses) on

2 unchanged sentences

Balance as of December 31, 2018

Other comprehensive loss before reclassification

Amount reclassified from accumulated other comprehensive loss

Total other comprehensive loss

Balance as of June 30, 2019

Other comprehensive income before reclassification

Amount reclassified from accumulated other comprehensive income

Total other comprehensive income

Balance as of September 30, 2019

(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 and six months ended June 30, 2020 and 2019:

The following table presents significant amounts reclassified out of each component of accumulated other comprehensive income (loss) (in thousands) for the three and nine months ended September 30, 2020 and 2019:

Amount Reclassified

5 unchanged sentences

Three months ended

September 30,

Unrealized gains on available for sale securities

1 unchanged sentence

Income tax expense

Six months ended

Nine months ended

September 30,

Unrealized gains on available for sale securities

10 unchanged sentences

(in thousands)

September 30,

Commitments to grant loans

13 unchanged sentences

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 June 30, 2020 for guarantees under standby letters of credit issued is not material.

The current amount of the liability as of September 30, 2020 for guarantees under standby letters of credit issued is not material.

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

June 30, 2020

September 30, 2020

(In Thousands)

14 unchanged sentences

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):

June 30, 2020

September 30, 2020

Less than 12 Months

12 unchanged sentences

Mortgage-backed securities-government sponsored entities

At June 30, 2020, the Company had five debt securities in an unrealized loss position in the less than twelve months category and no debt securities in the twelve months or more category.

At September 30, 2020, the Company had eight debt securities in an unrealized loss position in the less than twelve months category and no debt securities in the twelve months or more category.

In Management’s opinion the unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities.

1 unchanged sentence

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 June 30, 2020 by contractual maturity are shown below.

The amortized cost and fair value of debt securities as of September 30, 2020 by contractual maturity are shown below.

Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.

8 unchanged sentences

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

Ended June 30,

Ended September 30,

Gross realized gains

2 unchanged sentences

Proceeds from sales of securities

Securities with a carrying value of $ 163,150,000 and $ 196,986,000 at June 30, 2020 and 2019, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

Securities with a carrying value of $ 189,346,000 and $ 157,233,000 at September 30, 2020 and December 31, 2019, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

Loans Receivable and Allowance for Loan Losses

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

June 30, 2020

September 30, 2020

December 31, 2019

1 unchanged sentence

Commercial loans

Other agricultural loans

Consumer loans to individuals

3 unchanged sentences

Net loans receivable

During 2020 the Company participated in the Paycheck Protection Program (“PPP”), administered directly by the U.S.

During 2020 the Company participated in the Paycheck Protection Program (“PPP”), administered directly by the United States Small Business Administration (“SBA”).

The PPP provides loans to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during the COVID-19 emergency.

As of June 30, 2020, the Company had outstanding principal balances of $ 67.3 million.

The PPP loans are fully guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan is made as long as certain conditions are met regarding employee retention and compensation levels.

As of September 30, 2020, the Company had outstanding principal balances of $ 95,035,000 in PPP loans.

The PPP loans are fully guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs,

rent, and utility costs over a period of up to 24 weeks after the loan is made as long as certain conditions are met regarding employee retention and compensation levels.

PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company.

3 unchanged sentences

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

June 30, 2020

September 30, 2020

December 31, 2019

1 unchanged sentence

Carrying Amount

As a result of the acquisition of Delaware Bancshares, Inc.

(“Delaware”), the Company added $ 1,397,000 of loans that were accounted for in accordance with ASC 310-30.

Based on a review of the loans acquired by senior lending management, which included an analysis of credit deterioration of the loans since origination, the Company recorded a specific credit fair value adjustment of $ 499,000 .

As a result of the acquisition of UpState New York Bancorp, Inc.

(“UpState”), the Company added $ 15,410,000 of loans that were accounted for in accordance with ASC 310-30.

Based on a review of the loans acquired by the Company’s senior lending management, which included an analysis of credit deterioration of the loans since origination, the Company recorded a specific credit fair value adjustment of $ 6,937,000 .

For loans that were acquired with specific evidence of deterioration in credit quality, loan losses will be accounted for through a reduction of the specific reserve and will not impact the allowance for loan losses until actual losses exceed the allotted reserves.

For loans acquired without a deterioration of credit quality, losses incurred will result in adjustments to the allowance for loan losses through the allowance for loan loss adequacy calculation.

Changes in the accretable yield for purchased credit impaired loans for the nine-months ended September 30, 2019 and 2020, were as follows:

Balance at beginning of period

Reclassification and other

Balance at end of period

Loans acquired with credit deterioration of $ 15,410,000 and accounted for in accordance with ASC 310-30 were individually evaluated to estimate credit losses and a net recovery amount for each loan.

The net cash flows for each loan were then discounted to present value using a risk-adjusted market rate.

The table below presents the components of the purchase accounting adjustments:

(In Thousands)

Contractually required principal and interest

Non-accretable discount

Expected cash flows

Accretable discount

Estimated fair value

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.

8 unchanged sentences

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 June 30, 2020 and December 31, 2019, foreclosed real estate owned totaled $ 965,000 and $ 1,556,000 , respectively.

During the six months ended June 30, 2020, there were no additions to the foreclosed real estate category.

As of September 30, 2020 and December 31, 2019, foreclosed real estate owned totaled $ 965,000 and $ 1,556,000 , respectively.

During the nine months ended September 30, 2020, there were no additions to the foreclosed real estate category.

The Co mpany disposed of one property that was previously transferred to foreclosed real estate owned with a carrying value of $ 591,000 through the sale of the property.

As of June 30, 2020, the Company has initiated formal foreclosure proceedings on three properties classified as consumer residential mortgages with an aggregate carrying value of $ 59,000 .

As of September 30, 2020, the Company has initiated formal foreclosure proceedings on three properties classified as consumer residential mortgages with an aggregate carrying value of $ 440,000 .

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

Real Estate Loans

June 30, 2020

September 30, 2020

(In thousands)

9 unchanged sentences

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

June 30, 2020

September 30, 2020

(in thousands)

1 unchanged sentence

Real Estate Loans:

With an allowance recorded:

Real Estate Loans

Real Estate Loans:

Total Impaired Loans

7 unchanged sentences

Total Impaired Loans

The following table presents the average recorded investment in impaired loans and the related amount of interest income recognized during the three-month periods ended June 30, 2020 and 2019, respectively (in thousands):

The following table presents the average recorded investment in impaired loans and the related amount of interest income recognized during the three-month periods ended September 30, 2020 and 2019, respectively (in thousands):

Average Recorded

1 unchanged sentence

Real Estate Loans:

The following table presents the average recorded investment in impaired loans and the related amount of interest income recognized during the six-month periods ended June 30, 2020 and 2019, respectively (in thousands):

The following table presents the average recorded investment in impaired loans and the related amount of interest income recognized during the nine-month periods ended September 30, 2020 and 2019, respectively (in thousands):

Average Recorded

2 unchanged sentences

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 June 30, 2020 and December 31, 2019, troubled debt restructured loans totaled $ 93,000 and $ 99,000 , respectively , with no specific reserve.

For the six-month period ended June 30, 2020 and 2019, there were no new loans identified as troubled debt restructurings nor did the Company recognized any charge-off on a loan that was previously identified as a troubled debt restructuring.

As of September 30, 2020 and December 31, 2019, troubled debt restructured loans totaled $ 91,000 and $ 99,000 , respectively , with no specific reserve.

For the nine-month period ended September 30, 2020 and 2019, there were no new loans identified as troubled debt restructurings.

During 2019, the Company recognized a charge-off $ 451,000 on a loan that was previously identified as a troubled debt restructuring.

The loan was transferred to foreclosed real estate during the first quarter of 2019 with a carrying value of $ 608,000 .

On April 7, 2020, federal banking regulators issued a revised interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic.

The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented.

The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.

Management uses an eight point internal risk rating system to monitor the credit quality of the overall loan portfolio.

5 unchanged sentences

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.

4 unchanged sentences

Loans in the Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

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 June 30, 2020 and December 31, 2019 (in thousands):

June 30, 2020

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 September 30, 2020 and December 31, 2019 (in thousands):

September 30, 2020

Commercial real estate loans

Agricultural real estate loans

Commercial loans

Other agricultural loans

December 31, 2019

2 unchanged sentences

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 June 30, 2020 and December 31, 2019 (in thousands):

The following table presents the recorded investment in the loan classes based on payment activity as of September 30, 2020 and December 31, 2019 (in thousands):

Nonperforming

June 30, 2020

September 30, 2020

Residential real estate loans

5 unchanged sentences

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 June 30, 2020 and December 31, 2019 (in thousands):

The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of September 30, 2020 and December 31, 2019 (in thousands):

31-60 Days Past Due

2 unchanged sentences

Total Past Due and Non-Accrual

June 30, 2020

Purchased Credit-Impaired

September 30, 2020

Real Estate loans

Commercial loans

Other agricultural loans

Consumer loans

3 unchanged sentences

Total Past Due and Non-Accrual

Purchased Credit-Impaired

December 31, 2019

4 unchanged sentences

When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the allowance.

As of June 30, 2020, the allocation of the allowance pertaining to each major category of loans is higher than the allocation as of December 31, 2019.

As of September 30, 2020, the allocation of the allowance pertaining to each major category of loans is higher than the allocation as of December 31, 2019.

This increase is due primarily to an increase in the qualitative factor for economic conditions which worsened as a result of the COVID-19 pandemic.

The increase in this factor added $ 1.7 million to the required allowance for loan losses.

As of June 30, 2020, the Company has also added qualitative factors related to the pandemic to capture some of the risk associated with higher-risk industries and to recognize risk related to loans that have been granted deferral of payments due to COVID-19.

At June 30, 2020, the allowance for loan losses includes $ 1.0 million of COVID related factors.

These increases in the required allowance were offset partially by a decrease in the qualitative factor relating to loan growth which decreased by $ 908,000 due to a reduction in loan growth from 8.75 % in 2019 to projected growth of approximately 3.00 % for the year of 2020.

The 2020 growth excludes growth in Paycheck Protection Program loans which are fully guaranteed by the Small Business Association.

The increase in the economic factor added $ 2.2 million to the required allowance for loan losses.

As of September 30, 2020, the Company has also added qualitative factors related to the pandemic to capture some of the risk associated with higher-risk industries and to recognize risk related to loans that have been granted deferral of payments due to COVID-19.

At September 30, 2020, the allowance for loan losses includes $ 1.5 million of COVID related factors.

These increases in the required allowance were offset partially by a decrease in the qualitative factor relating to loan growth which decreased by $ 986,000 due to a reduction in loan growth from 8.75 % in 2019 to projected growth of approximately 2.00 % for the year

The 2020 growth excludes growth in Paycheck Protection Program loans which are fully guaranteed by the Small Business Association as well as loans acquired from UpState.

The following table presents the allowance for loan losses by the classes of the loan portfolio:

4 unchanged sentences

Provision for loan losses

Ending balance, June 30, 2020

Ending balance, September 30, 2020

Ending balance individually evaluated

5 unchanged sentences

Commercial Real Estate

Beginning balance, March 31, 2020

Beginning balance, June 30, 2020

Provision for loan losses

Ending balance, June 30, 2020

Ending balance, September 30, 2020

(In thousands)

3 unchanged sentences

Provision for loan losses

Ending balance, June 30, 2019

Ending balance, September 30, 2019

Ending balance individually evaluated

5 unchanged sentences

Commercial Real Estate

Beginning balance, March 31, 2019

Beginning balance, June 30, 2019

Provision for loan losses

Ending balance, June 30, 2019

The Company’s primary business activity as of June 30, 2020 was with customers located in northeastern Pennsylvania and the New York counties of Delaware and Sullivan.

Ending balance, September 30, 2019

The Company’s primary business activity as of September 30, 2020 was with customers located in northeastern Pennsylvania and the New York counties of Delaware, Sullivan, Ontario, Otsego and Yates.

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 June 30, 2020, the Company considered its concentration of credit risk to be acceptable.

The highest concentrations are in commercial rentals with $ 89.1 million of loans outstanding, or 9.0 % of total loans outstanding, and the hospitality/lodging industry with loans outstanding of $ 67.3 million, or 6.8 % of loans outstanding.

During 2020, the Company recognized a charge off of $ 33,000 on one property in the named concentrations.

As of September 30, 2020, the Company considered its concentration of credit risk to be acceptable.

The highest concentrations are in commercial rentals with $ 119.7 million of loans outstanding, or 8.5 % of total loans outstanding, and residential rentals with loans outstanding of $ 117.2 million, or 8.3 % of loans outstanding.

During 2020, the Company did not recognize any charge offs on loans in the named concentrations.

Operating Leases

The Company leases seven office locations under operating leases.

The Company leases eight office locations under operating leases.

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

2 unchanged sentences

These variable nonlease components were excluded from the calculation of the present value of the remaining lease payments, therefore, they are not included in other assets and other liabilities on the Consolidated Balance Sheets.

The lease cost associated with the operating leases for the six-month periods ending June 30, 2020 and 2019, amounted to $ 280,000 and $ 255,000 respectively.

The lease cost associated with the operating leases for the nine-month periods ending September 30, 2020 and 2019, amounted to $ 425,000 and $ 382,000 respectively.

Certain of the Company’s leases contain options to renew the lease after the initial term.

2 unchanged sentences

The discount rate utilized in calculating the present value of the remaining lease payments for each lease was the Federal Home Loan Bank of Pittsburgh advance rate corresponding to the remaining maturity of the lease.

The following table presents the weighted-average remaining lease term and discount rate for the leases outstanding at June 30, 2020.

The following table presents the weighted-average remaining lease term and discount rate for the leases outstanding at September 30, 2020.

Weighted-average remaining term

Weighted-average discount rate

The following table presents the undiscounted cash flows due related to operating leases as of June 30, 2020, along with a reconciliation to the discounted amount recorded on the Consolidated Balance Sheets:

The following table presents the undiscounted cash flows due related to operating leases as of September 30, 2020, along with a reconciliation to the discounted amount recorded on the Consolidated Balance Sheets:

Undiscounted cash flows due (in thousands)

15 unchanged sentences

Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2020 and December 31, 2019 are as follows:

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2020 and December 31, 2019 are as follows:

Fair Value Measurement Using

1 unchanged sentence

(In thousands)

June 30, 2020

September 30, 2020

Available for Sale:

16 unchanged sentences

Assets and Liabilities Required to be Measured and Reported at Fair Value on a Non-Recurring Basis

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2020 and December 31, 2019 are as follows:

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2020 and December 31, 2019 are as follows:

Fair Value Measurement Using Reporting Date

(In thousands)

June 30, 2020

September 30, 2020

Impaired Loans

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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 June 30, 2020, the fair value investment in impaired loans totaled $ 1,531,000 which included one loan relationship that required a valuation allowance of $ 392,000 since the estimated realizable value of the collateral was not sufficient to cover the recorded investment in the loan.

As of June 30, 2020, the Company has recognized a charge-off against the allowance for loan losses on this impaired loan in the amount of $ 33,000 .

As of September 30, 2020, the fair value investment in impaired loans was $ 0 since no loans required a specific reserve at period end.

As of December 31, 2019, the fair value investment in impaired loans totaled $ 1,584,000 which included two loans that required a valuation allowance of $ 417,000 since the estimated realizable value of the collateral or the discounted cash flows were not sufficient to cover the recorded investment in the loans.

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Range (Weighted Average)

June 30, 2020

September 30, 2020

Impaired loans

1 unchanged sentence

Appraisal adjustments(2)

10.00 % ( 10.00 %)

Foreclosed real estate owned

28 unchanged sentences

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 June 30, 2020 and December 31, 2019.

The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at September 30, 2020 and December 31, 2019.

Loans receivable (carried at cost):

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These prices obtained from this active market represent a fair value that is deemed to represent the transfer price if the liability were assumed by a third party.

The estimated fair values of the Bank’s financial instruments not required to be measured or reported at fair value were as follows at June 30, 2020 and December 31, 2019.

The estimated fair values of the Bank’s financial instruments not required to be measured or reported at fair value were as follows at September 30, 2020 and December 31, 2019.

(In thousands)

Fair Value Measurements at June 30, 2020

Fair Value Measurements at September 30, 2020

Carrying Amount

37 unchanged sentences

The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset.

The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period.

The income statement will be affected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period.

With certain exceptions, transition to the new r equirements will be through a cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted.

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This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

We expect to recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

We expect to recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective

but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment .

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The Update also removes the disclosure requirements for the effects of a one percentage point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost, and the benefit obligation for postretirement health care benefits.

This Update is effective for public business entities for fiscal years ending

after December 15, 2020, and must be applied on a retrospective basis.

This Update is effective for public business entities for fiscal years ending after December 15, 2020, and must be applied on a retrospective basis.

For all other entities, this Update is effective for fiscal years ending after December 15, 2021.

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In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) .

The Update defers the effective dates of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

The Update defers the effective dates of ASU 2016-13 for SEC filers that are eligible to

be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

This Update also amends the mandatory effective date for the elimination of Step 2 from the goodwill impairment test under ASU No.

11 unchanged sentences

This Update provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax and provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or was a separate transaction.

in a foreign entity transitions to or from the equity method of accounting, accounting for tax law changes and year-to-date losses in interim periods, and determining how to apply the income tax guidance to franchise taxes that are partially based on income.

The Update also changes current guidance for making an intraperiod allocation if there is a loss in continuing operations and gains outside of continuing operations, determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity method of accounting, accounting for tax law changes and year-to-date losses in interim periods, and determining how to apply the income tax guidance to franchise taxes that are partially based on income.

For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

21 unchanged sentences

The amendments in this ASU are effective for all entities upon issuance through December 31, 2022.

The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

It is too early to predict whether a new rate index replacement and the adoption of the ASU will have a material impact on the Company’s financial statements.

Acquisition of UpState New York Bancorp, Inc.

and USNY Bank.

On January 8, 2020, Norwood Financial Corp.

(“Norwood”) and its wholly owned subsidiary, Wayne Bank, and UpState New York Bancorp, Inc.

(“UpState”), and its wholly owned subsidiary, USNY Bank entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which UpState would merge with and into Norwood, with Norwood as the surviving corporation (“the Merger”).

On January 8, 2020, the Company and the Bank, and UpState and its wholly owned subsidiary, USNY Bank entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which UpState would merge with and into the Company, with the Company as the surviving corporation (“the Merger”).

The Merger was completed on July 7, 2020.

Pursuant to the terms of the Merger Agreement, UpState was merged with and into Norwood, with Norwood as the surviving corporation of the Merger.

Pursuant to the terms of the Merger Agreement, UpState was merged with and into the Company, with the Company as the surviving corporation of the Merger.

Immediately following the Merger, USNY Bank was merged with and into Wayne Bank, with Wayne Bank as the surviving entity.

USNY Bank conducted its business from two Bank of the Finger Lakes offices in Geneva and Penn Yan, New York, and two Bank of Cooperstown offices in Cooperstown and Oneonta, New York.

At March 31, 2020, UpState had total assets of $ 443.8 million, total deposits of $ 393.9 million and total stockholders’ equity of $ 46.5 million.

Pursuant to the terms of the Merger Agreement, shareholders of UpState elected to receive for each share of UpState common stock they owned, either 0.9390 shares of Norwood common stock or $ 33.33 in cash, or a combination of both.

All shareholder elections were subject to the allocation and proration procedures set forth in the Merger Agreement which were intended to ensure that 90 % of the shares of UpState would be exchanged for Norwood common stock and 10 % of the shares of UpState would be exchanged for cash.

At June 30, 2020, UpState had total assets of $ 463.8 million, total deposits of $ 412.8 million and total stockholders’ equity of $ 44.8 million.

Pursuant to the terms of the Merger Agreement, shareholders of UpState elected to receive for each share of UpState common stock they owned, either 0.9390 shares of the Company’s common stock or $ 33.33 in cash, or a combination of both.

All shareholder elections were subject to the allocation and proration procedures set forth in the Merger Agreement which were intended to ensure that 90 % of the shares of UpState would be exchanged for the Company’s common stock and 10 % of the shares of UpState would be exchanged for cash.

In addition, under the terms of the Merger Agreement, UpState shareholders received an additional $ 0.67 per share in cash for each share of UpState common stock held.

In the aggregate, the merger consideration paid to UpState shareholders consisted of approximately $ 8,845,198 in cash and 1,865,738 shares of Norwood common stock.

The senior management of Norwood and Wayne Bank remained the same following the completion of the Merger.

In the aggregate, the merger consideration paid to UpState shareholders consisted of approximately $ 8,845,198 in cash and 1,865,738 shares of the Company’s common stock.

The senior management of the Company and Wayne Bank remained the same following the completion of the Merger.

UpState directors Jeffrey S.

Gifford and Alexandra K.

Nolan have been appointed to the boards of directors of Norwood and Wayne Bank.

Nolan have been appointed to the boards of directors of the Company and Wayne Bank.

In addition, the remaining former directors of UpState have been invited to join a regional advisory board.

1 unchanged sentence

Michael Briggs has entered into a consulting agreement with Wayne Bank.

Norwood has retained the brand names of USNY’s two

units, Bank of the Finger Lakes and Bank of Cooperstown, and has also retained USNY’s administration center in Geneva, New York.

The Company has retained the brand names of USNY Bank’s two units, Bank of the Finger Lakes and Bank of Cooperstown, and has also retained USNY Bank’s administration center in Geneva, New York.

White, unit President of Bank of Cooperstown, and Jeffrey E.

Franklin, unit President of Bank of the Finger Lakes, will also remain in place as executives of their units.

The acquired assets and assumed liabilities were measured at estimated fair values.

Management made significant estimates and exercised significant judgement in accounting for the acquisition.

Management measured loan fair values based on loan file reviews, appraised collateral values , expected cash flows, and historical loss factors.

The Company also recorded and identifiable asset representing the core deposit base of UpState based on management’s evaluation of the cost of such deposits relative to alternative funding sources.

Management used significant estimates including the average lives of depository accounts, future interest rate levels, and the cost of servicing various depository products.

Management used market quotations to determine the fair value of investment securities.

The business combination resulted in the acquisition of loans with and without evidence of credit quality deterioration.

UpState loans were deemed impaired at the acquisition date if the Company did not expect to receive all contractually required cash flows due to concerns about credit quality.

Such loans were fair valued and the difference between contractually required payments at the acquisition date and cash flows expected to be collected was recorded as a non-accretable difference.

At the acquisition date, the Company recorded $ 15,410,000 of purchased credit-impaired loans subject to a non-accretable difference of $ 5,213,000 .

The method of measuring carrying value of purchased loans differs from loans originated by the Company (originated loans), and as such, the Company identifies purchased loans and purchased loans with a credit quality discount and originated loans at amortized cost.

UpState’s loans without evidence of credit deterioration were fair valued by discounting both expected principal and interest cash flows using an observable discount rate for similar instruments that a market participant would consider in determining fair value.

Additionally, consideration was given to management’s best estimates of default rates and payment speeds.

At acquisition, UpState’s loan portfolio without evidence of deterioration totaled $ 400,127,000 and was recorded at a fair value of $ 393,580,000 .

The following table summarizes the purchase of UpState as of July 7, 2020:

(Dollars in Thousands, Except Per Share Data)

Purchase Price Consideration in Common Stock

UpState New York Bancorp, Inc.

common shares settled for stock

Exchange Ratio

Norwood Financial Corp shares issued

Value assigned to each Norwood Financial Corp common share

Purchase price assigned to UpState New York Bancorp, Inc.

common shares

exchanged for Norwood Financial Corp shares

Purchase Price Consideration - Cash for Common Stock

UpState New York Bancorp, Inc.

shares exchanged for cash, excluding fractional shares

Purchase price paid to each UpState New York Bancorp, Inc.

common share exchanged for cash

Purchase price assigned to UpState New York Bancorp, Inc.

common shares exchanged for cash

Purchase price additional cash consideration per share

Purchase price consideration - Cash-in-lieu of Fractional Shares

Total Purchase Price

Net Assets Acquired:

UpState New York Bancorp, Inc.

shareholders'

UpState New York Bancorp, Inc.

goodwill and intangibles

Total tangible equity

Adjustments to reflect assets acquired at fair value:

Interest rate

General credit

Specific credit - non-amortizing

Specific credit - amortizing

Core deposit intangible

Deferred loan fees

Premises and equipment

Allowance for loan and lease losses

Deferred tax assets

Adjustments to reflect liabilities acquired at fair value:

Time deposits

Net assets acquired

Goodwill resulting from merger

The fo llowing condensed statement reflects the values assigned to UpState New York Bancorp, Inc.

net assets as of the acquisition date:

(In Thousands)

Total purchase price

Net assets acquired:

Securities available for sale

Premises and equipment, net

Regulatory stock

Accrued interest receivable

Core deposit intangible

Accrued interest payable

Other liabilities

Total identifiable net assets acquired

Goodwill resulting from UpState New York Bancorp, Inc.

The Company recorded goodwill and other intangibles associated with the acquisition of UpState New York Bancorp, Inc.

totaling $ 19,291,000 .

Goodwill is not amortized, but is periodically evaluated for impairment.

The Company did no t recognize any impairment during the nine months ended September 30, 2020.

The carrying amount of the goodwill at September 30, 2020 related to the UpState acquisition was $ 18,882,000 .

Identifiable intangibles are amortized to their estimated residual values over the expected useful lives.

Such lives are also periodically reassessed to determine if any amortization period adjustments are required.

During the nine months ended September 30, 2020, no such adjustments were recorded.

The identifiable intangible assets consist of a core deposit intangible which is being amortized on an accelerated basis over the useful life of such asset.

The gross carrying amount of the core deposit intangible at September 30, 2020 was $ 409,000 with $ 19,000 accumulated depreciation as of that date.

As of September 30, 2020, the current year and estimated future amortization expense for the core deposit intangible associated with the UpState acquisition is:

(In thousands)

After five years

The following table presents financial information for the former UpState included in the Consolidated Statements of Income from the date of acquisition through September 30, 2020:

Acquisition Date

September 30,2020

(in thousands)

Net interest income after provision for loan losses

Noninterest income

The following table presents pro forma information for the nine and three-month periods ended September 30, 2020 and 2019, as if the acquisition of UpState had occurred on January 1, 2019.

This table has been prepared for comparative purposes only, and is not indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of the periods presented, nor is it indicative of future results:

Nine Months Ended September 30,

Three Months Ended September 30,

(In Thousands, Except Per Share Data)

Net interest income after provision for loan losses

Noninterest income

Pro forma earnings per share:

Risks and Uncertainties

6 unchanged sentences

PPP loans will have:

(a) an interest rate of 1.0%, (b) a two-year loan term to maturity;

and (c) principal and interest payments deferred for six months from the date of disbursement.

(a) an interest rate of 1.0%, (b) a two-year or five-year loan term to maturity;

and (c) principal and interest payments deferred for ten months from the end of the coverage period.

The SBA will guarantee 100% of the PPP loans made to eligible borrowers.

The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses.

As of June 30, 2020, the Company approved 746 applications for $ 67.3 million of loans under the PPP.

As of September 30, 2020, the Company approved 1,138 applications for $ 95.0 million of loans under the PPP.

Since the opening of the PPP, several larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP.

4 unchanged sentences

The Company also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP.

In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by Norwood , the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

Owner-Occupied Residential Mortgage & Consumer Loans .

For residential mortgage and consumer loans, CARES Act Section 4013 forbearance agreements are available to qualified borrowers.

As of June 30, 2020, we had processed 112 residential mortgage payment deferrals of $ 11.0 million.

None of the deferrals granted were to non-owner-occupied loans.

Due to the widespread impact of the State of Pennsylvania and the State of New York Stay-At-Home orders, we expect that additional residential loan borrowers will seek loan forbearance or loan modification agreements in the third quarter of 2020.

As of June 30, 2020, we received requests to modify 918 loans aggregating $ 192.9 million primarily consisting of the deferral of principal and interest payments and the extension of the maturity date.

Details with respect to actual loan modifications are as follows:

In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company , the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

COVID-19 Loan Forbearance Programs .

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This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.

See Note 8 of the financial statements for additional disclosure of TDRs at June 30, 2020.

The following table presents a summary of loans that were granted forbearance by type of loan as of June 30, 2020:

See Note 8 of the financial statements for additional disclosure of TDRs at September 30, 2020.

The following table presents a summary of loans that were granted forbearance by type of loan during the nine-months ended September 30, 2020:

‎ (in thousands)

1 unchanged sentence

Commercial, financial and agricultural

Other agricultural loans

Consumer loans to individuals

The following table presents a summary of loans that remain in forbearance by type of loan as of June 30, 2020:

The following table presents a summary of loans that remain in forbearance by type of loan as of September 30, 2020:

‎ (in thousands)

1 unchanged sentence

Commercial, financial and agricultural

Other agricultural loans

Consumer loans to individuals

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements