EDGAR 10-K Filing

Company CIK: 1013272
Filing Year: 2023
Filename: 1013272_10-K_2023_0001562762-23-000122.json

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ITEM 1. BUSINESS
Item 1. Business .
General
Norwood Financial Corp (the “Company”), a Pennsylvania corporation, was incorporated in 1995 to become the holding company for Wayne Bank (the “Bank”). The Company is a registered bank holding company subject to regulation and supervision by the Board of Governors of the Federal Reserve System (“Federal Reserve”). As of December 31, 2022, the Company had total consolidated assets of $2.047 billion, consolidated deposits of $1.728 billion, and consolidated stockholders’ equity of $167.1 million. The Company’s ratio of average equity to average assets was 8.87%, 10.04%, and 10.70% for fiscal years 2022, 2021 and 2020, respectively. The decrease in the 2022 level was due to the impact of rising interest rates and the related decrease in accumulated other comprehensive income.
Wayne Bank is a Pennsylvania chartered bank and trust company headquartered in Honesdale, Pennsylvania. The Bank was originally chartered on February 17, 1870, as Wayne County Savings Bank and changed its name to Wayne County Bank and Trust in December 1943. In September 1993, the Bank adopted the name Wayne Bank. The Bank’s deposits are currently insured to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”) and the Bank is a member of the Federal Home Loan Bank (“FHLB”) of Pittsburgh. The Bank is regulated and examined by the Pennsylvania Department of Banking and Securities (“Department”) and the FDIC. The Bank is an independent community bank with fourteen offices in Northeastern Pennsylvania and fifteen offices in Delaware, Sullivan, Ontario, Otsego and Yates Counties, New York.
The Bank offers a wide variety of personal and business credit services and trust and investment products and real estate settlement services to the consumers, businesses, nonprofit organizations, and municipalities in each of the communities that the Bank serves. The Bank primarily serves the northeastern Pennsylvania counties of Wayne, Pike, Monroe, Lackawanna and Luzerne and, to a much lesser extent, Susquehanna County in addition to the New York counties of Delaware, Sullivan, Ontario, Otsego and Yates. In addition, the Bank operates automated teller machines at twenty-nine branch facilities plus one machine at an off-site location.
The Company’s main office is located at 717 Main Street, Honesdale, Pennsylvania and its main telephone number is (570) 253-1455. The Company maintains a website at waynebank.com. Information on our website should not be treated as part of this Annual Report on Form 10-K. The Company makes copies of its Securities and Exchange Commission (“SEC”) filings available free of charge as soon as reasonably practicable after they are filed, through a link on its website to the SEC’s website.
Completed Acquisitions
UpState New York Bancorp, Inc. On July 7, 2020, the Company completed the acquisition of UpState New York Bancorp, Inc. (“UpState”), and its wholly owned subsidiary, USNY Bank (“USNY Bank”). The acquisition was completed when UpState was merged with and into the Company, with the Company as the surviving corporation of the merger and USNY Bank was merged with and into Wayne Bank, with Wayne Bank as the surviving entity. At the time of completion of the acquisition, 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.
In the merger, 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 the Company’s common stock.
Delaware Bancshares, Inc. On July 31, 2016, the Company completed the acquisition of Delaware Bancshares, Inc. (“Delaware”) and its wholly owned subsidiary, The National Bank of Delaware County (“NBDC”). At the time of acquisition, Delaware had approximately $375.6 million in assets and 12 banking offices in Delaware and Sullivan Counties, New York. Pursuant to the terms of the Agreement and Plan of Merger, dated March 10, 2016, by and among the Company, Wayne Bank, Delaware and NBDC (the “Delaware Agreement”), Delaware was merged with and into the Company, with the Company as the surviving corporation of the merger (the “Merger”) and NBDC was merged with and into Wayne Bank immediately thereafter. At the effective time of the Merger, each outstanding share of the common stock of Delaware was converted, at the election of the holder but subject to the limitations and allocation and proration provisions set forth in the Delaware Agreement, into either $16.68 in cash or 0.6221 of a share of the Company’s
common stock, par value $0.10 per share (the “Common Stock”). In the aggregate, the merger consideration paid to Delaware shareholders consisted of approximately $3,860,000 in cash and 431,605 shares of the Common Stock.
North Penn Bancorp, Inc.
On May 31, 2011, the Company completed the acquisition of North Penn Bancorp, Inc. (“North Penn”) and its wholly owned subsidiary, North Penn Bank. At the time of acquisition, North Penn had approximately $158.9 million in assets and four banking offices in Lackawanna and Monroe Counties, Pennsylvania. Pursuant to the terms of the Agreement and Plan of Merger by and among the Company, Wayne Bank, and North Penn, North Penn was merged with and into the Company, with the Company as the surviving corporation of the merger (the “Merger”) and North Penn Bank was merged with and into Wayne Bank immediately thereafter. At the effective time of the Merger, each outstanding share of the common stock of North Penn was converted, at the election of the holder but subject to the limitations and allocation and proration provisions set forth in the Merger Agreement, into either $19.12 in cash or 0.6829 of a share of the Company’s common stock, par value $0.10 per share (the “Common Stock”). In the aggregate, the merger consideration paid to North Penn shareholders consisted of approximately $10,648,000 in cash and 530,994 shares of the Common Stock.
Competition
The competition for deposit products comes from other insured financial institutions such as commercial banks, thrift institutions, credit unions, and multi-state regional banks in the Company’s market area of Wayne, Pike, Monroe, Lackawanna and Luzerne Counties, Pennsylvania and Delaware, Sullivan, Ontario, Otsego and Yates Counties, New York as well as from on-line banks. Based on data compiled by the FDIC as of June 30, 2022 (the latest date for which such data is available), the Bank had the third largest share of FDIC-insured deposits in Wayne County with approximately 22.63%, the second largest share in Pike County with 17.83%, seventh largest share in Monroe County with 3.55%, the eleventh largest share in Lackawanna County with 1.04% and the seventeenth largest share in Luzerne County with 0.28%. At June 30, 2022, the Bank had the largest share of FDIC-insured deposits in Delaware County, New York, with 30.01% and the fifth largest share in Sullivan County, New York, with 7.95%. The Bank’s market share in Ontario, Otsego and Yates Counties were 3.82%, 16.32% and 12.60%, respectively. This data does not reflect deposits held by credit unions with which the Bank also competes. Deposit competition also includes a number of insurance products sold by local agents and investment products such as mutual funds and other securities sold by local and regional brokers. Loan competition varies depending upon market conditions and comes from other insured financial institutions such as commercial banks, thrift institutions, credit unions, multi-state regional banks, and mortgage bankers.
Personnel
As of December 31, 2022, the Bank had 274 full-time and two part-time employees. None of the Bank’s employees are represented by a collective bargaining group.
Trust Activities
The Bank operates a Wealth Management/Trust Department which provides estate planning, investment management and financial planning to customers for which it is generally compensated based on a percentage of assets under management. As of December 31, 2022, the Bank had $184.9 million of assets under management compared to $196.0 million as of December 31, 2021. The decrease reflects reduced market valuations during 2022, such as stock market performance which can affect the value of a customer’s investment portfolio.
Subsidiary Activities
The Bank, a Pennsylvania chartered bank, is the only wholly owned subsidiary of the Company. Norwood Investment Corp. (“NIC”), a Pennsylvania corporation incorporated in 1996 and a Pennsylvania licensed insurance agency, is a wholly owned subsidiary of the Bank. NIC’s business is annuity and mutual fund sales and discount brokerage activities primarily to customers of the Bank. The annuities, mutual funds and other investment products are not insured by the FDIC or any other government agency. They are not deposits, obligations of or guaranteed by any bank. Until February 16, 2018, securities were offered through Invest Financial, a registered broker/dealer. Effective February 16, 2018, the broker/dealer relationship transitioned to LPL Financial LLC (“LPL”) as a result of the sale of Invest to LPL in 2017. LPL is a registered broker/dealer and a member of FINRA and the SIPC. NIC generated gross revenues for the Company of $119,000 and $127,000 in 2022 and 2021, respectively, which is included in Other Income.
WCB Realty Corp., a Pennsylvania corporation, is a wholly owned real estate subsidiary of the Bank whose principal asset is the administrative offices of the Company, which also includes the Main Office of the Bank.
WTRO Properties Inc., a Pennsylvania corporation, is a wholly owned real estate subsidiary of the Bank established to hold title to certain real estate upon which the Bank has foreclosed. As of December 31, 2022 and 2021, the outstanding balance of foreclosed properties on which WTRO held title totaled $346,000 and $1,742,000, respectively.
Regulation
Set forth below is a brief description of certain laws which relate to the regulation of the Company and the Bank. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations.
Regulation of the Company
General. The Company, as a bank holding company registered under the Bank Holding Company Act of 1956, as amended (“BHCA”), is subject to regulation and supervision by the Federal Reserve. The Company is required to file periodic reports of its operations with, and is subject to examination by, the Federal Reserve. This regulation and oversight is generally intended to ensure that the Company limits its activities to those allowed by law and that it operates in a safe and sound manner without endangering the financial health of its subsidiary bank.
Under the BHCA, the Company generally must obtain the prior approval of the Federal Reserve before it may acquire control of another bank or bank holding company, merge or consolidate with another bank holding company, acquire all or substantially all of the assets of another bank or bank holding company, or acquire direct or indirect ownership or control of any voting shares of any bank or bank holding company if, after such acquisition, the Company would directly or indirectly own or control more than 5% of such shares.
Federal statutes impose restrictions on the ability of a bank holding company and its nonbank subsidiaries to obtain extensions of credit from its subsidiary bank, on the subsidiary bank’s investments in the stock or securities of the holding company, and on the subsidiary bank’s taking of the holding company’s stock or securities as collateral for loans to any borrower. A bank holding company and its subsidiaries are also prevented from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services by the subsidiary bank.
Source of Strength Doctrine. Under the Bank Holding Company Act, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. Under this source of strength doctrine, a bank holding company should stand ready to use available resources to provide adequate capital to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve regulations, or both.
Non-Banking Activities. The business activities of the Company, as a bank holding company, are restricted by the BHCA. Under the BHCA and the Federal Reserve’s bank holding company regulations, a bank holding company generally may only engage in, or acquire or control voting securities or assets of a company engaged in, (1) banking or managing or controlling banks and other subsidiaries authorized under the BHCA and (2) any business activity the Federal Reserve has determined to be so closely related to banking or managing or controlling banks to be a proper incident thereto. These include any incidental activities necessary to carry on those activities, as well as a lengthy list of activities that the Federal Reserve has determined to be so closely related to the business of banking as to be a proper incident thereto.
In addition to the above authority, bank holding companies that qualify and elect to be treated as “financial holding companies” may engage in a broad range of additional activities that are (i) financial in nature or incidental to such financial activities or (ii) complementary to a financial activity and do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. These activities include securities underwriting and dealing, insurance agency and underwriting, and making merchant banking investments. The Company has not made an election to be deemed a financial holding company.
Regulatory Capital Requirements. The Federal Reserve has adopted regulatory capital rules pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the BHCA. The Federal Reserve’s capital rules are similar to those imposed on the Bank by the FDIC. See “Regulation of the Bank-Regulatory Capital Requirements.” The Federal Reserve’s Small Bank Holding Company Policy Statement, however, exempts from the regulatory capital requirements bank holding companies with less than $3.0 billion in consolidated assets that are not engaged in significant non-banking or off-balance sheet activities and that do not have a material amount of debt or equity securities registered with the SEC. As long as their bank subsidiaries are well capitalized, such bank holding companies need only maintain a pro forma debt to equity ratio of less than 1.0 in order to pay dividends and repurchase stock and to be eligible for expedited treatment on applications.
Regulation of the Bank
General. As a Pennsylvania chartered, FDIC-insured commercial bank which is not a member of the Federal Reserve System, the Bank is subject to extensive regulation and examination by the Department and by the FDIC, which insures its deposits to the maximum extent permitted by law. The federal and state laws and regulations applicable to banks regulate, among other things, the scope of their business, their investments, the reserves required to be kept against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for certain loans. The laws and regulations governing the Bank generally have been promulgated to protect depositors and not for the purpose of protecting stockholders. This regulatory structure also gives the federal and state banking agencies extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulation, whether by the Department, the FDIC or the United States Congress, could have a material impact on the Company, the Bank and their operations.
Pennsylvania Banking Law. The Pennsylvania Banking Code (“Banking Code”) contains detailed provisions governing the organization, location of offices, rights and responsibilities of directors, officers, and employees, as well as corporate powers, savings and investment operations and other aspects of the Bank and its affairs. The Banking Code delegates extensive rule-making power and administrative discretion to the Department so that the supervision and regulation of state-chartered banks may be flexible and readily responsive to changes in economic conditions and in savings and lending practices.
The Federal Deposit Insurance Act (“FDIA”), however, prohibits state-chartered banks from making new investments, loans, or becoming involved in activities as principal and equity investments which are not permitted for national banks unless (1) the FDIC determines the activity or investment does not pose a significant risk of loss to the Deposit Insurance Fund and (2) the bank meets all applicable capital requirements. Accordingly, the additional operating authority provided to the Bank by the Banking Code is significantly restricted by the FDIA.
Interstate Banking. Wayne Bank operates branches in Pennsylvania and New York. Under the federal Riegle-Neal Interstate Banking and Branching Efficiency Act (the “Riegle-Neal Act”), an insured state bank that establishes a branch in another state may conduct any activity at such branch that is permissible under the laws of its home state to the extent that such activity is permissible either for a bank chartered by the host state or for a branch of an out-of-state national bank in the host state. The laws of the host state, including laws regarding community reinvestment, consumer protection, fair lending and branching within the host state, apply to any branch of an out-of-state bank to the same extent as such laws apply to a branch of an out-of-state national bank. The Riegle-Neal Act prohibits out-of-state banks from using their interstate branches primarily for purposes of deposit production. If a federal banking regulator reasonably determines from available information that an out-of-state bank’s level of lending in a host state is less than half the loan-to-deposit ratio for all banks in the host state, the regulator may order the closure of the out-of-state branches or prohibit the opening of new branches in the host state unless the out-of-state bank has an acceptable plan or can give reasonable assurances that it will reasonably help meet the credit needs of the communities served in the host state.
Federal Deposit Insurance. The Bank’s deposits are insured to applicable limits by the FDIC. The general maximum deposit insurance amount is $250,000.
The Bank is subject to deposit insurance assessments established by the FDIC to maintain the DIF. Under the FDIC’s risk-based assessment system, banks that are deemed to be less risky pay lower assessments. Assessment rates for small institutions (those with less than $10 billion in assets) are based on an institution’s weighted average CAMELS component ratings and certain financial ratios and are applied to the institution’s assessment base, which equals its average total assets minus its average tangible equity.
In October 2022, the FDIC adopted a final rule that increased the initial base deposit insurance assessment rate schedules uniformly by 2 basis points beginning with the first quarterly assessment period of 2023. The increased assessment is expected to improve the likelihood that the DIF reserve ratio would reach the statutory minimum of 1.35% by the statutory deadline of September 30, 2028, consistent with the FDIC’s amended restoration plan. The FDIC assessment rates effective January 1, 2023 (which are subject to certain adjustments) range from 5 to 18 basis points for institutions with CAMELS composite ratings of 1 or 2, 8 to 32 basis points for those with a CAMELS composite score of 3, and 18 to 32 basis points for those with CAMELS composite scores of 4 or 5.
Regulatory Capital Requirements. The Bank is required to comply with applicable capital adequacy rules adopted by the FDIC and other federal bank regulatory agencies (the “Basel III Capital Rules”). The Basel III Capital Rules apply to all depository institutions as well as to all top-tier bank and savings and loan holding companies that are not subject to the Federal Reserve Small Bank Holding Company Policy Statement.
Under the Basel III Capital Rules, banks are required to meet four minimum capital standards: (1) a “Tier 1” or “core” capital leverage ratio equal to at least 4% of total adjusted assets; (2) a common equity Tier 1 capital ratio equal to 4.5% of risk-weighted assets; (3) a Tier 1 risk-based ratio equal to 6% of risk-weighted assets; and (4) a total capital ratio equal to 8% of total risk-weighted assets. Common equity Tier 1 capital is defined as common stock instruments, retained earnings, any common equity Tier 1 minority interest and, unless the bank has made an “opt-out” election, accumulated other comprehensive income, net of goodwill and certain other intangible assets. Tier 1 or core capital is defined as common equity Tier 1 capital plus certain qualifying subordinated interests and grandfathered capital instruments. Total capital consists of Tier 1 capital plus Tier 2 or supplementary capital items, which include allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, qualifying subordinated instruments and certain grandfathered capital instruments. An institution’s risk-based capital requirements are measured against risk-weighted assets, which equal the sum of each on-balance-sheet asset and the credit-equivalent amount of each off-balance-sheet item after being multiplied by an assigned risk weight. Risk weightings range from 0% for cash to 100% for property acquired through foreclosure, commercial loans, and certain other assets to 150% for exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that finance the acquisition, development or construction of real property.
In addition to the above minimum requirements, the Basel III Capital Rules require banks and covered financial institution holding companies to maintain a capital conservation buffer of at least 2.5% of risk-weighted assets over and above the minimum risk-based capital requirements. Institutions that do not maintain the required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement effectively raises the minimum required risk-based capital ratios to 7% for Common Equity Tier 1 Capital, 8.5% for Tier 1 Capital and 10.5% for Total Capital on a fully phased-in basis.
In assessing an institution’s capital adequacy, the FDIC takes into consideration not only these numeric factors but also qualitative factors, and has the authority to establish higher capital requirements for individual institutions where necessary.
The Bank is also subject to minimum capital requirements imposed by the Department on Pennsylvania-chartered depository institutions. Under the Department’s capital requirements, a Pennsylvania bank or savings bank must maintain a minimum leverage ratio of Tier 1 capital (as defined under the FDIC’s capital regulations) to total assets of 4%. In addition, the Department has the supervisory discretion to require higher leverage ratio for any institutions based on the institution’s substandard performance in any of a number of areas. The Bank was in compliance with both the FDIC and the Pennsylvania capital requirements in effect as of December 31, 2022.
Prompt Corrective Regulatory Action. Under applicable federal statutes, the federal bank regulatory agencies are required to take “prompt corrective action” with respect to institutions that do not meet specified minimum capital requirements. For these purposes, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Under the FDIC’s prompt corrective action regulations, an institution is deemed to be “well capitalized” if it has a Total Risk-Based Capital Ratio of 10.0% or greater, a Tier 1 Risk-Based Capital Ratio of 8.0% or greater, a Common Equity Tier 1 risk-based capital ratio of 6.5% or better and a leverage ratio of 5.0% or greater.
An institution is “adequately capitalized” if it has a Total Risk-Based Capital Ratio of 8.0% or greater, a Tier 1 Risk-Based Capital Ratio of 6.0% or greater, a Common Equity Tier 1 Capital Ratio of 4.5% or better and a Leverage Ratio of 4.0% or greater. An institution is “undercapitalized” if it has a Total Risk-Based Capital Ratio of less than 8.0%, a Tier 1 Risk-Based Capital ratio of less than 6.0%, a Common Equity Tier 1 ratio of less than 4.5% or a Leverage Ratio of less than 4.0%. An institution is deemed to be “significantly undercapitalized” if it has a Total Risk-Based Capital Ratio of less than 6.0%, a Tier 1 Risk-Based Capital Ratio of less than 4.0%, a Common Equity Tier 1 ratio of less than 3.0% or a Leverage Ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%
The prompt corrective action regulations provide for the imposition of a variety of requirements and limitations on institutions that fail to meet the above capital requirements. In particular, the FDIC may require any state non-member bank that is not “adequately capitalized” to take certain action to increase its capital ratios. If the non-member bank’s capital is significantly below the minimum required levels of capital or if it is unsuccessful in increasing its capital ratios, the bank’s activities may be restricted.
At December 31, 2022, the Bank qualified as “well capitalized” under the prompt corrective action rules.
Affiliate Transaction Restrictions. Federal laws strictly limit the ability of banks to engage in transactions with their affiliates, including their bank holding companies. In particular, loans by a subsidiary bank and its parent company or the nonbank subsidiaries of the bank holding company are limited to 10% of a bank subsidiary’s capital and surplus and, with respect to such parent company and all such nonbank subsidiaries, to an aggregate of 20% of the bank subsidiary’s capital and surplus. Further, loans and other extensions of credit generally are required to be secured by eligible collateral in specified amounts. Transactions with non-affiliates may be treated
as transactions with an affiliate to the extent that proceeds from the transaction are used to benefit the affiliate. Federal law also requires that all transactions between a bank and its affiliates be on terms at least as favorable to the bank as transactions with non-affiliates.
Loans to One Borrower. Under Pennsylvania law, commercial banks have, subject to certain exemptions, lending limits to one borrower in an amount equal to 15% of the institution’s capital accounts. An institution’s capital account includes the aggregate of all capital, surplus, undivided profits, capital securities and general reserves for loan losses. Pursuant to the national bank parity provisions of the Pennsylvania Banking Code, the Bank may also lend up to the maximum amounts permissible for national banks, which are allowed to make loans to one borrower of up to 25% of capital and surplus in certain circumstances. As of December 31, 2022, the Bank’s loans-to-one-borrower limitation was $31.2 million and the Bank was in compliance with such limitation.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Pittsburgh, which is one of 11 regional FHLBs. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain restricted stock in the FHLB of Pittsburgh in an amount equal to the greater of 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5% of the Bank’s outstanding advances from the FHLB. At December 31, 2022, the Bank was in compliance with this requirement.
Restrictions on Dividends. The Pennsylvania Banking Code states, in part, that dividends may be declared and paid only out of accumulated net earnings and may not be declared or paid unless surplus (retained earnings) is at least equal to contributed capital. The Bank has not declared or paid any dividends which cause the Bank’s retained earnings to be reduced below the amount required. Finally, dividends may not be declared or paid if the Bank is in default in payment of any assessment due the FDIC.
The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve’s view that a bank holding company should pay cash dividends only to the extent that the holding company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company’s capital needs, asset quality and overall financial condition. The Federal Reserve also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. In addition, the Federal Reserve’s guidance states that a bank holding company should consult with its regional Federal Reserve Bank in advance of declaring or paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in a material adverse change to the organization’s capital structure. Finally, under the federal prompt corrective action regulations, the Federal Reserve may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized.”
Community Reinvestment. All insured depository institutions have a responsibility under the Community Reinvestment Act of 1977 (the “CRA”) and federal regulations thereunder to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In connection with its examination of the Bank, the FDIC is required to assess our record of meeting the credit needs of our entire community. The CRA requires the Bank’s record of compliance with the CRA to be taken into account in the evaluation of applications by the Bank or the Company for approval of an expansionary proposal, such as a merger or other acquisition of another bank or the opening of a new branch office. The Bank received a “satisfactory” CRA rating in its most recent CRA performance evaluation by the FDIC in May 2022.
In May 2022, the FDIC and the other federal bank regulatory agencies issued a joint proposal to modernize the regulations implementing the CRA, which would change both the process and substantive tests that the regulators use to assess the record of each bank in fulfilling its obligation to the community. The regulatory agencies stated that the proposal is intended to achieve the following objectives: (i) expand access to credit, investment and basic banking services in low- and moderate-income communities, (ii) adapt to changes in the banking industry, including internet and mobile banking, (iii) provide greater clarity, consistency and transparency in the application of the regulations and (iv) tailor performance standards to account for differences in bank size, business model, and local conditions. The Company will evaluate the impact of the proposal’s potential changes to the regulations implementing the CRA and their impact to our financial condition and/or results of operations, which cannot be predicted at this time.
Bank Secrecy Act / Anti-Money Laundering Laws. The Bank is subject to the Bank Secrecy Act and other anti-money laundering laws and regulations, including the USA PATRIOT Act of 2001 and the Anti-Money Laundering Act of 2020. These laws and regulations require the Bank to implement policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing and to verify the identity of their customers. Violations of these requirements can result in substantial civil and criminal sanctions. In addition, provisions of the USA PATRIOT Act require the federal bank regulatory agencies to consider the effectiveness of a bank’s anti-money laundering activities when reviewing mergers and acquisitions.
Incentive Compensation. The FDIC and the Federal Reserve review, as part of their regular, risk-focused examinations, the incentive compensation arrangements of banking organizations. These reviews are tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. Deficiencies are incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
In 2010, the FDIC and the other federal bank regulatory agencies issued comprehensive guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, is based upon the principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.
In 2016, the U.S. financial regulators, including the FDIC, the Federal Reserve and the SEC, proposed revised rules on incentive-based payment arrangements at financial institutions having at least $1 billion in total assets. These proposed rules have not been finalized.
In October 2022, the SEC adopted a final rule directing national securities exchanges, including Nasdaq, to establish listing standards requiring listed companies to adopt policies providing for the recovery or “clawback” of excess incentive-based compensation earned by current or former executive officers during the three fiscal years preceding the date the listed company determines an accounting restatement is required. The SEC final rule will require us to adopt a clawback policy within 60 days after the Nasdaq listing standard becomes effective.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
Not applicable.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2. Properties .
The Bank operates from its main office located at 717 Main Street, Honesdale, Pennsylvania and twenty-eight additional branch offices in Northeastern Pennsylvania and upstate New York. The Bank’s total investment in office property and equipment is $37.8 million with a net book value of $17.9 million as of December 31, 2022. The Bank currently operates automated teller machines at all but one of its community office facilities, as well as one off-site ATM. The Bank leases seven of its locations.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings .
Neither the Company nor its subsidiaries are involved in any other pending legal proceedings, other than routine legal matters occurring in the ordinary course of business, which in the aggregate involve amounts which are believed by management to be immaterial to the consolidated financial condition or results of operations of the Company.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures .
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities .
(a)Market Information
STOCK LISTING
Norwood Financial Corp stock is traded on the Nasdaq Global Market under the symbol NWFL. As of December 31, 2022, there were approximately 1,400 registered stockholders based on the records of our transfer agent.
The following firms are known to make a market in the Company’s stock:
Janney Montgomery Scott, LLC
‎ Philadelphia, PA 19003
215-665-6566
RBC Capital Markets
Philadelphia, PA 19103
888-848-4677
Stifel NicolausSt,. Louis, MO 63102314-342-2000
The following table sets forth the price range and cash dividends declared per share regarding common stock for the periods indicated:
Closing Price Range
High
Low
Cash dividend
Year 2022
Declared per share
First Quarter
$
28.85
$
26.23
$
0.28
Second Quarter
29.00
23.44
0.28
Third Quarter
28.01
24.04
0.28
Fourth Quarter
34.25
26.58
0.29
Year 2021
First Quarter
$
28.96
$
23.75
$
0.26
Second Quarter
27.07
24.75
0.26
Third Quarter
26.31
24.64
0.26
Fourth Quarter
27.60
25.42
0.28
The book value of the common stock was $20.86 per share as of December 31, 2022 compared to $25.24 per share as of December 31, 2021. As of December 31, 2022, the closing stock price was $33.44 per share, compared to $25.99 as of December 31, 2021.
TRANSFER AGENT
Computershare provides Transfer Agent services for the Company. Stockholders who may have questions regarding their stock ownership should contact the Transfer Agent at 800-662-7232, by regular mail at P.O. Box 43006, Providence, RI 02940-3006, or by overnight delivery at 150 Royall St, Suite 101, Canton, MA 02021.
DIVIDEND CALENDAR
Dividends on the Company’s common stock, if approved by the Board of Directors, are customarily paid on or about February 1, May 1, August 1 and November 1.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
The Plan, open to all shareholders, provides the opportunity to have dividends automatically reinvested into the Company’s common stock. Participants in the Plan may also elect to make cash contributions to purchase additional shares of common stock. Stockholders of the Company may contact the transfer agent for additional information.
(b)Use of Proceeds. Not applicable.
(c)Issuer Purchases of Equity Securities. Set forth below is information regarding the Company’s stock repurchases during the fourth quarter of the fiscal year ended December 31, 2022.
Issuer Purchases of Equity Securities
Total Number of Shares (or Units) purchased
Average Price Paid Per Share (or Unit)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs *
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet be Purchased Under the Plans or Programs
October 1 - 31, 2022
6,545
$
26.87
6,545
382,890
November 1 - 30, 2022
-
-
-
-
December 1 - 31, 2022
-
-
-
-
Total
6,545
$
26.87
6,545
382,890
*On March 19, 2008, the Company announced its intention to repurchase up to 5% of its outstanding common stock (approximately 226,050 split-adjusted shares) in the open market. On November 10, 2011, the Company announced that it had increased the number of shares which may be repurchased under its open-market program to 5% of its currently outstanding shares, or approximately 270,600 split-adjusted shares. On March 30, 2021, the Company announced that it had increased the number of shares which may be repurchased under its open-market program to 5% of its currently outstanding shares, or approximately 400,000 split-adjusted shares.

---

ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data.
For the years ended December 31,
Net interest income
$68,397
$65,313
$50,476
$38,606
$36,839
Provision for loan losses
4,200
5,450
1,250
1,725
Other income
9,926
8,056
7,182
6,355
6,837
Net realized gains on sales of loans and securities
Other expenses
41,044
38,578
34,440
27,311
25,975
Income before income taxes
36,385
30,860
18,366
16,823
16,204
Income tax expense
7,152
5,945
3,286
2,608
2,553
NET INCOME
29,233
24,915
15,080
14,215
13,651
Net income per share-Basic
$3.59
$3.05
$2.09
$2.27
$2.19
-Diluted
$3.58
$3.04
$2.09
$2.25
$2.17
Cash dividends declared
$1.13
$1.06
$1.01
$0.97
$0.90
Dividend pay-out ratio
31.48%
34.75%
48.33%
42.73%
41.10%
Return on average assets
1.43%
1.24%
0.97%
1.18%
1.19%
Return on average equity
16.11%
12.35%
9.06%
10.83%
11.71%
BALANCES AT YEAR-END
Total assets
2,047,070
2,068,504
1,851,864
1,230,610
1,184,559
Loans receivable
1,473,945
1,354,931
1,410,732
924,581
850,182
Allowance for loan losses
16,999
16,442
13,150
8,509
8,452
Total deposits
1,727,727
1,756,793
1,535,385
957,529
946,780
Stockholders’ equity
167,085
205,262
194,785
137,428
122,285
Trust assets under management
184,855
195,958
168,085
170,685
151,224
Book value per share
$20.86
$25.24
$23.72
$21.67
$19.43
Tier 1 Capital to risk-adjusted assets
12.49%
12.49%
11.65%
13.08%
13.04%
Total Capital to risk-adjusted assets
13.58%
13.66%
12.62%
13.98%
14.00%
Allowance for loan losses to total loans
1.15%
1.21%
0.93%
0.92%
0.99%
Non-performing assets to total assets
0.07%
0.12%
0.24%
0.19%
0.19%

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations .
Introduction This Management’s Discussion and Analysis and related financial data are presented to assist in the understanding and evaluation of the financial condition and results of operations for the Company and the Bank, as of December 31, 2022 and 2021, and for the years ended December 31, 2022 and 2021. This section should be read in conjunction with the consolidated financial statements and related footnotes.
Critical Accounting Policies Note 2 to the Company’s consolidated financial statements lists significant accounting policies used in the development and presentation of its financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations.
Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, the determination of other-than-temporary impairment on securities, the determination of goodwill impairment and the fair value of financial instruments. Please refer to the discussion of the allowance for loan losses calculation under “Allowance for Loan Losses and Non-performing Assets” in the “Financial Condition” section.
The deferred income taxes reflect temporary differences in the recognition of the revenue and expenses for tax reporting and financial statement purposes, principally because certain items are recognized in different periods for financial reporting and tax return purposes. Although realization is not assured, the Company believes it is more likely than not that all deferred tax assets will be realized.
In estimating other-than-temporary impairment losses on securities, the Company considers 1) the length of time and extent to which the fair value has been less than cost and 2) the financial condition of the issuer. The Company does not have the intent to sell these securities and it is more likely than not that it will not sell the securities before recovery of their cost basis. The Company believes that any unrealized losses at December 31, 2022 and 2021 represent temporary impairment of the securities.
The fair value of financial instruments is based upon quoted market prices, when available. For those instances where a quoted price is not available, fair values are based upon observable market based parameters, as well as unobservable parameters. Any such valuation is applied consistently over time.
In connection with the acquisition of North Penn in 2011, we recorded goodwill in the amount of $9.7 million, representing the excess of amounts paid over the fair value of the net assets of the institution acquired at the date of acquisition. In connection with the acquisition of Delaware in 2016, we recorded goodwill in the amount of $1.6 million, representing the excess of amounts paid over the fair value of the net assets of the institution acquired at the date of acquisition. In connection with the acquisition of UpState in July 2020, we recorded goodwill in the amount of $17.9 million, representing the excess of amounts paid over the fair value of the net assets of the institution acquired at the date of acquisition. Goodwill is tested annually and deemed impaired when the carrying value of goodwill exceeds its implied fair value.
FINANCIAL CONDITION
Total Assets
Total assets as of December 31, 2022 were $2.047 billion compared to $2.069 billion as of year-end 2021, a decrease of $21.4 million. The decrease in assets was primarily attributable to the $182.6 million decrease in interest-bearing deposits with banks.
Loans Receivable
As of December 31, 2022, loans receivable totaled $1.474 billion compared to $1.355 billion as of year-end 2021, an increase of $119.0 million due primarily to a $53.7 million increase in consumer loans. Commercial real estate loans increased $22.8 million, while residential mortgage loans increased $25.8 million during the year.
The Bank’s loan products include loans for personal and business use. Personal lending includes mortgage lending to finance principal residences and, to a lesser extent, second home dwellings. The Bank’s loan products include fixed-rate mortgage products with terms up to 30 years which may be sold in the secondary market through the Federal National Mortgage Association (“Fannie Mae”) or the FHLB, or held in the Bank’s portfolio to the extent consistent with our asset/liability management strategies. Fixed-rate home equity loans are originated on terms up to 180 months. Home equity lines of credit tied to the prime rate are also offered. The Bank also offers indirect dealer financing of automobiles (new and used), boats, and recreational vehicles through a limited network of dealers in Northeast Pennsylvania and the Southern Tier of New York. At December 31, 2022, there were $188.4 million of indirect loans in the portfolio. In connection with the acquisition of UpState in 2020, the Company acquired approximately $413.5 million in loans, including $37.3 million in residential real estate loans, $289.0 million in commercial real estate loans, $92.0 million in commercial, financial and agricultural loans, and $2.3 million in consumer loans. As of December 31, 2022, the approximate outstanding balance of these acquired loans was $233.3 million. In connection with the acquisition of Delaware, the Company acquired approximately $116.7 million in loans, including $68.7 million in residential real estate loans, $22.5 million in commercial real estate loans, $13.6 million in commercial, financial and agricultural loans, $6.5 million in consumer loans and $5.4 in construction loans. As of December 31, 2022, the approximate outstanding balance of these acquired loans was $30.7 million.
Commercial loans and commercial mortgages are provided to local small and mid-sized businesses at a variety of terms and rate structures. Commercial lending activities include lines of credit, revolving credit, term loans, mortgages, various forms of secured lending and a limited amount of letter of credit facilities. The rate structure may be fixed, immediately repricing tied to the prime rate or adjustable at set intervals. Also included in commercial loans are municipal finance lending in which the Bank has been active in recent years. Municipal lending includes both general obligations of local taxing authorities and revenue obligations of specific revenue
producing projects such as sewer authorities and educational units. At December 31, 2022, the Bank had approximately $141.9 million in loans on commercial rentals, as well as $113.0 million of loans outstanding on residential rentals, which are its largest lending concentrations.
The Bank’s construction lending has primarily involved lending for commercial construction projects and for single-family residences. All loans for the construction of speculative sale homes have a loan-to-value ratio of not more than 80%. For both commercial and single-family projects, loan proceeds are disbursed during the construction phase according to a draw schedule based on the stage of completion. Construction projects are inspected by contracted inspectors or bank personnel. Construction loans are underwritten on the basis of the estimated value of the property as completed. For commercial projects, the Bank typically also provides the permanent financing after the construction period, as a commercial mortgage.
The Bank also, from time to time, originates loans secured by undeveloped land. Land loans granted to individuals have a term of up to five years. Land loans granted to developers may have an interest only period during development. The substantial majority of land loans have a loan-to-value ratio not exceeding 75%. The Bank has limited its exposure to land loans but may expand its lending on raw land, as market conditions allow, to qualified borrowers experienced in the development and sale of raw land.
Loans involving construction financing and loans on raw land have a higher level of risk than loans for the purchase of existing homes since collateral values, land values, development costs and construction costs can only be estimated at the time the loan is approved. The Bank has sought to minimize its risk in construction lending and in lending for the purchase of raw land by offering such financing primarily to builders and developers to whom the Bank has loaned funds in the past and to persons who have previous experience in such projects. The Bank also limits construction lending and loans on raw land to its market area, with which management is familiar.
Adjustable-rate loans decrease the risks associated with changes in interest rates by periodically repricing, but involve other risks because as interest rates increase, the underlying payments by the borrower increase, thus increasing the potential for payment default. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustment of the contractual interest rate may also be limited by the maximum periodic interest rate adjustment permitted in certain adjustable-rate mortgage loan documents, and, therefore is potentially limited in effectiveness during periods of rapidly rising interest rates. These risks have not had an adverse effect on the Bank.
The Bank’s adjustable-rate loan portfolio includes approximately $4.0 million in loan participations indexed to the London Interbank Offered Rate (“LIBOR”) which is expected to be phased out by June 30, 2023. On December 16, 2022, the Board of Governors of the Federal Reserve System (Board) adopted Regulation ZZ to implement the Adjustable Interest Rate (LIBOR) Act (the “Act”). The Act was approved by Congress on March 15, 2022, to address references to LIBOR in contracts that are governed by US law; will not mature before June 30, 2023; and most importantly, will lack fallback provisions providing for a clearly defined practical replacement for LIBOR. The final rule replaces references to LIBOR in such contracts with one of five Board-selected benchmark replacements based on the Secured Overnight Financing Rate (“SOFR”), which may include spread adjustments specified in the Act. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by US Treasury securities and published daily by the Federal Reserve Bank of New York. The final rule identifies Board-selected benchmark replacements for (1) derivative transactions, (2) Federal Housing Finance Agency (FHFA) regulated entity contracts, (3) Federal Family Education Loan Program (FFELP) asset-based securitizations (ABS), (4) consumer loans, and (5) all other LIBOR contracts for replacing the overnight and one-, three-, six-, and 12-month tenors of US dollar LIBOR in existing contracts that do not provide for use of a clearly defined or practical replacement benchmark rate. The Bank must rely on the lead bank to renegotiate the terms of loans in which the Bank has a participation. There can be no assurance that the lead bank will be able to successfully renegotiate the loans in which the Bank has participations or that the substitute reference rate will perform as satisfactorily as LIBOR.
Consumer lending, including indirect financing, provides benefits to the Bank’s asset/liability management program by reducing the Bank’s exposure to interest rate changes, due to their generally shorter terms. Such loans may entail additional credit risks compared to owner-occupied residential mortgage lending especially when unsecured or secured by collateral such as automobiles that depreciate rapidly.
Commercial lending including real-estate related loans entail significant additional risks when compared with residential real estate and consumer lending. For example, commercial loans typically involve larger loan balances to single borrowers or groups of related borrowers. The payment experience on such loans typically is dependent on the successful operation of the project and these risks can be significantly impacted by the cash flow of the borrowers and market conditions for commercial office, retail, and warehouse space. In periods of decreasing cash flows, the commercial borrower may permit a lapse in general maintenance of the property causing the value of the underlying collateral to deteriorate. The liquidation of commercial property is often more costly and may involve more time to sell than residential real estate. The Bank offsets such factors with requiring more owner equity, a lower loan to value ratio and
by obtaining the personal guaranties of the principals. In addition, a majority of the Bank’s commercial real estate portfolio is owner-occupied property.
Commercial loans and leases are considered to have a higher degree of credit risk than secured real estate lending. The repayment of unsecured commercial business loans is wholly dependent on the success of the borrower’s business, while secured commercial business loans may be secured by collateral that may not be readily marketable in the event of default. Municipal financing includes lending to local taxing authorities and revenue-producing projects. Such loans may constitute the general obligation of the taxing authority or may rely on a specific revenue source which is responsible for the repayment of the debt. General obligations are considered to carry a lower level of risk than other loan types since they are backed by the full faith and credit of the taxing authority. Revenue obligations are backed solely by revenues generated by the project financed and repayment may be affected by the success of the project.
Due to the type and nature of the collateral, consumer lending generally involves more credit risk when compared with residential real estate lending. Consumer lending collections are typically dependent on the borrower’s continuing financial stability, and thus, are more likely to be adversely affected by job loss, divorce, illness and personal bankruptcy. In most cases, any repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan balance. The remaining deficiency is usually turned over to a collection agency.
There are additional risks associated with indirect lending since we must rely on the dealer to provide accurate information to us and accurate disclosures to the borrowers. These loans are principally done on a non-recourse basis. We seek to mitigate these risks by only dealing with dealers with whom we have a long-standing relationship.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) prohibits lenders from making residential mortgages unless the lender makes a reasonable and good faith determination that the borrower has a reasonable ability to repay the mortgage loan according to its terms. A borrower may recover statutory damages equal to all finance charges and fees paid within three years of a violation of the ability-to-repay rule and may raise a violation as a defense to foreclosure at any time. As authorized by the Dodd-Frank Act, the Consumer Financial Protection Bureau (“CFPB”) has adopted regulations defining “qualified mortgages” that are presumed to comply with the Dodd-Frank Act’s ability-to-repay rules. Under the CFPB regulations, qualified mortgages must satisfy the following criteria: (i) no negative amortization, interest-only payments, balloon payments, or term greater than 30 years; (ii) no points or fees in excess of 3% of the loan amount for loans over $100,000; (iii) borrower’s income and assets are verified and documented; and (iv) the borrower’s debt-to-income ratio generally may not exceed 43%. Qualified mortgages are conclusively presumed to comply with the ability-to-pay rule unless the mortgage is a “higher cost” mortgage, in which case the presumption is rebuttable. Under the Economic Growth, Regulatory Relief, and Consumer Protection Act, enacted in 2018, residential mortgages originated for portfolio by insured depository institutions, like the Bank, with less than $10 billion in total consolidated assets will be treated as qualified mortgages; provided that the mortgage terms do not include interest-only payments or negative amortization, total points and fees do not exceed 3% of the loan amount, prepayment penalties are not in excess of those permitted for qualified mortgages under Regulation Z and the lender has considered and documented the debt, income and financial resources of the borrower.
The Bank has established various lending limits for its officers and also maintains an Officer Loan Committee to approve higher loan amounts. The Officer Loan Committee is comprised of the President and Chief Executive Officer, Chief Lending Officer and other Bank officers. The Officer Loan Committee has the authority to approve all loans up to set limits based on the type of loan and the collateral. Requests in excess of these limits must be submitted to the Directors’ Loan Committee or Board of Directors for approval. Additionally, the President and Chief Executive Officer, and the Chief Lending Officer and other officers have the authority to approve secured and unsecured loans up to amounts approved by the Board of Directors and maintained in the Bank’s Loan Policy. Notwithstanding individual lending authority, certain loan policy exceptions must be submitted to the Officer Loan Committee for approval.
Hazard insurance coverage is required on all properties securing loans made by the Bank. Flood insurance is also required, when applicable.
Loan applicants are notified of the credit decision by letter. If the loan is approved, the loan commitment specifies the terms and conditions of the proposed loan including the amount, interest rate, amortization term, a brief description of the required collateral, and the required insurance coverage. The borrower must provide proof of fire, flood (if applicable) and casualty insurance on the property serving as collateral and title insurance, and these applicable insurances must be maintained during the full term of the loan.
The following table sets forth maturities and interest rate sensitivity for selected categories of loans as of December 31, 2022. Scheduled repayments are reported in the maturity category in which payment is due. Demand loans, loans having no stated schedule of repayments and no stated maturity and overdrafts are reported as due in one year or less.
One Year
After One to
After Five Years
After
or Less
Five Years
Through 15 years
15 years
Total
(dollars in thousands)
Real Estate:
Residential
$
43,237
$
110,343
$
103,805
$
41,428
$
298,813
Commercial
67,405
168,984
320,020
95,135
651,544
Agricultural
4,302
15,248
33,664
15,701
68,915
Construction
1,751
3,710
8,344
18,664
32,469
Commercial loans
71,893
85,748
29,311
187,257
Other agricultural loans
12,351
16,678
5,863
35,277
Consumer loans
76,632
113,088
10,162
200,149
Total
$
277,571
$
513,799
$
511,169
$
171,885
$
1,474,424
Loans with fixed rates
$
18,855
$
172,146
$
359,625
$
233,425
$
784,051
Loans with floating rates
213,340
412,610
63,416
1,007
690,373
Total
$
232,195
$
584,756
$
423,041
$
234,432
$
1,474,424
allowance for Loan Losses
The allowance for loan losses totaled $16,999,000 as of December 31, 2022 and represented 1.15% of total loans receivable compared to $16,442,000 and 1.21% of total loans as of year-end 2021. Net charge-offs for 2022 totaled $343,000 and represented 0.02% of average loans compared to $908,000 and 0.07% of average loans in 2021.
Management assesses the adequacy of the allowance for loan losses on a quarterly basis. The process includes a review of the risks inherent in the loan portfolio. It also includes an analysis of impaired loans and a historical review of losses. Other factors considered in the analysis include: concentrations of credit in specific industries in the commercial portfolio, the local and regional economic conditions, trends in delinquencies, internal risk rating classifications, total loan growth in the portfolio and fluctuations in large balance credits. For loans acquired, including those that are not deemed impaired at acquisition, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value. Subsequent to the purchase date, the methods utilized to estimate the required allowance for credit losses for these loans is similar to originated loans; however, the Company records a provision for loan losses only when the required allowance exceeds any remaining credit discounts.
The Company has limited exposure to higher-risk loans. The Company does not originate option ARM products, interest only loans, sub-prime loans or loans with initial teaser rates in its residential real estate portfolio. As of December 31, 2022, the Company had $14,437,000 million of junior lien home equity loans. For the year ended December 31, 2022, there were $5,000 of charge-offs for this portfolio, with recoveries of $5,000 in 2022.
As of December 31, 2022, the Company considered its concentration of credit risk profile to be acceptable. The highest concentrations are in commercial rentals and the residential rentals categories.
At December 31, 2022, the recorded investment in impaired loans, not requiring an allowance for loan losses, was $413,000 (net of charge-offs against the allowance for loan losses of $0). The recorded investment in impaired loans, requiring an allowance for loan losses, was $50,000, (net of charge-offs against the allowance for loan losses of $0). At December 31, 2021, the recorded investment in impaired loans, not requiring an allowance for loan losses, was $157,000 (net of charge-offs of $0). The recorded investment in impaired loans, requiring an allowance for loan losses, was $1,517,000.
As a result of its analysis, after applying these factors, management considers the allowance as of December 31, 2022, adequate. However, there can be no assurance that the allowance for loan losses will be adequate to cover significant losses that might be incurred in the future.
The following table sets forth information with respect to the Bank’s allowance for loan losses as of December 31, 2022 and 2021:
As of December 31,
(dollars in thousands)
Total loans receivable, net of deferred fees
$
1,473,945
$
1,354,931
Allowance balance at beginning of period
$
16,442
$
13,150
Net (charge-offs) recoveries:
Real Estate-Residential
(42)
Real Estate-Commercial
(433)
Real Estate-Agricultural
-
-
Real Estate-Construction
-
-
Commercial loans
(124)
Other agricultural loans
-
(27)
Consumer
(393)
(381)
Total
(343)
(908)
Provision Expense
4,200
Allowance balance at end of period
$
16,999
$
16,442
Average loans receivable:
Real Estate-Residential
$
286,545
$
264,305
Real Estate-Commercial
635,207
595,854
Real Estate-Agricultural
65,937
64,295
Real Estate-Construction
24,472
21,793
Commercial loans
185,687
247,953
Other agricultural loans
36,352
40,215
Consumer
166,803
152,478
Total average loans outstanding
$
1,401,003
$
1,386,893
Net (charge-offs) recoveries as a percent of average loans outstanding
Real Estate-Residential
(0.01)
%
0.02
%
Real Estate-Commercial
0.01
(0.07)
Real Estate-Agricultural
-
-
Real Estate-Construction
-
-
Commercial loans
0.02
(0.05)
Other agricultural loans
-
(0.07)
Consumer
(0.24)
(0.25)
Total net charge-offs
0.02
%
(0.07)
%
Credit Quality Ratios:
As a percent of year-end loans, net of unearned income:
Allowance for loan losses
1.15%
1.21%
Nonaccrual loans
0.08%
0.05%
Nonperforming loans
0.08%
0.05%
Allowance for loan losses to nonaccrual loans
1527.31%
2557.08%
Allowance for loan losses to nonperforming loans
1527.31%
2240.05%
The following table sets forth the allocation of the Bank’s allowance for loan losses by loan category and the percent of loans in each category to total loans at the date indicated. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which credit losses may occur. The total allowance is available to absorb losses from any type of loan.
As of December 31,
% of
% of
Loans
Loans
to Total
to Total
Amount
Loans
Amount
Loans
(dollars in thousands)
Real estate - residential
$
2,833
20.3
%
$
2,175
20.1
%
Real estate - commercial
8,293
44.2
10,878
46.4
Real estate - agricultural
4.7
-
4.6
Real estate - construction
2.2
1.6
Commercial
2,445
12.7
1,490
13.7
Other agricultural loans
2.4
-
2.8
Consumer
2,636
13.5
1,766
10.8
Total
$
16,999
%
$
16,442
%
As a result of the acquisition of UpState, the Company added $107.3 million of agricultural loans to the loan portfolio. These loans are included in the outstanding balance information, but do not require an allocation of the allowance for loan losses since they were recorded at fair value in accordance with ASC 310-20 and ASC 310-30.
Additional information about the allowance for loan losses at December 31, 2022 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 2 and Note 4 to the audited consolidated financial statements.
Non-Performing Assets
Non-performing assets consist of non-performing loans and real estate owned as a result of foreclosure, which is held for sale. Loans are placed on non-accrual status when management believes that a borrower’s financial condition is such that collection of interest is doubtful. Commercial and real estate related loans are generally placed on non-accrual when interest is 90 days delinquent. When loans are placed on non-accrual, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses.
As of December 31, 2022, non-performing loans totaled $1,113,000 and represented 0.08% of total loans compared to $734,000 or 0.05% as of December 31, 2021. The increase in the level of non-performing loans was due primarily to one credit relationship in the amount of $452,000 that was transferred to non-accrual status in the fourth quarter of 2022.
Foreclosed real estate owned totaled $346,000 as of December 31, 2022 and $1,742,000 as of December 31, 2021. During 2022, one property with a carrying value of $1,396,000 was disposed of through a sale. The Company recorded a gain of $427,000 on the sale of the property during the year ended December 31, 2022.
Securities
The securities portfolio consists of U.S. Treasury securities, U.S. Government agencies, mortgage-backed securities issued by government sponsored entities and municipal obligations. The Company classifies its investments into two categories: held to maturity (HTM) and available for sale (AFS). The Company does not have trading securities. Securities classified as HTM are those in which the Company has the ability and the intent to hold the security until contractual maturity. As of December 31, 2022, there were no securities carried in the HTM portfolio. Securities classified as AFS are eligible to be sold due to liquidity needs or interest rate risk management. These securities are adjusted to and carried at their fair value with any unrealized gains or losses recorded net of deferred income taxes, as an adjustment to capital and reported in the equity section of the Consolidated Balance Sheet as other comprehensive income. As of December 31, 2022, $418.9 million of securities were so classified and carried at their fair value, with unrealized losses, net of tax, of $57.9 million included in accumulated other comprehensive income as a component of stockholders’ equity. The Company considers its investment portfolio a source of earnings and liquidity. Investment securities may also be pledged to secure public deposits and customer repurchase agreements.
As of December 31, 2022, the average life of the portfolio was 7.3 years. The Company has maintained a relatively short average life in the portfolio in order to generate cash flow to support loan growth and maintain liquidity levels. Purchases for the year
totaled $130.8 million, while maturities and principal reductions totaled $40.8 million and proceeds from sales were $5.1 million. The purchases were funded principally by cash flow generated from the portfolio and excess overnight liquidity.
The following table sets forth certain information regarding securities not carried at fair value through earnings, weighted average yields, and maturities of the Company’s securities portfolio as of December 31, 2022 and 2021. Yields on tax-exempt securities are stated on a fully taxable equivalent basis using a Federal tax rate of 21%. Actual maturities may differ from contractual maturities as certain instruments have call features which allow prepayment of obligations. Maturity on the mortgage-backed securities is based upon contractual terms, the average life may differ as a result of changes in cash flow.
After One
After Five
Total Investment
One Year or Less
Through Five Years
Through Ten Years
After Ten Years
Securities
Carrying
Average
Carrying
Average
Carrying
Average
Carrying
Average
Carrying
Average
Value
Yield
Value
Yield
Value
Yield
Value
Yield
Value
Yield
(dollars in thousands)
U.S. Treasury securities
$
1,961
3.01
%
$
28,145
2.50
%
$
11,749
1.21
%
$
-
-
%
$
41,854
2.13
%
U.S. Government agencies
2,858
3.26
7,320
1.82
8,145
1.64
18,323
1.90
State and political subdivision
1,001
3.16
7,458
2.94
22,585
2.00
96,808
2.35
127,852
2.32
Corporate obligations
-
-
-
-
-
-
-
-
-
-
Mortgage-backed securities-government sponsored entities
-
-
1.40
18,956
2.39
211,713
1.81
230,898
1.85
Total Investment Securities
$
5,820
3.16
%
$
43,151
2.45
%
$
61,435
1.89
%
$
308,521
1.99
%
$
418,927
2.03
%
The portfolio had no adjustable-rate instruments as of December 31, 2022 and 2021. The portfolio contained no private label mortgage-backed securities, collateralized debt obligations (CDOs), or trust preferred securities, and no off-balance sheet derivatives were in use. As of December 31, 2022, the portfolio did not contain any step-up bonds. The mortgage-backed securities portfolio includes pass-through bonds and collateralized mortgage obligations (CMO’s) issued by Fannie Mae, Freddie Mac and the Government National Mortgage Association (GNMA).
The Company evaluates the securities in its portfolio for other-than-temporary-impairment (OTTI) as fair value declines below cost. In estimating OTTI, management considers (1) the length of time and the extent of the decline in fair value and (2) the financial condition and near-term prospects of the issuer. As of December 31, 2022, the Company held 343 investment securities in a loss position, which had a combined unrealized loss of $73.3 million. Management believes that these losses are principally due to changes in interest rates and represent temporary impairment as the Company does not have the intent to sell these securities and it is more likely than not that it will not have to sell the securities before recovery of their cost basis. No impairment charges were recognized in 2022 or 2021.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company uses fair value measurements to record fair value adjustments to certain financial instruments and determine fair value disclosures (see Note 16 of Notes to the Consolidated Financial Statements).
Approximately $420.4 million, which represents 20.5% of total assets at December 31, 2022, consisted of financial instruments recorded at fair value on a recurring basis. This amount consists entirely of the Company’s available for sale securities portfolio and interest rate derivatives. The Company uses valuation methodologies involving market-based or market-derived information, collectively Level 1 and 2 measurements, to measure fair value. There were no transfers into or out of Level 3 for any instruments for the years ended December 31, 2022 and 2021.
The Company utilizes a third party provider to perform valuations of the investments. Methods used to perform the valuations include: pricing models that vary based on asset class, available trade and bid information, actual transacted prices, and proprietary models for valuations of state and municipal obligations. In addition, the Company has a sample of fixed-income securities valued by another independent source. The Company does not adjust values received from its providers, unless it is evident that fair value measurement is not consistent with the Company’s policies.
The Company also utilizes a third party provider to provide the fair value of certain loan servicing rights. Fair value for the purpose of this measurement is defined as the amount at which the asset could be exchanged in a current transaction between willing
parties, other than in a forced liquidation. The fair value of mortgage servicing rights as of December 31, 2022 and 2021 was $498,000 and $500,000, respectively.
DEPOSITS
The Bank provides a full range of deposit products to its retail and business customers. These include interest-bearing and noninterest bearing transaction accounts, statement savings and money market accounts. Certificate of deposit terms range up to five years for retail instruments. As of December 31, 2022, the Bank does not have any brokered deposits obtained through internet listing services, and no broker deposits which were secured through Cede & Co. The Bank participates in the Jumbo CD ($100,000 and over) markets with local municipalities and school districts which are typically priced on a competitive bid basis. Other services the Bank offers its customers include cash management, direct deposit, Remote Deposit Capture, mobile deposit capture, PopMoney® mobile payments and Automated Clearing House (ACH) activity. The Bank operates thirty automated teller machines and is affiliated with the MoneyPass® ATM network. Internet banking including bill-pay is offered through the website at www.waynebank.com. Other services, such as eStatements and mobile banking are available online.
The following table sets forth information regarding deposit categories of the Company.
Years Ended December 31,
Average
Average
Balance
Rate Paid
Balance
Rate Paid
(dollars in thousands)
Noninterest-bearing demand
$
442,607
-
%
$
423,404
-
%
Interest-bearing demand
233,000
0.22
180,080
0.11
Money Market
306,518
0.32
295,626
0.23
Savings
298,933
0.08
265,981
0.06
Time
487,674
0.97
517,087
0.71
Total
$
1,768,732
$
1,682,178
As of December 31, 2022 and 2021, the total of uninsured deposits of the Company was $213,623,000 and $235,515,000, respectively. Total uninsured deposits is calculated based on regulatory reporting requirements and reflects the portion of any deposit of a customer at an insured depository institution that exceeds the applicable FDIC insurance coverage for that depositor at that institution and amounts in any other uninsured investment or deposit accounts that are classified as deposits and not subject to any federal or state deposit insurance regime.
As of December 31, 2022, the total of U.S. time deposits in excess of the Federal Deposit Insurance Corporation insurance limits were $213,623,000.
The following table indicates the amount of time deposits that are uninsured by time remaining until maturity as of December 31, 2022:
Amount
(in thousands)
Three months or less
$
46,123
Over 3 through 6 months
51,847
Over 6 months through 12 months
67,281
Over 12 months
48,372
$
213,623
Total deposits as of December 31, 2022, were $1.728 billion, a decrease of $29.1 million from December 31, 2021. Non-maturity interest-bearing deposits increased $2.0 million in 2022, while non-interest bearing demand deposits decreased $6.1 million. Time deposits decreased $24.9 million during 2022.
Time deposits over $250,000, which consist principally of school district funds, other public funds and short-term deposits from large commercial customers with maturities generally less than one year, totaled $213.6 million as of December 31, 2022,
compared to $257.2 million at year-end 2021. These deposits are subject to competitive bid and the Company bases its bid on current interest rates, loan demand, investment portfolio structure and the relative cost of other funding sources.
As of December 31, 2022, non-interest bearing demand deposits totaled $434.5 million compared to $440.7 million at December 31, 2021. Cash management accounts in the form of securities sold under agreements to repurchase included in short-term borrowings, totaled $51.0 million at December 31, 2022 compared to $60.8 million as of December 31, 2021. These balances represent commercial and municipal customers’ funds invested in overnight securities. The Company considers these accounts as a source of core funding.
RESULTS OF OPERATIONS
Summary
Net income for the Company for the year ended December 31, 2022 was $29,233,000, which was $4,318,000 higher than the $24,915,000 earned in 2021. Earnings per share on a fully diluted basis were $3.58 for 2022 compared to $3.04 in 2021. The return on average assets for the year ended December 31, 2022, was 1.43%, and the return on average equity was 16.11%, compared to 1.24% and 12.35%, respectively, for the year ended December 31, 2021. Net interest income increased $3,084,000 for the year ended December 31, 2022, which offset a $2,430,000 increase in other expenses during the 2022 year. A $3,300,000 decrease in the provision for loan losses, and a $1,571,000 increase in other income during the year ended December 31, 2022, also contributed to the positive variance.
For the year ended December 31, 2022, fully taxable equivalent (“fte”) net interest income totaled $69,164,000, which was an increase of $3,064,000 from the year ended 2021 total. Average loans outstanding increased $14.1 million in 2022, which resulted in an increase in interest income (fte) of $657,000. Total average securities increased $160.1 million in 2022 as proceeds from deposit growth and overnight liquidity were used to fund new purchases, resulting in a $3.6 million increase in total interest income (fte) on securities. During the year ended December 31, 2022, average interest-bearing deposits increased $67.4 million, resulting in a $1.7 million increase in total interest expense on deposits. The cost of borrowed funds decreased $202,000 in 2022, compared to the prior year due primarily to a lower level of borrowings. During the year ended December 31, 2022, the resulting net interest spread (fte) decreased one basis point to 3.38%, as a nine basis point increase in the yield earned was offset by a 10 basis point increase in the cost of funds.
Total other income for the year ended December 31, 2022 was $9,932,000, compared to $8,361,000 in the prior year, an increase of $1,571,000. During the year ended December 31, 2022, gains on the sale of loans and investment securities decreased $263,000 in the aggregate, while gains on the sale of foreclosed real estate owned increased $391,000. Service charges and fees decreased $32,000 in 2022 compared to the 2021, while all other items of other income increased $1,475,000, net, in 2022. The increase in 2022 includes $1.1 million of earnings recognized due to the payoff of purchased impaired loans acquired at a discount.
During the year ended December 31 ,2022, other expenses were $41,044,000, compared to $38,614,000 for the same period in 2021, an increase of $2,430,000. Salaries and benefits costs increased $1,463,000 in 2022, while occupancy and equipment costs rose $145,000. All other operating expenses increased $822,000, net, in 2022. Income tax expense for the 2022 year totaled $7,152,000, which was an increase of $1,207,000 from the 2021 year ended. The effective tax rate in 2022 was 19.7% compared to 19.3% in 2021. The increase in the effective tax rate reflects the increased level of taxable income, which is taxed at the marginal rate of 21%.
The following table sets forth changes in net income (in thousands):
Net income 2021
$
24,915
Net interest income
3,084
Provision for loan losses
3,300
Net gains on sales of loans and securities
(263)
Net gains on sales of foreclosed real estate
Other income
1,443
Salaries and employee benefits
(1,463)
Occupancy, furniture and equipment
(145)
Date processing and related operations
(533)
Professional fees
(137)
Other expenses
(152)
Income tax expense
(1,207)
Net income 2022
$
29,233
NET INTEREST INCOME
Net interest income is the most significant source of revenue for the Company and represented 87.3% of total revenue for the year ended December 31, 2022. Net interest income (fte) totaled $69,164,000 for the year ended December 31, 2022 compared to $66,100,000 for 2021, an increase of $3,064,000. The resulting fte net interest spread and net interest margin were 3.38% and 3.53%, respectively, in 2022 compared to 3.39% and 3.50%, respectively, in 2021.
Interest income (fte) for the year ended December 31, 2022 totaled $76,433,000 compared to $71,857,000 in 2021. The fte yield on average earning assets was 3.90%, increasing nine basis points from the 3.81% reported last year. The tax-equivalent yield on total loans remained stable at 4.73% in 2022, while average loans outstanding increased $14.1 million, resulting in an increase in interest income (fte) from loans of $657,000. The yield on securities increased 13 basis points in 2022 due primarily to higher yields on new purchases. During the 2022 year ended, average securities outstanding increased $160.1 million, as cash flows from deposit growth was utilized to fund new purchases, and interest income (fte) from the portfolio increased $3.6 million from the 2021 year ended.
Interest expense was $7,269,000 in 2022, which resulted in an average cost of interest-bearing liabilities of 0.52% compared to total interest expense of $5,757,000 in 2021, with an average cost of 0.42%. Total interest-bearing deposits cost was 0.49% in 2022, which was an increase of 11 basis points over the 2021 year. The increase in cost was due primarily to time certificates of deposit that repriced to current market rates upon maturity, resulting in an increase in the interest rate paid from 0.71% in 2021 to 0.97% in 2022. Borrowing costs also increased in 2022, reflecting the higher interest rate environment.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $900,000 in 2022 compared to $4,200,000 in 2021. The decreased provision for loan losses recorded in 2022 reflects the removal of the qualitative factors specific to the COVID-19 pandemic. Qualitative factors specific to the pandemic that were developed in 2020 required a $2.3 million allocation to the required allowance for loan losses at December 31, 2021. Additionally, the quantitative factor related to historical loan losses decreased $670,000 compared to the 2021 level.
Management assesses the adequacy of the allowance for loan losses on a quarterly basis. The process includes a review of the risks inherent in the loan portfolio. It also includes an analysis of impaired loans and a historical review of losses. Other factors considered in the analysis include: concentrations of credit in specific industries in the commercial portfolio, the local and regional economic conditions, trends in delinquencies, internal risk rating classifications, total loan growth in the portfolio and fluctuations in large balance credits. For loans acquired, including those that are not deemed impaired at acquisition, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value. Subsequent to the purchase date, the methods utilized to estimate the required allowance for credit losses for these loans is similar to originated loans; however, the Company records a provision for loan losses only when the required allowance exceeds any remaining credit discounts.
OTHER INCOME
Total other income was $9,932,000 for the year ended December 31, 2022, compared to $8,361,000 in 2021, an increase of $1,571,000. Debit card fees increased $267,000 in 2022, earnings and proceeds from bank-owned life insurance increased $146,000,
and gains on the sale of foreclosed real estate owned increased $391,000. During 2022, gains on the sale of loans and investment securities decreased $263,000 in the aggregate, while all other items of other income increased $1,027,000, net.
Other Income (dollars in thousands)
For the year ended December 31
Service charges on deposit accounts
$
$
ATM Fees
Overdraft Fees
1,155
1,029
Safe deposit box rental
Loan related service fees
1,368
Debit card
2,495
2,228
Fiduciary activities
Commissions on mutual funds & annuities
Earnings on and proceeds from bank-owned life insurance
1,087
Other income
1,906
9,499
8,056
Net realized gains on sales of securities
Gains on sales of loans
Gains on sales of foreclosed real estate owned
Total
$
9,932
$
8,361
OTHER EXPENSES
Other expenses totaled $41,044,000 for the year ended December 31, 2022, compared to $38,614,000 in the 2021 year. Salaries and employee benefits costs increased $1,463,000 in 2022, while occupancy and equipment costs increased $145,000. During the year ended December 31, 2022, all other operating expenses increased $822,000, net. The Company’s efficiency ratio, which measures total other expenses as a percentage of net interest income (fte) plus other income, was 51.9% in 2022 compared to 51.8% in 2021.
Other Expenses (dollars in thousands)
For the year ended December 31
Salaries
$
13,791
$
12,944
Employee benefits
8,280
7,664
Occupancy
3,701
3,533
Furniture and equipment
1,266
1,289
Data processing and related operations
2,948
2,415
Federal Deposit Insurance Corporation insurance assessment
Advertising
Professional fees
1,719
1,582
Postage and telephone
Office supplies
Taxes, other than income
1,013
1,122
Foreclosed real estate
Amortization of intangible assets
Other
5,582
5,201
Total
$
41,044
$
38,614
INCOME TAXES
Income tax expense for the year ended December 31, 2022 totaled $7,152,000, which resulted in an effective tax rate of 19.7%, compared to $5,945,000 and 19.3% for 2021. The higher effective tax rate reflects the increase in taxable income.
CAPITAL AND DIVIDENDS
Total stockholders’ equity as of December 31, 2022, was $167.1 million, compared to $205.3 million as of December 31, 2021. Earnings retention, net of a $9.2 million reduction resulting from cash dividends declared, contributed to the increase. Fluctuations in interest rates during the year ended December 31, 2022, impacted the fair value of the Company’s Available-for-Sale securities, and contributed to $57.1 million decrease in capital as a reduction in accumulated other comprehensive income. As of December 31, 2022 the Company had a leverage capital ratio of 9.36%, a Tier 1 risk-based capital ratio and a common equity Tier 1 risk-based capital ratio of 12.49%, and a total risk-based capital ratio of 13.58%, compared to 8.51%, 12.49% and 13.66%, respectively, at December 31, 2021.
NON-GAAP FINANCIAL MEASURES
This Annual Report contains or references fully taxable-equivalent interest income and net interest income, which are non-GAAP financial measures. Tax-equivalent interest income and net interest income are derived from GAAP interest income and net interest income using a marginal tax rate of 21%. We believe the presentation of interest income and net interest income on a fully taxable-equivalent basis ensures comparability of interest income and net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice.
The following table reconciles net interest income to net interest income on a fully taxable-equivalent basis:
(dollars in thousands)
Years ended December 31,
Net interest income
$
68,397
$
65,313
Taxable-equivalent basis adjustment
using a 21% marginal tax rate
Net interest income on a fully
taxable equivalent basis
$
69,164
66,100
CONSOLIDATED AVERAGE BALANCE SHEETS WITH RESULTANT INTEREST AND RATES(Tax-Equivalent Basis, dollars in thousands)
Year Ended December 31
Average
Average
Average
Average
Balance
Interest
Rate
Balance
Interest
Rate
(2)
(1)
(2)
(1)
ASSETS
Interest-earning assets:
Interest-bearing deposits with banks
$
77,496
$
0.78
%
$
175,854
$
0.15
%
Securities available for sale:
Taxable
405,374
7,262
1.79
261,912
4,055
1.55
Tax-exempt
78,224
2,265
2.90
61,610
1,889
3.06
Total securities available for sale
483,598
9,527
1.97
323,522
5,944
1.84
Loans receivable (3)(4)
1,401,003
66,304
4.73
1,386,893
65,647
4.73
Total interest-earning assets
1,962,097
76,433
3.90
1,886,269
71,857
3.81
Noninterest earning assets:
Cash and due from banks
24,560
23,828
Allowance for loan losses
(16,854)
(15,263)
Other assets
77,800
114,210
Total noninterest earning assets
85,506
122,775
TOTAL ASSETS
$
2,047,603
$
2,009,044
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Interest-bearing demand and money market
$
539,518
1,506
0.28
$
475,706
0.19
Savings
298,933
0.08
265,981
0.06
Time
487,674
4,723
0.97
517,087
3,694
0.71
Total interest-bearing deposits
1,326,125
6,471
0.49
1,258,774
4,757
0.38
Short-term borrowings
69,711
0.75
73,810
0.38
Other borrowings
11,045
2.48
36,196
1.98
Total interest-bearing liabilities
1,406,881
7,269
0.52
1,368,780
5,757
0.42
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits
442,607
423,404
Other liabilities
16,616
15,179
Total noninterest-bearing liabilities
459,223
438,583
Stockholders’ equity
181,499
201,681
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
2,047,603
$
2,009,044
Net Interest Income/spread
(tax equivalent basis)
69,164
3.38
%
66,100
3.39
%
Tax-equivalent basis adjustment
(767)
(787)
Net Interest Income
$
68,397
$
65,313
Net interest margin
(tax equivalent basis)
3.53
%
3.50
%
(1)Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 21%.
(2)Average balances have been calculated based on daily balances.
(3)Loan balances include non-accrual loans and are net of unearned income.
(4)Loan yields include the effect of amortization of purchased credit marks and deferred fees net of costs.
‎
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)
(dollars in thousands)
2022 compared to 2021
Variance due to
Volume
Rate
Net
INTEREST-EARNING ASSETS:
Interest-bearing deposits
$
(400)
$
$
Securities available for sale:
Taxable
2,325
3,207
Tax-exempt securities
(122)
Total securities available for sale
2,823
3,583
Loans receivable
-
Total interest-earning assets
3,080
1,496
4,576
INTEREST-BEARING LIABILITIES
Interest-bearing demand and money market
Savings
Time
(277)
1,306
1,029
Total interest-bearing deposits
(90)
1,804
1,714
Short-term borrowings
(30)
Other borrowings
(507)
(442)
Total interest-bearing liabilities
(627)
2,139
1,512
Net interest income (tax-equivalent basis)
$
3,707
$
(643)
$
3,064
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.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosure 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 the ALCO is to maximize net interest income within acceptable levels of risk, which are established by policy. Interest rate risk is monitored and managed by using financial modeling techniques to measure the impact of changes in interest rates.
Net interest income, which is the primary source of the Company’s earnings, is impacted by changes in interest rates and the relationship of different interest rates. To manage the impact of the rate changes, the balance sheet should be structured so that repricing opportunities exist for both assets and liabilities at approximately the same time intervals. The Company uses net interest simulation to assist in interest rate risk management. The process includes simulating various interest rate environments and their impact on net interest income. As of December 31, 2022, the level of net interest income at risk in a ± 200 basis points increase was within the Company’s policy limit of a decline less than 10% of net interest income.
Imbalances in repricing opportunities at a given point in time reflect interest-sensitivity gaps measured as the difference between rate-sensitive assets and rate-sensitive liabilities. These are static gap measurements that do not take into account any future activity, and as such are principally used as early indicators of potential interest rate exposures over specific intervals.
At December 31, 2022, the Bank had a negative 90-day interest sensitivity gap of $46.7 million or 2.3% of total assets. A negative gap indicates that the balance sheet has a higher level of rate-sensitive liabilities (RSL) than rate-sensitive assets (RSA) at the specific time interval. This would indicate that in an increasing rate environment, the cost of interest-bearing liabilities would increase faster than the yield on interest-earning assets in the 90-day period. The level of RSA and RSL for an interval is managed by ALCO strategies, including adjusting the average life of the investment portfolio through purchases and sales, pricing of deposit liabilities to attract long or short-term time deposits, utilizing borrowings to fund loan growth, loan pricing to encourage variable-rate products and evaluation of loan sales of long-term, fixed-rate mortgages.
The Company analyzes and measures the time periods in which RSA and RSL will mature or reprice in accordance with their contractual terms and assumptions. Management believes that the assumptions used are reasonable. The interest rate sensitivity of assets and liabilities could vary substantially if differing assumptions were used or if actual experience differs from the assumptions used in the analysis. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in differing degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Interest rates may change at different rates changing the shape of the yield curve. The level of rates on the investment securities may also be affected by the spread relationship between different investments. Further, in the event of a significant change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed. Finally, the ability of borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase. It should be noted that the operating results of the Company are not subject to foreign currency exchange or commodity price risk.
The following table displays interest-sensitivity as of December 31, 2022 (dollars in thousands):
3 Months
3-12
Over
Or Less
Months
1-3 Years
3 Years
Total
Federal funds sold and
interest-bearing deposits
$
3,019
$
-
$
-
$
-
$
3,019
Securities
8,225
24,995
77,885
307,822
418,927
Loans Receivable
218,811
229,896
445,384
579,854
1,473,945
Total Rate Sensitive Assets (RSA)
$
230,055
$
254,891
$
523,269
$
887,676
$
1,895,891
Non-maturity interest-bearing deposits
$
123,533
$
119,994
$
318,673
$
227,228
$
789,428
Time Deposits
90,296
245,962
154,207
13,305
503,770
Borrowings
62,902
47,387
22,926
-
133,215
Total Rate Sensitive Liabilities (RSL)
$
276,731
$
413,343
$
495,806
$
240,533
$
1,426,413
Interest sensitivity gap
$
(46,676)
$
(158,452)
$
27,463
$
647,143
$
469,478
Cumulative gap
(46,676)
(205,128)
(177,665)
469,478
RSA/RSL-cumulative
83.1
%
70.3
%
85.0
%
138.5
%
As of December 31, 2021
Interest sensitivity gap
$
175,100
$
(170,159)
$
11,040
$
524,379
$
540,360
Cumulative gap
175,100
4,941
15,981
540,360
RSA/RSL-cumulative
170.5
%
100.7
%
101.4
%
138.4
%
Certain interest-bearing deposits with no stated maturity dates are included in the interest-sensitivity table above. The balances allocated to the respective time periods represent an estimate of the total outstanding balance that has the potential to migrate either through withdrawal or transfer to time deposits, thereby impacting the interest-sensitivity position of the Company. The estimates were derived from a non-maturity deposit study, which was prepared by an independent third party provider. The purpose of the study was to estimate the average lives of various deposit types and their pricing sensitivity to movements in market interest rates.
INFLATION
Substantially all of the Company's assets and liabilities relate to banking activities and are monetary. The consolidated financial statements and related financial data are presented following GAAP. GAAP currently requires the Company to measure the financial position and results of operations in terms of historical dollars, except for securities available for sale, impaired loans, and other real estate loans that are measured at fair value. Changes in the value of money due to rising inflation can cause purchasing power loss.
Management's opinion is that movements in interest rates affect the financial condition and results of operations to a greater degree than changes in the rate of inflation. It should be noted that interest rates and inflation do affect each other but do not always move in correlation with each other. The Company's ability to match the interest sensitivity of its financial assets to the interest sensitivity of its liabilities in its asset/liability management may tend to minimize the effect of changes in interest rates on the Company's performance.
LIQUIDITY Liquidity is the ability to fund customers’ borrowing needs and their deposit withdrawal requests while supporting asset growth. The Company’s primary sources of liquidity include deposit generation, asset maturities, cash flow from payments on loans and securities and access to borrowing from the Federal Home Loan Bank and other correspondent banks.
As of December 31, 2022, the Company had cash and cash equivalents of $31.9 million in the form of cash, due from banks, balances with the Federal Reserve Bank, and short-term deposits with other institutions. In addition, at December 31, 2022, the Company had total securities available for sale of $418.9 million, which could be used for liquidity needs. This totals $450.8 million and represents 22.0% of total assets as of December 31, 2022, compared to $613.5 million and 29.7% of total assets as of December 31, 2021. The Company also monitors other liquidity measures for compliance with Company policy guidelines. Based upon these measures, the Company believes its liquidity position is adequate.
The Company maintains established lines of credit with the Federal Home Loan Bank of Pittsburgh (FHLB), the Atlantic Community Bankers Bank (ACBB) and other correspondent banks, which support liquidity needs. The total available credit under all lines was $190.0 million, with $42.3 million outstanding at December 31, 2022 and $0 million outstanding at December 31, 2021. The maximum borrowing capacity from FHLB at December 31, 2022 was $655.3 million. As of December 31, 2022, the Company had $40.0 million in term borrowings from the FHLB, compared to $30.0 million at December 31, 2021. Outstanding Letters of Credit to secure public funds totaled $92.9 million and $127.9 million at December 31, 2022 and 2021, respectively.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data .
REPORT ON MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
TO THE STOCKHOLDERS OF NORWOOD FINANCIAL CORP
Management of Norwood Financial Corp and its subsidiary (Norwood) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Norwood’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Norwood’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Norwood; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of Norwood’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Norwood’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Norwood’s internal control over financial reporting as of December 31, 2022. In making this assessment, management used the criteria established in Internal Control - Integrated Framework as set forth by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based upon its assessment, management has concluded that, as of December 31, 2022, the Company’s internal control over financial reporting, including controls over the preparation of regulatory financial statements in accordance with all federal and state laws and regulations, is effective based on the criteria established in the Internal Control - Integrated Framework.
/s/ James O. Donnelly
/s/ William S. Lance
James O. Donnelly
William S. Lance
President and
Executive Vice President and
Chief Executive Officer
Chief Financial Officer
‎
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Norwood Financial Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Norwood Financial Corp. and subsidiaries (the “Company”) as of December 31, 2022 and 2021; the related consolidated statements of income, comprehensive (loss) income, changes in stockholders’ equity, and cash flows for the years then ended; and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent, with respect to the Company, in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the Audit Committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involve our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter, in any way, our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Loan Losses (ALL) - Qualitative Factors
Description of the Matter
The Company’s loan portfolio totaled $1.47 billion as of December 31, 2022, and the associated ALL was $17 million. As discussed in Note 4 to the consolidated financial statements, determining the amount of the ALL requires significant judgment about the collectability of loans, which includes an assessment of quantitative factors such as historical loss experience within each risk category of loans and testing of certain commercial loans for impairment. Management applies additional qualitative adjustments to reflect the inherent losses that exist in the loan portfolio at the balance sheet date that are not reflected in the historical loss experience. Qualitative adjustments are made based upon changes in lending policies and practices, economic conditions, changes in the loan portfolio mix, trends in loan delinquencies and classified loans, collateral values, and concentrations of credit risk for the commercial loan portfolios.
Auditing the Company’s ALL involved a high degree of subjectivity due to the judgment involved in management’s determination and measurement of qualitative factor adjustments included in the estimate of the allowance for loan losses.
How We Addressed the Matter in Our Audit
We gained an understanding of the Company’s process for establishing the ALL, including the qualitative adjustments made to the ALL. We evaluated the design and tested the operating effectiveness of controls over the Company’s ALL process, which included, among others, management’s review and approval controls designed to assess the need and level of qualitative adjustments to the ALL, as well as the reliability of the data utilized to support management’s assessment.
To test the qualitative adjustments, we evaluated the appropriateness of management’s methodology and assessed whether all relevant risks were reflected in the ALL and the need to consider qualitative adjustments.
Regarding the measurement of the qualitative adjustments, we evaluated the completeness, accuracy, and relevance of the data and inputs utilized in management’s estimate. We evaluated the inputs and data to the Company’s historical loan performance data and third-party macroeconomic data. Furthermore, we analyzed the changes in the components of the qualitative reserves relative to changes in external market factors, the Company’s loan portfolio, and asset quality trends, which included the evaluation of management’s ability to capture and assess relevant data from both external sources and internal reports on loan customers and the supporting documentation for substantiating revisions to qualitative factors.
We also utilized internal credit review specialists to perform procedures on a sample of commercial loans to test the Company’s credit risk ratings by comparing key attributes used in the determination of the credit risk rating to supporting documentation such as borrowers’ financial statements, underlying collateral, financial health of the guarantor, and loan payment history.
We have served as the Company’s auditor since 2009.
King of Prussia, Pennsylvania
March 17, 2023
CONSOLIDATED BALANCE SHEETS
December 31,
(In Thousands, Except Share
‎and Per Share Data)
ASSETS
Cash and due from banks
$
28,847
$
21,073
Interest-bearing deposits with banks
3,019
185,608
Cash and cash equivalents
31,866
206,681
Securities available for sale
418,927
406,782
Loans receivable (net of allowance for loan losses 2022: $16,999; 2021: $16,442)
1,456,946
1,338,489
Regulatory stock, at cost
5,418
3,927
Premises and equipment, net
17,924
17,289
Bank owned life insurance
43,364
40,038
Accrued interest receivable
6,917
5,889
Foreclosed real estate owned
1,742
Deferred tax assets, net
23,549
8,791
Goodwill
29,266
29,266
Other intangibles
Other assets
12,241
9,203
Total Assets
$
2,047,070
$
2,068,504
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing demand
$
434,529
$
440,652
Interest-bearing demand
237,891
196,786
Money market deposit accounts
273,165
309,439
Savings
278,372
281,214
Time
503,770
528,702
Total Deposits
1,727,727
1,756,793
Short-term borrowings
93,215
60,822
Other borrowings
40,000
29,998
Accrued interest payable
2,653
1,203
Other liabilities
16,390
14,426
Total Liabilities
1,879,985
1,863,242
STOCKHOLDERS’ EQUITY
Preferred stock, no par value, authorized: 5,000,000 shares, issued: none
-
-
Common stock, $0.10 par value,
authorized: 20,000,000 shares
issued: 2022: 8,291,401 shares; 2021: 8,266,751 shares
Surplus
96,897
96,443
Retained earnings
130,020
110,015
Treasury stock at cost: 2022: 124,650 shares; 2021: 65,328 shares
(3,308)
(1,767)
Accumulated other comprehensive loss
(57,353)
(256)
Total Stockholders' Equity
167,085
205,262
Total Liabilities and Stockholders' Equity
$
2,047,070
$
2,068,504
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
(In Thousands, Except Share
‎and Per Share Data)
INTEREST INCOME
Loans receivable, including fees
$
66,013
$
65,257
Securities
Taxable
7,262
4,055
Tax exempt
1,789
1,492
Interest-bearing deposits with banks
Total Interest Income
75,666
71,070
INTEREST EXPENSE
Deposits
6,471
4,757
Short-term borrowings
Other borrowings
Total Interest Expense
7,269
5,757
Net Interest Income
68,397
65,313
PROVISION FOR LOAN LOSSES
4,200
Net Interest Income After
Provision for Loan Losses
67,497
61,113
OTHER INCOME
Service charges and fees
5,661
5,693
Income from fiduciary activities
Net realized gains on sales of securities
Net gain on sale of loans
Net gain on sale of foreclosed real estate owned
Earnings and proceeds on life insurance policies
1,087
Other
1,906
Total Other Income
9,932
8,361
OTHER EXPENSES
Salaries and employee benefits
22,071
20,608
Occupancy
3,701
3,533
Furniture and equipment
1,266
1,289
Data processing and related operations
2,948
2,415
Federal Deposit Insurance Corporation insurance assessment
Advertising
Professional fees
1,719
1,582
Postage and telephone
Taxes, other than income
1,013
1,122
Foreclosed real estate
Amortization of intangible assets
Other
6,065
5,644
Total Other Expenses
41,044
38,614
Income before Income Taxes
36,385
30,860
INCOME TAX EXPENSE
7,152
5,945
Net income
$
29,233
$
24,915
EARNINGS PER SHARE
BASIC
$
3.59
$
3.05
DILUTED
$
3.58
$
3.04
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
Years Ended December 31,
(in thousands)
NET INCOME
$
29,233
$
24,915
Other comprehensive (loss) income:
Unrealized (loss) gain on pension liability
(784)
Tax Effect
(46)
Investment securities available for sale:
Unrealized holding loss
(71,488)
(6,931)
Tax Effect
15,012
1,455
Reclassification of gains from sale of securities
(3)
(92)
Tax Effect
Other comprehensive loss
(57,097)
(5,375)
COMPREHENSIVE (LOSS) INCOME
$
(27,864)
$
19,540
See notes to consolidated financial statements.
‎
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended December 31, 2022 and 2021
(In Thousands, Except Share and Per Share Data)
Accumulated
Other
Common Stock
Retained
Treasury Stock
Comprehensive
Shares
Amount
Surplus
Earnings
Shares
Amount
Income (Loss)
Total
(Dollars in Thousands, Except per Share Data)
BALANCE - DECEMBER 31, 2020
8,236,331
$
$
95,388
$
93,796
10,263
$
(342)
$
5,119
$
194,785
Net Income
-
-
-
24,915
-
-
-
24,915
Other comprehensive loss
-
-
-
-
-
-
(5,375)
(5,375)
Cash dividends declared ($1.06 per share)
-
-
-
(8,696)
-
-
-
(8,696)
Acquisition of treasury stock
-
-
-
-
56,162
(1,440)
-
(1,440)
Stock options exercised
22,420
-
-
-
-
Sale of treasury stock for ESOP
-
-
(5)
-
(4,997)
-
Compensation expense related to
stock options
-
-
-
-
-
-
Restricted stock awards
8,000
-
3,900
(120)
-
BALANCE - DECEMBER 31, 2021
8,266,751
96,443
110,015
65,328
(1,767)
(256)
205,262
Net Income
-
-
-
29,233
-
-
-
29,233
Other comprehensive loss
-
-
-
-
-
-
(57,097)
(57,097)
Cash dividends declared ($1.13 per share)
-
-
-
(9,228)
-
-
-
(9,228)
Acquisition of treasury stock
-
-
-
-
96,062
(2,515)
-
(2,515)
Stock options exercised
1,650
-
(212)
-
(32,775)
-
Sale of treasury stock for ESOP
-
-
-
(3,965)
-
Compensation expense related to
stock options
-
-
-
-
-
-
Restricted stock awards
23,000
-
-
-
-
BALANCE - DECEMBER 31, 2022
8,291,401
$
$
96,897
$
130,020
124,650
$
(3,308)
$
(57,353)
$
167,085
See notes to consolidated financial statements.
‎
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
$
29,233
$
24,915
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses
4,200
Depreciation
1,470
1,481
Amortization of intangible assets
Deferred income taxes
(383)
Net amortization of securities premiums and discounts
1,303
1,529
Net realized gains on sales of securities
(3)
(92)
Earnings and proceeds on life insurance policies
(1,087)
(941)
Gain (loss) on sales of fixed assets and foreclosed real estate owned
(379)
Net amortization of loan fees
(217)
(3,497)
Net gain on sale of loans
(3)
(177)
Mortgage loans originated for sale
(845)
(8,616)
Proceeds from sale of loans originated for sale
8,793
Compensation expense related to stock options
Compensation expense related to restricted stock
(Increase) decrease in accrued interest receivable
(1,028)
Increase (decrease) in accrued interest payable
1,450
(398)
Other, net
(2,069)
1,261
Net Cash Provided by Operating Activities
30,734
29,198
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales
5,113
11,366
Proceeds from maturities and principal reductions on mortgage-backed securities
40,780
68,218
Purchases
(130,828)
(268,242)
Purchase of regulatory stock
(6,366)
(4,201)
Redemption of regulatory stock
4,875
4,255
Net (increase) decrease in loans
(118,999)
57,938
Proceeds from bank-owned life insurance
Purchase of bank-owned life insurance
(3,000)
-
Purchase of premises and equipment
(2,153)
(1,258)
Proceeds from sales of foreclosed real estate owned
1,823
Proceeds from sales of bank premises and fixed assets
-
Net Cash Used for Investing Activities
(207,994)
(130,964)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposits
(29,066)
221,151
Net increase (decrease) in short-term borrowings
32,393
(2,481)
Repayments of other borrowings
(29,998)
(12,461)
Proceeds from other borrowings
40,000
-
Stock options exercised
Sale of treasury stock for ESOP
Acquisition of treasury stock
(2,515)
(1,440)
Cash dividends paid
(9,158)
(8,539)
Net Cash Provided by Financing Activities
2,445
196,754
Net (Decrease) Increase in Cash and Cash Equivalents
(174,815)
94,988
CASH AND CASH EQUIVALENTS - BEGINNING
206,681
111,693
CASH AND CASH EQUIVALENTS - ENDING
$
31,866
$
206,681
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31,
(In Thousands)
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid
$
5,819
$
6,155
Income taxes paid, net of refunds
$
6,891
$
5,330
Supplemental Schedule of Noncash Investing Activities
Transfers of loans to foreclosed real estate owned and repossession of other assets
$
$
1,740
Dividends payable
$
2,366
$
2,296
See notes to consolidated financial statements
‎
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
Norwood Financial Corp (Company) is a one bank holding company. Wayne Bank (Bank) is a wholly-owned subsidiary of the Company. The Bank is a state-chartered bank headquartered in Honesdale, Pennsylvania. The Company derives substantially all of its income from bank-related services which include interest earnings on commercial mortgages, residential real estate mortgages, commercial and consumer loans, as well as interest earnings on investment securities and fees from deposit services to its customers. The Company is subject to regulation and supervision by the Federal Reserve Board while the Bank is subject to regulation and supervision by the Federal Deposit Insurance Corporation and the Pennsylvania Department of Banking and Securities.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank, and the Bank’s wholly-owned subsidiaries, WCB Realty Corp., Norwood Investment Corp. and WTRO Properties. All significant intercompany accounts and transactions have been eliminated in consolidation.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, the determination of other-than-temporary impairment on securities, the determination of goodwill impairment and the fair value of financial instruments.
Significant Group Concentrations of Credit Risk
Most of the Company’s activities are with customers located within its markets in Northeastern Pennsylvania and the New York Counties of Delaware, Sullivan, Ontario, Otsego and Yates. Note 3 discusses the types of securities that the Company invests in. Note 4 discusses the types of lending that the Company engages in. The Company does not have any significant concentrations to any one industry or customer.
Concentrations of Credit Risk
The Bank operates primarily in Wayne, Pike, Lackawanna, Luzerne and Monroe Counties, Pennsylvania and Delaware, Sullivan, Ontario, Otsego and Yates Counties, New York. Accordingly, the Bank has extended credit primarily to commercial entities and individuals in these areas whose ability to honor their contracts is influenced by the region’s economy. These customers are also the primary depositors of the Bank. The Bank is limited in extending credit by legal lending limits to any single borrower or group of related borrowers.
Securities
Securities classified as available for sale are those securities that the Company intends to hold for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movement in interest rates, changes in maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Securities available for sale are carried at fair value. Unrealized gains and losses are reported in other comprehensive income, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of the specific securities sold, are included in earnings. Premiums and discounts are recognized in interest income using a method which approximates the interest method over the term of the security.
Bonds, notes and debentures for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the term of the security.
Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each Consolidated Balance Sheet date.
Declines in the fair value of available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent of the Company to not sell the securities and it is more likely than not that it will not have to sell the securities before recovery of their cost basis.
Regulatory Stock
The Company, as a member of the Federal Home Loan Bank (FHLB) system is required to maintain an investment in capital stock of its district FHLB according to a predetermined formula. This regulatory stock has no quoted market value and is carried at cost.
Management evaluates the regulatory stock for impairment. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB. Management considers the FHLB’s regulatory capital ratios, liquidity, and the fact that new shares of FHLB stock continue to change hands at the $100 par value. Management believes no impairment charge is necessary related to FHLB stock as of December 31, 2022.
Loans Receivable
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees. Interest income is accrued on the unpaid principal balance. Loan origination fees are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Company is generally amortizing these amounts over the contractual life of the loan.
The accrual of interest is generally discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
Troubled Debt Restructurings
A loan is considered to be a troubled debt restructuring (TDR) loan when the Company grants a concession to the borrower because of the borrower’s financial condition that it would not otherwise consider. Such concessions include the reduction of interest rates, forgiveness of principal or interest, or other modifications of interest rates that are less than the current market rate for new obligations with similar risk.
Loans Acquired
Loans acquired including loans that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable, are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance. Loans are evaluated individually to determine if there is evidence of deterioration of credit quality since origination. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield,” is recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment or as a loss accrual or a valuation allowance. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining estimated life. Decreases in expected cash flows are recognized immediately as impairment. Any valuation allowances on these impaired loans reflect only losses incurred after the acquisition.
For purchased loans acquired that are not deemed impaired at acquisition, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value. Loans may be aggregated and accounted for as a pool of loans if the loans being aggregated have common risk characteristics. Subsequent to the purchase date, the methods utilized to estimate the required allowance for credit losses for these loans is similar to originated loans; however, the Company records a provision for loan losses only when the required allowance exceeds any remaining credit discounts. The remaining differences between the purchase price and the unpaid principal balance at the date of acquisition are recorded in interest income over the life of the loans.
Mortgage Servicing Rights
Servicing assets are recognized as separate assets when rights are acquired through purchase or through the sale of financial assets. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon a third party appraisal. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance to the extent that fair value is less than the capitalized amount. The Company’s loan servicing assets at December 31, 2022 and 2021, respectively, were not impaired. Total servicing assets included in other assets as of December 31, 2022 and 2021, were $213,000 and $289,000, respectively.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.
The allowance consists of specific and general components. The specific component relates to loans that are classified as substandard. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential real estate loans for impairment disclosures, unless such loans were acquired with impairment or are the subject of a restructuring agreement.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation expense is calculated principally on the straight-line method over the respective assets estimated useful lives as follows:
Years
Buildings and improvements
10 - 40
Furniture and equipment
3 - 10
Leases
The Company applies a right-of-use (ROU) model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease payments. For leases with a term of 12 months or less, a practical expedient is available whereby a lessee may elect, by class of underlying asset, not to recognize an ROU asset or lease liability. At inception, lessees must classify all leases as either finance or operating based on five criteria. Balance sheet recognition of finance and operating leases is similar, but the pattern of expense recognition in the income statement, as well as the effect on the statement of cash flows, differs depending on the lease classification. See Note 8 for related disclosures.
Transfers of Financial Assets
Transfers of financial assets, including loan and loan participation sales, are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value less cost to sell at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of its carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in other expenses.
Bank Owned Life Insurance
The Company invests in bank owned life insurance (BOLI) as a source of funding for employee benefit expenses. BOLI involves the purchasing of life insurance by the Bank on a select group of employees. The Company is the owner and beneficiary of the policies. This life insurance investment is carried at the cash surrender value of the underlying policies. Income from the increase in cash surrender value of the policies or from death benefits realized is included in other income on the Consolidated Statements of Income.
Goodwill
In connection with three acquisitions the Company recorded goodwill in the amount of $29.3 million, representing the excess of amounts paid over the fair value of net assets of the institutions acquired. Goodwill is tested and deemed impaired when the carrying value of goodwill exceeds its implied fair value. The value of the goodwill can change in the future. We expect the value of the goodwill to decrease if there is a significant decrease in the franchise value of the Bank. If an impairment loss is determined in the future, we will reflect the loss as an expense for the period in which the impairment is determined, leading to a reduction of our net income for that period by the amount of the impairment loss. No impairment was recognized for the years ended December 31, 2022 and 2021.
Other Intangible Assets
At December 31, 2022, the Company had other intangible assets of $306,000, which is net of accumulated amortization of $1,448,000. These intangible assets will continue to be amortized using the sum-of-the-years digits method of amortization over ten years. At December 31, 2021, the Company had other intangible assets of $407,000, which was net of accumulated amortization of $1,347,000. Amortization expense related to other intangible assets was $101,000 and $123,000 for the years ended December 31, 2022 and 2021, respectively.
As of December 31, 2022, the estimated future amortization expense for the core deposit intangible is as follows (in thousands):
$
Thereafter
$
Income Taxes
Deferred income tax assets and liabilities are determined based on the differences between financial statement carrying amounts and the tax basis of existing assets and liabilities. These differences are measured at the enacted tax rates that will be in effect when these differences reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
The Company and its subsidiary file a consolidated federal income tax return. The Company recognizes interest and penalties on income taxes as a component of income tax expense.
The Company analyzes each tax position taken in its tax returns and determines the likelihood that the position will be realized. Only tax positions that are “more-likely-than-not” to be realized can be recognized in an entity’s financial statements. For tax positions that do not meet this recognition threshold, an entity will record an unrecognized tax benefit for the difference between the position taken on the tax return and the amount recognized in the financial statements. The Company does not have any unrecognized tax benefits at December 31, 2022 or 2021, or during the years then ended. No unrecognized tax benefits are expected to arise within the next twelve months.
Advertising Costs
Advertising costs are expensed as incurred.
Earnings per Share
Basic earnings per share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the period less any unvested restricted shares. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method. Treasury shares are not deemed outstanding for earnings per share calculations.
Employee Benefit Plans
The Company has a defined contributory profit-sharing plan which includes provisions of a 401(k) plan. The Company’s contributions are expensed as the cost is incurred.
The Company has several supplemental executive retirement plans. To fund the benefits under these plans, the Company is the owner of single premium life insurance policies on the participants.
The Company provides pension benefits to eligible employees. The Company’s funding policy is to contribute at least the minimum required contributions annually.
Interest Rate Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments.
Stock Option Plans
The Company recognizes the value of share-based payment transactions as compensation costs in the financial statements over the period that an employee provides service in exchange for the award. The fair value of the share-based payments for stock options is estimated using the Black-Scholes option-pricing model. The Company used the modified-prospective transition method to record compensation expense. Under the modified-prospective method, companies are required to record compensation cost for new and
modified awards over the related vesting period of such awards and record compensation cost prospectively for the unvested portion, at the date of adoption, of previously issued and outstanding awards over the remaining vesting period of such awards. No change to prior periods presented is permitted under the modified-prospective method.
Restricted Stock
The Company recognizes compensation cost related to restricted stock based on the market price of the stock at the grant date over the vesting period. The product of the number of shares granted and the grant date market price of the Company’s common stock determines the fair value of restricted stock under the Company’s 2014 Equity Incentive Plan. The Company recognizes compensation expense for the fair value of the restricted stock on a straight-line basis over the requisite service period for the entire award.
Cash Flow Information
For the purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits with banks and federal funds sold.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit, letters of credit and commitments to sell loans. Such financial instruments are recorded on the balance sheets when they become receivable or payable.
Trust Assets
Assets held by the Company in a fiduciary capacity for customers are not included in the financial statements since such items are not assets of the Company. Trust income is reported on the accrual method.
Treasury Stock
Common shares repurchased are recorded as treasury stock at cost.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities and defined benefit pension obligations, are reported as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income as presented in the Consolidated Statement of Comprehensive Income.
Revenue Recognition
Under ASC Topic 606, management determined that the primary sources of revenue emanating from interest and dividend income on loans and investments along with noninterest revenue resulting from investment securities gains, loans servicing, gains on loans sold and earnings on bank-owned life insurance are not within the scope of this Topic.
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the year ended December 31:
(dollars in thousands)
Noninterest Income
In-scope of Topic 606:
Service charges on deposit accounts
$
$
ATM Fees
Overdraft Fees
1,155
1,029
Safe deposit box rental
Loan related service fees
1,238
Debit card
2,496
2,228
Fiduciary activities
Commissions on mutual funds & annuities
Gain on sales of other real estate owned
Other income
1,906
Noninterest Income (in-scope of Topic 606)
8,761
7,021
Out-of-scope of Topic 606:
Net realized gains on sales of securities
Loan servicing fees
Gain on sales of loans
Earnings on and proceeds from bank-owned life insurance
1,087
Noninterest Income (out-of-scope of Topic 606)
1,171
1,340
Total Noninterest Income
$
9,932
$
8,361
Segment Reporting
The Company acts as an independent community financial services provider and offers traditional banking related financial services to individual, business and government customers. Through its Community Office and automated teller machine network, the Company offers a full array of commercial and retail financial services, including the taking of time, savings and demand deposits; the making of commercial, consumer and mortgage loans; and the providing of safe deposit services. The Company also performs personal, corporate, pension and fiduciary services through its Trust Department.
Management does not separately allocate expenses, including the cost of funding loan demand, between the commercial, retail, mortgage banking and trust operations of the Company. As such, discrete information is not available and segment reporting would not be meaningful.
Reclassification of Comparative Amounts
Certain comparative amounts for the prior year have been reclassified to conform to current-year classifications. Such reclassifications had no material effect on net income or stockholders’ equity.
New Accounting Pronouncements Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This standard, along with several other subsequent codification updates, replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses that are expected to occur over the remaining life of a financial asset and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The new current expected credit losses model (“CECL”) will apply to the allowance for loan losses, available-for-sale and held-to-maturity debt securities, purchased financial assets with credit deterioration and certain off-balance sheet credit exposures.
Management has completed its implementation plan, segmentation and testing, and model validation. The implementation plan included drafting of additional controls and policies to govern data uploads to its third-party vendor, balancing and reconciling, testing
and auditing of inputs, and review and decision-making surrounding segmentation, methodologies, qualitative factor adjustments, and reasonable and supportable forecasts and reversion techniques. Parallel runs were processed during 2022 and the results were consistent with management's expectations. The implementation plan is currently going through the Company's control structure and internal control testing is being performed.
As a result of adopting this standard, the Company expects the increase in its allowance effective January 1, 2023, to be in the range of $2.0 million to $2.5 million. In addition, the adoption of ASU No. 2016-13 will require the Company to gross up its previously purchased credit impaired loans through the allowance at January 1, 2023. As a result, the Company expects an increase in its allowance as of January 1, 2023, to be in the range of $2.2 million to $2.7 million. These estimates are subject to further refinements based on ongoing evaluations of our model, methodologies, and judgments, as well as prevailing economic conditions and forecasts as of the adoption date. The adoption of ASU 2016-13 is not expected to have a significant impact on our regulatory capital ratios.
At adoption, the Company did not have any securities classified as HTM debt securities. No allowance was recorded related to AFS debt securities at the date of adoption, January 1, 2023.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Update is effective for smaller reporting companies and all other entities for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.
In January 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls “reference rate reform” if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which extends the sunset (or expiration) date of Accounting Standards Codification (ASC) Topic 848 to December 31, 2024. This gives reporting entities two additional years to apply the accounting relief provided under ASC Topic 848 for matters related to reference rate reform. ASU 2022-06 is effective for all reporting entities immediately upon issuance and must be applied on a prospective basis. This Update is not expected to have a significant impact on the Company’s financial statements.
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), which provides optional temporary guidance for entities transitioning away from the London Interbank Offered Rate (LIBOR) and other interbank offered rates (IBORs) to new references rates so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions within Topic 848. ASU 2021-01 clarifies that the derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. ASU 2021-01 is effective immediately for all entities. Entities may elect to apply the amendments on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. The amendments in this update do not apply to contract modifications made, as well as new hedging relationships entered into, after December 31, 2022, and to existing hedging relationships evaluated for effectiveness for periods after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship. This Update is not expected to have a significant impact on the Company’s financial statements.
In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (ASC 815): Fair Value Hedging - Portfolio Layer Method. ASC 815 currently permits only prepayable financial assets and one or more beneficial interests secured by a portfolio of prepayable financial instruments to be included in a last-of-layer closed portfolio. The amendments in this Update allow non-prepayable financial assets to also be included in a closed portfolio hedged using the portfolio layer method. That expanded scope permits an entity
to apply the same portfolio hedging method to both prepayable and non-prepayable financial assets, thereby allowing consistent accounting for similar hedges. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. This Update is not expected to have a significant impact on the Company’s financial statements.
NOTE 3 - SECURITIES
The amortized cost, gross unrealized gains and losses, and fair value of securities were as follows:
December 31, 2022
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
(In Thousands)
AVAILABLE FOR SALE:
U.S. Treasury securities
$
45,066
$
-
$
(3,212)
$
41,854
U.S. Government agencies
21,266
-
(2,943)
18,323
States and political subdivisions
157,524
(29,674)
127,852
Mortgage-backed securities-
government sponsored entities
268,400
-
(37,502)
230,898
Total debt securities
$
492,256
$
$
(73,331)
$
418,927
December 31, 2021
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
(In Thousands)
AVAILABLE FOR SALE:
U.S. Treasury securities
$
19,550
$
$
(205)
$
19,351
U.S. Government agencies
16,251
(264)
16,011
States and political subdivisions
145,107
2,155
(1,395)
145,867
Mortgage-backed securities-
government sponsored entities
227,712
(2,925)
225,553
Total debt securities
$
408,620
$
2,951
$
(4,789)
$
406,782
The following tables show the Company’s investments’ gross unrealized losses and fair value aggregated by security type and length of time that individual securities have been in a continuous unrealized loss position (in thousands):
December 31, 2022
Less than 12 Months
12 Months or More
Total
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
U.S. Treasury securities
$
25,733
$
(849)
$
16,121
$
(2,363)
$
41,854
$
(3,212)
U.S. Government agencies
8,321
(885)
10,002
(2,058)
18,323
(2,943)
States and political subdivisions
66,680
(11,194)
57,367
(18,480)
124,047
(29,674)
Mortgage-backed securities-government sponsored entities
102,361
(10,639)
128,537
(26,863)
230,898
(37,502)
$
203,095
$
(23,567)
$
212,027
$
(49,764)
$
415,122
$
(73,331)
December 31, 2021
Less than 12 Months
12 Months or More
Total
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
U.S. Treasury securities
$
18,361
$
(205)
$
-
$
-
$
18,361
$
(205)
U.S. Government agencies
7,912
(109)
3,843
(155)
11,755
(264)
States and political subdivisions
74,658
(1,395)
-
-
74,658
(1,395)
Mortgage-backed securities-government sponsored entities
170,647
(2,856)
2,919
(69)
173,566
(2,925)
$
271,578
$
(4,565)
$
6,762
$
(224)
$
278,340
$
(4,789)
The Company has 203 debt securities in the less than twelve month category and 140 debt securities in the twelve months or more category as of December 31, 2022. In management’s opinion, the unrealized losses on securities reflect changes in interest rates subsequent to the acquisition of specific securities. No other-than-temporary-impairment charges were recorded in 2022. Management believes that all other unrealized losses represent temporary impairment of the securities, and it is more likely than not that it will not have to sell the securities before recovery of their cost basis.
The amortized cost and fair value of debt securities as of December 31, 2022 by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.
Amortized
Fair
Cost
Value
(In Thousands)
Due in one year or less
$
5,883
$
5,821
Due after one year through five years
43,272
40,981
Due after five years through ten years
54,146
44,419
Due after ten years
120,555
96,808
223,856
188,029
Mortgage-backed securities - government sponsored entities
268,400
230,898
$
492,256
$
418,927
Gross realized gains and gross realized losses on sales of securities available for sale were $14,000 and $11,000, respectively, in 2022, compared to $92,000 and $0, respectively, in 2021. The proceeds from the sales of securities totaled $5,113,000 and $11,366,000 for the years ended December 31, 2022 and 2021, respectively.
Securities with a carrying value of $378,472,000 and $339,769,000 at December 31, 2022 and 2021, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.
NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Set forth below is selected data relating to the composition of the loan portfolio (in thousands):
December 31, 2022
December 31, 2021
Real Estate:
Residential
$
298,813
20.3
%
$
273,040
20.1
%
Commercial
651,544
44.2
628,724
46.4
Agricultural
68,915
4.7
61,925
4.6
Construction
32,469
2.2
21,990
1.6
Commercial loans
187,257
12.7
186,031
13.7
Other agricultural loans
35,277
2.4
37,930
2.8
Consumer loans to individuals
200,149
13.5
146,400
10.8
Total loans
1,474,424
100.0
%
1,356,040
100.0
%
Deferred fees, net
(479)
(1,109)
Total loans receivable
1,473,945
1,354,931
Allowance for loan losses
(16,999)
(16,442)
Net loans receivable
$
1,456,946
$
1,338,489
During 2021 and 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 December 31, 2022 and 2021, the Company had outstanding principal balances of $121,000 and $15,209,000, respectively, 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. PPP loans are included in the Commercial loan category.
In accordance with the SBA terms and conditions on these PPP loans, the Company received approximately $0 and $2.9 million in fees associated with the processing of these loans in 2022 and 2021, respectively. Upon funding of the loans, these fees were deferred and are amortized over the life of the loan as an adjustment to yield in accordance with FASB ASC 310-20-25-2.
As a result of the acquisition of 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 were as follows for the twelve months ended December 31:
(In thousands)
Balance at beginning of period
$
1,884
$
1,365
Additions
-
-
Accretion
(710)
(880)
Reclassification and other
1,399
Balance at end of period
$
1,827
$
1,884
The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30 (in thousands):
December 31, 2022
December 31, 2021
Outstanding Balance
$
8,368
$
12,862
Carrying Amount
$
6,290
$
8,304
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)
July 7, 2020
Contractually required principal and interest
$
15,410
Non-accretable discount
(5,213)
Expected cash flows
10,197
Accretable discount
(1,724)
Estimated fair value
$
8,473
There has been no allowance for loan losses recorded for acquired loans with specific evidence of deterioration in credit quality. As of December 31, 2022, for loans that were acquired prior to 2020 with or without specific evidence of deterioration in credit quality, adjustments to the allowance for loan losses have been accounted for through the allowance for loan loss adequacy calculation.
The Company maintains a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential impaired loans. The system takes into consideration, among other things, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers. Specific loan loss allowances are established for identified losses based on a review of such information. A loan evaluated for impairment is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans identified as impaired are evaluated independently. The Company does not aggregate such loans for evaluation purposes. Impairment is measured on a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential mortgage loans for impairment disclosures, unless such loans are part of a larger relationship that is impaired, or are classified as a troubled debt restructuring.
The following tables show the amount of loans in each category that were individually and collectively evaluated for impairment at the dates indicated:
Real Estate Loans
Commercial
Other
Consumer
Residential
Commercial
Agricultural
Construction
Loans
Agricultural
Loans
Total
(In thousands)
December 31, 2022
Individually evaluated for impairment
$
-
$
$
-
$
-
$
$
-
$
-
$
Loans acquired with deteriorated credit quality
2,049
2,034
-
1,640
-
-
6,290
Collectively evaluated for impairment
298,246
649,093
66,881
32,469
185,556
35,277
200,149
1,467,671
Total Loans
$
298,813
$
651,544
$
68,915
$
32,469
$
187,257
$
35,277
$
200,149
$
1,474,424
Real Estate Loans
Commercial
Other
Consumer
Residential
Commercial
Agricultural
Construction
Loans
Agricultural
Loans
Total
(In thousands)
December 31, 2021
Individually evaluated for impairment
$
-
$
1,658
$
-
$
-
$
$
-
$
-
$
1,674
Loans acquired with deteriorated credit quality
3,285
1,918
-
2,119
-
8,304
Collectively evaluated for impairment
272,256
623,781
60,007
21,990
185,817
35,811
146,400
1,346,062
Total Loans
$
273,040
$
628,724
$
61,925
$
21,990
$
186,031
$
37,930
$
146,400
$
1,356,040
The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable.
Unpaid Principal
Recorded
Principal
Associated
Investment
Balance
Allowance
December 31, 2022
(In thousands)
With no related allowance recorded:
Real Estate Loans
Commercial
$
$
$
-
Commercial loans
-
Subtotal
-
With an allowance recorded:
Commercial loans
Subtotal
Total:
Real Estate Loans
Commercial
$
$
$
-
Commercial loans
Total Impaired Loans
$
$
$
Unpaid
Recorded
Principal
Associated
Investment
Balance
Allowance
December 31, 2021
(In thousands)
With no related allowance recorded:
Real Estate Loans
Commercial
$
$
$
-
Commercial loans
-
Subtotal
-
With an allowance recorded:
Real Estate Loans
Commercial
1,517
1,517
Subtotal
1,517
1,517
Total:
Real Estate Loans
Residential
-
Commercial
$
1,658
$
1,658
$
Commercial loans
-
Total Impaired Loans
$
1,674
$
1,674
$
The following information for impaired loans is presented for the years ended December 31, 2022 and 2021:
Average Recorded
Interest Income
Investment
Recognized
(In thousands)
Total:
Real Estate Loans
Commercial
$
$
2,358
$
$
Commercial loans
-
Total Loans
$
$
2,376
$
$
Troubled debt restructured loans are those loans whose terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of financial difficulties experienced by the borrower, who could not obtain comparable terms from alternate financing sources. As of December 31, 2022, there were no troubled debt restructured loans. During 2022, there were no new loan relationships identified as troubled debt restructurings. During 2022, there were no charge-offs on loans classified as troubled debt restructurings.
As of December 31, 2021, there were no troubled debt restructured loans. During 2021, there were no new loans relationships identified as troubled debt restructurings. During 2021, there were no charge-offs on loans classified as troubled debt restructurings.
Foreclosed assets acquired in settlement of loans are carried at fair value less estimated costs to sell and are included in foreclosed real estate owned on the Consolidated Balance Sheets. As of December 31, 2022 and 2021, foreclosed real estate owned totaled $346,000 and $1,742,000, respectively. As of December 31, 2022, included within foreclosed real estate owned is one commercial property that was received via a deed in lieu. As of December 31, 2022, the Company has initiated formal foreclosure proceedings on four consumer residential mortgage loans with an outstanding balance of $223,000.
Management uses an eight point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first four categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. Loans greater than 90 days past due are considered Substandard unless full payment is expected. Any portion of a loan that has been charged off is placed in the Loss category.
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as nonperformance, repossession, or death occurs to raise awareness of a possible credit event. The Company’s Loan Review Department is responsible for the timely and accurate risk rating of the loans on an ongoing basis. Every credit which must be approved by Loan Committee or the Board of Directors is assigned a risk rating at time of consideration. Loan Review also annually reviews relationships of $1,500,000 and over to assign or re-affirm risk ratings. Loans in the Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.
The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard, Doubtful and Loss within the internal risk rating system as of December 31, 2022 and December 31, 2021 (in thousands):
Special
Pass
Mention
Substandard
Doubtful
Loss
Total
December 31, 2022
Commercial real estate loans
$
646,775
$
1,079
$
3,690
$
-
$
-
$
651,544
Real estate - agricultural
66,444
2,103
-
-
68,915
Commercial loans
186,966
-
-
187,257
Other agricultural loans
34,071
-
-
35,277
Total
$
934,256
$
2,187
$
6,550
$
-
$
-
$
942,993
Special
Pass
Mention
Substandard
Doubtful
Loss
Total
December 31, 2021
Commercial real estate loans
$
618,541
$
5,146
$
4,765
$
-
$
$
628,724
Real estate - agricultural
60,193
-
1,732
-
-
61,925
Commercial loans
185,729
-
-
186,031
Other agricultural loans
35,573
2,147
-
-
37,930
Total
$
900,036
$
5,555
$
8,747
$
-
$
$
914,610
For residential real estate loans, construction loans and consumer loans, the Company evaluates credit quality based on the performance of the individual credits. Nonperforming loans include loans that have been placed on nonaccrual status and loans remaining in accrual status on which the contractual payment of principal and interest has become 90 days past due.
The following table presents the recorded investment in the loan classes based on payment activity as of December 31, 2022 and December 31, 2021 (in thousands):
Performing
Nonperforming
Total
December 31, 2022
Residential real estate loans
$
298,327
$
$
298,813
Construction
32,469
-
32,469
Consumer loans to individuals
199,985
200,149
Total
$
530,781
$
$
531,431
Performing
Nonperforming
Total
December 31, 2021
Residential real estate loans
$
272,571
$
$
273,040
Construction
21,990
-
21,990
Consumer loans to individuals
146,345
146,400
Total
$
440,906
$
$
441,430
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of December 31, 2022 and December 31, 2021 (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
Purchased Credit Impaired Loans
Total Loans
December 31, 2022
Real Estate loans
Residential
$
297,350
$
$
$
-
$
$
$
$
298,813
Commercial
648,688
-
-
2,049
651,544
Agricultural
66,751
-
-
-
2,034
68,915
Construction
32,469
-
-
-
-
-
-
32,469
Commercial loans
185,485
-
-
1,640
187,257
Other agricultural loans
35,277
-
-
-
-
-
-
35,277
Consumer loans
198,893
-
1,256
-
200,149
Total
$
1,464,913
$
1,646
$
$
-
$
1,113
$
3,221
$
6,290
$
1,474,424
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
Purchased Credit Impaired Loans
Total Loans
December 31, 2021
Real Estate loans
Residential
$
271,622
$
$
$
-
$
$
$
$
273,040
Commercial
625,336
-
-
-
3,285
628,724
Agricultural
59,982
-
-
-
1,918
61,925
Construction
21,990
-
-
-
-
-
-
21,990
Commercial loans
185,801
186,031
Other agricultural loans
35,811
-
-
-
-
-
2,119
37,930
Consumer loans
145,986
-
-
146,400
Total
$
1,346,528
$
$
$
$
$
1,208
$
8,304
$
1,356,040
The following table presents the allowance for loan losses by the classes of the loan portfolio:
(In thousands)
Residential Real Estate
Commercial Real Estate
Agricultural
Construction
Commercial
Other Agricultural
Consumer
Total
Beginning balance, December 31, 2021
$
2,175
$
10,878
$
-
$
$
1,490
$
-
$
1,766
$
16,442
Charge Offs
(172)
(20)
-
-
(16)
-
(457)
(665)
Recoveries
-
-
-
Provision for loan losses
(2,647)
1,263
Ending balance, December 31, 2022
$
2,833
$
8,293
$
$
$
2,445
$
$
2,636
$
16,999
Ending balance individually evaluated
‎for impairment
$
-
$
-
$
-
$
-
$
$
-
$
-
$
Ending balance collectively evaluated
‎for impairment
$
2,833
$
8,293
$
$
$
2,395
$
$
2,636
$
16,949
(In thousands)
Residential Real Estate
Commercial Real Estate
Construction
Commercial
Consumer
Total
Beginning balance, December 31, 2020
$
1,960
$
8,004
$
$
1,360
$
1,676
$
13,150
Charge Offs
(17)
(452)
-
(200)
(480)
(1,149)
Recoveries
-
Provision for loan losses
3,307
(17)
4,200
Ending balance, December 31, 2021
$
2,175
$
10,878
$
$
1,490
$
1,766
$
16,442
Ending balance individually evaluated
‎for impairment
$
-
$
$
-
$
-
$
-
$
Ending balance collectively evaluated
for impairment
$
2,175
$
10,606
$
$
1,490
$
1,766
$
16,170
During the period ended December 31, 2022, the allowance for loan losses increased from $16,442,000 to $16,999,000. This $557,000 increase in the required allowance was due primarily to a $2.4 million increase in the qualitative factor related to loan growth and a $445,000 increase in the qualitative factor related to large balance loans, which was partially offset by a $2.3 million decrease in the qualitative factor related to COVID-19.
During the period ended December 31, 2021, the allowance for loan losses increased from $13,150,000 to $16,442,000. This $3,292,000 increase in the required allowance was due primarily to a $1.5 million increase in the qualitative factor related to loan growth and a $1.4 million increase due to an increase in the qualitative factor related to large balance loans.
Interest income that would have been recorded on loans accounted for on a non-accrual basis under the original terms of the loans was $182,000 and $35,000 for 2022 and 2021, respectively.
As of December 31, 2022 and 2021, the Company considered its concentration of credit risk to be acceptable. As of December 31, 2022, the highest concentrations are in commercial rentals and the residential rentals category, with loans outstanding of $141.9 million, or 9.6% of loans outstanding, to commercial rentals, and $113.0 million, or 7.7% of loans outstanding, to residential rentals. There were no charge-offs on loans within these concentrations for the years ended December 31, 2022 and 2021, respectively.
During 2022, the Company sold residential mortgage loans totaling $845,000. During 2021, the Company sold residential mortgage loans totaling $8,616,000. Gross realized gains and gross realized losses on sales of residential mortgage loans were $3,000 and $0, respectively, in 2022 and $177,000 and $0, respectively, in 2021. The proceeds from the sales of residential mortgage loans totaled $848,000 and $8,793,000 for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022 and 2021, the outstanding value of loans serviced for others totaled $60.0 million and $65.4 million, respectively.
NOTE 5 - PREMISES AND EQUIPMENT
Components of premises and equipment at December 31 are as follows:
(In Thousands)
Land and improvements
$
3,864
$
3,879
Buildings and improvements
23,444
21,846
Furniture and equipment
10,506
10,183
37,814
35,908
Accumulated depreciation
(19,890)
(18,619)
$
17,924
$
17,289
Depreciation expense totaled $1,470,000 and $1,481,000 for the years ended December 31, 2022 and 2021, respectively.
‎
NOTE 6 - DEPOSITS
Aggregate time deposits in denominations greater than $250,000 were $213,623,000 and $257,238,000 at December 31, 2022 and 2021, respectively.
At December 31, 2022, the scheduled maturities of time deposits are as follows (in thousands):
$
336,258
96,823
57,384
8,632
4,673
$
503,770
NOTE 7 - BORROWINGS
Short-term borrowings at December 31 consist of the following:
(In Thousands)
Securities sold under agreements to repurchase
$
50,951
$
60,822
Federal Home Loan Bank short-term borrowings
42,264
-
$
93,215
$
60,822
The outstanding balances and related information of short-term borrowings are summarized as follows:
Years Ended December 31,
(Dollars In Thousands)
Average balance during the year
$
69,711
$
73,810
Average interest rate during the year
0.75
%
0.39
%
Maximum month-end balance during the year
$
93,215
$
90,409
Weighted average interest rate at the end of the year
2.65
%
0.34
%
Securities sold under agreements to repurchase generally mature within one day to one year from the transaction date. Securities with an amortized cost and fair value of $63,737,000 and $54,562,000 at December 31, 2022 and $66,353,000 and $65,162,000 at December 31, 2021, respectively, were pledged as collateral for these agreements. The securities underlying the agreements were under the Company’s control.
The collateral pledged for repurchase agreements that are classified as secured borrowings is summarized as follows (in thousands):
As of December 31, 2022
Remaining Contractual Maturity of the Agreements
Overnight and continuous
Up to 30 days
30-90 days
Greater than 90 days
Total
Repurchase Agreements:
Mortgage-backed securities - government sponsored entities
$
54,562
$
-
$
-
$
-
$
54,562
Total liability recognized for repurchase agreements
50,951
As of December 31, 2021
Remaining Contractual Maturity of the Agreements
Overnight and continuous
Up to 30 days
30-90 days
Greater than 90 days
Total
Repurchase Agreements:
Mortgage-backed securities - government sponsored entities
$
65,162
$
-
$
-
$
-
$
65,162
Total liability recognized for repurchase agreements
60,822
The Company has a line of credit commitment available from the FHLB of Pittsburgh for borrowings of up to $150,000,000, which renews annually in June. At December 31, 2022, there was $42,264,000 of borrowings outstanding on this line. There were no borrowings outstanding on this line of credit at December 31, 2021. The Company has a line of credit commitment available from Atlantic Community Bankers Bank for $7,000,000, which expires on June 30, 2023. There were no borrowings under this line of credit at December 31, 2022 and 2021. The Company has a line of credit commitment available from PNC Bank for $16,000,000 at December 31, 2022. There were no borrowings under this line of credit at December 31, 2022 and December 31, 2021. The Company also has a line of credit commitment from Zions Bank for $17,000,000 at December 31, 2022. There were no borrowings under this line of credit at December 31, 2022 and December 31, 2021.
Other borrowings consisted of the following at December 31, 2022 and 2021:
(In Thousands)
Amortizing fixed rate borrowing due March 2022 at 1.75%
$
-
$
Amortizing fixed rate borrowing due August 2022 at 1.94%
-
1,364
Amortizing fixed rate borrowing due October 2022 at 1.88%
-
1,386
Amortizing fixed rate borrowing due October 2023 at 3.24%
-
3,856
Amortizing fixed rate borrowing due December 2023 at 3.22%
-
2,097
Fixed rate term borrowing due December 2023 at 1.95%
-
10,000
Amortizing fixed rate borrowing due December 2023 at 1.73%
-
5,190
Amortizing fixed rate borrowing due April 2024 at 0.91%
-
5,878
Amortizing fixed rate borrowing due December 2023 at 5.08%
40,000
-
$
40,000
$
29,998
Contractual maturities and scheduled cash flows of other borrowings at December 31, 2022 are as follows (in thousands):
$
40,000
$
40,000
The Bank’s maximum borrowing capacity with the FHLB was $655,344,000 of which $82,264,000 was outstanding in the form of advances and $92,900,000 was outstanding in the form of letters of credit at December 31, 2022. Advances from the FHLB are secured by qualifying assets of the Bank.
NOTE 8 - OPERATING LEASES
The Company leases seven office locations under operating leases. Several assumptions and judgments were made when applying the requirements of Topic 842 to the Company’s existing lease commitments, including the allocation of consideration in the contracts between lease and nonlease components, determination of the lease term, and determination of the discount rate used in calculating the present value of the lease payments.
The Company has elected to account for the variable nonlease components, such as common area maintenance charges, utilities, real estate taxes, and insurance, separately from the lease component. Such variable nonlease components are reported in net occupancy expense on the Consolidated Statements of Income when paid. These variable nonlease components were excluded from the calculation of the present value of the remaining lease payments, therefore, they are not included in other assets and other liabilities on the Consolidated Balance Sheets. The lease cost associated with the operating leases for the year ending December 31, 2022 and 2021, amounted to $609,000 and $587,000 respectively. The right-of-use asset associated with operating leases amounted to $4,109,000 and $4,511,000 at December 31, 2022 and 2021, respectively. The lease liability associated with operating leases amounted to $4,195,000 and $4,577,000 at December 31, 2022 and 2021, respectively.
Certain of the Company’s leases contain options to renew the lease after the initial term. Management considers the Company’s historical pattern of exercising renewal options on leases and the positive performance of the leased locations, when determining whether it is reasonably certain that the leases will be renewed. If management concludes that there is reasonable certainty about the renewal option, it is included in the calculation of the remaining term of each applicable lease. The discount rate utilized in calculating the present value of the remaining lease payments for each lease was the Federal Home Loan Bank of Pittsburgh advance rate corresponding to the remaining maturity of the lease. The following table presents the weighted-average remaining lease term and discount rate for the leases outstanding at December 31, 2022.
Operating
Weighted-average remaining term
10.7 years
Weighted-average discount rate
2.71%
The following table presents the undiscounted cash flows due related to operating leases as of December 31, 2022, along with a reconciliation to the discounted amount recorded on the Consolidated Balance Sheets:
Undiscounted cash flows due (in thousands)
Operating
$
2028 and thereafter
2,414
Total undiscounted cash flows
4,981
Discount on cash flows
(786)
Total lease liabilities
$
4,195
Under Topic 842, the lessee can elect to not record on the Consolidated Balance Sheets a lease whose term is twelve months or less and does not include a purchase option that the lessee is reasonably certain to exercise. As of December 31, 2022, the Company had no leases that had a term of twelve months or less.
NOTE 9 - EMPLOYEE BENEFIT PLANS
The Company has a defined contributory profit-sharing plan which includes provisions of a 401(k) plan. The plan permits employees to make pre-tax contributions, not to exceed the limits set by the Internal Revenue Service. The amount of contributions to the plan, including matching contributions, is at the discretion of the Board of Directors. All employees over the age of 21 are eligible to participate in the plan and receive Company contributions after 90 days of employment. Eligible employees are able to contribute to the Plan at the beginning of the first quarterly period after their date of employment. Employee contributions vest immediately, and any Company contributions are fully vested after four years. The Company’s contributions are expensed as the cost is incurred, funded currently, and amounted to $1,310,000 and $1,135,000 for the years ended December 31, 2022 and 2021, respectively.
The Company has several non-qualified supplemental executive retirement plans for the benefit of certain executive officers and former officers. At December 31, 2022 and 2021, other liabilities include $3,518,000 and $3,481,000 accrued under the Plan. Compensation expense includes approximately $461,000 and $364,000 relating to the supplemental executive retirement plan for 2022 and 2021, respectively. To fund the benefits under this plan, the Company is the owner of single premium life insurance policies on participants in the non-qualified retirement plan. At December 31, 2022 and 2021, the cash value of these policies was $43,364,000 and $40,038,000, respectively.
The Company provides postretirement benefits in the form of split-dollar life arrangements to employees who meet the eligibility requirements. The net periodic postretirement benefit expense included in salaries and employee benefits was $101,000 and $153,000 for the years ended December 31, 2022 and 2021, respectively.
FASB authoritative guidance on accounting for deferred compensation and postretirement benefit aspects of endorsement split-dollar life insurance arrangements requires the recognition of a liability and related compensation expense for endorsement split-dollar life insurance that provides a benefit to an employee that extends to postretirement periods. The life insurance policies purchased for the purpose of providing such benefits do not effectively settle an entity’s obligation to the employee. Accordingly, the entity must recognize a liability and related compensation expense during the employee’s active service period based on the future cost of insurance to be incurred during the employee’s retirement. This expense is included in the SERP plan expense for 2022 and 2021 discussed above. If the entity has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the FASB authoritative guidance on employer’s accounting for postretirement benefits other than pensions. The accumulated postretirement benefit obligation was $1,731,000 and $1,630,000 at December 31, 2022 and 2021, respectively.
Certain key executives have change in control agreements with the Company. These agreements provide certain potential benefits in the event of termination of employment following a change in control.
The Company participates in the Pentegra Mulitemployer Defined Benefit Pension Plan (EIN 13-5645888 and Plan # 333) as a result of its acquisition of North Penn. As of December 31, 2022 and 2021, the Company’s Plan was 106.7% and 116.6% funded, respectively, and total contributions made are not more than 5% of the total contributions to the Plan. The Company’s expense related to the Plan was $11,000 in 2022 and $17,000 in 2021. During the plan years ending December 31, 2022 and 2021, the Company made contributions of $11,000 and $17,000, respectively.
As a result of its acquisition of Delaware, the Company is a member of the New York State Bankers Retirement System. Substantially all full-time employees who were former employees of Delaware are covered under this defined benefit pension plan (the “Delaware Plan”). The Company’s funding policy is to contribute at least the minimum required contribution annually. Pension cost is computed using the projected unit credit actuarial cost method. Effective December 31, 2012, the Delaware Plan was closed to new participants and accrued benefits were frozen.
The following table sets forth the projected benefit obligation and change in plan assets for the Delaware Plan at December 31:
(in Thousands)
Change in projected benefit obligation:
Projected benefit obligation at beginning of year
$
(7,622)
$
(8,065)
Service cost
-
(51)
Interest cost
(216)
(206)
Actuarial (gain) loss
1,615
Benefits paid
Benefit obligation at end of year
$
(5,747)
$
(7,622)
Change in plan assets:
Fair value of plan assets at beginning of year
$
7,691
$
7,744
Actual return on plan assets
(1,933)
Benefits paid
(553)
(527)
Fair value of assets at end of year
5,205
7,691
Funded status at end of year
$
(542)
$
The Delaware Plan paid $476,000 and $523,000 in benefit payments in 2022 and 2021, respectively. Estimated benefit payments under the Delaware Plan are expected to be approximately $479,000, $463,000, $446,000, $449,000 and $439,000 for the next five years. Payments are expected to be approximately $2,081,000 in total for the five-year period ending December 31, 2032. The Company was not required to make any contributions to the Delaware Plan in 2022 or 2021. The increase in the projected discount rate from 2.93% to 5.44% decreased the projected benefit obligation for the year ended December 31, 2022 by approximately $1.6 million.
The accumulated benefit obligation for the Delaware Plan was $5,747,000 and $7,622,000 at December 31, 2022 and 2021, respectively.
The following table sets forth the amounts recognized in accumulated other comprehensive income for the years ended December 31 (in thousands):
Transition asset
$
-
$
-
Prior service credit
-
-
(Loss) gain
(784)
Total
$
(784)
$
Net pension cost (income) included the following components (in thousands):
Service cost benefits earned during the period
$
-
$
Interest cost on projected benefit obligation
Actual return on assets
(336)
(394)
Net amortization and deferral
(53)
(34)
Net periodic pension cost (income)
$
(173)
$
(171)
The weighted average assumptions used to determine the benefit obligation at December 31 are as follows:
Discount rate
5.44
%
2.93
%
The weighted average assumptions used to determine the net periodic pension cost at December 31 are as follows:
Discount rate
5.44
%
2.63
%
Expected long-term return on plan assets
6.00
%
5.25
%
Rate of compensation increase
-
%
-
%
The expected long-term return on plan assets was determined based upon expected returns on individual asset types included in the asset portfolio.
The Delaware Plan’s weighted-average asset allocations at December 31, by asset category, are as follows:
Cash equivalents
16.6
%
-
%
Equity securities
25.1
%
35.7
%
Fixed income securities
21.7
%
35.0
%
Other
36.6
%
29.3
%
100.0
%
100.0
%
The New York Bankers Retirement System (“System”) overall investment strategy is to invest in a diversifiedportfolio while managing the variability between the assets and projected liabilities of underfunded pension plans. The System’s Board Members approved a migration (the “Migration”) of substantially all of the System’s assets toone fund, Commingled Pensions Trust Fund (LDI Diversified Balanced) of JPMorgan Chase Bank, N.A. (“JPMCBLDI Diversified Balanced Fund” or the “Fund”). The Fund is a collective investment fund managed by the Trustee under the Declaration of Trust. The Trustee is the Fund’s manager and makes day-to-day investment decisions for the Fund. The Fund is a group trust within the meaning of Internal Revenue Service Revenue Ruling 81-100, as amended. In reliance upon exemptions from the registration requirements of the federal securities laws, neither the Fund nor the Fund’s Units are registered with the Securities and Exchange Commission (“SEC”) or any state securities commission. Because the Fund is not subject to registration under federal or state securities laws, certain protections that might otherwise be provided to investors in registered funds are not available to investors in the Fund. However, as a bank-sponsored collective investment trust holding qualified retirement plan assets, the Fund is required to comply with applicable provisions of the Employee Retirement Income Security Act of
1974, as amended (“ERISA”), and the Trustee is subject to supervision and regulation by the Office of theComptroller of the Currency and the Department of Labor.
The Fund employs a liability driven investing (“LDI”) strategy for pension plans that are seeking a solution that is balanced between growth and hedging. The Bloomberg Barclays Long A U.S. Corporate Index, the Fund’s primary liability-performance benchmark, is used as a proxy for plan projected liabilities. The growth-oriented portion of the Fund invests in a mix of asset classes that the Fund’s Trustee believes will collectively maximize total risk-adjusted return through a combination of capital appreciation and income. This portion of the Fund will comprise between 35% and 90% of the portfolio and will invest directly or indirectly via underlying funds in a broad mix of global equity, credit, global fixed income, real estate and cash-plus strategies. The remaining portionof the Fund, between 10% and 65% of the portfolio, provides exposure to U.S. long duration fixed income and is used to minimize volatility relative to a plan’s projected liabilities. This portion of the Fund will invest directly or indirectly via underlying funds in investment grade corporate bonds and securities issued by the U.S. Treasury and its agencies or instrumentalities.
At December 31, 2022 and 2021, the portfolio was substantially managed by one investment firm who controlled approximately 96% and 100%, respectively, of the System’s assets. Also, at December 31, 2022 and 2021, approximately $7.0 million and $-0-, respectively, of System’s assets in the short-term investment fund (STIF)account had not yet been allocated to an investment manager, nor deployed for benefit payments or expenses.
At December 31, 2022 and 2021, the System had an investment concentration of approximately 96% and 100%, respectively, of its total portfolio in the JPMCB LDI Diversified Balanced Fund, a commingled pension trust fund. In accordance with ASC Subtopic 820-10, certain investments measured at net asset value per share (or its equivalents) are not required to be classified in the fair value hierarchy.
NOTE 10 - INCOME TAXES
The components of the provision for federal income taxes are as follows:
Years Ended December 31,
(In Thousands)
Current
$
6,733
$
6,328
Deferred
(383)
$
7,152
$
5,945
Deferred income taxes reflect temporary differences in the recognition of revenue and expenses for tax reporting and financial statement purposes, principally because certain items, such as the allowance for loan losses and loan fees are recognized in different periods for financial reporting and tax return purposes. As of December 31, 2022, the Company had a $3,535,000 net operating loss carryforward that will begin to expire by December 31, 2037. A valuation allowance has not been established for deferred tax assets. Realization of the deferred tax assets is dependent on generating sufficient taxable income. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized. Deferred tax assets are recorded in other assets.
Income tax expense of the Company is less than the amounts computed by applying statutory federal income tax rates to income before income taxes because of the following:
Percentage of Income
before Income Taxes
Years Ended December 31,
Tax at statutory rates
21.0
%
21.0
%
Tax exempt interest income, net of interest expense disallowance
(1.6)
(1.9)
Non-deductible merger related expenses
-
-
Earnings and proceeds on life insurance
(0.6)
(0.6)
Other
0.9
0.8
19.7
%
19.3
%
The net deferred tax asset included in other assets in the accompanying Consolidated Balance Sheets includes the following amounts of deferred tax assets and liabilities:
(In Thousands)
Deferred tax assets:
Allowance for loan losses
$
3,985
$
3,855
Deferred compensation
Core deposit intangible
Pension liability
Foreclosed real estate valuation allowance
Net operating loss carryforward
Purchase price adjustment
1,779
2,487
Net unrealized loss on securities
15,399
Other
2,838
1,228
Total Deferred Tax Assets
26,154
10,238
Deferred tax liabilities:
Premises and equipment
1,085
1,004
Deferred loan fees
1,366
Net unrealized gain on pension liability
Total Deferred Tax Liabilities
2,605
1,447
Net Deferred Tax Asset
$
23,549
$
8,791
The Company’s federal and state income tax returns for taxable years through 2019 have been closed for purposes of examination by the Internal Revenue Service and the Pennsylvania Department of Revenue.
NOTE 11 - REGULATORY MATTERS AND STOCKHOLDERS’ EQUITY
The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total, Tier 1 and Common Equity Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2022 and 2021, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 2022, the most recent notification from the regulators has categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category.
The Company’s actual capital amounts and ratios are presented in the following table:
To be Well Capitalized
under Prompt
For Capital Adequacy
Corrective Action
Actual
Purposes
Provision
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in Thousands)
As of December 31, 2022:
Total capital (to risk-weighted assets)
$
211,055
13.58
%
≥$124,303
≥8.00
%
≥$155,379
≥10.00
%
Tier 1 capital (to risk-weighted assets)
194,124
12.49
≥$93,228
≥6.00
≥$124,303
≥8.00
Common Equity Tier 1 capital (to risk-weighted assets)
194,124
12.49
≥$69,921
≥4.50
≥$100,997
≥6.50
Tier 1 capital (to average assets)
194,124
9.36
≥$82,934
≥4.00
≥$103,668
≥5.00
As of December 31, 2021:
Total capital (to risk-weighted assets)
$
191,469
13.66
%
≥$112,117
≥8.00
%
≥$140,146
≥10.00
%
Tier 1 capital (to risk-weighted assets)
175,027
12.49
≥84,087
≥6.00
≥112,117
≥8.00
Common Equity Tier 1 capital (to risk-weighted assets)
175,027
12.49
≥63,066
≥4.50
≥91,095
≥6.50
Tier 1 capital (to average assets)
175,027
8.51
≥82,243
≥4.00
≥102,804
≥5.00
The Bank’s ratios do not differ significantly from the Company’s ratios presented above.
The Company and the Bank are subject to regulatory capital rules which, among other things, impose a common equity Tier 1 minimum capital requirement of 4.50% of risk-weighted assets; set the minimum leverage ratio for all banking organizations at a uniform 4.00% of total assets; set the minimum Tier 1 capital to risk-based assets requirement at 6.00% of risk-weighted assets; and assign a risk-weight of 150% to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The rules also require unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt out is exercised, which the Company and the Bank have done. The rule also limits a banking organization’s dividends, stock repurchases and other capital distributions, and certain discretionary bonus payments to executive officers, if the banking
organization does not hold a “capital conservation buffer” consisting of 2.50% of common equity Tier 1 capital to risk-weighted assets above regulatory minimum risk-based requirements. The Company and the Bank are in compliance with their respective new capital requirements, including the capital conservation buffer, as of December 31, 2022.
Pennsylvania banking regulations limit the ability of the Bank to pay dividends or make loans or advances to the Company. Dividends that may be paid in any calendar year are limited to the current year's net profits, combined with the retained net profits of the preceding two years. At December 31, 2022, dividends from the Bank available to be paid to the Company, without prior approval of the Bank's regulatory agency, totaled $52.7 million, subject to the Bank meeting or exceeding regulatory capital requirements. The Company's principal source of funds for dividend payments to shareholders is dividends received from the Bank.
NOTE 12 - STOCK BASED COMPENSATION
At the Annual Meeting held on April 22, 2014, the Company’s stockholders approved the Norwood Financial Corp 2014 Equity Incentive Plan. An aggregate of 375,000 shares of authorized but unissued Common Stock of the Company were reserved for future issuance under the Plan. This includes up to 60,000 shares for awards to outside directors. The Plan also authorized the Company to award restricted stock to officers and outside directors, limited to 63,000 shares of restricted stock awards for officers and 12,000 shares of restricted stock awards for outside directors. At the Annual Meeting held on April 24, 2018, the Company’s stockholders approved an amendment to the 2014 Equity Incentive Plan to ease certain restrictions on restricted stock awards to outside directors. As a result of this amendment, the number of shares available for restricted stock awards to officers was reduced by 300 shares to 62,700, while the number of shares available for restricted stock awards to outside directors was increased by 20,300 to 32,300 shares. At the Annual Meeting held on April 26, 2022, the Company’s stockholders approved an amendment to the 2014 Equity Incentive Plan to increase the number of shares available for awards. As a result of this amendment, the number of shares available for stock awards to officers was increased by 60,000 shares, including 40,000 shares for restricted stock awards, while the number of shares available for stock awards to outside directors was increased by 40,000 shares, including 30,000 shares for restricted stock awards. Under this plan, the Company has granted 357,966 shares, which included 229,866 options to employees, 10,400 options to directors, 74,125 shares of restricted stock to officers and 43,575 shares of restricted stock to directors. The restricted shares vest over five years. The product of the number of shares granted and the grant date market price of the Company’s common stock determine the fair value of restricted stock under the company’s restricted stock plan. Management recognizes compensation expense for the fair value of restricted stock on a straight-line basis over the requisite service period for the entire award. As of December 31, 2022, there were 117,035 shares available for future awards under this plan, which includes 71,010 shares available for officer awards and 46,025 shares available for awards to outside directors. Included in these totals are 28,575 shares available for restricted stock awards to officers and 18,725 shares available for restricted stock awards to outside directors.
Total unrecognized compensation cost related to stock options was $382,000 as of December 31, 2022 and $269,000 as of December 31, 2021. Salaries and employee benefits expense includes $269,000 and $214,000 of compensation costs related to options for the years ended December 31, 2022 and 2021, respectively. Compensation costs related to restricted stock amounted to $372,000 and $335,000 for the years ended December 31, 2022 and 2021, respectively. The expected future compensation expense relating to non-vested restricted stock outstanding as of December 31, 2022 and 2021 was $1,294,000 and $953,000, respectively.
A summary of the Company’s stock option activity and related information for the years ended December 31 follows:
Weighted
Weighted
Average
Average
Average
Average
Exercise
Intrinsic
Exercise
Intrinsic
Options
Price
Value
Options
Price
Value
Outstanding, beginning of year
226,075
$
26.37
215,970
$
25.73
Granted
38,000
33.53
43,500
25.80
Exercised
(34,425)
19.08
(22,420)
17.59
Forfeited
(10,675)
27.56
(10,975)
29.48
Outstanding, end of year
218,975
$
26.70
$
1,100
226,075
$
26.37
$
Exercisable, end of year
180,975
$
27.68
$
1,100
182,575
$
26.50
$
Exercise prices for options outstanding as of December 31, 2022 ranged from $17.93 to $36.02 per share. The weighted average remaining contractual life is 6.8 years.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
Years Ended December 31,
Dividend yield
3.57%
3.55%
Expected life
10 years
10 years
Expected volatility
35.01%
34.69%
Risk-free interest rate
3.87%
1.51%
Weighted average fair value of options granted
$
10.06
$
6.49
The expected volatility is based on historical volatility. The risk-free interest rates for periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on historical exercise experience. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts.
Proceeds from stock option exercises totaled $657,000 in 2022. Shares issued in connection with stock option exercises are issued from available treasury shares or from available authorized shares. During 2022, for the shares issued in connection with stock option exercises, 1,650 shares in total, all shares were issued from available authorized shares.
As of December 31, 2022, outstanding stock options consist of the following:
Average
Average
Options
Exercise
Remaining
Options
Exercise
Outstanding
Price
Life, Years
Exercisable
Price
11,125
$
17.93
1.0
11,125
$
17.93
8,250
19.39
1.9
8,250
19.39
9,375
19.03
2.9
9,375
19.03
12,125
22.37
4.0
12,125
22.37
25,250
32.81
5.0
25,250
32.81
22,100
32.34
6.0
22,100
32.34
22,500
36.02
7.0
22,500
36.02
30,750
26.93
8.0
30,750
26.93
1,000
26.35
8.3
1,000
26.35
1,000
25.38
8.5
1,000
25.38
37,500
25.80
9.0
37,500
25.80
38,000
33.53
10.0
-
-
Total
218,975
180,975
A summary of the Company’s restricted stock activity and related information for the years ended December 31 is as follows:
Weighted-Average
Weighted-Average
Number of
Grant Date
Number of
Grant Date
Shares
Fair Value
Shares
Fair Value
Non-vested, beginning of year
32,030
$26.76
39,135
$30.72
Granted
23,000
30.25
8,000
25.80
Vested
(10,570)
30.89
(11,205)
32.15
Forfeited
-
-
(3,900)
31.72
Non-vested at December 31
44,460
$30.12
32,030
$26.76
NOTE 13 - EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted earnings per share:
Years Ended December 31,
(In Thousands, Except Per Share Data)
Numerator, net income
$
29,233
$
24,915
Denominator:
Weighted average shares outstanding
8,174
8,213
Less: Weighted average unvested restricted shares
(37)
(35)
Denominator: Basic earnings per share
8,137
8,178
Weighted average shares outstanding, basic
8,137
8,178
Add: Dilutive effect of stock options and restricted stock
Denominator: Diluted earnings per share
8,177
8,199
Basic earnings per common share
$
3.59
$
3.05
Diluted earnings per common share
$
3.58
$
3.04
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 60,500 and 109,100 for the years ended December 31, 2022 and 2021, respectively, based on the closing price of the Company’s common stock which was $33.44 and $25.99 as of December 31, 2022 and 2021, respectively.
NOTE 14 - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
A summary of the Bank’s financial instrument commitments is as follows:
December 31,
(In Thousands)
Commitments to grant loans
$
90,379
$
78,996
Unfunded commitments under lines of credit
149,883
156,899
Standby letters of credit
15,052
8,462
$
255,314
$
244,357
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the customer and generally consists of real estate.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The majority of these standby letters of credit expire within the next twelve months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Bank requires collateral supporting these letters
of credit when deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees.
NOTE 15 - INTEREST RATE SWAPS
The Company enters into interest rate swaps that allow our commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate into a fixed-rate. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps with both the customers and third parties are not designated as hedges under FASB ASC 815 and are not marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC 820. There was no effect on earnings in any periods presented. At December 31, 2022, based upon the swap contract values, the company pledged cash in the amount of $350,000 as collateral for its interest rate swaps with a third-party financial institution which had a fair value $1,464,000.
Summary information regarding these derivatives is presented below:
(Amounts in thousands)
Notional Amount, December 31,
Fair Value December 31,
Interest Rate Paid
Interest Rate Received
Customer interest rate swap
Maturing November, 2030
$
6,513
$
6,873
Term SOFR + Margin
Fixed
$
$
Maturing December, 2030
4,297
4,553
Term SOFR + Margin
Fixed
Total
$
10,810
$
11,426
$
1,464
$
Third party interest rate swap
Maturing November, 2030
$
6,513
$
6,873
Fixed
Term SOFR + Margin
$
$
Maturing December, 2030
4,297
4,553
Fixed
Term SOFR + Margin
Total
$
10,810
$
11,426
$
1,464
$
The following table presents the fair values of derivative instruments in the Consolidated Balance Sheet.
(Amounts in thousands)
Assets
Liabilities
Balance Sheet Location
Fair Value
Balance Sheet Location
Fair Value
December 31, 2022
Interest rate derivatives
Other assets
$
1,464
Other liabilities
$
1,464
December 31, 2021
Interest rate derivatives
Other assets
Other liabilities
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In accordance with fair value accounting guidance, the Company measures, records, and reports various types of assets and liabilities at fair value on either a recurring or non-recurring basis in the Consolidated Financial Statements. Those assets and liabilities are presented
in the sections entitled “Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis” and “Assets and Liabilities Required to be Measured and Reported at Fair Value on a Non-Recurring Basis”. There are three levels of inputs that may be used to measure fair values:
Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 - Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2022 and 2021 are as follows (in thousands):
Fair Value Measurement Reporting Date using
Description
Total
Level 1
Level 2
Level 3
December 31, 2022
ASSETS
U.S. Treasury securities
$
41,854
$
-
$
41,854
$
-
U.S. Government agencies
18,323
-
18,323
-
States and political subdivisions
127,852
-
127,852
-
Mortgage-backed securities-government
sponsored entities
230,898
-
230,898
-
Interest rate derivatives
1,464
-
1,464
-
LIABILITIES
Interest rate derivatives
1,464
-
1,464
-
December 31, 2021
ASSETS
U.S. Treasury securities
$
19,351
$
-
$
19,351
$
-
U.S. Government agencies
16,011
-
16,011
-
States and political subdivisions
145,867
-
145,867
-
Mortgage-backed securities-government
sponsored entities
225,553
-
225,553
-
Interest rate derivatives
-
-
-
LIABILITIES
Interest rate derivatives
-
-
Securities:
The fair value of securities available for sale (carried at fair value) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted prices. For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) are used to support fair values of certain Level 3 investments, if applicable.
Interest Rate Swaps:
The fair value of interest rate swaps is based upon the present value of the expected future cash flows using the SOFR swap curve, the basis for the underlying interest rate. To price interest rate swaps, cash flows are first projected for each payment date using the fixed rate for the fixed side of the swap and the forward rates for the floating side of the swap. These swap cash flows are then discounted to time zero using SOFR zero-coupon interest rates. The sum of the present value of both legs is the fair market value of the interest rate swap. These valuations have been derived from our third party vendor’s proprietary models rather than actual market quotations. The proprietary models are based upon financial principles and assumptions that we believe to be reasonable.
Assets and Liabilities Required to be Measured and Reported at Fair Value on a Non-Recurring Basis
For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2022 and 2021 are as follows (in thousands):
Fair Value Measurement Reporting Date using
Description
Total
Level 1
Level 2
Level 3
December 31, 2022
Impaired Loans
$
$
-
$
-
$
Foreclosed real estate
-
-
December 31, 2021
Impaired Loans
$
1,402
$
-
$
-
$
1,402
Foreclosed real estate
1,742
-
-
1,742
Impaired loans (generally carried at fair value):
The Company measures impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the lowest level of input that is significant to the fair value measurements.
As of December 31, 2022, the fair value investment in impaired loans totaled $413,000, which included two loan relationships with a carrying value of $413,000 that did not require a valuation allowance since either the estimated realizable value of the collateral or the discounted cash flows exceeded the recorded investment in the loan. As of December 31, 2022, the Company has recognized charge-offs against the allowance for loan losses on these impaired loans in the amount of $0 over the life of the loans. As of December 31, 2022, the fair value investment in impaired loans included one loan relationships with a carrying value of $50,000 that required a valuation allowance of $50,000 since the estimated realizable value of the collateral did not support the recorded investment in the loan. As of December 31, 2022, the Company has recognized charge-offs against the allowance for loan losses on this impaired loan in the amount of $0 over the life of the loan.
As of December 31, 2021, the fair value investment in impaired loans totaled $1,402,000, which included three loan relationships with a carrying value of $157,000 that did not require a valuation allowance since either the estimated realizable value of the collateral or the discounted cash flows exceeded the recorded investment in the loan. As of December 31, 2021, the Company has recognized charge-offs against the allowance for loan losses on these impaired loans in the amount of $0 over the life of the loans. As of December 31, 2021, the fair value investment in impaired loans included one loan relationships with a carrying value of $1,517,000 that required a valuation allowance of $272,000 since the estimated realizable value of the collateral did not support the recorded investment in the loan. As of December 31, 2021, the Company has recognized charge-offs against the allowance for loan losses on this impaired loan in the amount of $0 over the life of the loan.
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.
The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
Quantitative Information about Level 3 Fair Value Measurements
(dollars in thousands)
Fair Value Estimate
Valuation Techniques
Unobservable Input
Range (Weighted Average)
December 31, 2022
Impaired loans
$
Appraisal of collateral(1)
Appraisal adjustments(2)
0%-10.0% (8.92%)
Foreclosed real estate owned
$
Appraisal of collateral(1)
Liquidation Expenses(2)
7.00%
‎(7.00%)
Quantitative Information about Level 3 Fair Value Measurements
(dollars in thousands)
Fair Value Estimate
Valuation Techniques
Unobservable Input
Range (Weighted Average)
December 31, 2021
Impaired loans
$
1,402
Appraisal of collateral(1)
Appraisal adjustments(2)
0%-10.0% (1.12%)
Foreclosed real estate owned
$
1,742
Appraisal of collateral(1)
Liquidation Expenses(2)
7.00%
‎(7.00%)
(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable, less any associated allowance.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
Assets and Liabilities Not Required to be Measured or Reported at Fair Value
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.
The estimated fair values of the Bank’s financial instruments not required to be measured or reported at fair value were as follows at December 31, 2022 and December 31, 2021. (In thousands):
Fair Value Measurements at December 31, 2022
Carrying
Fair
Amount
Value
Level 1
Level 2
Level 3
Financial assets:
Cash and cash equivalents (1)
$
31,866
$
31,866
$
31,866
$
-
$
-
Loans receivable, net
1,456,946
1,418,300
-
-
1,418,300
Mortgage servicing rights
-
-
Regulatory stock (1)
5,418
5,418
5,418
-
-
Bank owned life insurance (1)
43,364
43,364
43,364
-
-
Accrued interest receivable (1)
6,917
6,917
6,917
-
-
Financial liabilities:
Deposits
1,727,727
1,727,184
1,223,958
-
503,226
Short-term borrowings (1)
93,215
93,215
93,215
-
-
Other borrowings
40,000
40,074
-
-
40,074
Accrued interest payable (1)
2,653
2,653
2,653
-
-
Off-balance sheet financial instruments:
Commitments to extend credit and
‎outstanding letters of credit
-
-
-
-
-
Fair Value Measurements at December 31, 2021
Carrying
Fair
Amount
Value
Level 1
Level 2
Level 3
Financial assets:
Cash and cash equivalents (1)
$
206,681
$
206,681
$
206,681
$
-
$
-
Loans receivable, net
1,338,489
1,389,870
-
-
1,389,870
Mortgage servicing rights
-
-
Regulatory stock (1)
3,927
3,927
3,927
-
-
Bank owned life insurance (1)
40,038
40,038
40,038
-
-
Accrued interest receivable (1)
5,889
5,889
5,889
-
-
Financial liabilities:
Deposits
1,756,793
1,759,722
1,228,091
-
531,631
Short-term borrowings (1)
60,822
60,822
60,822
-
-
Other borrowings
29,998
30,221
-
-
30,221
Accrued interest payable (1)
1,203
1,203
1,203
-
-
Off-balance sheet financial instruments:
Commitments to extend credit and
‎outstanding letters of credit
-
-
-
-
-
(1) This financial instrument is carried at cost, which approximates the fair value of the instrument.
NOTE 17 - ACCUMULATED OTHER COMPREHENSIVE INCOME
The following tables present the changes in accumulated other comprehensive income (loss) (in thousands) by component, net of tax, for the years ended December 31, 2022 and 2021:
Unrealized gains on available for sale securities (a)
Unrealized gain on pension liability (a)
Total (a)
Balance as of December 31, 2021
$
(1,453)
$
1,197
$
(256)
Other comprehensive income (loss) before reclassification
(56,476)
(619)
(57,095)
Amount reclassified from accumulated other comprehensive loss
(2)
-
(2)
Total other comprehensive income
(56,478)
(619)
(57,097)
Balance as of December 31, 2022
$
(57,931)
$
$
(57,353)
Unrealized gains on available for sale securities (a)
Unrealized gain on pension liability (a)
Balance as of December 31, 2020
$
4,096
$
1,023
$
5,119
Other comprehensive income (loss) before reclassification
(5,476)
(5,302)
Amount reclassified from accumulated other comprehensive loss
(73)
-
(73)
Total other comprehensive
(5,549)
(5,375)
Balance as of December 31, 2021
$
(1,453)
$
1,197
$
(256)
(a) All amounts are net of tax. Amounts in parentheses indicate debits.
The following table presents significant amounts reclassified out of each component of accumulated other comprehensive income (loss) (in thousands) for the years ended December 31, 2022 and 2021:
Amount Reclassified
From Accumulated
Affected Line Item in
Other
Consolidated
Comprehensive
Statements of
Details about other comprehensive income
Income (a)
Income
Twelve months
Twelve months
ended
ended
December 31,
December 31,
Unrealized gains on available for sale securities
$
$
Net realized gains on sales of securities
(1)
(19)
Income tax expense
$
$
(a)Amounts in parentheses indicate debits to net income.
‎
NOTE 18 - NORWOOD FINANCIAL CORP (PARENT COMPANY ONLY) FINANCIAL INFORMATION
BALANCE SHEETS
December 31,
(In Thousands)
ASSETS
Cash on deposit in bank subsidiary
$
3,938
$
1,511
Investment in bank subsidiary
164,248
204,547
Other assets
2,365
2,472
Total assets
$
170,551
$
208,530
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
$
3,466
$
3,268
Stockholders’ equity
167,085
205,262
Total liabilities and stockholders' equity
$
170,551
$
208,530
STATEMENTS OF INCOME
Years Ended December 31,
Income:
(In Thousands)
Dividends from bank subsidiary
$
13,228
$
10,697
Expenses
12,485
10,070
Income tax benefit
(219)
(171)
12,704
10,241
Equity in undistributed earnings of subsidiary
16,529
14,674
Net Income
$
29,233
$
24,915
Comprehensive Income
$
(27,864)
$
19,540
STATEMENTS OF CASH FLOWS
Years Ended December 31,
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
$
29,233
$
24,915
Adjustments to reconcile net income to
net cash provided by operating activities:
Undistributed earnings of bank subsidiary
(16,529)
(14,674)
Other, net
(129)
Net Cash Provided by Operating Activities
13,311
10,112
CASH FLOWS FROM FINANCING ACTIVITIES
Stock options exercised
Sale of treasury stock for ESOP
Acquisition of treasury stock
(2,515)
(1,440)
Cash dividends paid
(9,158)
(8,539)
Net Cash Used in Financing Activities
(10,884)
(9,455)
Net Increase in Cash and Cash Equivalents
2,427
CASH AND CASH EQUIVALENTS - BEGINNING
1,511
CASH AND CASH EQUIVALENTS - ENDING
$
3,938
$
1,511

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .
Not applicable.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures.
(a) Disclosure Controls and Procedures. The Company’s management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
(b) Internal Control over Financial Reporting. Management’s Report on Internal Control over Financial Reporting is included in this Annual Report on Form 10-K under Item 8.
(c) Changes in Internal Control over Financial Reporting. There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

---

ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance .
The information contained under the sections captioned “Proposal I - Election of Directors” and “Corporate Governance” in the Proxy Statement for the 2023 Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated herein by reference.
The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer and principal accounting officer or controller. The Code of Ethics is posted on the stockholder services page of Wayne Bank’s website at www.waynebank.com/stockholder-services. The Company intends to report any waiver or amendment to its Code of Ethics on its website at www.waynebank.com/stockholder-services.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation .
The information contained under the sections captioned “Executive Compensation” and “Director Compensation” in the Proxy Statement are incorporated herein by reference.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to the Section captioned “Principal Holders of Our Common Stock” of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference to the section captioned “Proposal I - Election of Directors” of the Proxy Statement.
(c) Changes in Control
Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant.
(d) Equity Compensation Plan Information
EQUITY COMPENSATION PLAN INFORMATION
(a)
(b)
(c)
Number of Securities to be issued upon exercise of outstanding options, warrants and rights*
Weighted-average exercise price of outstanding options, warrants and rights *
Number of securities remaining available for future issuance under equity compensation plans, (excluding securities reflected in column (a)) *
Equity compensation plans
approved by security holders:
2006 Stock Option Plan
11,125
$
17.93
-
2014 Equity Incentive Plan, as amended(1)
252,310
$
29.42
117,035
Equity compensation plans
not approved by security holders:.
None
-
-
-
TOTAL
263,435
$
28.94
117,035
* Share and per share data adjusted for the 50% stock dividend declared on August 8, 2017.
(1) The second amendment to the 2014 Equity Incentive Plan, which increased the total shares available for stock awards by 100,000 shares, was approved by the stockholders of the Company at the Annual Meeting of Stockholders on April 26, 2022.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by this item is incorporated herein by reference to the sections in the Proxy Statement captioned “Related Party Transactions” and “Corporate Governance”.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated herein by reference to the section in the Proxy Statement captioned “Proposal III -Ratification of Appointment of Independent Auditors.”
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits, Financial Statement Schedules
(a)Listed below are all financial statements, schedules and exhibits filed as part of this Annual Report on Form 10-K.
1.The consolidated balance sheets of Norwood Financial Corp and subsidiary as of December 31, 2022 and 2021, and the related consolidated statements of income, comprehensive (loss) income, stockholders’ equity and cash flows for
each of the years in the two-year period ended December 31, 2022, together with the related notes and the independent registered public accounting firm reports of S.R. Snodgrass, P.C. (PCAOB: 00074), independent registered public accounting firm.
2.Schedules omitted as they are not applicable.
‎
3.The following exhibits are filed as part of the Form 10-K
No.
Description
3(i)
Amended and Restated Articles of Incorporation of Norwood Financial Corp (13)
3(ii)
Bylaws of Norwood Financial Corp (1)
4.1
Specimen Stock Certificate of Norwood Financial Corp (2)
4.2
Description of Capital Stock of Norwood Financial Corp (15)
10.1†
Employment Agreement with Lewis J. Critelli (3)
10.2†
Change in Control Severance Agreement with William S. Lance (3)
10.3†
Change in Control Severance Agreement with Robert J. Mancuso (4)
10.4†
Salary Continuation Agreement between the Bank and William W. Davis, Jr. (5)
10.5†
Amended and Restated Salary Continuation Agreement, dated September 1, 2017, between the Bank and Lewis J. Critelli (6)
10.7†
2006 Stock Option Plan (7)
10.8†
First and Second Amendments to Salary Continuation Agreement with William W. Davis, Jr. (8)
10.11†
2014 Equity Incentive Plan, as amended (9)
10.12†
Addendum to Change in Control Severance Agreement with William S. Lance (10)
10.13†
Salary Continuation Agreement, dated September 1, 2017, between Wayne Bank and William S. Lance (6)
10.14†
Salary Continuation Agreement, dated September 1, 2017, between Wayne Bank and Robert J. Mancuso (6)
10.15†
Change-In-Control Severance Agreement, dated February 14, 2022, by and among Norwood Financial Corp, Wayne Bank, and Vincent G. O’Bell (20)
10.16†
Change-In-Control Severance Agreement, dated January 16, 2018, by and among Norwood Financial Corp, Wayne Bank, and John F. Carmody (11)
10.17†
Addendum, dated January 16, 2018, to Change-In-Control Severance Agreement, dated March 2, 2010, by and among Norwood Financial Corp, Wayne Bank and William S. Lance (11)
10.18†
Addendum, dated January 16, 2018, to Change-In-Control Severance Agreement, dated January 3, 2013, by and among Norwood Financial Corp, Wayne Bank and Robert J. Mancuso (11)
10.19
Wayne Bank Executive Annual Incentive Plan (14)
10.20
Salary-Continuation Agreement dated March 1, 2021, between Wayne Bank and John F. Carmody (12)
10.21
First Amendment to Salary-Continuation Agreement dated January 24, 2023, between Wayne Bank and William S. Lance
10.22
Addendum to Change in Control Severance Agreement dated January 20, 2023 with William S. Lance
10.23
Employment Agreement dated May 9, 2022, by and among Norwood Financial Corp, Wayne Bank and James O. Donnelly (16)
10.24
Stock Award Agreement dated May 10, 2022, between Norwood Financial Corp and James O. Donnelly (17)
10.25
Salary-Continuation Agreement dated May 10, 2022, between Wayne Bank and James O. Donnelly (18)
10.26
Consulting Agreement dated July 1, 2022, by and between Norwood Financial Corp and Lewis J. Critelli (19)
Subsidiaries of Norwood Financial Corp
Consent of S.R. Snodgrass, P.C.
31.1
Rule 13a-14(a)/15d-14(a) Certification of CEO
31.2
Rule 13a-14(a)/15d-14(a) Certification of CFO
Certification pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of Sarbanes Oxley Act of 2002
The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, formatted in Inline XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Stockholder’s Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.
101.INS
Inline XBRL Instance Document (The instance document does not appear in the Interactive Data File because its XBRL tags are embedded with the Inline XBRL document)
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
†
Management contract or compensatory plan or arrangement.
(1)
Incorporated by reference into this document from the identically numbered exhibit to the Company’s Form 10-Q filed with the Commission on August 8, 2014.
(2)
Incorporated herein by reference into this document from the identically numbered Exhibit to the Company’s Form 10, Registration Statement initially filed in paper with the Commission on April 29, 1996, Registration No. 0-28364.
(3)
Incorporated herein by reference from the identically numbered exhibits to the Company’s Form 10-K filed with the Commission on March 15, 2010.
(4)
Incorporated by reference into this document from Exhibit 10.4 to the Company’s Form 10-K filed with the Commission on March 14, 2013. File No 0-28364.
(5)
Incorporated herein by reference into this document from Exhibit 10.6 to the Company’s Form 10-K filed with the Commission on March 23, 2000, File No. 0-28364.
(6)
Incorporated by reference from the exhibits to the Current Report on Form 8-K filed with the Commission on September 5, 2017.
7)
Incorporated herein by reference from Exhibit 4.1 to the Company’s Registration Statement on Form S-8 (File No. 333-134831) filed with the Commission on June 8, 2006.
(8)
Incorporated herein by reference from Exhibits 10.1 and 10.5 to the Company’s Current Report on Form 8-K filed April 4, 2006.
(9)
Incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-8 (File No. 333-266622) filed with the Commission on August 8, 2022.
(10)
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 18, 2015.
(11)
Incorporated by reference into this document from the exhibits to the Company’s Current Report on Form 8-K filed with the Commission on January 16, 2018
(12)
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on March 2, 2021, (File No. 0-28364).
(13)
Incorporated herein by reference from the identically numbered exhibit to the Company’s Form 10-K filed with the Commission on March 13, 2020.
(14)
Incorporated herein by reference from the identically numbered exhibit to the Company’s Form 10-K filed with the Commission on March 13, 2020.
(15) Incorporated herein by reference from the identically numbered exhibit to the Company’s Form 10-K filed with the
Commission on March 9, 2021.
(16)
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 12, 2022, (File No. 0-28364).
(17)
Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on May 12, 2022, (File No. 0-28364).
(18)
Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Commission on May 12, 2022, (File No. 0-28364).
(19)
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on July 5, 2022, (File No. 0-28364).
(20) Incorporated by reference to Exhibit 10.15 to the Company’s Form 10-K filed with the Commission on March 11, 2022, (File
No. 0-28364).