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Delaware Bancshares, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands of Dollars)

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Delaware Bancshares, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.	Basis of Financial Statement Presentation

The unaudited consolidated financial statements include all accounts of Delaware Bancshares, Inc. (the "Company") and its wholly owned subsidiary, The National Bank of Delaware County (the "Bank").  All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited consolidated  financial statements have been prepared in conformity with generally accepted accounting principles for interim financial statements and with instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period.  Actual results could differ from those estimates.  The financial statements reflect, in the opinion of management, all normal, recurring adjustments necessary to present fairly the financial position and results of operations of the Company. These statements should be read in conjunction with the consolidated financial statements and related notes which are incorporated by reference in the Current Report on Form 8-K/A filed by Norwood Financial Corp.("Norwood") for the merger of the Company with Norwood which was completed on July 31, 2016.

2.	Investment Securities

The following is a summary of held-to-maturity and available-for-sale securities:
 

 

 

 

 

	Available-for-Sale Securities
						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
	(In Thousands of Dollars)
December 31, 2015
U.S. Treasury securities and
obligations of U.S. Government
agencies and corporations		$	85,246			$	75			$	(1,012	)		$	84,309
Obligations of states and
political subdivisions			58,489				478				(202	)			58,765
Other securities			11,162				—				(217	)			10,934
Mortgage backed securities			56,066				11				(882	)			55,934
Total Debt Securities			210,952				564				(2.313	)			209,203
Equity Securities			11				—				—				11
TOTAL AVAILABLE-FOR-SALE SECURITIES		$	210,963			$	564			$	(2,313	)		$	209,214

 

 

The amortized cost and estimated fair value of investments in debt securities at March 31, 2016, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

		Amortized				Estimated
		Cost				Fair Value
		(in Thousands of Dollars)
Held-to-Maturity
Due in one year or less		$	2,894			$	2,894
Due after one year through five years			961				961
Due after five years through ten years			252				252
Due after ten years			293				293
Mortgaged backed securities			1				1
		$	4,401			$	4,401

		Amortized				Estimated
		Cost				Fair Value
		(in Thousands of Dollars)
Available-for-Sale
Due in one year or less		$	441			$	443
Due after one year through five years			8,427				8,493
Due after five years through ten years			91,973				92,697
Due after ten years			45,430				45,859
Mortgaged backed securities			54,151				54,368
		$	200,422			$	201,860

The following tables show the investments gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2016 and  December 31, 2015.

 

 

 

 

 

At March 31, 2016, the Bank had 52 debt securities with unrealized losses in the above table.  These unrealized losses relate principally to changes in interest rates.  In analyzing an issuer’s financial condition, management considers whether the securities are issued by the Federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports.  As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines are deemed to be other-than-temporary.

3.

Loans

The loan portfolio at March 31, 2016 and December 31, 2015, is summarized as follows:

		2016				2015
		(in Thousands of Dollars)
Real estate mortgages:
Residential		$	74,972			$	73,262
Commercial			19,091				21,401
Farm			3,616				3,622
Loans to farmers			1,437				1,500
Commercial loans			8,615				8,201
Installment loans to individuals			6,514				7,718
		$	114,245			$	115,704

The loan portfolio includes certain loans, which are considered impaired because, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreements.

Following is a summary of nonaccrual loans and impaired loans as of March 31, 2016 and December 31, 2015 and 2014, by class of financing receivables (in thousands of dollars):

		2016				2015
		(in Thousands of Dollars)
Nonaccrual Loans
Commercial – Real estate		$	124			$	36
Commercial – Non real estate			—				—
Agricultural – Real Estate			—				—
Agricultural – Non real estate			—				—
Residential			514				730
Consumer			—				—
		$	638			$	766

 

Impaired Loans as of December 31, 2015

		Recorded Investment				Unpaid Principal Balance				Related Allowance Investment				Average Recorded Investment				Interest Income Recognized
Commercial- Real estate		$	691			$	691			$	—			$	713			$	40
Commercial – Non real estate			1,131				1,131				95				1,101				67
Agricultural – Real estate			557				557				—				565				30
Agricultural – Non real estate			188				188				—				202				14
Residential			1,047				1,047				52				1,052				62
Consumer			—				—				—				—				—
		$	3,614			$	3,614			$	147			$	3,633			$	213

At March 31, 2016 and 2015, the allowance for loan losses and balance of financing receivables were composed of the following by portfolio segments:

 

		Real Estate				Commercial & Industrial				Consumer				Agricultural				Total
Allowance for loan losses -
Ending balance March 31, 2016		$	740			$	676			$	128			$	96			$	1,640
Ending balance:
Individually evaluated for impairment		$	14			$	391			$	—			$	—			$	405
Collectively evaluated for impairment		$	726			$	285			$	128			$	96			$	1,235
Financing receivables ending balance
March 31, 2016		$	75,027			$	27,651			$	6,514			$	5,053			$	114,245
Ending balance March 31, 2016:
Individually evaluated for impairment		$	1,006			$	2,284			$	—			$	455			$	3,745
Collectively evaluated for impairment		$	74,021			$	25,367			$	6,514			$	4,598			$	110,500

 

 

 

 

For purposes of establishing the allowance for loan losses, financing receivables are classified by an internally assigned grade.  Following is a summary of loans by credit quality and class as of March 31, 2016 and December 31, 2015:

 

 

 

		Commercial  Real Estate				Commercial Non Real Estate				Agricultural Real Estate				Agricultural Non Real Estate				Residential				Consumer					Total
December 31, 2015:
Uncriticized		$	19,662			$	6,533			$	3,022			$	1,189			$	71,992			$	7,718			$	110,116
Special Mention			1,048				537				43				122				223				—				1,973
Substandard			691				1,131				557				189				1,047				—				3,615
Doubtful			—				—				—				—				—				—				—
Loss			—				—				—				—				—				—				—
Total		$	21,401			$	8,201			$	3,622			$	1,500			$	73,262			$	7,718			$	115,704

 

Financing receivables aged by class are as follows at March 31, 2016:

		30-59 Days Past Due				60-89 Days Past Due				Greater than 90 Days				Total Past Due				Current				Total Loans				Recorded Investment > 90 Days Accruing
Commercial – Real estate		$	126			$	124			$	—			$	250			$	18,841			$	19,091			$	—
Commercial – Non real estate			6				—				—				6				8,609				8,615				—
Agricultural – Real estate			—				—				—				—				3,616				3,616				—
Agricultural – Non real estate			—				—				—				—				1,437				1,437				—
Residential			773				381				298				1,452				73,520				74,972				—
Consumer			10				6				—				16				6,498				6,514				—
Total		$	915			$	511			$	298			$	1,724			$	112,521			$	114,245			$	—

 

Financing receivables aged by class are as follows at December 31, 2015:

 

4.	Reserve for Loan Losses

Changes in the reserve during the years ended March 31, 2016 and 2015, are summarized as follows:

 

 

 

 

11.	Fair Value Disclosures

FASB authoritative guidance on fair value measurements provides a framework for measuring fair value under accounting principles generally accepted in the United States of America.  The guidance applies to all financial instruments that are being measured and reported on a fair value basis.

As defined in the guidance, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  In determining fair value, the Bank uses various methods, including market, income, and cost approaches.  Based on these approaches, the Bank often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique.  These inputs can be readily observable, market corroborated, or generally unobservable inputs.  The Bank utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.  Based on the observability of the inputs used in the valuation techniques, the Bank is required to provide the following information according to the fair value hierarchy.  The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.  Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

·	Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

·

Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

·	Level 3 - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Financial assets and financial liabilities measured at fair value on a recurring basis include the following:

Securities available-for-sale: The Bank’s securities available-for-sale are reported at fair value utilizing Level 2 inputs.  For these securities, the Bank obtains fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, credit information, and the bond’s terms and conditions, among other things.

Interest rate swap liability: The fair value of the interest rate swap was provided by the issuing entity using pricing models that use market observable inputs, therefore, it is valued using Level 2 inputs.

Fair value at March 31, 2016 and December 31, 2015, for assets and liabilities measured on a recurring basis is as follows (in thousands of dollars):

 

				Quoted Market Price in Active Markets (Level 1)				Other Observable Inputs (Level 2)				Unobservable Inputs (Level 3)
March 31, 2016
Securities available-for-sale				$		—		$	201,888			$	—
Interest rate swap liability						—			520				—

				Quoted Market Price in Active Markets (Level 1)				Other Observable Inputs (Level 2)				Unobservable Inputs (Level 3)
December 31, 2015
Securities available-for-sale				$		—		$	209,214			$	—
Interest rate swap liability						—			557				—

FASB authoritative guidance on disclosures about fair values of financial instruments requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis.  The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring basis are discussed above.  The methodologies for estimating the fair value of other financial assets and financial liabilities are discussed below.

Cash and cash equivalents - The carrying amounts reported in the balance sheets for cash and cash equivalents approximate those assets’ fair value.

Held-to-maturity securities - Fair values for held-to-maturity securities are based on quoted market prices, dealer quotes or a correspondent bank pricing system.  The fair value of investment securities is the market value based on quoted market prices, when available, or market prices provided by recognized broker dealers.  If listed prices or quotes are not available, fair value is based upon externally developed models that use unobservable inputs due to the limited market activity of the instrument.

Loans - For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.  The fair value of fixed rate loans at March 31, 2016 and December 31, 2015, was estimated through discounted cash flow analyses using interest rates currently being offered for loans with similar terms and credit quality.

                                                                          

Accrued interest receivable - The carrying amount of accrued interest receivable approximates fair value.

The Company also retains off-balance sheet lines of credit and mortgage commitments as described in Note 12.  The fair value of these instruments has not been estimated at March 31, 2016 and  December 31, 2015, for reasons of impracticability.

Deposits - The fair value for demand deposits (e.g. interest and noninterest bearing checking and savings accounts) are, by definition, equal to the amount payable on demand at the reporting date (the carrying value).  Also, the carrying amount for variable rate fixed-term money market accounts and certificates of deposit approximates fair value.

 

 

 

The fair value of fixed rate certificates of deposit at March 31, 2016 and December 31, 2015, was estimated using a discounted cash flow approach that applies interest rates currently being offered on certificates to a schedule of weighted average expected maturities on time deposits.

 

Securities sold under agreements to repurchase - The carrying amount of securities sold under agreements to repurchase approximates fair value.

Accrued interest payable - The carrying amount of accrued interest payable approximates fair value.

Overnight advance from Federal Home Loan Bank - The fair value of variable rate advances from the Federal Home Loan Bank are based upon carrying amounts.  The fair value of fixed rate advances is estimated using discounted cash flow analyses based upon the Bank’s current incremental borrowing rates for similar types of borrowings.

Long-term debt - The fair value of variable rate debt is based upon the carrying amount which approximates fair value.

Junior subordinated debentures - The fair value of variable rate debentures is based upon the carrying amount, which approximates fair value.

The estimated fair value of the Bank’s financial instruments is as follows (in thousands of dollars):

 

		March 31, 2016								December 31, 2015
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
Assets:
Cash and cash equivalents		$	28,656			$	238,656			$	6,154			$	6,154
Investment securities
Held-to-maturity			4,401				4,401				4,412				4,412
Available-for-sale			201,888				201,888				210,963				209,214
Loans, net of allowance			112,605				110,566				114,027				113,660
Accrued interest receivable and other assets			9,407				9,407				11,343				11,343
Li Liabilities:
Deposits		$	332,051			$	319,514			$	316,969			$	301,107
Securities sold under agreements to repurchase			2,533				2,533				2,277				2,277
Accrued interest payable, taxes and other liabilities			5,740				5,740				6,854				6,854
Overnight advance from Federal Home Loan Bank			—				—				4,500				4,500
Long-term debt			11,695				11,695				11,781				11,781
Junior subordinated debentures			8,248				8,248				8,248				8,248

The carrying amounts in the preceding table are included in the balance sheets under the applicable captions.  The fair values of off-balance sheet financial instruments are not significant.

 

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