NWFL 10-Q Quarter ended March 31, 2019

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-28364

Norwood Financial Corp.

(Exact name of registrant as specified in its charter)

Pennsylvania		23-2828306
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification no.)
717 Main Street, Honesdale, Pennsylvania		18431
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (570) 253-1455

N/A

Former name, former address and former fiscal year, if changed since last report.

Indicate by check (x) whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

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

Large accelerated filer		☐		Accelerated filer		☒
Non-accelerated filer		☐		Smaller reporting company		☒
				Emerging growth company		☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    ☐  Yes    ☒  No

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.10 per share		NWFL		The Nasdaq Stock Market LLC

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding as of May 1, 2019
Common stock, par value $0.10 per share		6,288,955

NORWOOD FINANCIAL CORP.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2019

				Page Number
PART I – CONSOLIDATED FINANCIAL INFORMATION OF NORWOOD FINANCIAL CORP.
Item 1.		Financial Statements (unaudited)			3
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			31
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			42
Item 4.		Controls and Procedures			43
PART II – OTHER INFORMATION
Item 1.		Legal Proceedings			44
Item 1A.		Risk Factors			44
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			44
Item 3.		Defaults Upon Senior Securities			44
Item 4.		Mine Safety Disclosures			44
Item 5.		Other Information			44
Item 6.		Exhibits			45
Signatures					47

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NORWOOD FINANCIAL CORP.

Consolidated Balance Sheets ( unaudited)

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

		March 31, 2019				December 31, 2018
ASSETS
Cash and due from banks		$	13,583			$	18,039
Interest-bearing deposits with banks			6,291				309
Cash and cash equivalents			19,874				18,348
Securities available for sale, at fair value			240,621				243,277
Loans receivable			864,198				850,182
Less: Allowance for loan losses			8,349				8,452
Net loans receivable			855,849				841,730
Regulatory stock, at cost			3,132				3,926
Bank premises and equipment, net			14,165				13,846
Bank owned life insurance			38,134				37,932
Accrued interest receivable			4,089				3,776
Foreclosed real estate owned			1,792				1,115
Goodwill			11,331				11,331
Other intangibles			307				336
Other assets			14,301				8,942
TOTAL ASSETS		$	1,203,595			$	1,184,559
LIABILITIES
Deposits:
Non-interest bearing demand		$	206,806			$	201,457
Interest-bearing			767,609				745,323
Total deposits			974,415				946,780
Short-term borrowings			37,824				53,046
Other borrowings			47,955				52,284
Accrued interest payable			2,457				1,806
Other liabilities			14,172				8,358
TOTAL LIABILITIES			1,076,823				1,062,274
STOCKHOLDERS’ EQUITY
Preferred stock, no par value per share, authorized 5,000,000 shares			—				—
Common stock, $0.10 par value per share, authorized 10,000,000 shares; issued 2019: 6,301,263 shares, 2018: 6,295,113 shares			630				630
Surplus			48,559				48,322
Retained earnings			80,115				78,434
Treasury stock at cost: 2019: 13,807 shares, 2018: 2,470 shares			(455	)			(81	)
Accumulated other comprehensive loss			(2,077	)			(5,020	)
TOTAL STOCKHOLDERS’ EQUITY			126,772				122,285
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,203,595			$	1,184,559

See accompanying notes to the unaudited consolidated financial statements.

3

NORWOOD FINANCIAL CORP.

Consolidated Statements of Income ( unaudited)

(dollars in thousands, except per share data)

		Three Months Ended March 31,
		2019				2018
INTEREST INCOME
Loans receivable, including fees		$	9,970			$	8,487
Securities			1,441				1,524
Other			15				18
Total interest income			11,426				10,029
INTEREST EXPENSE
Deposits			1,729				1,029
Short-term borrowings			123				52
Other borrowings			303				141
Total interest expense			2,155				1,222
NET INTEREST INCOME			9,271				8,807
PROVISION FOR LOAN LOSSES			450				550
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES			8,821				8,257
OTHER INCOME
Service charges and fees			1,031				980
Income from fiduciary activities			142				137
Net realized gains on sales of securities			—				142
Gain on sale of loans, net			42				—
Earnings and proceeds on bank owned life insurance			202				273
Other			143				162
Total other income			1,560				1,694
OTHER EXPENSES
Salaries and employee benefits			3,649				3,462
Occupancy, furniture & equipment, net			924				892
Data processing and related operations			448				319
Taxes, other than income			161				175
Professional fees			250				230
Federal Deposit Insurance Corporation insurance			71				92
Foreclosed real estate			23				(19	)
Amortization of intangibles			29				34
Other			1,093				1,063
Total other expenses			6,648				6,248
INCOME BEFORE INCOME TAXES			3,733				3,703
INCOME TAX EXPENSE			543				574
NET INCOME		$	3,190			$	3,129
BASIC EARNINGS PER SHARE		$	0.51			$	0.50
DILUTED EARNINGS PER SHARE		$	0.51			$	0.50

See accompanying notes to the unaudited consolidated financial statements.

4

NORWOOD FINANCIAL CORP.

Consolidated Statements of Comprehensive Income (Loss) (unaudited)

(dollars in thousands)

		Three Months Ended March 31,
		2019				2018
Net income		$	3,190			$	3,129
Other comprehensive income (loss):
Investment securities available for sale:
Unrealized holding gain (loss)			3,725				(4,490	)
Tax effect			(782	)			942
Reclassification of investment securities gains recognized in net income			—				(142	)
Tax effect			—				30
Other comprehensive income (loss)			2,943				(3,660	)
Comprehensive Income (Loss)		$	6,133			$	(531	)

See accompanying notes to the unaudited consolidated financial statements.

5

NORWOOD FINANCIAL CORP.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

Three Months Ended March 31, 2019 and 2018

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

										Surplus				Retained Earnings												Accumulated Other Comprehensive Loss				Total
		Common Stock																Treasury Stock
		Shares				Amount												Shares				Amount
Balance, December 31, 2018			6,295,113			$	630			$	48,322			$	78,434				2,470			$	(81	)		$	(5,020	)		$	122,285
Net Income			—				—				—				3,190				—				—				—				3,190
Other comprehensive income			—				—				—				—				—				—				2,943				2,943
Cash dividends declared ($0.24 per share)			—				—				—				(1,509	)			—				—				—				(1,509	)
Compensation expense related to restricted stock			—				—				72				—				—				—				—				72
Acquisition of treasury stock			—				—				—				—				11,337				(374	)			—				(374	)
Stock options exercised			6,150				—				113				—				—				—				—				113
Compensation expense related to stock options			—				—				52				—				—				—				—				52
Balance, March 31, 2019			6,301,263			$	630			$	48,559			$	80,115				13,807			$	(455	)		$	(2,077	)		$	126,772
										Surplus				Retained Earnings												Accumulated Other Comprehensive Loss				Total
		Common Stock																Treasury Stock
		Shares				Amount												Shares				Amount
Balance, December 31, 2017			6,256,063			$	626			$	47,431			$	70,426				2,608			$	(77	)		$	(2,667	)		$	115,739
Net Income			—				—				—				3,129				—				—				—				3,129
Other comprehensive loss			—				—				—				—				—				—				(3,660	)			(3,660	)
Cash dividends declared ($0.22 per share)			—				—				—				(1,376	)			—				—				—				(1,376	)
Compensation expense related to restricted stock			—				—				51				—				—				—				—				51
Acquisition of treasury stock			—				—				—				—				5,446				(179	)			—				(179	)
Stock options exercised			1,500				—				7				—				(2,325	)			68				—				75
Compensation expense related to stock options			—				—				59				—				—				—				—				59
Balance, March 31, 2018			6,257,563			$	626			$	47,548			$	72,179				5,729			$	(188	)		$	(6,327	)		$	113,838

See accompanying notes to the unaudited consolidated financial statements.

6

NORWOOD FINANCIAL CORP.

Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)

		Three Months Ended March 31,
		2019				2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income		$	3,190			$	3,129
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			450				550
Depreciation			241				216
Amortization of intangible assets			29				34
Deferred income taxes			(40	)			(127	)
Net amortization of securities premiums and discounts			371				463
Net realized gain on sales of securities			—				(142	)
Earnings and proceeds on life insurance policies			(202	)			(273	)
Gain on sales and write-downs of fixed assets and foreclosed real estate owned			(8	)			(47	)
Net gain on sale of loans			(42	)			—
Mortgage loans originated for sale			(732	)			—
Proceeds from sale of loans originated for sale			758				—
Compensation expense related to stock options			52				59
Compensation expense related to restricted stock			72				51
(Increase) decrease in accrued interest receivable			(313	)			29
Increase in accrued interest payable			651				22
Other, net			(201	)			(1,920	)
Net cash provided by operating activities			4,276				2,044
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales			327				10,761
Proceeds from maturities and principal reductions on mortgage-backed securities			5,684				7,724
Purchases			—				(8,179	)
Purchase of regulatory stock			(1,112	)			(765	)
Redemption of regulatory stock			1,906				1,725
Net increase in loans			(15,352	)			(11,925	)
Purchase of premises and equipment			(560	)			(160	)
Proceeds from sales of foreclosed real estate owned			44				412
Net cash used in investing activities			(9,063	)			(407	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits			27,635				10,765
Net decrease in short-term borrowings			(15,222	)			(12,625	)
Repayments of other borrowings			(4,329	)			(2,852	)
Stock options exercised			113				75
Purchase of treasury stock			(374	)			(179	)
Cash dividends paid			(1,510	)			(1,376	)
Net cash provided by (used in) financing activities			6,313				(6,192	)
Increase (decrease) in cash and cash equivalents			1,526				(4,555	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			18,348				16,697
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	19,874			$	12,142

7

NORWOOD FINANCIAL CORP.

Consolidated Statements of Cash Flows (Unaudited) (continued)

(dollars in thousands)

		Three Months Ended March 31,
		2019				2018
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest on deposits and borrowings		$	1,504			$	1,200
Income taxes paid, net of refunds		$	46			$	19
Supplemental Schedule of Noncash Investing Activities:
Transfers of loans to foreclosed real estate and repossession of other assets		$	822			$	203
Cash dividends declared		$	1,509			$	1,376
Investment maturity receivable		$	—			$	2,009

See accompanying notes to the unaudited consolidated financial statements.

8

Notes to the Unaudited Consolidated Financial Statements

1. Basis of Presentation

The unaudited consolidated financial statements include the accounts of Norwood Financial Corp. (Company) and its wholly-owned subsidiary, Wayne Bank (Bank) and the Bank’s wholly-owned subsidiaries, WCB Realty Corp., Norwood Investment Corp., and WTRO Properties, Inc. All significant intercompany transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles for interim financial statements and with instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. The financial statements reflect, in the opinion of management, all normal, recurring adjustments necessary to present fairly the consolidated financial position and results of operations of the Company. The operating results for the three month period ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or any other future interim period.

2. Revenue Recognition

Management has determined that the primary sources of revenue emanating from interest income on loans and investments along with noninterest revenue resulting from investment security gains, loan servicing, gains on the sale of loans, commitment fees, and fees from financial guarantees are not within the scope of ASC 606. As a result, no changes were made during the period related to those sources of revenue.

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months ended March 31:

(dollars in thousands)
Noninterest Income		2019				2018
In-scope of Topic 606:
Service charges on deposit accounts		$	67			$	65
ATM fees			90				96
Overdraft fees			351				384
Safe deposit box rental			26				30
Loan related service fees			129				80
Debit card fees			326				295
Fiduciary activities			142				137
Commissions on mutual funds and annuities			55				43
Other income			115				139
Noninterest Income ( in-scope of Topic 606 )			1,301				1,269
Out-of-scope of Topic 606:
Net realized gains on sales of securities			—				142
Loan servicing fees			15				10
Gains on sales of loans			42				—
Earnings on and proceeds from bank-owned life insurance			202				273
Noninterest Income ( out-of-scope of Topic 606 )			259				425
Total Noninterest Income		$	1,560			$	1,694

9

3. Earnings Per Share

Basic earnings per share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.

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

(in thousands)		Three Months Ended March 31,
		2019				2018
Weighted average shares outstanding			6,293				6,256
Less: Unvested restricted shares			(34	)			(31	)
Basic EPS weighted average shares outstanding			6,259				6,225
Basic EPS weighted average shares outstanding			6,259				6,225
Add: Dilutive effect of stock options and restricted shares			50				54
Diluted EPS weighted average shares outstanding			6,309				6,279

As of March 31, 2019, there were 60,650 stock options that would be anti-dilutive to the earnings per share calculations based upon the closing price of Norwood common stock of $30.84 per share on March 31, 2019.

As of March 31, 2018, there were 34,000 stock options that would be anti-dilutive to the earnings per share calculations based upon the closing price of Norwood common stock of $30.09 per share on March 31, 2018.

4. Stock-Based Compensation

No awards were granted during the three-month period ending March 31, 2019. As of March 31, 2019, there was $156,000 of total unrecognized compensation cost related to non-vested options granted in 2018 under the 2014 Equity Incentive Plan, which will be fully amortized by December 31, 2019. Compensation costs related to stock options amounted to $52,000 and $59,000 during the three-month periods ended March 31, 2019 and 2018, respectively.

10

A summary of the Company’s stock option activity for the three-month period ended March 31, 2019 is as follows:

		Options				Weighted Average Exercise Price Per Share				Weighted Average Remaining Contractual Term				Aggregate Intrinsic Value ($000)
Outstanding at January 1, 2019			208,700			$	22.54				5.9 Yrs.			$	2,183
Granted			—				—				—				—
Exercised			(6,150	)			18.31				4.7 Yrs.				113
Forfeited			—				—				—				—
Outstanding at March 31, 2019			202,550			$	22.67				5.7 Yrs.			$	1,761
Exercisable at March 31, 2019			173,650			$	21.06				5.0 Yrs.			$	1,761

Intrinsic value represents the amount by which the market price of the stock on the measurement date exceeded the exercise price of the option. The stock price was $30.84 per share as of March 31, 2019 and $33.00 per share as of December 31, 2018.

A summary of the Company’s restricted stock activity for the three-month periods ended March 31, 2019 and 2018 is as follows:

		2019								2018
		Number of Restricted Stock				Weighted-Average Grant Date Fair Value				Number of Restricted Stock				Weighted-Average Grant Date Fair Value
Non-vested, January 1,			34,615			$	27.82				30,415			$	24.46
Granted			—				—				—				—
Vested			—				—				—				—
Forfeited			—				—				—				—
Non-vested, March 31,			34,615			$	27.82				30,415			$	24.46

The expected future compensation expense relating to the 34,615 shares of non-vested restricted stock outstanding as of March 31, 2019 is $891,000. This cost will be recognized over the remaining vesting period of 4.75 years. Compensation costs related to restricted stock amounted to $72,000 and $51,000 during the three-month periods ended March 31, 2019 and 2018, respectively.

11

5. Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in accumulated other comprehensive loss (in thousands) by component net of tax for the three months ended March 31, 2019 and 2018:

		Unrealized gains (losses) on available for sale securities (a)
Balance as of December 31, 2018		$	(5,020	)
Other comprehensive income before reclassification			2,943
Amount reclassified from accumulated other comprehensive loss			—
Total other comprehensive income			2,943
Balance as of March 31, 2019		$	(2,077	)
		Unrealized gains (losses) on available for sale securities (a)
Balance as of December 31, 2017		$	(2,667	)
Other comprehensive loss before reclassification			(3,548	)
Amount reclassified from accumulated other comprehensive loss			(112	)
Total other comprehensive loss			(3,660	)
Balance as of March 31, 2018		$	(6,327	)

(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 loss (in thousands) for the three months ended March 31, 2019 and 2018:

Details about other comprehensive income		Amount Reclassified From Accumulated Other Comprehensive Income (Loss) (a)								Affected Line Item in Consolidated Statements of Income
		Three months ended March 31,
		2019				2018
Unrealized gains on available for sale securities		$	—			$	142			Net realized gains on sales of securities
			—				(30	)		Income tax expense
		$	—			$	112

(a)	Amounts in parentheses indicate debits to net income

12

6. Off-Balance Sheet Financial Instruments and Guarantees

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

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

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

(in thousands)		March 31,
		2019				2018
Commitments to grant loans		$	40,322			$	46,792
Unfunded commitments under lines of credit			77,573				63,135
Standby letters of credit			4,183				5,919
		$	122,078			$	115,846

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

The Bank does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Bank, generally, holds collateral and/or personal guarantees supporting these commitments. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of March 31, 2019 for guarantees under standby letters of credit issued is not material.

13

7. Securities

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

		March 31, 2019
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(In Thousands)
Available for Sale:
States and political subdivisions		$	97,955			$	726			$	(488	)		$	98,193
Corporate obligations			8,854				—				(107	)			8,747
Mortgage-backed securities-government sponsored entities			137,121				52				(3,492	)			133,681
Total debt securities		$	243,930			$	778			$	(4,087	)		$	240,621
		December 31, 2018
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(In Thousands)
Available for Sale:
States and political subdivisions		$	99,218			$	385			$	(1,990	)		$	97,613
Corporate obligations			8,896				—				(256	)			8,640
Mortgage-backed securities-government sponsored entities			142,197				25				(5,198	)			137,024
Total debt securities		$	250,311			$	410			$	(7,444	)		$	243,277

The following tables show the Company’s investments’ gross unrealized losses and fair value aggregated by length of time that individual securities have been in a continuous unrealized loss position (in thousands):

		March 31, 2019
		Less than 12 Months								12 Months or More								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
States and political subdivisions		$	773			$	(11	)		$	52,523			$	(477	)		$	53,296			$	(488	)
Corporate obligations			—				—				8,747				(107	)			8,747				(107	)
Mortgage-backed securities-government sponsored entities			1,747				(2	)			120,061				(3,490	)			121,808				(3,492	)
		$	2,520			$	(13	)		$	181,331			$	(4,074	)		$	183,851			$	(4,087	)

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		December 31, 2018
		Less than 12 Months								12 Months or More								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
States and political subdivisions		$	19,140			$	(390	)		$	56,740			$	(1,600	)		$	75,880			$	(1,990	)
Corporate obligations			2,045				(21	)			6,595				(235	)			8,640				(256	)
Mortgage-backed securities-government sponsored entities			8,444				(22	)			122,950				(5,176	)			131,394				(5,198	)
		$	29,629			$	(433	)		$	186,285			$	(7,011	)		$	215,914			$	(7,444	)

At March 31, 2019, the Company had two debt securities in an unrealized loss position in the less than twelve months category and 183 debt securities in the twelve months or more category. In Management’s opinion the unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. No other-than-temporary-impairment charges were recorded in 2019. Management believes that all unrealized losses represent temporary impairment of the securities as the Company does not have the intent to sell the securities and it is more likely than not that it will not have to sell the securities before recovery of its cost basis.

The amortized cost and fair value of debt securities as of March 31, 2019 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.

		Available for Sale
		Amortized Cost				Fair Value
		(In Thousands)
Due in one year or less		$	2,689			$	2,689
Due after one year through five years			21,030				20,874
Due after five years through ten years			45,176				44,948
Due after ten years			37,914				38,429
			106,809				106,940
Mortgage-backed securities-government sponsored entities			137,121				133,681
		$	243,930			$	240,621

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

		Three Months Ended March 31,
		2019				2018
Gross realized gains		$	—			$	142
Gross realized losses			—				—
Net realized gain		$	—			$	142
Proceeds from sales of securities		$	327			$	10,761

Securities with a carrying value of $196,137,000 and $216,435,000 at March 31, 2019 and 2018, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

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8. Loans Receivable and Allowance for Loan Losses

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

		March 31, 2019								December 31, 2018
Real Estate Loans:
Residential		$	231,954				26.8	%		$	235,523				27.7	%
Commercial			373,276				43.2				374,790				44.1
Construction			18,604				2.2				17,445				2.0
Commercial, financial and agricultural			118,535				13.7				110,542				13.0
Consumer loans to individuals			121,945				14.1				112,002				13.2
Total loans			864,314				100.0	%			850,302				100.0	%
Deferred fees, net			(116	)							(120	)
Total loans receivable			864,198								850,182
Allowance for loan losses			(8,349	)							(8,452	)
Net loans receivable		$	855,849							$	841,730

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

		March 31, 2019				December 31, 2018
Outstanding Balance		$	985			$	1,055
Carrying Amount		$	829			$	886

As a result of the acquisition of Delaware Bancshares, Inc. (“Delaware”), the Company added $1,397,000 of loans that were accounted for in accordance with ASC 310-30. Based on a review of the loans acquired by senior lending management, which included an analysis of credit deterioration of the loans since origination, the Company recorded a specific credit fair value adjustment of $499,000. 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.

The Company maintains a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers. Specific loan loss allowances are established for identified losses based on a review of such information. A loan evaluated for impairment is considered to be impaired when, based on current information and events, it is 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. We do not aggregate such loans for evaluation purposes. Impairment is measured on a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent.

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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.

Foreclosed assets acquired in settlement of loans are carried at fair value less estimated costs to sell and are included in foreclosed real estate owned on the Consolidated Balance Sheets. As of March 31, 2019 and December 31, 2018, foreclosed real estate owned totaled $1,792,000 and $1,115,000 respectively. During the three months ended March 31, 2019, the Company acquired three properties via deed-in-lieu transactions with an aggregate carrying value of $680,000 and foreclosed on one commercial property with a carrying value of $32,000, and disposed of one property with a carrying value of $36,000 through the sale of the property. As of March 31, 2019, the Company has initiated formal foreclosure proceedings on two properties classified as consumer residential mortgages with an aggregate carrying value of $221,000.

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

		Real Estate Loans
		Residential				Commercial				Construction				Commercial Loans				Consumer Loans				Total
March 31, 2019		(In thousands)
Individually evaluated for impairment		$	—			$	451			$	—			$	—			$	—			$	451
Loans acquired with deteriorated credit quality			581				248				—				—				—				829
Collectively evaluated for impairment			231,373				372,577				18,604				118,535				121,945				863,034
Total Loans		$	231,954			$	373,276			$	18,604			$	118,535			$	121,945			$	864,314

		Real Estate Loans
		Residential				Commercial				Construction				Commercial Loans				Consumer Loans				Total
		(In thousands)
December 31, 2018
Individually evaluated for impairment		$	—			$	1,319			$	—			$	—			$	—			$	1,319
Loans acquired with deteriorated credit quality			630				256				—				—				—				886
Collectively evaluated for impairment			234,893				373,215				17,445				110,542				112,002				848,097
Total Loans		$	235,523			$	374,790			$	17,445			$	110,542			$	112,002			$	850,302

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

		Recorded Investment				Unpaid Principal Balance				Associated Allowance
March 31, 2019		(in thousands)
With no related allowance recorded:
Real Estate Loans:
Commercial		$	451			$	702			$	—
Subtotal			451				702				—
Total:
Real Estate Loans:
Commercial			451				702				—
Total Impaired Loans		$	451			$	702			$	—
		Recorded Investment				Unpaid Principal Balance				Associated Allowance
December 31, 2018		(in thousands)
With no related allowance recorded:
Real Estate Loans:
Commercial		$	1,319			$	1,747			$	—
Subtotal			1,319				1,747				—
Total:
Real Estate Loans:
Commercial			1,319				1,747				—
Total Impaired Loans		$	1,319			$	1,747			$	—

The following table presents the average recorded investment in impaired loans and the related amount of interest income recognized during the three-month periods ended March 31, 2019 and 2018, respectively (in thousands):

		Average Recorded Investment								Interest Income Recognized
		2019				2018				2019				2018
Real Estate Loans:
Residential		$	—			$	23			$	—			$	—
Commercial			885				1,219				—				14
Total		$	885			$	1,242			$	—			$	14

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