Norwood Financial Corp
2017 Annual Report
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www.waynebank.com
SUMMARY OF SELECTED FINANCIAL DATA
(dollars in thousands except per share data)
*Per share information has been restated to reflect the 50% stock dividend declared in 2017 and the 10% stock dividend declared in 2013.
NORWOOD FINANCIAL CORP
William W. Davis, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Chairman of the BoarD
Dr. anDreW a. forte . . . . . . . . . . . . . . . . . . . . . . . . . viCe Chairman of the BoarD
leWis J. Critelli . . . . . . . . . . . . . . . . . . . . PresiDent & Chief exeCutive offiCer
William s. lanCe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .exeCutive viCe PresiDent,
Chief finanCial offiCer & seCretary
James f. Burke . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . exeCutive viCe PresiDent
John f. CarmoDy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . exeCutive viCe PresiDent
roBert J. manCuso . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . exeCutive viCe PresiDent
John h. sanDers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .senior viCe PresiDent
WAYNE BANK
staCey kuhn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . assistant viCe PresiDent
vonnie leWis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . assistant viCe PresiDent
Bonnie loCkett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . assistant viCe PresiDent
kristine malti. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . assistant viCe PresiDent
eileen mershon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . assistant viCe PresiDent
frank J. sislo. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . assistant viCe PresiDent
miChele Bailey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Community offiCe manager
karen Beissel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Community offiCe manager
Craig D. grimm. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Community offiCe manager
teresa hynes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Community offiCe manager
erin mason . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Community offiCe manager
gerry moore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Community offiCe manager
sanDra C. mruCzkeWyCz. . . . . . . . . . . . . . . . . . . . .Community offiCe manager
William W. Davis, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Chairman of the BoarD
maDeline Portugal . . . . . . . . . . . . . . . . . . . . . . . . . .Community offiCe manager
Dr. anDreW a. forte . . . . . . . . . . . . . . . . . . . . . . . . . viCe Chairman of the BoarD
annamae reChtoroviC . . . . . . . . . . . . . . . . . . . . . . .Community offiCe manager
leWis J. Critelli . . . . . . . . . . . . . . . . . . . . PresiDent & Chief exeCutive offiCer
DeBra renWiCk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Community offiCe manager
William s. lanCe . . . . . . . . . . . . . . exeCutive viCe PresiDent, Chief finanCial
elaine reuthe. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Community offiCe manager
offiCer & seCretary
Christine routleDge . . . . . . . . . . . . . . . . . . . . . . . .Community offiCe manager
James f. Burke . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .exeCutive viCe PresiDent,
JessiCa santiago. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Community offiCe manager
Chief lenDing offiCer
Denise seman. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Community offiCe manager
John f. CarmoDy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . exeCutive viCe PresiDent
laurie J. BishoP . . . . . . . . . . . . . . . . . . .assistant Community offiCe manager
Chief CreDit offiCer
timothy gutliPh . . . . . . . . . . . . . . . . . .assistant Community offiCe manager
roBert J. manCuso . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . exeCutive viCe PresiDent
Denise r. kern. . . . . . . . . . . . . . . . . . . . .assistant Community offiCe manager
Chief oPerating offiCer
tariq Peters . . . . . . . . . . . . . . . . . . . . . . .assistant Community offiCe manager
ryan J. frenCh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .senior viCe PresiDent
Diane l. riChter . . . . . . . . . . . . . . . . . . .assistant Community offiCe manager
John h. sanDers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .senior viCe PresiDent
Cheryl Wilkerson . . . . . . . . . . . . . . .assistant Community offiCe manager
DireCtor of human resourCes
tanyia vannatta . . . . . . . . . . . . . . . . . . .assistant Community offiCe manager
Diane m. Wylam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .senior viCe PresiDent
traCy gooDriCh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . training offiCer
retail lenDing manager
geralD J. arnese . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer loan offiCer
senior trust offiCer
annette JurkoWski . . . . . . . . . . . . . . . . . assistant Bsa/ComPlianCe offiCer
thomas a. Byrne . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .senior viCe PresiDent
marianne mCConeghy . . . . . . . . . . . . . . . . . . . . . . . . . trust oPerations offiCer
JosePh a. Castrogiovanni . . . . . . . . . . . . . . . . . . . . . . . . .senior viCe PresiDent
linDa a. meskey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CreDit analyst
kenneth C. Doolittle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .senior viCe PresiDent
amanDa r. miller . . . . . . . . . . . .CommerCial loan DoCumentation offiCer
John forD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .senior viCe PresiDent
Jamie PaDula . . . . . . . . . . . . . . . . human resourCes aDministrative offiCer
Joann fuller. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .senior viCe PresiDent
kathryn a. serniak . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .mortgage loan offiCer
nanCy a. hart. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . senior viCe PresiDent,
Briana sCholl . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CreDit analyst manager
Controller & assistant seCretary
gary steiCh. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .resourCe reCovery offiCer
DaWnette hotaling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .senior viCe PresiDent
Bonnie rutleDge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . assistant trust offiCer
linDa D. maDer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .senior viCe PresiDent
Doreen a. sWingle. . . . . . . . . . . . . .resiDential mortgage lenDing offiCer
vinCent o’Bell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .senior viCe PresiDent
John veleBer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .senior viCe PresiDent
BarBara a. riDD . . . . . . . . . . . . . . . . . . . viCe PresiDent & assistant seCretary
roBert J. Behrens, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
Pilar Cueva . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
steven r. Daniels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
karen r. gasPer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
amanDa hall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
Jill a. hessling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
NORWOOD INVESTMENT CORP
leWis J. Critelli
William s. lanCe
sCott C. riCkarD
PresiDent & Chief exeCutive offiCer
treasurer
investment exeCutive
lPl finanCial
MONROE COUNTY ASSOCIATE BOARD
John e. koCzWara . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
miChael J. Baxter
Julie r. kuen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
sara Cramer
Juliette P. mCkerrell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
Dr. anDreW a. forte
heiDi PiCkett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
ralPh a. matergia, esq.
mark W. ranzan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
riCharD a. siarniak . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
kara r. suChy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
eli t. tomlinson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
Douglas W. atherton . . . . . . . . . . . . . . . . . . . . . . . . . . . assistant viCe PresiDent
Derek Bellinger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . assistant viCe PresiDent
NEW YORK ADVISORY BOARD
miChael P. Degroat
leonarD a. govern
Douglas a. sluiter
James h. ott
marvin PaPillon
ray PriCe
ron saraJian
PatriCk P. galloWay
meg hungerforD
Joel smith
FOR ThE YEARS ENDED DECEMBER 31,20172016201520142013net interest income$34,908$28,590 $24,521 $24,560$24,661Provision for loan losses2,2002,0504,5801,6802,400other income6,4964,8413,9693,9404,734net realized gains on sales of loans and securities4153387301,170881other expenses24,87023,12417,10017,72716,705income before income taxes14,7498,5957,54010,26311,171income tax expense6,5511,8841,6322,6062,706NET INCOME$8,198$6,711$5,908$7,657$8,465net income per share -Basic*$1.32$1.16$1.07$1.40$1.55 -Diluted*$1.31$1.15$1.07$1.40$1.55Cash dividends declared*$0.87$0.83 $0.83$0.80$0.77Dividend pay-out ratio65.91%71.84%77.50%57.14%49.79%return on average assets0.73%0.74%0.80%1.08%1.23%return on average equity7.04%6.17%5.83%7.92%9.13%BALANCES AT YEAR-ENDtotal assets$1,132,916$1,111,183$750,505$711,635$711,234loans receivable764,092713,889559,925501,135503,097allowance for loan losses7,6346,4637,2985,8755,708total deposits929,384925,385550,909559,944541,182stockholders’ equity115,739111,079100,99899,04191,864trust assets under management157,838138,167131,690134,888126,673Book value per share*$18.61$17.43$18.26$17.53$16.95tier 1 Capital to risk-adjusted assets13.16%13.27%15.86%17.33%16.53%total Capital to risk-adjusted assets14.11%14.12%17.09%18.49%17.66%allowance for loan losses to total loans1.00%0.91%1.30%1.17%1.13%non-performing assets to total assets0.37%0.64%1.33%1.31%1.48%
LETTER FROM THE PRESIDENT
“We established high goals for ourselves
this year and I am pleased to share that
we not only reached those goals, we
exceeded them.”
Lewis J. Critelli
President and CEO
e are pleased to share with you the Company’s achievements and performance in this Annual Report.
Your Company had a very productive year with a solid increase in earnings, strong loan growth,
improvements in credit quality, and enhancements in operating efficiencies. We also paid you, our
shareholders, a 50% stock dividend and a 4.8% increase in cash dividends. In addition, we opened a
W
new Community Office in Clarks Summit, announced plans to relocate our Community Office in Roscoe, New York, and
improved our various electronic banking channels.
For the year ended December 31, 2017, your Company earned $8,198,000, an increase of $1,487,000 or 22.2% from
the $6,711,000 earned in the prior year. Earnings per share on a fully diluted basis were $1.31 for 2017 compared to
$1.15 in 2016, after adjusting for the 50% stock dividend declared in 2017. Our earnings for 2017 were impacted by the
Tax Cuts and Jobs Act, which the President signed into law on December 22, 2017. Among other things, the Act reduced
the corporate tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. As a result of the reduction
in the corporate income tax rate and in accordance with Generally Accepted Accounting Principles, the Company revalued
its net deferred tax asset, which resulted in an additional $3,060,000 of income tax expense in 2017. Though the Act had
a negative impact in 2017, the Company expects to benefit from the lower tax rate beginning in 2018. Our core operating
results, excluding this one-time tax adjustment, totaled $11,258,000, an increase of $4,547,000 from 2016, with core
earnings per share of $1.80 in 2017 compared to $1.15 in 2016. I encourage you to read the Management’s Discussion
and Analysis and the Financial Statements with footnotes for a full report on our performance.
The year 2017 marked the 146th anniversary of Wayne Bank serving its local communities. As a community bank,
we’ve remained dedicated to our mission of supporting our local residents and Helping the Community Grow by serving
local businesses and their employees. We now have 26 Community Offices in six counties throughout Northeastern
Pennsylvania and the Southern Tier of New York, and have grown to $1.1 billion in asset size.
NORWOOD FINANCIAL CORP ■ 2017 ANNUAL REPORT
Thanks to the dedication of our employees, the loyalty of our customers, and the support of our local communities,
Wayne Bank was able to meet the goals we set and honor the commitments we made in 2017. We worked hard to expand
and improve our products, services, and Community Offices. We solidified our presence and continued our dedication to
investing in the communities we serve.
Wayne Bank experienced progress and prosperity across its various sectors in 2017, including record growth in its
commercial loan and wealth management divisions. This was also the first full year that the Bank’s customers enjoyed 26
Community Offices, after the 2016 acquisition of the 12 New York Offices. Although Wayne Bank’s reach now includes
six counties with six very different markets, every office functions efficiently and effectively, and contributed greatly to
our success in 2017.
Today, Wayne Bank employs more than 200 local people. Our experienced team of financial professionals are accessible,
knowledgeable, and live in the communities they serve. Because of this, Wayne Bank employees are committed to helping
their neighbors, local businesses, and hometown organizations grow and thrive. They offer face-to-face guidance, directly
understand their customers’ needs, and genuinely care about their success.
The Bank had an extremely productive year in meeting the needs of our communities by providing financing to small
businesses, municipalities, and individuals. In fact, in 2017 we originated over $100 million in commercial loans. These
loans helped businesses expand, provided municipalities funds for infrastructure improvements, and created jobs and
opportunities throughout our six county market area. We were also very active in our office network, generating over
Downtown Roscoe, New York will benefit as our Community Office moves across the street to a larger space to better serve the community.
Our recently relocated Clarks Summit Community Office offers customers the latest in banking technology and modern conveniences.
2,600 loans totaling over $80 million. We assisted our customers in building and purchasing new homes, remodeling
projects, funding education, and buying new cars.
One of the most exciting accomplishments of the year was the relocation of the Bank’s Clarks Summit Community
Office. In December 2017, the Clarks Summit staff moved into their newly constructed, state-of-the-art office. The new,
2,300 square foot building is located up the street from the Bank’s original location, which it had occupied since 1989.
The Bank’s growth in the Clarks Summit market necessitated this relocation in order to provide its customers with a
more spacious and contemporary environment. The new Clarks Summit Community Office also offers a much larger and
improved parking lot, with easier access to the drive-thru banking lanes. The move has been a tremendously positive one for
the customers, staff, and local community, and an official grand opening event will take place at the office in May of 2018.
NORWOOD FINANCIAL CORP ■ 2017 ANNUAL REPORT
Wayne Bank Senior Management Team (left to right): William S. Lance, Executive Vice President; Diane Wylam, Esq., Senior Vice President; Robert J.
Mancuso, Executive Vice President; Lewis J. Critelli, President and Chief Executive Officer; John F. Carmody, Executive Vice President;
John H. Sanders, Senior Vice President; James F. Burke, Executive Vice President; Ryan J. French, Senior Vice President
Wayne Bank is committed to investing in the communities we serve, and the decision was made to also relocate the
Roscoe, New York, Community Office in the spring of 2018. The new office is a much larger and more modern building,
and is conveniently located across the street from the current Roscoe office. Renovations for the new office began
in early 2018 and, once completed, will offer a more contemporary, spacious, and visible location to better serve the
Roscoe community. The Bank is pleased to be able to undertake and complete these relocation initiatives that offer such
wonderful improvements for our customers.
In 2017, the Bank moved forward with its initiative to install new, blue signage throughout its Pennsylvania Community
Offices, as a result of the prior year’s logo change. Community Offices in Lackawanna and Pike Counties were
refreshed with all new exterior signage in the Wayne Bank shade of blue. The results offered impressive improvements
in visibility and branding for these offices. This project will be completed in 2018 with signage updates in Monroe and
Wayne Counties.
An exciting addition to the Bank’s product line was this year’s release of the redesigned Rewards Checking program.
Using feedback from the Community Office staff, Wayne Bank’s management team developed a checking account
that is truly rewarding to customers. With free benefits including personal checks, debit cards, official bank checks and
money orders, paid interest on all balances, check images in monthly statements, and more, this membership account
adds significant value to our customers. The new Rewards Checking account was very well received and one of the most
successful deposit products of 2017.
NORWOOD FINANCIAL CORP ■ 2017 ANNUAL REPORT
This year, we remained dedicated to delivering our customers the latest in banking technology, while maintaining
the security, reliability, and privacy they expect. Our online banking services are available for consumers, as well as fully
customizable for businesses so that multiple users can access designated accounts. Businesses and consumers can also
take advantage of the Bank’s free mobile apps that can be downloaded to most smart phones and tablets, offering the
flexibility of banking from anywhere. In addition to normal banking functions, these apps also offer customers an array of
additional convenient features including Mobile Deposit Capture, Instant Balance, and Touch ID. Wayne Bank debit cards
are EMV chip enabled, Apply Pay ready, offer Visa-Checkout, Card Valet, and are now available at 33,000 surcharge-free
MoneyPass compatible ATM locations.
Since 1871, we have invested in our local schools, businesses, arts programs, and neighborhood organizations, and
2017 was no exception. This year, the Bank sponsored hundreds of local organizations and Bank employees participated
in a record number of community events throughout Northeastern Pennsylvania and Upstate New York. We began the year
by supporting our local farmers at the CCE Catskill Agricultural Conference Trade Show, and raising funds for Artisans
for Ava, a benefit for a local child organized entirely by our Andes Community Office team. You may have seen us running
This year, the Bank sponsored
hundreds of local organizations and
Bank employees participated in a record
number of community events throughout
Pennsylvania and New York.
“
or cheering on the runners in
the Narrowsburg Windy
Kilt 5K, the Scranton Half
Marathon, Jog For Jude,
or the NEPA 5K for MLS.
Maybe you watched us
canoe with the Honesdale
Jaycees, raise awareness for
Colon Cancer during C.A.S.U.A.L Day, don our tie dye for Waymart’s Waystock, or show our patriotism during Stamford’s
Flag Day parade. We had fun in the summer sun at Honesdale Roots & Rhythm, the Celebrate Roxbury Summer
Festival, the Dorflinger Wildflower Music Festival, and the Delaware County Fair. We were there at Liberty’s Annual July
Fourth Celebration, Steampunk Honesdale, Narrowsburg’s Riverfest, and Arts on the Square in Scranton. Wayne Bank
employees participated in Andes Community Days, the Hamden Bass-Ball Game, New-Old Franklin Day, the Line of Hope
“
Fundraiser in Eldred, Komen NEPA Race For the Cure, and Kinsley’s Grocers Against Cancer. We enjoyed the themes
of the Narrowsburg Honey Bee Festival, the Margaretville Cauliflower Festival, the Stamford Scarecrow Festival, and
the Honesdale Jaycees Halloween Parade. Wayne Bank employees rounded out the year and celebrated the season by
Spending The Day in Walton, holding a food drive for Honesdale for the Holidays, participating in the Hancock Christmas
Parade, taking photos with Santa in Waymart, and collecting toys for kids in Delaware, Pike, and Wayne Counties.
Our efforts did not go unnoticed, as Wayne Bank was awarded the 2017 Happenings Magazine’s Happie Award for
Best Bank. This was the third year in a row winning the Happie Award, but the first for the Bank’s next honor, The River
Reporter’s Readers’ Choice Best Award for Best Bank. The Bank also took home first place honors with our entry in the
Canaltown Short Spooky Movie Festival.
NORWOOD FINANCIAL CORP ■ 2017 ANNUAL REPORT
I was honored to accept the Richard L. Snyder Business Leadership Award at the Greater Pike Community Foundation’s
4th Annual Dinner this year. Dick Snyder served on Wayne Bank’s Board of Directors for twelve years and was a great
friend and mentor. This award was founded in his memory to recognize outstanding corporate philanthropic leadership in
the community, and receiving it was a particularly meaningful honor for both the Bank and me.
Our greatest asset has always been our employees and we are so proud to honor the long-term dedication of those
who celebrated milestone years of service with Wayne Bank during 2017. Congratulations to Dawnette Hotaling, Senior
Vice President and NY Retail Banking Market Manager, for her thirty-five years of service and to Kim Murphy, Liberty
Community Office Branch Specialist, for thirty years with the Bank. Adding employees who celebrated twenty, fifteen, ten,
and five year anniversaries, the group represents 270 years of Community Banking experience.
The Bank’s growth in 2017 facilitated numerous opportunities for employee advancement and recognition for their
valuable contributions. Robert J. Mancuso was promoted to Executive Vice President and Chief Operating Officer,
Steven Daniels to Vice President and Commercial Loan Officer, Julie Kuen to Vice President and Retail Operations and
Marketing Manager, Jill Hessling to Vice President and Wayne County Regional Manager, Vonnie Lewis to Assistant Vice
President and Community Office Manager in Lakewood, Kris Malti to Assistant Vice President and Deposit Operations
and Electronic Banking Manager, Annette Jurkowski to Assistant BSA/Compliance Officer, Erin Mason to Community
Office Manager in Monticello, Jamie Padula to Human Resources Administrative Officer, and Briana Scholl to Credit
Analyst Manager. Tariq Peters was also recognized with the Presidential Award for Excellence and promoted to Assistant
Manager in Monticello.
Stacey L. Kuhn joined the Wayne Bank team this year as Sullivan County Mortgage Sales Manager, and has been
tasked with utilizing her experience and expertise to build customer relationships and grow the Bank’s mortgage portfolio
in Sullivan County.
In 2017, Norwood Financial Corp appointed Meg L. Hungerford to the Bank’s Board of Directors. Ms. Hungerford’s
public service and community involvement is a tremendous asset to the Bank as we work to expand our footprint in
New York.
We truly appreciate the support and confidence of our stockholders. We thank you for your ownership interest in
Norwood as we continue to work to enhance shareholder value. Please keep us in mind for all of your financial needs.
Lewis J. Critelli
President & Chief Executive Officer
NORWOOD FINANCIAL CORP ■ 2017 ANNUAL REPORT
2017 BOARD OF DIRECTORS
William W. Davis, Jr.
Chairman of the Board
Susan Campfield
Director
Ralph A. Matergia, Esq.
Director
Joseph W. Adams
Director
Lewis J. Critelli
President and CEO
Kevin M. Lamont
Director
Dr. Kenneth A. Phillips
Director
Meg L. Hungerford
Director
Dr. Andrew A. Forte
Director
NORWOOD FINANCIAL CORP ■ 2017 ANNUAL REPORT
26 COMMUNITY OFFICES
DELAWARE COUNTY
ANDES, NY
FRANkLiN, NY
HAMDEN, NY
ROxBuRY, NY
STAMFORD, NY
WALTON, NY
WAYNE COUNTY
HAWLEY, PA
HONESDALE, PA
LAkEWOOD, PA
WAYMART, PA
WiLLOW AVENuE
(HONESDALE), PA
SULLIVAN COUNTY
CALLiCOON, NY
LiBERTY, NY
MONTiCELLO, NY
NARROWSBuRg, NY
ROSCOE, NY
WuRTSBORO, NY
STAMFORD
ROXBURY
FRANKLIN
HAMDEN
ANDES
WALTON
DELAWARE
COUNTY
ROSCOE
SULLIVAN
COUNTY
CALLICOON
LIBERTY
LAKEWOOD
WAYNE
COUNTY
WAYMART
NARROWSBURG
lackawanna
COUNTY
HONESDALE
WILLOW
AVE
CLARKS
SUMMIT
CENTRAL
SCRANTON
HAWLEY
SHOHOLA
LORDS VALLEY
MILFORD
PIKE
COUNTY
MONROE
COUNTY
TANNERSVILLE
MARSHALLS
CREEK
EFFORT
STROUD MALL
MONTICELLO
WURTSBORO
LACKAWANNA
COUNTY
CENTRAL SCRANTON, PA
CLARkS SuMMiT, PA
PIKE COUNTY
LORDS VALLEY, PA
MiLFORD, PA
SHOHOLA, PA
MONROE COUNTY
EFFORT, PA
MARSHALLS CREEk, PA
STROuD MALL
(STROuDSBuRg), PA
TANNERSViLLE, PA
NORWOOD FINANCIAL CORP ■ 2017 ANNUAL REPORT
2017 CONSOLIDATED FINANCIAL REPORT
Management’s Discussion & Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Management’s Report On Internal Control Over Financial Reporting . . . . . . . . 30
Reports Of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . 31
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Consolidated Statements Of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Consolidated Statements Of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . 35
Consolidated Statements Of Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Consolidated Statements Of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Notes To Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Investor Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 Norwood Financial Corp
(the Company), and its subsidiary, Wayne Bank (the Bank), as of December 31, 2017 and 2016, and for the years
ended December 31, 2017, 2016, and 2015. This section should be read in conjunction with the consolidated
financial statements and related footnotes.
Forward-LookIng StatementS
The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking
statements. When used in this discussion, the words "believes", "anticipates", "contemplates", "expects", and
similar expressions are intended to identify forward-looking statements. Such statements are subject to certain
risks and uncertainties, which could cause actual results to differ materially from those projected. Those risks
and uncertainties include changes in Federal and State laws, changes in interest rates, risks associated with the
acquisition of Delaware Bancshares, Inc., the ability to control costs and expenses, demand for real estate,
government fiscal policies, cybersecurity and general economic conditions. The Company undertakes no
obligation to publicly release the results of any revisions to those forward-looking statements which may be
made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
crItIcaL accountIng PoLIcIeS
Note 2 to the Company’s consolidated financial statements (incorporated by reference in Item 8 of the Form
10-K) lists significant accounting policies used in the development and presentation of its financial statements.
This discussion and analysis, the significant accounting policies, and other financial statement disclosures
identify and address key variables and other qualitative and quantitative factors that are necessary for an
understanding and evaluation of the Company and its results of operations.
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. Prior to the enactment of the Tax Cuts and Jobs
Act (the "Act") on December 22, 2017, the Company had a net deferred tax asset totaling $7.6 million, based on
the pre-Act federal tax rate of 35%. As a result of the Act's reduction in the corporate income tax rate to 21%, the
Company revalued its net deferred tax asset as of December 31, 2017, which resulted in a $3,060,000 reduction
in its value. The reduction in the value of the net deferred tax asset has been recorded as additional income tax
expense in 2017.
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,
2017 and 2016 represent temporary impairment of the securities.
10
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
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 Bancorp, Inc. 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 Bancshares, Inc. ("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. Goodwill is tested annually and
deemed impaired when the carrying value of goodwill exceeds its implied fair value.
reSuLtS oF oPeratIonS – Summary
Net income for the Company for the year ended December 31, 2017 was $8,198,000 which was $1,487,000
higher than the $6,711,000 earned in 2016. On December 22, 2017, the President signed the Tax Cut and Jobs
Act (the “Act”) into law. Among other things, the Act reduced the corporate tax rate from a maximum of 35% to
a flat 21% rate effective January 1, 2018. Prior to December 22, 2017, the Company had a net deferred tax asset
totaling $7.6 million, based on the pre-Act federal tax rate of 35%. As a result of the reduction in the corporate
income tax rate to 21%, the Company revalued its net deferred tax asset as of December 31, 2017, which resulted
in a $3,060,000 reduction in its value. The reduction in the value of the net deferred tax asset has been recorded
as additional income tax expense in 2017. The Company’s core operating results (which excludes the non-recurring
tax expense related to the revaluation of the deferred tax asset) increased $4,547,000 to $11,258,000. Earnings
per share on a fully diluted basis were $1.31 for 2017 ($1.80 core operating results per diluted share) compared
to $1.15 in 2016, after adjusting for the 50% stock dividend declared in 2017. The return on average assets for
the year was 0.73% with a return on average equity of 7.04% compared to 0.74% and 6.17%, respectively, in
2016. Core operating results reflected a return on average assets of 1.02% for 2017 and a return on average
equity of 10.39%. Net interest income increased $6,318,000 and other income improved $1,732,000 to offset
the $1,746,000 increase in other expenses and the $4,667,000 increase in income tax expense.
Net interest income (fully taxable equivalent, or fte) totaled $37,090,000 which was an increase of $6,751,000
from the 2016 total. Average loans outstanding increased $110.9 million in 2017 which resulted in an increase in
fte interest income of $5,011,000. The increase in average loan balances was impacted by growth and the $112.1
million of loans acquired from Delaware in 2016. Total average securities increased $91.5 million in 2017 due
primarily to the Delaware acquisition which contributed to a $2,160,000 increase in fte interest income. Average
interest-bearing deposits with banks were $4.7 million in 2017 and interest income in this area increased $6,000.
Average interest-bearing deposits increased $160.6 million due primarily to the acquisition and resulted in a
$774,000 increase in interest expense. The cost of borrowed funds decreased $348,000 compared to the prior
year due primarily to a $5.2 million decrease in average long-term borrowings and a 79 basis point decrease in
the cost of the borrowings resulting from the maturity of higher costing borrowings. The resulting fte net
interest spread decreased 2 basis points to 3.44% in 2017 as an 8 basis point reduction in the yield earned was
only partially offset by a 6 basis point decrease in the cost of funds.
Loans receivable increased $50.2 million from the prior year-end. Loan growth included a $34.7 million
increase in commercial loans due primarily to a $22.7 million increase in commercial real estate loans. Retail loans
increased $15.5 million in 2017 due to a $19.4 million increase in indirect auto and marine financing. Residential
mortgage loans and construction loans decreased $3.9 million. Total non-performing loans increased from $1.9
million and 0.27% of total loans at the end of 2016 to $2.5 million, or 0.32% of total loans on December 31, 2017.
Net charge-offs totaled $1,029,000 in 2017 which was a decrease from the $2,885,000 recorded in 2016. Based
on management’s analysis, the Company determined that it would be appropriate to allocate $2,200,000 to the
11
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
allowance for loan losses in 2017 which resulted in an increase in the ratio of the allowance for loan losses to total
loans outstanding to 1.00% compared to 0.91% on December 31, 2016. The allowance for loan losses represented
308% of total non-performing loans on December 31, 2017 compared to 335% as of December 31, 2016.
Other income for the year ended December 31, 2017 totaled $6,911,000 compared to $5,179,000 in the prior
year, an increase of $1,732,000. Gains on the sale of loans and investment securities increased $77,000 in the
aggregate, while all other items of other income increased $1,655,000, net. Service charges and fees collected
from the expanded customer base contributed to this increase.
Other expenses were $24,870,000 in 2017 compared to $23,124,000 for the similar period in 2016, an
increase of $1,746,000. Salaries and benefits costs increased $1,922,000 in 2017, while occupancy and furniture
and equipment costs increased $736,000 due to costs related to the operation of twelve new Community Offices.
Foreclosed real estate expense increased $484,000 in 2017, while all other operating expenses decreased
$1,396,000, net. Included in the decreased expenses are $1.8 million of merger related expenses recognized in
2016. Income tax expense for the year totaled $6,551,000 which was an increase of $4,667,000 from the prior
year. The increase includes a non-recurring charge of $3,060,000 related to the revaluation of deferred tax assets.
The effective tax rate in 2017 was 44.4% compared to 21.9% in 2016. Excluding the revaluation charge, the
effective tax rate in 2017 would have been 23.7%.
The following table sets forth changes in net income (in thousands):
Net income 2016
Net interest income
Provision for loan losses
Net gains on sales of loans and securities
Other income
Salaries and employee benefits
Occupancy, furniture and equipment
Foreclosed real estate owned
Merger related
Other expenses
Income tax expense - ordinary income
Income tax expense - net deferred tax asset revaluation
Net income for 2017
$
$
6,711
6,318
(150)
77
1,655
(1,922)
(736)
(484)
1,806
(410)
(1,607)
(3,060)
8,198
Net income for the Company for the year ended December 31, 2016 was $6,711,000 which was $803,000
higher than the $5,908,000 earned in 2015. Basic and diluted earnings per share were $1.16 and $1.15,
respectively, in 2016 after adjusting for the 50% stock dividend declared in 2017, compared to the split-adjusted
$1.07 per share for basic and diluted in 2015. The return on average assets (ROA) for the year ended December
31, 2016 was 0.74% and the return on average equity (ROE) was 6.17% compared to an ROA of 0.80% and an
ROE of 5.83% in the prior year. The improvement in earnings over the prior year was the result of the benefits
realized from the acquisition of Delaware on July 31, 2016. Net interest income increased $4,069,000 and the
provision for loan losses decreased $2,530,000 in 2016 which offset increased expenses related to the
acquisition, including $1,806,000 of merger costs.
Net interest income (fully taxable equivalent, or fte) for 2016 totaled $30,339,000 which was an increase of
$4,457,000 from the 2015 total. Average loans outstanding increased $96.9 million in 2016 which resulted in an
increase in fte interest income of $4,476,000, while an 11 basis point decrease in the yield earned impacted
earnings negatively by $672,000. The reduced yield was due to loan production at current market rates. Average
loan balances and loan yields were also impacted by the $112.1 million of loans acquired from Delaware. Total
average securities increased $55.6 million in 2016 due primarily to the Delaware acquisition which contributed
12
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
to a $1,023,000 increase in fte interest income. Average interest-bearing deposits with banks were $8.2 million
in 2016 and interest income in this area increased $26,000. Average interest-bearing deposits increased $106.5
million due to the acquisition and resulted in a $182,000 increase in interest expense. The cost of borrowed
funds increased $214,000 compared to the prior year due primarily to a $7.8 million increase in average
long-term borrowings. The resulting fte net interest margin decreased 15 basis points to 3.60% in 2016 as a
20 basis point reduction in the yield earned was only partially offset by a 5 basis point decrease in the cost of funds.
Loans receivable increased $154.0 million in 2016 from the prior year-end due primarily to the $112.1 million
of loans acquired from Delaware. Organic growth included a $22.8 million increase in commercial loans due
primarily to an $18.6 million increase in commercial real estate loans. Residential mortgage loans and
construction loans increased $5.4 million internally after the sale of $1.7 million in fixed-rate residential
mortgage loans for the purpose of interest rate risk management. Consumer loans increased $13.7 million
internally in 2016 due to a $16.5 million increase in indirect auto and marine financing. Total non-performing
loans decreased from $7.1 million and 1.27% of total loans at the end of 2015 to $1.8 million, or 0.25% of total
loans on December 31, 2016. The significant decrease includes the transfer of one loan relationship with a
balance of $5,015,000 on December 31, 2015 to foreclosed real estate owned in 2016. Net charge-offs totaled
$2,885,000 in 2016 which was a decrease from the $3,157,000 recorded in 2015. Based on management’s
analysis, the Company determined that it would be appropriate to allocate $2,050,000 to the allowance for loan
losses in 2016 which resulted in a decrease in the ratio of the allowance for loan losses to total loans outstanding
to 0.91% compared to 1.30% on December 31, 2015. The decrease in the ratio of the allowance for loan losses to
total loans outstanding reflects the impact of the loans acquired from Delaware with no allowance. Based on the
improvement in credit quality, the allowance for loan losses represented 335% of total non-performing loans on
December 31, 2016 compared to 102% as of December 31, 2015.
Other income for the year ended December 31, 2016 totaled $5,179,000 compared to $4,699,000 in the prior
year, an increase of $480,000. Gains on the sale of loans and investment securities decreased $392,000 in the
aggregate, while all other items of other income increased $872,000, net. Service charges and fees collected from
the expanded customer base contributed to this increase.
Other expenses were $23,124,000 in 2016 compared to $17,100,000 for the similar period in 2015, an increase
of $6,024,000. Salaries and benefits costs increased $2,393,000 in 2016 while occupancy and furniture and
equipment costs increased $543,000 and all other operating expenses increased $3,088,000, net, due to costs
related to the acquisition and the operation of twelve new community offices. Included in the increased expenses
are $1.8 million of merger related expenses. Income tax expense for the year totaled $1,884,000 which was an
increase of $252,000 from the prior year. The effective tax rate in 2016 was 21.9% compared to 21.6%
in 2015.
The following table sets forth changes in net income (in thousands):
Net income 2015
Net interest income
Provision for loan losses
Net gains on sales of loans and securities
Other income
Salaries and employee benefits
Occupancy, furniture and equipment
Foreclosed real estate owned
Merger related
Other expenses
Income tax expense
Net income for 2016
13
$
$
5,908
4,069
2,530
(392)
872
(2,393)
(543)
231
(1,806)
(1,513)
(252)
6,711
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
FINANCIAL CONDITION
totaL aSSetS
Total assets as of December 31, 2017, were $1.133 billion compared to $1.111 billion as of year-end 2016,
an increase of $21.7 million. The increase in assets was primarily attributable to organic loan growth.
LoanS receIvabLe
As of December 31, 2017, loans receivable totaled $764.1 million compared to $713.9 million as of year-end
2016, an increase of $50.2 million. Commercial loans grew $34.7 million, while retail loans increased $15.5
million during the year.
Residential real estate loans, which include home equity lending, totaled $235.8 million as of December 31, 2017,
compared to $237.2 million as of year-end 2016, a decrease of $1.4 million. The Company does not originate any
non-traditional mortgage products such as interest-only loans or option adjustable rate mortgages and has no
sub-prime mortgage exposure. The Company evaluates sales of its long-term, fixed-rate residential loan
production for interest rate risk management. No sales were initiated during 2017. In the current interest rate
environment, the Company expects to evaluate selling mortgage loans in 2018. The Company’s home equity loan
portfolio, which is included in residential real estate loans, increased $600,000 in 2017.
Commercial loans consist principally of loans made to small businesses within the Company’s market and are
usually secured by real estate or other assets of the borrower. Commercial real estate loans totaled $342.9 million
as of December 31, 2017, increasing from $320.2 million as of December 31, 2016. The terms for commercial
real estate loans are typically 15 to 20 years, with adjustable rates based on a spread to the prime rate or fixed
for the initial three to five year period then adjusting to a spread to the prime rate. The majority of the Company’s
commercial real estate portfolio is owner occupied and includes the personal guarantees of the principals.
Commercial loans consisting principally of lines of credit and term loans secured by equipment or other assets
increased $12.0 million to $97.5 million as of December 31, 2017.
The Company’s indirect lending portfolio (included in consumer loans to individuals) increased $19.4 million
to $60.8 million as of December 31, 2017.
aLLowance For Loan LoSSeS and non-PerFormIng aSSetS
4
1
The allowance for loan losses totaled $7,634,000 as of December 31, 2017 and represented 1.00% of total
loans receivable compared to $6,463,000 and 0.91% of total loans as of year-end 2016. Net charge-offs for 2017
totaled $1,029,000 and represented 0.14% of average loans compared to $2,885,000 and 0.46% of average loans
in 2016.
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, accrued
interest is reversed from current earnings.
14
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT As of December 31, 2017, non-performing loans totaled $2,479,000 and represented 0.32% of total loans
compared to $1,927,000 or 0.27% as of December 31, 2016. The increase in the level of non-performing loans
includes one loan with a balance of $409,000 at December 31, 2017 which is guaranteed by the USDA on which
full recovery is expected in 2018. Based on management’s analysis, the Company added $2,200,000 to the
allowance for loan losses for the year ended December 31, 2017 compared to $2,050,000 in 2016.
Foreclosed real estate owned totaled $1,661,000 as of December 31, 2017 and $5,302,000 as of December 31, 2016.
During 2017, six properties with a carrying value of $3.5 million were disposed of through sales. The Company
recorded a net loss of $158,000 from the sale of the properties.
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 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, and growth in the portfolio. 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. The Company has $9.2 million of junior lien home equity loans. For 2017, there were no charge-offs
for this portfolio.
As of December 31, 2017, the Company considered its concentration of credit risk profile to be acceptable.
The highest concentrations are in commercial rentals and the hospitality lodging industry.
During 2017, the Company recognized an increase in its adversely classified loans due to the transfer of one
loan relationship with a balance of $5.5 million to Special Mention during 2017. The reclassified loan is
adequately collateralized and has made all timely payments, but was classified due to insufficient debt coverage.
The Company assesses a loss factor against the classified loans, which is based on prior experience. Classified
loans which are considered impaired are measured on a loan by loan basis. The Company values such loans by
either the present value of expected cash flows, the loan’s obtainable market price or the fair value of collateral
if the loan is collateral dependent.
5
1
At December 31, 2017, the recorded investment in impaired loans, not requiring an allowance for loan
losses was $1,247,000 (net of charge-offs against the allowance for loan losses of $277,000). There were no
loans requiring an allowance. The recorded investment in impaired loans not requiring an allowance for loan
losses was $2,624,000 (net of charge-offs of $831,000) and there were no loans requiring an allowance as of
December 31, 2016.
As a result of its analysis, after applying these factors, management considers the allowance as of December 31, 2017,
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.
15
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT The following table sets forth information with respect to the Company’s allowance for loan losses at the
dates indicated:
2016
Year-ended December 31,
2015
(dollars in thousands)
2014
2013
2017
$
6,463
(83)
(902)
(28)
(207)
-
(1,220)
6
159
-
26
-
191
2,200
7,634
$
1.00%
$
0.14%
3.1x
$
1,706
277
—
—
—
1,983
496
2,479
1,661
4,140
$
Allowance balance at beginning of period
Charge-offs:
Real Estate loans
Residential
Commercial
Construction
Commercial loans
Consumer loans
Total
Recoveries:
Real Estate loans
Residential
Commercial
Construction
Commercial loans
Consumer loans
Total
Provision expense
Allowance balance at end of period
Allowance for loan losses as a percent
of total loans outstanding
Net loans charged off as a percent of
average loans outstanding
Allowance coverage of non-performing loans
Non-accrual loans:
Real Estate loans
Residential
Commercial
Construction
Commercial loans
Consumer loans
Total
Accruing loans which are contractually
past due 90 days or more
Total non-performing loans
Foreclosed real estate
Total non-performing assets
Non-performing loans to total loans
Non-performing loans to total assets
$
7,298
$
5,875
$
5,708
$
5,502
(123)
(2,711)
-
(15)
(102)
(2,951)
6
15
-
-
45
66
2,050
6,463
$
(224)
(2,883)
-
-
(91)
(3,198)
20
-
-
-
21
41
4,580
7,298
(270)
(1,196)
-
-
(80)
(1,546)
(603)
(1,488)
(40)
(4)
(90)
(2,225)
-
2
-
-
31
33
1,680
5,875
9
-
-
-
22
31
2,400
5,708
$
$
0.91%
1.30%
1.17%
1.13%
0.46%
3.4x
0.60%
1.0x
0.30%
1.1x
0.45%
0.6x
$
$
1,136
762
28
—
—
1,926
440
6,649
—
43
—
7,132
$
1,675
3,921
—
—
4
5,600
$
1,704
7,843
—
—
—
9,547
1
—
—
—
1,927
5,302
7,229
$
7,132
2,847
9,979
5,600
3,726
9,326
9,547
1,009
10,556
$
$
0.27%
1.27%
1.12%
1.90%
0.17%
0.95%
0.79%
1.34%
0.32%
$
0.22%
0.37%
The following table sets forth information regarding non-performing assets.
2017
2016
December 31,
2015
(dollars in thousands)
2014
2013
Non-performing assets to total assets
0.65%
1.33%
1.31%
1.48%
16
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
SecurItIeS
The securities portfolio consists of issues of United States Treasury securities, mortgage-backed securities
issued by government sponsored entities, municipal obligations, and corporate debt. 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, 2017, 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, 2017, $281.1 million of
securities were so classified and carried at their fair value, with unrealized losses, net of tax, of $3,041,000
included in accumulated other comprehensive loss as a component of stockholders’ equity.
As of December 31, 2017, the average life of the portfolio was 5.5 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 $20.0 million, while maturities and cash flow totaled $26.9 million
and proceeds from sales were $15.6 million. The purchases were funded principally by cash flow generated from
the portfolio and excess overnight liquidity.
The carrying value of the securities portfolio at December 31 is as follows:
2017
(dollars in thousands)
2016
U.S. Treasury securities
States and political subdivisions
Corporate obligations
Mortgage-backed securities –
government sponsored entities
Equity securities – financial services
Total
Carrying
Value
1,998
120,478
9,989
$
148,656
-
$ 281,121
% of portfolio
0.7%
42.9%
3.5%
52.9%
-%
100.0%
Carrying
Value
$
$
1,997
125,101
10,112
164,930
424
302,564
% of portfolio
0.7%
41.4%
3.3%
54.5%
0.1%
100.0%
The portfolio had no adjustable-rate instruments as of December 31, 2017 and 2016. 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, 2017, 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, 2017, the
Company held 201 investment securities in a loss position which had a combined unrealized loss of $5.4 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. During 2017, the Company disposed of a small
portfolio of equity securities of other financial institutions. No impairment charges have been recognized in 2017,
2016 or 2015.
17
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
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 14 of Notes to the Consolidated Financial Statements).
Approximately $281.1 million, which represents 24.8% of total assets at December 31, 2017, 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. 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 ending December 31, 2017 and 2016.
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, 2017 and 2016 was $223,000 and $250,000, respectively.
dePoSItS
The Company, through the Community Offices of the Bank, provides a full range of deposit products to its retail
and business customers. These products include interest-bearing and non-interest bearing transaction accounts,
statement savings and money market accounts. Time deposits consist of certificates of deposit (CDs) with terms
of up to five years and include Individual Retirement Accounts. The Bank participates in the Jumbo CD ($100,000
and over) markets with local municipalities and school districts, which are typically awarded on a competitive
bid basis. The Company has no brokered deposits nor does it participate in the Certificate of Deposit Account
Registry Service (CDARS).
Total deposits as of December 31, 2017, totaled $929.4 million, increasing $4.0 million from year-end 2016.
Deposit growth included a $13.7 million increase in non-interest bearing demand balances and a $24.7 million
increase in certificates of deposit. The large increase in certificates of deposit includes deposits of local
municipalities and school districts which were held in more liquid accounts at year-end 2016. The $34.4 million
decrease in other interest-bearing deposits includes transfers to certificates of deposit and the sale of $13.7
million of deposits with a Community Office.
Time deposits of $250,000 or more, 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 $92.5
million as of December 31, 2017, compared to $64.0 million at year-end 2016. 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.
18
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT As of December 31, 2017, non-interest bearing demand deposits totaled $205.1 million compared to $191.5
million at year-end 2016. Cash management accounts in the form of securities sold under agreements to
repurchase included in short-term borrowings, totaled $24.3 million at year end 2017 compared to $32.8 million
as of December 31, 2016. These balances represent commercial and municipal customers’ funds invested in
overnight securities. The Company considers these accounts as a source of core funding.
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, 2017, 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 8% 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, 2017, the Bank had a positive 90-day interest sensitivity gap of $20.3 million or 1.8% of
total assets. A positive gap indicates that the balance sheet has a higher level of rate-sensitive assets (RSA)
than rate-sensitive liabilities (RSL) at the specific time interval. This would indicate that in an increasing rate
environment, the yield on interest-earning assets would increase faster than the cost of interest-bearing liabilities
in the 90-day time frame. 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.
19
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
The following table displays interest-sensitivity as of December 31, 2017 (dollars in thousands):
Federal funds sold and
interest-bearing deposits
Securities
Loans Receivable
Total Rate Sensitive Assets (RSA)
Non-maturity interest-bearing deposits
Time Deposits
Borrowings
Total Rate Sensitive Liabilities (RSL)
Interest sensitivity gap
Cumulative gap
RSA/RSL-cumulative
As of December 31, 2016
Interest sensitivity gap
Cumulative gap
RSA/RSL-cumulative
3 Months
or Less
3-12
Months
$
485
8,279
139,528
$ 148,292
$
—
21,899
163,270
$ 185,169
$
60,057
41,652
26,256
$ 127,965
$
59,377
144,100
16,661
$ 220,138
$
$
$
20,327
20,327
115.9%
(34,969)
(14,642)
95.8%
$
34,669
34,669
126.1%
(21,445)
13,224
103.9%
$
$
$
$
$
$
1-3 Years
—
50,859
230,022
280,881
157,589
98,806
31,411
287,806
Over
3 Years
Total
$
—
200,084
231,272
$ 431,356
$
485
281,121
764,092
$ 1,045,698
$ 126,929
35,736
4,147
$ 166,812
$ 403,952
320,294
78,475
$ 802,721
(6,925)
(21,567)
96.6%
$ 264,544
242,977
130.3%
$ 242,977
(23,293)
(10,069)
98.4%
$ 230,044
219,975
127.5%
$ 219,975
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 in 2017. 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.
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, 2017, the Company had cash and cash equivalents of $16.7 million in the form of cash, due
from banks, balances with the Federal Reserve Bank, and short-term deposits with other institutions. In addition,
the Company had total securities available for sale of $281.1 million, which could be used for liquidity needs.
This totals $297.8 million and represents 26.3% of total assets compared to $319.7 million and 28.8% of total
assets as of December 31, 2016. The Company also monitors other liquidity measures, all of which were within
the Company’s policy guidelines as of December 31, 2017. 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 under all the lines was $190.0 million, with $18.2 million outstanding at December 31, 2017
and $0 outstanding at December 31, 2016. The maximum borrowing capacity from FHLB was $369.6 million.
As of December 31, 2017, the Company had $35.9 million in term borrowings from the FHLB, compared to $32.0
million at December 31, 2016.
20
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
oFF-baLance SHeet arrangementS
The Company’s financial statements do not reflect various commitments that are made in the normal course
of business, which may involve some liquidity risk. These commitments consist mainly of unfunded loans and
letters of credit made under the same standards as on-balance sheet instruments. Unused commitments, as of
December 31, 2017 totaled $113.1 million. They consisted of $45.0 million of commitments for residential and
commercial real estate, construction and land developments loans, $25.6 million in unused home equity lines of
credit, $5.9 million in performance and standby letters of credit and $36.6 million in other unused commitments,
principally commercial lines of credit. Because these instruments have fixed maturity dates and many of them
will expire without being drawn upon, management believes they do not represent any significant liquidity risk.
Management believes that any amounts actually drawn upon can be funded in the normal course of operations.
The Company has no investment in or financial relationship with any unconsolidated entities that are reasonably
likely to have a material effect on liquidity or the availability of capital resources.
The following table presents information on known contractual obligations to make future payments
(in thousands):
contractuaL obLIgatIonS
December 31, 2017
1-3 years
Total
$ 320,294
35,945
6,928
$ 363,167
Less than 1 year
$ 185,752
874
467
$ 187,093
$
$
98,806
23,595
905
123,306
4-5 years
$
35,597
11,476
902
47,975
$
Over 5 years
139
$
—
4,654
4,793
$
Time deposits
Long-term debt
Operating leases
RESULTS OF OpERATIONS
net IntereSt Income
Net interest income is the most significant source of revenue for the Company and represented 83.5% of total
revenue for the year ended December 31, 2017. Net interest income (fte) totaled $37,090,000 for the year ended
December 31, 2017 compared to $30,339,000 for 2016, an increase of $6,751,000. The resulting fte net interest
spread and net interest margin were 3.44% and 3.56%, respectively, in 2017 compared to 3.46% and 3.60%,
respectively, in 2016.
Interest income (fte) for the year ended December 31, 2017 totaled $41,170,000 compared to $33,993,000 in
2016. The fte yield on average earning assets was 3.95%, decreasing eight basis points from the 4.03% reported
last year. The tax-equivalent yield on total loans remained stable at 4.50% in 2017, while average loans outstanding
increased $110.9 million due to growth during the year and a full year’s effect on the loans acquired from Delaware
in 2016, resulting in an increase in interest income (fte) from loans of $5.0 million. The yield on securities decreased
12 basis points in 2017 due primarily to a full year’s effect from the lower yielding portfolio acquired from
Delaware in 2016. A $91.5 million increase in average securities outstanding offset the lower yield, and interest
income (fte) from the portfolio improved $2.2 million.
Interest expense was $4,080,000 in 2017 which resulted in an average cost of interest-bearing liabilities of
0.51% compared to total interest expense of $3,654,000 in 2016 with an average cost of 0.57%. Total interest-
bearing deposits cost 0.46% in 2017 which was equal to the cost in the prior year. Non-maturity deposit rates
21
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
remained fairly stable, but time certificates of deposit repriced to current market rates upon maturity and new
growth was added, resulting in an increase in the rate paid from 0.94% in 2016 to 0.98%. Long-term borrowings
repriced downward in 2017 reflecting the impact from lower cost borrowings originated in recent years.
Net interest income represented 84.7% of total revenue for the year ended December 31, 2016. Net interest
income (fte) totaled $30,339,000 for the year ended December 31, 2016 compared to $25,882,000 for 2015, an
increase of $4,457,000. The resulting fte net interest spread and net interest margin were 3.46% and 3.60%,
respectively, in 2016 compared to 3.61% and 3.75%, respectively, in 2015.
Interest income (fte) for the year ended December 31, 2016 totaled $33,993,000 compared to $29,140,000 in
2015. The fte yield on average earning assets was 4.03%, decreasing 20 basis points from the 4.23% reported
last year. The low interest rate environment impacted the yield earned as new loan production was added at
historically low rates. This impacted loan yields which earned 4.50% in 2016 compared to 4.61% in the prior
year. The reduced yield was offset by a $96.9 million increase in average loans outstanding due primarily to
loans acquired from Delaware, and interest income (fte) from loans increased $3.8 million. The yield on
securities decreased 33 basis points in 2016 due primarily to the lower yielding portfolio acquired from
Delaware. A $55.6 million increase in average securities outstanding offset the lower yield, and interest
income (fte) from the portfolio improved $1.0 million.
Interest expense was $3,654,000 in 2016 which resulted in an average cost of interest-bearing liabilities of
0.57% compared to total interest expense of $3,258,000 in 2015 with an average cost of 0.62%. The continued
low rate environment also impacted rates paid on deposits as the Company reduced rates paid on time deposits
to market levels. Total interest-bearing deposits cost 0.46% in 2016 which was 6 basis points lower than the
0.52% cost in the prior year. Time certificates of deposit repriced to current market rates upon maturity and
new growth was added at the reduced levels. Time deposits acquired from Delaware also impacted the cost of
deposits. Long-term borrowings also repriced downward in 2016 reflecting the impact from low-cost
borrowings originated in recent years.
otHer Income
0
2
Other income totaled $6,911,000 for the year ended December 31, 2017 compared to $5,179,000 in 2016, an
increase of $1,732,000. Gains from the sales of loans and securities increased $77,000 from the prior year, while
all other items of other income increased $1,655,000, net. The increase reflects a full year effect from the
increased fees related to the Delaware acquisition.
Other income totaled $5,179,000 for the year ended December 31, 2016 compared to $4,699,000 in 2015, an
increase of $480,000. Gains from the sales of loans and securities decreased $392,000 from the prior year, while
all other items of other income increased $872,000, net. The increase reflects the increased fees related to the
Delaware acquisition.
22
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
Other Income (dollars in thousands)
For the year ended December 31
Service charges on deposit accounts
ATM Fees
Overdraft Fees
Safe deposit box rental
Loan related service fees
Debit card
Fiduciary activities
Commissions on mutual funds & annuities
Gain on sales of loans
Earnings on and proceeds from bank-owned life insurance
Other income
$
$
2017
255
362
1,639
100
445
1,186
510
146
67
1,133
720
6,563
348
Net realized gains on sales of securities
$
6,911
2016
2015
200
258
1,171
66
319
874
448
143
54
888
474
4,895
284
$
168
220
850
62
451
660
439
143
104
664
312
4,073
626
Total
otHer eXPenSeS
$
5,179
$
4,699
Other expenses totaled $24,870,000 for the year ended December 31, 2017 compared to $23,124,000 in the
prior year. The $1,746,000 increase in costs reflects a full year effect of operating twelve new Community Offices.
Salaries and benefits costs increased $1,922,000 in 2017 while occupancy and equipment costs increased $736,000.
All other operating expenses decreased $912,000, net, which includes a $484,000 increase in foreclosed real estate
costs and a $1,806,000 decrease from the merger expenses recorded in 2016. The Company’s efficiency ratio, which
measures total other expenses as a percentage of net interest income (fte) plus other income, was 56.5% in 2017
compared to 65.1% in 2016. Merger costs contributed to the higher ratio in 2016.
Other expenses totaled $23,124,000 for the year ended December 31, 2016 compared to $17,100,000 in the
prior year. The $6,024,000 increase in costs includes $1,806,000 of merger expenses plus the costs of acquiring
and operating twelve new Community Offices. Salaries and benefits costs increased $2,393,000 in 2016 while
occupancy and equipment costs increased $543,000. All other operating expenses increased $3,088,000, net,
which includes $1,806,000 of merger expenses. The Company’s efficiency ratio, which measures total other
expenses as a percentage of net interest income (fte) plus other income, was 65.1% in 2016 compared to 55.9%
in 2015. Merger costs contributed to the higher ratio in 2016.
Other Expenses (dollars in thousands)
For the year ended December 31
Salaries
Employee benefits
Occupancy
Furniture and equipment
Data processing and related operations
Federal Deposit Insurance Corporation insurance assessment
Advertising
Professional fees
Postage and telephone
Office supplies
Taxes, other than income
Foreclosed real estate
Amortization of intangible assets
Merger related
Other
Total
23
2017
8,317
4,533
2,662
699
1,353
377
268
949
664
426
661
1,164
150
-
2,647
24,870
$
$
2016
2015
$
$
7,054
3,874
2,077
548
1,337
412
283
836
566
379
731
680
122
1,806
2,419
23,124
$
$
5,752
2,783
1,660
422
943
411
240
730
436
255
711
911
105
-
1,741
17,100
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
Income taXeS
Income tax expense for the year ended December 31, 2017 totaled $6,551,000 which resulted in an effective
tax rate of 44.4% compared to $1,884,000 and 21.9% for 2016. On December 22, 2017, the President signed
the Tax Cut and Jobs Act (the “Act”) into law. Among other things, the Act reduced the corporate tax rate from
a maximum of 35% to a flat 21% rate effective January 1, 2018. Prior to December 22, 2017, the Company
had a net deferred tax asset totaling $7.6 million, based on the pre-Act federal tax rate of 35%. As a result of
the reduction in the corporate income tax rate to 21%, the Company revalued its net deferred tax asset as of
December 31, 2017, which resulted in a $3,060,000 reduction in its value. The reduction in the value of the
net deferred tax asset has been recorded as additional income tax expense in 2017. Excluding this one-time
adjustment, the effective tax rate for 2017 would have been 23.7%.
Income tax expense for the year ended December 31, 2016 totaled $1,884,000 which resulted in an effective
tax rate of 21.9% compared to $1,632,000 and 21.6% for 2015.
caPItaL and dIvIdendS
Total stockholders’ equity as of December 31, 2017, was $115.7 million, compared to $111.1 million as of
year-end 2016. The increase was due primarily to earnings retention net of a $5.4 million reduction resulting
from cash dividends declared. As of December 31, 2017 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 13.16% and a total
risk-based capital ratio of 14.11% compared to 9.16%, 13.27% and 14.12%, respectively, at December 31, 2016.
The Company’s common stock is traded on the Nasdaq Global Market under the symbol, NWFL. As of December
31, 2017, there were approximately 2,600 shareholders based on transfer agent mailings.
The following table sets forth the price range and cash dividends declared per share regarding common stock
for the periods indicated:
Year 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
Closing Price Range
High
27.93
28.34
29.52
34.91
Low
21.24
24.65
26.71
28.00
$
$
20.60
19.33
19.83
23.00
$
17.50
18.34
18.40
19.02
$
$
Cash dividends
Declared per share
0.213
0.213
0.220
0.220
0.207
0.207
0.207
0.213
The book value of the common stock was $18.61 per share as of December 31, 2017 compared to $17.43 as of
December 31, 2016. As of year-end 2017, the closing stock price was $33.00 per share, compared to $22.09 as
of December 31, 2016. All per share information has been adjusted to reflect the 50% stock dividend declared
in 2017.
24
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
non-gaaP FInancIaL meaSureS
This annual report contains or references tax-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 an assumed tax rate of 34% based on then-current federal tax
rates. We believe the presentation of interest income and net interest income on a tax-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. This annual report also references core operating results, core operating
results per diluted share, core operating results return on average assets and core operating results return on
average equity which are also a non-GAAP financial measure. Core operating results excludes the $3,060,000 of
non-recurring additional income tax expense resulting from the revaluation of our net deferred tax asset as
required by the Tax Cuts and Jobs Act. We believe this presentation provides the reader with a more concise
understanding of the impact from the required revaluation of deferred tax assets and facilitates period-to-period
comparisons. Tax-equivalent net interest income is reconciled to GAAP net interest income on page 28.
A reconcilement of core operating results is located below. Although the Company believes that these non-GAAP
financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial
measures should not be considered an alternative to GAAP measures.
The following table reconciles net income to core operating results:
(dollars in thousands)
Net income
Add: net deferred tax asset revaluation charge
Core operating results
Year ended December 31,
2017
2016
$
8,198
3,060
$ 11,258
$
$
6,711
-
6,711
The following table reconciles diluted earnings per share to core operating results per diluted share:
Year ended December 31,
Diluted earnings per share
Add: net deferred tax asset revaluation charge
Core operating results per diluted share
2017
2016
$
$
1.31
0.49
1.80
$
$
1.15
.0-
1.15
The following table reconciles return on average assets to core operationg results return on average assets:
Year ended December 31,
Return on average assets
Add: net deferred tax asset revaluation charge
Core operating results return on average assets
2017
2016
0.73%
0.29%
1.02%
0.74%
.0-
0.74%
The following table reconciles return on average equity to core operating results return on average equity:
Year ended December 31,
Return on average equity
Add: net deferred tax asset revaluation charge
Core operating results return on average equity
25
2017
2016
7.04%
3.35%
10.39%
6.17%
.0-
6.17%
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
Stock PerFormance graPH
Set forth below is a stock performance graph comparing the cumulative total shareholder return on the
Common Stock with (a) the cumulative total stockholder return on stocks included in the Nasdaq Stock Market
index and (b) the cumulative total stockholder return on stocks included in the Nasdaq Bank index, as prepared
by Zack’s Investment Research, Inc. using data from the Center for Research in Securities Prices (CRSP) at the
University of Chicago. All three investment comparisons assume the investment of $100 at the market close on
December 31, 2012 and the reinvestment of dividends paid. The graph provides comparison at December 31,
2012 and each fiscal year through December 31, 2017.
There can be no assurance that the Company’s future stock performance will be the same or similar to the
historical performance shown in the above graph. The Company neither makes nor endorses any predictions as
to stock performance.
Legend
CRSP Total Returns Index for:
Norwood Financial Corp
CRSP Nasdaq U.S. Index
Nasdaq Bank Index
12/31/12
12/31/13
12/31/14 12/31/15 12/31/16
12/31/17
$100.00
$103.50
$116.55
$120.38
$145.00
$223.87
100.00
139.38
160.72
173.11
190.07
100.00
143.13
150.40
163.81
221.79
203.16
236.30
Symbol
♦
■
▲
Notes:
A. Data complete through last fiscal year.
B. Corporate Performance Graph with peer group only performance (excludes only company).
C. Peer group indices use beginning of period market capitalization weighting.
D. Prepared by Zacks Investment Research, Inc. Used with permission. All rights reserved. Copyright 1980-2018.
E. Index Data: Calculated (or Derived) based from CRSP NASDAQ Stock Market (US Companies) and CRSP NASDAQ
Banks Index, Center for Research in Security Prices (CRSP®), Graduate School of Business, The University of Chicago. Copyright 2018.
Used with permission. All rights reserved.
26
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT norwood FInancIaL corP
Summary oF QuarterLy reSuLtS (unaudIted)
(Dollars in thousands, except per share amounts)
2017
Interest income
Interest expense
Net interest income
Provision for loan losses
Other income
Net realized gains on sales of securities
Other expense
Income before income taxes
Income tax expense
NET INCOME
Basic earnings per share
Diluted earnings per share
2016
Interest income
Interest expense
Net interest income
Provision for loan losses
Other income
Net realized gains on sales of securities
Other expense
Income before income taxes
Income tax expense
NET INCOME
Basic earnings per share
Diluted earnings per share
December 31 September 30
June 30
March 31
$
10,075
$
9,896
$
9,582
$
9,434
1,191
8,884
400
1,573
181
5,886
4,352
4,195
1,026
8,870
600
1,729
129
6,239
3,889
948
926
8,656
600
1,625
31
6,130
3,582
858
937
8,497
600
1,637
6
6,614
2,926
550
$
$
$
157
$
2,941
$
2,724
$
2,376
0.03
0.03
$
$
0.47
$
0.44
$
0.38
0.47
$
0.43
$
0.38
December 31 September 30
June 30
March 31
$
9,456
$
8,528
$
7,234
$
7,026
1,005
8,451
450
1,475
15
6,568
2,923
577
958
7,570
450
1,399
-
7,679
840
228
840
6,394
700
1,018
205
4,528
2,389
511
851
6,175
450
1,003
64
4,349
2,443
567
$
2,346
$
612
$
1,878
$
1,876
$
$
0.38
0.37
$
$
0.10
0.10
$
$
0.34
$
0.34
0.34
$
0.34
27
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
norwood FInancIaL corP conSoLIdated average baLance SHeetS wItH
reSuLtant IntereSt and rateS
(Tax-Equivalent Basis, dollars in thousands)
Year Ended December 31
2017
2016
2015
Average
Average
Average
Average
Average
Balance(2)
Interest (1)
Rate
Balance(2)
Interest (1)
Rate
Balance(2)
Interest (1)
Average
Rate
$
4,742
$
48
1.01%
ASSETS
Interest-earning assets:
Interest-bearing deposits
with banks
Securities available for sale:
Taxable
Tax-exempt
Total securities
available for sale
Loans receivable (3)(4)
Total interest-
earning assets
Non-interest earning assets:
Cash and due from banks
Allowance for loan losses
Other assets
Total non-interest
TOTAL ASSETS
earning assets
14,193
(7,416)
76,427
83,204
$ 1,125,789
180,087
119,991
3,548
4,345
300,078
7,893
737,765
33,229
1.97
3.62
2.63
4.50
1,042,585
41,170
3.95
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Interest-bearing demand
and money market
Savings
Time
Total interest-
bearing deposits
Short-term borrowings
Other borrowings
Total interest-
bearing liabilities
Non-interest
bearing liabilities:
Non-interest bearing
demand deposits
Other liabilities
Total non-interest
bearing liabilities
TOTAL LIABILITIES
Stockholders’ equity
AND STOCKHOLDERS’
$ 245,717
189,548
293,641
406
95
2,876
728,906
3,377
39,170
31,276
199
504
0.17
0.05
0.98
0.46
0.51
1.61
799,352
4,080
0.51
200,368
9,662
210,030
116,407
EQUITY
$ 1,125,789
Net Interest Income
(tax equivalent basis)
Tax-equivalent basis adjustment
Net Interest Income
Net interest margin
(tax equivalent basis)
37,090
3.44%
(2,182)
$ 34,908
3.56%
$
8,182
$
42
0.51%
$
6,392
$
16
0.25%
123,364
85,170
2,375
3,358
208,534
626,907
5,733
28,218
1.93
3.94
2.75
4.50
93,294
59,659
152,953
529,989
1,918
2,792
4,710
24,414
2.06
4.68
3.08
4.61
843,623
33,993
4.03
689,334
29,140
4.23
11,275
(6,719)
62,069
66,625
$ 910,248
$
208,373
125,904
234,026
568,303
41,593
36,509
8,638
(5,945)
44,794
47,487
$ 736,821
336
66
2,201
2,603
174
877
0.16
0.05
0.94
0.46
0.42
2.40
$
177,104
74,753
209,930
461,787
34,022
28,742
301
37
2,083
2,421
85
752
0.17
0.05
0.99
0.52
0.25
2.62
646,405
3,654
0.57
524,551
3,258
0.62
146,578
8,482
155,060
108,783
106,601
4,305
110,906
101,364
$
910,248
$
736,821
30,339
3.46%
(1,749)
$ 28,590
25,882
(1,361)
$
24,521
3.60%
3.61%
3.75%
1. Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 34%.
2. Average balances have been calculated based on daily balances.
3. 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.
28
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
rate/voLume anaLySIS
The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income
and interest expense.
(dollars in thousands)
Increase/(Decrease)
2017 compared to 2016
Variance due to
2016 compared to 2015
Variance due to
INTEREST-EARNING ASSETS:
Interest-bearing deposits
Securities available for sale:
Taxable
Tax-exempt securities
Total securities available
for sale
Loans receivable
Total interest-earning assets
Interest-bearIng lIabIlItIes:
Interest-bearing demand
and money market
Savings
Time
Total interest-bearing deposits
Short-term borrowings
Other borrowings
Total interest-bearing liabilities
$
Net interest income
(tax-equivalent basis)
Volume
Rate
Net
Volume
Rate
Net
$
(25)
$
31
$
6
1,102
1,346
2,448
5,011
7,434
50
29
563
642
(11)
(95)
536
71
(359)
(288)
-
(257)
20
-
112
132
36
(278)
(110)
1,173
987
2,160
5,011
7,177
70
29
675
774
25
(373)
426
6,898
$ (147)
$ 6,751
$
8
$
18
$
26
609
1,122
1,731
4,476
6,215
54
29
232
315
28
199
542
(152)
(556)
457
566
(708)
(672)
(1,362)
1,023
3,804
4,853
(19)
-
(114)
(133)
61
(74)
(146)
35
29
118
182
89
125
396
$ 5,673
$ (1,216)
$ 4,457
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.
29
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
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
Framework
31, 2017. In making this assessment, management used the criteria established in
Internal Control – Integrated
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, 2017, the Company’s internal
control over financial reporting, including controls over the preparation of regulatory financial statements in
Internal Control – Integrated Framework
accordance with all federal and state laws and regulations, is effective based on the criteria established in the
.
Norwood’s independent registered certified public accounting firm has audited the effectiveness of Norwood’s
internal control over financial reporting. Their report appears on page 32.
Lewis J. Critelli
President and
Chief Executive Officer
William S. Lance
Executive Vice President and
Chief Financial Officer
30
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
rePort oF IndePendent regIStered PubLIc accountIng FIrm
Opinion on the Financial Statements
To the Stockholders and the Board of Directors of Norwood Financial Corp.
We have audited the accompanying consolidated balance sheet of Norwood Financial Corp. and subsidiaries
(the “Company”) as of December 31, 2017 and 2016; the related consolidated statements of income,
comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2017; 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, 2017 and 2016, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2017, in conformity with accounting principles
generally accepted in the United States of America.
Internal Control – Integrated Framework
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based
issued by the Committee of Sponsoring
on criteria established in
Organizations of the Treadway Commission in 2013, and our report dated March 13, 2018, expressed an
unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
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. 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.
We have served as the Company’s auditor since 2009.
Cranberry Township, Pennsylvania
March 13, 2018
31
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
rePort oF IndePendent regIStered PubLIc accountIng FIrm
To the Stockholders and the Board of Directors of Norwood Financial Corp.
Opinion on Internal Control over Financial Reporting
We have audited Norwood Financial Corp. and subsidiaries’ (the “Company”) internal control over financial reporting as of
December 31, 2017, based on criteria established in
Internal
Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material
Control — Integrated Framework
respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in
issued by the Committee of
issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
Internal Control — Integrated Framework
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheet of the Company as of December 31, 2017 and 2016, and the related consolidated
statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2017, of the Company and our report dated March 13, 2018, expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Annual Report
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit. We are a public accounting firm registered with the 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’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 the company; (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 receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company’s assets that could have a material effect on the 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.
Cranberry Township, Pennsylvania
March 13, 2018
32
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT conSoLIdated baLance SHeetS
ASSETS
Cash and due from banks
Interest bearing deposits with banks
Cash and cash equivalents
Securities available for sale
Loans receivable (net of allowance for loan losses 2017: $7,634; 2016: $6,463)
Regulatory stock, at cost
Premises and equipment, net
Bank owned life insurance
Accrued interest receivable
Foreclosed real estate owned
Goodwill
Other intangibles
Deferred tax asset
Other assets
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Non-interest bearing demand
Interest-bearing demand
Money market deposit accounts
Savings
Time
Total Deposits
Short-term borrowings
Other borrowings
Accrued interest payable
Other liabilities
Total Liabilities
STOCKHOLDERS’ EQUITY
Common stock, $.10 par value, authorized 10,000,000 shares,
issued: 2017: 6,256,063 shares, 2016: 4,164,723 shares
Surplus
Retained earnings
Treasury stock at cost: 2017: 2,608 shares, 2016: 4,509 shares
Accumulated other comprehensive loss
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See notes to consolidated financial statements
33
December 31,
2017
2016
(In Thousands, Except
Share and Per Share Data)
$
16,212
485
16,697
281,121
756,458
3,505
13,864
37,060
3,716
1,661
11,331
462
4,781
2,260
$ 1,132,916
$ 205,138
91,479
146,362
166,111
320,294
929,384
42,530
35,945
1,434
7,884
1,017,177
$
14,900
2,274
17,174
302,564
707,426
2,119
13,531
36,133
3,643
5,302
11,331
612
8,989
2,359
$ 1,111,183
$ 191,445
93,485
153,020
191,878
295,557
925,385
32,811
32,001
1,069
8,838
1,000,104
626
47,431
70,426
(77)
(2,667)
115,739
416
47,682
67,225
(125)
(4,119)
$ 1,132,916
111,079
$ 1,111,183
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
conSoLIdated StatementS oF Income
INTEREST INCOME
Loans receivable, including fees
Securities
Taxable
Tax exempt
Total Interest Income
Other
INTEREST EXPENSE
Deposits
Short-term borrowings
Other borrowings
Total Interest Expens
Net Interest Income
e
PROVISION FOR LOAN LOSSES
Net Interest Income After Provision for Loan Losses
OTHER INCOME
Service charges and fees
Income from fiduciary activities
Net realized gains on sales of securities
Net gain on sale of loans
Earnings and proceeds on life insurance policies
Other
Total Other Income
OTHER EXPENSES
Salaries and employee benefits
Occupancy
Furniture and equipment
Data processing and related operations
Federal Deposit Insurance Corporation insurance assessment
Advertising
Professional fees
Postage and telephone
Taxes, other than income
Foreclosed real estate
Amortization of intangible assets
Merger related
Other
Total Other Expenses
Income before Income Taxes
INCOME TAX EXPENSE
Net income
EARNINGS PER SHARE
BASIC
DILUTED
See notes to consolidated financial statements
34
2017
Years Ended December 31,
2015
2016
(In Thousands, Except per Share Data)
$
32,524
3,548
2,868
48
38,988
3,377
199
504
4,080
34,908
2,200
32,708
4,079
510
348
67
1,133
774
6,911
12,850
2,662
699
1,353
377
268
949
664
661
1,164
150
-
3,073
24,870
14,749
6,551
8,198
1.32
1.31
$
$
$
$
27,611
$
24,002
2,375
2,216
42
1,918
1,843
16
32,244
27,779
2,603
130
921
2,421
85
752
3,654
3,258
28,590
24,521
2,050
4,580
26,540
19,941
2,951
449
284
54
888
553
2,440
439
626
104
665
425
5,179
4,699
10,928
2,077
548
1,337
412
283
836
566
731
680
122
1,806
2,798
23,124
8,535
1,660
422
943
411
240
730
436
711
911
105
-
1,996
17,100
8,595
7,540
1,884
6,711
1.16
1.15
1,632
5,908
1.07
1.07
$
$
$
$
$
$
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
conSoLIdated StatementS oF comPreHenSIve Income
(In thousands)
Years Ended December 31,
2017
2016
2015
NET INCOME
$
8,198
Other comprehensive income (loss):
Unrealized gain on pension liability
Tax Effect
Investment securities available for sale:
Unrealized holding gains (losses)
Tax Effect
Reclassification of gains from sale of securities
Net of tax amount
Tax Effect
$
(17)
6
3,224
(1,097)
(348)
118
1,886
COMPREHENSIVE INCOME
$
10,084
6,711
$
5,908
490
(172)
(7,180)
2,440
(284)
99
(4,607)
-
-
656
(217)
(626)
213
26
$
2,104
$
5,934
See notes to consolidated financial statements
35
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
conSoLIdated StatementS oF StockHoLderS’ eQuIty
Years Ended December 31, 2017, 2016 and 2015
Accumulated
Other
Common Stock
Shares
Amount
Surplus
Retained Treasury Stock Comprehensive
Income (Loss)
Earnings
Amount
Shares
Total
(Dollars in Thousands, Except Per Share Data)
3,718,018
-
-
$
372
-
-
$
35,206
-
-
$
64,078
5,908
-
40,576
-
-
$
(1,077)
-
-
$
462
-
26
$
99,041
5,908
26
BALANCE - DECEMBER 31, 2014
Net Income
Other comprehensive income
Cash dividends declared
($0.83 per share)
Acquisition of treasury stock
Stock options exercised
Tax benefit on stock options exercised
Sale of treasury stock for ESOP
Compensation expense related to
stock options
Restricted stock awards
BALANCE - DECEMBER 31, 2015
Net Income
Other comprehensive loss
Cash dividends declared
($0.83 per share)
Acquisition of treasury stock
Stock options exercised
Tax benefit on stock options exercised
Sale of treasury stock for ESOP
Compensation expense related to
stock options
Restricted stock awards
Delaware Bancshares acquisition
BALANCE - DECEMBER 31, 2016
Net Income
Other comprehensive income
Reclassification of certain income
tax effects from accumulated other
comprehensive income
Cash dividends declared
($0.87 per share)
Acquisition of treasury stock
Stock options exercised
Sale of treasury stock for ESOP
Compensation expense related to
stock options
Restricted stock awards
50% stock dividend
BALANCE - DECEMBER 31, 2017
Cash-in-lieu stock dividend adjustment
-
(127)
450
-
136
-
(8)
(626)
-
-
-
(447)
851
-
110
-
(13)
-
-
(125)
-
-
-
-
-
-
-
-
(4,574)
(127)
441
16
146
66
55
488
-
(4,607)
100,998
6,711
(4,607)
-
-
-
-
-
-
-
-
(4,898)
(447)
843
38
131
71
89
12,150
-
(4,119)
1,886
8,198
111,079
1,886
-
-
-
-
-
-
6,650
-
-
-
-
-
-
1
-
-
(9)
16
10
66
62
(4,574)
-
-
-
-
-
4,374
(16,859)
-
(5,060)
-
-
-
280
3,724,668
-
-
373
-
-
35,351
-
-
65,412
6,711
-
23,311
-
-
-
-
(8)
38
21
(4,898)
-
-
-
-
-
15,538
(30,823)
-
(3,967)
71
102
12,107
-
47,682
-
-
-
-
8,198
67,225
-
-
450
-
-
4,509
-
-
-
-
-
-
-
8,450
431,605
-
4,164,723
-
-
-
-
-
-
-
-
-
-
-
-
-
43
-
416
-
-
-
-
-
-
-
434
-
-
(434)
-
-
-
(291)
14
(5,412)
-
-
-
-
42,257
(44,219)
(3,847)
-
(1,587)
1,522
113
-
-
-
-
(5,412)
(1,587)
1,231
127
-
9,400
2,082,362
(422)
6,256,063
-
1
209
-
626
93
142
(209)
-
$ 47,431
-
-
-
(19)
$ 70,426
$
-
-
3,908
-
2,608
$
-
-
-
-
(77)
-
-
-
-
$ (2,667)
93
143
-
(19)
$ 115,739
See notes to consolidated financial statements
36
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
conSoLIdated StatementS oF caSH FLowS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses
Depreciation
Amortization of intangible assets
Deferred income taxes
Revaluation of deferred tax assets, net
Net amortization of securities premiums and discounts
Net realized gains on sales of securities
Gain on sales of deposits
Earnings and proceeds on life insurance policies
Loss on sales of fixed assets and foreclosed real estate owned
Net gain on sale of loans
Mortgage loans originated for sale
Proceeds from sale of loans originated for sale
Compensation expense related to stock options
Compensation expense related to restricted stock
(Increase) decrease in accrued interest receivable
Increase (decrease) in accrued interest payable
Net Cash Provided by Operating Activities
Other, net
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales
Proceeds from maturities and principal reductions on
mortgage-backed securities
Purchases
Purchase of regulatory stock
Redemption of regulatory stock
Net increase in loans
Proceeds from bank-owned life insurance
Purchase of bank-owned life insurance
Purchase of premises and equipment
Proceeds from sales of foreclosed real estate owned
Proceeds from sales of bank premises and fixed assets
Acquisition, net of cash and cash equivalents acquired
Net Cash (Used in) Provided by Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits
Deposits sold
Net increase (decrease) in short-term borrowings
Repayments of other borrowings
Proceeds from other borrowings
Stock options exercised
ESOP purchase of shares from treasury stock
Purchase of treasury stock
Cash dividends paid
Net Cash Provided by (Used in) Financing Activities
Years Ended December 31,
2016
2015
2017
(In Thousands)
$
8,198
$
6,711
$
5,908
2,200
922
150
(331)
3,060
2,115
(348)
(209)
(1,133)
774
(67)
-
-
93
142
(73)
365
193
16,051
15,612
26,893
(19,955)
(5,842)
4,456
(51,980)
-
-
(1,633)
3,341
515
-
(28,593)
17,867
(13,659)
9,719
(24,056)
28,000
1,040
127
(1,587)
(5,386)
12,065
2,050
726
122
746
-
1,648
(284)
-
(888)
11
(54)
(1,685)
1,739
71
89
346
17
11
4,580
551
105
(387)
-
936
(626)
-
(665)
427
(113)
(4,297)
4,410
66
55
(24)
(9)
(419)
11,376
10,498
110,748
44,976
26,182
(100,982)
(2,883)
4,455
(43,468)
205
(2,000)
(511)
685
-
11,112
22,853
(50,565)
(4,095)
2,397
(65,830)
-
-
(290)
4,310
-
-
3,543
(46,244)
47,213
-
(21,800)
(28,981)
-
843
131
(447)
(4,714)
(9,035)
-
27,540
(10,074)
29,000
441
146
(127)
(4,527)
Net (Decrease) Increase in Cash and Cash Equivalents
(477)
(7,755)
33,364
CASH AND CASH EQUIVALENTS - BEGINNING
CASH AND CASH EQUIVALENTS - ENDING
See notes to consolidated financial statements
17,174
16,697
$
7,164
(2,382)
10,010
17,174
12,376
10,010
$
$
37
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
conSoLIdated StatementS oF caSH FLowS (contInued)
Years Ended December 31,
2016
2015
2017
(In Thousands)
$
$
$
$
3,715
3,040
750
1,375
$
$
$
$
3,542
1,535
3,246
1,331
$
$
$
$
3,267
2,315
3,880
1,147
$ 208,488
279
116,674
7,292
1,626
14,762
449
3,034
3,281
1,616
$
357,501
$
71,342
255,921
21,232
95
7,873
356,463
1,038
$
14,977
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid
Income taxes paid, net of refunds
Supplemental Schedule of Noncash Investing Activities
Transfers of loans to foreclosed real estate owned and repossession
of other assets
Dividends payable
Merger with Delaware Bancshares, Inc.
Noncash assets acquired:
Securities available-for-sale
Regulatory stock
Loans
Premises and equipment, net
Accrued interest receivable
Bank-owned life insurance
Core deposit intangible
Deferred tax assets
Other assets
Goodwill
Liabilities assumed:
Time deposits
Deposits other than time deposits
Borrowings
Accrued interest payable
Other liabilities
Net Noncash Assets Acquired
Cash Acquired
See notes to consolidated financial statements
38
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
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 located 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.
Change in Accounting Principle
Income Statement-
Reporting Comprehensive Income (Topic 220)
On February 14, 2018, the Financial Accounting Standards Board finalized ASU 2018-02 -
. This accounting standard allows companies to reclassify the
"stranded" tax effect in accumulated other comprehensive income that resulted from the U.S. federal government
enacted tax bill, H.R.1, an Act to Provide Reconciliation Pursuant to Titles II and V of the Concurrent Resolution
on the Budget for Fiscal Year 2018 (Tax Cuts and Jobs Act), which requires deferred tax liabilities and assets to be
adjusted for the effect of a change in tax laws.
The Company has elected to early-adopt this accounting standard, which provides a benefit to the financial
statements by more accurately aligning the impacts of the items carried in accumulated other comprehensive
income with the associate tax effect. The adoption resulted in a one-time cumulative effect adjustment of
$434,000 between Retained Earnings and Accumulated Other Comprehensive Income on the Consolidated
Balance Sheet. The adjustment had no impact on Net Income or any prior periods presented.
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., Norwood
Settlement Services, LLC and WTRO Properties. In June 2017, the Bank adopted a plan of dissolution for
Norwood Settlement Services, LLC. 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 Southern Tier of New York. 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.
39
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT note 2 - Summary oF SIgnIFIcant accountIng PoLIcIeS (contInued)
Concentrations of Credit Risk
The Bank operates primarily in Wayne, Pike, Lackawanna and Monroe Counties, Pennsylvania and Delaware
and Sullivan 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 held to maturity and available for sale securities below their cost that are deemed
to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary
impairment losses, 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, 2017.
40
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT note 2 - Summary oF SIgnIFIcant accountIng PoLIcIeS (contInued)
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.
41
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT note 2 - Summary oF SIgnIFIcant accountIng PoLIcIeS (contInued)
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, 2017 and 2016, respectively, were not impaired. Total servicing assets included in other assets
as of December 31, 2017 and 2016, were $200,000 and $232,000, 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.
42
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 2 - Summary oF SIgnIFIcant accountIng PoLIcIeS (contInued)
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
Furniture and equipment
Transfers of Financial Assets
10 - 40
3 - 10
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 two acquisitions the Company recorded goodwill in the amount of $11.3 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, 2017, 2016
and 2015.
Other Intangible Assets
At December 31, 2017, the Company had other intangible assets of $462,000 which is net of accumulated
amortization of $883,000. These intangible assets will continue to be amortized using the sum-of-the-years digits
method of amortization over ten years. At December 31, 2016, the Company had other intangible assets of $612,000
which was net of accumulated amortization of $732,000. Amortization expense related to other intangible assets was
$150,000, $122,000 and $105,000 for the years ended December 31, 2017, 2016 and 2015, respectively.
43
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 2 - Summary oF SIgnIFIcant accountIng PoLIcIeS (contInued)
As of December 31, 2017, the estimated future amortization expense for the core deposit intangible is as
follows (in thousands):
Income Taxes
2018
2019
2020
2021
2022
Thereafter
$
$
126
101
77
52
38
68
462
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. On December 22, 2017, the President signed the Tax Cut and
Jobs Act (the “Act”) into law. Among other things, the Act reduced the corporate tax rate from a maximum of 35%
to a flat 21% rate effective January 1, 2018. As a result of the reduction in the corporate income tax rate to 21%,
the Company revalued its net deferred tax asset as of December 31, 2017, which resulted in a $3,060,000
reduction in its value. The reduction in the value of the net deferred tax asset has been recorded as additional
income tax expense in the fourth quarter of 2017.
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, 2017 or 2016 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
The Company’s contributions are expensed as the cost is incurred.
has a defined contributory profit-sharing plan which includes provisions of a 401(k) plan.
44
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 2 - Summary oF SIgnIFIcant accountIng PoLIcIeS (contInued)
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.
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.
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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 Standards
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09,
(a new revenue recognition
standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. In addition, this Update specifies the accounting for certain costs to obtain
or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is
effective for annual reporting periods beginning after December 15, 2016, including interim periods within that
reporting period. Since the guidance scopes out revenue associated with financial instruments, including loan
receivables and investment securities, we do not expect the adoption of the new standard, or any of the
amendments, to result in a material change from our current accounting for revenue because the majority of the
Company’s revenue is not within the scope of Topic 606. However, we do expect that the standard will result in
new disclosure requirements, which are currently being evaluated.
Revenue from Contracts with Customers
Topic 606
In August 2015, the FASB issued ASU 2015-14,
(
).
The amendments in this Update defer the effective date of ASU 2014-09 for all entities by one year. Public
business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance
in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting
periods within that reporting period. All other entities should apply the guidance in ASU 2014-09 to annual
reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting
periods beginning after December 15, 2019. The Company is evaluating the effect of adopting this new
accounting Update.
Financial Instruments – Overall (Subtopic 825-10): Recognition
and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued ASU 2016-01,
. This Update applies to all entities that hold
financial assets or owe financial liabilities and is intended to provide more useful information on the recognition,
measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a)
requires equity investments (except those accounted for under the equity method of accounting or those that
result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net
income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values
by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair
value of financial instruments measured at amortized cost for entities that are not public business entities; (d)
eliminates the requirement for public business entities to disclose the method(s) and significant assumptions
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used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized
cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the
fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial assets
and financial liabilities by measurement category and form of financial asset (that is, securities or loans and
receivables) on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies that
an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale
securities in combination with the entity’s other deferred tax assets. For public business entities, the amendments
in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within
those fiscal years. For all other entities, including not-for-profit entities and employee benefit plans within the
scope of Topics 960 through 965 on plan accounting, the amendments in this Update are effective for fiscal years
beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.
All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal
years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is
currently evaluating the impact the adoption of the standard will have on the Company’s financial position or
results of operations
Leases (Topic 842)
In February 2016, the FASB issued ASU 2016-02,
. The standard requires lessees to
recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the
statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset
representing its right to use the underlying asset for the lease term. A short-term lease is defined as one in which
(a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the
lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments
over the lease term on a straight-line basis. For public business entities, the amendments in this Update are
effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other
entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for
interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at
the beginning of the earliest period presented using a modified retrospective approach with earlier application
permitted as of the beginning of an interim or annual reporting period. The Company is currently assessing the
practical expedients it may elect at adoption, but does not anticipate the amendments will have a significant
impact on the financial statements. Based on the Company’s preliminary analysis of its current portfolio, the
impact to the Company’s balance sheet is estimated to result in less than a 1 percent increase in assets and
liabilities. The Company also anticipates additional disclosures to be provided at adoption.
Liabilities – Extinguishments of Liabilities (Subtopic 405-20)
In March 2016, the FASB issued ASU 2016-04,
.
The standard provides that liabilities related to the sale of prepaid stored-value products within the scope of this
Update are financial liabilities. The amendments in the Update provide a narrow-scope exception to the guidance
in Subtopic 405-20 to require that breakage for those liabilities be accounted for consistent with the breakage
guidance in Topic 606. The amendments in this Update are effective for public business entities, certain not-for-
profit entities, and certain employee benefit plans for financial statements issued for fiscal years beginning after
December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are
effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods
within fiscal years beginning after December 15, 2019. Earlier application is permitted, including adoption in an
interim period. This Update is not expected to have a significant impact on the Company’s financial statements.
Revenue from Contracts with Customers (Topic 606) .
In March 2016, the FASB issued ASU 2016-08,
The amendments in this Update affect entities with transactions included within the scope of Topic 606, which
includes entities that enter into contracts with customers to transfer goods or services (that are an output of the
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The amendments in this Update do not change the
entity’s ordinary activities) in exchange for consideration.
core principle of the guidance in Topic 606; they simply clarify the implementation guidance on principal versus
agent considerations. The amendments in this Update are intended to improve the operability and
Revenue from Contracts with Customers (Topic 606),
understandability of the implementation guidance on principal versus agent considerations. The amendments in
this Update affect the guidance in ASU 2014-09,
which is not
yet effective. The effective date and transition requirements for the amendments in this Update are the same as
Customers (Topic 606): Deferral of the Effective Date,
the effective date and transition requirements of Update 2014-09. ASU 2015-14,
Revenue from Contracts with
The Company is currently evaluating the impact the adoption of the standard will have on the Company’s
financial position or results of operations.
Revenue from Contracts with Customers (Topic 606) .
defers the effective date of Update 2014-09 by one year.
In April 2016, the FASB issued ASU 2016-10,
The amendments in this Update affect entities with transactions included within the scope of Topic 606,
which includes entities that enter into contracts with customers to transfer goods or services in exchange for
consideration. The amendments in this Update do not change the core principle for revenue recognition in Topic
606. Instead, the amendments provide (1) more detailed guidance in a few areas and (2) additional
implementation guidance and examples based on feedback the FASB received from its stakeholders.
The amendments are expected to reduce the degree of judgment necessary to comply with Topic 606, which the
FASB expects will reduce the potential for diversity arising in practice and reduce the cost and complexity of
Contracts with Customers (Topic 606)
applying the guidance. The amendments in this Update affect the guidance in ASU 2014-09,
Revenue from
Revenue from Contracts with Customers (Topic 606)
the amendments in this Update are the same as the effective date and transition requirements in Topic 606 (and
Deferral of the Effective Date
:
any other Topic amended by Update 2014-09). ASU 2015-14,
, defers the effective date of Update 2014-09 by one year. The Company is currently
, which is not yet effective. The effective date and transition requirements for
evaluating the impact the adoption of the standard will have on the Company’s financial position or results
of operations.
Revenue from Contracts with Customers (Topic 606)
In May 2016, the FASB issued ASU 2016-12,
, which among
other things clarifies the objective of the collectability criterion in Topic 606, as well as certain narrow aspects of
Customers (Topic 606)
Topic 606. The amendments in this Update affect the guidance in ASU 2014-09,
Revenue from Contracts with
, which is not yet effective. The effective date and transition requirements for the
Revenue from Contracts with Customers (Topic 606):
amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any
Deferral of the Effective Date
other Topic amended by Update 2014-09). ASU 2015-14,
to have a significant impact on the Company’s financial statements
Financial Instruments - Credit Losses: Measurement of Credit Losses
, defers the effective date of Update 2014-09 by one year. This Update is not expected
on Financial Instruments
In June 2016, the FASB issued ASU 2016-13,
, which changes the impairment model for most financial assets. This Update is intended
to improve financial reporting by requiring timelier recording of credit losses on loans and other financial
instruments held by financial institutions and other organizations. The underlying premise of the Update is that
financial assets measured at amortized cost should be presented at the net amount expected to be collected,
through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit
losses should reflect management’s current estimate of credit losses that are expected to occur over the
remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for
newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that
have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after
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December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December
15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect
adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is
adopted. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of
the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the
magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated
financial statements.
Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU 2016-15,
, which addresses eight specific cash flow issues with the objective of reducing
diversity in practice. Among these include recognizing cash payments for debt prepayment or debt extinguishment
as cash outflows for financing activities; cash proceeds received from the settlement of insurance claims should
be classified on the basis of the related insurance coverage; and cash proceeds received from the settlement of
bank-owned life insurance policies should be classified as cash inflows from investing activities while the cash
payments for premiums on bank-owned policies may be classified as cash outflows for investing activities,
operating activities, or a combination of investing and operating activities. The amendments in this Update are
effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods
within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after
December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption
is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period,
any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity
that elects early adoption must adopt all of the amendments in the same period. The amendments in this Update
should be applied using a retrospective transition method to each period presented. If it is impracticable to apply
the amendments retrospectively for some of the issues, the amendments for those issues would be applied
prospectively as of the earliest date practicable. The Company is currently evaluating the impact the adoption of
the standard will have on the Company’s statement of cash flows.
Income Taxes (Topic 740)
In October 2016, the FASB issued ASU 2016-16,
, which requires recognition of current
and deferred income taxes resulting from an intra-entity transfer of any asset (excluding inventory) when the
transfer occurs. Consequently, the amendments in this Update eliminate the exception for an intra-entity transfer
of an asset other than inventory. The amendments in this Update are effective for public business entities for
fiscal years beginning after December 15, 2017, including interim periods within those annual reporting periods.
For all other entities, the amendments are effective for annual reporting periods beginning after December 15,
2018, and interim reporting periods within annual periods beginning after December 15, 2019. Early adoption is
permitted for all entities as of the beginning of an annual reporting period for which financial statements
(interim or annual) have not been issued or made available for issuance. That is, earlier adoption should be in the
first interim period if an entity issues interim financial statements. The amendments in this Update should be
applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as
of the beginning of the period of adoption. This Update is not expected to have a significant impact on the
Company’s financial statements.
Statement of Cash Flows (Topic 230)
In October 2016, the FASB issued ASU 2016-18,
, which requires that a
statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts
generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as
restricted cash and restricted cash equivalents should be included with cash and cash equivalents when
reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.
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The amendments in this Update are effective for public business entities for fiscal years beginning after
December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are
effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning
after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early
adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal
year that includes that interim period. The amendments in this Update should be applied using a retrospective
transition method to each period presented. The Company is currently evaluating the impact the adoption of the
standard will have on the Company’s statement of cash flows.
Revenue from Contracts with Customers
Technical Corrections and Improvements to Topic 606,
In December 2016, the FASB issued ASU 2016-20,
. This Update, among others things, clarifies that guarantee fees within
the scope of Topic 460, Guarantees, (other than product or service warranties) are not within the scope of Topic
606. The effective date and transition requirements for ASU 2016-20 are the same as the effective date and
transition requirements for the new revenue recognition guidance. For public entities with a calendar year-end,
the new guidance is effective in the quarter and year beginning January 1, 2018. For all other entities with a
calendar year-end, the new guidance is effective in the year ending December 31, 2019, and interim periods in
2020. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s
financial position or results of operations.
Business Combinations (Topic 805), Clarifying the Definition of a
Business
In January 2017, the FASB issued ASU 2017-01,
, which provides a more robust framework to use in determining when a set of assets and activities
(collectively referred to as a “set”) is a business. The screen requires that when substantially all of the fair value
of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar
identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be
further evaluated. Public business entities should apply the amendments in this Update to annual periods
beginning after December 15, 2017, including interim periods within those periods. All other entities should
apply the amendments to annual periods beginning after December 15, 2018, and interim periods within annual
periods beginning after December 15, 2019. The amendments in this Update should be applied prospectively
on or after the effective date. This Update is not expected to have a significant impact on the Company’s
financial statements.
Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04,
. 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 units fair value; however, the loss recognized should not exceed the total amount of
goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange
Commission (SEC) filer should adopt the amendments in this Update for its annual or any interim goodwill
impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is not an SEC
filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal
years beginning after December 15, 2020. All other entities, including not-for-profit entities that are adopting the
amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years
beginning after December 15, 2021. This Update is not expected to have a significant impact on the Company’s
financial statements.
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Other Income—Gains and Losses from the Derecognition of
Nonfinancial Assets (Subtopic 610-20) .
In February 2017, the FASB issued ASU 2017-05,
The amendments in this Update clarify what constitutes a financial asset
within the scope of Subtopic 610-20. The amendments also clarify that entities should identify each distinct
nonfinancial asset or in substance nonfinancial asset that is promised to a counterparty and to derecognize each
asset when the counterparty obtains control. There is also additional guidance provided for partial sales of a
nonfinancial asset and when derecognition, and the related gain or loss, should be recognized. The amendments
in this Update are effective at the same time as the amendments in Update 2014-09. Therefore, for public entities,
the amendments are effective for annual reporting periods beginning after December 15, 2017, including interim
reporting periods within that reporting period. For all other entities, the amendments in this Update are effective
for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual
reporting periods beginning after December 15, 2019. This Update is not expected to have a significant impact
on the Company’s financial statements.
Plan Accounting: Defined Benefit Pension Plans (Topic 960),
Defined Contribution Pension Plans (Topic 962), and Health and Welfare Benefit Plans (Topic 965)
In February 2017, the FASB issued ASU 2017-06,
. This Update
relates primarily to the reporting by an employee benefit plan for its interest in a master trust, which is a trust
for which a regulated financial institution serves as a trustee or custodian and in which assets of more than one
plan sponsored by a single employer or by a group of employers under common control are held. For each
master trust in which a plan holds an interest, the amendments in this Update require a plan’s interest in that
master trust and any change in that interest to be presented in separate line items in the statement of net assets
available for benefits and in the statement of changes in net assets available for benefits, respectively.
The amendments in this Update remove the requirement to disclose the percentage interest in the master trust
for plans with divided interests and require that all plans disclose the dollar amount of their interest in each of
those general types of investments, which supplements the existing requirement to disclose the master trusts
balances in each general type of investments. There are also increased disclosure requirements for investments
in master trusts. The amendments in this Update are effective for fiscal years beginning after December 15,
2018. Early adoption is permitted. This Update is not expected to have a significant impact on the Company’s
financial statements.
Compensation—Retirement Benefits (Topic 715)
In March 2017, the FASB issued ASU 2017-07,
. The amendments
in this Update require that an employer report the service cost component in the same line item or items as other
compensation costs arising from services rendered by the pertinent employees during the period. The other
components of net benefit cost as defined in paragraphs 715-30-35-4 and 715-60-35-9 are required to be presented
in the income statement separately from the service cost component and outside a subtotal of income from
operations, if one is presented. If a separate line item or items are used to present the other components of net
benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used,
the line item or items used in the income statement to present the other components of net benefit cost must be
disclosed. The amendments in this Update are effective for public business entities for annual periods beginning
after December 15, 2017, including interim periods within those annual periods. For other entities, the amendments
in this Update are effective for annual periods beginning after December 15, 2018, and interim periods within annual
periods beginning after December 15, 2019. The amendments in this Update should be applied retrospectively for
the presentation of the service cost component and the other components of net periodic pension cost and net
periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date,
for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement
benefit in assets. This Update is not expected to have a significant impact on the Company’s financial statements.
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Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20)
In March 2017, the FASB issued ASU 2017-08,
.
The amendments in this Update shorten the amortization period for certain callable debt securities held at a
premium. Specifically, the amendments require the premium to be amortized to the earliest call date.
The amendments do not require an accounting change for securities held at a discount; the discount continues to
be amortized to maturity. For public business entities, the amendments in this Update are effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities,
the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within
fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim
period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of
the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this
Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as
of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide
disclosures about a change in accounting principle. The Company is currently evaluating the impact the adoption
of the standard will have on the Company’s financial position or results of operations.
Compensation – Stock Compensation (Topic 718)
In May 2017, the FASB issued ASU 2017-09,
, which affects any
entity that changes the terms or conditions of a share-based payment award. This Update amends the
definition of modification by qualifying that modification accounting does not apply to changes to outstanding
share-based payment awards that do not affect the total fair value, vesting requirements, or equity/liability
classification of the awards. The amendments in this Update are effective for all entities for annual periods, and
interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted,
including adoption in any interim period, for (1) public business entities for reporting periods for which financial
statements have not yet been issued and (2) all other entities for reporting periods for which financial statements
have not yet been made available for issuance. The amendments in this Update should be applied prospectively to
an award modified on or after the adoption date. This Update is not expected to have a significant impact on the
Company’s financial statements.
Service Concession Arrangements (Topic 853)
In May 2017, the FASB issued ASU 2017-10,
, which applies to
the accounting by operating entities for service concession arrangements within the scope of Topic 853. The
amendments in this Update clarify that the grantor (government), rather than the third-party drivers, is the
customer of the operation services in all cases for service concession arrangements within the scope of Topic
853. For an entity that has not adopted Topic 606 before the issuance of this Update, the effective date and
transition requirements for the amendments in this Update generally are the same as the effective date and
with Customers (Topic 606))
transition requirements for Topic 606 (and any other Topic amended by ASU 2014-09,
Effective Date
Revenue from Contracts
Revenue from Contracts with Customers (Topic 606): Deferral of the
. ASU 2015-14,
, deferred the effective date of Update 2014-09 by one year. This Update is not expected to have
a significant impact on the Company’s financial statements.
Earnings Per Share (Topic 260), Distinguishing Liabilities from
Equity (Topic 480), and Derivative and Hedging (Topic 815)
In July 2017, the FASB issued ASU 2017-11,
. The amendments in Part I of this Update change the
classification analysis of certain equity-linked financial instruments (or embedded features) with down-round
features. When determining whether certain financial instruments should be classified as liabilities or equity
instruments, a down-round feature no longer precludes equity classification when assessing whether the instrument
is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-
classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion
option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a
down-round feature. For freestanding equity classified financial instruments, the amendments require entities
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Debt—Debt with Conversion and Other Options
), including related EPS guidance (in Topic 260). The
that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down-round
feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common
shareholders in basic EPS. Convertible instruments with embedded conversion options that have down- round
features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic
470-20,
amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that
now are presented as pending content in the Accounting Standards Codification, to a scope exception. Those
amendments do not have an accounting effect. For public business entities, the amendments in Part I of this
Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15,
2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after
December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is
permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an
interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim
period. The amendments in Part I of this Update should be applied either retrospectively to outstanding financial
instruments with a down-round feature by means of a cumulative-effect adjustment to the statement of financial
position as of the beginning of the first fiscal year and interim period(s) in which the pending content that links
to this paragraph is effective or retrospectively to outstanding financial instruments with a down-round feature
for each prior reporting period presented in accordance with the guidance on accounting changes in paragraphs
250-10-45-5 through 45-10. The amendments in Part II of this Update do not require any transition guidance
because those amendments do not have an accounting effect. This Update is not expected to have a significant
impact on the Company’s financial statements.
Derivatives and Hedging (Topic 850)
In August 2017, the FASB issued ASU 2017-12,
, the objective of which is
to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s
risk management activities in its financial statements. In addition, the amendments in this Update make certain
targeted improvements to simplify the application and disclosure of the hedge accounting guidance in current
general accepted accounting principles. For public business entities, the amendments in this Update are effective
for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other
entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods
beginning after December 15, 2020. Early application is permitted in any period after issuance. For cash flow
and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment
related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income
with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal
year that an entity adopts the amendments in this Update. The amended presentation and disclosure guidance
is required only prospectively. This Update is not expected to have a significant impact on the Company’s
financial statements.
Leases (Topic 842)
In January 2018, the FASB issued ASU 2018-01,
, which provides an optional transition
practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously
accounted for as leases under the current lease guidance in Topic 840. An entity that elects this practical
expedient should evaluate new or modified land easements under Topic 842 beginning at the date the entity
adopts Topic 842; otherwise, an entity should evaluate all existing or expired land easements in connection with
the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease.
The effective date and transition requirements for the amendments are the same as the effective date and
transition requirements in ASU 2016-02. This Update is not expected to have a significant impact on the
Company’s financial statements.
53
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 3 - SecurItIeS
The amortized cost, gross unrealized gains and losses, and fair value of securities were as follows:
December 31, 2017
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Fair
Value
Amortized
Cost
AVAILABLE FOR SALE:
U.S. Treasury securities
States and political subdivisions
Corporate obligations
Mortgage-backed securities-
government sponsored entities
Total debt securities
AVAILABLE FOR SALE:
U.S. Treasury securities
States and political subdivisions
Corporate obligations
Mortgage-backed securities-
government sponsored entities
Total debt securities
Equity securities-financial services
(In Thousands)
$
2,001
$
-
$
(3) $
1,998
120,000
10,068
1,535
16
(1,057)
120,478
(95)
9,989
152,901
17
(4,262)
148,656
$ 284,970
$
1,568
$
(5,417) $ 281,121
Amortized
Cost
December 31, 2016
Gross
Gross
Unrealized
Unrealized
Losses
Gains
(In Thousands)
Fair
Value
$
2,005
$
-
$
(8) $
1,997
127,585
10,255
169,124
308,969
320
884
37
26
947
104
(3,368)
125,101
(180)
10,112
(4,220)
(7,776)
-
164,930
302,140
424
$ 309,289
$
1,051
$
(7,776) $
302,564
54
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 3 - SecurItIeS (contInued)
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:
December 31, 2017
U.S. Treasury securities
States and political subdivisions
Corporate obligations
Mortgage-backed securities-
government sponsored entities
Less than 12 Months
12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$
-
17,310
-
22,250
39,560
$
$
$
(In Thousands)
-
(228)
-
$
1,998
44,948
6,859
$
(3)
(829)
(95)
$
1,998
62,258
6,859
$
(3)
(1,057)
(95)
(320)
125,846
(548) $ 179,651
(3,942)
(4,869)
148,096
$ 219,211
(4,262)
$ (5,417)
$
Less than 12 Months
Unrealized
Fair
Losses
Value
December 31, 2016
12 Months or More
Unrealized
Losses
Fair
Value
(In Thousands)
Total
Fair
Value
Unrealized
Losses
U.S. Treasury securities
States and political subdivisions
Corporate obligations
Mortgage-backed securities-
government sponsored entities
$
1,997
90,109
6,895
$
(8) $
(3,362)
(180)
-
205
-
152,614
$ 251,615
(3,912)
(7,462) $
9,967
10,172
$
$
$
-
(6)
-
$
1,997
90,314
6,895
$
(8)
(3,368)
(180)
(308)
(314)
162,581
$ 261,787
(4,220)
(7,776)
$
The Company has 39 debt securities in the less than twelve month category and 162 debt securities in the
twelve months or more category as of December 31, 2017. 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 2017. 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, 2017 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
Cost
Fair
Value
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed securities -
government sponsored entities
55
(In Thousands)
$
5,514
21,383
45,373
59,799
132,069
$
5,517
21,269
44,705
60,974
132,465
152,901
$ 284,970
148,656
$ 281,121
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 3 - SecurItIeS (contInued)
Gross realized gains and gross realized losses on sales of securities available for sale were $354,000 and
$6,000, respectively, in 2017, compared to $284,000 and $0, respectively, in 2016, and $626,000 and $0,
respectively, in 2015. The proceeds from the sales of securities totaled $15,612,000, $110,748,000 and
$44,976,000 for the years ended December 31, 2017, 2016 and 2015, respectively.
Securities with a carrying value of $213,065,000 and $230,263,000 at December 31, 2017 and 2016,
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):
(dollars in thousands)
Types of loans
December 31, 2017
December 31, 2016
Real Estate-
Residential
Commercial
Construction
Commercial, financial and agricultural
Consumer loans to individuals
Total loans
Deferred fees, net
Total loans receivable
Allowance for loan losses
Net loans receivable
$ 235,759
342,934
17,228
97,461
70,953
764,335
30.8%
44.9
2.3
12.7
9.3
100.0%
(243)
764,092
(7,634)
$ 756,458
$ 237,177
320,187
19,709
85,508
51,524
714,105
33.2%
44.8
2.8
12.0
7.2
100.0%
(216)
713,889
(6,463)
707,426
$
The following table presents the components of the purchase accounting adjustments related to the purchased
credit-impaired loans acquired:
(In Thousands)
July 31, 2016
Contractually required principal and interest
Non-accretable discount
Expected cash flows
Accretable discount
Estimated fair value
$
2,621
(1,014)
1,607
(239)
$
1,368
Changes in the accretable yield for purchased credit-impaired loans were as follows for the twelve months
ended December 31:
2016
2017
2015
(In thousands)
Balance at beginning of period
Additions
Accretion
Reclassification and other
Balance at end of period
$
208
-
(73)
(27)
108
$
$
-
$
239
(30)
(1)
$
208
$
8
-
(1)
(7)
-
56
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 4 - LoanS receIvabLe and aLLowance For Loan LoSSeS (contInued)
The following table presents additional information regarding loans acquired and accounted for in accordance
with ASC 310-30 (in thousands):
December 31, 2017 December 31, 2016
Outstanding Balance
Carrying Amount
$
$
1,444
1,174
$
$
1,821
1,386
There were no material increases or decreases in the expected cash flows of these loans since the acquisition
date. There has been no allowance for loan losses recorded for acquired loans with specific evidence of
deterioration in credit quality. As of December 31, 2017, for loans that were acquired prior to 2017 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. For loans that were acquired in
2016 with or without specific evidence of deterioration in credit quality, there were no adjustments to the
allowance for loan losses 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.
57
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 4 - LoanS receIvabLe and aLLowance For Loan LoSSeS (contInued)
The following tables show the amount of loans in each category that were individually and collectively
evaluated for impairment at the dates indicated:
December 31, 2017
Real Estate Loans
Residential
Commercial Construction
Commercial
Loans
Consumer
Loans
Total
Individually
evaluated for
impairment
Loans acquired with
deteriorated credit quality
Collectively evaluated
for impairment
Total Loans
$
23
$
1,224
$
-
$
-
$
-
$
1,247
(In thousands)
833
341
-
-
-
1,174
234,903
341,369
17,228
97,461
70,953
761,914
$ 235,759
$ 342,934
$
17,228
$
97,461
$
70,953
$ 764,335
December 31, 2016
Real Estate Loans
Residential
Commercial Construction
Commercial
Loans
Consumer
Loans
Total
(In thousands)
Individually
evaluated
for impairment
$
23
$
2,601
$
-
$
-
$
-
$
2,624
Loans acquired with
deteriorated credit quality
Collectively evaluated
for impairment
821
565
-
-
-
1,386
236,333
317,021
19,709
85,508
51,524
710,095
Total Loans
$
237,177
$ 320,187
$
19,709
$
85,508
$
51,524
$ 714,105
58
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 4 - LoanS receIvabLe and aLLowance For Loan LoSSeS (contInued)
The following table includes the recorded investment and unpaid principal balances for impaired loans with
the associated allowance amount, if applicable.
December 31, 2017
With no related allowance recorded:
Real Estate Loans
Residential
Commercial
Total:
Subtotal
Real Estate Loans
Residential
Commercial
Total Impaired Loans
December 31, 2016
With no related allowance recorded:
Real Estate Loans
Residential
Commercial
Total:
Subtotal
Real Estate Loans
Residential
Commercial
Total Impaired Loans
Recorded
Investment
23
1,224
1,247
Unpaid
Principal
Balance
(In thousands)
28
1,496
1,524
$
23
1,224
1,247
28
1,496
1,524
$
$
$
Associated
Allowance
$
$
-
-
-
-
-
-
Recorded
Investment
Unpaid
Principal
Balance
(In thousands)
Associated
Allowance
$
$
23
2,601
2,624
23
2,601
2,624
$
$
28
3,427
3,455
28
3,427
3,455
$
$
-
-
-
-
-
-
The following information for impaired loans is presented for the years ended December 31, 2017, 2016
and 2015:
2017
2016
Average Recorded
Investment
2015
2017
2016
Interest Income
Recognized
2015
Total:
Real Estate Loans
Residential
Commercial
Commercial Loans
Total Loans
$
$
23
1,209
-
1,232
(In thousands)
$
$
25
2,671
-
2,696
$
$
159
8,847
9
9,015
$
$
-
56
-
56
$
$
-
91
-
91
$
$
4
526
2
532
59
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 4 - LoanS receIvabLe and aLLowance For Loan LoSSeS (contInued)
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, 2017, troubled debt restructured
loans totaled $1.1 million and resulted in specific reserves of $0. During 2017, there were no new loan relationships
identified as troubled debt restructurings, while one loan identified as a troubled debt restructuring with a
balance of $322,000 as of December 31, 2016 was paid in full during 2017. During 2017, the Company
recognized charge-offs totaling $55,000 on loans classified as troubled debt restructurings.
As of December 31, 2016, troubled debt restructured loans totaled $1.5 million and resulted in specific
reserves of $0. During 2016, there were no new loan relationships identified as troubled debt restructurings,
while one loan with a balance of $5.0 million as of December 31, 2015 was transferred to Foreclosed Real Estate
Owned during 2016 as a result of foreclosure on the property and one loan relationship with a balance of
$82,000 as of December 31, 2015 was charged-off in 2016. During 2016, the Company recognized charge-offs
totaling $2.6 million 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, 2017 and 2016,
foreclosed real estate owned totaled $1,661,000 and $5,302,000, respectively. As of December 31, 2017, included
within foreclosed real estate owned is $34,000 of consumer residential mortgages that were foreclosed on or
received via a deed in lieu transaction prior to the year end. As of December 31, 2017, the Company has initiated
formal foreclosure proceedings on 15 consumer residential mortgage loans with an outstanding balance of
$1,166,000.
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.
60
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT note 4 - LoanS receIvabLe and aLLowance For Loan LoSSeS (contInued)
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, 2017 and December 31, 2016 (in thousands):
December 31, 2017
Commercial real estate loans
Commercial
Total
Pass
$ 329,617
97,389
$ 427,006
Special
Mention
9,680
16
9,696
$
$
$
Substandard
3,637
56
3,693
$
Doubtful
-
-
-
$
$
Loss
-
-
-
Total
$ 342,934
97,461
$ 440,395
$
$
December 31, 2016
Pass
Special
Mention
Substandard
Doubtful
Loss
Total
Commercial real estate loans
Commercial
Total
$ 310,432
84,600
$ 395,032
$
$
5,432
885
6,317
$
$
4,323
23
4,346
$
$
-
-
-
$
$
-
-
-
$ 320,187
85,508
$ 405,695
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, 2017 and December 31, 2016 (in thousands):
December 31, 2017
Residential real estate loans
Construction
Consumer loans to individuals
Total
December 31, 2016
Residential real estate loans
Construction
Consumer loans to individuals
Total
$
Performing Nonperforming Total
$
1,793
-
-
1,793
$ 235,759
17,228
70,953
$ 323,940
233,966
17,228
70,953
322,147
$
Performing Nonperforming Total
$
$
235,829
19,681
51,524
307,034
1,137
28
-
1,165
$ 237,177
19,709
51,524
$ 308,410
$
$
$
61
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 4 - LoanS receIvabLe and aLLowance For Loan LoSSeS (contInued)
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, 2017 and December 31, 2016 (in thousands):
$
$
$
Non-
Accrual
1,706
277
-
-
-
1,983
Total Past
Due and
Non-Accrual
2,468
$
1,332
-
37
84
3,921
$
Total
Loans
$ 235,759
342,934
17,228
97,461
70,953
$ 764,335
Non-
Accrual
Total Past
Due and
Non-Accrual
Total
Loans
1,136
762
28
-
-
$
2,387
1,208
28
153
68
$ 237,177
320,187
19,709
85,508
51,524
$
1,926
$
3,844
$ 714,105
Current
$ 233,291
341,602
17,228
97,424
70,869
$ 760,414
31-60 Days
Past Due
594
$
646
-
10
60
1,310
$
61-90 Days
Past Due
$
81
-
-
27
24
132
$
$
Greater than
90 Days Past
Due and still
accruing
87
409
-
-
-
496
$
Current
31-60 Days
Past Due
61-90 Days
Past Due
Greater than
90 Days Past
Due and still
accruing
December 31, 2017
Real Estate loans
Residential
Commercial
Construction
Commercial loans
Consumer loans
Total
December 31, 2016
Real Estate loans
Residential
Commercial
Construction
Commercial loans
Consumer loans
$
$
$ 234,790
318,979
19,681
85,355
51,456
986
445
-
143
39
Total
$ 710,261
$
1,613
$
264
1
-
10
29
304
$
$
1
-
-
-
-
1
62
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 4 - LoanS receIvabLe and aLLowance For Loan LoSSeS (contInued)
The following table presents the allowance for loan losses by the classes of the loan portfolio:
(In thousands)
Beginning balance,
December 31, 2016
Charge Offs
Recoveries
Provision for loan losses
Ending balance,
December 31, 2017
Ending balance individually
evaluated for impairment
Ending balance collectively
evaluated for impairment
(In thousands)
Beginning balance,
December 31, 2015
Charge Offs
Recoveries
Provision for loan losses
Ending balance,
December 31, 2016
Ending balance individually
evaluated for impairment
Ending balance collectively
evaluated for impairment
(In thousands)
Beginning balance,
December 31, 2014
Charge Offs
Recoveries
Provision for loan losses
Ending balance,
December 31, 2015
Ending balance individually
evaluated for impairment
Ending balance collectively
evaluated for impairment
Residential
Real Estate
1,092
$
(83)
6
257
$
Commercial
Real Estate Construction
4,623
78
$
(28)
(902)
-
159
40
1,385
Commercial
307
$
-
-
156
Consumer
363
$
(207)
26
362
$
Total
6,463
(1,220)
191
2,200
$
1,272
$
5,265
$
90
$
463
$
544
$
7,634
$
-
$
-
$
-
$
-
$
-
$
-
$
1,272
$
5,265
$
90
$
463
$
544
$
7,634
Residential
Real Estate
Commercial
Real Estate Construction
Commercial
Consumer
Total
$
1,069
(123)
6
140
$
$
5,506
(2,711)
15
1,813
$
90
-
-
(12)
$
397
(15)
-
(75)
236
(102)
45
184
$
7,298
(2,951)
66
2,050
$
1,092
$
4,623
$
78
$
307
$
363
$
6,463
$
-
$
3
$
-
$
-
$
-
$
3
$
1,092
$
4,620
$
78
$
307
$
363
$
6,460
Residential
Real Estate
Commercial
Real Estate Construction
Commercial
Consumer
Total
$
1,323
(224)
20
(50)
$
$
3,890
(2,883)
-
4,499
$
222
-
-
(132)
$
256
-
-
141
184
(91)
21
122
$
5,875
(3,198)
41
4,580
$
1,069
$
5,506
$
90
$
397
$
236
$
7,298
$
-
$
1,613
$
-
$
-
$
-
$
1,613
$
1,069
$
3,893
$
90
$
397
$
236
$
5,685
63
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 4 - LoanS receIvabLe and aLLowance For Loan LoSSeS (contInued)
The recorded investment in impaired loans, not requiring an allowance for loan losses was $1,247,000
(net of charge-offs against the allowance for loan losses of $277,000) and $2,624,000 (net of charge-offs against
the allowance for loan losses of $831,000) at December 31, 2017 and 2016, respectively. The recorded investment
in impaired loans requiring an allowance for loan losses was $0 at December 31, 2017 and 2016, respectively.
The specific reserve related to impaired loans was $0 for 2017 and 2016. For the years ended December 31, 2017
and 2016, the average recorded investment in these impaired loans was $1,232,000, and $2,696,000, respectively,
and the interest income recognized on these impaired loans was $56,000 and $91,000, respectively.
During the period ended December 31, 2017, the allowance for commercial real estate loans increased from
$4,623,000 to $5,265,000. This $642,000 increase in the required allowance was due primarily to a $22,747,000
increase in loan balances and an increase in the amount of reserve required for classified loans. This increase
was partially offset by a reduction in the historical loss factor from 0.80% at December 31, 2016 to 0.74% on
December 31, 2017.
During the period ended December 31, 2016, the allowance for commercial real estate loans decreased from
$5,506,000 to $4,623,000. This $883,000 decrease in the required allowance was due to a $1,610,000 decrease
in the specific reserve component resulting from the transfer of an impaired loan with a specific reserve allowance
of $1,596,000 at December 31, 2015 to foreclosed real estate during 2016. This reduction was partially offset by
a $419,000 increase in the allowance for commercial real estate loans due to an increase in the historical loss
factor from 0.70% at December 31, 2015 to 0.80% on December 31, 2016.
Interest income that would have been recorded on loans accounted for on a non-accrual basis under the
original terms of the loans was $163,000, $163,000 and $515,000 for 2017, 2016 and 2015, respectively.
As of December 31, 2017 and 2016, the Company considered its concentration of credit risk to be acceptable.
As of December 31, 2017, the highest concentrations are in commercial rentals and the hospitality lodging
industry, with loans outstanding of $68.1 million, or 63.6% of bank capital, to commercial rentals, and $53.9
million, or 50.4% of bank capital to the hospitality and lodging industry. Charge-offs on loans within these
concentrations were $762,000, $31,000 and $643,000 for the years ended December 31, 2017, 2016 and 2015,
respectively.
The Company did not sell any residential mortgage loans in 2017. Gross realized gains and gross realized
losses on sales of residential mortgage loans were $54,000 and $0, respectively, in 2016 and $113,000 and $0,
respectively, in 2015. The proceeds from the sales of residential mortgage loans totaled $1.7 million and
$4.4 million for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2017 and 2016,
the outstanding value of loans serviced for others totaled $29.0 million and $35.5 million, respectively.
note 5 - PremISeS and eQuIPment
Components of premises and equipment at December 31 are as follows:
Land and improvements
Buildings and improvements
Furniture and equipment
Accumulated depreciation
64
2017
(In Thousands)
2016
$
$
2,771
17,613
6,636
27,020
(13,156)
13,864
$
$
2,925
17,662
6,351
26,938
(13,407)
13,531
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 5 - PremISeS and eQuIPment (contInued)
Depreciation expense totaled $922,000, $726,000 and $551,000 for the years ended December 31, 2017, 2016
and 2015, respectively.
Certain facilities are leased under various operating leases. Rental expense for these leases was $405,000,
$367,000 and $341,000, respectively, for the years ended December 31, 2017, 2016 and 2015. Future minimum
rental commitments under noncancellable leases as of December 31, 2017 were as follows (in thousands):
note 6 - dePoSItS
2018
2019
2020
2021
2022
Thereafter
$
Aggregate time deposits in denominations of $250,000 or more were $92,527,000 and $63,982,000 at
December 31, 2017 and 2016, respectively.
$
467
454
451
451
451
4,654
6,928
At December 31, 2017, the scheduled maturities of time deposits are as follows (in thousands):
2018
2019
2020
2021
2022
Thereafter
$
185,752
71,222
27,584
17,380
18,217
139
$ 320,294
note 7 - borrowIngS
Short-term borrowings at December 31 consist of the following:
Securities sold under agreements to repurchase
Federal Home Loan Bank short-term borrowings
2017
2016
(In Thousands)
$ 24,286
18,244
$ 42,530
$
$
32,811
-
32,811
The outstanding balances and related information of short-term borrowings are summarized as follows:
Years Ended December 31,
2017
2016
(Dollars In Thousands)
$ 39,170
Average balance during the year
Average interest rate during the year
Maximum month-end balance during the year
Weighted average interest rate at the end of the year
0.51%
$
$ 54,286
0.87%
$
41,593
0.31%
52,672
0.32%
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 $27,255,000 and $26,626,000 at December
31, 2017 and $35,770,000 and $35,147,000 at December 31, 2016, respectively, were pledged as collateral for
these agreements. The securities underlying the agreements were under the Company’s control.
65
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 7 - borrowIngS (contInued)
The collateral pledged for repurchase agreements that are classified as secured borrowings is summarized as
follows (in thousands):
As of December 31, 2017
Remaining Contractual Maturity of the Agreements
Overnight and
Up to
Greater than
Continuous
30 days
30-90 days
90 days
Total
$
26,626
$
0
$
0
$
0
$
$
26,626
24,286
As of December 31, 2016
Remaining Contractual Maturity of the Agreements
Overnight and
Up to
Greater than
Continuous
30 days
30-90 days
90 days
Total
Repurchase Agreements:
Mortgage-backed securities -
government sponsored entities
Total liability recognized for
repurchase agreements
Repurchase Agreements:
Obligations of U.S.
Government agencies
$
34,917
$
0
$
0
$
230
Total liability recognized for
repurchase agreements
$
$
35,147
32,811
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 May. At December 31, 2017, there were $18,244,000 of borrowings
outstanding on this line. There were no borrowings under this line of credit at December 31, 2016. The Company
has a line of credit commitment available from Atlantic Community Bankers Bank for $7,000,000 which expires
on June 30, 2018. There were no borrowings under this line of credit at December 31, 2017 and 2016. The Company
has a line of credit commitment available from PNC Bank for $16,000,000 at December 31, 2017. There were no
borrowings under this line of credit at December 31, 2017 and December 31, 2016. The Company also has a line
of credit commitment from Zions Bank for $17,000,000. There were no borrowings under this line of credit at
December 31, 2017 and December 31, 2016.
Other borrowings consisted of the following at December 31, 2017 and 2016:
Convertible note due January 2017 at 4.71%
Amortizing fixed rate borrowing due December 2017 at 1.27%
Amortizing fixed rate borrowing due January 2018 at 0.91%
Amortizing fixed rate borrowing due December 2018 at 1.42%
Amortizing fixed rate borrowing due January 2019 at 1.39%
Fixed rate term borrowing due August 2019 at 1.61%
Amortizing fixed rate borrowing due June 2020 at 1.49%
Amortizing fixed rate borrowing due December 2020 at 1.71%
Amortizing fixed rate borrowing due March 2022 at 1.75%
Amortizing fixed rate borrowing due October 2022 at 1.88%
$
$
2017
2016
(In Thousands)
-
-
51
823
5,451
10,000
5,093
3,051
3,730
7,746
35,945
$
$
10,000
4,025
662
1,634
-
-
7,078
4,034
4,568
-
32,001
66
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 7 - borrowIngS (contInued)
Contractual maturities and scheduled cash flows of other borrowings at December 31, 2017 are as follows
(in thousands):
$
11,316
15,926
4,556
2,534
1,613
35,945
2018
2019
2020
2021
2022
$
The Bank’s maximum borrowing capacity with the FHLB was $369,580,000 of which $54,188,000 was
outstanding at December 31, 2017. Advances from the FHLB are secured by qualifying assets of the Bank.
note 8 - 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 up to 15% of the employee’s compensation, 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 one year 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 five years.
The Company’s contributions are expensed as the cost is incurred, funded currently, and amounted to $605,000,
$538,000 and $445,000 for the years ended December 31, 2017, 2016 and 2015, respectively.
The Company has several non-qualified supplemental executive retirement plans for the benefit of certain
executive officers and former officers. At December 31, 2017 and 2016, other liabilities include $3,360,000 and
$3,575,000 accrued under the Plan. Compensation expense includes approximately $301,000, $174,000 and
$122,000 relating to the supplemental executive retirement plan for 2017, 2016 and 2015, 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, 2017 and 2016, the cash value of these policies was
$37,060,000 and $36,133,000, 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 $168,000, $26,000 and $89,000 for the years ended December 31, 2017, 2016 and
2015, 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 2017 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 $1,142,000 and $976,000 at December 31, 2017 and 2016, respectively.
67
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 8 - emPLoyee beneFIt PLanS (contInued)
Through its acquisition of Delaware, the Company also has certain director fee deferral and continuation plans.
These plans allow directors to defer current director fees and provide a benefit payment for a period of five
to fifteen years. The Company expensed $9,000 and $1,000 under these plans in 2017 and 2016, respectively.
At December 31, 2017 and 2016, the liability under these plans was $331,000 and $413,000, 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, 2017 and 2016, the Company’s
Plan was 89.0% and 80.0% 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 $46,000 in 2017, $54,000 in 2016 and
$48,000 in 2015. During the plan years ending December 31, 2017, 2016 and 2015, the Company made
contributions of $46,000, $54,000 and $48,000, 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 of Dollars)
2017
2016
Change in projected benefit obligation:
Projected benefit obligation at beginning of year
Projected benefit obligation acquired
Service cost
Interest cost
Actuarial gain (loss)
Benefits paid
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Fair value acquired
Actual return on plan assets
Benefits paid
Fair value of assets at end of year
Funded status at end of year
68
$
$
$
$
$
(8,084)
-
(68)
(303)
(587)
577
(8,465)
6,702
-
981
(573)
7,110
(1,355)
$
$
$
-
(8,843)
(28)
(113)
662
238
(8,084)
-
6,932
12
(242)
6,702
(1,382)
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 8 - emPLoyee beneFIt PLanS (contInued)
The Delaware Plan paid $577,000 and $238,000 in benefit payments in 2017 and 2016, respectively. Estimated
benefit payments under the Delaware Plan are expected to be approximately $509,000, $498,000, $489,000,
$478,000 and $480,000 for the next five years. Payments are expected to be approximately $2,253,000 in total for
the five-year period ending December 31, 2027. The Company was not required to make any contributions to the
Delaware Plan in 2017 or 2016. The decrease in the projected discount rate contributed approximately $480,000
to the overall increase in the projected benefit obligation for the year ended December 31, 2017.
The accumulated benefit obligation for the Delaware Plan was $8,465,000 and $8,084,000 at December 31,
2017 and 2016, respectively.
The following table sets forth the amounts recognized in accumulated other comprehensive income for the
2016
years ended December 31 (in thousands):
2017
Transition asset
Prior service credit
Gain
Total
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
Net amortization and deferral
NET PERIODIC PENSION COST (INCOME)
$
$
$
$
-
-
473
473
$
$
-
-
490
490
2017
2016
$
68
303
(416)
-
(45)
28
113
(180)
-
$
(39)
The weighted average assumptions used to determine the benefit obligation at December 31 are as follows:
2016
2017
3.43%
Discount rate
3.90%
The weighted average assumptions used to determine the net periodic pension cost at December 31 are
as follows:
Discount rate
Expected long-term return on plan assets
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:
2017
3.90%
6.50%
0.00%
2016
3.18%
6.50%
0.00%
2017
6.4%
50.2%
40.2%
3.2%
100.0%
2016
6.1%
47.9%
42.6%
3.4%
100.0%
Cash equivalents
Equity securities
Fixed income securities
Other
69
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 8 - emPLoyee beneFIt PLanS (contInued)
The Delaware Plan’s overall investment strategy is to achieve a mix of approximately 97 percent of investments
for long-term growth and 3 percent for near-term benefit payments with a wide diversification of asset types,
fund strategies, and fund managers. The target allocation for the Delaware Plan assets is 0 to 20 percent cash
equivalents, 40 to 60 percent equity securities, 40 to 60 percent fixed income securities, and 0 to 5 percent other.
Cash equivalents consist primarily of government issues and short-term investment funds. Equity securities
primarily include investments in common stock, depository receipts, preferred stock, and real estate investment
trusts. Fixed income securities include corporate bonds, government issues, mortgage-backed securities,
municipals, and other asset backed securities.
December 31, 2017
The fair value of the Delaware Plan’s assets, by asset category, is as follows:
Quoted Market
Price in
Active Markets
(Level 1)
Other
Observable
Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
Total
Cash equivalents:
Cash (including foreign currencies)
Short-term investment funds
Equity securities:
Common stock
Depository receipts
Commingled Pension Trust Fund
Preferred stock
Fixed income securities:
Corporate bonds
Government issue
Mortgage-backed securities
Collateralized mortgage obligations
Commingled Pension Trust Fund
Other
Total
4
4
Cash equivalents:
Foreign currencies
Short-term investment funds
Equity securities:
Common stock
Depository receipts
Commingled Pension Trust Fund
Fixed income securities:
Corporate bonds
Government issue
Mortgage-backed securities
Collateralized mortgage
obligations
Commingled Pension Trust Fund
Other
(in Thousands of Dollars)
$
70
19
$
70
-
$
$
-
19
1,401
35
2,203
31
296
992
6
56
1,746
255
1,401
35
-
31
-
-
-
-
-
-
-
-
2,203
-
296
992
6
56
1,746
-
$
7,110
$
1,537
$
5,318
$
-
-
-
-
-
-
-
-
-
-
-
255
255
December 31, 2016
Quoted Market
Price in
Active Markets
(Level 1)
Other
Observable
Inputs
(Level 2)
(in Thousands of Dollars)
Unobservable
Inputs
(Level 3)
Total
$
$
11
33
$
11
-
$
-
33
1,430
42
1,680
307
1,112
4
68
1,732
283
1,430
42
-
-
-
-
-
-
-
-
-
1,680
307
1,112
4
68
1,732
-
-
-
-
-
-
-
-
-
-
-
283
283
Total
$
6,702
$
1,483
$
4,936
$
70
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 8 - emPLoyee beneFIt PLanS (contInued)
The following table sets forth a summary of the changes in the Level 3 assets for the year ended December 31,
2017 and 2016 (in thousands of dollars).
2017
2016
$
283
-
(28)
$
255
$
$
-
-
283
283
Balance, January 1
Purchase
Unrealized gain (loss)
Balance, December 31
note 9 - Income taXeS
The components of the provision for federal income taxes are as follows:
(In Thousands)
Current
Change in corporate tax rate
Deferred
Years Ended December 31,
2017
2016
2015
$
$
3,822
3,060
(331)
6,551
$
$
1,138
-
746
1,884
$
$
2,019
-
(387)
1,632
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, 2017,
the Company has a $5,329,000 net operating loss carryforward that will begin to expire in 2035. 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
Percentage of Income
before Income Taxes
Years Ended December 31,
2017
35.0 %
(9.6)
-
0.2
.
(2.7)
20.8
0.7
44.4 %
2016
2015
35.0 %
34.0 %
(13.1)
2.7
0.3
(2.8)
.-
(0.2)
21.9 %
(11.3)
.-
0.3
(1.8)
.-
0.4
21.6 %
tax rates to income before income taxes because of the following:
Tax at statutory rates
Tax exempt interest income, net of interest expense disallowance
Nondeductible merger expenses
Incentive stock options
Earnings and proceeds on life insurance
Change in corporate tax rate
Other
71
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 9 - Income taXeS (contInued)
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:
2017
2016
(In Thousands)
Deferred tax assets:
Allowance for loan losses
Deferred compensation
Core deposit intangible
Prepaid expenses
Pension liability
Foreclosed real estate valuation allowance
AMT tax credit carryforward
Net operating loss carryforward
Net unrealized loss on securities
Other
Total Deferred Tax Assets
Deferred tax liabilities:
Premises and equipment
Deferred loan fees
Net unrealized gain on pension liability
Purchase price adjustment
Total Deferred Tax Liabilities
$
$
1,603
775
232
125
384
7
260
1,249
808
92
5,535
210
142
99
303
754
Net Deferred Tax Asset
$
4,781
2,197
1,430
485
267
655
19
260
2,147
2,286
310
10,056
347
192
171
357
1,067
$
8,989
The Company’s federal and state income tax returns for taxable years through 2014 have been closed for
purposes of examination by the Internal Revenue Service and the Pennsylvania Department of Revenue.
note 10 - 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, 2017 and 2016, that the Company and the Bank meet all capital adequacy requirements
to which they are subject.
72
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 10 - reguLatory matterS and StockHoLderS’ eQuIty (contInued)
As of December 31, 2017, 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
As of December 31, 2017:
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Common Equity Tier 1 capital
(to risk-weighted assets)
Tier 1 capital (to average assets)
As of December 31, 2016:
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Common Equity Tier 1 capital
(to risk-weighted assets)
Tier 1 capital (to average assets)
For Capital Adequacy
Corrective Action
Actual
Purposes
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in Thousands)
$113,091 14.11%
105,457 13.16
≥$64,126
≥48,095
≥8.00%
≥6.00
≥$80,158
≥64,126
≥10.00%
≥8.00
105,457 13.16
9.36
105,457
≥36,071
≥45,075
≥4.50
≥4.00
≥52,103
≥56,343
≥6.50
≥5.00
$107,765 14.12%
101,302 13.27
≥$61,057
≥45,793
≥8.00%
≥6.00
≥$76,321
≥61,057
≥10.00%
≥8.00
101,302 13.27
9.16
101,302
≥34,344
≥44,251
≥4.50
≥4.00
≥49,609
≥55,314
≥6.50
≥5.00
The Bank’s ratios do not differ significantly from the Company’s ratios presented above.
Effective January 1, 2015, the Company and the Bank became subject to new regulatory capital rules which,
among other things, impose a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted
assets), set the minimum leverage ratio for all banking organizations at a uniform 4% of total assets, increased
the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and
assigned a higher risk-weight (150%) to exposures that are more than 90 days past due or are on nonaccrual
status and to certain commercial real estate facilities that finance the acquisition, development or construction
of real property. The new rules also require unrealized gains and losses on certain “available-for-sale” securities
holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt out is
exercised, which the Company and the Bank have done. The final rule limits a banking organization’s dividends,
stock repurchases and other capital distributions, and certain discretionary bonus payments to executive officers,
if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity
Tier 1 capital to risk-weighted assets above regulatory minimum risk-based requirements. The capital conservation
buffer requirements will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital
conservation buffer will be effective. The Company and the Bank are in compliance with their respective new
capital requirements, including the capital conservation buffer, as of December 31, 2017.
The Bank is required to maintain average cash reserve balances in vault cash or with the Federal Reserve Bank.
The amount of these restricted cash reserve balances at December 31, 2017 and 2016 was approximately
$1,111,000 and $1,099,000, respectively.
73
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 10 - reguLatory matterS and StockHoLderS’ eQuIty (contInued)
Under Pennsylvania banking law, the Bank is subject to certain restrictions on the amount of dividends that it
may declare without prior regulatory approval. At December 31, 2017, $64,661,000 of retained earnings were
available for dividends without prior regulatory approval, subject to the regulatory capital requirements
discussed above. Under Federal Reserve regulations, the Bank is limited as to the amount it may lend affiliates,
including the Company, unless such loans are collateralized by specific obligations.
note 11 - Stock baSed comPenSatIon
The Company’s shareholders approved the Norwood Financial Corp 2006 Stock Option Plan at the Annual
Meeting on April 26, 2006. An aggregate of 412,500 shares of authorized but unissued Common Stock of the
Company were reserved for future issuance under the Plan. This includes up to 66,000 shares for awards to
outside directors. Under this plan, the Company granted 11,135 options to employees in 2015, 18,750 options to
employees in 2014, and 42,900 options, which included 6,000 options granted to outside directors in 2013.
No options were granted under this plan in 2017 or 2016. As of December 31, 2017, there were no shares
available for future awards under this plan. All share information has been restated to reflect the 50% stock
dividend declared in 2017.
At the Annual Meeting held on April 22, 2014, the Company’s shareholders 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. Under this plan, the Company granted 44,150 shares in 2017 which included 26,750
options to employees, 9,000 shares of restricted stock to officers, 8,000 options to directors and 400 shares of
restricted stock to directors. In 2016, the Company granted 36,675 shares which included 24,000 options to
employees, 9,000 shares of restricted stock to officers and 3,675 shares of restricted stock to directors. In 2015,
the Company granted 20,591 shares which included 10,616 options to employees, 6,375 shares of restricted
stock to officers and 3,600 shares of restricted stock to directors. In 2014, the Company granted 13,950 shares,
which included 4,200 shares of restricted stock to outside directors. All shares granted in 2014 were for
restricted stock. The restricted shares vest over a five-year period. The product of the number of shares granted
and the grant date market price of the Company’s common stock 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,
2017, there were 259,635 shares available for future awards under this plan, which includes 219,510 shares
available for officer awards and 40,125 shares available for awards to outside directors. Included in these totals
are 28,875 shares available for restricted stock awards to officers and 125 shares available for restricted stock
awards to outside directors. All share information has been restated to reflect the 50% stock dividend declared
in 2017.
Total unrecognized compensation cost related to stock options was $237,000 as of December 31, 2017, $93,000
as of December 31, 2016 and $71,000 as of December 31, 2015. Salaries and employee benefits expense includes
$93,000, $71,000 and $66,000 of compensation costs related to options for the years ended December 31, 2017,
2016 and 2015, respectively. Compensation costs related to restricted stock amounted to $143,000, $89,000 and
$55,000 for the years ended December 31, 2017, 2016 and 2015, respectively. The expected future compensation
expense relating to non-vested restricted stock outstanding as of December 31, 2017 and 2016 was $744,000 and
$579,000, respectively. Net income was reduced by $187,000, $130,000 and $92,000 for the years ended
December 31, 2017, 2016 and 2015, respectively.
74
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT note 11 - Stock baSed comPenSatIon (contInued)
A summary of the Company’s stock option activity and related information for the years ended December
31 follows:
2017
Weighted
Average
Exercise
Price
2016
Weighted
Average
Exercise
Price
Options
Intrinsic
Value
Options
Intrinsic
Value
Options
Intrinsic
Value
2015
Weighted
Average
Exercise
Price
Outstanding,
beginning of year
Granted
Exercised
Forfeited
Outstanding,
end of year
Exercisable,
end of year
225,669
34,750
(44,219)
(3,475)
$
19.46
32.81
23.53
21.71
212,725
$
20.76 $ 2,604,097
177,975
$
18.41 $ 2,597,494
276,807
24,000
(46,234)
(28,904)
$
17.94
22.37
18.23
18.57
294,720
21,750
(25,288)
(14,375)
$
17.83
19.03
17.46
18.01
225,669
$
19.46 $ 931,963
276,807
$
17.94
$ 362,754
216,644
$
17.59 $ 931,963
270,032
$
17.85
$ 359,854
Exercise prices for options outstanding as of December 31, 2017 ranged from $16.65 to $32.81 per share.
The weighted average remaining contractual life is 6.1 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,
2016
2015
Dividend yield
Expected life
Expected volatility
Risk-free interest rate
Weighted average fair value of options granted
2017
3.89%
10 years
29.11%
2.41%
$6.83
3.93%
10 years
24.84%
2.44%
$5.79
3.77%
10 years
24.35%
2.28%
$4.89
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 $1,040,000 in 2017. Shares issued in connection with stock option
exercises are issued from available treasury shares. If no treasury shares are available, new shares are issued
from available authorized shares. During 2017, all the shares issued in connection with stock option exercises,
44,219 shares in total, were issued from available treasury shares. All share information has been adjusted to
reflect the 50% stock dividend declared in 2017.
75
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 11 - Stock baSed comPenSatIon (contInued)
As of December 31, 2017, outstanding stock options consist of the following:
Options
Outstanding
9,075
17,325
15,675
20,625
29,700
1,650
3,000
26,925
14,250
16,500
23,250
34,750
212,725
Total
Average
Exercise
Price
$ 16.67
17.33
16.83
16.65
18.03
18.36
19.30
17.93
19.39
19.03
22.37
32.81
Remaining
Life, Years
Options
Exercisable
1.0
2.0
3.0
4.0
5.0
5.0
5.8
6.0
6.9
7.9
9.0
9,075
17,325
15,675
20,625
29,700
1,650
3,000
26,925
14,250
16,500
23,250
10.0
-
177,975
Average
Exercise
Price
$ 16.67
17.33
16.83
16.65
18.03
18.36
19.30
17.93
19.39
19.03
22.37
.0 -
A summary of the Company’s restricted stock activity and related information for the years ended
December 31 is as follows:
2017
2016
Non-vested, beginning of year
Granted
Vested
Forfeited
Non-vested at December 31
note 12 - earnIngS Per SHare
Weighted
Average
Number
of Shares
28,035
9,400
(7,020)
$
Grant Date Number
of Shares
Fair Value
20.64
32.81
20.37
Weighted
Average
Grant Date
Fair Value
$
$
19.21
22.37
19.23
19.20
20.64
20,715
12,675
(4,680)
(675)
28,035
30,415
-
$
24.46
.0-
The following table sets forth the computations of basic and diluted earnings per share:
Years Ended December 31,
2017
2016
2015
Numerator, net income
Denominator:
Weighted average shares outstanding
Less: Weighted average unvested restricted shares
Denominator: Basic earnings per share
Weighted average shares outstanding
Add: Dilutive effect of stock options
Denominator: Diluted earnings per share
Basic earnings per common share
Diluted earnings per common share
76
(In Thousands, Except per Share Data)
$
8,198
6,238
(28)
6,210
6,210
61
6,271
1.32
1.31
$
$
$
6,711
$
5,908
5,816
(21)
5,795
5,795
33
5,828
5,523
(14)
5,510
5,523
14
5,537
$
$
1.16
1.15
$
$
1.07
1.07
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 12 - earnIngS Per SHare (contInued)
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 0, 24,000, and 21,000 for the years ended December 31, 2017,
2016 and 2015, respectively, based on the closing price of the Company’s common stock which was $33.00, $22.09
and $19.17 at December 31, 2017, 2016 and 2015, respectively. All share and per share information has been
restated to reflect the 50% stock dividend declared in 2017.
note 13 - 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.
December 31,
A summary of the Bank’s financial instrument commitments is as follows:
Commitments to grant loans
Unfunded commitments under lines of credit
Standby letters of credit
2017
2016
(In Thousands)
$
44,970
62,228
5,919
$ 113,117
$
$
22,210
54,789
5,642
82,641
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 14 - FaIr vaLueS oF FInancIaL InStrumentS
Management uses its best judgment in estimating the fair value of the Company’s financial instruments;
however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial
instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could
have realized in a sale transaction on the dates indicated. The estimated fair value amounts have been measured
as of their respective year ends and have not been re-evaluated or updated for purposes of these consolidated
financial statements subsequent to those respective dates. As such, the estimated fair values of these financial
instruments subsequent to the respective reporting dates may be different than the amounts reported at each
year end.
77
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 14 - FaIr vaLueS oF FInancIaL InStrumentS (contInued)
The fair value hierarchy prioritizes the inputs to valuation methods used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the
fair value hierarchy are as follows:
Level 1:
Unadjusted quoted prices in active markets that are accessible at the measurement date for
Level 2:
identical, unrestricted assets or liabilities.
Quoted prices in markets that are not active, or inputs that are observable either directly or
Level 3:
indirectly, for substantially the full term of the asset or liability.
Prices or valuation techniques that require inputs that are both significant to the fair value
measurement and are unobservable (i.e. supported with little or no market activity).
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is
significant to the fair value measurement.
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the
fair value hierarchy used at December 31, 2017 and 2016 are as follows (in thousands):
Fair Value Measurement Reporting Date using
Description
December 31, 2017
Total
Level 1
Level 2
Level 3
Available for Sale:
U.S. Treasury securities
States and political subdivisions
Corporate obligations
Mortgage-backed securities-government
sponsored entities
Total available for sale
December 31, 2016
$
1,998
120,478
9,989
148,656
281,121
$
Available for Sale:
U.S. Treasury securities
States and political subdivisions
Corporate obligations
Mortgage-backed securities-government
sponsored entities
Equity securities-financial services
Total available for sale
$
$
1,997
125,101
10,112
164,930
424
302,564
$
$
$
$
-
-
-
-
-
-
-
-
-
424
424
$
$
$
$
1,998
120,478
9,989
148,656
281,121
1,997
125,101
10,112
164,930
-
302,140
$
$
$
$
-
-
-
-
-
-
-
-
-
-
-
78
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 14 - FaIr vaLueS oF FInancIaL InStrumentS (contInued)
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, 2017 and 2016 are as follows (in thousands):
Fair Value Measurement Reporting Date using
Description
December 31, 2017
Impaired Loans
Foreclosed real estate
December 31, 2016
Impaired Loans
Foreclosed real estate
Total
Level 1
Level 2
Level 3
$
$
1,247
1,661
2,624
5,302
$
$
$
$
-
-
-
-
-
-
-
-
$
$
1,247
1,661
2,624
5,302
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:
December 31, 2017
(dollars in thousands)
Impaired Loans
Impaired Loans
Foreclosed real estate owned
December 31, 2016
Impaired Loans
Impaired Loans
Forclosed real estate owned
Quantitative Information about Level 3 Fair Value Measurements
Fair Value
Estimate
Valuation
Techniques
Unobservable
Input
Range
(Weighted Average)
$
$
131
1,116
$
1,661
$
$
$
1,473
1,151
5,302
Appraisal of
collateral(1)
Appraisal
adjustments(2)
10% (10%)
4-5.25% (5.11%)
0%
Present value
of future cash
flows
Loan discount rate
Probability of default
0-42.60% (14.68%)
Appraisal of
collateral(1)
Liquidation
expenses(2)
Appraisal of
collateral(1)
Appraisal
adjustments(2)
10% (10%)
Present value
of future cash
flows
Appraisal of
collateral(1)
Loan discount rate
Probability of default
4-5.25% (5.11%)
0%
Liquidation
expenses(2)
10%
(1) Fair value is generally determined through independent appraisals of the underlying collateral, which
generally include various Level 3 inputs which are not identifiable, less any associated allowance.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and
estimated liquidation expenses. The range and weighted average of liquidation expenses and other
appraisal adjustments are presented as a percent of the appraisal.
79
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 14 - FaIr vaLueS oF FInancIaL InStrumentS (contInued)
The following information should not be interpreted as an estimate of the fair value of the entire Company
since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to
a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons
between the Company’s disclosures and those of other companies may not be meaningful.
The following methods and assumptions were used to estimate the fair values of the Company’s financial
instruments at December 31, 2017 and 2016.
Cash and cash equivalents (carried at cost):
The carrying amounts reported in the consolidated balance sheet for cash and short-term instruments
approximate those assets’ fair values.
Securities:
The fair value of securities available for sale (carried at fair value) are determined by obtaining quoted
market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a
mathematical technique used widely in the industry to value debt securities without relying exclusively on
quoted market prices for the specific securities but rather by relying on the securities’ relationship to other
benchmark quoted prices. For certain securities which are not traded in active markets or are subject to transfer
restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are
generally based on available market evidence (Level 3). In the absence of such evidence, management’s best
estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3
investments. Internal cash flow models using a present value formula that includes assumptions market
participants would use along with indicative exit pricing obtained from broker/dealers (where available) are
used to support fair values of certain Level 3 investments, if applicable.
Loans receivable (carried at cost):
The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance
sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are
calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal.
Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values
are based on carrying values.
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, 2017, the fair value investment in impaired loans totaled $1,247,000 which included five
loans which did not require a valuation allowance since the estimated realizable value of the collateral exceeded
the recorded investment in the loan. As of December 31, 2017, the Company has recognized charge-offs against
the allowance for loan losses on these impaired loans in the amount of $277,000 over the life of the loans.
80
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT note 14 - FaIr vaLueS oF FInancIaL InStrumentS (contInued)
As of December 31, 2016, the fair value investment in impaired loans totaled $2,624,000 which included seven
loans which did not require a valuation allowance since the estimated realizable value of the collateral exceeded
the recorded investment in the loan. As of December 31, 2016, the Company has recognized charge-offs against
the allowance for loan losses on these impaired loans in the amount of $831,000 over the life of the loans.
Mortgage Servicing Rights (generally carried at cost):
The Company utilizes a third party provider to estimate the fair value of certain loan servicing rights. Fair
value for the purpose of this measurement is determined by estimating potential revenues and expenses of the
various loan pools to arrive at a net cash flow stream, and then utilize present value methodologies on the cash
flow stream at a current market yield.
Foreclosed real estate owned (carried at fair value):
Real estate properties acquired through, or in lieu of loan foreclosure are to be sold and are carried at fair value
less estimated cost to sell. Fair value is based upon independent market prices, appraised value of the collateral
or management’s estimation of the value of the collateral. These assets are included in Level 3 fair value based
upon the lowest level of input that is significant to the fair value measurement.
Restricted investment in Federal Home Loan Bank stock (carried at cost):
The Company, as a member of the Federal Home Loan Bank (FHLB) system is required to maintain an
investment in capital stock of its district FHLB according to a predetermined formula. This regulatory stock has
no quoted market value and is carried at cost.
Bank owned life insurance (carried at cost):
The fair value is equal to the cash surrender value of the Bank owned life insurance.
Accrued interest receivable and payable (carried at cost):
The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.
Deposit liabilities (carried at cost except certificates of deposit which are at fair value):
The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings
and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date
(i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule
of aggregated expected monthly maturities on time deposits.
Short-term borrowings (carried at cost):
The carrying amounts of short-term borrowings approximate their fair values.
Other borrowings (carried at cost):
Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for
new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained
from this active market represent a market value that is deemed to represent the transfer price if the liability
were assumed by a third party.
81
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 14 - FaIr vaLueS oF FInancIaL InStrumentS (contInued)
Off-balance sheet financial instruments (disclosed at cost):
Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of
credit) are based on fees currently charged in the market to enter into similar agreements, taking into account,
the remaining terms of the agreements and the counterparties’ credit standing.
The estimated fair values of the Bank’s financial instruments were as follows at December 31, 2017 and
December 31, 2016 (In thousands):
Fair Value Measurements at December 31, 2017
Carrying
Amount
Fair Value
Level 1
Level 2
Level 3
Financial assets:
Cash and cash equivalents
Securities
Loans receivable, net
Mortgage servicing rights
Regulatory stock
Bank owned life insurance
Financial liabilities:
Accrued interest receivable
Deposits
Short-term borrowings
Other borrowings
Off-balance sheet financial instruments:
Accrued interest payable
Commitments to extend credit and
outstanding letters of credit
Financial assets:
Cash and cash equivalents
Securities
Loans receivable, net
Mortgage servicing rights
Regulatory stock
Bank owned life insurance
Accrued interest receivable
$
16,697
281,121
756,458
200
3,505
37,060
3,716
$
16,697
281,121
756,092
223
3,505
37,060
3,716
$
16,697
-
-
-
3,505
37,060
3,716
$
-
281,121
-
-
-
-
-
$
-
-
756,092
223
-
-
-
929,384
42,530
35,945
1,434
929,709
42,530
35,514
1,434
609,090
42,530
-
1,434
-
-
-
-
-
-
-
-
320,619
-
35,514
-
-
Fair Value Measurements at December 31, 2016
Carrying
Amount
Fair Value
Level 1
Level 2
Level 3
$
17,174
302,564
707,426
232
2,119
36,133
3,643
$
17,174
302,564
716,661
250
2,119
36,133
3,643
$
$
17,174
424
-
-
2,119
36,133
3,643
$
-
302,140
-
-
-
-
-
Financial liabilities:
Deposits
Short-term borrowings
Other borrowings
Off-balance sheet financial instruments:
Accrued interest payable
925,385
32,811
32,001
1,069
925,561
32,811
31,863
1,069
629,829
32,811
-
1,069
Commitments to extend credit
and outstanding letters of credit
-
-
-
-
-
-
-
-
82
-
-
716,661
250
-
-
-
295,732
-
31,863
-
-
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 15 – accumuLated otHer comPreHenSIve Income (LoSS)
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, 2017 and 2016:
Balance as of December 31, 2016
Other comprehensive income (loss) before reclassification
Amount reclassified from accumulated
other comprehensive income
Total other comprehensive income
Reclassification of certain income tax effects from
other comprehensive income
Balance as of December 31, 2017
Balance as of December 31, 2015
Other comprehensive loss before reclassification
Amount reclassified from accumulated
other comprehensive income
Total other comprehensive loss
Balance as of December 31, 2016
Unrealized gains
(losses) on
available for sale
(4,437)
$
securities (a)
2,127
(230)
1,897
(501)
(3,041)
$
Unrealized gains
(losses) on
available for sale
securities (a)
488
(4,740)
$
(185)
(4,925)
(4,437)
$
Unrealized gain (loss)
318
$
on pension liability (a) Total (a)
(11)
(4,119)
2,116
$
-
(11)
67
374
(230)
1,886
(434)
(2,667)
$
Unrealized gain on
pension liability (a)
Total (a)
-
318
-
318
318
$
$
488
(4,422)
(185)
(4,607)
(4,119)
$
$
$
(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, 2017 and 2016:
Details about other comprehensive income
Unrealized gains on available for sale securities
Amount Reclassified
From Accumulated
Other
Comprehensive
Income (Loss) (a)
Affected Line Item in
the Consolidated
Statement of
Income
Twelve
months ended
2017
December 31,
348
(118)
230
$
$
Twelve
months ended
2016
December 31,
$
$
284
(99)
185
Net realized gains on sales of securities
Income tax expense
(a) Amounts in parentheses indicate debits to net income.
83
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 16 – acQuISItIon oF deLaware bancSHareS, Inc.
On July 31, 2016, Norwood Financial Corp. (the “Company”) closed on its acquisition of Delaware Bancshares, Inc.
(“Delaware”) pursuant to the terms of the Agreement and Plan of Merger, dated March 10, 2016, by and among the
Company, Wayne Bank, Delaware and The National Bank of Delaware County (the “Merger Agreement”).
Pursuant to the terms of the Merger Agreement, Delaware was merged with and into the Company, with the
Company as the surviving corporation of the merger (the “Merger”). At the effective time of the Merger, each
outstanding share of the common stock of Delaware was converted into, at the election of the holder but subject
to the limitations and allocation and proration provisions set forth in the Merger Agreement, either $16.68 in
cash or 0.6221 of a share of the common stock, par value $0.10 per share (the “Common Stock”) of the Company.
In the aggregate, the merger consideration paid to Delaware shareholders consisted of approximately $3,860,000
in cash and 431,605 shares of Norwood common stock. Immediately following the Merger, The National Bank of
Delaware County (“NBDC”) was merged with and into Wayne Bank, a wholly-owned subsidiary of the Company,
with Wayne Bank as the surviving entity.
In connection with the Merger, the Company assumed the obligations of Delaware under the Indenture, dated
as of October 31, 2007, by and between Delaware, as issuer, and Wells Fargo Bank, National Association, as
trustee (the “Indenture”) and Delaware’s Junior Subordinated Debt Securities, due January 1, 2038 (the “Debt
Securities”) issued thereunder. The Debt Securities were issued by Delaware in connection with a private
placement completed on October 31, 2007 of $8.0 million of trust preferred securities issued through the
Delaware Bancshares Capital Trust I (the “Trust”). The proceeds from the initial sale of the trust preferred
securities were used by the Trust to purchase the Debt Securities. The Debt Securities bore interest at a variable
rate which reset quarterly at LIBOR plus 2.4%, and were redeemable, in whole or in part, without penalty, at the
option of the Company, beginning on January 1, 2013 and on any January 1, April 1, July 1 or October 1 thereafter.
The interest payments on the Debt Securities made by the Company were used to pay the quarterly distributions
payable by the Trust to the holders of the trust preferred securities. On October 3, 2016, the Company redeemed
the Debt Securities and the trust preferred securities in full.
The acquired assets and assumed liabilities were measured at estimated fair values. Management made
significant estimates and exercised significant judgment in accounting for the acquisition. Management
measured loan fair values based on loan file reviews, appraised collateral values, expected cash flows, and
historical loss factors of NBDC. The Company also recorded an identifiable intangible asset representing the
core deposit base of NBDC based on management’s evaluation of the cost of such deposits relative to alternative
funding sources. Management used significant estimates including the average lives of depository accounts,
future interest rate levels, and the cost of servicing various depository products. Management used market
quotations to determine the fair value of investment securities.
The business combination resulted in the acquisition of loans with and without evidence of credit quality
deterioration. NBDC loans were deemed impaired at the acquisition date if the Company did not expect to
receive all contractually required cash flows due to concerns about credit quality. Such loans were fair valued
and the difference between contractually required payments at the acquisition date and cash flows expected to be
collected was recorded as a non-accretable difference. At the acquisition date, the Company recorded $1,410,000
of purchased credit-impaired loans subject to a non-accretable difference of $260,000. The method of measuring
carrying value of purchased loans differs from loans originated by the Company (originated loans), and as such,
the Company identifies purchased loans and purchased loans with a credit quality discount and originated loans
at amortized cost.
84
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 16 – acQuISItIon oF deLaware bancSHareS, Inc. (contInued)
NBDC’s loans without evidence of credit deterioration were fair valued by discounting both expected principal
and interest cash flows using an observable discount rate for similar instruments that a market participant would
consider in determining fair value. Additionally, consideration was given to management’s best estimates of
default rates and payment speeds. At acquisition, NBDC’s loan portfolio without evidence of deterioration totaled
$111,307,000 and was recorded at a fair value of $109,693,000.
The following table summarizes the purchase of Delaware Bancshares, Inc. as of July 31, 2016:
(Dollars In Thousands, Except Per Share Data)
Purchase Price Consideration in Common Stock
Delaware Bancshares, Inc. common shares settled for stock
Exchange Ratio
Norwood Financial Corp. shares issued
Value assigned to Norwood Financial Corp. common share
Purchase price assigned to Delaware Bancshares, Inc. common shares
exchanged for Norwood Financial Corp.
Purchase Price Consideration – Cash for Common Stock
Delaware Bancshares, Inc. shares exchanged for cash
Purchase price paid to each Delaware Bancshares, Inc.
common shares exchanged for cash
Purchase price assigned to Delaware Bancshares, Inc.
common shares exchanged for cash
Purchase price consideration-Cash in Lieu of Fractional Shares
Total Purchase Price
Net Assets Acquired:
Delaware Bancshares, Inc. shareholders’ equity
Delaware Bancshares, Inc. goodwill and intangibles
Adjustments to reflect assets acquired at fair value:
Total tangible equity
Investments
Loans
Interest rate
General credit
Specific credit- non-amortizing
Specific credit – amortizing
Core deposit intangible
Deferred loan fees
Premises and equipment
Allowance for loan and lease losses
Deferred tax assets
Other
Adjustments to reflect liabilities acquired at fair value:
Time deposits
Goodwill resulting from merger
85
694,114
0.6221
431,605
28.15
$
231,385
$
16.68
$ 19,357
(7,640)
11,717
219
1,486
(1,614)
(260)
(239)
449
(296)
3,053
1,651
(1,417)
(97)
(252)
$ 12,150
$
3,860
6
$ 16,016
14,400
1,616
$
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 16 – acQuISItIon oF deLaware bancSHareS, Inc. (contInued)
The following condensed statement reflects the values assigned to Delaware Bancshares, Inc. net assets as of
acquisition date:
(In Thousands)
Total purchase price
Net assets acquired:
Cash
Securities available for sale
Loans
Premises and equipment, net
Regulatory stock
Accrued interest receivable
Bank-owned life insurance
Core deposit intangible
Deferred tax assets
Other assets
Time deposits
Deposits other than time deposits
Borrowings
Accrued interest payable
Other liabilities
$ 16,016
$ 14,977
208,488
116,674
7,292
279
1,626
14,762
449
3,034
3,282
(71,342)
(255,921)
(21,232)
(95)
(7,873)
Goodwill resulting from Delaware Bancshares, Inc. Merger
14,400
1,616
$
The Company recorded goodwill and other intangibles associated with the purchase of Delaware Bancshares,
Inc. totaling $1,616,000. Goodwill is not amortized, but is periodically evaluated for impairment. The Company
did not recognize any impairment during the twelve months ended December 31, 2017 and 2016. The carrying
amount of the goodwill at December 31, 2017 and 2016, related to the Delaware acquisition was $1,616,000.
Identifiable intangibles are amortized to their estimated residual values over the expected useful lives.
The core deposit intangible recorded with the purchase of Delaware is being amortized over ten years.
Such lives are also periodically reassessed to determine if any amortization period adjustments are required.
During the twelve months ended December 31, 2017 and 2016, no such adjustments were recorded.
The identifiable intangible assets consist of a core deposit intangible which is being amortized on an accelerated
basis over the useful life of such assets. The carrying amount of the core deposit intangible at December 31, 2017
and 2016 was $337,000 and $416,000 with $112,000 and $34,000, respectively, of accumulated amortization as
of that date.
As of December 31, 2017, the current year and estimated future amortization expense for the core deposit
intangible is:
(In thousands)
2018
2019
2020
2021
2022
After five years
$
$
70
62
54
46
37
68
337
86
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 16 – acQuISItIon oF deLaware bancSHareS, Inc. (contInued)
The following table presents unaudited pro forma information for the years ended December 31, 2017 and
2016 as if the acquisition of Delaware Bancshares, Inc. had occurred on January 1, 2016 under the “Pro Forma”
columns. The table below has been prepared for comparative purposes only and is not necessarily indicative of
the actual results that would have been attained had the acquisition occurred as of the beginning of the periods
presented, nor is it indicative of future results. Furthermore, the unaudited pro-forma information does not
reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings as a result of
the integration and consolidation of the acquisition. Merger and acquisition integration costs and amortization of
fair value adjustments are included in the numbers below.
(In Thousands, Except Per Share Data)
Net interest income
Non-interest income
Net income
Pro forma earnings per share:
Basic
Diluted
$
$
$
Nonrecurring merger and acquisition integration costs included in the pro-forma table above are
(in thousands):
$
Pro Forma
2016
2017
Year Ended December 31,
34,908
6,911
8,198
$
1.32
1.31
-
-
-
37,199
6,487
3,588
$
$
0.58
0.58
$
1,602
638
810
Professional fees
Data Processing related
Other
87
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
note 17 - norwood FInancIaL corP (Parent comPany onLy) FInancIaL InFormatIon
BALANCE SHEETS
ASSETS
Cash on deposit in bank subsidiary
Securities available for sale
Investment in bank subsidiary
Other assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Total assets
Liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
STATEMENTS OF INCOME
Income:
Dividends from bank subsidiary
Net realized gain on sales of securities
Other interest income
Expenses
Income tax benefit
Net Income
Equity in undistributed earnings of subsidiary
Comprehensive Income
STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to
net cash provided by operating activities:
Undistributed earnings of bank subsidiary
Net gains on sales of securities
Decrease in prepaid federal income tax
Net Cash Provided by Operating Activities
Other, net
CASH FLOWS FROM INVESTING ACTIVITIES
Net Cash Provided by (Used in) Investing Activities
Proceeds from sales of securities
Outlays for business acquisitions
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of borrowings
Stock options exercised
ESOP purchase of shares from treasury stock
Purchase of treasury stock
Net Cash Used in Financing Activities
Cash dividends paid
Net Increase in Cash and Cash Equivalents
CASH AND CASH EQUIVALENTS - BEGINNING
CASH AND CASH EQUIVALENTS - ENDING
88
December 31,
2017
2016
(In Thousands)
$
4,782
-
110,218
2,858
$ 117,858
$
2,119
115,739
$ 117,858
$
3,005
397
105,138
4,539
$ 113,079
2,000
$
111,079
$ 113,079
Years Ended December 31,
2017
2016
(In Thousands)
2015
$
$
$
5,412
130
8
5,550
511
5,039
(127)
5,166
3,032
8,198
10,084
$
$
$
28,598
-
12
28,610
1,347
27,263
(225)
27,488
(20,777)
6,711
2,104
$
$
$
4,574
-
11
4,585
313
4,272
(103)
4,375
1,533
5,908
5,934
Years Ended December 31,
2017
2016
(In Thousands)
2015
$
8,198
$
6,711
$
5,908
(3,032)
(130)
1,736
389
7,161
422
-
422
-
1,040
127
(1,587)
(5,386)
(5,806)
1,777
3,005
4,782
$
20,777
-
-
(267)
27,221
-
(2,324)
(2,324)
(19,856)
843
131
(447)
(4,714)
(24,043)
854
(1,533)
-
-
(3)
4,372
-
-
-
-
441
146
(127)
(4,527)
(4,067)
305
2,151
3,005
1,846
2,151
$
$
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
InveStor InFormatIon
Stock LIStIng
Norwood Financial Corp stock is traded on the Nasdaq Global Market under the symbol NWFL. The following
firms are known to make a market in the Company’s stock:
Boenning & Scattergood, Inc.
RBC Capital Markets
West Conshohocken, PA 19428
800-883-1212
Janney Montgomery Scott, LLC
Philadelphia, PA 19103
888-848-4677
Stifel Nicolaus
Scranton, PA 18503
800-638-4417
tranSFer agent
St. Louis, MO 63102
314-342-2000
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 50500, Louisville, KY 40233-5000, or by overnight delivery at 462 South 4th Street, Suite 1600,
Louisville, KY 40202.
dIvIdend caLendar
Dividends on Norwood Financial Corp 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
Norwood stock. Participants in the Plan may also elect to make cash contributions to purchase additional shares
of common stock. Please contact the transfer agent for additional information.
Sec rePortS and addItIonaL InFormatIon
A copy of the Company’s annual report on Form 10-K for its fiscal year ended December 31, 2017
including financial statements and schedules thereto, required to be filed with the Securities and
Exchange Commission is available on the Company’s website at www.waynebank.com under the
Stockholder Services tab. A copy of the report may be obtained upon written request of any stockholder,
investor or analyst by contacting William S. Lance, Executive Vice President, Chief Financial Officer and
Secretary, Norwood Financial Corp., 717 Main Street, PO Box 269, Honesdale, PA 18431, 570-253-1455.
89
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT
tHIS Page IntentIonaLLy LeFt bLank
90
NORWOOD FINANCIAL CORP - 2017 CONSOLIDATED FINANCIAL REPORT SUMMARY OF SELECTED FINANCIAL DATA
(dollars in thousands except per share data)
*Per share information has been restated to reflect the 50% stock dividend declared in 2017 and the 10% stock dividend declared in 2013.
NORWOOD FINANCIAL CORP
William W. Davis, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Chairman of the BoarD
Dr. anDreW a. forte . . . . . . . . . . . . . . . . . . . . . . . . . viCe Chairman of the BoarD
leWis J. Critelli . . . . . . . . . . . . . . . . . . . . PresiDent & Chief exeCutive offiCer
William s. lanCe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .exeCutive viCe PresiDent,
Chief finanCial offiCer & seCretary
James f. Burke . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . exeCutive viCe PresiDent
John f. CarmoDy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . exeCutive viCe PresiDent
roBert J. manCuso . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . exeCutive viCe PresiDent
John h. sanDers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .senior viCe PresiDent
WAYNE BANK
staCey kuhn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . assistant viCe PresiDent
vonnie leWis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . assistant viCe PresiDent
Bonnie loCkett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . assistant viCe PresiDent
kristine malti. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . assistant viCe PresiDent
eileen mershon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . assistant viCe PresiDent
frank J. sislo. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . assistant viCe PresiDent
miChele Bailey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Community offiCe manager
karen Beissel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Community offiCe manager
Craig D. grimm. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Community offiCe manager
teresa hynes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Community offiCe manager
erin mason . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Community offiCe manager
gerry moore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Community offiCe manager
sanDra C. mruCzkeWyCz. . . . . . . . . . . . . . . . . . . . .Community offiCe manager
William W. Davis, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Chairman of the BoarD
maDeline Portugal . . . . . . . . . . . . . . . . . . . . . . . . . .Community offiCe manager
Dr. anDreW a. forte . . . . . . . . . . . . . . . . . . . . . . . . . viCe Chairman of the BoarD
annamae reChtoroviC . . . . . . . . . . . . . . . . . . . . . . .Community offiCe manager
leWis J. Critelli . . . . . . . . . . . . . . . . . . . . PresiDent & Chief exeCutive offiCer
DeBra renWiCk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Community offiCe manager
William s. lanCe . . . . . . . . . . . . . . exeCutive viCe PresiDent, Chief finanCial
elaine reuthe. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Community offiCe manager
offiCer & seCretary
Christine routleDge . . . . . . . . . . . . . . . . . . . . . . . .Community offiCe manager
James f. Burke . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .exeCutive viCe PresiDent,
JessiCa santiago. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Community offiCe manager
Chief lenDing offiCer
Denise seman. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Community offiCe manager
John f. CarmoDy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . exeCutive viCe PresiDent
laurie J. BishoP . . . . . . . . . . . . . . . . . . .assistant Community offiCe manager
Chief CreDit offiCer
timothy gutliPh . . . . . . . . . . . . . . . . . .assistant Community offiCe manager
roBert J. manCuso . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . exeCutive viCe PresiDent
Denise r. kern. . . . . . . . . . . . . . . . . . . . .assistant Community offiCe manager
Chief oPerating offiCer
tariq Peters . . . . . . . . . . . . . . . . . . . . . . .assistant Community offiCe manager
ryan J. frenCh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .senior viCe PresiDent
Diane l. riChter . . . . . . . . . . . . . . . . . . .assistant Community offiCe manager
John h. sanDers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .senior viCe PresiDent
Cheryl Wilkerson . . . . . . . . . . . . . . .assistant Community offiCe manager
DireCtor of human resourCes
tanyia vannatta . . . . . . . . . . . . . . . . . . .assistant Community offiCe manager
Diane m. Wylam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .senior viCe PresiDent
traCy gooDriCh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . training offiCer
retail lenDing manager
geralD J. arnese . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer loan offiCer
senior trust offiCer
annette JurkoWski . . . . . . . . . . . . . . . . . assistant Bsa/ComPlianCe offiCer
thomas a. Byrne . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .senior viCe PresiDent
marianne mCConeghy . . . . . . . . . . . . . . . . . . . . . . . . . trust oPerations offiCer
JosePh a. Castrogiovanni . . . . . . . . . . . . . . . . . . . . . . . . .senior viCe PresiDent
linDa a. meskey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CreDit analyst
kenneth C. Doolittle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .senior viCe PresiDent
amanDa r. miller . . . . . . . . . . . .CommerCial loan DoCumentation offiCer
John forD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .senior viCe PresiDent
Jamie PaDula . . . . . . . . . . . . . . . . human resourCes aDministrative offiCer
Joann fuller. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .senior viCe PresiDent
kathryn a. serniak . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .mortgage loan offiCer
nanCy a. hart. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . senior viCe PresiDent,
Briana sCholl . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CreDit analyst manager
Controller & assistant seCretary
gary steiCh. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .resourCe reCovery offiCer
DaWnette hotaling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .senior viCe PresiDent
Bonnie rutleDge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . assistant trust offiCer
linDa D. maDer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .senior viCe PresiDent
Doreen a. sWingle. . . . . . . . . . . . . .resiDential mortgage lenDing offiCer
vinCent o’Bell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .senior viCe PresiDent
John veleBer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .senior viCe PresiDent
BarBara a. riDD . . . . . . . . . . . . . . . . . . . viCe PresiDent & assistant seCretary
roBert J. Behrens, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
Pilar Cueva . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
steven r. Daniels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
karen r. gasPer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
amanDa hall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
Jill a. hessling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
NORWOOD INVESTMENT CORP
leWis J. Critelli
William s. lanCe
sCott C. riCkarD
PresiDent & Chief exeCutive offiCer
treasurer
investment exeCutive
lPl finanCial
MONROE COUNTY ASSOCIATE BOARD
John e. koCzWara . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
miChael J. Baxter
Julie r. kuen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
sara Cramer
Juliette P. mCkerrell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
Dr. anDreW a. forte
heiDi PiCkett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
ralPh a. matergia, esq.
mark W. ranzan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
riCharD a. siarniak . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
kara r. suChy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
eli t. tomlinson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viCe PresiDent
Douglas W. atherton . . . . . . . . . . . . . . . . . . . . . . . . . . . assistant viCe PresiDent
Derek Bellinger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . assistant viCe PresiDent
NEW YORK ADVISORY BOARD
miChael P. Degroat
leonarD a. govern
Douglas a. sluiter
James h. ott
marvin PaPillon
ray PriCe
ron saraJian
PatriCk P. galloWay
meg hungerforD
Joel smith
FOR ThE YEARS ENDED DECEMBER 31,20172016201520142013net interest income$34,908$28,590 $24,521 $24,560$24,661Provision for loan losses2,2002,0504,5801,6802,400other income6,4964,8413,9693,9404,734net realized gains on sales of loans and securities4153387301,170881other expenses24,87023,12417,10017,72716,705income before income taxes14,7498,5957,54010,26311,171income tax expense6,5511,8841,6322,6062,706NET INCOME$8,198$6,711$5,908$7,657$8,465net income per share -Basic*$1.32$1.16$1.07$1.40$1.55 -Diluted*$1.31$1.15$1.07$1.40$1.55Cash dividends declared*$0.87$0.83 $0.83$0.80$0.77Dividend pay-out ratio65.91%71.84%77.50%57.14%49.79%return on average assets0.73%0.74%0.80%1.08%1.23%return on average equity7.04%6.17%5.83%7.92%9.13%BALANCES AT YEAR-ENDtotal assets$1,132,916$1,111,183$750,505$711,635$711,234loans receivable764,092713,889559,925501,135503,097allowance for loan losses7,6346,4637,2985,8755,708total deposits929,384925,385550,909559,944541,182stockholders’ equity115,739111,079100,99899,04191,864trust assets under management157,838138,167131,690134,888126,673Book value per share*$18.61$17.43$18.26$17.53$16.95tier 1 Capital to risk-adjusted assets13.16%13.27%15.86%17.33%16.53%total Capital to risk-adjusted assets14.11%14.12%17.09%18.49%17.66%allowance for loan losses to total loans1.00%0.91%1.30%1.17%1.13%non-performing assets to total assets0.37%0.64%1.33%1.31%1.48%
Norwood Financial Corp
2017 Annual Report
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