Norwood FINANCIAL CorP
2o19 An nua l R eport
DeAR STOCKHOLDe RS,
We are pleased to share with you the Company’s performance and achievements in this Annual Report.
In 2019, your Company had a record level of earnings, 8.8% growth in loans, improvement in credit
quality metrics, and an expansion into a new market in Luzerne County, PA. We also increased our cash
dividend in the fourth quarter of 2019 to $0.25 per share, which represents a 4.2% increase compared
to the fourth quarter of 2018. This marks 27 consecutive years of an increase in the Company’s cash
dividend, truly an impressive record. In January 2020, we announced the signing of a definitive merger
agreement to acquire Upstate New York Bancorp, Inc., and its subsidiary, USNY Bank, which operates
the Bank of the Finger Lakes and the Bank of Cooperstown.
For the year ended December 31, 2019, the Company earned a record $14,215,000 compared to
$13,651,000 earned in 2018. The increase reflects improvement in net interest income, as well as a
reduction in the provision for loan losses. The return on average assets for the year was 1.18%, with
a return on average equity of 10.83%, compared to 1.19% and 11.71%, respectively, in 2018. Total
assets were $1.231 billion as of December 31, 2019. Loans receivable increased $74.4 million to
total $924.6 million as of December 31, 2019, with total deposits of $957.5 million and stockholders’
equity of $137.1 million. I encourage you to read Management’s Discussion and Analysis and the
Financial Statements with Footnotes for a full report on our performance.
The year 2019 marked the 148th anniversary of Wayne Bank helping the community grow.
Though many things have changed throughout the years, Wayne Bank has remained committed to our
longstanding principles. We believe in building lasting relationships with our customers, reinvesting in
our communities, and providing value to our stockholders.
We now have 27 Community Offices in seven counties to better serve the residents, businesses, and
organizations of Northeastern Pennsylvania and the Southern Tier of New York; and employ more than
220 local people who are passionate about helping their neighbors and communities.
Wayne Bank has experienced tremendous growth throughout our organization this year. In 2019, our
in-office network generated almost 1,100 mortgage, home equity, and other personal loans totaling $47
million; our business lending division originated over $100 million in commercial loans; and our dealer
center produced auto and other loans totaling $78 million.
One of the most exciting events of the year was our expansion into Luzerne County, Pennsylvania.
Wayne Bank is dedicated to investing in the communities we serve and we are proud to continue that
tradition in Luzerne County. We opened our Hanover Township Community Office in April of 2019, and
a second Community Office, located in Exeter, followed in November. Both offices house retail banking
and commercial lending professionals, and offer Wayne Bank’s complete line of products and services
for consumers and businesses. Drive-up banking, drive-up ATMs, and ample parking further enhance
both locations. This expansion has resulted in positive market opportunities for our deposit, lending,
and wealth management products.
Wayne Bank is committed to providing the most advanced, secure, and user friendly bank technology,
along with a knowledgeable staff and innovative tools to demonstrate how easy and accessible it is to
use. This offers customers the convenience of banking from anywhere, combined with the comfort
“
we Now hA ve 27 CommuNIty oFFICes
IN seveN C ouNtI es to better serve
the resI deN ts, busINesses, ANd
orgANIzAtIoN s oF NortheA sterN
PeNNsyLv ANIA ANd the s outherN
tIer oF New y ork.
”
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2o19 Annu a l Report
Norwood FINANCIAL CorP
Wurtsboro, NY
Roscoe, NY
Narrowsburg, NY
Monticello, NY
Liberty, NY
Callicoon, NY
SULLIVAN COUNTY
Shohola, PA
Milford, PA
PIKE COUNTY
Exeter, PA
Hanover Township, PA
LUzERNE COUNTY
Tannersville, PA
Stroud Mall (Stroudsburg), PA
Marshalls Creek, PA
Effort, PA
MONROE COUNTY
Clarks Summit, PA
Central Scranton, PA
LACKAWANNA COUNTY
Willow Avenue (Honesdale), PA
Waymart, PA
Lakewood, PA
Honesdale, PA
Hawley, PA
WAYNE COUNTY
Walton, NY
Stamford, NY
Roxbury, NY
Hamden, NY
Franklin, NY
Andes, NY
DELAWARE COUNTY
N
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R
W
O
O
D
F
I
N
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C
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Norwood FINANCIAL CorP
2o19 A n nu a l R ep ort
DeAR STOCKHOLDe RS,
We are pleased to share with you the Company’s performance and achievements in this Annual Report.
In 2019, your Company had a record level of earnings, 8.8% growth in loans, improvement in credit
quality metrics, and an expansion into a new market in Luzerne County, PA. We also increased our cash
dividend in the fourth quarter of 2019 to $0.25 per share, which represents a 4.2% increase compared
to the fourth quarter of 2018. This marks 27 consecutive years of an increase in the Company’s cash
dividend, truly an impressive record. In January 2020, we announced the signing of a definitive merger
agreement to acquire Upstate New York Bancorp, Inc., and its subsidiary, USNY Bank, which operates
the Bank of the Finger Lakes and the Bank of Cooperstown.
For the year ended December 31, 2019, the Company earned a record $14,215,000 compared to
$13,651,000 earned in 2018. The increase reflects improvement in net interest income, as well as a
reduction in the provision for loan losses. The return on average assets for the year was 1.18%, with
a return on average equity of 10.83%, compared to 1.19% and 11.71%, respectively, in 2018. Total
assets were $1.231 billion as of December 31, 2019. Loans receivable increased $74.4 million to
total $924.6 million as of December 31, 2019, with total deposits of $957.5 million and stockholders’
equity of $137.1 million. I encourage you to read Management’s Discussion and Analysis and the
Financial Statements with Footnotes for a full report on our performance.
The year 2019 marked the 148th anniversary of Wayne Bank helping the community grow.
Though many things have changed throughout the years, Wayne Bank has remained committed to our
longstanding principles. We believe in building lasting relationships with our customers, reinvesting in
our communities, and providing value to our stockholders.
We now have 27 Community Offices in seven counties to better serve the residents, businesses, and
organizations of Northeastern Pennsylvania and the Southern Tier of New York; and employ more than
220 local people who are passionate about helping their neighbors and communities.
Wayne Bank has experienced tremendous growth throughout our organization this year. In 2019, our
in-office network generated almost 1,100 mortgage, home equity, and other personal loans totaling $47
million; our business lending division originated over $100 million in commercial loans; and our dealer
center produced auto and other loans totaling $78 million.
One of the most exciting events of the year was our expansion into Luzerne County, Pennsylvania.
Wayne Bank is dedicated to investing in the communities we serve and we are proud to continue that
tradition in Luzerne County. We opened our Hanover Township Community Office in April of 2019, and
a second Community Office, located in Exeter, followed in November. Both offices house retail banking
and commercial lending professionals, and offer Wayne Bank’s complete line of products and services
for consumers and businesses. Drive-up banking, drive-up ATMs, and ample parking further enhance
both locations. This expansion has resulted in positive market opportunities for our deposit, lending,
and wealth management products.
Wayne Bank is committed to providing the most advanced, secure, and user friendly bank technology,
along with a knowledgeable staff and innovative tools to demonstrate how easy and accessible it is to
use. This offers customers the convenience of banking from anywhere, combined with the comfort
“
we Now hA ve 27 CommuNIty oFFICes
IN seveN C ouNtI es to better serve
the resI deN ts, busINesses, ANd
orgANIzAtIoN s oF NortheA sterN
PeNNsyLv ANIA ANd the s outherN
tIer oF New y ork.
”
www.wAyNebANk.C om
2o19 A n nua l Report
Norwood FINANCIAL CorP
Wurtsboro, NY
Roscoe, NY
Narrowsburg, NY
Monticello, NY
Liberty, NY
Callicoon, NY
SULLIVAN COUNTY
Shohola, PA
Milford, PA
PIKE COUNTY
Exeter, PA
Hanover Township, PA
LUzERNE COUNTY
Tannersville, PA
Stroud Mall (Stroudsburg), PA
Marshalls Creek, PA
Effort, PA
MONROE COUNTY
Clarks Summit, PA
Central Scranton, PA
LACKAWANNA COUNTY
Willow Avenue (Honesdale), PA
Waymart, PA
Lakewood, PA
Honesdale, PA
Hawley, PA
WAYNE COUNTY
Walton, NY
Stamford, NY
Roxbury, NY
Hamden, NY
Franklin, NY
Andes, NY
DELAWARE COUNTY
Norwood FINANCIAL CorP
2o19 A n n u al Report
of personalized service from their local bank. In 2019, we launched seven additional Smart Banking
Solution Centers in Community Offices throughout our market area. Our innovative Smart Banking
Solution Centers showcase the Bank’s suite of electronic banking services, the centerpiece of which is
an interactive, floor standing touchscreen that customers can use to watch video tutorials. At the end of
the fourth quarter, Mobile Banking users totaled over 26,000, Mobile Deposit Capture was utilized by
over 4,500 individuals and businesses, 10,000 deposit customers were enrolled in eStatements, and
CardValet users increased by 75% over the prior year.
As a community bank, Wayne Bank is an integral part of both the local community and economy.
In 2019, we contributed to hundreds of organizations throughout Pennsylvania and New York and our
employees helped their communities to grow first-hand through event participation and service to local
charities. By supporting these organizations, Wayne Bank is reinvesting in the communities we serve
and encouraging economic growth.
“
the FouNdAtIoN oF wAyNe bANk’s suCCess Is
buILt uPoN our exCePtIoNAL emPLoyees ANd theIr
CoNtINued dedICAtIoN to our orgANIzAtIoN.
Our efforts did not go unnoticed, and we are proud to have been recognized with the Readers’ Choice
Award for “Best Bank” and “Best Customer Service” from The River Reporter. The awards are voted on
by the publication’s readers to celebrate the best people, places, and businesses in the local community.
”
The foundation of Wayne Bank’s success is built upon our exceptional employees and their continued
dedication to our organization. We are proud to honor the talents and accomplishments of those
employees who celebrated milestone years of service with Wayne Bank in 2019. Congratulations to
Ann M. Crane, Accounting Specialist, and Bonnie Lockett, Assistant Vice President and Credit Analyst,
for their thirty five years of service. Teresa Hynes, Assistant Vice President and Roxbury Community
Office Manager, and David F. Yamialkowski, Facilities Specialist, both achieved thirty years of service.
Adding employees who celebrated twenty-five, twenty, fifteen, ten, and five year anniversaries, the group
represents 365 years of Community Banking experience.
Wayne Bank’s growth provided many opportunities for employee advancement and over the past
year numerous employees were recognized for their outstanding contributions. The most senior
promotions included Karen Gasper to Senior Vice President and BSA/CRA/Regulatory Compliance
Officer, Julie Kuen to Senior Vice President and Retail Operations and Electronic Banking Manager
and Kris Malti to Vice President and Deposit Operations and Fraud Manager. In addition, many other
employees were promoted throughout the Company. Senior Vice President and Commercial Loan
Officer, Vincent O’Bell, was also honored by the Pennsylvania Bankers Association for his 40 years of
service to the banking industry.
ReDeSIGNe D SPACeS
Our newly redesigned board room showcases our building’s
uniquely arched windows.
SeNIOR MANAGeMe NT TeAM
Wayne Bank Senior Management Team (left to right):
John H. Sanders, Senior Vice President
Diane Wylam, Esq., Senior Vice President
Robert J. Mancuso, Executive Vice President
Lewis J. Critelli, President and Chief Executive Officer
James F. Burke, Executive Vice President
William S. Lance, Executive Vice President
John F. Carmody, Executive Vice President
Ryan J. French, Senior Vice President
B O A R D O f DI Re C TO R S
Norwood Financial Corp and Wayne Bank Board of Directors (seated, left to right) Dr. Andrew A. Forte, Vice Chairman of the Board; Lewis J. Critelli,
President & Chief Executive Officer; William W. Davis, Jr., Chairman of the Board (standing, left to right) Meg L. Hungerford, Kevin M. Lamont,
Joseph W. Adams, Ralph A. Matergia, Esq., Dr. Kenneth A. Phillips, Susan Campfield, (not pictured) Russell L. Ridd, Director Emeritus
The Bank’s Community Office management team also grew in 2019. Kristen Bolin joined the
Bank as the Exeter Community Office Manager, Nicola D. Folina as the Monticello Community Office
Manager, Julie Shenyo as the Hanover Township Community Office Manager, and Krystin Woodcock
as the Stamford Community Office Manager. Using their experience, customer service skills, and local
knowledge, these bankers will provide sound financial solutions to the residents, businesses, and
organizations within their market areas.
“
we beLIeve IN buILdINg LAstINg reLAtIoNshIPs wIth
our Customers, reINvestINg IN our CommuNItIes,
ANd ProvIdINg vALue to our stoCkhoLders.
”
We are truly excited to have announced that we have entered into a Definitive Merger Agreement
pursuant to which Norwood Financial Corp will acquire Upstate New York Bancorp, Inc. and its wholly
owned subsidiary, USNY Bank. When the merger is completed, this will expand our footprint into Ontario
and Yates Counties, with Bank of the Finger Lakes, and into Otsego County, with Bank of Cooperstown.
The combined Company will have approximately $1.7 billion assets and 31 offices throughout five
counties in Northeastern Pennsylvania, two counties in the Southern Tier of New York, and three
counties in Upstate New York. The merger is expected to close in the third quarter of 2020 pending
regulatory and shareholder approvals. We look forward to welcoming our new customers, stockholders,
and employees as a result of the transaction.
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 and CEO
eXeTeR COMMUNITY OffICe
HANOveR TOwNSHIP
COMMUNITY OffICe
eXPANSION TO LUZe RNe COUNTY
We opened our Hanover Township Community Office during April
of 2019, and a second Community Office, located in Exeter,
followed in November. Both offices house retail banking and
commercial lending professionals, and offer Wayne Bank’s
complete line of products and services for consumers and
businesses. Drive-up banking, drive-up ATMs, and ample
parking further enhance both locations.
STAMFORD
ROXBURY
FRANKLIN
DELAWARE
HAMDEN
ANDES
WALTON
LAKEWOOD
ROSCOE
SULLIVAN
WAYNE
CALLICOON
LIBERTY
WAYMART
LACKAWANNA
HONESDALE
CLARKS
SUMMMIT
HAWLEY
SHOHOLA
WILLOW
AVE
NARROWSBURG
MONTICELLO
WURTSBORO
CENTRAL
SCRANTON
PIKE
MILFORD
EXETER
HANOVER
TOWNSHIP
LUZERNE
MONROE
TANNERSVILLE
MARSHALLS
CREEK
STROUD MALL
EFFORT
Norwood FINANCIAL CorP
2o19 An nual Report
of personalized service from their local bank. In 2019, we launched seven additional Smart Banking
Solution Centers in Community Offices throughout our market area. Our innovative Smart Banking
Solution Centers showcase the Bank’s suite of electronic banking services, the centerpiece of which is
an interactive, floor standing touchscreen that customers can use to watch video tutorials. At the end of
the fourth quarter, Mobile Banking users totaled over 26,000, Mobile Deposit Capture was utilized by
over 4,500 individuals and businesses, 10,000 deposit customers were enrolled in eStatements, and
CardValet users increased by 75% over the prior year.
As a community bank, Wayne Bank is an integral part of both the local community and economy.
In 2019, we contributed to hundreds of organizations throughout Pennsylvania and New York and our
employees helped their communities to grow first-hand through event participation and service to local
charities. By supporting these organizations, Wayne Bank is reinvesting in the communities we serve
and encouraging economic growth.
”
Our efforts did not go unnoticed, and we are proud to have been recognized with the Readers’ Choice
Award for “Best Bank” and “Best Customer Service” from The River Reporter. The awards are voted on
by the publication’s readers to celebrate the best people, places, and businesses in the local community.
The foundation of Wayne Bank’s success is built upon our exceptional employees and their continued
dedication to our organization. We are proud to honor the talents and accomplishments of those
employees who celebrated milestone years of service with Wayne Bank in 2019. Congratulations to
Ann M. Crane, Accounting Specialist, and Bonnie Lockett, Assistant Vice President and Credit Analyst,
for their thirty five years of service. Teresa Hynes, Assistant Vice President and Roxbury Community
Office Manager, and David F. Yamialkowski, Facilities Specialist, both achieved thirty years of service.
Adding employees who celebrated twenty-five, twenty, fifteen, ten, and five year anniversaries, the group
represents 365 years of Community Banking experience.
Wayne Bank’s growth provided many opportunities for employee advancement and over the past
year numerous employees were recognized for their outstanding contributions. The most senior
promotions included Karen Gasper to Senior Vice President and BSA/CRA/Regulatory Compliance
Officer, Julie Kuen to Senior Vice President and Retail Operations and Electronic Banking Manager
and Kris Malti to Vice President and Deposit Operations and Fraud Manager. In addition, many other
employees were promoted throughout the Company. Senior Vice President and Commercial Loan
Officer, Vincent O’Bell, was also honored by the Pennsylvania Bankers Association for his 40 years of
service to the banking industry.
SeNIOR MANAGeMe NT TeAM
Wayne Bank Senior Management Team (left to right):
John H. Sanders, Senior Vice President
Diane Wylam, Esq., Senior Vice President
Robert J. Mancuso, Executive Vice President
Lewis J. Critelli, President and Chief Executive Officer
James F. Burke, Executive Vice President
William S. Lance, Executive Vice President
John F. Carmody, Executive Vice President
Ryan J. French, Senior Vice President
“
the FouNdAtIoN oF wAyNe bANk’s suCCess Is
buILt uPoN our exCePtIoNAL emPLoyees ANd theIr
CoNtINued dedICAtIoN to our orgANIzAtIoN.
B O A R D O f DI Re C TO R S
Norwood Financial Corp and Wayne Bank Board of Directors (seated, left to right) Dr. Andrew A. Forte, Vice Chairman of the Board; Lewis J. Critelli,
President & Chief Executive Officer; William W. Davis, Jr., Chairman of the Board (standing, left to right) Meg L. Hungerford, Kevin M. Lamont,
Joseph W. Adams, Ralph A. Matergia, Esq., Dr. Kenneth A. Phillips, Susan Campfield, (not pictured) Russell L. Ridd, Director Emeritus
ReDeSIGNe D SPACeS
Our newly redesigned board room showcases our building’s
uniquely arched windows.
The Bank’s Community Office management team also grew in 2019. Kristen Bolin joined the
Bank as the Exeter Community Office Manager, Nicola D. Folina as the Monticello Community Office
Manager, Julie Shenyo as the Hanover Township Community Office Manager, and Krystin Woodcock
as the Stamford Community Office Manager. Using their experience, customer service skills, and local
knowledge, these bankers will provide sound financial solutions to the residents, businesses, and
organizations within their market areas.
“
we beLIeve IN buILdINg LAstINg reLAtIoNshIPs wIth
our Customers, reINvestINg IN our CommuNItIes,
ANd ProvIdINg vALue to our stoCkhoLders.
”
We are truly excited to have announced that we have entered into a Definitive Merger Agreement
pursuant to which Norwood Financial Corp will acquire Upstate New York Bancorp, Inc. and its wholly
owned subsidiary, USNY Bank. When the merger is completed, this will expand our footprint into Ontario
and Yates Counties, with Bank of the Finger Lakes, and into Otsego County, with Bank of Cooperstown.
The combined Company will have approximately $1.7 billion assets and 31 offices throughout five
counties in Northeastern Pennsylvania, two counties in the Southern Tier of New York, and three
counties in Upstate New York. The merger is expected to close in the third quarter of 2020 pending
regulatory and shareholder approvals. We look forward to welcoming our new customers, stockholders,
and employees as a result of the transaction.
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 and CEO
eXeTeR COMMUNITY OffICe
HANOveR TOwNSHIP
COMMUNITY OffICe
eXPANSION TO LUZe RNe COUNTY
We opened our Hanover Township Community Office during April
of 2019, and a second Community Office, located in Exeter,
followed in November. Both offices house retail banking and
commercial lending professionals, and offer Wayne Bank’s
complete line of products and services for consumers and
businesses. Drive-up banking, drive-up ATMs, and ample
parking further enhance both locations.
STAMFORD
ROXBURY
FRANKLIN
DELAWARE
HAMDEN
ANDES
WALTON
LAKEWOOD
ROSCOE
SULLIVAN
WAYNE
CALLICOON
LIBERTY
WAYMART
LACKAWANNA
HONESDALE
CLARKS
SUMMMIT
HAWLEY
SHOHOLA
WILLOW
AVE
NARROWSBURG
MONTICELLO
WURTSBORO
CENTRAL
SCRANTON
PIKE
MILFORD
EXETER
HANOVER
TOWNSHIP
LUZERNE
MONROE
TANNERSVILLE
MARSHALLS
CREEK
STROUD MALL
EFFORT
www.wAyNEb ANk.COm
2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP
NORWOOD FINANCIAL CORP
NORWOOD FINANCIAL CORP
SUMMARY OF SELECTE D F IN ANCI AL DATA
DIRECTORY OF OF FICERS
(dollars in thousands except per share data)
FOR ThE YEARS ENDED DECEMBER 31,
2019
2018
2017
2016
2015
Net interest income
Provision for loan losses
Other income
Net realized gains on sales of loans and securities
$38,606
$36,839
$34,908
$28,590
$24,521
1,250
1,725
2,200
2,050
4,580
6,355
423
6,837
228
6,496
4,841
3,969
415
338
730
John H. Sanders ..................................... Senior Vice President
Other expenses
27,311
25,975
24,870
23,124
17,100
Income before income taxes
16,823
16,204
14,749
Income tax expense
2,608
2,553
6,551
8,595
1,884
7,540
1,632
NET INCOME
Net income per share -Basic*
-Diluted*
Cash dividends declared*
Dividend pay-out ratio
Return on average assets
Return on average equity
BALANCES AT YEAR-END
Total assets
Loans receivable
$14,215
$13,651
$8,198
$6,711
$5,908
$2.27
$2.25
$0.97
$2.19
$2.17
$0.90
$1.32
$1.31
$0.87
$1.16
$1.15
$0.83
$1.07
$1.07
$0.83
42.73%
41.10%
65.91%
71.84%
77.50%
1.18%
1.19%
10.83%
11.71%
0.73%
7.04%
0.74%
6.17%
0.80%
5.83%
$1,230,610
$1,184,559
$1,132,916
$1,111,183
$750,505
924,581
850,182
764,092
713,889
559,925
Allowance for loan losses
8,509
8,452
7,634
6,463
7,298
Total deposits
Stockholders’ equity
957,529
946,780
929,384
925,385
550,909
Eli T. Tomlinson ..................................... Senior Vice President
Amanda R. Miller .......Commercial Loan Documentation Officer
137,428
122,285
115,739
111,079
100,998
Trust assets under management
170,685
151,224
157,838
138,167
131,690
Book value per share*
$21.67
$19.43
$18.61
$17.43
$18.26
Tier 1 Capital to risk-adjusted assets
13.08%
13.04%
13.16%
13.27%
15.86%
John E. Koczwara ............................................. Vice President
NORWOOD INVESTMENT CORP
Total Capital to risk-adjusted assets
13.98%
14.00%
14.11%
14.12%
17.09%
Allowance for loan losses to total loans
Non-performing assets to total assets
0.92%
0.19%
0.99%
0.19%
1.00%
0.91%
0.37%
0.64%
1.30%
1.33%
*Per share information has been restated to reflect the 50% stock dividend declared in 2017.
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
WAYNE BANK
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, Chief Lending Officer
John F. Carmody ......Executive Vice President, Chief Credit Officer
Robert J. Mancuso .............................Executive Vice President,
Chief Operating Officer
Ryan J. French ..................................... Senior Vice President,
Director of Human Resources
John H. Sanders ... Senior Vice President, Retail Lending Manager
Diane M. Wylam ........Senior Vice President, Senior Trust Officer
Thomas A. Byrne .................................... Senior Vice President
Joseph A. Castrogiovanni ........................ Senior Vice President
Kenneth C. Doolittle ............................... Senior Vice President
John Ford .............................................. Senior Vice President
Karen R. Gasper ..................................... Senior Vice President
Nancy A. Hart ........................ Senior Vice President, Controller
& Assistant Secretary
Dawnette Hotaling .................................. Senior Vice President
Julie R. Kuen ......................................... Senior Vice President
Linda D. Mader ...................................... Senior Vice President
Teresa Hynes ...................................... Assistant Vice President
Stacey L. Kuhn ................................... Assistant Vice President
Vonnie Lewis ...................................... Assistant Vice President
Bonnie Lockett ................................... Assistant Vice President
Eileen Mershon .................................. Assistant Vice President
Gerry Moore ....................................... Assistant Vice President
Christine Routledge ............................ Assistant Vice President
Tanyia Vannatta .................................. Assistant Vice President
Michele Bailey................................ Community Office Manager
Karen Beissel ................................. Community Office Manager
Kristen Bolin .................................. Community Office Manager
Nicola Folina .................................. Community Office Manager
Brenda Gessell ............................... Community Office Manager
Timothy Gutliph .............................. Community Office Manager
Sandra C. Mruczkewycz ................... Community Office Manager
Madeline Portugal ........................... Community Office Manager
AnnaMae Rechtorovic ..................... Community Office Manager
Debra Renwick ............................... Community Office Manager
Jessica Santiago ............................. Community Office Manager
Denise Seman ................................ Community Office Manager
Julie Shenyo .................................. Community Office Manager
Cheryl Wilkerson ............................. Community Office Manager
Krystin Woodcock ........................... Community Office Manager
Laurie J. Bishop ............... Assistant Community Office Manager
Kimberly Charner .............. Assistant Community Office Manager
Kimberly Crellin .............. Assistant Community Office Manager
Denise R. Kern ................. Assistant Community Office Manager
Joelyn Lee........................ Assistant Community Office Manager
Wendy Olsen .................... Assistant Community Office Manager
Diane L. Richter ............... Assistant Community Office Manager
Stacey Stephenson ........... Assistant Community Office Manager
Ronald DePasquale ............................Facilities/Security Officer
Kimberly Gola .......................Residential Mortgage Underwriter
Annette Jurkowski ................. Assistant BSA/Compliance Officer
Kristen E. Lancia .......................................... Marketing Officer
Vincent O’Bell ........................................ Senior Vice President
Marianne McConeghy ........................... Trust Operations Officer
F. Jeffrey Reimer .................................... Senior Vice President
Linda A. Meskey ................................................Credit Analyst
John Veleber .......................................... Senior Vice President
Corissa O’Malley ............................Loan Documentation Officer
Barbara A. Ridd .................Vice President & Assistant Secretary
Robert J. Behrens, Jr. ........................................ Vice President
Pilar Cueva ...................................................... Vice President
Steven R. Daniels ............................................. Vice President
Amanda Hall .................................................... Vice President
Jill A. Hessling ................................................. Vice President
Jamie Padula ..............Human Resources Administrative Officer
Elaine Reuthe ..............Retail Training and Development Officer
Kathryn A. Serniak ................................. Mortgage Loan Officer
Briana Scholl ......................................Credit Analyst Manager
Gary Steich ..................................... Resource Recovery Officer
Bonnie Rutledge .................................... Assistant Trust Officer
Paul Kosiba...................................................... Vice President
Lewis J. Critelli ................... President & Chief Executive Officer
Kristine Malti .................................................. Vice President
Frank J. Sislo ................................................... Vice President
Kara R. Suchy .................................................. Vice President
Gerald J. Arnese ................................. Assistant Vice President
Douglas W. Atherton ............................ Assistant Vice President
John Baker ......................................... Assistant Vice President
William S. Lance .....................................................Treasurer
Scott C. Rickard .............. Investment Executive, LPL Financial
MONROE COUNTY ASSOCIATE BOARD
Michael J. Baxter
Sara Cramer
Derek Bellinger ................................... Assistant Vice President
Dr. Andrew A. Forte
Craig D. Grimm .................................. Assistant Vice President
Ralph A. Matergia, Esq.
James H. Ott
Marvin Papillon
Ray Price
Ron Sarajian
2019 CONSOLIDATED FINANCIAL REPORT
Management’s Discussion & Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Management’s Report On Internal Control Over Financial Reporting . . . . 20
Reports Of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . 21
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Consolidated Statements Of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Consolidated Statements Of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . 25
Consolidated Statements Of Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . 26
Consolidated Statements Of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Notes To Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Investor Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
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, 2019 and 2018, and for the
years ended December 31, 2019 and 2018. 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, the ability
to control costs and expenses, demand for real estate, government fiscal and trade 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.
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
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, 2019 and 2018 represent temporary impairment of the securities.
The fair value of financial instruments is based upon quoted market prices, when available. For those
instances where a quoted price is not available, fair values are based upon observable market based
parameters, as well as unobservable parameters. Any such valuation is applied consistently over time.
In connection with the acquisition of North Penn 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. 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, 2019 was $14,215,000, which was $564,000
higher than the $13,651,000 earned in 2018. Earnings per share on a fully diluted basis were $2.25 for 2019
compared to $2.17 in 2018. The return on average assets for the year was 1.18%, with a return on average
equity of 10.83%, compared to 1.19% and 11.71%, respectively, in 2018. Net interest income increased
$1,767,000 and the provision for loan losses decreased $475,000, to offset the $482,000 reduction in other
income and the $1,336,000 increase in other expenses.
Net interest income (fully taxable equivalent, or fte) totaled $39,612,000, which was an increase of
$1,713,000 from the 2018 total. Average loans outstanding increased $84.8 million in 2019, which resulted
in an increase in fte interest income of $5,540,000. Total average securities decreased $35.9 million in 2019
as proceeds were utilized to fund loan growth, resulting in an $814,000 decrease in fte interest income on
securities. Average interest-bearing deposits increased $21.5 million due to growth in time deposits, and
resulted in a $2,495,000 increase in interest expense. The cost of borrowed funds increased $526,000
compared to the prior year due primarily to a $14.4 million increase in average borrowings and an increase in
the cost of borrowings. The resulting fte net interest spread decreased eight basis points to 3.28% in 2019 as
a 24 basis point improvement in the yield earned was offset by a 32 basis point increase in the cost of funds.
Loans receivable increased $74.3 million from the prior year-end. Loan growth included a $40.1 million
increase in commercial loans due to a $23.6 million increase in commercial, financial and agriculture loans,
and a $16.5 million increase in commercial real estate loans. Retail loans increased $34.2 million in 2019
due to a $39.7 million increase in indirect auto and marine financing. Residential mortgage loans and
construction loans decreased $5.5 million, net, due to the sale of $4.7 million residential mortgage loans.
Total non-performing loans decreased from $1.1 million, or 0.13% of total loans at the end of 2018, to
$795,000, or 0.09% of total loans on December 31, 2019. Net charge-offs totaled $1,193,000 in 2019,
which was an increase from the $907,000 recorded in 2018. Based on management’s analysis, the Company
2
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
determined that it would be appropriate to allocate $1,250,000 to the allowance for loan losses in 2019, which
resulted in a decrease in the ratio of the allowance for loan losses to total loans outstanding of 0.92% in 2019
compared to 0.99% on December 31, 2018. The allowance for loan losses represented 1,070% of total non-
performing loans on December 31, 2019 compared to 741% as of December 31, 2018.
Total other income for the year ended December 31, 2019 totaled $6,778,000 compared to $7,065,000 in the
prior year, a decrease of $287,000. Gains on the sale of loans and investment securities increased $195,000 in
the aggregate, while service charges and fees increased $155,000. Earnings and proceeds on life insurance
policies decreased $658,000 compared to 2018.
Other expenses were $27,311,000 in 2019 compared to $25,975,000 for the similar period in 2018, an
increase of $1,336,000. Salaries and benefits costs increased $635,000 in 2019, while data processing costs
increased $442,000. Foreclosed real estate expense decreased $127,000 in 2019, while all other operating
expenses increased $386,000, net. Income tax expense for the year totaled $2,608,000, which was an increase
of $55,000 from the prior year. The effective tax rate in 2019 was 15.5% compared to 15.8% in 2018.
The following table sets forth changes in net income (in thousands):
Net income 2018
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
Data processing and related operations
Foreclosed real estate owned
Other expenses
Income tax expense
Net income 2019
$ 13,651
1,767
475
195
(482)
(635)
(24)
(442)
127
(362)
(55)
$ 14,215
4
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
FINANCIAL CONDITION
TOTAL ASSETS
Total assets as of December 31, 2019 were $1.231 billion compared to $1.185 billion as of year-end 2018, an
increase of $46.1 million. The increase in assets was primarily attributable to organic loan growth.
LOANS RECEIVABLE
As of December 31, 2019, loans receivable totaled $924.5 million compared to $850.2 million as of year-end
2018, an increase of $74.3 million. Commercial loans, including commercial real estate, grew $40.1 million,
while retail loans increased $34.2 million during the year.
Residential real estate loans, which include home equity lending, totaled $229.8 million as of December 31,
2019, compared to $235.5 million as of year-end 2018, a decrease of $5.7 million. Home equity loans
decreased $1.2 million to $51.2 million in 2019, from $52.4 million at December 31, 2018. 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. During 2019, the Company sold residential real
estate loans totaling $4.7 million.
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
$391.3 million as of December 31, 2019, increasing from $374.8 million as of December 31, 2018. The terms
for commercial real estate loans are typically 15 to 20 years, with adjustable rates based on a spread over
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 and loans to municipalities increased $23.6 million to $134.2 million as of
December 31, 2019.
The Company’s indirect lending portfolio (included in consumer loans to individuals) increased $39.8
million to $141.2 million as of December 31, 2019.
ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS
The allowance for loan losses totaled $8,509,000 as of December 31, 2019 and represented 0.92% of total
loans receivable compared to $8,452,000 and 0.99% of total loans as of year-end 2018. Net charge-offs for
2019 totaled $1,193,000 and represented 0.13% of average loans compared to $907,000 and 0.11% of average
loans in 2018.
Non-performing assets consist of non-performing loans and real estate owned as a result of foreclosure,
which is held for sale. Loans are placed on non-accrual status when management believes that a borrower’s
financial condition is such that collection of interest is doubtful. Commercial and real estate related loans are
generally placed on non-accrual when interest is 90 days delinquent. When loans are placed on non-accrual,
unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is
charged against the allowance for loan losses.
4
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
As of December 31, 2019, non-performing loans totaled $795,000 and represented 0.09% of total loans
compared to $1,140,000 or 0.13% as of December 31, 2018. The decrease in the level of non-performing
loans reflects the resolution of loan workout efforts on several residential real estate properties. Based on
management’s analysis, the Company added $1,250,000 to the allowance for loan losses for the year ended
December 31, 2019 compared to $1,725,000 in 2018.
Foreclosed real estate owned totaled $1,556,000 as of December 31, 2019 and $1,115,000 as of December
31, 2018. During 2019, seven properties with a carrying value of $454,000 were disposed of through sales.
The Company recorded a net gain of $94,000 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 also includes an analysis of impaired loans and
a historical review of losses. Other factors considered in the analysis include: concentrations of credit in
specific industries in the commercial portfolio, the local and regional economic conditions, trends in
delinquencies, internal risk rating classifications, total growth in the portfolio and fluctuations in large balance
credits. For loans acquired, including those that are not deemed impaired at acquisition, credit discounts
representing the principal losses expected over the life of the loan are a component of the initial fair value.
Subsequent to the purchase date, the methods utilized to estimate the required allowance for credit losses for
these loans is similar to originated loans; however, the Company records a provision for loan losses only when
the required allowance exceeds any remaining credit discounts.
The Company has limited exposure to higher-risk loans. The Company does not originate option ARM
products, interest only loans, sub-prime loans or loans with initial teaser rates in its residential real estate
portfolio. The Company has $10.7 million of junior lien home equity loans. For 2019, there were no charge-offs
for this portfolio.
As of December 31, 2019, 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 2019, the Company recognized an increase in its adversely classified loans due primarily to the
transfer of one loan relationship with a balance of $4.1 million to special mention during 2019. Based on
current analysis, the loans appear to be adequately collateralized, but were classified due to a debt service
ratio below Company standards. The Company assesses a loss factor against the classified loans, which is
based on prior experience. Classified loans that 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.
At December 31, 2019, the recorded investment in impaired loans, not requiring an allowance for loan
losses, was $143,000 (net of charge-offs against the allowance for loan losses of $251,000). The recorded
investment in impaired loans, requiring an allowance for loan losses, was $2,001,000 (net of charge-offs
against the allowance for loan losses of $0). The recorded investment in impaired loans, not requiring an
allowance for loan losses, was $1,319,000 (net of charge-offs of $428,000) and there were no loans requiring
an allowance as of December 31, 2018.
6
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
As a result of its analysis, after applying these factors, management considers the allowance as of December
31, 2019, adequate. However, there can be no assurance that the allowance for loan losses will be adequate to
cover significant losses that might be incurred in the future.
The following table sets forth information with respect to the Company’s allowance for loan losses at the
dates indicated:
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
2019
$
8,452
(102)
(627)
-
(284)
(420)
(1,433)
24
125
-
48
43
240
1,250
8,509
$
0.92%
$
0.13%
10.7x
2018
Year-ended December 31,
(dollars in thousands)
2017
2016
2015
$
7,634
$
6,463
$
7,298
$ 5,875
(197)
(283)
-
(246)
(263)
(989)
9
33
-
8
32
82
1,725
8,452
(83)
(902)
(28)
-
(207)
(1,220)
(123)
(2,711)
-
(15)
(102)
(2,951)
(224)
(2,883)
-
-
(91)
(3,198)
6
159
-
-
26
191
2,200
7,634
6
15
-
-
45
66
2,050
6,463
20
-
-
-
21
41
4,580
7,298
$
$
$
0.99%
1.00%
0.91%
1.30%
0.11%
7.4x
0.14%
3.1x
0.46%
3.4x
0.60%
1.0x
6
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
The following table sets forth information regarding non-performing assets:
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
Non-performing assets to total assets
SECURITIES
$
2019
567
99
-
50
79
795
2018
December 31,
(dollars in thousands)
2017
2016
2015
$
798
-
342
-
-
$
1,706
-
277
-
-
$
1,136
762
-
28
-
$
440
-
6,649
-
43
1,140
1,983
1,926
7,132
-
-
-
795
1,556
2,351
$
0.09%
$
0.06%
0.19%
496
1
1,140
1,115
2,255
2,479
1,661
4,140
1,927
5,302
7,229
7,132
2,847
9,979
$
$
$
0.13%
0.32%
0.27%
1.27%
0.10%
0.22%
0.17%
0.95 %
0.19%
0.37%
0.65%
1.33%
The securities portfolio consists of 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, 2019, 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, 2019, $210.2 million of
securities were so classified and carried at their fair value, with unrealized gains, net of tax, of $354,000
included in accumulated other comprehensive income as a component of stockholders’ equity.
As of December 31, 2019, the average life of the portfolio was 3.7 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 $21.5 million, while maturities and principal
reductions totaled $33.7million and proceeds from sales were $27.2 million. The purchases were funded
principally by cash flow generated from the portfolio and excess overnight liquidity.
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
The carrying value of the securities portfolio at December 31 is as follows:
2019
2018
(dollars in thousands)
States and political subdivisions
Corporate obligations
Mortgage-backed securities –
government sponsored entities
Total
$
Carrying
71,305
Value
4,100
% of
33.9%
portfolio
2.0%
134,800
210,205
64.1%
100.0%
$
Carrying
Value
97,613
8,640
% of
portfolio
40.1%
3.6%
137,024
243,277
56.3%
100.0%
$
$
The portfolio had no adjustable-rate instruments as of December 31, 2019 and 2018. 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, 2019, 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, 2019, the Company held 90 investment securities in a loss position, which had a combined unrealized
loss of $1.1 million. Management believes that these losses are principally due to changes in interest rates
and represent temporary impairment as the Company does not have the intent to sell these securities and it
is more likely than not that it will not have to sell the securities before recovery of their cost basis.
No impairment charges were recognized in 2019 or 2018.
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 $210.2 million, which represents 17.1% of total assets at December 31, 2019, 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 ended December 31, 2019
and 2018.
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.
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
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, 2019 and 2018 was $226,000 and $220,000, 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. At December 31, 2019, the Company did not have any brokered deposits through its
participation in the Certificate of Deposit Account Registry Service (CDARS).
Total deposits as of December 31, 2019, totaled $957.5 million, increasing $10.7 million from year-end
2018. Deposit growth included a $15.5 million increase in certificates of deposit and a $16.3 million increase
in demand deposits. The large increase in certificates of deposit includes deposits of local municipalities and
school districts, which offset an $8.5 million decrease in CDARS deposits. Money market and savings deposits
decreased $21.0 million during 2019, which includes the transfer of funds to time deposits.
Time deposits over $250,000, which consist principally of school district funds, other public funds and
short-term deposits from large commercial customers with maturities generally less than one year, totaled
$133.9 million as of December 31, 2019, compared to $112.7 million at year-end 2018. These deposits are
subject to competitive bid and the Company bases its bid on current interest rates, loan demand, investment
portfolio structure and the relative cost of other funding sources.
As of December 31, 2019, non-interest bearing demand deposits totaled $207.3 million compared to $201.5
million at year-end 2018. Cash management accounts in the form of securities sold under agreements to
repurchase included in short-term borrowings, totaled $30.5 million at year end 2019 compared to $37.5
million as of December 31, 2018. 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, 2019, the level of net interest income at risk in a ± 200 basis points
increase was within the Company’s policy limit of a decline less than 10% of net interest income.
10
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
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, 2019, the Bank had a positive 90-day interest sensitivity gap of $5.9 million or 0.5% 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 period. The level of RSA and RSL for an interval is managed by ALCO strategies,
including adjusting the average life of the investment portfolio through purchases and sales, pricing of deposit
liabilities to attract long or short-term time deposits, utilizing borrowings to fund loan growth, loan pricing to
encourage variable-rate products and evaluation of loan sales of long-term, fixed-rate mortgages.
The Company analyzes and measures the time periods in which RSA and RSL will mature or reprice in
accordance with their contractual terms and assumptions. Management believes that the assumptions used are
reasonable. The interest rate sensitivity of assets and liabilities could vary substantially if differing assumptions
were used or if actual experience differs from the assumptions used in the analysis. For example, although
certain assets and liabilities may have similar maturities or periods to repricing, they may react in differing
degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind
changes in market rates. Interest rates may change at different rates changing the shape of the yield curve.
The level of rates on the investment securities may also be affected by the spread relationship between different
investments. Further, in the event of a significant change in interest rates, prepayment and early withdrawal
levels would likely deviate significantly from those assumed. Finally, the ability of borrowers to service their
adjustable-rate debt may decrease in the event of an interest rate increase. It should be noted that the operating
results of the Company are not subject to foreign currency exchange or commodity price risk.
10
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
The following table displays interest-sensitivity as of December 31, 2019 (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, 2018
Interest sensitivity gap
Cumulative gap
RSA/RSL-cumulative
3 Months
or Less
3-12
Months
1-3 Years
Over
3 Years
Total
$
377
16,536
137,625
$ 154,538
$ 58,036
47,169
43,449
$ 148,654
$
-
33,273
180,917
$ 214,190
$
-
61,460
299,218
$ 360,678
$
-
98,936
306,821
$ 405,757
$
377
210,205
924,581
$ 1,135,163
$ 57,651
211,477
27,516
$ 296,644
$ 152,979
64,974
32,461
$ 250,414
$ 120,846
37,098
15,268
$ 173,212
$ 389,512
360,718
118,694
$ 868,924
$
5,884
5,884
104.0%
$ (82,454)
(76,570)
82.8%
$ 110,264
33,694
$ 232,545
266,239
104.8%
130.6%
$ 266,239
$ (18,749)
(18,749)
88.4%
$ (60,791)
(79,540)
79.8%
$
18,852
(60,688)
$ 303,804
243,116
91.1%
128.6%
$ 243,116
Certain interest-bearing deposits with no stated maturity dates are included in the interest-sensitivity table
above. The balances allocated to the respective time periods represent an estimate of the total outstanding
balance that has the potential to migrate either through withdrawal or transfer to time deposits, thereby
impacting the interest-sensitivity position of the Company. The estimates were derived from a non-maturity
deposit study, which was prepared by an independent third party provider. The purpose of the study was to
estimate the average lives of various deposit types and their pricing sensitivity to movements in market
interest rates.
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, 2019, the Company had cash and cash equivalents of $15.4 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 $210.2 million, which could be used for
liquidity needs. This totals $225.6 million and represents 18.3% of total assets compared to $261.6 million
and 22.1% of total assets as of December 31, 2018. The Company also monitors other liquidity measures for
compliance with Company policy guidelines. Based upon these measures, the Company believes its liquidity
position is adequate.
12
13
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
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 lines was $190.0 million, with $31.8 million outstanding at December 31, 2019
and $15.6 million outstanding at December 31, 2018. The maximum borrowing capacity from FHLB was
$425.2 million. As of December 31, 2019, the Company had $56.4 million in term borrowings from the FHLB,
compared to $52.3 million at December 31, 2018.
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, 2019 totaled $104.8 million. They consisted of $44.3 million of commitments for residential
and commercial real estate, construction and land development loans; $25.9 million in unused home equity
lines of credit; $3.7 million in performance and standby letters of credit; and $30.9 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.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the most significant source of revenue for the Company and represented 85.1% of
total revenue for the year ended December 31, 2019. Net interest income (fte) totaled $39,612,000 for the
year ended December 31, 2019 compared to $37,899,000 for 2018, an increase of $1,713,000. The resulting
fte net interest spread and net interest margin were 3.28% and 3.53%, respectively, in 2019 compared to
3.36% and 3.53%, respectively, in 2018.
Interest income (fte) for the year ended December 31, 2019 totaled $48,290,000 compared to $43,556,000
in 2018. The fte yield on average earning assets was 4.30%, increasing 24 basis points from the 4.06%
reported last year. The tax-equivalent yield on total loans improved 18 basis points to 4.78% in 2019, while
average loans outstanding increased $84.8 million, resulting in an increase in interest income (fte) from loans
of $5.5 million. The yield on securities increased three basis points in 2019 due primarily to repositioning of
the portfolio into higher yielding securities. Average securities outstanding decreased $35.9 million as cash
flow from the portfolio was utilized to fund loan growth, and interest income (fte) from the portfolio
decreased $814,000.
12
13
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
Interest expense was $8,678,000 in 2019 which resulted in an average cost of interest-bearing liabilities of
1.02% compared to total interest expense of $5,657,000 in 2018 with an average cost of 0.70%. Total interest-
bearing deposits cost was 0.94% in 2019, which was an increase of 31 basis points over the prior year.
Non-maturity deposit rates increased slightly, but time certificates of deposit repriced to current market rates
upon maturity, resulting in an increase in the rate paid from 1.27% in 2018 to 1.79%. Long-term borrowings
also repriced upward in 2019 reflecting the impact from higher cost borrowings added in 2019.
OTHER INCOME
Total other income was $6,778,000 for the year ended December 31, 2019 compared to $7,065,000 in 2018, a
decrease of $287,000. Gains on the sale of loans and investment securities increased $195,000 in the aggregate,
while service charges and fees increased $155,000. Earnings on and proceeds from bank-owned life insurance
decreased $296,000 from the prior year, while all other items of other income increased $9,000, net.
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
Gains on sales of loans
Earnings on and proceeds from bank-owned life insurance
Other income
Net realized gains on sales of securities
Total
OTHER EXPENSES
2019
301
384
1,380
94
691
1,424
610
141
169
830
500
6,524
254
6,778
$
$
2018
$
263
398
1,505
96
563
1,330
589
185
15
1,126
782
6,852
213
$ 7,065
Other expenses totaled $27,311,000 for the year ended December 31, 2019 compared to $25,975,000 in the
prior year. The $1,336,000 increase in costs reflects a higher level of salaries and employee benefits costs,
which increased $635,000 in 2019, and increased data processing expenses, which increased $442,000.
All other operating expenses increased $259,000, net. The Company’s efficiency ratio, which measures total
other expenses as a percentage of net interest income (fte) plus other income, was 58.9% in 2019 compared
to 57.8% in 2018. The increase reflects the reduced level of other income combined with the increase in
other expenses.
14
15
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
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
Other
Total
INCOME TAXES
$
2019
9,208
5,447
2,936
783
1,869
153
267
1,113
834
396
751
45
101
3,408
$ 27,311
2018
$ 8,695
5,325
2,889
806
1,427
347
257
993
705
413
572
172
126
3,248
$ 25,975
Income tax expense for the year ended December 31, 2019 totaled $2,608,000, which resulted in an effective
tax rate of 15.5% compared to $2,553,000 and 15.8% for 2018.
CAPITAL AND DIVIDENDS
Total stockholders’ equity as of December 31, 2019, was $137.4 million, compared to $122.3 million as of year-
end 2018. The increase was due primarily to earnings retention net of a $6.1 million reduction resulting from
cash dividends declared. As of December 31, 2019 the Company had a leverage capital ratio of 10.33%, a Tier 1
risk-based capital ratio and a common equity Tier 1 risk-based capital ratio of 13.08%, and a total risk-based
capital ratio of 13.98%, compared to 9.82%, 13.04% and 14.00%, respectively, at December 31, 2018.
The Company’s common stock is traded on the Nasdaq Global Market under the symbol, NWFL. As of
December 31, 2019, there were approximately 2,600 shareholders based on the records of our transfer agent.
14
15
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
The following table sets forth the price range and cash dividends declared per share regarding common
stock for the periods indicated:
Year 2019
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year 2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Closing Price Range
$
$
High
33.00
34.97
35.90
39.25
33.00
38.86
40.41
39.06
$
$
Low
28.08
31.00
29.76
30.39
28.85
29.02
34.51
30.30
Cash dividends
Declared per share
0.24
$
0.24
0.24
0.25
$
0.22
0.22
0.22
0.24
The book value of the common stock was $21.67 per share as of December 31, 2019 compared to $19.43 per
share as of December 31, 2018. As of year-end 2019, the closing stock price was $38.90 per share, compared
to $33.00 as of December 31, 2018.
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 a marginal tax rate of 21%. 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.
The following table reconciles net interest income to net interest income on a tax-equivalent basis:
Three months ended
December 31
Year Ended
December 31
(dollars in thousands)
Net interest income
Tax-equivalent basis adjustment
using 21% marginal tax rate
Net interest income on a fully
taxable equivalent basis
2019
2018
2019
2018
$
9,833
$ 38,606
233
$
9,429
1,006
$ 36,839
$
10,066
258
$ 39,612
1,060
$
9,687
$ 37,899
16
17
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 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, 2014 and the reinvestment of dividends paid. The graph provides comparison
at December 31, 2014 and each fiscal year through December 31, 2019.
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
12/31/14
12/31/15
12/31/16 12/31/17 12/31/18
12/31/19
$100.00
$103.28
$124.41
$192.07
$197.18
$239.51
100.00
107.71
118.26
152.92
150.42
100.00
108.91
147.47
157.10
130.44
204.72
163.98
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 1980-2019.
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 2020. Used with permission.
All rights reserved.
16
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
CONSOLIDATED AVERAGE BALANCE SHEETS WITH RESULTANT INTEREST
AND RATES
(Tax-Equivalent Basis, dollars in thousands)
Year Ended December 31
2019
2018
ASSETS
Average
Balance (2)
Interest (1)
Average
Rate
Average
Balance (2)
Interest (1)
Average
Rate
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
Noninterest earning assets:
Cash and due from banks
Allowance for loan losses
Other assets
TOTAL ASSETS
Total noninterest-
earning assets
$
3,469
$
81
2.33%
148,825
84,225
3,277
2,578
233,050
885,741
5,855
42,354
2.20
3.06
2.51
4.78
1,122,260
48,290
4.30
14,630
(8,465)
80,828
86,993
$ 1,209,253
LIABILITIES AND STOCKHOLDERS’ EQUITY
$ 229,912
170,167
356,282
756,361
48,945
43,743
655
100
6,384
7,139
468
1,071
0.28
0.06
1.79
0.94
0.96
2.45
849,049
8,678
1.02
213,165
15,767
228,932
131,272
$ 1,209,253
Interest-bearing liabilities:
Interest-bearing demand
and money market
Savings
Time
Total interest-
bearing deposits
Short-term borrowings
Other borrowings
Total interest-
bearing liabilities
Noninterest-bearing liabilities:
Noninterest-bearing
demand deposits
Other liabilities
Total noninterest-
TOTAL LIABILITIES AND
bearing liabilities
STOCKHOLDERS’ EQUITY
Stockholders’ equity
Net Interest Income/spread
(tax equivalent basis)
Tax-equivalent basis adjustment
Net Interest Income
Net interest margin
(tax equivalent basis)
$
3,978
$
73
1.84%
167,443
101,525
3,573
3,096
268,968
800,957
6,669
36,814
2.13
3.05
2.48
4.60
1,073,903
43,556
4.06
14,583
(8,259)
67,441
73,765
$ 1,147,668
$
233,929
178,203
322,768
734,900
41,963
36,606
466
90
4,088
4,644
323
690
0.20
0.05
1.27
0.63
0.77
1.88
813,469
5,657
0.70
208,222
9,439
217,661
116,538
$ 1,147,668
39,612
(1,006)
$ 38,606
3.28%
3.53%
37,899
(1,060)
$ 36,839
3.36%
3.53%
1. Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 21%.
2. Average balances have been calculated based on daily balances.
3. Loan balances include non-accrual loans and are net of unearned income.
4. Loan yields include the effect of amortization of purchased credit marks and deferred fees net of costs.
18
19
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
RATE/VOLUME ANALYSIS
The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income
(dollars in thousands)
and interest expense.
Increase/(Decrease)
2019 compared to 2018
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
$
(11)
$
19
$
8
(403)
(526)
(929)
3,976
3,036
(10)
(5)
562
547
61
157
765
107
8
115
1,564
1,698
199
15
1,734
1,948
84
224
2,256
(296)
(518)
(814)
5,540
4,734
189
10
2,296
2,495
145
381
3,021
$ 2,271
$ (558)
$ 1,713
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.
18
19
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 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 31, 2019. In making this assessment, management used the criteria established in Internal Control
– Integrated Framework as set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in 2013. Based upon its assessment, management has concluded that, as of December 31, 2019,
the Company’s internal control over financial reporting, including controls over the preparation of regulatory
financial statements in accordance with all federal and state laws and regulations, is effective based on the
criteria established in the Internal Control – Integrated Framework.
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 22.
Lewis J. Critelli
President and
Chief Executive Officer
William S. Lance
Executive Vice President and
Chief Financial Officer
20
21
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Norwood Financial Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Norwood Financial Corp. and subsidiaries (the
“Company”) as of December 31, 2019 and 2018; the related consolidated statements of income, comprehensive
income, changes in stockholders’ equity, and cash flows for the years then ended; and the related notes to the
consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and
the results of its operations and its cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
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, 2019, based on
criteria established in
Organizations of the Treadway Commission in 2013, and our report dated March 12, 2020, expressed an unqualified
opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
issued by the Committee of Sponsoring
,
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 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 12, 2020
20
21
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Opinion on Internal Control over Financial Reporting
To the Stockholders and the Board of Directors of Norwood Financial Corp.
We have audited Norwood Financial Corp. and subsidiaries’ (the “Company”) internal control over financial
reporting as of December 31, 2019, based on criteria established in
, issued by
the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based
on criteria established in
, issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013.
Internal Control – Integrated Framework
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 sheets of the Company as of December 31, 2019 and 2018; the related
consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the
Basis for Opinion
years then ended, of the Company; and our report dated March 12, 2020, expressed an unqualified opinion.
Report on
Management’s Assessment of Internal Control over Financial Reporting
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
. 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
Definition and Limitations of Internal Control over Financial Reporting
we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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 12, 2020
22
23
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 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 2019: $8,509; 2018: $8,452)
Regulatory stock, at cost
Premises and equipment, net
Bank owned life insurance
Accrued interest receivable
Foreclosed real estate owned
Goodwill
Other intangibles
Other assets
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Noninterest-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
Preferred stock, no par value, authorized 5,000,000 shares,
Common stock, $.10 par value, authorized: 2019: 20,000,000 shares,
2018: 10,000,000 shares, issued: 2019: 6,340,563 shares; 2018: 6,295,113 shares
Surplus
Retained earnings
Treasury stock at cost: 2019: 12,007 shares; 2018: 2,470 shares
Accumulated other comprehensive income (loss)
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See notes to consolidated financial statements .
December 31,
2018
2019
(In Thousands, Except Share
and Per Share Data)
$
15,038
377
15,415
210,205
916,072
4,844
14,228
38,763
3,719
1,556
11,331
235
14,242
$ 1,230,610
$
207,299
99,366
128,441
161,705
360,718
957,529
62,256
56,438
2,432
14,527
1,093,182
-
634
49,471
86,536
(400)
1,187
137,428
$
18,039
309
18,348
243,277
841,730
3,926
13,846
37,932
3,776
1,115
11,331
336
8,942
$ 1,184,559
$
201,457
88,917
137,636
173,593
345,177
946,780
53,046
52,284
1,806
8,358
1,062,274
-
630
48,322
78,434
(81)
(5,020)
$ 1,230,610
122,285
$ 1,184,559
22
23
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
CONSOLIDATED STATEMENTS OF INCOME
INTEREST INCOME
Loans receivable, including fees
Securities
Taxable
Tax exempt
Interest-bearing deposits with banks
Total Interest Income
INTEREST EXPENSE
Deposits
Short-term borrowings
Other borrowings
Total Interest Expense
Net Interest Income
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
Other
Total Other Expenses
Income before Income Taxes
INCOME TAX EXPENSE
Net income
EARNINGS PER SHARE
BASIC
DILUTED
See notes to consolidated financial statements .
Years Ended December 31,
2019
2018
(In Thousands, Except
Share and Per Share Data)
$
41,889
3,277
2,037
81
47,284
7,139
468
1,071
8,678
38,606
1,250
37,356
4,450
610
254
169
830
465
6,778
14,655
2,936
783
1,869
153
267
1,113
834
751
45
101
3,804
27,311
16,823
2,608
14,215
2.27
2.25
$
36,404
3,573
2,446
73
42,496
4,644
323
690
5,657
36,839
1,725
35,114
4,295
589
213
15
1,126
827
7,065
14,020
2,889
806
1,427
347
257
993
705
572
172
126
3,661
25,975
16,204
2,553
13,651
2.19
2.17
$
$
$
$
$
$
24
25
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
NET INCOME
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
Other comprehensive income (loss)
Tax Effect
COMPREHENSIVE INCOME
Years Ended December 31,
2019
2018
$
14,215
375
(79)
7,736
(1,624)
(254)
53
6,207
$
20,422
$
13,651
207
(43)
(2,973)
624
(213)
45
(2,353)
$
11,298
24
25
See notes to consolidated financial statements .
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended December 31, 2019 and 2018
Common Stock
Shares
Amount
Surplus
Retained Treasury Stock
Shares
Earnings
Amount
(Dollars in Thousands, Except Per Share Data)
Accumulated
Other
Comprehensive
Loss
Total
BALANCE - DECEMBER 31, 2017
Net Income
Other comprehensive loss
Cash dividends declared ($0.90 per share)
Acquisition of treasury stock
Stock options exercised
Sale of treasury stock for ESOP
Compensation expense related to
stock options
Restricted stock awards
BALANCE - DECEMBER 31, 2018
Net Income
Other comprehensive income
Cash dividends declared ($0.97 per share)
Acquisition of treasury stock
Stock options exercised
Sale of treasury stock for ESOP
Compensation expense related to
stock options
Restricted stock awards
BALANCE - DECEMBER 31, 2019
$
6,256,063
-
-
-
-
25,950
-
-
13,100
-
6,295,113
-
-
-
32,350
-
-
13,100
$
626
-
-
-
-
3
-
-
1
-
630
-
-
-
3
-
-
1
$
47,431
-
-
-
-
449
1
237
204
-
48,322
-
-
-
635
18
208
288
$
70,426
13,651
-
(5,643)
-
-
-
-
-
14,215
78,434
-
(6,113)
-
-
-
2,608
-
-
-
5,921
(2,325)
(3,734)
-
-
-
2,470
-
-
12,797
-
(3,260)
-
-
-
-
(77)
-
-
-
(194)
68
122
-
-
-
(81)
-
-
(428)
-
109
-
-
$
(2,667)
-
(2,353)
-
-
-
-
-
-
-
(5,020)
6,207
-
-
-
-
$ 115,739
13,651
(2,353)
(5,643)
(194)
520
123
237
205
14,215
122,285
6,207
(6,113)
(428)
638
127
-
-
208
289
6,340,563
$
634
$
49,471
$
86,536
12,007
$
(400)
$
1,187
$ 137,428
See notes to consolidated financial statements .
26
27
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 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
Net amortization of securities premiums and discounts
Net realized gains on sales of securities
Earnings and proceeds on life insurance policies
(Gain) 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
Decrease (increase) in accrued interest receivable
Increase 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
Purchase of premises and equipment
Proceeds from sales of foreclosed real estate owned
Proceeds from sales of bank premises and fixed assets
Net Cash Used for Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits
Net increase in short-term borrowings
Repayments of other borrowings
Proceeds from other borrowings
Stock options exercised
Sale of treasury stock for ESOP
Acquisition of treasury stock
Cash dividends paid
Net Cash Provided by Financing Activities
Years Ended December 31,
2019
2018
(In Thousands)
$
14,215
1,250
1,005
101
988
1,448
(254)
(830)
(97)
(169)
(4,715)
4,838
208
289
57
626
(522)
18,438
27,247
33,656
(21,543)
(6,595)
5,677
(77,401)
(1,623)
556
246
(39,780)
10,749
9,210
(26,846)
31,000
638
127
(428)
(6,041)
18,409
$
13,651
1,725
895
126
24
1,711
(213)
(1,126)
26
(15)
(752)
767
237
205
(60)
372
(275)
17,298
17,745
30,873
(15,458)
(6,155)
5,734
(87,480)
(873)
776
-
(54,838)
17,396
10,516
(13,661)
30,000
520
123
(194)
(5,509)
Net (Decrease) Increase in Cash and Cash Equivalents
(2,933)
39,191
CASH AND CASH EQUIVALENTS - BEGINNING
CASH AND CASH EQUIVALENTS - ENDING
18,348
15,415
$
1,651
16,697
18,348
$
See notes to consolidated financial statements .
26
27
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
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
Right of use for operating leases
Lease liability for operating leases
Years Ended December 31,
2019
2018
(In Thousands)
$
$
$
$
$
$
8,052
2,407
1,865
1,582
5,335
5,335
$
$
$
$
$
$
5,285
2,239
553
1,510
-
-
See notes to consolidated financial statements .
28
29
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 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 headquartered in Honesdale,
Pennsylvania. The Company derives substantially all of its income from bank-related services which include
interest earnings on commercial mortgages, residential real estate mortgages, commercial and consumer
loans, as well as interest earnings on investment securities and fees from deposit services to its customers.
The Company is subject to regulation and supervision by the Federal Reserve Board while the Bank is subject
to regulation and supervision by the Federal Deposit Insurance Corporation and the Pennsylvania Department
of Banking and Securities.
Revenue Recognition
Under ASC Topic 606, management determined that the primary sources of revenue emanating from
interest and dividend income on loans and investments along with noninterest revenue resulting from
investment securities gains, loans servicing, gains on loans sold and earnings on bank-owned life insurance are
not within the scope of this Topic.
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of
Topic 606, for the year ended December 31:
(dollars in thousands)
Noninterest Income
2019
2018
In-scope of Topic 606:
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
Other income
Out-of-scope of Topic 606:
Noninterest Income (in-scope of Topic 606)
Net realized gains on sales of securities
Loan servicing fees
Gain on sales of loans
Earnings on and proceeds from bank-owned life insurance
Noninterest Income (out-of-scope of Topic 606)
Total Noninterest Income
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
$
$
301
384
1,380
94
614
1,424
610
141
500
5,448
254
77
169
830
1,330
6,778
$
$
263
398
1,505
96
515
1,330
589
185
782
5,663
213
48
15
1,126
1,402
7,065
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. Effective May 29, 2018, the existence of Norwood Settlement Services, LLC,
was terminated. All significant intercompany accounts and transactions have been eliminated in consolidation.
28
29
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Concentrations of Credit Risk
The Bank operates primarily in Wayne, Pike, Lackawanna, Luzerne 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 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.
30
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 2019.
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
Troubled Debt Restructurings
collectability of the total contractual principal and interest is no longer in doubt.
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
30
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
deterioration of credit quality since origination. The difference between the undiscounted cash flows expected at
acquisition and the investment in the loan, or the “accretable yield,” is recognized as interest income on a level-
yield method over the life of the loan. Contractually required payments for interest and principal that exceed the
undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield
adjustment or as a loss accrual or a valuation allowance. Increases in expected cash flows subsequent to the
initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining
estimated life. Decreases in expected cash flows are recognized immediately as impairment. Any valuation
allowances on these impaired loans reflect only losses incurred after the acquisition.
For purchased loans acquired that are not deemed impaired at acquisition, credit discounts representing the
principal losses expected over the life of the loan are a component of the initial fair value. Loans may be
aggregated and accounted for as a pool of loans if the loans being aggregated have common risk
characteristics. Subsequent to the purchase date, the methods utilized to estimate the required allowance for
credit losses for these loans is similar to originated loans; however, the Company records a provision for loan
losses only when the required allowance exceeds any remaining credit discounts. The remaining differences
between the purchase price and the unpaid principal balance at the date of acquisition are recorded in interest
income over the life of the loans.
Mortgage Servicing Rights
Servicing assets are recognized as separate assets when rights are acquired through purchase or through
the sale of financial assets. Capitalized servicing rights are reported in other assets and are amortized into
noninterest income in proportion to, and over the period of, the estimated future net servicing income of the
underlying financial assets. Servicing assets are evaluated for impairment based upon a third party appraisal.
Fair value is determined using prices for similar assets with similar characteristics, when available, or based
upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation
allowance to the extent that fair value is less than the capitalized amount. The Company’s loan servicing assets
at December 31, 2019 and 2018, respectively, were not impaired. Total servicing assets included in other
assets as of December 31, 2019 and 2018, were $187,000 and $178,000, 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
32
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the carrying value of that loan. The general component covers non-classified loans and is based on historical
loss experience adjusted for qualitative factors.
A loan is considered impaired when, based on current information and events, it is probable that the
Company will be unable to collect the scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value and the probability of collecting scheduled principal and interest
payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are
not classified as impaired. Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the
borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and
the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-
by-loan basis for commercial and construction loans by either the present value of expected future cash flows
discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the
collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the
Company does not separately identify individual consumer and residential real estate loans for impairment
disclosures, unless such loans were acquired with impairment or are the subject of a restructuring agreement.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation.
Years
Depreciation expense is calculated principally on the straight-line method over the respective assets estimated
useful lives as follows:
Buildings and improvements
Furniture and equipment
Leases
10 - 40
3 - 10
The Company applies a right-of-use (ROU) model that requires a lessee to record, for all leases with a lease
term of more than 12 months, an asset representing its right to use the underlying asset and a liability to make
lease payments. For leases with a term of 12 months or less, a practical expedient is available whereby a lessee
may elect, by class of underlying asset, not to recognize an ROU asset or lease liability. At inception, lessees must
classify all leases as either finance or operating based on five criteria. Balance sheet recognition of finance and
operating leases is similar, but the pattern of expense recognition in the income statement, as well as the effect
on the statement of cash flows, differs depending on the lease classification. See Note 8 for related disclosures.
Transfers of Financial Assets
Transfers of financial assets, including loan and loan participation sales, are accounted for as sales, when
control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered
when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets
and (3) the Company does not maintain effective control over the transferred assets through an agreement to
repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 2019 and 2018.
Other Intangible Assets
At December 31, 2019, the Company had other intangible assets of $235,000, which is net of accumulated
amortization of $1,110,000. These intangible assets will continue to be amortized using the sum-of-the-years
digits method of amortization over ten years. At December 31, 2018, the Company had other intangible assets
of $336,000 which was net of accumulated amortization of $1,008,000. Amortization expense related to other
intangible assets was $101,000 and $126,000 for the years ended December 31, 2019 and 2018, respectively.
As of December 31, 2019, the estimated future amortization expense for the core deposit intangible is as
follows (in thousands):
2020
2021
2022
2023
2024
Thereafter
$
$
77
52
38
29
21
18
235
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
Deferred income tax assets and liabilities are determined based on the differences between financial
statement carrying amounts and the tax basis of existing assets and liabilities. These differences are measured
at the enacted tax rates that will be in effect when these differences reverse. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of
the deferred tax assets will not be realized. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
The Company and its subsidiary file a consolidated federal income tax return. The Company recognizes
interest and penalties on income taxes as a component of income tax expense.
The Company analyzes each tax position taken in its tax returns and determines the likelihood that the
position will be realized. Only tax positions that are “more-likely-than-not” to be realized can be recognized in
an entity’s financial statements. For tax positions that do not meet this recognition threshold, an entity will
record an unrecognized tax benefit for the difference between the position taken on the tax return and the
amount recognized in the financial statements. The Company does not have any unrecognized tax benefits at
December 31, 2019 or 2018, or during the years then ended. No unrecognized tax benefits are expected to
arise within the next twelve months.
Advertising Costs
Advertising costs are expensed as incurred.
Earnings per Share
Basic earnings per share represents income available to common stockholders divided by the weighted
average number of common shares outstanding during the period less any unvested restricted shares.
Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustment to income that would result from the
assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding
stock options and are determined using the treasury stock method. Treasury shares are not deemed
outstanding for earnings per share calculations.
Employee Benefit Plans
The Company has a defined contributory profit-sharing plan which includes provisions of a 401(k) plan.
The Company’s contributions are expensed as the cost is incurred.
The Company has several supplemental executive retirement plans. To fund the benefits under these plans,
the Company is the owner of single premium life insurance policies on the participants.
The Company provides pension benefits to eligible employees. The Company’s funding policy is to
contribute at least the minimum required contributions annually.
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 and Recently Adopted Accounting Pronouncements
Recently Adopted Accounting Pronouncements
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. Upon adoption on January 1, 2018, we have included
the related new disclosure requirements in Note 1
.
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. Upon adoption of ASU 2016-02 on
January 1, 2019, we recorded right-of-use assets and related lease liabilities totaling $5.3 million each, which are
recorded in other assets and other liabilities, respectively.
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Pronouncements Not Yet Adopted
Financial Instruments – Credit Losses: Measurement of Credit
Losses 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 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
Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)
period in which the guidance is adopted. In November 2019, the FASB issued ASU 2019-10,
Financial
Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting
companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022,
including interim periods within those fiscal years. We expect to recognize a one-time cumulative effect
adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new
standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall
impact of the new guidance on the consolidated financial statements.
Simplifying the Test for Goodwill Impairment
. This
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
Financial Instruments – Credit Losses
Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after
(Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)
December 15, 2021. In November 2019, the FASB issued ASU 2019-10,
, which deferred the effective date for ASC
7
3
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangibles – Goodwill and Other
, for smaller reporting companies to fiscal years beginning after December
350,
15, 2022, and interim periods within those fiscal years. This Update is not expected to have a significant impact
on the Company’s financial statements.
, 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.
Financial Services – Insurance (Topic 944): Targeted
Improvements to the Accounting for Long-Duration Contract
In August 2018, the FASB issued ASU 2018-12,
s. This Update is intended to improve financial
reporting for insurance companies that issue long-duration contracts, such as life insurance, disability income,
long-term care, and annuities, by requiring updated assumptions for liability measurement, standardizing the
liability discount rate, simplifying and improving the accounting for certain market-based options or
guarantees associated with deposit (or account balance) contracts by requiring those benefits to be measured
at fair value instead of using two different measurement models, simplifying the amortization of deferred
acquisition costs, and increasing transparency by improving the effectiveness of disclosures. This Update is
effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods
within those fiscal years, with early adoption permitted. For all other entities, the amendments are effective
Financial Instruments – Credit Losses
for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after
(Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842),
December 15, 2022. In November 2019, the FASB issued ASU 2019-10,
, Financial Services – Insurance
which deferred the effective date for
ASC 944
reporting companies, to fiscal years beginning after December 15, 2021, and interim periods within those
fiscal years and for all other entities, including smaller reporting companies, to fiscal years beginning after
December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.
not expected to have a significant impact on the Company’s financial statements.
, for public business entities that are SEC filers, except for smaller
Fair Value Measurement (Topic 820): Disclosure Framework –
This Update is
Changes the Disclosure Requirements for Fair Value Measurements
In August 2018, the FASB issued ASU 2018-13,
. The Update removes the requirement to
disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy, the
policy for timing of transfers between levels, and the valuation processes for Level III fair value measurements.
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Update requires disclosure of changes in unrealized gains and losses for the period included in other
comprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting
period and the range and weighted average of significant unobservable inputs used to develop Level III fair
value measurements. This Update is effective for all entities for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2019. This Update is not expected to have a significant impact on
the Company’s financial statements.
Compensation – Retirement Benefits (Topic 715-20) .
In August 2018, the FASB issued ASU 2018-14,
This
Update amends ASC 715 to add, remove and clarify disclosure requirements related to defined benefit pension
and other postretirement plans. The Update eliminates the requirement to disclose the amounts in
accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost over
the next year. The Update also removes the disclosure requirements for the effects of a one-percentage-point
change on the assumed health care costs and the effect of this change in rates on service cost, interest cost and
the benefit obligation for postretirement health care benefits. This Update is effective for public business
entities for fiscal years ending after December 15, 2020, and must be applied on a retrospective basis. For all
other entities, this Update is effective for fiscal years ending after December 15, 2021. This Update is not
expected to have a significant impact on the Company’s financial statements.
Intangibles – Goodwill and Other – Internal-Use Software
(Subtopic 350-40) .
In August 2018, the FASB issued ASU 2018-15,
This Update addresses customers’ accounting for implementation costs incurred in a cloud
computing arrangement that is a service contract and also adds certain disclosure requirements related to
implementation costs incurred for internal-use software and cloud computing arrangements. The amendment
aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a
service contract with the requirements for capitalizing implementation costs incurred to develop or obtain
internal-use software (and hosting arrangements that include an internal-use software license). This Update is
effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods
within those fiscal years, with early adoption permitted. For all other entities, the amendments are effective
for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after
December 15, 2021. The amendments in this Update can be applied either retrospectively or prospectively to
all implementation costs incurred after the date of adoption. This Update is not expected to have a significant
impact on the Company’s financial statements.
, Derivatives and Hedging (Topic 815)
In October 2018, the FASB issued ASU 2018-16
. The amendments in
this Update permit use of the Overnight Index Swap (OIS) rate based on the Secured Overnight Financing Rate
(SOFR) as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to the
interest rates on direct Treasury obligations of the U.S. government, the London Interbank Offered Rate
(LIBOR) swap rate, the OIS rate based on the Fed Funds Effective Rate, and the Securities Industry and
Financial Markets Association (SIFMA) Municipal Swap Rate. For entities that have not already adopted
Update 2017-12, the amendments in this Update are required to be adopted concurrently with the
amendments in Update 2017-12. For public business entities that already have adopted the amendments in
Update 2017-12, the amendments are effective for fiscal years beginning after December 15, 2018, and interim
periods within those fiscal years. For all other entities that already have adopted the amendments in Update
2017-12, the amendments are effective for fiscal years beginning after December 15, 2019, and interim
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
periods within those fiscal years. Early adoption is permitted in any interim period upon issuance of this
Update if an entity already has adopted Update 2017-12. This Update is not expected to have a significant
impact on the Company’s financial statements.
Consolidation (Topic 810)
In October, 2018, the FASB issued ASU 2018-17,
, which made improvements in 1)
applying the variable interest entity (VIE) guidance to private companies under common control and 2)
considering indirect interests held through related parties under common control for determining whether
fees paid to decision makers and service providers are variable interests. Under the amendments in this
Update, a private company may elect not to apply VIE guidance to legal entities under common control
(including common control leasing arrangements) if both the parent and the legal entity being evaluated for
consolidation are not public business entities. In addition, indirect interests held through related parties in
common control arrangements should be considered on a proportional basis for determining whether fees
paid to decision makers and service providers are variable interests. For entities other than private companies,
the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and interim
periods within those fiscal years. The amendments in this Update are effective for a private company for fiscal
years beginning after December 15, 2020, and interim periods within fiscal years beginning after December
15, 2021. This Update is not expected to have a significant impact on the Company’s financial statements.
Collaborative Arrangements (Topic 808)
In November, 2018, the FASB issued ASU 2018-18,
, which made the
following targeted improvements to generally accepted accounting principles (GAAP) for collaborative
arrangements (1) clarified that certain transactions between collaborative arrangement participants should be
accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the
context of a unit of account, (2) add unit-of-account guidance in Topic 808 to align with the guidance in Topic
606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or
a part of the arrangement is within the scope of Topic 606, and (3) require that in a transaction with a
collaborative arrangement participant that is not directly related to sales to third parties, presenting the
transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement
participant is not a customer. For public business entities, the amendments in this Update are effective for
fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other
entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods
within fiscal years beginning after December 15, 2021. This Update is not expected to have a significant impact
on the Company’s financial statements.
Codification Improvements to Topic 326, Financial Instruments –
Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,
In April 2019, the FASB issued ASU 2019-04,
Topic 326, Financial Instruments – Credit Losses
of topics in the Codification and applies to all reporting entities within the scope of the affected accounting
guidance.
amendments are effective for SEC registrants for
fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other
public business entities, the effective date is for fiscal years beginning after December 15, 2020, and for all
and Hedging
other entities, the effective date is for fiscal years beginning after December 15, 2021.
Topic 815, Derivatives
which affects a variety
amendments are effective for public business entities 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. For
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
entities that have adopted the amendments in Update 2017-12, the effective date is as of the beginning of the
first annual period beginning after the issuance of this Update.
amendments
Financial Instruments – Credit Losses (Topic 326), Derivatives
are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years. In
and Hedging (Topic 815), and Leases (Topic 842)
November 2019, the FASB issued ASU 2019-10,
Topic 825, Financial Instruments
. This Update defers the effective date of ASU 2016-13 for SEC
filers that are eligible to be smaller reporting companies, non-SEC filers and all other companies to fiscal years
beginning after December 15, 2022, including interim periods within those fiscal years. Furthermore, the ASU
provides a one-year deferral of the effective dates of the ASUs on derivatives and hedging for companies that
are not public business entities. The Company qualifies as a smaller reporting company and does not expect to
early adopt these ASUs.
Financial Instruments – Credit Losses, Topic 326
In May 2019, the FASB issued ASU 2019-05,
, which allows
entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized
cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing
financial asset must otherwise be both within the scope of the new credit losses standard and eligible for the
applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument
basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect
the fair value option, the difference between the carrying amount and the fair value of the financial asset
would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an
entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in
current earnings. For entities that have not yet adopted ASU 2016-13, the effective dates and transition
requirements are the same as those in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-
05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal
years. Early adoption is permitted once ASU 2016-13 has been adopted. In November 2019, the FASB issued
Leases (Topic 842)
ASU 2019-10,
Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and
. The Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be
smaller reporting companies, non-SEC filers and all other companies to fiscal years beginning after December
15, 2022, including interim periods within those fiscal years. The Company qualifies as a smaller reporting
company and does not expect to early adopt ASU 20.
Codification Updates to SEC Sections, Amendments to SEC
Paragraphs Pursuant to SEC Final Rule Releases No . 33-10532, Disclosure Update and Simplification, and Nos .
33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates .
In July 2019, the FASB issued ASU 2019-07,
Update and Simplification
amends various SEC paragraphs pursuant to the issuance of SEC Final Rule Releases No. 33-10532,
Investment Company Reporting Modernization
Disclosure
This ASU
, and Nos. 33-10231 and 33-10442,
.
Other miscellaneous updates to agree to the electronic Code of Federal Regulations also have been
incorporated.
Financial Instruments – Credit Losses (Topic 326),
Derivatives and Hedging (Topic 815), and Leases (Topic 842)
In November 2019, the FASB issued ASU 2019-10,
2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other
. The Update defers the effective dates of ASU
42
43
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal
years. This Update also amends the mandatory effective date for the elimination of Step 2 from the goodwill
Goodwill Impairment (Goodwill)
impairment test under ASU No. 2017-04,
Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for
,
to align with those used for credit losses. Furthermore, the ASU provides a
one-year deferral of the effective dates of the ASUs on derivatives and hedging and leases for companies that
are not public business entities. The Company qualifies as a smaller reporting company and does not expect to
early adopt these ASUs.
ASU 2019-11, Codification Improvements to Topic 326
In November 2019, the FASB issued
, Financial
Instruments – Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on
implementation issues raised by stakeholders. This Update clarified, among other things, that expected
recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy
election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the
prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the
restructuring event; and extends the practical expedient to exclude accrued interest receivable from all
additional relevant disclosures involving amortized cost basis. The effective dates in this Update are the same
as those applicable for ASU 2019-10. The Company is currently evaluating the impact the adoption of the
standard will have on the Company’s financial position or results of operations.
ASU 2019-12, Income Taxes (Topic 740)
In December 2019, the FASB issued
, to simplify the accounting for
income taxes, change the accounting for certain tax transactions, and make minor improvements to the
codification. This Update provides a policy election to not allocate consolidated income taxes when a member
of a consolidated tax return is not subject to income tax and provides guidance to evaluate whether a step-up
in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate
transaction. The Update also changes current guidance for making an intraperiod allocation, if there is a loss in
continuing operations and gains outside of continuing operations; determining when a deferred tax liability is
recognized after an investor in a foreign entity transitions to or from the equity method of accounting;
accounting for tax law changes and year-to-date losses in interim periods; and determining how to apply the
income tax guidance to franchise taxes that are partially based on income. For public business entities, the
amendments in this Update are effective for fiscal years and interim periods within those fiscal years,
beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years
beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15,
2022. This Update is not expected to have a significant impact on the Company’s financial statements.
ASU 2020-1, Investments – Equity Securities (Topic 321), Investments –
Equity Method and Joint Ventures (Topic 323)
In January 2020, the FASB issued
, and Derivatives and Hedging (Topic 815), to clarify that an entity
should consider observable transactions that require it to either apply or discontinue the equity method of
accounting for the purposes of applying the measurement alternative in accordance with Topic 321
immediately before applying or upon discontinuing the equity method. The amendments also clarify that, for
the purpose of applying paragraph 815-10-15-141(a) an entity should not consider whether, upon the
settlement of the forward contract or exercise of the purchased option, individually or with existing
42
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
investments, the underlying securities would be accounted for under the equity method in Topic 323 or the
fair value option, in accordance with the financial instruments guidance in Topic 825. An entity also would
evaluate the remaining characteristics in paragraph 815-10-15-141 to determine the accounting for those
forward contracts and purchased options. For public business entities, the amendments in this Update are
effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. For
all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and
interim periods within those fiscal years. This Update is not expected to have a significant impact on the
Company’s financial statements.
NOTE 3 - SECURITIES
The amortized cost, gross unrealized gains and losses, and fair value of securities were as follows:
December 31, 2019
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Amortized
Cost
Fair
Value
AVAILABLE FOR SALE:
States and political subdivisions
Corporate obligations
Mortgage-backed securities-
government sponsored entities
Total debt securities
AVAILABLE FOR SALE:
States and political subdivisions
Corporate obligations
Mortgage-backed securities-
government sponsored entities
Total debt securities
(In Thousands)
$
70,015
4,097
$
1,293
3
$
(3)
-
$
71,305
4,100
135,646
238
(1,084)
134,800
$ 209,758
$
1,534
$
(1,087)
$ 210,205
Amortized
Cost
December 31, 2018
Gross
Gross
Unrealized
Unrealized
Losses
Gains
(In Thousands)
Fair
Value
$ 99,218
8,896
142,197
250,311
$
$
$
385
-
25
410
$
$
(1,990)
(256)
$
97,613
8,640
(5,198)
(7,444)
137,024
$ 243,277
44
45
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 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
(in thousands):
December 31, 2019
12 Months or More
Total
Less than 12 Months
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$
1,296 $
(2) $
481
$
(1) $
1,777
$
(3)
States and political subdivisions
Mortgage-backed securities-
government sponsored entities
32,415
$ 33,711 $
(241)
61,096
(243) $ 61,577
$
(843)
(844) $
93,511
95,288
(1,084)
(1,087)
$
Less than 12 Months
December 31, 2018
12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
States and political subdivisions
Corporate obligations
Mortgage-backed securities-
government sponsored entities
$ 19,140 $
2,045
(390) $
(21)
56,740
6,595
8,444
$ 29,629 $
(22)
122,950
(433) $ 186,285
$
$
(1,600) $
(235)
75,880
8,640
(5,176)
(7,011) $
131,394
215,914
$
$
(1,990)
(256)
(5,198)
(7,444)
The Company has 33 debt securities in the less than twelve month category and 57 debt securities in the
twelve months or more category as of December 31, 2019. 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 2019. 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, 2019 by contractual maturity, are
shown below. Expected maturities may differ from contractual maturities because borrowers may have the
Fair
right to prepay obligations with or without call or prepayment penalties.
Value
Amortized
Cost
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
44
45
(In Thousands)
$
$
4,252
14,048
28,259
27,553
74,112
4,264
14,087
28,413
28,641
75,405
135,646
$ 209,758
134,800
$ 210,205
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 3 - SECURITIES (CONTINUED)
Gross realized gains and gross realized losses on sales of securities available for sale were $254,000 and $0,
respectively, in 2019, compared to $213,000 and $0, respectively, in 2018. The proceeds from the sales of
securities totaled $27,247,000 and $17,745,000 for the years ended December 31, 2019 and 2018, respectively.
Securities with a carrying value of $157,233,000 and $193,918,000 at December 31, 2019 and 2018,
respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for
other purposes as required or permitted by law.
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, 2019
December 31, 2018
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
$ 229,781
24.9%
391,327
42.3
17,732
1.9
134,150
14.5
151,686
16.4
924,676
100.0%
(95)
924,581
(8,509)
$ 916,072
$
235,523
27.7%
374,790
44.1
17,445
110,542
112,002
2.0
13.0
13.2
850,302
100.0%
(120)
850,182
(8,452)
$
841,730
Changes in the accretable yield for purchased credit-impaired loans were as follows for the twelve months
ended December 31:
(In thousands)
Balance at beginning of period
Additions
Accretion
Reclassification and other
Balance at end of period
2019
2018
$
$
29
-
(29)
-
-
$
$
108
-
(56)
(23)
29
The following table presents additional information regarding loans acquired and accounted for in
accordance with ASC 310-30 (in thousands):
December 31, 2019 December 31, 2018
$
$
793
696
$
$
1055
886
Outstanding Balance
Carrying Amount
46
47
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
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, 2019, for loans that were acquired prior to
2019 with or without specific evidence of deterioration in credit quality, adjustments to the allowance for loan
losses have been accounted for through the allowance for loan loss adequacy calculation.
The Company maintains a loan review system, which allows for a periodic review of our loan portfolio and
the early identification of potential impaired loans. The system takes into consideration, among other things,
delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers.
Specific loan loss allowances are established for identified losses based on a review of such information.
A loan evaluated for impairment is considered to be impaired when, based on current information and events,
it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan
agreement. All loans identified as impaired are evaluated independently. The Company does not aggregate
such loans for evaluation purposes. Impairment is measured on a loan-by-loan basis for commercial and
construction loans by the present value of expected future cash flows discounted at the loan’s effective interest
rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.
Accordingly, the Company does not separately identify individual consumer and residential mortgage loans
for impairment disclosures, unless such loans are part of a larger relationship that is impaired, or are
classified as a troubled debt restructuring.
The following tables show the amount of loans in each category that were individually and collectively
evaluated for impairment at the dates indicated:
December 31, 2019
Individually evaluated
for impairment
Loans acquired with
deteriorated credit quality
Collectively evaluated
for impairment
Total Loans
December 31, 2018
Individually evaluated
for impairment
Loans acquired with
deteriorated credit quality
Collectively evaluated
for impairment
Real Estate Loans
Residential Commercial Construction
$
(In thousands)
$
2,144 $
- $
-
Commercial Consumer
Loans
-
$
Loans
-
$
Total
2,144
476
220
-
-
-
696
229,305
388,963
17,732
134,150
151,686
921,836
$ 229,781 $ 391,327 $ 17,732
$ 134,150
$ 151,686
$ 924,676
Real Estate Loans
Residential Commercial Construction
Commercial Consumer
Loans
Loans
Total
(In thousands)
$
- $
1,319 $
-
$
-
$
-
$
1,319
630
256
-
-
-
886
234,893
373,215
17,445
110,542
112,002
848,097
46
47
Total Loans
$ 235,523 $ 374,790 $
17,445
$ 110,542
$
112,002
$
850,302
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 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, 2019
With no related allowance recorded:
Real Estate Loans
Commercial
Subtotal
With an allowance recorded:
Real Estate Loans
Total:
Commercial
Subtotal
Real Estate Loans
Commercial
Total Impaired Loans
December 31, 2018
With no related allowance recorded:
Real Estate Loans
Total:
Commercial
Subtotal
Real Estate Loans
Commercial
Total Impaired Loans
Unpaid
Principal
Balance
(In thousands)
$
394
394
$
Associated
Allowance
-
-
Recorded
Investment
143
143
$
2,001
2,001
2,001
2,001
417
417
2,144
2,144
$
$
2,395
2,395
$
417
417
Recorded
Investment
Unpaid
Principal
Balance
(In thousands)
Associated
Allowance
$
$
1,319
1,319
$
1,747
1,747
1,319
1,319
$
1,747
1,747
$
$
-
-
-
-
The following information for impaired loans is presented for the years ended December 31, 2019 and 2018:
2018
2019
Average Recorded
Investment
2019
Interest Income
Recognized
2018
Total:
Real Estate Loans
Commercial
Total Loans
(In thousands)
1,036
1,036
$
$
$
$
$
$
1,220
1,220
233
233
$
$
67
67
48
49
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 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, 2019, troubled
debt restructured loans totaled $99,000 and did not require a specific reserve. During 2019, there were no
new loan relationships identified as troubled debt restructurings, while one loan identified as a troubled debt
restructuring with a balance of $977,000 as of December 31, 2018 was transferred to foreclosed real estate
during 2019. During 2019, there was a charge-off in the amount of $451,000 on loans classified as troubled
debt restructurings.
As of December 31, 2018, troubled debt restructured loans totaled $1.1 million and resulted in
specific reserves of $0. During 2018, there were no new loan relationships identified as troubled debt
restructurings, while one loan identified as a troubled debt restructuring with a balance of $23,000 as of
December 31, 2017 was paid in full during 2018. During 2018, there were no charge-offs on loans
classified as troubled debt restructurings.
Foreclosed assets acquired in settlement of loans are carried at fair value less estimated costs to sell and
are included in foreclosed real estate owned on the Consolidated Balance Sheets. As of December 31, 2019
and 2018, foreclosed real estate owned totaled $1,556,000 and $1,115,000, respectively. As of December 31,
2019, included within foreclosed real estate owned are two commercial properties that were foreclosed on or
received via a deed in lieu. As of December 31, 2019, the Company has initiated formal foreclosure
proceedings on three consumer residential mortgage loans with an outstanding balance of $299,000.
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.
48
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 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, 2019 and December 31, 2018 (in thousands):
December 31, 2019
Commercial real estate loans
Commercial
Total
Special
Mention
Pass
$ 376,109 $ 12,268 $
133,695
$ 509,804 $ 12,516 $
248
Substandard
2,950
207
3,157
Doubtful
-
-
-
$
$
$
$
Loss
-
-
-
Total
$ 391,327
134,150
$ 525,477
December 31, 2018
Pass
Special
Mention
Substandard
Doubtful
Loss
Total
Commercial real estate loans
Commercial
Total
$ 360,838 $
109,966
$ 470,804 $
7,918 $
82
8,000 $
6,034
494
6,528
$
$
-
-
-
$
$
-
-
-
$
$
374,790
110,542
485,332
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, 2019 and December 31, 2018 (in thousands):
December 31, 2019
Residential real estate loans
Construction
Consumer loans to individuals
Total
December 31, 2018
Residential real estate loans
Construction
Consumer loans to individuals
Total
$ 229,214
$
Performing Nonperforming
17,732
151,607
$ 398,553
567
-
79
646
$ 229,781
Total
17,732
151,686
$ 399,199
$
Performing Nonperforming
$ 234,725
$
17,445
112,002
$ 364,172
798
-
-
798
$
$
$
Total
235,523
17,445
112,002
364,970
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, 2019 and December 31, 2018 (in thousands):
50
51
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
December 31, 2019
Current
$ 228,242
388,117
17,695
134,018
151,309
$ 919,381
Real Estate loans
Residential
Commercial
Construction
Commercial loans
Consumer loans
Total
December 31, 2018
Current
Real Estate loans
Residential
Commercial
Construction
Commercial loans
Consumer loans
Total
$ 234,201
372,617
17,445
110,191
111,796
$ 846,250
$
Greater than
90 Days Past
31-60 Days 61-90 Days Due and still
Past Due
245
$
2,935
37
-
65
$ 3,282
Past Due
727
176
-
82
233
1,218
accruing
-
-
-
-
-
-
$
$
$
Non-
Total Past
Due and
Accrual Non-Accrual
$
$
567
99
-
50
79
795
1,539
3,210
37
132
377
5,295
$
$
Greater than
90 Days Past
31-60 Days 61-90 Days Due and still
Past Due
Past Due
accruing
Non-
Total Past
Due and
Accrual Non-Accrual
$
$
373
1,043
-
320
171
1,907
$
151
788
-
31
35
$ 1,005
$
$
-
-
-
-
-
-
$
$
798
342
-
-
-
1,140
$
$
1,322
2,173
-
351
206
4,052
Total
Loans
229,781
391,327
17,732
134,150
151,686
924,676
Total
Loans
235,523
374,790
17,445
110,542
112,002
850,302
$
$
$
$
50
51
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 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, 2018
Charge Offs
Recoveries
Provision for loan losses
Ending balance,
December 31, 2019
Ending balance individually
evaluated for impairment
Ending balance collectively
evaluated for impairment
(In thousands)
Beginning balance,
December 31, 2017
Charge Offs
Recoveries
Provision for loan losses
Ending balance,
December 31, 2018
Ending balance individually
evaluated for impairment
Ending balance collectively
evaluated for impairment
Residential Commercial
Real Estate Real Estate Construction Commercial
$
$
$
1,328 $
(102)
24
302
5,455 $
(627)
125
(266)
93
-
-
2
712
(284)
48
473
$
Consumer
864
(420)
43
739
Total
8,452
(1,433)
240
1,250
$
1,552 $
4,687 $
95
$
949
$
1,226
$
8,509
$
- $
417 $
-
$
-
$
-
$
417
$
1,552 $
4,270 $
95
$
949
$
1,226
$
8,092
Residential Commercial
Real Estate Real Estate Construction Commercial
Consumer
Total
$
1,272 $
(197)
9
244
5,265 $
(283)
33
440
$
90
-
-
3
$
463
(246)
8
487
$
544
(263)
32
551
7,634
(989)
82
1,725
$
1,328 $
5,455 $
93
$
712
$
864
$
8,452
$
- $
- $
-
$
-
$
-
$
-
$
1,328 $
5,455 $
93
$
712
$
864
$
8,452
52
53
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
During the period ended December 31, 2019, the allowance for loan losses increased from $8,452,000 to
$8,509,000. This $57,000 increase in the required allowance was due primarily to a $417,000 specific reserve
for impaired loans and a $447,000 increase in the qualitative factor related to economic conditions. This
increase was partially offset by a reduction in the historical loss factor from 0.26% at December 31, 2018 to
0.15% on December 31, 2019.
During the period ended December 31, 2018, the allowance for loan losses increased from $7,634,000 to
$8,452,000. This $818,000 increase in the required allowance was due primarily to an $86.1 million increase
in loan balances and an additional qualitative factor to allocate reserves for potential risk in large balance
loans. This increase was partially offset by a reduction in the historical loss factor from 0.41% at December
31, 2017 to 0.26% on December 31, 2018.
Interest income that would have been recorded on loans accounted for on a non-accrual basis under the
original terms of the loans was $101,000 and $98,000 for 2019 and 2018, respectively.
As of December 31, 2019 and 2018, the Company considered its concentration of credit risk to be
acceptable. As of December 31, 2019, the highest concentrations are in commercial rentals and the hospitality
lodging industry, with loans outstanding of $84.6 million, or 65.0% of bank capital, to commercial rentals, and
$64.6 million, or 49.6% of bank capital to the hospitality lodging industry. There were no charge-offs on loans
within these concentrations for the years ended December 31, 2019 and 2018, respectively.
During 2019, the Company sold residential mortgage loans totaling $4,715,000. During 2018, the Company
sold residential mortgage loans totaling $752,000. Gross realized gains and gross realized losses on sales of
residential mortgage loans were $123,000 and $0, respectively, in 2019 and $15,000 and $0, respectively, in
2018. The proceeds from the sales of residential mortgage loans totaled $4,838,000 and $767,000 for the
years ended December 31, 2019 and 2018, respectively. As of December 31, 2019 and 2018, the outstanding
value of loans serviced for others totaled $28.5 million and $26.8 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
2019
(In Thousands)
2018
$
$
$
2,806
17,914
8,164
28,884
(14,656)
14,228
$
2,832
17,788
7,171
27,791
(13,945)
13,846
Depreciation expense totaled $1,005,000 and $895,000 for the years ended December 31, 2019 and
2018, respectively.
52
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 6 - DEPOSITS
Aggregate time deposits in denominations of $250,000 or greater were $137,108,000 and $116,147,000 at
December 31, 2019 and 2018, respectively.
At December 31, 2019, the scheduled maturities of time deposits are as follows (in thousands):
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
$ 258,645
38,394
26,580
24,162
12,937
$ 360,718
2020
2021
2022
2023
2024
2019
(In Thousands)
2018
$
$
30,505
31,751
62,256
$
$
37,457
15,589
53,046
The outstanding balances and related information of short-term borrowings are summarized as follows:
2018
Years Ended December 31,
2019
(In Thousands)
48,945
$
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
0.96%
$
62,256
1.30%
$
41,963
0.77%
$
53,046
1.27%
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 $36,313,000 and $36,195,000 at
December 31, 2019 and $41,587,000 and $40,161,000 at December 31, 2018, respectively, were pledged as
collateral for these agreements. The securities underlying the agreements were under the Company’s control.
The collateral pledged for repurchase agreements that are classified as secured borrowings is summarized
As of December 31, 2019
as follows (in thousands):
Remaining Contractual Maturity of the Agreements
Overnight
and
continuous
$ 36,195
Up to
30 days
30-90
days
Greater
than 90
days
$ -
$ -
$ -
Total
$ 36,195
$30,505
Repurchase Agreements:
Mortgage-backed securities -
government sponsored entities
Total liability recognized for
repurchase agreements
54
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 7 - BORROWINGS (CONTINUED)
As of December 31, 2018
Remaining Contractual Maturity of the Agreements
Overnight
and
continuous
Up to
30 days
30-90
days
Greater
than 90
days
$ 40,161 $ -
$ -
$ -
Total
$
$
40,161
37,457
Repurchase Agreements:
Mortgage-backed securities -
government sponsored entities
Total liability recognized for
repurchase agreements
The Company has a line of credit commitment available from the FHLB of Pittsburgh for borrowings of up to
$150,000,000, which renews annually in June. At December 31, 2019, there were $31,751,000 of borrowings
outstanding on this line. There were $15,589,000 of borrowings outstanding on this line of credit at December
31, 2018. The Company has a line of credit commitment available from Atlantic Community Bankers Bank for
$7,000,000, which expires on June 30, 2020. There were no borrowings under this line of credit at December 31,
2019 and 2018. The Company has a line of credit commitment available from PNC Bank for $16,000,000 at
December 31, 2019. There were no borrowings under this line of credit at December 31, 2019 and December 31,
2018. 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, 2019 and December 31, 2018.
Other borrowings consisted of the following at December 31, 2019 and 2018:
Amortizing fixed rate borrowing due January 2019 at 1.39%
Fixed rate term borrowing due August 2019 at 1.61%
Fixed rate term borrowing due May 2020 at 1.85%
Amortizing fixed rate borrowing due June 2020 at 1.49%
Amortizing fixed rate borrowing due July 2020 at 2.77%
Amortizing fixed rate borrowing due December 2020 at 1.71%
Amortizing fixed rate borrowing due December 2020 at 3.06%
Amortizing fixed rate borrowing due March 2022 at 1.75%
Amortizing fixed rate borrowing due August 2022 at 1.94%
Amortizing fixed rate borrowing due October 2022 at 1.88%
Amortizing fixed rate borrowing due October 2023 at 3.24%
Amortizing fixed rate borrowing due December 2023 at 3.22%
Fixed rate term borrowing due December 2023 at 1.95%
Amortizing fixed rate borrowing due December 2023 at 1.73%
2019
2018
(In Thousands)
$
$
-
-
5,000
1,034
2,974
2,538
1,034
2,009
5,351
4,626
7,809
4,063
10,000
10,000
56,438
$
$
423
10,000
-
3,079
7,962
5,000
2,051
2,877
-
6,200
9,692
5,000
-
-
52,284
54
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 7 - BORROWINGS (CONTINUED)
Contractual maturities and scheduled cash flows of other borrowings at December 31, 2019 are as follows
(in thousands):
$
22,435
10,080
8,654
15,269
56,438
2020
2021
2022
2023
$
The Bank’s maximum borrowing capacity with the FHLB was $425,226,000 of which $88,189,000 was
outstanding in the form of advances and $56,000,000 was outstanding in the form of letters of credit at
December 31, 2019. Advances from the FHLB are secured by qualifying assets of the Bank.
NOTE 8 - OPERATING LEASES
Due to the adoption of ASU 2016-02, Leases (Topic 842), the Company completed a comprehensive review
and analysis of all its property contracts. As a result of this review, it was determined that the Company leases
seven office locations under operating leases. Several assumptions and judgments were made when applying
the requirements of Topic 842 to the Company’s existing lease commitments, including the allocation of
consideration in the contracts between lease and nonlease components, determination of the lease term, and
determination of the discount rate used in calculating the present
value of the lease payments.
The Company has elected to account for the variable nonlease components, such as common area
maintenance charges, utilities, real estate taxes, and insurance, separately from the lease component. Such
variable nonlease components are reported in net occupance expense on the Consolidated Statements of
Income when paid. These variable nonlease components were excluded from the calculation of the present
value of the remaining lease payments, therefore, they are not included in other assets and other liabilities on
the Consolidated Balance Sheets. The lease cost associated with the operating leases for the year ended
December 31, 2019 amounted to $518,000.
Certain of the Company’s leases contain options to renew the lease after the initial term.
Management considers the Company’s historical pattern of exercising renewal options on leases
and the positive performance of the leased locations, when determining whether it is reasonably certain
that the leases will be renewed. If management concludes that there is reasonable certainty about the
renewal option, it is included in the calculation of the remaining term of each applicable lease. The discount
rate utilized in calculating the present value of the remaining lease payments for each lease was the Federal
Home Loan Bank of Pittsburgh advance rate corresponding to the remaining maturity of the lease as of
January 1, 2019. The following table presents the weighted-average remaining lease term and discount rate
for the leases outstanding at December 31, 2019.
Weighted-average remaining term (years)
Weighted-average discount rate
Operating
13.2
3.21%
56
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 8 - OPERATING LEASES (CONTINUED)
The following table presents the undiscounted cash flows due related to operating leases as of December 31,
2019, along with a reconciliation to the discounted amount recorded on the Consolidated Balance Sheets:
Undiscounted cash flows due (in thousands):
2020
2021
2022
2023
2024
2025 and thereafter
Total undiscounted cash flows
Discount on cash flows
Total lease liabilities
535
$
Operating
535
535
535
544
3,879
6,563
(1,247)
5,316
$
Under Topic 842, the lessee can elect to not record on the Consolidated Balance Sheets a lease whose term is
twelve months or less and does not include a purchase option that the lessee is reasonably certain to exercise.
As of December 31, 2019, the Company had no leases that had a term of twelve months or less.
Certain facilities are leased under various operating leases. Rental expense for these leases was $518,000
and $470,000, respectively, for the years ended December 31, 2019 and 2018.
NOTE 9 - EMPLOYEE BENEFIT PLANS
The Company has a defined contributory profit-sharing plan which includes provisions of a 401(k) plan.
The plan permits employees to make pre-tax contributions of 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 $730,000 and $738,000 for the years ended December 31, 2019 and 2018, respectively.
The Company has several non-qualified supplemental executive retirement plans for the benefit of certain
executive officers and former officers. At December 31, 2019 and 2018, other liabilities include $3,428,000
and $3,362,000 accrued under the Plan. Compensation expense includes approximately $491,000 and
$434,000 relating to the supplemental executive retirement plan for 2019 and 2018, 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, 2019 and 2018, the cash value of these policies was
$38,763,000 and $37,932,000, respectively.
The Company provides postretirement benefits in the form of split-dollar life arrangements to employees who
meet the eligibility requirements. The net periodic postretirement benefit expense included in salaries and
employee benefits was $101,000 and $149,000 for the years ended December 31, 2019 and 2018, respectively.
56
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 9 - EMPLOYEE BENEFIT PLANS (CONTINUED)
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 2018 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 $1,392,000 and $1,291,000 at December 31, 2019 and 2018, respectively.
Through its acquisition of Delaware, the Company also has certain director fee deferral and continuation
plans. These plans allowed directors to defer director fees and provide a benefit payment for a period of five
to fifteen years. The Company expensed $3,000 and $6,000 under these plans in 2019 and 2018, respectively.
At December 31, 2019 and 2018, the liability under these plans was $166,000 and $249,000, 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, 2019 and 2018, the
Company’s Plan was 95.0% and 91.4% 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 $29,000 in 2019 and
$46,000 in 2018. During the plan years ending December 31, 2019 and 2018, the Company made
contributions of $29,000 and $46,000, 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.
58
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 9 - EMPLOYEE BENEFIT PLANS (CONTINUED)
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)
2018
2019
Change in projected benefit obligation:
Projected benefit obligation at beginning of year
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
Actual return on plan assets
Benefits paid
Fair value of assets at end of year
Funded status at end of year
$
$
$
$
$
(7,186)
(55)
(312)
(515)
553
(7,515)
$
6,136
1,275
(558)
6,853
(662)
$
$
(8,465)
(64)
(279)
1,040
582
(7,186)
7,110
(401)
(573)
6,136
(1,050)
The Delaware Plan paid $553,000 and $582,000 in benefit payments in 2019 and 2018, respectively.
Estimated benefit payments under the Delaware Plan are expected to be approximately $477,000, $466,000,
$467,0000, $453,000 and $438,000 for the next five years. Payments are expected to be approximately
$2,115,000 in total for the five-year period ending December 31, 2029. The Company was not required to
make any contributions to the Delaware Plan in 2019 or 2018. The decrease in the projected discount rate
contributed approximately $801,000 to the overall increase in the projected benefit obligation for the year
ended December 31, 2019.
The accumulated benefit obligation for the Delaware Plan was $7,515,000 and $7,186,000 at December 31,
2019 and 2018, respectively.
The following table sets forth the amounts recognized in accumulated other comprehensive income for the
2018
years ended December 31 (in thousands):
$
2019
-
-
375
375
$
$
-
-
207
207
Transition asset
Prior service credit
Gain
Total
$
58
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 9 - EMPLOYEE BENEFIT PLANS (CONTINUED)
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)
2019
55
312
(379)
-
$
2018
64
279
(441)
-
$
(12)
The weighted average assumptions used to determine the benefit obligation at December 31 are as follows:
2018
2019
3.55%
Discount rate
4.54%
$
(98)
The weighted average assumptions used to determine the net periodic pension cost at December 31 are
as follows:
2018
2019
4.54%
6.50%
0.00%
3.43%
6.50%
0.00%
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:
2019
2018
Cash equivalents
Equity securities
Fixed income securities
Other
0.0%
31.7%
57.7%
10.6%
100.0%
4.2%
46.1%
45.8%
3.9%
100.0%
The Delaware Plan’s overall investment strategy is to invest in a diversified portfolio while managing the
variability between the assets and projected liabilities of underfunded pension plans. In 2019, the New York
Bankers Retirement System (“System”) Board Members approved a migration of substantially all of the System’s
assets to one fund, Commingled Pensions Trust Fund (LDI Diversified Balanced) of JPMorgan Chase Bank, N.A.
The growth-oriented portion of the Fund invests in a mix of asset classes that the Fund’s Trustee believes will
collectively maximize total risk-adjusted return through a combination of capital appreciation and income. This
portion of the Fund will comprise between 35% and 90% of the portfolio and will invest directly or indirectly via
underlying funds in a broad mix of global equity, global fixed income, real estate and cash-plus strategies. The
remaining portion of the Fund, between 10% and 65% of the portfolio, is used to minimize volatility relative to a
plan’s projected liabilities.
60
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 9 - EMPLOYEE BENEFIT PLANS (CONTINUED)
The fair value of the Delaware Plan’s assets, by asset category, is as follows:
Quoted
Market
Price in
Active
Markets
(Level 1)
Total
December 31, 2019
Other
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
(in thousands of dollars)
Cash equivalents:
Cash (including foreign currencies)
Equity securities:
Common stock
Depository receipts
Preferred stock
Fixed income securities:
Corporate bonds
Government issue
Collateralized mortgage obligations
Other
Total
Cash equivalents:
Cash (including foreign currencies)
Equity securities:
Common stock
Depository receipts
Preferred stock
Fixed income securities:
Corporate bonds
Government issue
Collateralized mortgage obligations
Other
Total
60
$
6
$
6
$
2,765
47
22
678
2,490
174
671
6,853
$
2,765
47
22
-
-
-
-
2,840
$
-
-
-
-
$
$
-
-
-
-
-
-
-
671
671
678
2,490
174
-
3,342
$
December 31, 2018
Quoted
Market
Price in
Active
Markets
(Level 1)
Total
Other
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
(in thousands of dollars)
-
-
-
-
-
-
-
601
601
$
6
$
6
$
-
$
2,475
42
20
608
2,228
156
601
6,136
$
2,475
42
20
-
-
-
-
2,543
-
-
-
608
2,228
156
-
2,992
$
$
$
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 9 - 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,
2019 and 2018 (in thousands of dollars):
2018
Balance, January 1
Realized gain
Purchase
Sales
Unrealized gain (loss)
Balance, December 31
NOTE 10 - INCOME TAXES
$
$
2019
601
187
-
(610)
(178)
-
$
$
255
-
-
-
346
601
The components of the provision for federal income taxes are as follows:
Current
Deferred
Years Ended December 31,
2019
2018
(In Thousands)
1,620
988
2,608
$
$
$
$
2,529
24
2,553
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, 2019, the Company has a $4,611,000 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 tax rates to income before income taxes because of the following:
Tax at statutory rates
Tax exempt interest income, net of interest expense disallowance
Earnings and proceeds on life insurance
Other
Percentage of Income
before Income Taxes
Years Ended December 31,
2019
2018
21.0%
(4.4)
(1.0)
(0.1)
15.5%
21.0%
(4.9)
(1.1)
0.8
15.8%
62
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 10 - 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:
2019
2018
(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
Net unrealized gain on securities
Total Deferred Tax Liabilities
Net Deferred Tax Asset
$
$
1,787
797
141
55
360
17
-
968
-
122
4,247
598
220
221
327
94
1,460
$
2,787
1,775
766
278
90
363
20
260
1,173
1,477
95
6,297
223
186
143
321
-
873
$
5,424
The Company’s federal and state income tax returns for taxable years through 2016 have been closed for
purposes of examination by the Internal Revenue Service and the Pennsylvania Department of Revenue.
NOTE 11 - REGULATORY MATTERS AND STOCKHOLDERS’ EQUITY
The Company and Bank are subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the
Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the
Company’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting
practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the
regulators about components, risk-weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the
Bank to maintain minimum amounts and ratios (set forth in the table below) of Total, Tier 1 and Common
Equity Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average
assets. Management believes, as of December 31, 2019 and 2018, that the Company and the Bank meet all
capital adequacy requirements to which they are subject.
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 11 - REGULATORY MATTERS AND STOCKHOLDERS’ EQUITY (CONTINUED)
As of December 31, 2019, 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:
Actual
For Capital Adequacy
Purposes
To Be Well Capitalized
under Prompt
Corrective Action
Provisions
As of December 31, 2019:
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, 2018:
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in Thousands)
$132,507 14.01%
123,999 13.11
≥$75,674
≥56,756
≥8.00%
≥6.00
≥$94,593
≥75,674
≥10.00%
≥8.00
123,999 13.11
123,999 10.18
≥42,567
≥48,735
≥4.50
≥4.00
≥61,485
≥60,918
≥6.50
≥5.00
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Common Equity Tier 1 capital
$122,917 14.00%
114,465 13.04
≥$70,248
≥52,686
≥8.00%
≥6.00
≥$87,810
≥70,248
≥10.00%
≥8.00
(to risk-weighted assets)
Tier 1 capital (to average assets)
114,465 13.04
9.82
114,465
≥39,515
≥46,619
≥4.50
≥4.00
≥57,077
≥58,273
≥6.50
≥5.00
The Bank’s ratios do not differ significantly from the Company’s ratios presented above.
The Company and the Bank are subject to regulatory capital rules which, among other things, impose a
common equity Tier 1 minimum capital requirement of 4.50% of risk-weighted assets; set the minimum
leverage ratio for all banking organizations at a uniform 4.00% of total assets; set the minimum Tier 1 capital
to risk-based assets requirement at 6.00% of risk-weighted assets; and assign a risk-weight of 150% to
exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real
estate facilities that finance the acquisition, development or construction of real property. The rules also
require unrealized gains and losses on certain “available-for-sale” securities holdings to be included for
purposes of calculating regulatory capital requirements unless a one-time opt out is exercised, which the
Company and the Bank have done. The rule also limits a banking organization’s dividends, stock repurchases
and other capital distributions, and certain discretionary bonus payments to executive officers, if the banking
organization does not hold a “capital conservation buffer” consisting of 2.50% of common equity Tier 1 capital
to risk-weighted assets above regulatory minimum risk-based requirements. The Company and the Bank are
in compliance with their respective capital requirements, including the capital conservation buffer, as of
December 31, 2019.
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 11 - REGULATORY MATTERS AND STOCKHOLDERS’ EQUITY (CONTINUED)
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, 2019 and 2018 was
approximately $1,074,000 and $1,018,000, respectively.
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, 2019, $65,096,000 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 12 - 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 2019 or 2018. As of December 31, 2019, 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. At the Annual Meeting held on April 24, 2018, the Company’s shareholders
approved an amendment to the 2014 Equity Incentive Plan to ease certain restrictions on restricted stock
awards to outside directors. As a result of this amendment, the number of shares available for restricted stock
awards to officers was reduced by 300 shares to 62,700, while the number of shares available for restricted
stock awards to outside directors was increased by 20,300 to 32,300 shares. Under this plan, the Company
granted 39,850 shares in 2019 which included 26,750 options to employees, 7,500 shares of restricted stock
to officers and 5,600 shares of restricted stock to directors. In 2018, the Company granted 42,000 shares
which included 26,500 options to employees, 7,500 shares of restricted stock to officers, 2,400 options to
directors and 5,600 shares of restricted stock to directors. In 2017, the Company granted 44,150 shares 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 9,750 shares of restricted stock to officers and 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
64
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 12 - STOCK BASED COMPENSATION (CONTINUED)
straight-line basis over the requisite service period for the entire award. As of December 31, 2019, there were
177,785 shares available for future awards under this plan, which includes 151,260 shares available for officer
awards and 26,525 shares available for awards to outside directors. Included in these totals are 13,575 shares
available for restricted stock awards to officers and 9,225 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 $203,000 as of December 31, 2019 and
$207,000 as of December 31, 2018. Salaries and employee benefits expense includes $207,000 and $237,000 of
compensation costs related to options for the years ended December 31, 2019 and 2018, respectively.
Compensation costs related to restricted stock amounted to $289,000 and $205,000 for the years ended
December 31, 2019 and 2018, respectively. The expected future compensation expense relating to non-vested
restricted stock outstanding as of December 31, 2019 and 2018 was $1,146,000 and $963,000, respectively.
A summary of the Company’s stock option activity and related information for the years ended
December 31 follows:
2019
Weighted
Average
Exercise
Price
Average
Intrinsic
Value
Options
2018
Weighted
Average
Exercise
Price
Average
Intrinsic
Value
Options
208,700
26,750
(32,350)
(3,275)
199,825
Outstanding,
beginning of year
Granted
Exercised
Forfeited
Outstanding, end of year
173,075
$
$
$
22.54
36.02
19.71
24.31
24.78 $ 2,822,470
212,725
28,900
(28,275)
(4,650)
23.04 $ 2,745,430
208,700
$
$
$
20.76
32.34
18.39
27.08
22.54 $ 2,182,537
20.97 $ 2,163,463
Exercisable, end of year
179,800
Exercise prices for options outstanding as of December 31, 2019 ranged from $16.65 to $36.02 per share.
The weighted average remaining contractual life is 5.9 years.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing
Years Ended December 31,
model with the following weighted average assumptions:
2019
3.59%
10 years
29.08%
1.92%
$7.61
Dividend yield
Expected life
Expected volatility
Risk-free interest rate
Weighted average fair value of options granted
3.72%
10 years
29.10%
2.68%
$7.18
2018
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 13 - EARNINGS PER SHARE
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 $638,000 in 2019. Shares issued in connection with stock
option exercises are issued from available treasury shares or from available authorized shares. During 2019,
for the shares issued in connection with stock option exercises, 32,350 shares in total, all shares were issued
from available authorized shares. All share information has been adjusted to reflect the 50% stock dividend
declared in 2017.
As of December 31, 2019, outstanding stock options consist of the following:
Remaining
Life, Years
Options
Outstanding
Average
Exercise
Price
13,200
18,825
23,925
1,650
3,000
20,875
8,250
11,250
16,250
29,500
26,350
26,750
Total 199,825
$
16.83
16.65
18.03
18.36
19.30
17.93
19.39
19.03
22.37
32.81
32.34
36.02
1.0
2.0
3.0
3.0
3.8
4.0
4.9
5.9
7.0
8.0
9.0
10.0
$
Average
Exercise
Price
16.83
16.65
18.03
18.36
19.30
17.93
19.39
19.03
22.37
32.81
32.34
-
Options
Exercisable
13,200
18,825
23,925
1,650
3,000
20,875
8,250
11,250
16,250
29,500
26,350
-
173,075
A summary of the Company’s restricted stock activity and related information for the years ended
December 31 is as follows:
2019
2018
Non-vested, beginning of year
Granted
Vested
Forfeited
Non-vested at December 31
Number
of Shares
34,615
13,100
(11,520)
-
36,195
$
$
66
67
Weighted
Average
Grant Date
Fair Value
27.82
36.02
25.12
31.65
.0-
Weighted
Average
Grant Date
Fair Value
Number
of Shares
30,415
13,100
(8,900)
-
34,615
$
$
24.46
32.34
23.00
-
27.82
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 13 - EARNINGS PER SHARE (CONTINUED)
The following table sets forth the computations of basic and diluted earnings per share:
Years Ended December 31,
Numerator, net income
Denominator:
Weighted average shares outstanding
Less: Weighted average unvested restricted shares
Denominator: Basic earnings per share
Weighted average shares outstanding, basic
Add: Dilutive effect of stock options and restricted stock
Denominator: Diluted earnings per share
Basic earnings per common share
Diluted earnings per common share
2019
2018
(In Thousands, Except
Per Share Data)
$
14,215
$
13,651
6,295
(35)
6,260
6,260
72
6,332
$
2.27
$
2.25
6,263
(31)
6,232
6,232
58
6,290
$
$
2.19
2.17
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 zero for both years ended December 31, 2019 and 2018, based
on the closing price of the Company’s common stock which was $38.90 and $33.00 as of December 31, 2019 and
2018, respectively. All share and per share information has been restated to reflect the 50% stock dividend
declared in 2017.
NOTE 14 - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to
meet the financing needs of its customers. These financial instruments include commitments to extend credit and
letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the balance sheets.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial
instrument for commitments to extend credit and letters of credit is represented by the contractual amount of
those instruments. The Bank uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments.
A summary of the Bank’s financial instrument commitments is as follows:
Commitments to grant loans
Unfunded commitments under lines of credit
Standby letters of credit
December 31,
2019
2018
(In Thousands)
$
44,246
56,840
3,668
$ 104,754
$
$
45,246
71,906
4,269
121,421
68
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 14 - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (CONTINUED)
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some of the commitments are expected to expire without
being drawn upon, the total commitment amount does not necessarily represent future cash requirements.
The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit
evaluation of the customer and generally consists of real estate.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a
customer to a third party. The majority of these standby letters of credit expire within the next twelve months.
The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other
loan commitments. The Bank requires collateral supporting these letters of credit when deemed necessary.
Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to
cover the maximum potential amount of future payments required under the corresponding guarantees.
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. In accordance with fair value accounting guidance, the
Company measures, records, and reports various types of assets and liabilities at fair value on either a
recurring or non-recurring basis in the Consolidated Financial Statements. Those assets and liabilities are
presented in the sections entitled “Assets and Liabilities Required to be Measured and Reported at Fair Value
on a Recurring Basis” and “Assets and Liabilities Required to be Measured and Reported at Fair Value on a
Non-Recurring Basis”. There are three levels of inputs that may be used to measure fair values:
Level 1:
Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity
Level 2:
has the ability to access as of the measurement date.
Significant other observable inputs other than Level 1 prices such as quoted prices for
Level 3:
similar assets or liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data.
Significant unobservable inputs that reflect a company’s own assumptions about the
assumptions that market participants would use in pricing an asset or liability.
The methods of determining the fair value of assets and liabilities presented in this note are consistent
with our methodologies disclosed in Note 14 of the Company’s 2017 Form 10-K, except for the valuation of
loans which was impacted by the adoption of ASU 2016-01. In accordance with ASU 2016-01, the fair value of
loans, excluding previously presented impaired loans measured at fair value on a non-recurring basis, is
estimated using discounted cash flow analyses. The discount rates used to determine fair value use interest
rate spreads that reflect factors such as liquidity, credit and nonperformance risk. Loans are considered a
Level 3 classification.
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
ASSETS AND LIABILITIES REQUIRED TO BE MEASURED AND REPORTED
AT FAIR VALUE ON A RECURRING BASIS
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within
the fair value hierarchy used at December 31, 2019 and 2018 are as follows (in thousands):
Fair Value Measurement Reporting Date using
Description
December 31, 2019
Total
Level 1
Level 2
Level 3
Available for Sale:
States and political subdivisions
Corporate obligations
Mortgage-backed securities-government
sponsored entities
Total available for sale
December 31, 2018
Available for Sale:
U.S. Treasury securities
States and political subdivisions
Corporate obligations
Mortgage-backed securities-government
sponsored entities
Total available for sale
Securities:
$
$
$
$
71,305
4,100
134,800
210,205
-
97,613
8,640
137,024
243,277
$
$
$
$
-
-
-
-
-
-
-
-
-
$
$
$
$
71,305
4,100
134,800
210,205
-
97,613
8,640
137,024
243,277
$
$
$
$
-
-
-
-
-
-
-
-
-
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.
70
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
ASSETS AND LIABILITIES REQUIRED TO BE MEASURED AND REPORTED
AT FAIR VALUE ON A NON-RECURRING BASIS
For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level
within the fair value hierarchy used at December 31, 2019 and 2018 are as follows (in thousands):
Total
Description
Fair Value Measurement Reporting Date using
Level 1
Level 2
Level 3
December 31, 2019
Impaired Loans
Foreclosed real estate
December 31, 2018
$
1,584
1,556
Impaired Loans
Foreclosed real estate
Impaired loans (generally carried at fair value):
$
1,319
1,115
$
$
$
$
-
-
-
-
-
-
-
-
$
1,584
1,556
$
1,319
1,115
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, 2019, the fair value investment in impaired loans totaled $2,144,000, which included
two loan relationships that did not require a valuation allowance since either the estimated realizable value
of the collateral or the discounted cash flows exceeded the recorded investment in the loan. As of December
31, 2019, the Company has recognized charge-offs against the allowance for loan losses on these impaired
loans in the amount of $251,000 over the life of the loans. Additionally, there were two loan relationships
which totaled $2,001,000 which required a valuation allowance of $417,000 since either the estimated
realizable value of the collateral or the discounted cash flows were below the recorded investment in the loan.
As of December 31, 2019, the Company has not recognized a charge-off against the allowance for loan losses
on these impaired loans.
As of December 31, 2018, the fair value investment in impaired loans totaled $1,319,000 which included six
loan relationships that did not require a valuation allowance since either the estimated realizable value of the
collateral or the discounted cash flows exceeded the recorded investment in the loan. As of December 31,
2018, the Company has recognized charge-offs against the allowance for loan losses on these impaired loans in
the amount of $428,000 over the life of the loans.
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.
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The following tables present additional quantitative information about assets measured at fair value on a
nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
Quantitative Information about Level 3 Fair Value Measurements
December 31, 2019
(In thousands)
Impaired loans
Impaired loans
Foreclosed real estate owned
December 31, 2018
(In thousands)
Impaired loans
Impaired loans
Fair Value
Estimate
1,531
$
Valuation
Techniques
Unobservable
Input
Range
(Weighted Average)
10.00%
(10.00%)
$
53
Appraisal of
collateral(1)
Appraisal
adjustments(2)
4.00-6.97% (5.55%)
$
1,556
Present value of Loan
future cash flows discount rate
Appraisal of
collateral(1)
Probability
of default
Liquidation
Expenses(2)
0%
0-7.00% (4.34%)
Quantitative Information about Level 3 Fair Value Measurements
Fair Value
Estimate
Valuation
Techniques
Unobservable
Input
Range
(Weighted Average)
$
232
Appraisal of
collateral(1)
Appraisal
adjustments(2)
10.00-81.54%
(56.06%)
$
1,087
Present value of Loan
future cash flows discount rate
4.00-6.00% (5.80%)
Foreclosed real estate owned
$
1,115
Appraisal of
collateral(1)
Probability
of default
Liquidation
Expenses(2)
0%
7.00-85.71% (7.80%)
(1) Fair value is generally determined through independent appraisals of the underlying collateral, which
generally include various Level 3 inputs which are not identifiable, less any associated allowance.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and
estimated liquidation expenses. The range and weighted average of liquidation expenses and other
appraisal adjustments are presented as a percent of the appraisal.
ASSETS AND LIABILITIES NOT REQUIRED TO BE MEASURED OR REPORTED AT FAIR VALUE
The following information should not be interpreted as an estimate of the fair value of the entire Company
since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due
to a wide range of valuation techniques and the degree of subjectivity used in making the estimates,
comparisons between the Company’s disclosures and those of other companies may not be meaningful.
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Bank’s financial instruments not required to be measured or reported at fair
value were as follows at December 31, 2019 and December 31, 2018. (In thousands):
Fair Value Measurements at December 31, 2019
Financial assets:
Cash and cash equivalents (1)
Loans receivable, net
Mortgage servicing rights
Regulatory stock (1)
Bank owned life insurance (1)
Accrued interest receivable (1)
Financial liabilities:
Deposits
Short-term borrowings (1)
Other borrowings
Off-balance sheet financial instruments:
Accrued interest payable (1)
Commitments to extend credit and
outstanding letters of credit
Financial assets:
Cash and cash equivalents (1)
Loans receivable, net
Mortgage servicing rights
Regulatory stock (1)
Bank owned life insurance (1)
Accrued interest receivable (1)
Financial liabilities:
Carrying
Amount
Fair Value
Level 1
Level 2
Level 3
$
$ 15,415 $ 15,415
943,143
916,072
187
226
4,844
4,844
38,763
38,763
3,719
3,719
$
15,415
-
-
4,844
38,763
3,719
957,529
62,256
56,438
2,432
961,120
62,256
56,618
2,432
596,811
62,256
-
2,432
-
-
-
-
-
-
-
-
-
-
$
-
943,143
226
-
-
-
364,309
-
56,618
-
Fair Value Measurements at December 31, 2018
-
Carrying
Amount
Fair Value
Level 1
Level 2
-
-
-
-
Level 3
$
18,348 $
841,730
178
3,926
37,932
3,776
$
18,348
840,134
220
3,926
37,932
3,776
$
18,348
-
-
3,926
37,932
3,776
Deposits
Short-term borrowings (1)
Other borrowings
Accrued interest payable (1)
Off-balance sheet financial instruments:
946,780
53,046
52,284
1,806
945,773
53,046
52,043
1,806
601,604
53,046
-
1,806
Commitments to extend credit
and outstanding letters of credit
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
-
840,134
220
-
-
-
344,169
-
52,043
-
-
(1) This financial instrument is carried at cost, which approximates the fair value of the instrument.
72
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NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 16 – 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, 2019 and 2018:
Unrealized gains
(losses) on
available for sale
(5,558)
$
securities (a)
Unrealized gain (loss)
on pension liability (a)
538
$
$
(5,020)
Total (a)
Balance as of December 31, 2018
Other comprehensive income (loss)
before reclassification
Amount reclassified from accumulated
other comprehensive loss
Total other comprehensive income
Balance as of December 31, 2019
6,113
(201)
5,912
354
$
295
-
295
833
$
6,408
(201)
6,207
1,187
$
Unrealized gains
(losses) on
available for sale
securities (a)
Unrealized gain (loss)
on pension liability (a)
Total (a)
Balance as of December 31, 2017
Other comprehensive income (loss)
before reclassification
Amount reclassified from accumulated
other comprehensive loss
Total other comprehensive income (loss)
Balance as of December 31, 2018
$
(3,041)
$
374
$
(2,667)
(2,349)
(168)
(2,517)
(5,558)
$
164
-
164
538
$
(2,185)
(168)
(2,353)
(5,020)
$
(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, 2019 and 2018:
Details about other
comprehensive income
Amount Reclassified
From Accumulated
Other Comprehensive
Income (Loss) (a)
Twelve
months ended
2019
December 31,
Twelve
months ended
2018
December 31,
Affected Line Item in
the Consolidated
Statement of Income
Unrealized gains on available
for sale securities
$
$
254
(53)
201
$
$
Net realized gains on sales of securities
213
(45) Income tax expense
168
(a) Amounts in parentheses indicate debits to net income.
74
75
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 17 – PROPOSED ACQUISITION OF UPSTATE NEW YORK BANCORP, INC.
On January 8, 2020, Norwood Financial Corp. (“Norwood”) and its wholly owned subsidiary, Wayne Bank,
and UpState New York Bancorp, Inc. (“UpState”), and its wholly owned subsidiary, USNY Bank entered into an
Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which UpState will merge with and into
Norwood, with Norwood as the surviving corporation. Concurrent with the merger, it is expected that USNY
Bank will merge with and into Wayne Bank.
USNY Bank conducts its business from its two Bank of the Finger Lakes offices in Geneva and Penn Yan, New
York, and two Bank of Cooperstown offices in Cooperstown and Oneonta, New York. As of December 31, 2019,
UpState had total assets of $439.6 million, total net loans of $380.7 million, total deposits of $387.9 million
and total stockholders’ equity of $46.4 million.
Pursuant to the terms of the Merger Agreement, shareholders of UpState will have the opportunity to elect to
receive for each share of UpState common stock they own, either 0.9390 shares of Norwood common stock or
$33.33 in cash, or a combination of both. All shareholder elections will be subject to the allocation and proration
procedures set forth in the Merger Agreement which are intended to ensure that 90% of the shares of UpState
will be exchanged for Norwood common stock and 10% of the shares of UpState will be exchanged for cash. In
addition to the purchase price per share, UpState may also be permitted, under certain performance conditions,
to distribute at the closing of the merger, a special cash dividend of up to an additional $0.67 per share to
UpState’s shareholders. In the event of a greater than 20% decline in market value of Norwood’s common stock,
UpState may, in certain circumstances, be able to terminate the Merger Agreement unless Norwood increases the
number of shares into which UpState common stock may be converted.
The senior management of Norwood and Wayne Bank will remain the same following the merger. UpState
directors Jeffrey S. Gifford and Alexandra K. Nolan will be appointed to the boards of directors of Norwood and
Wayne Bank. In addition, the other directors of UpState will be invited to join a regional advisory board.
UpState President and CEO R. Michael Briggs will enter into a consulting agreement with Wayne Bank.
Norwood will retain the brand names of USNY’s two units, Bank of the Finger Lakes and Bank of Cooperstown,
and will also retain USNY’s administration center in Geneva, New York. Scott D. White, unit President of Bank
of Cooperstown, and Jeffrey E. Franklin, unit President of Bank of the Finger Lakes, will also remain in place as
executives of their units.
The transaction is subject to customary closing conditions, including the receipt of regulatory approvals and
approval by the shareholders of Norwood and UpState. The merger is expected to be completed in the third
quarter of 2020.
Each of the directors and executive officers of Norwood and UpState have agreed to vote their shares in
favor of the approval of the Merger Agreement at the shareholders’ meetings to be held to vote on the
proposed transaction. If the merger is not consummated under certain circumstances, UpState has agreed to
pay Norwood a termination fee of $3.2 million.
The Merger Agreement also contains usual and customary representations and warranties that Norwood
and UpState made to each other as of specific dates. The assertions embodied in those representations and
warranties were made solely for purposes of the contract between Norwood and UpState, and may be subject
to important qualifications and limitations agreed to by the parties in connection with negotiating its terms.
Moreover, the representations and warranties are subject to a contractual standard of materiality that may be
different from what may be viewed as material to shareholders, and the representations and warranties may
have been used to allocate risk between Norwood and UpState rather than establishing matters as facts.
74
75
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NOTE 18 - NORWOOD FINANCIAL CORP (PARENT COMPANY ONLY) FINANCIAL INFORMATION
BALANCE SHEETS
December 31,
2019
2018
(In Thousands)
ASSETS
Cash on deposit in bank subsidiary
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
Expenses
Income tax benefit
Net Income
Comprehensive Income
Equity in undistributed earnings of subsidiary
STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to
net cash provided by operating activities:
Net Cash Provided by Operating Activities
Undistributed earnings of bank subsidiary
Decrease in deferred income tax
Other, net
CASH FLOWS FROM INVESTING ACTIVITIES
Net Cash (Used in) Provided by Investing Activities
Investment in bank subsidiary
CASH FLOWS FROM FINANCING ACTIVITIES
Stock options exercised
Sale of treasury stock for ESOP
Acquisition of treasury stock
Cash dividends paid
Net Cash Used in Financing Activities
Net (Decrease) Increase in Cash and Cash Equivalents
CASH AND CASH EQUIVALENTS - BEGINNING
CASH AND CASH EQUIVALENTS - ENDING
$
2,848
135,433
1,875
$ 140,156
$
2,728
137,428
$ 140,156
$
2,509
120,511
1,739
$ 124,759
$
2,474
122,285
124,759
2018
Years Ended December 31,
$
2019
(In Thousands)
$
$
$
$
6,113
637
5,476
(232)
5,708
8,507
14,215
20,422
5,643
618
5,025
(217)
5,242
8,409
13,651
11,298
$
$
Years Ended December 31,
2019
2018
(In Thousands)
$
14,215
$
13,651
(8,507)
335
6,043
-
-
-
638
127
(428)
(6,041)
(5,704)
339
2,509
2,848
$
$
(8,409)
1,158
387
6,787
(4,000)
(4,000)
520
123
(194)
(5,509)
(5,060)
(2,273)
4,782
2,509
76
77
NORWOOD FINANCIAL CORP - 2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP - 2019 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, 2019,
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.
76
77
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79
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80
NORWOOD FINANCIAL CORP
NORWOOD FINANCIAL CORP
SUM MARY OF SEL E CTE D F IN ANCI AL DATA
DIRECTORY OF OF FI CER S
(dollars in thousands except per share data)
FOR ThE YEARS ENDED DECEMBER 31,
2019
2018
2017
2016
2015
Net interest income
Provision for loan losses
Other income
$38,606
$36,839
$34,908
$28,590
$24,521
1,250
1,725
2,200
2,050
4,580
6,355
423
6,837
228
6,496
4,841
3,969
Other expenses
27,311
25,975
24,870
23,124
17,100
Income before income taxes
16,823
16,204
14,749
Income tax expense
2,608
2,553
6,551
8,595
1,884
$1.16
$1.15
$0.83
7,540
1,632
$1.07
$1.07
$0.83
$14,215
$13,651
$8,198
$6,711
$5,908
$2.27
$2.25
$0.97
$2.19
$2.17
$0.90
$1.32
$1.31
$0.87
42.73%
41.10%
65.91%
71.84%
77.50%
1.18%
1.19%
10.83%
11.71%
0.73%
7.04%
0.74%
6.17%
0.80%
5.83%
NET INCOME
Net income per share -Basic*
-Diluted*
Cash dividends declared*
Dividend pay-out ratio
Return on average assets
Return on average equity
BALANCES AT YEAR-END
Total assets
Loans receivable
$1,230,610
$1,184,559
$1,132,916
$1,111,183
$750,505
924,581
850,182
764,092
713,889
559,925
Allowance for loan losses
8,509
8,452
7,634
6,463
7,298
Total deposits
Stockholders’ equity
957,529
946,780
929,384
925,385
550,909
137,428
122,285
115,739
111,079
100,998
Trust assets under management
170,685
151,224
157,838
138,167
131,690
Book value per share*
$21.67
$19.43
$18.61
$17.43
$18.26
Tier 1 Capital to risk-adjusted assets
13.08%
13.04%
13.16%
13.27%
15.86%
Total Capital to risk-adjusted assets
13.98%
14.00%
14.11%
14.12%
17.09%
Allowance for loan losses to total loans
Non-performing assets to total assets
0.92%
0.19%
0.99%
0.19%
1.00%
0.91%
0.37%
0.64%
1.30%
1.33%
*Per share information has been restated to reflect the 50% stock dividend declared in 2017.
Net realized gains on sales of loans and securities
415
338
730
John H. Sanders ..................................... Senior Vice President
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
WAYNE BANK
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, Chief Lending Officer
John F. Carmody ......Executive Vice President, Chief Credit Officer
Robert J. Mancuso .............................Executive Vice President,
Chief Operating Officer
Ryan J. French ..................................... Senior Vice President,
Director of Human Resources
John H. Sanders ... Senior Vice President, Retail Lending Manager
Diane M. Wylam ........Senior Vice President, Senior Trust Officer
Thomas A. Byrne .................................... Senior Vice President
Joseph A. Castrogiovanni ........................ Senior Vice President
Kenneth C. Doolittle ............................... Senior Vice President
John Ford .............................................. Senior Vice President
Karen R. Gasper ..................................... Senior Vice President
Nancy A. Hart ........................ Senior Vice President, Controller
& Assistant Secretary
Dawnette Hotaling .................................. Senior Vice President
Julie R. Kuen ......................................... Senior Vice President
Linda D. Mader ...................................... Senior Vice President
Vincent O’Bell ........................................ Senior Vice President
F. Jeffrey Reimer .................................... Senior Vice President
Eli T. Tomlinson ..................................... 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
Amanda Hall .................................................... Vice President
Jill A. Hessling ................................................. Vice President
John E. Koczwara ............................................. Vice President
Paul Kosiba...................................................... Vice President
Kristine Malti .................................................. Vice President
Frank J. Sislo ................................................... Vice President
Kara R. Suchy .................................................. Vice President
Gerald J. Arnese ................................. Assistant Vice President
Douglas W. Atherton ............................ Assistant Vice President
John Baker ......................................... Assistant Vice President
Derek Bellinger ................................... Assistant Vice President
Craig D. Grimm .................................. Assistant Vice President
Teresa Hynes ...................................... Assistant Vice President
Stacey L. Kuhn ................................... Assistant Vice President
Vonnie Lewis ...................................... Assistant Vice President
Bonnie Lockett ................................... Assistant Vice President
Eileen Mershon .................................. Assistant Vice President
Gerry Moore ....................................... Assistant Vice President
Christine Routledge ............................ Assistant Vice President
Tanyia Vannatta .................................. Assistant Vice President
Michele Bailey................................ Community Office Manager
Karen Beissel ................................. Community Office Manager
Kristen Bolin .................................. Community Office Manager
Nicola Folina .................................. Community Office Manager
Brenda Gessell ............................... Community Office Manager
Timothy Gutliph .............................. Community Office Manager
Sandra C. Mruczkewycz ................... Community Office Manager
Madeline Portugal ........................... Community Office Manager
AnnaMae Rechtorovic ..................... Community Office Manager
Debra Renwick ............................... Community Office Manager
Jessica Santiago ............................. Community Office Manager
Denise Seman ................................ Community Office Manager
Julie Shenyo .................................. Community Office Manager
Cheryl Wilkerson ............................. Community Office Manager
Krystin Woodcock ........................... Community Office Manager
Laurie J. Bishop ............... Assistant Community Office Manager
Kimberly Charner .............. Assistant Community Office Manager
Kimberly Crellin .............. Assistant Community Office Manager
Denise R. Kern ................. Assistant Community Office Manager
Joelyn Lee........................ Assistant Community Office Manager
Wendy Olsen .................... Assistant Community Office Manager
Diane L. Richter ............... Assistant Community Office Manager
Stacey Stephenson ........... Assistant Community Office Manager
Ronald DePasquale ............................Facilities/Security Officer
Kimberly Gola .......................Residential Mortgage Underwriter
Annette Jurkowski ................. Assistant BSA/Compliance Officer
Kristen E. Lancia .......................................... Marketing Officer
Marianne McConeghy ........................... Trust Operations Officer
Linda A. Meskey ................................................Credit Analyst
Amanda R. Miller .......Commercial Loan Documentation Officer
Corissa O’Malley ............................Loan Documentation Officer
Jamie Padula ..............Human Resources Administrative Officer
Elaine Reuthe ..............Retail Training and Development Officer
Kathryn A. Serniak ................................. Mortgage Loan Officer
Briana Scholl ......................................Credit Analyst Manager
Gary Steich ..................................... Resource Recovery Officer
Bonnie Rutledge .................................... Assistant Trust Officer
NORWOOD INVESTMENT CORP
Lewis J. Critelli ................... President & Chief Executive Officer
William S. Lance .....................................................Treasurer
Scott C. Rickard .............. Investment Executive, LPL Financial
MONROE COUNTY ASSOCIATE BOARD
Michael J. Baxter
Sara Cramer
Dr. Andrew A. Forte
Ralph A. Matergia, Esq.
James H. Ott
Marvin Papillon
Ray Price
Ron Sarajian
www.wAyNEb ANk.COm
2019 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP
“
the FouNdAtIoN oF wAyNe bANk’s suCCess Is
buILt uPoN our exCePtIoNAL emPLoyees ANd theIr
CoNtINued dedICAtIoN to our orgANIzAtIoN.
B O A R D O f DI Re C TO R S
Norwood Financial Corp and Wayne Bank Board of Directors (seated, left to right) Dr. Andrew A. Forte, Vice Chairman of the Board; Lewis J. Critelli,
President & Chief Executive Officer; William W. Davis, Jr., Chairman of the Board (standing, left to right) Meg L. Hungerford, Kevin M. Lamont,
Joseph W. Adams, Ralph A. Matergia, Esq., Dr. Kenneth A. Phillips, Susan Campfield, (not pictured) Russell L. Ridd, Director Emeritus
Norwood FINANCIAL CorP
2o19 An nua l R eport
of personalized service from their local bank. In 2019, we launched seven additional Smart Banking
Solution Centers in Community Offices throughout our market area. Our innovative Smart Banking
Solution Centers showcase the Bank’s suite of electronic banking services, the centerpiece of which is
an interactive, floor standing touchscreen that customers can use to watch video tutorials. At the end of
the fourth quarter, Mobile Banking users totaled over 26,000, Mobile Deposit Capture was utilized by
over 4,500 individuals and businesses, 10,000 deposit customers were enrolled in eStatements, and
CardValet users increased by 75% over the prior year.
As a community bank, Wayne Bank is an integral part of both the local community and economy.
In 2019, we contributed to hundreds of organizations throughout Pennsylvania and New York and our
employees helped their communities to grow first-hand through event participation and service to local
charities. By supporting these organizations, Wayne Bank is reinvesting in the communities we serve
and encouraging economic growth.
”
Our efforts did not go unnoticed, and we are proud to have been recognized with the Readers’ Choice
Award for “Best Bank” and “Best Customer Service” from The River Reporter. The awards are voted on
by the publication’s readers to celebrate the best people, places, and businesses in the local community.
The foundation of Wayne Bank’s success is built upon our exceptional employees and their continued
dedication to our organization. We are proud to honor the talents and accomplishments of those
employees who celebrated milestone years of service with Wayne Bank in 2019. Congratulations to
Ann M. Crane, Accounting Specialist, and Bonnie Lockett, Assistant Vice President and Credit Analyst,
for their thirty five years of service. Teresa Hynes, Assistant Vice President and Roxbury Community
Office Manager, and David F. Yamialkowski, Facilities Specialist, both achieved thirty years of service.
Adding employees who celebrated twenty-five, twenty, fifteen, ten, and five year anniversaries, the group
represents 365 years of Community Banking experience.
Wayne Bank’s growth provided many opportunities for employee advancement and over the past
year numerous employees were recognized for their outstanding contributions. The most senior
promotions included Karen Gasper to Senior Vice President and BSA/CRA/Regulatory Compliance
Officer, Julie Kuen to Senior Vice President and Retail Operations and Electronic Banking Manager
and Kris Malti to Vice President and Deposit Operations and Fraud Manager. In addition, many other
employees were promoted throughout the Company. Senior Vice President and Commercial Loan
Officer, Vincent O’Bell, was also honored by the Pennsylvania Bankers Association for his 40 years of
service to the banking industry.
The Bank’s Community Office management team also grew in 2019. Kristen Bolin joined the
Bank as the Exeter Community Office Manager, Nicola D. Folina as the Monticello Community Office
Manager, Julie Shenyo as the Hanover Township Community Office Manager, and Krystin Woodcock
as the Stamford Community Office Manager. Using their experience, customer service skills, and local
knowledge, these bankers will provide sound financial solutions to the residents, businesses, and
organizations within their market areas.
“
we beLIeve IN buILdINg LAstINg reLAtIoNshIPs wIth
our Customers, reINvestINg IN our CommuNItIes,
ANd ProvIdINg vALue to our stoCkhoLders.
”
We are truly excited to have announced that we have entered into a Definitive Merger Agreement
pursuant to which Norwood Financial Corp will acquire Upstate New York Bancorp, Inc. and its wholly
owned subsidiary, USNY Bank. When the merger is completed, this will expand our footprint into Ontario
and Yates Counties, with Bank of the Finger Lakes, and into Otsego County, with Bank of Cooperstown.
The combined Company will have approximately $1.7 billion assets and 31 offices throughout five
counties in Northeastern Pennsylvania, two counties in the Southern Tier of New York, and three
counties in Upstate New York. The merger is expected to close in the third quarter of 2020 pending
regulatory and shareholder approvals. We look forward to welcoming our new customers, stockholders,
and employees as a result of the transaction.
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 and CEO
eXeTeR COMMUNITY OffICe
HANOveR TOwNSHIP
COMMUNITY OffICe
eXPANSION TO LUZe RNe COUNTY
We opened our Hanover Township Community Office during April
of 2019, and a second Community Office, located in Exeter,
followed in November. Both offices house retail banking and
commercial lending professionals, and offer Wayne Bank’s
complete line of products and services for consumers and
businesses. Drive-up banking, drive-up ATMs, and ample
parking further enhance both locations.
ReDeSIGNe D SPACeS
Our newly redesigned board room showcases our building’s
uniquely arched windows.
SeNIOR MANAGeMe NT TeAM
Wayne Bank Senior Management Team (left to right):
John H. Sanders, Senior Vice President
Diane Wylam, Esq., Senior Vice President
Robert J. Mancuso, Executive Vice President
Lewis J. Critelli, President and Chief Executive Officer
James F. Burke, Executive Vice President
William S. Lance, Executive Vice President
John F. Carmody, Executive Vice President
Ryan J. French, Senior Vice President
FRANKLIN
STAMFORD
ROXBURY
HAMDEN
ANDES
WALTON
DELAWARE
LAKEWOOD
ROSCOE
SULLIVAN
WAYNE
CALLICOON
LIBERTY
WAYMART
LACKAWANNA
HONESDALE
NARROWSBURG
MONTICELLO
WURTSBORO
CLARKS
SUMMMIT
WILLOW
AVE
HAWLEY
SHOHOLA
CENTRAL
SCRANTON
PIKE
MILFORD
EXETER
HANOVER
TOWNSHIP
LUZERNE
MONROE
TANNERSVILLE
MARSHALLS
CREEK
STROUD MALL
EFFORT
Norwood FINANCIAL CorP
2o19 Annu al Report
DeAR STOCKHOLDe RS,
We are pleased to share with you the Company’s performance and achievements in this Annual Report.
In 2019, your Company had a record level of earnings, 8.8% growth in loans, improvement in credit
quality metrics, and an expansion into a new market in Luzerne County, PA. We also increased our cash
dividend in the fourth quarter of 2019 to $0.25 per share, which represents a 4.2% increase compared
to the fourth quarter of 2018. This marks 27 consecutive years of an increase in the Company’s cash
dividend, truly an impressive record. In January 2020, we announced the signing of a definitive merger
agreement to acquire Upstate New York Bancorp, Inc., and its subsidiary, USNY Bank, which operates
the Bank of the Finger Lakes and the Bank of Cooperstown.
For the year ended December 31, 2019, the Company earned a record $14,215,000 compared to
$13,651,000 earned in 2018. The increase reflects improvement in net interest income, as well as a
reduction in the provision for loan losses. The return on average assets for the year was 1.18%, with
a return on average equity of 10.83%, compared to 1.19% and 11.71%, respectively, in 2018. Total
assets were $1.231 billion as of December 31, 2019. Loans receivable increased $74.4 million to
total $924.6 million as of December 31, 2019, with total deposits of $957.5 million and stockholders’
equity of $137.1 million. I encourage you to read Management’s Discussion and Analysis and the
Financial Statements with Footnotes for a full report on our performance.
The year 2019 marked the 148th anniversary of Wayne Bank helping the community grow.
Though many things have changed throughout the years, Wayne Bank has remained committed to our
longstanding principles. We believe in building lasting relationships with our customers, reinvesting in
our communities, and providing value to our stockholders.
We now have 27 Community Offices in seven counties to better serve the residents, businesses, and
organizations of Northeastern Pennsylvania and the Southern Tier of New York; and employ more than
220 local people who are passionate about helping their neighbors and communities.
Wayne Bank has experienced tremendous growth throughout our organization this year. In 2019, our
in-office network generated almost 1,100 mortgage, home equity, and other personal loans totaling $47
million; our business lending division originated over $100 million in commercial loans; and our dealer
center produced auto and other loans totaling $78 million.
One of the most exciting events of the year was our expansion into Luzerne County, Pennsylvania.
Wayne Bank is dedicated to investing in the communities we serve and we are proud to continue that
tradition in Luzerne County. We opened our Hanover Township Community Office in April of 2019, and
a second Community Office, located in Exeter, followed in November. Both offices house retail banking
and commercial lending professionals, and offer Wayne Bank’s complete line of products and services
for consumers and businesses. Drive-up banking, drive-up ATMs, and ample parking further enhance
both locations. This expansion has resulted in positive market opportunities for our deposit, lending,
and wealth management products.
Wayne Bank is committed to providing the most advanced, secure, and user friendly bank technology,
along with a knowledgeable staff and innovative tools to demonstrate how easy and accessible it is to
use. This offers customers the convenience of banking from anywhere, combined with the comfort
“
we Now hA ve 27 CommuNIty oFFICes
IN seveN C ouNtI es to better serve
the resI deN ts, busINesses, ANd
orgANIzAtIoN s oF NortheA sterN
PeNNsyLv ANIA ANd the s outherN
tIer oF New y ork.
”
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www.wAyNebANk.C om
2o19 Annual Report
Norwood FINANCIAL CorP
Wurtsboro, NY
Roscoe, NY
Narrowsburg, NY
Monticello, NY
Liberty, NY
Callicoon, NY
SULLIVAN COUNTY
Shohola, PA
Milford, PA
PIKE COUNTY
Exeter, PA
Hanover Township, PA
LUzERNE COUNTY
Tannersville, PA
Stroud Mall (Stroudsburg), PA
Marshalls Creek, PA
Effort, PA
MONROE COUNTY
Clarks Summit, PA
Central Scranton, PA
LACKAWANNA COUNTY
Willow Avenue (Honesdale), PA
Waymart, PA
Lakewood, PA
Honesdale, PA
Hawley, PA
WAYNE COUNTY
Walton, NY
Stamford, NY
Roxbury, NY
Hamden, NY
Franklin, NY
Andes, NY
DELAWARE COUNTY