UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM10-Q

(Mark One)

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

For the quarterly period ended ~~June 30, 2018~~

March 31, 2019

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

For the transition period from to

Commission file number0-28364

Norwood Financial Corp.

(Exact name of registrant as specified in its charter)

~~Norwood Financial Corp.~~
~~(Exact name of registrant as specified in its charter)~~

Pennsylvania

23-2828306

(State or other jurisdiction of

incorporation or organization)

(I.R.S. employer

identification no.)


717 Main Street, Honesdale, Pennsylvania		18431
(Address of principal executive offices)		(Zip Code)

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

~~N/A~~

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

N/A

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

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

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act): ☐ Yes ☒ No

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

Title of each class

Trading

symbol(s)

Name of each exchange

on which registered

Common Stock, par value $0.10 per share

NWFL

The Nasdaq Stock Market LLC

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


Class		Outstanding as of ~~August~~May 1, ~~2018~~2019
Common stock, par value $0.10 per share		~~6,263,159~~6,288,955

NORWOOD FINANCIAL CORP.

FORM10-Q

FOR THE QUARTER ENDED ~~JUNE 30, 2018~~

MARCH 31, 2019


				Page Number
PART I -			– CONSOLIDATED FINANCIAL INFORMATION OF NORWOOD FINANCIAL CORP.

Item 1.		Financial Statements (unaudited)			3
Item 2.
~~Item 1.~~	~~Financial Statements (unaudited)~~	3
~~Item 2.~~	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33		31
Item 3.		Quantitative and Qualitative Disclosures about Market Risk	47		42
Item 4.		Controls and Procedures	48
~~PART II -~~	~~OTHER INFORMATION~~	43

PART II – OTHER INFORMATION

Item 1.		Legal Proceedings
~~Item 1.~~44	~~Legal Proceedings~~	49
Item 1A.		Risk Factors	49		44
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	49		44
Item 3.		Defaults Upon Senior Securities	49		44
Item 4.		Mine Safety Disclosures	49
~~Item 5.~~	~~Other Information~~	50
~~Item 6.~~	~~Exhibits~~	50
		44
~~Signatures~~ Item 5.		52Other Information			44
Item 6.		Exhibits			45

Signatures					47

~~Table of Contents~~

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NORWOOD FINANCIAL CORP.

Consolidated Balance Sheets(unaudited)

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

June 30,
2018

December 31,
2017

ASSETS
Cash and due from banks $ 15,193 $ 16,212
Interest-bearing deposits with banks 914 485
Cash and cash equivalents 16,107 16,697

Securities available for sale, at fair value 259,442 281,121
Loans receivable 803,773 764,092
Less: Allowance for loan losses 8,326 7,634
Net loans receivable 795,447 756,458
Regulatory stock, at cost 2,313 3,505
Bank premises and equipment, net 13,894 13,864
Bank owned life insurance 37,485 37,060
Accrued interest receivable 3,672 3,716
Foreclosed real estate owned 1,386 1,661
Goodwill 11,331 11,331
Other intangibles 394 462
Deferred tax asset 5,885 4,781
Other assets 3,237 2,260
TOTAL ASSETS $ 1,150,593 $ 1,132,916

LIABILITIES
Deposits:
Non-interest bearing demand $ 216,472 $ 205,138
Interest-bearing 734,417 724,246
Total deposits 950,889 929,384
Short-term borrowings 43,325 42,530
Other borrowings 30,283 35,945
Accrued interest payable 1,461 1,434
Other liabilities 9,102 7,884
TOTAL LIABILITIES 1,035,060 1,017,177

STOCKHOLDERS’ EQUITY
Common stock, $.10 par value per share, authorized 10,000,000 shares; issued 2018: 6,266,388 shares, 2017: 6,256,063 shares 627 626
Surplus 47,815 47,431
Retained earnings 74,315 70,426
Treasury stock at cost: 2018: 5,729 shares, 2017: 2,608 shares (188 ) (77 )
Accumulated other comprehensive loss (7,036 ) (2,667 )
TOTAL STOCKHOLDERS’ EQUITY 115,533 115,739
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 1,150,593 $ 1,132,916

data)


	March 31, 2019			December 31, 2018
ASSETS
Cash and due from banks	$	13,583		$	18,039
Interest-bearing deposits with banks		6,291			309

Cash and cash equivalents		19,874			18,348
Securities available for sale, at fair value		240,621			243,277
Loans receivable		864,198			850,182
Less: Allowance for loan losses		8,349			8,452

Net loans receivable		855,849			841,730
Regulatory stock, at cost		3,132			3,926
Bank premises and equipment, net		14,165			13,846
Bank owned life insurance		38,134			37,932
Accrued interest receivable		4,089			3,776
Foreclosed real estate owned		1,792			1,115
Goodwill		11,331			11,331
Other intangibles		307			336
Other assets		14,301			8,942

TOTAL ASSETS	$	1,203,595		$	1,184,559

LIABILITIES
Deposits:
Non-interest bearing demand	$	206,806		$	201,457
Interest-bearing		767,609			745,323

Total deposits		974,415			946,780
Short-term borrowings		37,824			53,046
Other borrowings		47,955			52,284
Accrued interest payable		2,457			1,806
Other liabilities		14,172			8,358

TOTAL LIABILITIES		1,076,823			1,062,274

STOCKHOLDERS’ EQUITY
Preferred stock, no par value per share, authorized 5,000,000 shares		—			—
Common stock, $0.10 par value per share, authorized 10,000,000 shares; issued 2019: 6,301,263 shares, 2018: 6,295,113 shares		630			630
Surplus		48,559			48,322
Retained earnings		80,115			78,434
Treasury stock at cost: 2019: 13,807 shares, 2018: 2,470 shares		(455	)		(81	)
Accumulated other comprehensive loss		(2,077	)		(5,020	)

TOTAL STOCKHOLDERS’ EQUITY		126,772			122,285

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,203,595		$	1,184,559

See accompanying notes to the unaudited consolidated financial statements.

~~Table of Contents~~

NORWOOD FINANCIAL CORP.

Consolidated Statements of Income(unaudited)

(dollars in ~~thousan ds,~~thousands, except per share ~~data~~)

Three Months Ended
June 30,

Six Months Ended
June 30,

2018 2017 2018 2017
INTEREST INCOME
Loans receivable, including fees $ 8,857 $ 7,925 $ 17,344 $ 15,731
Securities 1,536 1,633 3,060 3,251
Other 43 24 61 35
Total interest income 10,436 9,582 20,465 19,017

INTEREST EXPENSE
Deposits 1,052 797 2,082 1,563
Short-term borrowings 38 28 90 56
Other borrowings 131 101 271 244
Total interest expense 1,221 926 2,443 1,863
NET INTEREST INCOME 9,215 8,656 18,022 17,154
PROVISION FOR LOAN LOSSES 425 600 975 1,200
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,790 8,056 17,047 15,954

OTHER INCOME
Service charges and fees 1,101 1,016 2,082 1,951
Income from fiduciary activities 175 128 311 235
Net realized gains on sales of securities 58 31 200 37
Gain on sale of loans, net - 67 - 67
Gain on sale of deposits - - - 209
Earnings and proceeds on bank owned life insurance 279 275 552 530
Other 161 139 323 270
Total other income 1,774 1,656 3,468 3,299

OTHER EXPENSES
Salaries and employee benefits 3,406 3,212 6,868 6,430
Occupancy, furniture & equipment, net 857 809 1,749 1,720
Data processing and related operations 340 324 658 668
Taxes, other than income 153 227 327 460
Professional fees 229 240 459 489
Federal Deposit Insurance Corporation insurance 86 91 178 186
Foreclosed real estate 114 152 95 724
Amortization of intangibles 33 39 68 80
Other 1,135 1,036 2,198 1,987
Total other expenses 6,353 6,130 12,600 12,744

INCOME BEFORE INCOME TAXES 4,211 3,582 7,915 6,509
INCOME TAX EXPENSE 698 858 1,273 1,409
NET INCOME $ 3,513 $ 2,724 $ 6,642 $ 5,100

BASIC EARNINGS PER SHARE (1) $ 0.57 $ 0.44 $ 1.07 $ 0.82

DILUTED EARNINGS PER SHARE (1) $ 0.56 $ 0.43 $ 1.06 $ 0.81

~~(1) Per share data for 2017 has been restated to give retroactive effect to the 50% stock dividend declared on August 8, 2017.~~

data)


	Three Months Ended March 31,
	2019		2018
INTEREST INCOME
Loans receivable, including fees	$	9,970	$	8,487
Securities		1,441		1,524
Other		15		18

Total interest income		11,426		10,029

INTEREST EXPENSE
Deposits		1,729		1,029
Short-term borrowings		123		52
Other borrowings		303		141

Total interest expense		2,155		1,222

NET INTEREST INCOME		9,271		8,807
PROVISION FOR LOAN LOSSES		450		550

NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		8,821		8,257

OTHER INCOME
Service charges and fees		1,031		980
Income from fiduciary activities		142		137
Net realized gains on sales of securities		—		142
Gain on sale of loans, net		42		—
Earnings and proceeds on bank owned life insurance		202		273
Other		143		162

Total other income		1,560		1,694

OTHER EXPENSES
Salaries and employee benefits		3,649		3,462
Occupancy, furniture & equipment, net		924		892
Data processing and related operations		448		319
Taxes, other than income		161		175
Professional fees		250		230
Federal Deposit Insurance Corporation insurance		71		92
Foreclosed real estate		23		(19	)
Amortization of intangibles		29		34
Other		1,093		1,063

Total other expenses		6,648		6,248

INCOME BEFORE INCOME TAXES		3,733		3,703
INCOME TAX EXPENSE		543		574

NET INCOME	$	3,190	$	3,129

BASIC EARNINGS PER SHARE	$	0.51	$	0.50

DILUTED EARNINGS PER SHARE	$	0.51	$	0.50

See accompanying notes to the unaudited consolidated financial statements.

~~Table of Contents~~

NORWOOD FINANCIAL CORP.

Consolidated Statements of Comprehensive Income (Loss) ~~Income~~ (unaudited)

(dollars in thousands)

Three Months Ended
June 30,

2018 2017
Net income $ 3,513 $ 2,724
Other comprehensive (loss) income:
Investment securities available for sale:
Unrealized holding (loss) gain (840 ) 2,735
Tax effect 177 (930 )
Reclassification of investment securities gains recognized in net income (58 ) (31 )
Tax effect 12 11
Other comprehensive (loss) income (709 ) 1,785
Comprehensive Income $ 2,804 $ 4,509

Six Months Ended
June 30,

2018 2017
Net income $ 6,642 $ 5,100
Other comprehensive (loss) income:
Investment securities available for sale:
Unrealized holding (loss) gain (5,330 ) 3,957
Tax effect 1,119 (1,346 )
Reclassification of investment securities gains recognized in net income (200 ) (37 )
Tax effect 42 13
Other comprehensive (loss) income (4,369 ) 2,587
Comprehensive Income $ 2,273 $ 7,687


	Three Months Ended March 31,
	2019			2018
Net income	$	3,190		$	3,129

Other comprehensive income (loss):
Investment securities available for sale:
Unrealized holding gain (loss)		3,725			(4,490	)
Tax effect		(782	)		942
Reclassification of investment securities gains recognized in net income		—			(142	)
Tax effect		—			30

Other comprehensive income (loss)		2,943			(3,660	)

Comprehensive Income (Loss)	$	6,133		$	(531	)

See accompanying notes to the unaudited consolidated financial statements.

~~Table of Contents~~

NORWOOD FINANCIAL CORP.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

~~Six~~

Three Months Ended ~~June 30,~~March 31, 2019 and 2018

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

Common Stock Retained Treasury Stock
Accumulated
Other
Comprehensive

Shares Amount Surplus Earnings Shares Amount Loss Total
Balance, December 31, 2017 6,256,063 $ 626 $ 47,431 $ 70,426 2,608 $ (77 ) $ (2,667 ) $ 115,739
Net Income - - - 6,642 - - - 6,642
Other comprehensive loss - - - - - - (4,369 ) (4,369 )
Cash dividends declared ($0.44 per share) - - - (2,753 ) - - - (2,753 )
Compensation expense related to restricted stock - - 102 - - - - 102
Acquisition of treasury stock - - - - 5,446 (179 ) - (179 )
Stock options exercised 10,325 1 164 - (2,325 ) 68 - 233
Compensation expense related to stock options - - 118 - - - - 118
Balance, June 30, 2018 6,266,388 $ 627 $ 47,815 $ 74,315 5,729 $ (188 ) $ (7,036 ) $ 115,533


					Surplus		Retained Earnings									Accumulated Other Comprehensive Loss			Total
	Common Stock									Treasury Stock
	Shares		Amount							Shares			Amount
Balance, December 31, 2018		6,295,113	$	630	$	48,322	$	78,434			2,470		$	(81	)	$	(5,020	)	$	122,285
Net Income		—		—		—		3,190			—			—			—			3,190
Other comprehensive income		—		—		—		—			—			—			2,943			2,943
Cash dividends declared ($0.24 per share)		—		—		—		(1,509	)		—			—			—			(1,509	)
Compensation expense related to restricted stock		—		—		72		—			—			—			—			72
Acquisition of treasury stock		—		—		—		—			11,337			(374	)		—			(374	)
Stock options exercised		6,150		—		113		—			—			—			—			113
Compensation expense related to stock options		—		—		52		—			—			—			—			52

Balance, March 31, 2019		6,301,263	$	630	$	48,559	$	80,115			13,807		$	(455	)	$	(2,077	)	$	126,772


					Surplus		Retained Earnings									Accumulated Other Comprehensive Loss			Total
	Common Stock									Treasury Stock
	Shares		Amount							Shares			Amount
Balance, December 31, 2017		6,256,063	$	626	$	47,431	$	70,426			2,608		$	(77	)	$	(2,667	)	$	115,739
Net Income		—		—		—		3,129			—			—			—			3,129
Other comprehensive loss		—		—		—		—			—			—			(3,660	)		(3,660	)
Cash dividends declared ($0.22 per share)		—		—		—		(1,376	)		—			—			—			(1,376	)
Compensation expense related to restricted stock		—		—		51		—			—			—			—			51
Acquisition of treasury stock		—		—		—		—			5,446			(179	)		—			(179	)
Stock options exercised		1,500		—		7		—			(2,325	)		68			—			75
Compensation expense related to stock options		—		—		59		—			—			—			—			59

Balance, March 31, 2018		6,257,563	$	626	$	47,548	$	72,179			5,729		$	(188	)	$	(6,327	)	$	113,838

See accompanying notes to the unaudited consolidated financial statements.

~~Table of Contents~~

NORWOOD FINANCIAL CORP.

Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)


	Three Months Ended March 31,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	3,190		$	3,129
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		450			550
Depreciation		241			216
Amortization of intangible assets		29			34
Deferred income taxes		(40	)		(127	)
Net amortization of securities premiums and discounts		371			463
Net realized gain on sales of securities		—			(142	)
Earnings and proceeds on life insurance policies		(202	)		(273	)
Gain on sales and write-downs of fixed assets and foreclosed real estate owned		(8	)		(47	)
Net gain on sale of loans		(42	)		—
Mortgage loans originated for sale		(732	)		—
Proceeds from sale of loans originated for sale		758			—
Compensation expense related to stock options		52			59
Compensation expense related to restricted stock		72			51
(Increase) decrease in accrued interest receivable		(313	)		29
Increase in accrued interest payable		651			22
Other, net		(201	)		(1,920	)

Net cash provided by operating activities		4,276			2,044

CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales		327			10,761
Proceeds from maturities and principal reductions on mortgage-backed securities		5,684			7,724
Purchases		—			(8,179	)
Purchase of regulatory stock		(1,112	)		(765	)
Redemption of regulatory stock		1,906			1,725
Net increase in loans		(15,352	)		(11,925	)
Purchase of premises and equipment		(560	)		(160	)
Proceeds from sales of foreclosed real estate owned		44			412

Net cash used in investing activities		(9,063	)		(407	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		27,635			10,765
Net decrease in short-term borrowings		(15,222	)		(12,625	)
Repayments of other borrowings		(4,329	)		(2,852	)
Stock options exercised		113			75
Purchase of treasury stock		(374	)		(179	)
Cash dividends paid		(1,510	)		(1,376	)

Net cash provided by (used in) financing activities		6,313			(6,192	)

Increase (decrease) in cash and cash equivalents		1,526			(4,555	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		18,348			16,697

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	19,874		$	12,142

Six Months Ended June 30,
2018 2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 6,642 $ 5,100
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 975 1,200
Depreciation 437 468
Amortization of intangible assets 68 80
Deferred income taxes (202 ) (525 )
Net amortization of securities premiums and discounts 885 1,120
Net realized gain on sales of securities (200 ) (37 )
Gain on sale of deposits - (209 )
Earnings and proceeds on bank owned life insurance (552 ) (530 )
Loss on sales and writedowns of fixed assets and foreclosed real estate owned 9 529
Gain on sale of loans - (67 )
Loans originated for sale - (1,693 )
Proceeds from sale of loans originated for sale - 1,760
Compensation expense related to stock options 118 46
Compensation expense related to restricted stock 102 71
Decrease in accrued interest receivable 44 226
Increase (decrease) in accrued interest payable 27 (127 )
Other, net 853 1,338
Net cash provided by operating activities 9,206 8,750

CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales 14,583 1,835
Proceeds from maturities and principal reductions on mortgage-backed securities 15,151 14,792
Purchases (14,269 ) (11,893 )
Purchase of regulatory stock (1,158 ) (1,378 )
Redemption of regulatory stock 2,350 1,062
Net increase in loans (40,393 ) (21,481 )
Purchase of premises and equipment (467 ) (155 )
Proceeds from sales of fixed assets and foreclosed real estate owned 467 515
Net cash used in investing activities (23,736 ) (16,703 )

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 21,505 20,954
Deposits sold - (13,659 )
Net decrease in short-term borrowings 795 9,381
Repayments of other borrowings (5,662 ) (16,671 )
Proceeds from other borrowings - 10,000
Stock options exercised 233 694
Purchase of treasury stock (179 ) (854 )
Cash dividends paid (2,752 ) (2,663 )
Net cash provided by financing activities 13,940 7,182
Decrease in cash and cash equivalents (590 ) (771 )

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 16,697 17,174
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 16,107 $ 16,403

~~Table of Contents~~

NORWOOD FINANCIAL CORP.

Consolidated Statements of Cash Flows (Unaudited) (continued)

(dollars in thousands)

Six Months Ended June 30,
2018 2017
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest on deposits and borrowings $ 2,416 $ 1,990
Income taxes paid, net of refunds $ 1,097 $ 505
Supplemental Schedule of Noncash Investing Activities:
Transfers of loans to foreclosed real estate and repossession of other assets $ 333 $ 71
Cash dividends declared $ 2,753 $ 2,665


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

See accompanying notes to the unaudited consolidated financial statements.

~~Table of Contents~~

Notes to the Unaudited Consolidated Financial Statements

1.	~~Basis of Presentation~~

1. Basis of Presentation

The unaudited consolidated financial statements include the accounts of Norwood Financial Corp. (Company) and its wholly-owned subsidiary, Wayne Bank (Bank) and the Bank’s wholly-owned subsidiaries, WCB Realty Corp., Norwood Investment Corp., ~~Norwood Settlement Services, LLC,~~ and WTRO Properties, Inc. On June 13, 2017, the Company approved and adopted a Plan of Dissolution for Norwood Settlement Services, LLC. Effective May 29, 2018, the existence of Norwood Settlement Services, LLC was terminated. All activity prior to the dissolution is included in the consolidated financial statements. All significant intercompany transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles for interim financial statements and with instructions to Form10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. The financial statements reflect, in the opinion of management, all normal, recurring adjustments necessary to present fairly the consolidated financial position and results of operations of the Company. The operating results for the three month ~~and six month periods~~period ended ~~June 30, 2018~~March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2018~~2019 or any other future interim period.

2. ~~Stock Dividend~~

On August 8, 2017, the Company declared a 50% stock dividend to stockholders of record on August 22, 2017 which was payable September 15, 2017. Share and per share information has been adjusted for this dividend.

2.	~~Revenue Recognition~~

~~Effective January 1, 2018, the Company adopted ASU 2014-09~~ Revenue ~~from Contracts with Customers – Topic 606~~ ~~and all subsequent ASCs that modified ASC 606. The Company~~Recognition

Management has elected to apply the standard utilizing the modified retrospective approach with a cumulative effect of adoption for the impact from uncompleted contracts as the date of adoption. The implementation of the new standard had no material impact to the measurement or recognition of revenue of prior periods.

~~Management~~ determined that the primary sources of revenue emanating from interest income on loans and investments along with noninterest revenue resulting from investment security gains, loan servicing, gains on the sale of loans, commitment fees, and fees from financial guarantees are not within the scope of ASC 606. As a result, no changes were made during the period related to ~~these~~those sources of ~~revenue, which cumulatively comprise 94.2% percent of the total revenue of the Company.~~

revenue.

The ~~main types of~~following presents noninterest income, ~~within~~segregated by revenue streamsin-scope andout-of-scope of Topic 606, for the ~~scope of the standard are as follows:~~three months ended March 31:


(dollars in thousands)

Noninterest Income	2019		2018
In-scope of Topic 606:
Service charges on deposit accounts	$	67	$	65
ATM fees		90		96
Overdraft fees		351		384
Safe deposit box rental		26		30
Loan related service fees		129		80
Debit card fees		326		295
Fiduciary activities		142		137
Commissions on mutual funds and annuities		55		43
Other income		115		139

Noninterest Income (in-scope of Topic 606)		1,301		1,269


Out-of-scope of Topic 606:
Net realized gains on sales of securities		—		142
Loan servicing fees		15		10
Gains on sales of loans		42		—
Earnings on and proceeds from bank-owned life insurance		202		273

Noninterest Income (out-of-scope of Topic 606)		259		425

Total Noninterest Income	$	1,560	$	1,694

3. ~~Service charges on deposit accounts~~Earnings Per Share – The Company has contracts with its deposit customers where fees are charged if the account balance falls below predetermined levels defined as compensating balances. The agreements can be cancelled at any time by either the Company or the deposit customer. Revenue from the transactions is recognized on a monthly basis as the Company has an unconditional right to the fee consideration. The Company also has transaction fees related to specific transactions or activities resulting from a customer request or activity that include overdraft fees, online banking fees, and other transaction fees. All of these fees are attributable to specific performance obligations of the Company where the revenue is recognized at a defined point in time or at the completion of the requested service/transaction.

~~Table of Contents~~

~~Fiduciary/trust fees~~ – Typical contracts for trust services are based on a fixed percentage of assets earned ratably over a defined period and billed on a monthly or quarterly basis. Fees charged to customers’ accounts are recognized as revenue over the period during which the Company fulfills its performance obligation under the contract (i.e. holding client assets in a managed fiduciary trust account). For these accounts, the performance obligation of the Company is typically satisfied by holding and managing the customer’s assets over time. Other fees related to specific customer requests are attributable to specific performance obligations of the Company where the revenue is recognized at a defined point in time or at the completion of the requested service/transaction.

The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity.

3.	~~Earnings Per Share~~

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

The following table sets forth the weighted average shares outstanding used in the computations of basic and diluted earnings per share. ~~All 2017 share and per share information has been restated to reflect the retroactive effect~~


(in thousands)	Three Months Ended March 31,
	2019			2018
Weighted average shares outstanding		6,293			6,256
Less: Unvested restricted shares		(34	)		(31	)

Basic EPS weighted average shares outstanding		6,259			6,225


Basic EPS weighted average shares outstanding		6,259			6,225
Add: Dilutive effect of stock options and restricted shares		50			54

Diluted EPS weighted average shares outstanding		6,309			6,279

As of ~~the 50% stock dividend declared on August 8, 2017.~~

(in thousands)
Three Months Ended
June 30,

Six Months Ended
June 30,

2018 2017 2018 2017
Weighted average shares outstanding 6,256 6,240 6,256 6,242
Less: Unvested restricted shares 31 29 31 29
Basic EPS weighted average shares outstanding 6,225 6,211 6,225 6,213

Basic EPS weighted average shares outstanding 6,225 6,211 6,225 6,213
Add: Dilutive effect of stock options 50 50 51 51
Diluted EPS weighted average shares outstanding 6,275 6,261 6,276 6,264

~~For the three and six month periods ending June 30, 2018,~~March 31, 2019, there were no60,650 stock options that would be anti-dilutive to the earnings per share calculations based upon the closing price of Norwood common stock of ~~$36.02~~$30.84 per share on ~~June 30, 2018.~~

~~For the three and six month periods ending June 30, 2017,~~March 31, 2019.

As of March 31, 2018, there were no34,000 stock options that would be anti-dilutive ~~options~~to the earnings per share calculations based ~~on Norwood's~~upon the closing price of ~~$28.17~~Norwood common stock of $30.09 per share ~~after adjusting for the 50% stock dividend declared~~ on ~~August 8, 2017.~~

~~Table of Contents~~

4.	~~Stock-Based Compensation~~

March 31, 2018.

4. Stock-Based Compensation

No awards were granted during the ~~six-month~~three-month period ending ~~June 30, 2018.~~March 31, 2019. As of ~~June 30, 2018,~~March 31, 2019, there was ~~$119,000~~$156,000 of total unrecognized compensation cost related tonon-vested options granted in ~~2017~~2018 under the 2014 Equity Incentive Plan, which will be fully amortized by December 31, ~~2018.~~2019. Compensation costs related to stock options amounted to ~~$118,000~~$52,000 and ~~$46,000~~$59,000 during the ~~six-month~~three-month periods ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively.

A summary of the Company’s stock option activity for the ~~six-month~~three-month period ended ~~June 30, 2018~~March 31, 2019 is as ~~follows, after adjusting for the 50% stock dividend declared on August 8, 2017~~:

Options
Weighted
Average Exercise
Price
Per Share

Weighted Average
Remaining
Contractual Term

Aggregate
Intrinsic Value
($000)

Outstanding at January 1, 2018 212,725 $ 20.76 6.1 Yrs. $ 2,604
Granted - - - -
Exercised (12,650 ) 18.41 4.8 Yrs. 160
Forfeited (750 ) 32.81 9.5 Yrs. 25
Outstanding at June 30, 2018 199,325 $ 20.86 5.6 Yrs. $ 1,932

Exercisable at June 30, 2018 165,325 $ 18.41 4.8 Yrs. $ 1,932

follows:


	Options			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value ($000)
Outstanding at January 1, 2019		208,700		$	22.54		5.9 Yrs.	$	2,183
Granted		—			—		—		—
Exercised		(6,150	)		18.31		4.7 Yrs.		113
Forfeited		—			—		—		—

Outstanding at March 31, 2019		202,550		$	22.67		5.7 Yrs.	$	1,761

Exercisable at March 31, 2019		173,650		$	21.06		5.0 Yrs.	$	1,761

Intrinsic value represents the amount by which the market price of the stock on the measurement date exceeded the exercise price of the option. The stock price was ~~$36.02~~$30.84 per share as of ~~June 30, 2018~~March 31, 2019 and $33.00 per share as of December 31, ~~2017.~~

2018.

A summary of the Company’s restricted stock activity for the ~~six-month~~three-month periods ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ is as ~~follows, after adjusting for the 50% stock dividend declared on August 8, 2017~~:

2018 2017

Number of
Restricted Stock

Weighted-Average
Grant Date
Fair Value

Number of
Restricted Stock

Weighted-Average
Grant Date
Fair Value

Non-vested, January 1, 30,415 $ 24.46 28,035 $ 20.64
Granted - - - -
Vested - - - -
Forfeited - - - -
Non-vested, June 30, 30,415 $ 24.46 28,035 $ 20.64

follows:


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

Non-vested, March 31,		34,615	$	27.82		30,415	$	24.46

The expected future compensation expense relating to the ~~30,415~~34,615 shares ofnon-vested restricted stock outstanding as of ~~June 30, 2018~~March 31, 2019 is ~~$642,000.~~$891,000. This cost will be recognized over the remaining vesting period of ~~4.5~~4.75 years. Compensation costs related to restricted stock amounted to ~~$102,000~~$72,000 and ~~$71,000~~$51,000 during the ~~six-month~~three-month periods ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively.

~~Table of Contents~~

5.	~~Accumulated Other Comprehensive Income (Loss)~~

5. Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in accumulated other comprehensive loss (in thousands) by component net of tax for the three months ended March 31, 2019 and ~~six months ended June 30, 2018 and 2017:~~

Unrealized gains (losses) on
available for sale
securities (a)

Balance as of March 31, 2018 $ (6,327 )
Other comprehensive loss before reclassification (663 )
Amount reclassified from accumulated other comprehensive loss (46 )
Total other comprehensive loss (709 )
Balance as of June 30, 2018 $ (7,036 )

Unrealized gains (losses) on
available for sale
securities (a)

Balance as of March 31, 2017 $ (3,317 )
Other comprehensive income before reclassification 1,805
Amount reclassified from accumulated other comprehensive income (20 )
Total other comprehensive income 1,785
Balance as of June 30, 2017 $ (1,532 )

Unrealized gains (losses) on
available for sale
securities (a)

Balance as of December 31, 2017 $ (2,667 )
Other comprehensive loss before reclassification (4,211 )
Amount reclassified from accumulated other comprehensive loss (158 )
Total other comprehensive loss (4,369 )
Balance as of June 30, 2018 $ (7,036 )

Unrealized gains (losses) on
available for sale
securities (a)

Balance as of December 31, 2016 $ (4,119 )
Other comprehensive income before reclassification 2,611
Amount reclassified from accumulated other comprehensive loss (24 )
Total other comprehensive income 2,587
Balance as of June 30, 2017 $ (1,532 )

~~(a) All amounts are net of tax. Amounts in parentheses indicate debits.~~

~~Table of Contents~~

2018:


	Unrealized gains (losses) on available for sale securities (a)
Balance as of December 31, 2018	$	(5,020	)
Other comprehensive income before reclassification		2,943
Amount reclassified from accumulated other comprehensive loss		—

Total other comprehensive income		2,943

Balance as of March 31, 2019	$	(2,077	)


	Unrealized gains (losses) on available for sale securities (a)
Balance as of December 31, 2017	$	(2,667	)
Other comprehensive loss before reclassification		(3,548	)
Amount reclassified from accumulated other comprehensive loss		(112	)

Total other comprehensive loss		(3,660	)

Balance as of March 31, 2018	$	(6,327	)

(a)	All amounts are net of tax. Amounts in parentheses indicate debits.

The following table presents significant amounts reclassified out of each component of accumulated other comprehensive loss (in thousands) for the three months ended March 31, 2019 and ~~six months ended June 30, 2018 and 2017:~~

Details about other comprehensive income
Amount Reclassified
From Accumulated
Other
Comprehensive
Income (Loss) (a)

Affected Line Item in
Consolidated
Statements
of Income

Three months ended
June 30,

2018 2017
Unrealized gains on available for sale securities $ 58 $ 31 Net realized gains on sales of securities
(12 ) (11 ) Income tax expense
$ 46 $ 20

Six months ended
June 30,

2018 2017
Unrealized gains on available for sale securities $ 200 $ 37 Net realized gains on sales of securities
(42 ) (13 ) Income tax expense
$ 158 $ 24

~~(a) Amounts in parentheses indicate debits to net income~~

2018:


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

	$	—	$	112

6.(a)

~~Off-Balance Sheet Financial Instruments and Guarantees~~

Amounts in parentheses indicate debits to net income

6. Off-Balance Sheet Financial Instruments and Guarantees

The Bank is a party to financial instruments withoff-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 foron-balance sheet instruments.

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

(in thousands) June 30,
2018 2017

Commitments to grant loans $ 43,280 $ 51,583
Unfunded commitments under lines of credit 72,359 69,171
Standby letters of credit 5,733 7,802
$ 121,372 $ 128,556

~~Table of Contents~~

follows:


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

	$	122,078	$	115,846

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

The Bank does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Bank, generally, holds collateral and/or personal guarantees supporting these commitments. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of ~~June 30, 2018~~March 31, 2019 for guarantees under standby letters of credit issued is not material.

7.	~~Securities~~

7. Securities

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

June 30, 2018

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

(In Thousands)
Available for Sale:
States and political subdivisions $ 104,115 $ 477 $ (2,620 ) $ 101,972
Corporate obligations 8,980 - (270 ) 8,710
Mortgage-backed securities-government sponsored entities 155,725 3 (6,968 ) 148,760
Total debt securities $ 268,820 $ 480 $ (9,858 ) $ 259,442

December 31, 2017

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

(In Thousands)
Available for Sale:
U.S. Treasury securities $ 2,001 $ - $ (3 ) $ 1,998
States and political subdivisions 120,000 1,535 (1,057 ) 120,478
Corporate obligations 10,068 16 (95 ) 9,989
Mortgage-backed securities-government sponsored entities 152,901 17 (4,262 ) 148,656
Total debt securities $ 284,970 $ 1,568 $ (5,417 ) $ 281,121

~~Table of Contents~~


	March 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
Available for Sale:
States and political subdivisions	$	97,955	$	726	$	(488	)	$	98,193
Corporate obligations		8,854		—		(107	)		8,747
Mortgage-backed securities-government sponsored entities		137,121		52		(3,492	)		133,681

Total debt securities	$	243,930	$	778	$	(4,087	)	$	240,621


	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
Available for Sale:
States and political subdivisions	$	99,218	$	385	$	(1,990	)	$	97,613
Corporate obligations		8,896		—		(256	)		8,640
Mortgage-backed securities-government sponsored entities		142,197		25		(5,198	)		137,024

Total debt securities	$	250,311	$	410	$	(7,444	)	$	243,277

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


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

	$	2,520	$	(13	)	$	181,331	$	(4,074	)	$	183,851	$	(4,087	)

June 30, 2018
Less than 12 Months   12 Months or More     Total
Fair Value   Unrealized
Losses
  Fair Value Unrealized
Losses
Fair Value Unrealized
Losses

States and political subdivisions $ 36,534 $ (860 ) $ 42,947 $ (1,760 ) $ 79,481 $ (2,620 )
Corporate obligations 2,065 (22 ) 6,645 (248 ) 8,710 (270 )
Mortgage-backed securities-government sponsored entities 29,724 (766 ) 114,524 (6,202 ) 144,248 (6,968 )
$ 68,323 $ (1,648 ) $ 164,116 $ (8,210 ) $ 232,439 $ (9,858 )

	December 31, 2017
	Less than 12 Months					12 Months or More					Total					December 31, 2018
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Less than 12 Months					12 Months or More					Total
U.S. Treasury securities	$	-	$	-		$	1,998	$	(3	)	$	1,998	$	(3	)
																Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
States and political subdivisions		17,310		(228	)		44,948		(829	)		62,258		(1,057	)	$	19,140	$	(390	)	$	56,740	$	(1,600	)	$	75,880	$	(1,990	)
Corporate obligations		-		-			6,859		(95	)		6,859		(95	)		2,045		(21	)		6,595		(235	)		8,640		(256	)
Mortgage-backed securities-government sponsored entities		22,250		(320	)		125,846		(3,942	)		148,096		(4,262	)		8,444		(22	)		122,950		(5,176	)		131,394		(5,198	)
	$	39,560	$	(548	)	$	179,651	$	(4,869	)	$	219,211	$	(5,417	)
																$	29,629	$	(433	)	$	186,285	$	(7,011	)	$	215,914	$	(7,444	)

At ~~June 30, 2018,~~March 31, 2019, the Company had 79two debt securities in an unrealized loss position in the less than twelve months category and ~~160~~183 debt securities in the twelve months or more category. In Management’s opinion the unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. No other-than-temporary-impairment charges were recorded in ~~2018.~~2019. Management believes that all unrealized losses represent temporary impairment of the securities as the Company does not have the intent to sell the securities and it is more likely than not that it will not have to sell the securities before recovery of its cost basis.

The amortized cost and fair value of debt securities as of ~~June 30, 2018~~March 31, 2019 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.

Available for Sale
Amortized Cost Fair Value
(In Thousands)

Due in one year or less $ 2,304 $ 2,320
Due after one year through five years 21,279 20,903
Due after five years through ten years 44,371 42,719
Due after ten years 45,141 44,740
Mortgage-backed securities-government sponsored entities 155,725 148,760
$ 268,820 $ 259,442

~~Table of Contents~~


	Available for Sale
	Amortized Cost		Fair Value
	(In Thousands)
Due in one year or less	$	2,689	$	2,689
Due after one year through five years		21,030		20,874
Due after five years through ten years		45,176		44,948
Due after ten years		37,914		38,429

		106,809		106,940
Mortgage-backed securities-government sponsored entities		137,121		133,681

	$	243,930	$	240,621

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

Three Months
Ended June 30,

Six Months
Ended June 30,

2018 2017 2018 2017
Gross realized gains $ 58 $ 31 $ 200 $ 43
Gross realized losses - - - (6 )
Net realized gain $ 58 $ 31 $ 200 $ 37
Proceeds from sales of securities $ 3,822 $ 1,831 $ 14,583 $ 1,835


	Three Months Ended March 31,
	2019		2018
Gross realized gains	$	—	$	142
Gross realized losses		—		—

Net realized gain	$	—	$	142

Proceeds from sales of securities	$	327	$	10,761

Securities with a carrying value of ~~$219,244,000~~$196,137,000 and ~~$226,759,000~~$216,435,000 at ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

8.Loans Receivable and Allowance for Loan Losses

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

June 30, 2018 December 31, 2017
Real Estate Loans:
Residential $ 230,840 28.7 % $ 235,759 30.8 %
Commercial 364,686 45.4 342,934 44.9
Construction 18,115 2.2 17,228 2.3
Commercial, financial and agricultural 101,779 12.7 97,461 12.7
Consumer loans to individuals 88,523 11.0 70,953 9.3
Total loans 803,943 100.0 % 764,335 100.0 %
Deferred fees, net (170 ) (243 )
Total loans receivable 803,773 764,092
Allowance for loan losses (8,326 ) (7,634 )
Net loans receivable $ 795,447 $ 756,458


	March 31, 2019					December 31, 2018
Real Estate Loans:
Residential	$	231,954		26.8	%	$	235,523		27.7	%
Commercial		373,276		43.2			374,790		44.1
Construction		18,604		2.2			17,445		2.0
Commercial, financial and agricultural		118,535		13.7			110,542		13.0
Consumer loans to individuals		121,945		14.1			112,002		13.2

Total loans		864,314		100.0	%		850,302		100.0	%

Deferred fees, net		(116	)				(120	)

Total loans receivable		864,198					850,182
Allowance for loan losses		(8,349	)				(8,452	)

Net loans receivable	$	855,849				$	841,730

The following table presents information regarding loans acquired and accounted for in accordance with ASC310-30 (in thousands):

June 30, 2018 December 31, 2017

Outstanding Balance $ 1,111 $ 1,444
Carrying Amount $ 919 $ 1,174

~~Table of Contents~~


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

As a result of the acquisition of Delaware Bancshares, Inc. (“Delaware”), the Company added $1,397,000 of loans that were accounted for in accordance with ASC310-30. Based on a review of the loans acquired by senior lending management, which included an analysis of credit deterioration of the loans since origination, the Company recorded a specific credit fair value adjustment of $499,000. For loans that were acquired with specific evidence of deterioration in credit quality, loan losses will be accounted for through a reduction of the specific reserve and will not impact the allowance for loan losses until actual losses exceed the allotted reserves. For loans acquired without a deterioration of credit quality, losses incurred will result in adjustments to the allowance for loan losses through the allowance for loan loss adequacy calculation.

The Company maintains a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers. Specific loan loss allowances are established for identified losses based on a review of such information. A loan evaluated for impairment is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans identified as impaired are evaluated independently. We do not aggregate such loans for evaluation purposes. Impairment is measured on aloan-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.

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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, foreclosed real estate owned totaled ~~$1,386,000~~$1,792,000 and ~~$1,661,000,~~$1,115,000 respectively. During the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, the Company acquired ~~a property~~three properties via a deed-in-lieu ~~transaction~~ transactions with aan aggregate carrying value of ~~$62,000,~~$680,000 and ~~disposed of a~~foreclosed on one commercial property with a carrying value of ~~$34,000 through a sale~~$32,000, and disposed of ~~the property. Additional properties~~one property with a carrying value of ~~$249,000 were sold, while a write down~~$36,000 through the sale of ~~$53,000 was processed on a parcel of vacant land due to a lack of interest.~~the property. As of ~~June 30, 2018,~~March 31, 2019, the Company has initiated formal foreclosure proceedings on ~~five~~two properties classified as consumer residential mortgages with aan aggregate carrying value of ~~$182,000.~~

$221,000.

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


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

Total Loans	$	231,954	$	373,276	$	18,604	$	118,535	$	121,945	$	864,314


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

Total Loans	$	235,523	$	374,790	$	17,445	$	110,542	$	112,002	$	850,302

Real Estate Loans
Commercial Consumer
Residential Commercial Construction Loans Loans Total
June 30, 2018 (In thousands)

Individually evaluated for impairment $ 23 $ 1,234 $ - $ - $ - $ 1,257
Loans acquired with deteriorated credit quality 644 275 - - - 919
Collectively evaluated for impairment 230,173 363,177 18,115 101,779 88,523 801,767
Total Loans $ 230,840 $ 364,686 $ 18,115 $ 101,779 $ 88,523 $ 803,943

~~Table of Contents~~

Real Estate Loans
Commercial Consumer
Residential Commercial Construction Loans Loans Total
(In thousands)
December 31, 2017

Individually evaluated for impairment $ 23 $ 1,224 $ - $ - $ - $ 1,247
Loans acquired with deteriorated credit quality 833 341 - - - 1,174
Collectively evaluated for impairment 234,903 341,369 17,228 97,461 70,953 761,914
Total Loans $ 235,759 $ 342,934 $ 17,228 $ 97,461 $ 70,953 $ 764,335

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

Recorded
Investment

Unpaid
Principal
Balance

Associated
Allowance

June 30, 2018 (in thousands)
With no related allowance recorded:
Real Estate Loans
Residential $ 23 $ 28 $ -
Commercial 1,234 1,546 -
Subtotal 1,257 1,574 -
Total:
Real Estate Loans
Residential 23 28 -
Commercial 1,234 1,546 -
Total Impaired Loans $ 1,257 $ 1,574 $ -

Recorded
Investment

Unpaid
Principal
Balance

Associated
Allowance

December 31, 2017 (in thousands)
With no related allowance recorded:
Real Estate Loans
Residential $ 23 $ 28 $ -
Commercial 1,224 1,496 -
Subtotal 1,247 1,524 -
Total:
Real Estate Loans
Residential 23 28 -
Commercial 1,224 1,496 -
Total Impaired Loans $ 1,247 $ 1,524 $ -

~~Table of Contents~~

applicable.


	Recorded Investment		Unpaid Principal Balance		Associated Allowance
March 31, 2019	(in thousands)
With no related allowance recorded:
Real Estate Loans:
Commercial	$	451	$	702	$	—

Subtotal		451		702		—

Total:
Real Estate Loans:
Commercial		451		702		—

Total Impaired Loans	$	451	$	702	$	—


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

Subtotal		1,319		1,747		—

Total:
Real Estate Loans:
Commercial		1,319		1,747		—

Total Impaired Loans	$	1,319	$	1,747	$	—

The following table presents the average recorded investment in impaired loans and the related amount of interest income recognized during the three-month periods ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively (in thousands):


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

Total	$	885	$	1,242	$	—	$	14

Average Recorded
Investment

Interest Income
Recognized

2018 2017 2018 2017

Real Estate Loans:
Residential $ 23 $ 23 $ - $ -
Commercial 1,202 2,821 16 29
Total $ 1,225 $ 2,844 $ 16 $ 29

The following table presents the average recorded investment in impaired loans and the related amount of interest income recognized during the six-month periods ended June 30, 2018 and 2017, respectively (in thousands):

Average Recorded
Investment

Interest Income
Recognized

2018 2017 2018 2017

Real Estate Loans:
Residential $ 23 $ 23 $ - $ -
Commercial 1,194 2,730 30 51
Total $ 1,217 $ 2,753 $ 30 $ 51

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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, troubled debt restructured loans totaled $107,000 and $1.1 million, respectively, with no specific reserve. For the ~~six-month~~three-month period ended ~~June 30, 2018,~~March 31, 2019, there were no new loans identified as troubled debt restructurings. During ~~2018,~~2019, the Company recognized a loss of $451,000 on a loan that was previously identified as a troubled debt restructuring. The loan was transferred to foreclosed real estate during the first quarter of 2019 with a carrying value of $608,000.

For the three-month period ended March 31, 2018, there were no new loans identified as troubled debt restructurings nor did ~~not~~the Company recognize any ~~losses~~write-down on loans that were previously identified as a troubled debt restructuring.

For the six-month period ended June 30, 2017, there were no new loans identified as troubled debt restructurings. During the 2017 period, the Company recognized a write-down of $55,000 on one loan that was previously identified as a troubled debt restructuring with a carrying value of $247,000 as of June 30, 2017.

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. All loans greater than 90 days past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss ~~category~~.

~~Table of Contents~~

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 Bank 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 orre-affirm risk ratings. Loans in the Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard, Doubtful and Loss within the internal risk rating system as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 (in thousands):


	Pass		Special Mention		Substandard		Doubtful or Loss		Total
March 31, 2019
Commercial real estate loans	$	359,791	$	8,118	$	5,367	$	—	$	373,276
Commercial loans		118,294		—		241		—		118,535

Total	$	478,085	$	8,118	$	5,608	$	—	$	491,811


	Pass		Special Mention		Substandard		Doubtful or Loss		Total
December 31, 2018
Commercial real estate loans	$	360,838	$	7,918	$	6,034	$	—	$	374,790
Commercial loans		109,966		82		494		—		110,542

Total	$	470,804	$	8,000	$	6,528	$	—	$	485,332

Pass
Special
Mention
Substandard
Doubtful
or Loss
Total
June 30, 2018
Commercial real estate loans $ 351,691 $ 8,610 $ 4,385 $ - $ 364,686
Commercial loans 101,571 116 92 - 101,779
Total $ 453,262 $ 8,726 $ 4,477 $ - $ 466,465

Pass
Special
Mention
Substandard
Doubtful
or Loss
Total
December 31, 2017
Commercial real estate loans $ 329,617 $ 9,680 $ 3,637 $ - $ 342,934
Commercial loans 97,389 16 56 - 97,461
Total $ 427,006 $ 9,696 $ 3,693 $ - $ 440,395

For residential real estate loans, construction loans and consumer loans, the Company evaluates credit quality based on the performance of the individual credits. The following table presents the recorded investment in the loan classes based on payment activity as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 (in thousands):

Performing Nonperforming Total
June 30, 2018
Residential real estate loans $ 229,816 $ 1,024 $ 230,840
Construction 18,115 - 18,115
Consumer loans 88,523 - 88,523
Total $ 336,454 $ 1,024 $ 337,478

Performing Nonperforming Total
December 31, 2017
Residential real estate loans $ 233,966 $ 1,793 $ 235,759
Construction 17,228 - 17,228
Consumer loans 70,953 - 70,953
Total $ 322,147 $ 1,793 $ 323,940

~~Table of Contents~~


	Performing		Nonperforming		Total
March 31, 2019
Residential real estate loans	$	231,358	$	596	$	231,954
Construction		18,604		—		18,604
Consumer loans		121,927		18		121,945

Total	$	371,889	$	614	$	372,503


	Performing		Nonperforming		Total
December 31, 2018
Residential real estate loans	$	234,725	$	798	$	235,523
Construction		17,445		—		17,445
Consumer loans		112,002		—		112,002

Total	$	364,172	$	798	$	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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 (in thousands):


	Current		31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due and still accruing		Non-Accrual		Total Past Due and Non-Accrual		Total Loans
March 31, 2019
Real Estate loans
Residential	$	230,696	$	598	$	64	$	—	$	596	$	1,258	$	231,954
Commercial		370,808		445		1,572		—		451		2,468		373,276
Construction		18,604		—		—		—		—		—		18,604
Commercial loans		118,242		1		260		—		32		293		118,535
Consumer loans		121,736		185		6		—		18		209		121,945

Total	$	860,086	$	1,229	$	1,902	$	—	$	1,097	$	4,228	$	864,314


	Current		31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due and still accruing		Non-Accrual		Total Past Due and Non-Accrual		Total Loans
December 31, 2018
Real Estate loans
Residential	$	234,201	$	373	$	151	$	—	$	798	$	1,322	$	235,523
Commercial		372,617		1,043		788		—		342		2,173		374,790
Construction		17,445		—		—		—		—		—		17,445
Commercial loans		110,191		320		31		—		—		351		110,542
Consumer loans		111,796		171		35		—		—		206		112,002

Total	$	846,250	$	1,907	$	1,005	$	—	$	1,140	$	4,052	$	850,302

Current
31-60 Days
Past Due

61-90 Days
Past Due

Greater than
90 Days Past
Due and still
accruing
Non-Accrual
Total Past Due
and Non
-Accrual
Total Loans
June 30, 2018
Real Estate loans
Residential $ 229,283 $ 533 $ - $ - $ 1,024 $ 1,557 $ 230,840
Commercial 364,271 168 - - 247 415 364,686
Construction 18,115 - - - - - 18,115
Commercial loans 101,705 74 - - - 74 101,779
Consumer loans 88,474 42 7 - - 49 88,523
Total $ 801,848 $ 817 $ 7 $ - $ 1,271 $ 2,095 $ 803,943

Current
31-60 Days
Past Due

61-90 Days
Past Due

Greater than
90 Days Past
Due and still
accruing
Non-Accrual
Total Past Due
and Non-
Accrual
Total Loans
December 31, 2017
Real Estate loans
Residential $ 233,291 $ 594 $ 81 $ 87 $ 1,706 $ 2,468 $ 235,759
Commercial 341,602 646 - 409 277 1,332 342,934
Construction 17,228 - - - - - 17,228
Commercial loans 97,424 10 27 - - 37 97,461
Consumer loans 70,869 60 24 - - 84 70,953
Total $ 760,414 $ 1,310 $ 132 $ 496 $ 1,983 $ 3,921 $ 764,335

~~Table of Contents~~

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the allowance for loan losses. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the allowance.

As of March 31, 2019, the allocation of the allowance pertaining to commercial real estate loans is slightly lower than the allocation as of December 31, 2018. This decrease is due to a reduction in the quantitative factor for historical losses which decreased from 0.42% as of December 31, 2018 to 0.22% at March 31, 2019.

The following table presents the allowance for loan losses by the classes of the loan portfolio:

(In thousands)
Residential
Real Estate

Commercial
Real Estate
Construction Commercial Consumer Total
Beginning balance, December 31, 2017 $ 1,272 $ 5,265 $ 90 $ 463 $ 544 $ 7,634
Charge Offs (75 ) (134 ) - (5 ) (117 ) (331 )
Recoveries 2 31 - - 15 48
Provision for loan losses 256 85 38 232 364 975
Ending balance, June 30, 2018 $ 1,455 $ 5,247 $ 128 $ 690 $ 806 $ 8,326
Ending balance individually evaluated for impairment $ - $ - $ - $ - $ - $ -
Ending balance collectively evaluated for impairment $ 1,455 $ 5,247 $ 128 $ 690 $ 806 $ 8,326

(In thousands)
Residential
Real Estate

Commercial
Real Estate
Construction Commercial Consumer Total
Beginning balance, March 31, 2018 $ 1,525 $ 5,129 $ 120 $ 638 $ 687 $ 8,099
Charge Offs (24 ) (134 ) - (5 ) (69 ) (232 )
Recoveries 1 25 - - 8 34
Provision for loan losses (47 ) 227 8 57 180 425
Ending balance, June 30, 2018 $ 1,455 $ 5,247 $ 128 $ 690 $ 806 $ 8,326

(In thousands)
Residential
Real Estate

Commercial
Real Estate
Construction Commercial Consumer Total
Beginning balance, December 31, 2016 $ 1,092 $ 4,623 $ 78 $ 307 $ 363 $ 6,463
Charge Offs (83 ) (96 ) (13 ) - (82 ) (274 )
Recoveries 3 4 12 - 11 30
Provision for loan losses 242 697 16 53 192 1,200
Ending balance, June 30, 2017 $ 1,254 $ 5,228 $ 93 $ 360 $ 484 $ 7,419
Ending balance individually evaluated for impairment $ - $ - $ - $ - $ - $ -
Ending balance collectively evaluated for impairment $ 1,254 $ 5,228 $ 93 $ 360 $ 484 $ 7,419

(In thousands)
Residential
Real Estate

Commercial
Real Estate
Construction Commercial Consumer Total
Beginning balance, March 31, 2017 $ 1,179 $ 4,831 $ 95 $ 369 $ 427 $ 6,901
Charge Offs (44 ) (11 ) (5 ) - (30 ) (90 )
Recoveries 2 2 - - 4 8
Provision for loan losses 117 406 3 (9 ) 83 600
Ending balance, June 30, 2017 $ 1,254 $ 5,228 $ 93 $ 360 $ 484 $ 7,419


(In thousands)	Residential Real Estate			Commercial Real Estate			Construction		Commercial			Consumer			Total
Beginning balance, December 31, 2018	$	1,328		$	5,455		$	93	$	712		$	864		$	8,452
Charge Offs		(65	)		(469	)		—		(1	)		(63	)		(598	)
Recoveries		11			10			—		10			14			45
Provision for loan losses		181			(49	)		15		90			213			450

Ending balance, March 31, 2019	$	1,455		$	4,947		$	108	$	811		$	1,028		$	8,349

Ending balance individually evaluated for impairment	$	—		$	—		$	—	$	—		$	—		$	—
Ending balance collectively evaluated for impairment	$	1,455		$	4,947		$	108	$	811		$	1,028		$	8,349


(In thousands)	Residential Real Estate			Commercial Real Estate			Construction		Commercial		Consumer			Total
Beginning balance, December 31, 2017	$	1,272		$	5,265		$	90	$	463	$	544		$	7,634
Charge Offs		(51	)		—			—		—		(48	)		(99	)
Recoveries		1			6			—		—		7			14
Provision for loan losses		303			(142	)		30		175		184			550

Ending balance, March 31, 2018	$	1,525		$	5,129		$	120	$	638	$	687		$	8,099

Ending balance individually evaluated for impairment	$	—		$	—		$	—	$	—	$	—		$	—
Ending balance collectively evaluated for impairment	$	1,525		$	5,129		$	120	$	638	$	687		$	8,099

The Company’s primary business activity as of ~~June 30, 2018~~March 31, 2019 was with customers located in northeastern Pennsylvania and the New York counties of Delaware and Sullivan. Accordingly, the Company has extended credit primarily to commercial entities and individuals in this area whose ability to honor their contracts is influenced by the region’s economy.

~~Table of Contents~~

As of ~~June 30, 2018,~~March 31, 2019, the Company considered its concentration of credit risk to be acceptable. The highest concentrations are in commercial rentals with ~~$79.2~~$73.4 million of loans outstanding, or ~~9.8%~~8.5% of total loans outstanding, and the hospitality/lodging industry with loans outstanding of ~~$61.2~~$59.1 million, or ~~7.6%~~6.8% of loans outstanding. During ~~2018,~~2019, the Company did not recognize any ~~losses~~charge offs in the named concentrations.

9.	~~Fair Value of Assets and Liabilities~~

9. Fair Value of Assets and Liabilities

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 ornon-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 aNon-Recurring Basis”. There are three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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~~2018 Form ~~10-K, except for the valuation of loans which was impacted by the adoption of ASU 2016-01.~~10-K. In accordance with ASU2016-01, the fair value of loans, excluding previously presented impaired loans measured at fair value on anon-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.

~~Table of Contents~~

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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 are as follows:


	Fair Value Measurement Using Reporting Date
Description	Total		Level 1		Level 2		Level 3
	(In thousands)
March 31, 2019
Available for Sale:
States and political subdivisions	$	98,193	$	—	$	98,193	$	—
Corporate obligations		8,747		—		8,747		—
Mortgage-backed securities-government sponsored entities		133,681		—		133,681		—

Total	$	240,621	$	—	$	240,621	$	—

Fair Value Measurement Using
Reporting Date

Description Total Level 1 Level 2 Level 3
(In thousands)

June 30, 2018
Available for Sale:
States and political subdivisions $ 101,972 $ - $ 101,972 $ -
Corporate obligations 8,710 - 8,710 -
Mortgage-backed securities-government sponsored entities 148,760 - 148,760 -
Total $ 259,442 $ - $ 259,442 $ -

Description Total Level 1 Level 2 Level 3
(In thousands)

December 31, 2017
Available for Sale:
U.S. Treasury securities $ 1,998 $ - $ 1,998 $ -
States and political subdivisions 120,478 - 120,478 -
Corporate obligations 9,989 - 9,989 -
Mortgage-backed securities-government sponsored entities 148,656 - 148,656 -
Total $ 281,121 $ - $ 281,121 $ -



Description	Total		Level 1		Level 2		Level 3
	(In thousands)
December 31, 2018
Available for Sale:
States and political subdivisions	$	97,613	$	—	$	97,613	$	—
Corporate obligations		8,640		—		8,640		—
Mortgage-backed securities-government sponsored entities		137,024		—		137,024		—

Total	$	243,277	$	—	$	243,277	$	—

Securities:

The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) 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/ornon-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.

~~Table of Contents~~

Assets and Liabilities Required to be Measured and Reported at Fair Value on aNon-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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 are as ~~follows~~:follows:


	Fair Value Measurement Using Reporting Date
(In thousands) Description	Total		Level 1		Level 2		Level 3
March 31, 2019
Impaired Loans	$	451	$	—	$	—	$	451
Foreclosed Real Estate Owned		1,792		—		—		1,792

December 31, 2018
Impaired Loans	$	1,319	$	—	$	—	$	1,319
Foreclosed Real Estate Owned		1,115		—		—		1,115

Fair Value Measurement Reporting Date using Reporting Date

(In thousands)

Description Total Level 1 Level 2 Level 3
June 30, 2018
Impaired Loans $ 1,257 $ - $ - $ 1,257
Foreclosed Real Estate Owned 1,386 - - 1,386

December 31, 2017
Impaired Loans $ 1,247 $ - $ - $ 1,247
Foreclosed Real Estate Owned 1,661 - - 1,661

Impaired loans (generally carried at fair value):

The Company measures impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the lowest level of input that is significant to the fair value measurements.

As of ~~June 30, 2018,~~March 31, 2019, the fair value investment in impaired loans totaled ~~$1,257,000~~$451,000 which included ~~five~~four 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 ~~June 30, 2018,~~March 31, 2019, the Company has recognized charge-offs against the allowance for loan losses on these impaired loans in the amount of ~~$316,000~~$251,000 over the life of the loans.

As of December 31, ~~2017,~~2018, the fair value investment in impaired loans totaled ~~$1,247,000~~$1,319,000 which included ~~five~~six loans which did not require a valuation allowance since the estimated realizable value of the collateral exceeded the recorded investment in the loan. As of December 31, ~~2017,~~2018, the Company had recognized charge-offs against the allowance for loan losses on these impaired loans in the amount of ~~$277,000~~$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.

~~Table of Contents~~

The following table presents additional quantitative information about assets measured at fair value on anon-recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

Quantitative Information about Level 3 Fair Value Measurements

(dollars in thousands)

Fair Value
Estimate

Valuation Techniques

Unobservable Input

Range (Weighted Average)

March 31, 2019

Impaired loans

344

Appraisal of collateral(1)

Appraisal adjustments(2)

10.00-57.58% (18.93%)

Impaired loans

107

Present value of future cash flows

Loan discount rate

4.00% (4.00%)

Foreclosed real estate owned

1,792

Appraisal of collateral(1)

Liquidation Expenses(2)

7.00-68.75% (9.25%)

Quantitative Information about Level 3 Fair Value Measurements
(dollars in thousands)
Fair Value
Estimate
Valuation Techniques Unobservable Input
Range (Weighted
Average)

June 30, 2018
Impaired loans $ 155 Appraisal of collateral(1) Appraisal adjustments(2) 10% (10 %)
Impaired loans $ 1,102 Present value of future cash flows Loan discount rate 4.00 - 5.25% (5.12 %)

Foreclosed real estate owned $ 1,386 Appraisal of collateral(1) Liquidation Expenses(2) 0-71.43% (11.72 %)


	Quantitative Information about Level 3 Fair Value Measurements							Quantitative Information about Level 3 Fair Value Measurements
(dollars in thousands)	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)			Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
December 31, 2017
December 31, 2018
Impaired loans	$	131	Appraisal of collateral(1)	Appraisal adjustments(2)		10% (10	%)	$	232	Appraisal of collateral(1)	Appraisal adjustments(2)		10.00-81.54% (56.06%)
Impaired loans	$	1,116	Present value of future cash flows	Loan discount rate		4.00 - 5.25% (5.11	%)	$	1,087	Present value of future cash flows	Loan discount rate		4.00-6.00% (5.80%)

Foreclosed real estate owned	$	1,661	Appraisal of collateral(1)	Liquidation Expenses(2)		0-42.60% (14.68	%)	$	1,115	Appraisal of collateral(1)	Liquidation Expenses(2)		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. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~

~~Cash and cash equivalents (carried at cost):~~

~~The carrying amounts reported in the consolidated balance sheet for cash and short-term instruments approximate those assets’ fair values.~~

~~Table of Contents~~

2018.

Loans receivable (carried at cost):

The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Mortgage servicing rights (generally carried at cost)

The Company utilizes a third party provider to estimate the fair value of certain loan servicing rights. Fair value for the purpose of this measurement is defined as the amount at which the asset could be exchanged in a current transaction between willing parties, other than in a forced liquidation.

~~Restricted investment in Federal Home Loan Bank stock (carried at cost):~~

The Bank, as a member of the Federal Home Loan Bank (FHLB) system, is required to maintain an investment in capital stock of its district FHLB according to a predetermined formula. This regulatory stock has no quoted market value and is carried at cost.

~~Bank owned life insurance (carried at cost):~~

~~The fair value is equal to the cash surrender value of the Bank owned life insurance.~~

~~Accrued interest receivable and payable (carried at cost):~~

~~The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.~~

Deposit liabilities (carried at cost):

The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

~~Short-term borrowings (carried at cost):~~

~~The carrying amounts of short-term borrowings approximate their fair values.~~

Other borrowings (carried at cost):

Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a ~~market~~fair value that is deemed to represent the transfer price if the liability were assumed by a third party.

~~Off-balance sheet financial instruments (disclosed at cost):~~

Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.

~~Table of Contents~~

The estimated fair values of the Bank’s financial instruments not required to be measured or reported at fair value were as follows at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018. (In thousands)

Fair Value Measurements at June 30, 2018
Carrying Amount Fair Value Level 1 Level 2 Level 3
Financial assets:
Cash and cash equivalents $ 16,107 $ 16,107 $ 16,107 $ - $ -
Loans receivable, net 795,447 791,456 - - 791,456
Mortgage servicing rights 185 223 - - 223
Regulatory stock 2,313 2,313 2,313 - -
Bank owned life insurance 37,485 37,485 37,485 - -
Accrued interest receivable 3,672 3,672 3,672 - -

Financial liabilities:
Deposits 950,889 950,692 642,431 - 308,342
Short-term borrowings 43,325 43,325 43,325 - -
Other borrowings 30,283 29,757 - - 29,757
Accrued interest payable 1,461 1,461 1,461 - -

Off-balance sheet financial instruments:
Commitments to extend credit and outstanding letters of credit - - - - -

Fair Value Measurements at December 31, 2017
Carrying Amount Fair Value Level 1 Level 2 Level 3
Financial assets:
Cash and cash equivalents $ 16,697 $ 16,697 $ 16,697 $ - $ -
Loans receivable, net 756,458 756,092 - - 756,092
Mortgage servicing rights 200 223 - - 223
Regulatory stock 3,505 3,505 3,505 - -
Bank owned life insurance 37,060 37,060 37,060 - -
Accrued interest receivable 3,716 3,716 3,716 - -

Financial liabilities:
Deposits 929,384 929,709 609,090 - 320,619
Short-term borrowings 42,530 42,530 42,530 - -
Other borrowings 35,945 35,514 - - 35,514
Accrued interest payable 1,434 1,434 1,434 - -

Off-balance sheet financial instruments:
Commitments to extend credit and outstanding letters of credit - - - - -

~~Table of Contents~~


	Fair Value Measurements at March 31, 2019
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents (1)	$	19,874	$	19,874	$	19,874	$	—	$	—
Loans receivable, net		855,849		861,129		—		—		861,129
Mortgage servicing rights		176		220		—		—		220
Regulatory stock (1)		3,132		3,132		3,132		—		—
Bank owned life insurance (1)		38,134		38,134		38,134		—		—
Accrued interest receivable (1)		4,089		4,089		4,089		—		—

Financial liabilities:
Deposits		974,415		973,011		611,162		—		361,849
Short-term borrowings (1)		37,824		37,824		37,824		—		—
Other borrowings		47,955		47,977		—		—		47,977
Accrued interest payable (1)		2,457		2,457		2,457		—		—

Off-balance sheet financial instruments:
Commitments to extend credit and outstanding letters of credit		—		—		—		—		—


	Fair Value Measurements at December 31, 2018
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents (1)	$	18,348	$	18,348	$	18,348	$	—	$	—
Loans receivable, net		841,730		840,134		—		—		840,134
Mortgage servicing rights		178		220		—		—		220
Regulatory stock (1)		3,926		3,926		3,926		—		—
Bank owned life insurance (1)		37,932		37,932		37,932		—		—
Accrued interest receivable (1)		3,776		3,776		3,776		—		—

Financial liabilities:
Deposits		946,780		945,773		601,604		—		344,169
Short-term borrowings (1)		53,046		53,046		53,046		—		—
Other borrowings		52,284		52,043		—		—		52,043
Accrued interest payable (1)		1,806		1,806		1,806		—		—

Off-balance sheet financial instruments:
Commitments to extend credit and outstanding letters of credit		—		—		—		—		—

~~10.~~(1)

This financial instrument is carried at cost, which approximates the fair value of the instrument.

10. New and ~~Recently Adopted Accounting Pronouncements~~

Recently Adopted Accounting Pronouncements

~~In May 2014, the FASB issued ASU 2014-09,~~ ~~Revenue from Contracts with Customers~~ (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. ~~Upon adoption on January 1, 2018, we have included the related new disclosure requirements in Note 2~~.

~~In January 2016, the FASB issued ASU 2016-01,~~ ~~Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities~~. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ~~Upon adoption on January 1, 2018, we have included the related new disclosure requirements in Note 9.~~

~~Table of Contents~~

~~New~~

Recently Adopted Accounting Pronouncements ~~Not Yet Adopted~~

In February 2016, the FASB issued ASU2016-02,Leases (Topic 842). 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 aright-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~~ASU2016-02 was effective for ~~fiscal years beginning after December 15,~~the Company on January 1, 2019. In July 2018, ~~and interim~~the FASB issued ASU2018-11,“Leases (Topic 842) – Targeted Improvements,”which, among other things, provides an additional transition method that would allow entities to not apply the guidance in ASU2016-02 in the comparative periods ~~within those years. For all other entities, the amendments~~presented in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. ~~The Company is currently assessing the practical expedients it may elect at adoption, but does not anticipate the amendments will have a significant impact on~~ the financial ~~statements. Based on the Company’s preliminary analysis of its current portfolio, the impact~~statements and instead recognize a cumulative-effect adjustment to the ~~Company’s~~opening balance ~~sheet is estimated to result~~of retained earnings in ~~less than~~the period of adoption. In December 2018, the FASB also issuedASU2018-20, “Leases (Topic 842)- Narrow-Scope Improvements for Lessors,”which provides for certain policy elections and changes lessor accounting for sales and similar taxes and certain lessor costs. Upon adoption of ASU2016-02, ASU2018-11 and ASU2018-20 on January 1, 2019, we recorded recognized a ~~1 percent increase in~~right-of-use assets and ~~liabilities. The Company also anticipates additional disclosures to be provided at adoption.~~

related lease liabilities totaling $5.3 million each, which are recorded in other assets and other liabilities, respectively.

New Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU2016-13,Financial Instruments -– Credit Losses: Measurement of Credit Losses on Financial Instruments, 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. ASU2016-13 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 period in which the guidance is adopted. We expect to recognize aone-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 suchone-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

In January 2017, the FASB issued ASU2017-04,Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting 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, includingnot-for-profit entities that are adopting the amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. This Update is not expected to have a significant impact on the Company’s financial statements.

~~Table of Contents~~

In March 2017, the FASB issued ASU2017-08,Receivables – Nonrefundable Fees and Other Costs (Subtopic310-20). The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle. ~~The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.~~

~~In January 2018, the FASB issued ASU 2018-01,~~ ~~Leases (Topic 842)~~, which provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current lease guidance in Topic 840. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date the entity adopts Topic 842; otherwise, an entity should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in ASU 2016-02. ~~The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.~~

~~In February 2018, the FASB issued ASU 2018-03,~~ ~~Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10)~~, to clarify certain aspects of the guidance issued in ASU 2016-01. (1) An entity measuring an equity security using the measurement alternative may change its measurement approach to a fair value method in accordance with Topic 820, ~~Fair Value Measurement~~, through an irrevocable election that would apply to that security and all identical or similar investments of the same issuer. Once an entity makes this election, the entity should measure all future purchases of identical or similar investments of the same issuer using a fair value method in accordance with Topic 820. (2) Adjustments made under the measurement alternative are intended to reflect the fair value of the security as of the date that the observable transaction for a similar security took place. (3) Remeasuring the entire value of forward contracts and purchased options is required when observable transactions occur on the underlying equity securities. (4) When the fair value option is elected for a financial liability, the guidance in paragraph 825-10- 45-5 should be applied, regardless of whether the fair value option was elected under either Subtopic 815-15, ~~Derivatives and Hedging—Embedded Derivatives, or 825-10,~~ ~~Financial Instruments—Overall~~. (5) Financial liabilities for which the fair value option is elected, the amount of change in fair value that relates to the instrument specific credit risk should first be measured in the currency of denomination when presented separately from the total change in fair value of the financial liability. Then, both components of the change in the fair value of the liability should be remeasured into the functional currency of the reporting entity using end-of-period spot rates. (6) The prospective transition approach for equity securities without a readily determinable fair value in the amendments in Update 2016-01 is meant only for instances in which the measurement alternative is applied. An insurance entity subject to the guidance in Topic 944, ~~Financial Services— Insurance~~, should apply a prospective transition method when applying the amendments related to equity securities without readily determinable fair values. An insurance entity should apply the selected prospective transition method consistently to the entity’s entire population of equity securities for which the measurement alternative is elected. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required to adopt these amendments until the interim period beginning after June 15, 2018, and public business entities with fiscal years beginning between June 15, 2018, and December 15, 2018, are not required to adopt these amendments before adopting the amendments in Update 2016-01. For all other entities, the effective date is the same as the effective date in Update 2016-01. All entities may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they have adopted Update 2016-01. This Update isdid not ~~expected to~~ have a significant impact on the Company’s financial statements.

~~Table of Contents~~

~~ASU 2018-04,~~ ~~Investments – Debt Securities (Topic 320)~~ ~~and~~ ~~Regulated Operations (Topic 980) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273,~~ ASU 2018-04 supersedes various SEC paragraphs and adds an SEC paragraph pursuant to the issuance of Staff Accounting Bulletin No. 117. This Update is not expected to have a significant impact on the Company’s financial statements.

~~ASU 2018-06,~~ ~~Codification Improvements to Topic 942, Financial Services-Depository and Lending, amends the guidance in Subtopic 942-740,~~ ~~Financial Services-Depository and Lending-Income Taxes~~, that is related to Circular 202 because that guidance has been rescinded by the Office of the Comptroller of the Currency (OCC) and no longer is relevant. This Update is not expected to have a significant impact on the Company’s financial statements.

In June 2018, the FASB issued ASU2018-07,Compensation – Stock Compensation (Topic 718), which simplified the accounting for nonemployee share-based payment transactions. The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments in this Update improve the following areas of nonemployee share-based payment ~~accounting;~~accounting: (a) the overall measurement objective, (b) the measurement date, (c) awards with performance conditions, (d) classification reassessment of certain equity-classified awards, (e) calculated value (nonpublic entities only), and (f) intrinsic value (nonpublic entities only). The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. This Update isdid not ~~expected to~~ have a significant impact on the Company’s financial statements.

In July 2018, the FASB issued ASU2018-09,Codification Improvements, represents changes to clarify, correct errors in, or make minor improvements to the Codification. The amendments make the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments do not require transition guidance and will be effective upon issuance of this ASU. However, many of the amendments in this ASU do have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities. This Update did not have a significant impact on the Company’s financial statements.

In August 2018, the FASB issued ASU2018-12,Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. 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 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.

In August 2018, the FASB issued ASU2018-13,Fair Value Measurement (Topic 820): Disclosure Framework – Changes the Disclosure Requirements for Fair Value Measurements. 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. 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.

In August 2018, the FASB issued ASU2018-14,Compensation – Retirement Benefits (Topic715-20). 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 aone-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.

In August 2018, the FASB issued ASU2018-15,Intangibles – Goodwill and Other –Internal-Use Software (Subtopic350-40). 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 forinternal-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 obtaininternal-use software (and hosting arrangements that include aninternal-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.

In October, 2018, the FASB issued ASU2018-17,Consolidation (Topic 810), 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.

In November, 2018, the FASB issued ASU ~~2018-10,~~ 018-18,Collaborative Arrangements (Topic 808), 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) addunit-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.

In November, 2018, the FASB issued ASU2018-19,Codification Improvements to Topic ~~842, Leases~~326, Financial Instruments – Credit Losses,which amended the effective date of ASU2016-13 for entities other than public business entities (PBEs), ~~represents changes~~by requiringnon-PBEs to ~~clarify, correct errors in, or make minor improvements to~~adopt the ~~Codification.~~standard for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Therefore, the revised effective dates of ASU2016-13 for PBEs that are SEC filers will be fiscal years beginning after December 15, 2019, including interim periods within those years, PBEs other than SEC filers will be for fiscal years beginning after December 15, 2020, including interim periods within those years, and all other entities(non-PBEs) will be for fiscal years beginning after December 15, 2021, including interim periods within those years. The ~~amendments in this~~ ASU ~~affect the amendments in ASU 2016-02, which~~also clarifies that receivables arising from operating leases are not ~~yet~~within the scope of Subtopic326-20. Rather, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842,Leases. The effective ~~but~~date and transition requirements for ~~which early adoption upon issuance is permitted. For entities that early adopted Topic 842, the amendments are effective upon issuance of this~~ ASU ~~and the transition requirements~~2018-19 are the same as those in ~~Topic 842. For entities that~~ASU2016-13, as amended by ASU2018-19. This Update is not expected to have ~~not adopted Topic 842, the effective date and transition requirements will be the same as the effective date and transition requirements in Topic 842. The Company is currently evaluating the~~a significant impact ~~the adoption of the standard will have~~ on the Company’s financial ~~position or results~~statements.

In April 2019, the FASB issued ASU2019-04,Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of ~~operations.~~

~~Table~~topics in the Codification and applies to all reporting entities within the scope of ~~Contents~~the affected accounting guidance. This Update is not expected to have a significant impact on the Company’s financial statements.

~~Item 2.~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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:

~~our ability to realize the anticipated benefits from our acquisition of Delaware Bancshares, Inc.~~

possible future impairment of intangible assets

our ability to effectively manage future growth

loan losses in excess of our allowance

risks inherent in commercial lending

real estate collateral which is subject to declines in value

potential other-than-temporary impairments

soundness of other financial institutions

interest rate risks

potential liquidity risk

deposits acquired through competitive bidding

availability of capital

regional economic factors

loss of senior officers

comparatively low legal lending limits

risks of new capital requirements

potential impact of Tax Cuts and Jobs Act

limited market for the Company’s stock

restrictions on ability to pay dividends

common stock may lose value

insider ownership

issuing additional shares may dilute ownership

competitive environment

certain anti-takeover provisions

extensive and complex governmental regulation and ~~associated~~associate cost

cybersecurity

~~cybersecurity~~

Norwood Financial Corp. 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 for the year ended December 31, ~~2017~~2018 (incorporated by reference in Item 8 of the Form10-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.

~~Table of Contents~~

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 fair value of financial instruments, the determination of ~~goodwill~~other-than-temporary impairment on securities and the determination of ~~other-than-temporary impairment on securities.~~goodwill impairment. Please refer to the discussion of the allowance for loan losses calculation under “Loans” in the “Changes in Financial Condition” section.

The Company uses the modified prospective transition method to account for stock options. Under this method companies are required to record compensation expense, based on the fair value of options over the vesting period. 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 determines the fair value of restricted stock.

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. On December 22, 2017, the President signed the Tax Cut and Jobs Act (the “Act”) into law. Among other things, the Act reduced the corporate tax rate from a maximum of 35% to a flat 21% rate effective January 1, 2018. As a result of the reduction in the corporate income tax rate to 21%, the Company revalued its net deferred tax asset as of December 31, 2017, which resulted in a $3,060,000 reduction in its value. The reduction in the value of the net deferred tax asset was recorded as additional income tax expense in the fourth quarter of 2017. Although realization is not assured, the Company believes that it is more likely than not that all deferred tax assets will be realized.

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.

Management determines the appropriate classification of debt securities at the time of purchase andre-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, the Company 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 whether it is more likely than not that it will not have to sell the securities before recovery of their cost basis. The Company believes that all unrealized losses on securities at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 represent temporary impairment of the securities, related to changes in interest rates.

In connection with 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 in purchase transactions, at its fair value at the date of acquisition. 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 Company or 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.

Changes in Financial Condition

General

Total assets as of ~~June 30, 2018~~March 31, 2019 were ~~$1.151~~$1.204 billion compared to ~~$1.133~~$1.185 billion as of December 31, ~~2017.~~2018. The increase reflects growth in loans which were funded by an increase in deposits and cash flows from securities.

~~Table of Contents~~

Securities

The fair value of securities available for sale as of ~~June 30, 2018~~March 31, 2019 was ~~$259.4~~$240.6 million compared to ~~$281.1~~$243.3 million as of December 31, ~~2017.~~2018. The decrease in the securities portfolio is the result of sales, calls, maturities and principal reductions of securities.

The carrying value of the Company’s securities portfolio ~~(Available-for~~(Available-for Sale) consisted of the following:

June 30, 2018 December 31, 2017
(dollars in thousands) Amount % of portfolio Amount % of portfolio

U.S. Treasury securities $ - - % $ 1,998 0.7 %
States and political subdivisions 101,972 39.3 120,478 42.9
Corporate obligations 8,710 3.4 9,989 3.5
Mortgage-backed securities-government sponsored entities 148,760 57.3 148,656 52.9
Total $ 259,442 100.0 % $ 281,121 100.0 %


	March 31, 2019					December 31, 2018
(dollars in thousands)	Amount		% of portfolio			Amount		% of portfolio
States and political subdivisions	$	98,193		40.8	%	$	97,613		40.1	%
Corporate obligations		8,747		3.6			8,640		3.6
Mortgage-backed securities-government sponsored entities		133,681		55.6			137,024		56.3

Total	$	240,621		100.0	%	$	243,277		100.0	%

The Company has securities in an unrealized loss position. In management’s opinion, the unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. Management believes that the unrealized losses on all holdings represent temporary impairment of the securities, as the Company has the intent and ability to hold these investments until maturity or market price recovery.

Loans

Loans receivable totaled ~~$803.8~~$864.2 million at ~~June 30, 2018~~March 31, 2019 compared to ~~$764.1~~$850.2 million as of December 31, ~~2017.~~2018. The increase in loans receivable includes a ~~$26.1~~$7.5 million increase in retail loans and a $6.5 million increase in commercial ~~loans and a $13.5 million increase in retail~~ loans.

The allowance for loan losses totaled ~~$8,326,000~~$8,349,000 as of ~~June 30, 2018~~March 31, 2019 and represented ~~1.04%~~0.97% of total loans outstanding, compared to ~~$7,634,000,~~$8,452,000, or ~~1.00%~~0.99% of total loans, at December 31, ~~2017.~~2018. The Company had net charge-offs for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 of ~~$283,000~~$553,000 compared to ~~$244,000~~$85,000 in the corresponding period in ~~2017.~~2018. The increase in charge-offs was due to one commercial credit which was written down by $451,000 and subsequently transferred to foreclosed real estate. The Company’s management assesses the adequacy of the allowance for loan losses on a quarterly basis. The process includes an analysis of the risks inherent in the loan portfolio. It includes an analysis of impaired loans and a historical review of credit losses by loan type. Other factors considered include concentration of credit in specific industries, economic and industry conditions, trends in delinquencies and loan classifications, and loan growth. Management considers the allowance adequate at ~~June 30, 2018~~March 31, 2019 based on the Company’s criteria. However, there can be no assurance that the allowance for loan losses will be adequate to cover significant losses, if any, that might be incurred in the future.

As of ~~June 30, 2018,~~ March 31, 2019,non-performing loans totaled ~~$1.3~~$1.1 million, or ~~0.16%~~0.13% of total loans compared to ~~$2.5~~$1.1 million, or ~~0.32%~~0.13%, of total loans at December 31, ~~2017.~~2018. At ~~June 30, 2018,~~ March 31, 2019,non-performing assets totaled ~~$2.7~~$2.9 million, or ~~0.23%~~0.24%, of total assets compared to ~~$4.1~~$2.3 million, or ~~0.37%~~0.19%, of total assets at December 31, ~~2017.~~2018.

~~Table of Contents~~

The following table sets forth information regardingnon-performing loans and foreclosed real estate at the dates indicated:

(dollars in thousands) June 30, 2018 December 31, 2017
Loans accounted for on a non-accrual basis:
Real Estate
Residential $ 1,024 $ 1,706
Commercial 247 277
Construction - -
Commercial, financial and agricultural - -
Consumer loans to individuals - -
Total non-accrual loans * 1,271 1,983

Accruing loans which are contractually past due 90 days or more - 496
Total non-performing loans 1,271 2,479
Foreclosed real estate 1,386 1,661
Total non-performing assets $ 2,657 $ 4,140
Allowance for loans losses $ 8,326 $ 7,634
Coverage of non-performing loans 655.07 % 307.95 %
Non-performing loans to total loans 0.16 % 0.32 %
Non-performing loans to total assets 0.11 % 0.22 %
Non-performing assets to total assets 0.23 % 0.37 %

*Includes non-accrual TDRs of $139,000 as of June 30, 2018 and $144,000 on December 31, 2017. The Company also had $987,000 and $1.0 million of accruing TDRs on June 30, 2018 and December 31, 2017, respectively.


(dollars in thousands)	March 31, 2019			December 31, 2018
Loans accounted for on anon-accrual basis:
Real Estate
Residential	$	596		$	798
Commercial		451			342
Construction		—			—
Commercial, financial and agricultural		32			—
Consumer loans to individuals		18			—

Totalnon-accrual loans *		1,097			1,140
Accruing loans which are contractually past due 90 days or more		—			—

Totalnon-performing loans		1,097			1,140
Foreclosed real estate		1,792			1,115

Totalnon-performing assets	$	2,889		$	2,255

Allowance for loans losses	$	8,349		$	8,452
Coverage ofnon-performing loans		761.08	%		741.40	%
Non-performing loans to total loans		0.13	%		0.13	%
Non-performing loans to total assets		0.09	%		0.10	%
Non-performing assets to total assets		0.24	%		0.19	%

*	Includesnon-accrual TDRs of $107,000 as of March 31, 2019 and $110,000 on December 31, 2018. There were no accruing TDRs on March 31, 2019 and $977,000 of accruing TDRs as of December 31, 2018.

Deposits

During the ~~six-month~~three-month period ending ~~June 30, 2018,~~March 31, 2019, total deposits increased ~~$21.5~~$27.6 million due primarily to ~~a $16.9~~an $18.1 million increase in ~~savings~~time deposits which reflects seasonal activity in municipal account relationships. All other deposits decreased ~~$4.6~~$9.5 million, net.

The following table sets forth deposit balances as of the dates indicated:


(dollars in thousands)	March 31, 2019		December 31, 2018
Non-interest bearing demand	$	206,806	$	201,457
Interest-bearing demand		92,067		88,917
Money market deposit accounts		135,293		137,636
Savings		176,996		173,593
Time deposits <$100,000		145,767		145,343
Time deposits >$100,000		217,486		199,834

Total	$	974,415	$	946,780

(dollars in thousands) June 30, 2018 December 31, 2017

Non-interest bearing demand $ 216,472 $ 205,138
Interest-bearing demand 96,528 91,479
Money market deposit accounts 146,307 146,362
Savings 183,044 166,111
Time deposits <$100,000 145,967 152,241
Time deposits >$100,000 162,571 168,053

Total $ 950,889 $ 929,384

Borrowings

Other borrowings as of ~~June 30, 2018~~March 31, 2019 totaled ~~$30.3~~$48.0 million compared to ~~$35.9~~$52.3 million as of December 31, ~~2017.~~2018. Short-term borrowings, which consist of securities sold under agreements to repurchase and overnight borrowings from the FHLB, ~~increased $795,000 as~~decreased $15.2 million due to a ~~$17.4 million increase in cash management accounts offset a $16.6~~$15.6 million reduction in overnight borrowings.

~~Table of Contents~~

Other borrowings consisted of the following:

~~(dollars in thousands)~~

June 30, 2018 December 31, 2017
Notes with the FHLB:
Amortizing fixed rate borrowing due January 2018 at 0.913% $ - $ 51
Amortizing fixed rate borrowing due December 2018 at 1.425% 413 823
Amortizing fixed rate borrowing due January 2019 at 1.393% 2,946 5,451
Term fixed rate borrowing due August 2019 at 1.606% 10,000 10,000
Amortizing fixed rate borrowing due June 2020 at 1.490% 4,090 5,093
Amortizing fixed rate borrowing due December 2020 at 1.706% 2,553 3,051
Amortizing fixed rate borrowing due March 2022 at 1.748% 3,305 3,730
Amortizing fixed rate borrowing due October 2022 at 1.883% 6,976 7,746
$ 30,283 $ 35,945


(dollars in thousands)
	March 31, 2019		December 31, 2018
Notes with the FHLB:
Amortizing fixed rate borrowing due January 2019 at 1.393%	$	—	$	423
Term fixed rate borrowing due August 2019 at 1.606%		10,000		10,000
Amortizing fixed rate borrowing due June 2020 at 1.490%		2,570		3,079
Amortizing fixed rate borrowing due July 2020 at 2.77%		6,728		7,962
Amortizing fixed rate borrowing due December 2020 at 1.706%		1,799		2,051
Amortizing fixed rate borrowing due December 2020 at 3.06%		4,392		5,000
Amortizing fixed rate borrowing due March 2022 at 1.748%		2,661		2,877
Amortizing fixed rate borrowing due October 2022 at 1.88%		5,809		6,200
Amortizing fixed rate borrowing due October 2023 at 3.24%		9,227		9,692
Amortizing fixed rate borrowing due December 2023 at 3.22%		4,769		5,000

	$	47,955	$	52,284

Stockholders’ Equity and Capital Ratios

As of ~~June 30, 2018,~~March 31, 2019, stockholders’ equity totaled ~~$115.5~~$126.8 million, compared to ~~$115.7~~$122.3 million as of December 31, ~~2017.~~2018. The net change in stockholders’ equity included ~~$6.6~~$3.2 million of net income that was partially offset by ~~$2.8~~$1.5 million of dividends declared. In addition, total equity ~~decreased $4.4~~increased $2.9 million due to ~~a decrease~~an increase in the fair value of securities in the available for sale portfolio, net of tax. This ~~decrease~~increase in fair value is the result of a change in interest rates and spreads, which may impact the value of the securities. Because of interest rate volatility, the Company’s accumulated other comprehensive income (loss) could materially fluctuate for each interim andyear-end period.

A comparison of the Company’s consolidated regulatory capital ratios is as follows:


	March 31, 2019			December 31, 2018
Tier 1 Capital
(To average assets)		9.81	%		9.82	%
Tier 1 Capital
(To risk-weighted assets)		12.92	%		13.04	%
Common Equity Tier 1 Capital
(To risk-weighted assets)		12.92	%		13.04	%
Total Capital
(To risk-weighted assets)		13.85	%		14.00	%

June 30, 2018 December 31, 2017
Tier 1 Capital
(To average assets) 9.61 % 9.36 %
Tier 1 Capital
(To risk-weighted assets) 13.06 % 13.16 %
Common Equity Tier 1 Capital
(To risk-weighted assets) 13.06 % 13.16 %
Total Capital
(To risk-weighted assets) 14.06 % 14.11 %

Effective January 1, 2015, the Company and the Bank became subject to new regulatory capital rules, which, among other things, impose a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), set the minimum leverage ratio for all banking organizations at a uniform 4% of total assets, increase the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assign a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The new rules also require unrealized gains and losses on certain ~~“available-for-sale”~~“available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless aone-time opt out is exercised which the Company and the Bank have done. The final rule limits a banking organization’s dividends, stock repurchases and other capital distributions, and certain discretionary bonus payments to executive officers, if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above regulatory minimum risk-based requirements. The capital conservation buffer requirement ~~is being~~was phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement ~~will be~~became effective. The Company and the Bank are in compliance with their respective new capital requirements, including the capital conservation buffer, as of ~~June 30, 2018.~~

~~Table of Contents~~

March 31, 2019.

Liquidity

As of ~~June 30, 2018,~~March 31, 2019, the Company had cash and cash equivalents of ~~$16.1~~$19.9 million in the form of cash, due from banks and short-term deposits with other institutions. In addition, the Company had total securities available for sale of ~~$259.4~~$240.6 million which could be used for liquidity needs. This totals ~~$275.5~~$260.5 million of liquidity and represents ~~23.9%~~21.6% of total assets compared to ~~$297.8~~$261.6 million and ~~26.3%~~22.1% of total assets as of December 31, ~~2017.~~2018. The Company also monitors other liquidity measures, all of which were within the Company’s policy guidelines as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018. Based upon these measures, the Company believes its liquidity is adequate.

Capital Resources

The Company has a line of credit commitment from Atlantic Community Bankers Bank for $7,000,000 which expires June 30, 2019. There were no borrowings under this line as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~

2018.

The Company has a line of credit commitment available which has no stated expiration date from PNC Bank for $16,000,000. There were no borrowings under this line as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~

2018.

The Company has a line of credit commitment available which has no stated expiration date from Zions Bank for $17,000,000. There were no borrowings under this line as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~

2018.

The Bank’s maximum borrowing capacity with the Federal Home Loan Bank was approximately ~~$374,819,000~~$411,912,000 as of ~~June 30, 2018,~~March 31, 2019, of which ~~$31,941,000~~$47,955,000 and ~~$54,188,000~~$67,873,000 was outstanding at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively. Additionally, as of March 31, 2019, the Bank had secured Letters of Credit from the Federal Home Loan Bank in the amount of $45.0 million as collateral for specific municipal deposits. These Letters of Credit reduce the availability under the maximum borrowing capacity. There was $45,000,000 outstanding in the form of Letters of Credit as of December 31, 2018. Advances and Letters of Credit from the Federal Home Loan Bank are secured by qualifying assets of the Bank.

Non-GAAP Financial Measures

This report contains or references fully taxable-equivalent (fte) interest income and net interest income, which arenon-GAAP financial measures. Interest income (fte) and net interest income (fte) are derived from GAAP interest income and net interest income using an assumed tax rate of 21% ~~for 2018 and 34% for 2017.~~. We believe the presentation of interest income (fte) and net interest income (fte) ensures comparability of interest income and net interest income arising from both taxable andtax-exempt sources and is consistent with industry practice. Net interest income (fte) is reconciled to GAAP net interest income on ~~pages 39 and 43.~~page 38. Although the Company believes that thesenon-GAAP financial measures enhance investors’ understanding of our business and performance, thesenon-GAAP financial measures should not be considered an alternative to GAAP measures.

~~Table of Contents~~

Results of Operations

NORWOOD FINANCIAL CORP.

Consolidated Average Balance Sheets with Resultant Interest and Rates

(Tax-Equivalent Basis, Three Months Ended June 30,
dollars in thousands) 2018 2017

Average
Balance
(2)

Interest
(1)

Average
Rate
(3)

Average
Balance
(2)

Interest
(1)

Average
Rate
(3)

Assets
Interest-earning assets:
Interest-bearing deposits with banks Securities available for sale: $ 9,488 $ 43 1.81 % $ 9,717 $ 24 0.99 %
Taxable 169,851 912 2.15 181,979 911 2.00
Tax-exempt (1) 103,189 790 3.06 122,285 1,094 3.58
Total securities available for sale (1) 273,040 1,702 2.49 304,264 2,005 2.64
Loans receivable (1) (4) (5) 788,026 8,960 4.55 724,125 8,096 4.47
Total interest-earning assets 1,070,554 10,705 4.00 1,038,106 10,125 3.90
Non-interest earning assets:
Cash and due from banks 14,534 13,517
Allowance for loan losses (8,287 ) (7,197 )
Other assets 67,442 76,954
Total non-interest earning assets 73,689 83,274
Total Assets $ 1,144,243 $ 1,121,380
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand and money market $ 242,552 $ 113 0.19 $ 251,904 $ 100 0.16
Savings 185,039 23 0.05 199,015 25 0.05
Time 317,294 916 1.15 288,191 672 0.93
Total interest-bearing deposits 744,885 1,052 0.56 739,110 797 0.43
Short-term borrowings 33,772 38 0.45 33,917 28 0.33
Other borrowings 31,541 131 1.66 26,944 101 1.50
Total interest-bearing liabilities 810,198 1,221 0.60 799,971 926 0.46
Non-interest bearing liabilities:
Demand deposits 209,743 196,129
Other liabilities 9,260 9,590
Total non-interest bearing liabilities 219,003 205,719
Stockholders' equity 115,042 115,690
Total Liabilities and Stockholders' Equity $ 1,144,243 $ 1,121,380

Net interest income (tax equivalent basis) 9,484 3.40 % 9,199 3.44 %
Tax-equivalent basis adjustment (269 ) (543 )
Net interest income $ 9,215 $ 8,656
Net interest margin (tax equivalent basis) 3.54 % 3.54 %


(Tax-Equivalent Basis, dollars in thousands)	Three Months Ended March 31,
	2019									2018
	Average Balance (2)			Interest (1)			Average Rate (3)			Average Balance (2)			Interest (1)			Average Rate (3)
Assets
Interest-earning assets:
Interest-bearing deposits with banks	$	2,389		$	15			2.51	%	$	4,452		$	18			1.62	%
Securities available for sale:
Taxable		156,224			874			2.24			170,513			867			2.03
Tax-exempt (1)		94,883			718			3.03			108,613			832			3.06

Total securities available for sale (1)		251,107			1,592			2.54			279,126			1,699			2.43
Loans receivable (1) (4) (5)		857,438			10,084			4.70			767,481			8,588			4.48

Total interest-earning assets		1,110,934			11,691			4.21			1,051,059			10,305			3.92
Non-interest earning assets:
Cash and due from banks		14,024									13,779
Allowance for loan losses		(8,614	)								(7,877	)
Other assets		74,910									68,977

Totalnon-interest earning assets		80,320									74,879

Total Assets	$	1,191,254								$	1,125,938

Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand and money market	$	225,813		$	147			0.26		$	235,431		$	112			0.19
Savings		172,863			24			0.06			173,460			21			0.05
Time		359,168			1,558			1.74			325,012			896			1.10

Total interest-bearing deposits		757,844			1,729			0.91			733,903			1,029			0.56
Short-term borrowings		45,400			123			1.08			32,962			52			0.63
Other borrowings		49,939			303			2.43			34,360			141			1.64

Total interest-bearing liabilities		853,183			2,155			1.01			801,225			1,222			0.61
Non-interest bearing liabilities:
Demand deposits		200,273									200,786
Other liabilities		13,052									8,607

Totalnon-interest bearing liabilities		213,325									209,393
Stockholders’ equity		124,746									115,320

Total Liabilities and Stockholders’ Equity	$	1,191,254								$	1,125,938

Net interest income/spread (tax equivalent basis)					9,536			3.20	%					9,083			3.31	%

Tax-equivalent basis adjustment					(265	)								(276	)

Net interest income				$	9,271								$	8,807

Net interest margin (tax equivalent basis)								3.43	%								3.46	%

(1)	Interest and yields are presented on atax-equivalent basis using a marginal tax rate of 21% ~~for 2018 and 34% for 2017.~~.

(2)	Average balances have been calculated based on daily balances.

(3)	Annualized

(4)	Loan balances includenon-accrual loans and are net of unearned income.

(5)	Loan yields include the effect of amortization of deferred fees, net of costs.

~~Table of Contents~~

Rate/Volume Analysis. The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense.

Increase/(Decrease)
Three months ended June 30, 2018 Compared to
Three months ended June 30, 2017
Variance due to

Volume Rate Net

(dollars in thousands)

Interest-earning assets:
Interest-bearing deposits with banks $ (1 ) $ 20 $ 19
Securities available for sale:
Taxable (64 ) 65 1
Tax-exempt securities (159 ) (145 ) (304 )
Total securities (223 ) (80 ) (303 )
Loans receivable 710 154 864
Total interest-earning assets 486 94 580

Interest-bearing liabilities:
Interest-bearing demand and money market (4 ) 17 13
Savings (2 ) - (2 )
Time 79 165 244
Total interest-bearing deposits 73 182 255
Short-term borrowings - 10 10
Other borrowings 18 12 30
Total interest-bearing liabilities 91 204 295
Net interest income (tax-equivalent basis) $ 395 $ (110 ) $ 285


	Increase/(Decrease) Three months ended March 31, 2019 Compared to Three months ended March 31, 2018 Variance due to
	Volume			Rate			Net
	(dollars in thousands)
Interest-earning assets:
Interest-bearing deposits with banks	$	(9	)	$	6		$	(3	)
Securities available for sale:
Taxable		(78	)		85			7
Tax-exempt securities		(107	)		(7	)		(114	)

Total securities		(185	)		78			(107	)
Loans receivable		1,034			462			1,496

Total interest-earning assets		840			546			1,386


Interest-bearing liabilities:
Interest-bearing demand and money market		(6	)		41			35
Savings		—			3			3
Time		136			526			662

Total interest-bearing deposits		130			570			700
Short-term borrowings		29			42			71
Other borrowings		79			83			162

Total interest-bearing liabilities		238			695			933

Net interest income(tax-equivalent basis)	$	602		$	(149	)	$	453

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.

~~Table of Contents~~

Comparison of Operating Results for the Three Months Ended ~~June 30,~~March 31, 2019 to March 31, 2018 ~~to June 30, 2017~~

General

For the three months ended ~~June 30, 2018,~~March 31, 2019, net income totaled ~~$3,513,000~~$3,190,000 compared to ~~$2,724,000~~$3,129,000 earned in the similar period in ~~2017.~~2018. The increase in net income for the three months ended ~~June 30, 2018~~March 31, 2019 was due primarily to a ~~$559,000~~$464,000 improvement in net interest income. Earnings per share for the current period were ~~$0.57~~$0.51 per share for basic shares and ~~$0.56 per share for~~ fully diluted shares compared to ~~$0.44 and $0.43~~$0.50 per share for basic and fully diluted shares ~~respectively,~~ for the three months ended ~~June 30, 2017, after giving retroactive effect to the 50% stock dividend declared August 8, 2017.~~March 31, 2018. The resulting annualized return on average assets and annualized return on average equity for the three months ended ~~June 30, 2018~~March 31, 2019 were ~~1.23%%~~1.09% and ~~12.25%~~10.37%, respectively, compared to ~~0.97%~~1.13% and ~~9.45%~~11.00%, respectively, for the similar period in ~~2017.~~

2018.

The following table sets forth changes in net income:

(dollars in thousands) Three months ended
June 30, 2018 to June 30, 2017
Net income three months ended June 30, 2017 $ 2,724
Change due to:
Net interest income 559
Provision for loan losses 175
Net gains on sales (40 )
Other income 158
Salaries and employee benefits (194 )
Occupancy, furniture and equipment (48 )
Foreclosed real estate 38
All other expenses (19 )
Income tax expense 160

Net income three months ended June 30, 2018 $ 3,513


(dollars in thousands)	Three months ended
	March 31, 2019 to March 31, 2018
Net income three months ended March 31, 2018	$	3,129
Change due to:
Net interest income		464
Provision for loan losses		100
Net gains on sales		(100	)
Other income		(34	)
Salaries and employee benefits		(187	)
Occupancy, furniture and equipment		(32	)
Foreclosed real estate		(42	)
All other expenses		(139	)
Income tax expense		31

Net income three months ended March 31, 2019	$	3,190

Net Interest Income

Net interest income on a fully taxable equivalent basis (fte) for the three months ended ~~June 30, 2018~~March 31, 2019 totaled ~~$9,484,000~~$9,536,000 which was ~~$285,000~~$453,000 higher than the comparable period in ~~2017.~~2018. The increase in net interest income was due primarily to ~~an $864,000~~a $1,496,000 increase in interest income (fte) on loans.Tax-equivalent interest income was negatively impacted by a ~~$303,000~~$107,000 decrease in securities ~~income and the reduction in the federal tax rate from 34% to 21%.~~income. The fte net interest spread and net interest margin were ~~3.40%~~3.20% and ~~3.54%~~3.43%, respectively, for the three months ended ~~June 30, 2018~~March 31, 2019 compared to ~~3.44%~~3.31% and ~~3.54%~~3.46%, respectively, for the similar period in ~~2017.~~2018. The decrease in the net interest spread and margin reflects the ~~impact on tax-equivalent net interest income related to the change in the tax rate.~~

increased cost of funding.

Interest income (fte) totaled ~~$10,705,000~~$11,691,000 with a yield on average earning assets of ~~4.00%~~4.21% compared to ~~$10,125,000~~$10,305,000 and ~~3.90%~~3.92% for the ~~2017~~2018 period. Average loans increased ~~$63.9~~$90.0 million over the comparable period of last year, while average securities decreased ~~$31.2~~$28.0 million as portfolio runoff was utilized to fund loan growth. Average earning assets totaled ~~$1.1~~$1.111 billion for the three months ended ~~June 30, 2018,~~March 31, 2019, an increase of ~~$32.4~~$59.9 million over the average for the similar period in ~~2017.~~

~~Table of Contents~~

2018.

Interest expense for the three months ended ~~June 30, 2018~~March 31, 2019 totaled ~~$1,221,000~~$2,155,000 at an average cost of ~~0.60%~~1.01% compared to ~~$926,000~~$1,222,000 and ~~0.46%~~0.61% for the similar period in ~~2017.~~2018. The increase in average cost reflects the rising rates on ~~overnight borrowings~~borrowed funds and certificates of deposit. The average cost of time deposits, which is the most significant component of funding, increased to ~~1.15%~~1.74% from ~~0.93%~~1.10% for the similar period in the prior year.

Provision for Loan Losses

The Company’s provision for loan losses for the three months ended ~~June 30, 2018~~March 31, 2019 was ~~$425,000~~$450,000 compared to ~~$600,000~~$550,000 for the three months ended ~~June 30, 2017.~~March 31, 2018. The Company makes provisions for loan losses in an amount necessary to maintain the allowance for loan losses at an acceptable level. Net charge-offs were ~~$198,000~~$553,000 for the quarter ended ~~June 30, 2018~~March 31, 2019 compared to ~~$82,000~~$85,000 for the similar period in ~~2017.~~

2018. The increase in charge-offs was due to one commercial credit which was written down by $451,000 in the current period.

Other Income

Other income totaled ~~$1,774,000~~$1,560,000 for the three months ended ~~June 30, 2018~~March 31, 2019 compared to ~~$1,656,000~~$1,694,000 for the similar period in ~~2017. Service charges and fees increased $85,000~~2018. The decrease was due primarily to ~~the accounts added, while other fee income categories increased $76,000, net. Net~~a $100,000 decrease in net gains from sales of loans and securities ~~increased $27,000, while gains from the sale of loans decreased $67,000.~~

reflecting to reduced opportunities. All other items included in other income declined $34,000, net.

Other Expense

Other expense for the three months ended ~~June 30, 2018~~March 31, 2019 totaled ~~$6,353,000~~$6,648,000 which was ~~$223,000, or 3.6%,~~$400,000 higher than the same period of ~~2017~~2018 due primarily to a ~~$194,000~~$187,000 increase in salaries and benefits ~~expenses.~~expenses and a $129,000 increase in data processing costs. All other operating expenses increased ~~$29,000,~~$84,000, net.

Income Tax Expense

Income tax expense totaled ~~$698,000~~$543,000 for an effective tax rate of ~~16.6%~~14.6% for the period ending ~~June 30, 2018~~March 31, 2019 compared to ~~$858,000~~$574,000 for an effective tax rate of ~~24.0%~~15.5% for the similar period in ~~2017.~~2018. The decrease in tax expense ~~reflects the reduction in the Company’s federal tax rate from 34% to 21% as a result of the Tax Cuts and Jobs Act which became effective on January 1, 2018.~~

~~Table of Contents~~

~~Results of Operations~~

~~NORWOOD FINANCIAL CORP.~~

~~Consolidated Average Balance Sheets with Resultant Interest and Rates~~

(Tax-Equivalent Basis, Six Months Ended June 30,
dollars in thousands) 2018 2017

Average
Balance
(2)

Interest
(1)

Average
Rate
(3)

Average
Balance
(2)

Interest
(1)

Average
Rate
(3)

Assets
Interest-earning assets:
Interest-bearing deposits with banks Securities available for sale: $ 6,984 $ 61 1.75 % $ 7,288 $ 35 0.96 %
Taxable 170,181 1,779 2.09 183,440 1,803 1.97
Tax-exempt (1) 105,886 1,622 3.06 122,368 2,194 3.59
Total securities available for sale (1) 276,067 3,401 2.46 305,808 3,997 2.61
Loans receivable (1) (4) (5) 777,810 17,548 4.51 721,703 16,074 4.45
Total interest-earning assets 1,060,861 21,010 3.96 1,034,799 20,106 3.89
Non-interest earning assets:
Cash and due from banks 14,159 13,711
Allowance for loan losses (8,083 ) (6,960 )
Other assets 68,204 76,043
Total non-interest earning assets 74,280 82,794
Total Assets $ 1,135,141 $ 1,117,593
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand and money market $ 239,011 $ 225 0.19 $ 250,024 $ 194 0.16
Savings 179,281 44 0.05 197,387 49 0.05
Time 321,132 1,813 1.13 291,154 1,320 0.91
Total interest-bearing deposits 739,424 2,082 0.56 738,565 1,563 0.42
Short-term borrowings 33,369 90 0.54 33,703 56 0.33
Other borrowings 32,943 271 1.65 29,634 244 1.65
Total interest-bearing liabilities 805,736 2,443 0.61 801,902 1,863 0.46
Non-interest bearing liabilities:
Demand deposits 205,289 192,412
Other liabilities 8,936 9,042
Total non-interest bearing liabilities 214,225 201,454
Stockholders' equity 115,180 114,237
Total Liabilities and Stockholders' Equity $ 1,135,141 $ 1,117,593

Net interest income (tax equivalent basis) 18,567 3.35 % 18,243 3.42 %
Tax-equivalent basis adjustment (545 ) (1,089 )
Net interest income $ 18,022 $ 17,154
Net interest margin (tax equivalent basis) 3.50 % 3.53 %

~~(1)~~

~~Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 21% for 2018 and 34% for 2017.~~

~~(2)~~

~~Average balances have been calculated based on daily balances.~~

~~(3)~~

~~Annualized~~

~~(4)~~

~~Loan balances include non-accrual loans and are net of unearned income.~~

~~(5)~~

~~Loan yields include the effect of amortization of deferred fees, net of costs.~~

~~Table of Contents~~

~~Rate/Volume Analysis.~~ ~~The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense.~~

Increase/(Decrease)
Six months ended June 30, 2018 Compared to
Six months ended June 30, 2017
Variance due to

Volume Rate Net

(dollars in thousands)

Interest-earning assets:
Interest-bearing deposits with banks $ (3 ) $ 29 $ 26
Securities available for sale:
Taxable (132 ) 108 (24 )
Tax-exempt securities (270 ) (302 ) (572 )
Total securities (402 ) (194 ) (596 )
Loans receivable 1,245 229 1,474
Total interest-earning assets 840 64 904

Interest-bearing liabilities:
Interest-bearing demand and money market (9 ) 40 31
Savings (5 ) - (5 )
Time 160 333 493
Total interest-bearing deposits 146 373 519
Short-term borrowings (1 ) 35 34
Other borrowings 27 - 27
Total interest-bearing liabilities 172 408 580
Net interest income (tax-equivalent basis) $ 668 $ (344 ) $ 324

~~Table of Contents~~

~~Comparison of Operating Results for the Six Months Ended June 30, 2018 to June 30, 2017~~

~~General~~

For the six months ended June 30, 2018, net income totaled $6,642,000 compared to $5,100,000 earned in the similar period in 2017. The increase in net income for the six months ended June 30, 2018 was due primarily to an $868,000 improvement in net interest income and a $629,000 decrease in foreclosed real estate expense. Earnings per share for the current period were $1.07 per share for basic shares and $1.06 per share for fully diluted shares compared to $0.82 per share for basic shares and $0.81 per share for fully diluted shares for the six months ended June 30, 2017, after giving retroactive effect to the 50% stock dividend declared August 8, 2017. The resulting annualized return on average assets and annualized return on average equity for the six months ended June 30, 2018 were 1.18%% and 11.63%, respectively, compared to 0.92% and 9.00%, respectively, for the similar period in 2017.

~~The following table sets forth changes in net income:~~

(dollars in thousands) Six months ended
June 30, 2018 to June 30, 2017
Net income six months ended June 30, 2017 $ 5,100
Change due to:
Net interest income 868
Provision for loan losses 225
Service charges and fees 131
Net gains on sales (113 )
Other income 151
Salaries and employee benefits (438 )
Occupancy, furniture and equipment (29 )
Foreclosed real estate 629
All other expenses (18 )
Income tax expense 136

Net income six months ended June 30, 2018 $ 6,642

~~Net Interest Income~~

Net interest income on a fully taxable equivalent basis (fte) for the six months ended June 30, 2018 totaled $18,567,000 which was $324,000 higher than the comparable period in 2017. The increase in net interest income was due primarily to a $1,474,000 increase in interest income (fte) on loans. Tax-equivalent interest income was negatively impacted due to the reduction in the federal tax rate from 34% to 21% and a $29.7 million reduction in average securities. The fte net interest spread and net interest margin were 3.35% and 3.50%, respectively, for the six months ended June 30, 2018 compared to 3.42% and 3.53%, respectively, for the similar period in 2017. The decrease in the net interest spread and the ~~net interest margin reflects the impact on tax-equivalent net interest income related to the change in the tax rate.~~

~~Table of Contents~~

Interest income (fte) totaled $21,010,000 with a yield on average earning assets of 3.96% compared to $20,106,000 and 3.89% for the 2017 period. Average loans increased $56.1 million over the comparable period of last year, while average securities decreased $29.7 million as portfolio runoff was utilized to fund loan growth. Average earning assets totaled $1.061 billion for the six months ended June 30, 2018, an increase of $26.1 million over the average for the similar period in 2017.

Interest expense for the six months ended June 30, 2018 totaled $2,443,000 at an average cost of 0.61% compared to $1,863,000 and 0.46% for the similar period in 2017. The increase in average cost reflects the rising rates on overnight borrowings and certificates of deposit. The average cost of time deposits, which is the most significant component of funding, increased to 1.13% from 0.91% for the similar period in the prior year.

~~Provision for Loan Losses~~

The Company’s provision for loan losses for the six months ended June 30, 2018 was $975,000 compared to $1,200,000 for the six months ended June 30, 2017. The Company makes provisions for loan losses in an amount necessary to maintain the allowance for loan losses at an acceptable level. Net charge-offs were $283,000 for the six months ended June 30, 2018 compared to $244,000 for the similar period in 2017.

~~Other Income~~

Other income totaled $3,468,000 for the six months ended June 30, 2018 compared to $3,299,000 for the similar period in 2017. Service charges and fees increased $131,000 due primarily to the accounts added, while other fee income categories increased $151,000, net. Net gains from sales of securities increased $163,000, while gains from the sale of deposits decreased $209,000 due to the sale of the Company’s West Scranton Office in the first quarter of 2017. Gains from the sale of loans also decreased $67,000 from the prior year period.

~~Other Expense~~

Other expense for the six months ended June 30, 2018 totaled $12,600,000 which was $144,000 lower than the same period of 2017 due to a $629,000 reduction in foreclosed real estate expenses. All other operating expenses increased $485,000, or 4.0%, net.

~~Income Tax Expense~~

~~Income tax expense totaled $1,273,000 for an~~ effective tax rate ~~of 16.1% for the six-month period ending June 30, 2018 compared to $1,409,000 for~~reflects an ~~effective tax rate of 21.7% for the similar period in 2017. The decrease in tax expense reflects the reduction~~increase in the ~~Company’s federal tax rate from 34% to 21% as a result~~level of ~~the Tax Cuts~~tax-exempt income.

Item 3. Quantitative and ~~Jobs Act which became effective on January 1, 2018.~~

~~Table of Contents~~

~~Item 3.~~

~~Quantitative and Qualitative Disclosures about Market Risk~~

Qualitative Disclosures about Market Risk

Market Risk

Interest rate sensitivity and the repricing characteristics of assets and liabilities are managed by the Asset and Liability Management Committee (ALCO). The principal objective of 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 must 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 ~~June 30, 2018,~~March 31, 2019, the level of net interest income at risk in a rising or declining 200 basis point change in interest rates was within the Company’s policy limits. The Company’s policy allows for a decline of no more than 10% of net interest income for a ± 200 basis point shift in interest rates.

Imbalance in repricing opportunities at a given point in time reflects interest-sensitivity gaps measured as the difference between rate-sensitive assets (RSA) and rate-sensitive liabilities (RSL). These are static gap measurements that do not take into account any future activity, and as such are principally used as early indications of potential interest rate exposures over specific intervals.

As of ~~June 30, 2018,~~March 31, 2019, the Company had a positive90-day interest sensitivity gap of ~~$9.8~~$19.8 million or ~~0.9%~~1.6% of total assets, compared to the ~~$20.3~~$18.7 million ~~positive~~negative gap, or ~~1.8%~~(1.6)% of total assets, as of December 31, ~~2017.~~2018. Rate-sensitive assets repricing within 90 days ~~decreased $9.4~~increased $5.6 million due primarily to ~~an $8.4~~a $6.0 million ~~decrease~~increase in ~~loans repricing.~~overnight liquidity. Rate-sensitive liabilities repricing within 90 days ~~increased $1.2~~decreased $32.8 million since year end due to a ~~$13.9~~$17.4 million ~~increase~~decrease in time deposits repricing ~~which was partially offset by~~and a ~~$12.7~~$16.1 million decrease in borrowings. A positive gap means that rate-sensitive assets are greater than rate-sensitive liabilities at the time interval. This would indicate that in a rising rate environment, the yield on interest-earning assets could increase faster than the cost of interest-bearing liabilities in the90-day time frame. The repricing intervals are managed by ALCO strategies, including adjusting the average life of the investment portfolio, pricing of deposit liabilities to attract longer term time deposits, loan pricing to encourage variable rate products and evaluation of loan sales of long-term fixed rate mortgages.

Certain interest-bearing deposits with no stated maturity dates are included in the interest-sensitivity table below. The balances allocated to the respective time periods represent an estimate of the total outstanding balance that has the potential to migrate through withdrawal or transfer to time deposits, thereby impacting the interest-sensitivity position of the Company. The estimates were derived from an independently preparednon-maturity deposit study for Wayne Bank which addressed the various deposit types and their pricing sensitivity to movements in market interest rates. The process involved analyzing correlations between product rates and market rates over aten-year period. The Company believes the study provides pertinent data to support the assumptions used in modelingnon-maturity deposits.

~~Table of Contents~~

~~June 30, 2018~~March 31, 2019

Rate Sensitivity Table

(dollars in thousands)

3 Months 3-12 Months 1 to 3 Years Over 3 Years Total
Federal funds sold and interest-bearing deposits $ 914 $ - $ - $ - $ 914
Securities 6,869 21,593 54,117 176,863 259,442
Loans Receivable 131,146 152,457 227,354 292,816 803,773
Total RSA $ 138,929 $ 174,050 $ 281,471 $ 469,679 $ 1,064,129

Non-maturity interest-bearing deposits $ 63,331 $ 63,176 $ 166,581 $ 132,791 $ 425,879
Time Deposits 52,282 125,984 100,777 29,495 308,538
Borrowings 13,521 20,319 36,881 2,887 73,608
Total RSL $ 129,134 $ 209,479 $ 304,239 $ 165,173 $ 808,025

Interest Sensitivity Gap $ 9,795 $ (35,429 ) $ (22,768 ) $ 304,506 $ 256,104
Cumulative Gap 9,795 (25,634 ) (48,402 ) 256,104
RSA/RSL-cumulative 107.6 % 92.4 % 92.5 % 131.7 %

December 31, 2017

Interest Sensitivity Gap $ 20,327 $ (34,969 ) $ (6,925 ) $ 264,544 $ 242,977
Cumulative Gap 20,327 (14,642 ) (21,567 ) 242,977
RSA/RSL-cumulative 115.9 % 95.8 % 96.6 % 130.3 %

~~Item 4.~~

~~Controls and Procedures~~


	3 Months			3-12 Months			1 to 3 Years			Over 3 Years			Total
Federal funds sold and interest-bearing deposits	$	6,291		$	—		$	—		$	—		$	6,291
Securities		6,326			22,658			55,897			155,740			240,621
Loans Receivable		135,399			161,234			281,276			286,289			864,198

Total RSA	$	148,016		$	183,892		$	337,173		$	442,029		$	1,111,110

Non-maturity interest-bearing deposits	$	60,251		$	59,672		$	157,749		$	126,684		$	404,356
Time Deposits		56,233			171,053			100,748			35,219			363,253
Borrowings		11,781			35,577			32,382			6,039			85,779

Total RSL	$	128,265		$	266,302		$	290,879		$	167,942		$	853,388


Interest Sensitivity Gap	$	19,751		$	(82,410	)	$	46,294		$	274,087		$	257,722
Cumulative Gap		19,751			(62,659	)		(16,365	)		257,722
RSA/RSL-cumulative		115.4	%		84.1	%		97.6	%		130.2	%

December 31, 2018

Interest Sensitivity Gap	$	(18,749	)	$	(60,791	)	$	18,852		$	303,804		$	243,116
Cumulative Gap		(18,749	)		(79,540	)		(60,688	)		243,116
RSA/RSL-cumulative		88.4	%		79.8	%		91.1	%		128.6	%

Item 4. Controls and Procedures

The Company’s management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

~~Table of Contents~~

Part II. OTHER INFORMATION

~~Item 1.~~

~~Legal Proceedings~~

~~Reference is made to Part I,~~ Item ~~3 in the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017. On July 18, 2018, the parties agreed to a settlement of all claims and a dismissal of the action.~~

~~Item 1A.~~

~~Risk Factors~~

1. Legal Proceedings

Not applicable.

Item 1A. Risk Factors

There have been no material changes in the risk factors affecting the Company that were identified in Item 1A of Part 1 of the Company’s Form10-K for the year ended December 31, ~~2017.~~

~~Item 2.~~

~~Unregistered Sales of Equity Sales and Use of Proceeds~~

2018.

Item 2. Unregistered Sales of Equity Sales and Use of Proceeds

(a)Unregistered Sales of Equity Securities. Not Applicable.

(b)Use of Proceeds. Not Applicable

(c)Issuer Purchases of Equity Securities. Set forth below is information regarding the Company’s stock repurchases during the quarter ended ~~June 30, 2018.~~

March 31, 2019.


	Issuer Purchases of Equity Securities
	Total Number of Shares (or Units) Purchased		Average Price Paid Per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs *		Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
January 1 – 31, 2019		—	$	—
~~April 1 – 30, 2018~~		-	$	-		-—		129,500
~~May~~ February 1 – ~~31, 2018~~28, 2019		-—		-—		-—		129,500
~~June~~ March 1 – ~~30, 2018~~31, 2019		-—		-—		-—		129,500

Total		—	$	—
~~Total~~		-	$	-		-—		129,500

*~~On March 19, 2008, the Registrant announced its intention to repurchase up to 5% of its outstanding common stock (approximately 226,050 split-adjusted shares) in the open market.~~ On November 10, 2011, the Registrant announced that the Company had increased the number of shares which may be repurchased under its open-market program to 5% of its currently outstanding shares, or approximately 270,600 split-adjusted shares. There is no expiration date for this plan.

~~Item 3.~~

~~Defaults Upon Senior Securities~~

~~Not applicable~~

~~Item 4.~~

~~Mine Safety Disclosures~~

~~Not applicable~~

~~Table of Contents~~

~~Item 5.~~

~~Other Information~~

~~None~~

~~Item 6.~~

~~Exhibits~~

~~No.~~

~~Description~~

On March 19, 2008, the Registrant announced its intention to repurchase up to 5% of its outstanding common stock (approximately 226,050 split-adjusted shares) in the open market. On November 10, 2011, the Registrant announced that the Company had increased the number of shares which may be repurchased under its open-market program to 5% of its currently outstanding shares, or approximately 270,600 split-adjusted shares. There is no expiration date for this plan.

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

Item 6. Exhibits


No.		Description

3(i)		Amended and Restated Articles of Incorporation of Norwood Financial Corp.⁽¹⁾
~~3(ii)~~
3(ii)		Bylaws of Norwood Financial Corp.⁽²⁾

4.0		Specimen Stock Certificate of Norwood Financial Corp.⁽¹⁾
~~10.1~~
10.1		Employment Agreement with Lewis J. Critelli⁽³⁾
~~10.2~~
10.2		Change in Control Severance Agreement with William S. Lance⁽³⁾
~~10.3~~
10.3		Change in Control Severance Agreement with Robert J. Mancuso⁽⁴⁾
~~10.4~~
10.4		Salary Continuation Agreement between the Bank and William W. Davis, Jr.⁽⁵⁾
~~10.5~~
10.5		Amended and Restated Salary Continuation Agreement, dated September 1, 2017, between the Bank and Lewis J. Critelli ⁽⁶⁾
~~10.6~~
10.6		Salary Continuation Agreement between the Bank and John H. Sanders⁽⁷⁾
~~10.7~~
10.7		2006 Stock Option Plan⁽⁸⁾
~~10.8~~
10.8		First and Second Amendments to Salary Continuation Agreement with William W. Davis, Jr.⁽⁹⁾
~~10.9~~
10.9		First and Second Amendments to Salary Continuation Agreement with John H. Sanders⁽⁹⁾
~~10.10~~
10.10		Change In Control Severance Agreement with James F. Burke⁽¹⁰⁾
~~10.11~~
10.11		2014 Equity Incentive Plan, as amended⁽¹¹⁾
~~10.12~~
10.12		Addendum to Change in Control Severance Agreement with William S. Lance⁽¹²⁾
~~10.13~~
10.13		Salary Continuation Agreement, dated September 1, 2017, between Wayne Bank and William S. Lance⁽⁶⁾
~~10.14~~
10.14		Salary Continuation Agreement, dated September 1, 2017, between Wayne Bank and Robert J. Mancuso⁽⁶⁾
~~10.15~~
10.15		Salary Continuation Agreement, dated September 1, 2017, between Wayne Bank and James F. Burke⁽⁶⁾
~~31.1~~
10.16		Change-In-Control Severance Agreement, dated January 16, 2018, by and among Norwood Financial Corp., Wayne Bank, and John F. Carmody⁽¹³⁾

10.17		Addendum, dated January 16, 2018, toChange-In-Control Severance Agreement, dated March 2, 2010, by and among Norwood Financial Corp., Wayne Bank and William S. Lance⁽¹³⁾

10.18		Addendum, dated January 16, 2018, toChange-In-Control Severance Agreement, dated January 3, 2013, by and among Norwood Financial Corp., Wayne Bank and Robert J. Mancuso⁽¹³⁾

31.1		Rule13a-14(a)/15d-14(a) Certification of CEO
~~31.2~~
31.2		Rule13a-14(a)/15d-14(a) Certification of CFO
32
32		Certification pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of Sarbanes Oxley Act of 2002

101		Interactive Data Files consisting of the following financial information from the Company’s Quarterly Report onForm 10-Q for the quarter ended ~~June 30, 2018~~March 31, 2019 formatted in XBRL: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Changes in Stockholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements.

(footnotes on next page)

⁽¹⁾

~~(1)~~

Incorporated herein by reference into this document from the identically numbered Exhibits to the Registrant’s Form 10, Registration Statement initially filed in paper with the Commission on April 29, 1996, RegistrationNo. 0-28364

⁽²⁾

~~(2)~~

Incorporated by reference into this document from the identically numbered exhibit to the Registrant’s Form10-Q filed with the Commission on August 8, 2014.

⁽³⁾

~~(3)~~

Incorporated by reference into this document from the identically numbered exhibits to the Registrant’s Form10-K filed with the Commission on March 15, 2010.

~~Table of Contents~~

⁽⁴⁾

~~(4)~~

Incorporated by reference into this document from Exhibit 10.4 to the Registrant’s Form10-K filed with the Commission on March 14, 2013, FileNo. 0-28364.

⁽⁵⁾

~~(5)~~

Incorporated by reference to Exhibit ~~10.1~~10.6 to the Registrant’s Form10-K filed with the Commission on March 23, 2000.

⁽⁶⁾

~~(6)~~

Incorporated by reference from the exhibits to the Current Report on Form8-K filed with the Commission on September 5, 2017.

⁽⁷⁾

~~(7)~~

Incorporated herein by reference to Exhibit 10.11 to the Registrant’s Form10-K filed with the Commission on March 22, 2004.

⁽⁸⁾

~~(8)~~

Incorporated by reference to this document from Exhibit 4.1 to Registrant’s Registration Statement on FormS-8 (FileNo. 333-134831) filed with the Commission on June 8, 2006.

⁽⁹⁾

~~(9)~~

Incorporated herein by reference from ~~the~~ Exhibits 10.1 and 10.5 to the Registrant’s Current Report on Form8-K filed on April 4, 2006.

⁽¹⁰⁾

~~(10)~~

Incorporated by reference from Exhibit 10.13 to the Registrant’s Form10-Q filed with the Commission on November 7, 2013.

⁽¹¹⁾

~~(11)~~

Incorporated by reference to Exhibit 10.1 to Post-Effective No. 1 to the Registrant’s Registration Statement on FormS-8 (FileNo. 333-195643) filed with the Commission on May 4, 2018.

⁽¹²⁾

~~(12)~~

Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form8-K filed on February 18, 2015.

⁽¹³⁾	Incorporated by reference into this document from the exhibits to the Registrant’s Current Report on Form8-K filed with the Commission on January 16, 2018

~~Table of Contents~~

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


					NORWOOD FINANCIAL CORP.

Date: May 9, 2019				By:
~~Date:~~	~~August 8, 2018~~	~~By:~~	/s/ Lewis J. Critelli
					Lewis J. Critelli
					President and Chief Executive Officer
			(Principal Executive Officer)


Date: May 9, 2019				By:
~~Date:~~	~~August 8, 2018~~	~~By:~~	/s/ William S. Lance
					William S. Lance
					Executive Vice President and
			Chief Financial Officer
			(Principal Financial Officer)

	June 30, 2018			December 31, 2017
ASSETS
Cash and due from banks	$	15,193		$	16,212
Interest-bearing deposits with banks		914			485
Cash and cash equivalents		16,107			16,697

Securities available for sale, at fair value		259,442			281,121
Loans receivable		803,773			764,092
Less: Allowance for loan losses		8,326			7,634
Net loans receivable		795,447			756,458
Regulatory stock, at cost		2,313			3,505
Bank premises and equipment, net		13,894			13,864
Bank owned life insurance		37,485			37,060
Accrued interest receivable		3,672			3,716
Foreclosed real estate owned		1,386			1,661
Goodwill		11,331			11,331
Other intangibles		394			462
Deferred tax asset		5,885			4,781
Other assets		3,237			2,260
TOTAL ASSETS	$	1,150,593		$	1,132,916

LIABILITIES
Deposits:
Non-interest bearing demand	$	216,472		$	205,138
Interest-bearing		734,417			724,246
Total deposits		950,889			929,384
Short-term borrowings		43,325			42,530
Other borrowings		30,283			35,945
Accrued interest payable		1,461			1,434
Other liabilities		9,102			7,884
TOTAL LIABILITIES		1,035,060			1,017,177

STOCKHOLDERS’ EQUITY
Common stock, $.10 par value per share, authorized 10,000,000 shares; issued 2018: 6,266,388 shares, 2017: 6,256,063 shares		627			626
Surplus		47,815			47,431
Retained earnings		74,315			70,426
Treasury stock at cost: 2018: 5,729 shares, 2017: 2,608 shares		(188	)		(77	)
Accumulated other comprehensive loss		(7,036	)		(2,667	)
TOTAL STOCKHOLDERS’ EQUITY		115,533			115,739
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,150,593		$	1,132,916

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
INTEREST INCOME
Loans receivable, including fees	$	8,857	$	7,925	$	17,344	$	15,731
Securities		1,536		1,633		3,060		3,251
Other		43		24		61		35
Total interest income		10,436		9,582		20,465		19,017

INTEREST EXPENSE
Deposits		1,052		797		2,082		1,563
Short-term borrowings		38		28		90		56
Other borrowings		131		101		271		244
Total interest expense		1,221		926		2,443		1,863
NET INTEREST INCOME		9,215		8,656		18,022		17,154
PROVISION FOR LOAN LOSSES		425		600		975		1,200
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		8,790		8,056		17,047		15,954

OTHER INCOME
Service charges and fees		1,101		1,016		2,082		1,951
Income from fiduciary activities		175		128		311		235
Net realized gains on sales of securities		58		31		200		37
Gain on sale of loans, net		-		67		-		67
Gain on sale of deposits		-		-		-		209
Earnings and proceeds on bank owned life insurance		279		275		552		530
Other		161		139		323		270
Total other income		1,774		1,656		3,468		3,299

OTHER EXPENSES
Salaries and employee benefits		3,406		3,212		6,868		6,430
Occupancy, furniture & equipment, net		857		809		1,749		1,720
Data processing and related operations		340		324		658		668
Taxes, other than income		153		227		327		460
Professional fees		229		240		459		489
Federal Deposit Insurance Corporation insurance		86		91		178		186
Foreclosed real estate		114		152		95		724
Amortization of intangibles		33		39		68		80
Other		1,135		1,036		2,198		1,987
Total other expenses		6,353		6,130		12,600		12,744

INCOME BEFORE INCOME TAXES		4,211		3,582		7,915		6,509
INCOME TAX EXPENSE		698		858		1,273		1,409
NET INCOME	$	3,513	$	2,724	$	6,642	$	5,100

BASIC EARNINGS PER SHARE (1)	$	0.57	$	0.44	$	1.07	$	0.82

DILUTED EARNINGS PER SHARE (1)	$	0.56	$	0.43	$	1.06	$	0.81

	Common Stock						Retained			Treasury Stock						Accumulated Other Comprehensive
	Shares		Amount		Surplus		Earnings			Shares			Amount			Loss			Total
Balance, December 31, 2017		6,256,063	$	626	$	47,431	$	70,426			2,608		$	(77	)	$	(2,667	)	$	115,739
Net Income		-		-		-		6,642			-			-			-			6,642
Other comprehensive loss		-		-		-		-			-			-			(4,369	)		(4,369	)
Cash dividends declared ($0.44 per share)		-		-		-		(2,753	)		-			-			-			(2,753	)
Compensation expense related to restricted stock		-		-		102		-			-			-			-			102
Acquisition of treasury stock		-		-		-		-			5,446			(179	)		-			(179	)
Stock options exercised		10,325		1		164		-			(2,325	)		68			-			233
Compensation expense related to stock options		-		-		118		-			-			-			-			118
Balance, June 30, 2018		6,266,388	$	627	$	47,815	$	74,315			5,729		$	(188	)	$	(7,036	)	$	115,533

	Six Months Ended June 30,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	6,642		$	5,100
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		975			1,200
Depreciation		437			468
Amortization of intangible assets		68			80
Deferred income taxes		(202	)		(525	)
Net amortization of securities premiums and discounts		885			1,120
Net realized gain on sales of securities		(200	)		(37	)
Gain on sale of deposits		-			(209	)
Earnings and proceeds on bank owned life insurance		(552	)		(530	)
Loss on sales and writedowns of fixed assets and foreclosed real estate owned		9			529
Gain on sale of loans		-			(67	)
Loans originated for sale		-			(1,693	)
Proceeds from sale of loans originated for sale		-			1,760
Compensation expense related to stock options		118			46
Compensation expense related to restricted stock		102			71
Decrease in accrued interest receivable		44			226
Increase (decrease) in accrued interest payable		27			(127	)
Other, net		853			1,338
Net cash provided by operating activities		9,206			8,750

CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales		14,583			1,835
Proceeds from maturities and principal reductions on mortgage-backed securities		15,151			14,792
Purchases		(14,269	)		(11,893	)
Purchase of regulatory stock		(1,158	)		(1,378	)
Redemption of regulatory stock		2,350			1,062
Net increase in loans		(40,393	)		(21,481	)
Purchase of premises and equipment		(467	)		(155	)
Proceeds from sales of fixed assets and foreclosed real estate owned		467			515
Net cash used in investing activities		(23,736	)		(16,703	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		21,505			20,954
Deposits sold		-			(13,659	)
Net decrease in short-term borrowings		795			9,381
Repayments of other borrowings		(5,662	)		(16,671	)
Proceeds from other borrowings		-			10,000
Stock options exercised		233			694
Purchase of treasury stock		(179	)		(854	)
Cash dividends paid		(2,752	)		(2,663	)
Net cash provided by financing activities		13,940			7,182
Decrease in cash and cash equivalents		(590	)		(771	)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		16,697			17,174
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	16,107		$	16,403

	Options			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value ($000)

Outstanding at January 1, 2018		212,725		$	20.76	6.1	Yrs.	$	2,604
Granted		-			-	-			-
Exercised		(12,650	)		18.41	4.8	Yrs.		160
Forfeited		(750	)		32.81	9.5	Yrs.		25
Outstanding at June 30, 2018		199,325		$	20.86	5.6	Yrs.	$	1,932

Exercisable at June 30, 2018		165,325		$	18.41	4.8	Yrs.	$	1,932

	2018				2017

	Number of Restricted Stock		Weighted-Average Grant Date Fair Value		Number of Restricted Stock		Weighted-Average Grant Date Fair Value
Non-vested, January 1,		30,415	$	24.46		28,035	$	20.64
Granted		-		-		-		-
Vested		-		-		-		-
Forfeited		-		-		-		-
Non-vested, June 30,		30,415	$	24.46		28,035	$	20.64

	Unrealized gains (losses) on available for sale securities (a)
Balance as of March 31, 2017	$	(3,317	)
Other comprehensive income before reclassification		1,805
Amount reclassified from accumulated other comprehensive income		(20	)
Total other comprehensive income		1,785
Balance as of June 30, 2017	$	(1,532	)

	Unrealized gains (losses) on available for sale securities (a)
Balance as of December 31, 2016	$	(4,119	)
Other comprehensive income before reclassification		2,611
Amount reclassified from accumulated other comprehensive loss		(24	)
Total other comprehensive income		2,587
Balance as of June 30, 2017	$	(1,532	)

Details about other comprehensive income	Amount Reclassified From Accumulated Other Comprehensive Income (Loss) (a)						Affected Line Item in Consolidated Statements of Income

	Three months ended June 30,
	2018			2017
Unrealized gains on available for sale securities	$	58		$	31		Net realized gains on sales of securities
		(12	)		(11	)	Income tax expense
	$	46		$	20

	Six months ended June 30,
		2018			2017
Unrealized gains on available for sale securities	$	200		$	37		Net realized gains on sales of securities
		(42	)		(13	)	Income tax expense
	$	158		$	24

(in thousands)	June 30,
	2018		2017

Commitments to grant loans	$	43,280	$	51,583
Unfunded commitments under lines of credit		72,359		69,171
Standby letters of credit		5,733		7,802
	$	121,372	$	128,556

		June 30, 2018
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
Available for Sale:
States and political subdivisions		$	104,115	$	477	$	(2,620	)	$	101,972
Corporate obligations			8,980		-		(270	)		8,710
Mortgage-backed securities-government sponsored entities			155,725		3		(6,968	)		148,760
Total debt securities		$	268,820	$	480	$	(9,858	)	$	259,442

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Gross realized gains	$	58	$	31	$	200	$	43
Gross realized losses		-		-		-		(6	)
Net realized gain	$	58	$	31	$	200	$	37
Proceeds from sales of securities	$	3,822	$	1,831	$	14,583	$	1,835

(Tax-Equivalent Basis,	Three Months Ended June 30,
dollars in thousands)	2018									2017
	Average Balance (2)			Interest (1)			Average Rate (3)			Average Balance (2)			Interest (1)			Average Rate (3)
Assets
Interest-earning assets:
Interest-bearing deposits with banks Securities available for sale:	$	9,488		$	43			1.81	%	$	9,717		$	24			0.99	%
Taxable		169,851			912			2.15			181,979			911			2.00
Tax-exempt (1)		103,189			790			3.06			122,285			1,094			3.58
Total securities available for sale (1)		273,040			1,702			2.49			304,264			2,005			2.64
Loans receivable (1) (4) (5)		788,026			8,960			4.55			724,125			8,096			4.47
Total interest-earning assets		1,070,554			10,705			4.00			1,038,106			10,125			3.90
Non-interest earning assets:
Cash and due from banks		14,534									13,517
Allowance for loan losses		(8,287	)								(7,197	)
Other assets		67,442									76,954
Total non-interest earning assets		73,689									83,274
Total Assets	$	1,144,243								$	1,121,380
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand and money market	$	242,552		$	113			0.19		$	251,904		$	100			0.16
Savings		185,039			23			0.05			199,015			25			0.05
Time		317,294			916			1.15			288,191			672			0.93
Total interest-bearing deposits		744,885			1,052			0.56			739,110			797			0.43
Short-term borrowings		33,772			38			0.45			33,917			28			0.33
Other borrowings		31,541			131			1.66			26,944			101			1.50
Total interest-bearing liabilities		810,198			1,221			0.60			799,971			926			0.46
Non-interest bearing liabilities:
Demand deposits		209,743									196,129
Other liabilities		9,260									9,590
Total non-interest bearing liabilities		219,003									205,719
Stockholders' equity		115,042									115,690
Total Liabilities and Stockholders' Equity	$	1,144,243								$	1,121,380

Net interest income (tax equivalent basis)					9,484			3.40	%					9,199			3.44	%
Tax-equivalent basis adjustment					(269	)								(543	)
Net interest income				$	9,215								$	8,656
Net interest margin (tax equivalent basis)								3.54	%								3.54	%

(dollars in thousands)	Three months ended
	June 30, 2018 to June 30, 2017
Net income three months ended June 30, 2017	$	2,724
Change due to:
Net interest income		559
Provision for loan losses		175
Net gains on sales		(40	)
Other income		158
Salaries and employee benefits		(194	)
Occupancy, furniture and equipment		(48	)
Foreclosed real estate		38
All other expenses		(19	)
Income tax expense		160

Net income three months ended June 30, 2018	$	3,513

(dollars in thousands)	Six months ended
	June 30, 2018 to June 30, 2017
Net income six months ended June 30, 2017	$	5,100
Change due to:
Net interest income		868
Provision for loan losses		225
Service charges and fees		131
Net gains on sales		(113	)
Other income		151
Salaries and employee benefits		(438	)
Occupancy, furniture and equipment		(29	)
Foreclosed real estate		629
All other expenses		(18	)
Income tax expense		136

Net income six months ended June 30, 2018	$	6,642

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company ☐

~~(Do not check if a smaller reporting company)~~

Emerging growth company