NORWOOD FINANCIAL CORP - Quarter Report: 2017 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2017

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

For the transition period from to ____________________

Commission file number 0-28364

Norwood Financial Corp.

(Exact name of registrant as specified in its charter)

Pennsylvania		23-2828306
(State or other jurisdiction of		(I.R.S. employer identification no.)
incorporation or organization)

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

Registrant's telephone number, including area code

(570) 253-1455

N/A

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

Indicate by check (x) whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] 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 Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes [X] No [ ]

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

Large accelerated filer [ ] Accelerated filer [ X]

Non-accelerated filer [ ] Smaller reporting company [ ]

(Do not check if a smaller reporting company) Emerging growth company [ ]

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

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

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 November 1, 2017
Common stock, par value $0.10 per share		6,234,939

NORWOOD FINANCIAL CORP.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2017


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

Item 1.	Financial Statements (unaudited)	3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	53
Item 4.	Controls and Procedures	54
PART II -	OTHER INFORMATION

Item 1.	Legal Proceedings	55
Item 1A.	Risk Factors	55
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3.	Defaults Upon Senior Securities	55
Item 4.	Mine Safety Disclosures	55
Item 5.	Other Information	55
Item 6.	Exhibits	55

Signatures		57

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NORWOOD FINANCIAL CORP.

Consolidated Balance Sheets (unaudited)

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



	September 30,			December 31,
	2017			2016
ASSETS
Cash and due from banks	$	13,947		$	14,900
Interest-bearing deposits with banks		368			2,274
Cash and cash equivalents		14,315			17,174

Securities available for sale, at fair value		285,706			302,564
Loans receivable		756,014			713,889
Less: Allowance for loan losses		7,760			6,463
Net loans receivable		748,254			707,426
Regulatory stock, at cost		3,115			2,119
Bank premises and equipment, net		12,922			13,531
Bank owned life insurance		36,839			36,133
Accrued interest receivable		3,729			3,643
Foreclosed real estate owned		4,243			5,302
Goodwill		11,331			11,331
Other intangibles		496			612
Deferred tax asset		8,304			8,989
Other assets		2,699			2,359
TOTAL ASSETS	$	1,131,953		$	1,111,183

LIABILITIES
Deposits:
Non-interest bearing demand	$	212,844		$	191,445
Interest-bearing		711,178			733,940
Total deposits		924,022			925,385
Short-term borrowings		47,229			32,811
Other borrowings		31,771			32,001
Accrued interest payable		1,167			1,069
Other liabilities		10,072			8,838
TOTAL LIABILITIES		1,014,261			1,000,104

STOCKHOLDERS' EQUITY
Common stock, $.10 par value per share,
authorized 10,000,000 shares; issued 2017: 6,246,662 shares, 2016: 4,164,723 shares		625			416
Surplus		47,467			47,682
Retained earnings		71,210			67,225
Treasury stock at cost: 2017: 11,724 shares,
2016: 4,509 shares		(341	)		(125	)
Accumulated other comprehensive loss		(1,269	)		(4,119	)
TOTAL STOCKHOLDERS' EQUITY		117,692			111,079
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,131,953		$	1,111,183

See accompanying notes to the unaudited consolidated financial statements.

NORWOOD FINANCIAL CORP.

Consolidated Statements of Income (unaudited)

(dollars in thousan ds, except per share data)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
INTEREST INCOME
Loans receivable, including fees	$	8,289	$	7,267	$	24,020	$	19,752
Securities		1,605		1,239		4,856		3,008
Other		2		22		37		28
Total interest income		9,896		8,528		28,913		22,788

INTEREST EXPENSE
Deposits		828		677		2,392		1,838
Short-term borrowings		82		65		138		142
Other borrowings		116		216		360		669
Total interest expense		1,026		958		2,890		2,649
NET INTEREST INCOME		8,870		7,570		26,023		20,139
PROVISION FOR LOAN LOSSES		600		450		1,800		1,600
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		8,270		7,120		24,223		18,539

OTHER INCOME
Service charges and fees		1,105		829		3,056		2,000
Income from fiduciary activities		160		126		395		342
Net realized gains on sales of securities		129		-		167		269
Gains on sale of loans, net		-		-		67		54
Gain on sale of deposits		-		-		209		-
Earnings and proceeds on bank owned life insurance		320		283		850		616
Other		144		161		414		408
Total other income		1,858		1,399		5,158		3,689

OTHER EXPENSES
Salaries and employee benefits		3,209		3,070		9,639		7,620
Occupancy, furniture & equipment, net		799		755		2,519		1,736
Data processing and related operations		354		423		1,022		949
Taxes, other than income		233		205		693		535
Professional fees		217		185		706		516
Federal Deposit Insurance Corporation insurance		97		170		283		402
Foreclosed real estate		303		119		1,028		582
Amortization of intangibles		35		34		115		81
Merger related		-		1,659		-		1,664
Other		992		1,059		2,979		2,471
Total other expenses		6,239		7,679		18,984		16,556

INCOME BEFORE INCOME TAXES		3,889		840		10,397		5,672
INCOME TAX EXPENSE		948		228		2,356		1,307
NET INCOME	$	2,941	$	612	$	8,041	$	4,365

BASIC EARNINGS PER SHARE (1)	$	0.47	$	0.10	$	1.29	$	0.77

DILUTED EARNINGS PER SHARE (1)	$	0.47	$	0.10	$	1.28	$	0.77

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

See accompanying notes to the unaudited consolidated financial statements.

NORWOOD FINANCIAL CORP.

Consolidated Statements of Comprehensive Income (unaudited)

(dollars in thousands)



	Three Months Ended
	September 30,
	2017			2016
Net income	$	2,941		$	612
Other comprehensive income (loss):
Investment securities available for sale:
Unrealized holding gain		529			(653	)
Tax effect		(180	)		221
Reclassification of gains recognized in net income		(129	)		-
Tax effect		43			-
Other comprehensive income (loss)		263			(432	)
Comprehensive Income	$	3,204		$	180



	Nine Months Ended
	September 30,
	2017			2016
Net income	$	8,041		$	4,365
Other comprehensive income:
Investment securities available for sale:
Unrealized holding gain		4,486			3,176
Tax effect		(1,526	)		(1,080	)
Reclassification of gains recognized in net income		(167	)		(269	)
Tax effect		57			91
Other comprehensive income		2,850			1,918
Comprehensive Income	$	10,891		$	6,283

See accompanying notes to the unaudited consolidated financial statements.

NORWOOD FINANCIAL CORP.

Consolidated Statements of Changes in Stockholders' Equity (unaudited)

Nine Months Ended September 30, 2017

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



													Accumulated
													Other
	Common Stock						Retained		Treasury Stock				Comprehensive
	Shares		Amount		Surplus		Earnings		Shares		Amount		Income (Loss)		Total
Balance, December 31, 2016		4,164,723	$	416	$	47,682	$	67,225		4,509	$	(125)	$	(4,119)	$	111,079
Net Income		-		-		-		8,041		-		-		-		8,041
Other comprehensive income		-		-		-		-		-		-		2,850		2,850
Cash dividends declared ($0.65 per share) *		-		-		-		(4,037)		-		-		-		(4,037)
Compensation expense related to restricted stock		-		-		107		-		-		-		-		107
Acquisition of treasury stock		-		-		-		-		32,257		(1,290)		-		(1,290)
Stock options exercised		-		-		(308)		-		(28,950)		1,074		-		766
Tax benefit of stock options		-		-		125		-		-		-		-		125
Compensation expense related to stock options		-		-		69		-		-		-		-		69
Stock dividend declared - 50%		2,081,939		209		(208)		(19)		3,908		-		-		(18)
Balance, September 30, 2017		6,246,662	$	625	$	47,467	$	71,210		11,724	$	(341)	$	(1,269)	$	117,692

* Per share data has been restated to give retroactive effect to the 50% stock dividend declared on August 8, 2017.

See accompanying notes to the unaudited consolidated financial statements.

NORWOOD FINANCIAL CORP.

Consolidated Statements of Cash Flows (Unaudited)


(dollars in thousands)
	Nine Months Ended September 30,
	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	8,041		$	4,365
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,800			1,600
Depreciation		703			484
Amortization of intangible assets		115			81
Deferred income taxes		(783	)		155
Net amortization of securities premiums and discounts		1,651			1,039
Net realized gain on sales of securities		(167	)		(269	)
Gain on sale of deposits		(209	)		-
Earnings and proceeds on bank owned life insurance		(850	)		(616	)
Loss on sales and writedowns of fixed assets and foreclosed real estate owned		673			2
Gain on sale of loans		(67	)		(54	)
Loans originated for sale		(1,693	)		(1,685	)
Proceeds from sale of loans originated for sale		1,760			1,739
Compensation expense related to stock options		69			53
Tax benefit of stock options exercised		125			3
Compensation expense related to restricted stock		107			67
(Increase) decrease in accrued interest receivable		(86	)		(1,178	)
Increase (decrease) in accrued interest payable		98			84
Other, net		1,153			2,068
Net cash provided by operating activities		12,440			7,938

CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales		13,027			101,804
Proceeds from maturities and principal reductions on mortgage-backed securities		20,570			18,083
Purchases		(13,905	)		(80,538	)
Purchase of regulatory stock		(3,737	)		(2,675	)
Redemption of regulatory stock		2,741			4,015
Net increase in loans		(42,783	)		(35,325	)
Proceeds from bank-owned life insurance		-			205
Purchase of bank-owned life insurance		-			(2,000	)
Purchase of premises and equipment		(484	)		(337	)
Proceeds from sales of fixed assets and foreclosed real estate owned		777			387
Acquisition, net of cash and cash equivalents acquired		-			11,112
Net cash (used in) provided by investing activities		(23,794	)		14,731

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		12,505			44,072
Deposits sold		(13,659	)		-
Net increase (decrease) in short-term borrowings		14,418			(21,456	)
Repayments of other borrowings		(20,230	)		(18,439	)
Proceeds from other borrowings		20,000			-
Stock options exercised		766			160
Purchase of treasury stock		(1,290	)		(447	)
Cash dividends paid		(4,015	)		(3,436	)
Net cash provided by financing activities		8,495			454
(Decrease) increase in cash and cash equivalents		(2,859	)		23,123

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		17,174			10,010
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	14,315		$	33,133

NORWOOD FINANCIAL CORP.

Consolidated Statements of Cash Flows (Unaudited) (continued)


(dollars in thousands)
	Nine Months Ended September 30,
	2017		2016
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest on deposits and borrowings	$	2,792	$	2,566
Income taxes paid, net of refunds	$	1,825	$	1,135
Supplemental Schedule of Noncash Investing Activities:
Transfers of loans to foreclosed real estate and repossession of other assets	$	112	$	2,953
Cash dividends declared	$	4,037	$	3,567

Merger with Delaware Bancshares, Inc.
Noncash assets acquired:
Securities available-for-sale			$	208,488
Regulatory stock				279
Loans				116,674
Premises and equipment, net				7,292
Accrued interest receivable				1,626
Bank-owned life insurance				14,762
Core deposit intangible				449
Deferred tax assets				3,034
Other assets				2,934
Goodwill				1,964
			$	357,502

Liabilities assumed:
Time deposits			$	71,342
Deposits other than time deposits				255,921
Borrowings				21,232
Accrued interest payable				95
Other liabilities				7,873
				356,463
Net Noncash Assets Acquired				1,039
Cash Acquired			$	14,977

See accompanying notes to the unaudited consolidated financial statements.

Notes to the Unaudited Consolidated Financial Statements

1. Basis of Presentation

The unaudited consolidated financial statements include the accounts of Norwood Financial Corp. (Company) and its wholly-owned subsidiary, Wayne Bank (Bank) and the Bank's wholly-owned subsidiaries, WCB Realty Corp., Norwood Investment Corp., 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. 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 Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. The financial statements reflect, in the opinion of management, all normal, recurring adjustments necessary to present fairly the financial position and results of operations of the Company. The operating results for the three and nine month periods ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 or any other future interim period.

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.

These statements should be read in conjunction with the consolidated financial statements and related notes which are incorporated by reference in the Company's Annual Report on Form 10-K for the year-ended December 31, 2016.

2. 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 share and per share information has been restated to reflect the retroactive effect of the 50% stock dividend declared on August 8, 2017.



(in thousands)	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
Weighted average shares outstanding		6,239			5,967			6,239			5,685
Less: Unvested restricted shares		(28	)		(21	)		(28	)		(21	)
Basic EPS weighted average shares outstanding		6,211			5,946			6,211			5,664


Basic EPS weighted average shares outstanding		6,211			5,946			6,211			5,664
Add: Dilutive effect of stock options		52			14			56			14
Diluted EPS weighted average shares outstanding		6,263			5,960			6,267			5,678

As of September 30, 2017, there were no stock options that would be anti-dilutive to the earnings per share calculations based upon the closing price of Norwood common stock of $30.52 per share on September 30, 2017.

As of September 30, 2016, there were 16,500 anti-dilutive options based on Norwood's closing price of $19.38 per share, after adjusting for the 50% stock dividend declared on August 8, 2017.

3. Stock-Based Compensation

No awards were granted during the nine-month period ending September 30, 2017. As of September 30, 2017, there was $23,000 of total unrecognized compensation cost related to non-vested options granted in 2016 under the 2014 Equity Incentive Plan, which will be fully amortized by December 31, 2017. Compensation costs related to stock options amounted to $69,000 and $53,000 during the nine-month periods ended September 30, 2017 and 2016, respectively.

A summary of stock options from all plans, adjusted for stock dividends declared, is shown below.



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

Outstanding at January 1, 2017	225,669	$	19.46	5.6	Yrs.	$	932
Granted	-		-	-			-
Exercised	(28,950)		26.46	3.1	Yrs.		-
Forfeited	(1,000)		28.55	8.2	Yrs.		-
Outstanding at September 30, 2017	195,719	$	18.38	5.2	Yrs.	$	2,377

Exercisable at September 30, 2017	171,719	$	17.82	4.7	Yrs.	$	2,181

Intrinsic value represents the amount by which the market price of the stock on the measurement date exceeded the exercise price of the option. The stock price was $30.52 as of September 30, 2017 and $22.09 as of December 31, 2016, after adjusting for the 50% stock dividend declared on August 8, 2017.

A summary of the Company's restricted stock activity for the nine-month periods ended September 30, 2017 and 2016 is as follows, after adjusting for the 50% stock dividend declared on August 8, 2017:


	2017			2016
			Weighted-Average			Weighted-Average
	Number of		Grant Date	Number of		Grant Date
	Restricted Stock		Fair Value	Restricted Stock		Fair Value
Non-vested, January 1,	28,035	$	20.64	28,035	$	19.21
Granted	-		-	-		-
Vested	-		-	-		-
Forfeited	-		-	-		-
Non-vested, September 30,	28,035	$	20.64	28,035	$	19.21

The expected future compensation expense relating to the 28,035 shares of non-vested restricted stock outstanding as of September 30, 2017 is $471,000. This cost will be recognized over the remaining vesting period of 4.25 years. Compensation costs related to restricted stock amounted to $107,000 and $67,000 during the nine-month periods ended September 30, 2017 and 2016, respectively.

4. Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in accumulated other comprehensive income (loss) (in thousands) by component net of tax for the three months and nine months ended September 30, 2017 and 2016:



	Unrealized gains (losses) on
	available for sale
	securities (a)
Balance as of December 31, 2016	$	(4,119)
Other comprehensive income before reclassification		2,960
Amount reclassified from accumulated other comprehensive loss		(110)
Total other comprehensive income		2,850
Balance as of September 30, 2017	$	(1,269)


	Unrealized gains (losses) on
	available for sale
	securities (a)
Balance as of December 31, 2015	$	488
Other comprehensive income before reclassification		2,096
Amount reclassified from accumulated other comprehensive income		(178)
Total other comprehensive income		1,918
Balance as of September 30, 2016	$	2,406


	Unrealized gains (losses) on
	available for sale
	securities (a)
Balance as of June 30, 2017	$	(1,532)
Other comprehensive income before reclassification		349
Amount reclassified from accumulated other comprehensive loss		(86)
Total other comprehensive income		263
Balance as of September 30, 2017	$	(1,269)



	Unrealized gains (losses) on
	available for sale
	securities (a)
Balance as of June 30, 2016	$	2,838
Other comprehensive loss before reclassification		(432)
Amount reclassified from accumulated other comprehensive income		-
Total other comprehensive loss		(432)
Balance as of September 30, 2016	$	2,406

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

The following table presents significant amounts reclassified out of each component of accumulated other comprehensive income (loss) (in thousands) for the three months and nine months ended September 30, 2017 and 2016:



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

		Three months ended
		September 30,
		2017		2016
Unrealized gains on available for sale securities	$	129	$	-	Net realized gains on sales of securities
		(43)		-	Income tax expense
	$	86	$	-


		Nine months ended
		September 30,
		2017		2016
Unrealized gains on available for sale securities	$	167	$	269	Net realized gains on sales of securities
		(57)		(91)	Income tax expense
	$	110	$	178

(a) Amounts in parentheses indicate debits to net income

5. Off-Balance Sheet Financial Instruments and Guarantees

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

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

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



(in thousands)	September 30,
	2017		2016

Commitments to grant loans	$	41,990	$	21,764
Unfunded commitments under lines of credit		60,153		62,599
Standby letters of credit		5,919		5,642
	$	108,062	$	90,005

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

The Bank does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Bank, generally, holds collateral and/or personal guarantees supporting these commitments. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of September 30, 2017 for guarantees under standby letters of credit issued is not material.

6. Securities

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



	September 30, 2017
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(In Thousands)
Available for Sale:
U.S. Treasury securities	$	2,002	$	-	$	(6)	$	1,996
States and political subdivisions		119,173		1,548		(1,016)		119,705
Corporate obligations		10,115		39		(65)		10,089
Mortgage-backed securities-
government sponsored entities		156,636		34		(2,990)		153,680
Total debt securities		287,926		1,621		(4,077)		285,470
Equity securities-financial services		185		51		-		236
	$	288,111	$	1,672	$	(4,077)	$	285,706


	December 31, 2016
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

	(In Thousands)
Available for Sale:
U.S. Treasury securities	$	2,005	$	-	$	(8)	$	1,997
States and political subdivisions		127,585		884		(3,368)		125,101
Corporate obligations		10,255		37		(180)		10,112
Mortgage-backed securities-government
sponsored entities		169,124		26		(4,220)		164,930
Total debt securities		308,969		947		(7,776)		302,140
Equity securities-financial services		320		104		-		424
	$	309,289	$	1,051	$	(7,776)	$	302,564

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):



	September 30, 2017
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasury securities	$	-	$	-	$	1,997	$	(6)	$	1,997	$	(6)
States and political subdivisions		45,387		(483)		24,817		(533)		70,204		(1,016)
Corporate obligations		3,697		(28)		3,222		(37)		6,919		(65)
Mortgage-backed securities-government sponsored entities		101,143		(1,541)		50,504		(1,449)		151,647		(2,990)
	$	150,227	$	(2,052)	$	80,540	$	(2,025)	$	230,767	$	(4,077)



	December 31, 2016
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasury securities	$	1,997	$	(8)	$	-	$	-	$	1,997	$	(8)
States and political subdivisions		90,109		(3,362)		205		(6)		90,314		(3,368)
Corporate obligations		6,895		(180)		-		-		6,895		(180)
Mortgage-backed securities-government sponsored entities		152,614		(3,912)		9,967		(308)		162,581		(4,220)
	$	251,615	$	(7,462)	$	10,172	$	(314)	$	261,787	$	(7,776)

At September 30, 2017, the Company has 145 debt securities in an unrealized loss position in the less than twelve months category and 73 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 2017. 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 September 30, 2017 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.



	Available for Sale
	Amortized Cost		Fair Value
		(In Thousands)

Due in one year or less	$	4,643	$	4,663
Due after one year through five years		18,134		18,131
Due after five years through ten years		47,731		47,333
Due after ten years		60,783		61,663

Mortgage-backed securities-government sponsored agencies		156,636		153,680
	$	287,927	$	285,470

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



	Three Months				Nine Months
	Ended September 30,				Ended September 30,
	2017		2016		2017		2016
Gross realized gains	$	129	$	-	$	173	$	269
Gross realized losses		-		-		(6)		-
Net realized gain	$	129	$	-	$	167	$	269
Proceeds from sales of securities	$	11,192	$	70,028	$	13,027	$	101,804

Securities with a carrying value of $205,678,000 and $217,907,000 at September 30, 2017 and 2016, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

7. 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):


	September 30, 2017					December 31, 2016
Real Estate Loans:
Residential	$	235,508		31.1	%	$	237,177		33.2	%
Commercial		344,960		45.6			320,187		44.8
Construction		15,328		2.0			19,709		2.8
Commercial, financial and agricultural		92,979		12.3			85,508		12.0
Consumer loans to individuals		67,492		9.0			51,524		7.2
Total loans		756,267		100.0	%		714,105		100.0	%
Deferred fees, net		(253	)				(216	)
Total loans receivable		756,014					713,889
Allowance for loan losses		(7,760	)				(6,463	)
Net loans receivable	$	748,254				$	707,426

The following table presents the components of the purchase accounting adjustments related to the purchased credit-impaired loans acquired:



(In Thousands)		July 31, 2016

Contractually required principal and interest	$	2,621
Non-accretable discount		(1,014)
Expected cash flows		1,607
Accretable discount		(239)
Estimated fair value	$	1,368

Changes in the accretable yield for purchased credit-impaired loans were as follows for the nine-month period ended September 30 (in thousands):



	2017
Balance at beginning of period	$	208
Additions		-
Accretion		(56)
Reclassification and other		(15)
Balance at end of period	$	137

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



	September 30, 2017		December 31, 2016

Outstanding Balance	$	1,555	$	1,821
Carrying Amount	$	1,256	$	1,386

As a result of the acquisition of Delaware, the Company added $1,397,000 of loans that were accounted for in accordance with ASC 310-30. Based on a review of the loans acquired by senior lending management, which included an analysis of credit deterioration of the loans since origination, the Company recorded a specific credit fair value adjustment of $499,000. For loans that were acquired with specific evidence of deterioration in credit quality, loan losses will be accounted for through a reduction of the specific reserve and will not impact the allowance for loan losses until actual losses exceed the allotted reserves. For loans acquired without a deterioration of credit quality, losses incurred will result in adjustments to the allowance for loan losses through the allowance for loan loss adequacy calculation.

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

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 September 30, 2017 and December 31, 2016, foreclosed real estate owned totaled $4,243,000 and $5,302,000, respectively. During the nine months ended September 30, 2017, there were no consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of September 30, 2017, the Company has initiated formal foreclosure proceedings on eight properties classified as consumer residential mortgages with a carrying value of $494,000.

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
							Commercial		Consumer
	Residential		Commercial		Construction		Loans		Loans		Total
September 30, 2017	(In thousands)

Individually evaluated for impairment	$	23	$	1,382	$	-	$	-	$	-	$	1,405
Loans acquired with deteriorated credit quality		831		425		-		-		-		1,256
Collectively evaluated for impairment		234,654		343,153		15,328		92,979		67,492		753,606
Total Loans	$	235,508	$	344,960	$	15,328	$	92,979	$	67,492	$	756,267



	Real Estate Loans
							Commercial		Consumer
	Residential		Commercial		Construction		Loans		Loans		Total
	(In thousands)
December 31, 2016

Individually evaluated for impairment	$	23	$	2,601	$	-	$	-	$	-	$	2,624
Loans acquired with deteriorated credit quality		821		565		-		-		-		1,386
Collectively evaluated for impairment		236,333		317,021		19,709		85,508		51,524		710,095
Total Loans	$	237,177	$	320,187	$	19,709	$	85,508	$	51,524	$	714,105

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



			Unpaid
	Recorded		Principal		Associated
	Investment		Balance		Allowance
September 30, 2017				(in thousands)
With no related allowance recorded:
Real Estate Loans
Residential	$	23	$	28	$	-
Commercial		1,382		2,263		-
Subtotal		1,405		2,291		-
Total:
Real Estate Loans
Residential		23		28		-
Commercial		1,382		2,263		-
Total Impaired Loans	$	1,405	$	2,291	$	-


			Unpaid
	Recorded		Principal		Associated
	Investment		Balance		Allowance
December 31, 2016				(in thousands)
With no related allowance recorded:
Real Estate Loans
Residential	$	23	$	28	$	-
Commercial		2,601		3,427		-
Subtotal		2,624		3,455		-
Total:
Real Estate Loans
Residential		23		28		-
Commercial		2,601		3,427		-
Total Impaired Loans	$	2,624	$	3,455	$	-

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 September 30, 2017 and 2016 (in thousands):



	Average Recorded				Interest Income
	Investment				Recognized
	2017		2016		2017		2016

Real Estate Loans:
Residential	$	23	$	579	$	-	$	1
Commercial		1,423		3,253		12		33
Total	$	1,446	$	3,832	$	12	$	34

The following table presents the average recorded investment in impaired loans and the related amount of interest income recognized during the nine-month periods ended September 30, 2017 and 2016 (in thousands):



	Average Recorded				Interest Income
	Investment				Recognized
	2017		2016		2017		2016

Real Estate Loans:
Residential	$	23	$	372	$	-	$	3
Commercial		1,465		3,249		41		90
Total	$	1,488	$	3,621	$	41	$	93

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 September 30, 2017, troubled debt restructured loans totaled $1.3 million with no specific reserve. As of December 31, 2016, troubled debt restructured loans totaled $1.5 million with no specific reserve. For the nine month period ended September 30, 2017, there were no new loans identified as troubled debt restructurings. During 2017, 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 $175,000 as of September 30, 2017.

For the nine-month period ended September 30, 2016, there were no new loans identified as troubled debt restructurings. During the 2016 period, the Company recognized write-downs of $2,519,000 on loans previously identified as a troubled debt restructuring.

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.

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 non performance, repossession, or death occurs to raise awareness of a possible credit event. The Company's Loan Review Department is responsible for the timely and accurate risk rating of the loans on an ongoing basis. Every credit which must be approved by Loan Committee or the Board of Directors is assigned a risk rating at time of consideration. Loan Review also annually reviews relationships of $1,500,000 and over to assign or re-affirm risk ratings. Loans in the Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

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 September 30, 2017 and December 31, 2016 (in thousands):



			Special				Doubtful
	Pass		Mention		Substandard		or Loss		Total
September 30, 2017
Commercial real estate loans	$	331,511	$	9,542	$	3,907	$	-	$	344,960
Commercial loans		92,879		20		80		-		92,979
Total	$	424,390	$	9,562	$	3,987	$	-	$	437,939



			Special				Doubtful
	Pass		Mention		Substandard		or Loss		Total
December 31, 2016
Commercial real estate loans	$	310,432	$	5,432	$	4,323	$	-	$	320,187
Commercial loans		84,600		885		23		-		85,508
Total	$	395,032	$	6,317	$	4,346	$	-	$	405,695

For residential real estate loans, construction loans and consumer loans, the Company evaluates credit quality based on the performance of the individual credits. The following table presents the recorded investment in the loan classes based on payment activity as of September 30, 2017 and December 31, 2016 (in thousands):



	Performing		Nonperforming		Total
September 30, 2017
Residential real estate loans	$	234,004	$	1,504	$	235,508
Construction		15,328		-		15,328
Consumer loans		67,492		-		67,492
Total	$	316,824	$	1,504	$	318,328



	Performing		Nonperforming		Total
December 31, 2016
Residential real estate loans	$	235,829	$	1,137	$	237,177
Construction		19,681		28		19,709
Consumer loans		51,524		-		51,524
Total	$	307,034	$	1,165	$	308,410

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 September 30, 2017 and December 31, 2016 (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
September 30, 2017
Real Estate loans
Residential	$	232,909	$	909	$	186	$	-	$	1,504	$	2,599	$	235,508
Commercial		343,754		703		-		-		503		1,206		344,960
Construction		15,328		-		-		-		-		-		15,328
Commercial loans		92,897		40		42		-		-		82		92,979
Consumer loans		67,457		29		6		-		-		35		67,492
Total	$	752,345	$	1,681	$	234	$	-	$	2,007	$	3,922	$	756,267



	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, 2016
Real Estate loans
Residential	$	234,790	$	986	$	264	$	1	$	1,136	$	2,387	$	237,177
Commercial		318,979		445		1		-		762		1,208		320,187
Construction		19,681		-		-		-		28		28		19,709
Commercial loans		85,355		143		10		-		-		153		85,508
Consumer loans		51,456		39		29		-		-		68		51,524
Total	$	710,261	$	1,613	$	304	$	1	$	1,926	$	3,844	$	714,105

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. 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, 2016	$	1,092	$	4,623	$	78	$	307	$	363	$	6,463
Charge Offs		(83)		(308)		(28)		-		(127)		(546)
Recoveries		4		5		12		-		22		43
Provision for loan losses		340		979		35		165		281		1,800
Ending balance, September 30, 2017	$	1,353	$	5,299	$	97	$	472	$	539	$	7,760
Ending balance individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-
Ending balance collectively evaluated for impairment	$	1,353	$	5,299	$	97	$	472	$	539	$	7,760


(In thousands)	Residential Real Estate		Commercial Real Estate		Construction		Commercial		Consumer		Total
Beginning balance, June 30, 2017	$	1,254	$	5,228	$	93	$	360	$	484	$	7,419
Charge Offs		-		(212)		(15)		-		(45)		(272)
Recoveries		1		1		-		-		11		13
Provision for loan losses		98		282		19		112		89		600
Ending balance, September 30, 2017	$	1,353	$	5,299	$	97	$	472	$	539	$	7,760



(In thousands)	Residential Real Estate		Commercial Real Estate		Construction		Commercial		Consumer		Total
Beginning balance, December 31, 2015	$	1,069	$	5,506	$	90	$	397	$	236	$	7,298
Charge Offs		(32)		(2,670)		-		(15)		(71)		(2,788)
Recoveries		4		11		-		-		39		54
Provision for loan losses		15		1,516		(12)		(46)		127		1,600
Ending balance, September 30, 2016	$	1,056	$	4,363	$	78	$	336	$	331	$	6,164
Ending balance individually evaluated for impairment	$	-	$	15	$	-	$	-	$	-	$	15
Ending balance collectively evaluated for impairment	$	1,056	$	4,348	$	78	$	336	$	331	$	6,149


(In thousands)	Residential Real Estate		Commercial Real Estate		Construction		Commercial		Consumer		Total
Beginning balance, June 30, 2016	$	976	$	4,191	$	59	$	293	$	279	$	5,798
Charge Offs		(15)		(28)		-		(15)		(41)		(99)
Recoveries		2		9		-		-		4		15
Provision for loan losses		93		191		19		58		89		450
Ending balance, September 30, 2016	$	1,056	$	4,363	$	78	$	336	$	331	$	6,164

The Company's primary business activity as of September 30, 2017 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.

As of September 30, 2017, the Company considered its concentration of credit risk to be acceptable. The highest concentrations are in commercial rentals with $81.3 million of loans outstanding, or 10.8% of total loans outstanding, and the hospitality/lodging industry with loans outstanding of $53.8 million, or 7.1% of loans outstanding. During 2017, the Company recognized a loss of $212,000 on one loan in the named concentrations which was paid off during the three month period ending September 30, 2017.

The Company did not sell any residential mortgage loans during the first nine months of 2017. Gross realized gains and gross realized losses on sales of residential mortgage loans were $54,000 and $0, respectively, in the first nine months of 2016. The proceeds from the sales of residential mortgage loans totaled $1.7 million for the nine months ended September 30, 2016.

During the nine months ended September 30, 2017, the Company sold $1.7 million of USDA guaranteed commercial real estate loans. The gross realized gain on the sale was $67,000.

The Company did not sell any residential mortgage loans during the three months ended September 30, 2017 or 2016.

8. Fair Value Measurements

Fair value estimates are based on quoted market prices, if available, quoted market prices of similar assets or liabilities, or the present value of expected future cash flows and other valuation techniques. These valuations are significantly affected by discount rates, cash flow assumptions and risk assumptions used. Therefore, fair value estimates may not be substantiated by comparison to independent markets and are not intended to reflect the proceeds that may be realizable in an immediate settlement of the instruments.

Fair value is determined at one point in time and is not representative of future value. These amounts do not reflect the total value of a going concern organization. Management does not have the intention to dispose of a significant portion of its assets and liabilities and therefore, the unrealized gains or losses should not be interpreted as a forecast of future earnings and cash flows.

The following is a discussion of assets and liabilities measured at fair value and valuation techniques applied:

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/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, management's best estimate is used. Management's best estimate consists of both internal and external support on certain Level 3 investments. Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) are used to support fair values of certain Level 3 investments, if applicable.

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.

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.

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2017 and December 31, 2016 are as follows:



	Fair Value Measurement Using
	Reporting Date


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

September 30, 2017
Available for Sale:
U.S. Treasury securities	$	1,996	$	-	$	1,996	$	-
States and political subdivisions		119,705		-		119,705		-
Corporate obligations		10,089		-		10,089		-
Mortgage-backed securities-government
sponsored agencies		153,680		-		153,680		-
Equity securities-financial services		236		236		-		-
Total	$	285,706	$	236	$	285,470	$	-


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

December 31, 2016
Available for Sale:
U.S. Treasury securities	$	1,997	$	-	$	1,997	$	-
States and political subdivisions		125,101		-		125,101		-
Corporate obligations		10,112		-		10,112		-
Mortgage-backed securities-government
sponsored agencies		164,930		-		164,930		-
Equity securities-financial services		424		424		-		-
Total	$	302,564	$	424	$	302,140	$	-

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2017 and December 31, 2016 are as follows:



			Fair Value Measurement Reporting Date using Reporting Date

(In thousands)

Description	Total		Level 1		Level 2		Level 3
September 30, 2017
Impaired Loans	$	1,405	$	-	$	-	$	1,405
Foreclosed Real Estate Owned		4,243		-		-		4,243


December 31, 2016
Impaired Loans	$	2,624	$	-	$	-	$	2,624
Foreclosed Real Estate Owned		5,302		-		-		5,302

The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:



		Quantitative Information about Level 3 Fair Value Measurements
(dollars in thousands)	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
September 30, 2017
Impaired loans	$	279	Appraisal of collateral(1)	Appraisal adjustments(2)	10% (10%)
Impaired loans	$	1,126	Present value of future cash flows	Loan discount rate	4.00 - 5.25% (5.11%)
				Probability of default	0%

Foreclosed real estate owned	$	4,243	Appraisal of collateral(1)	Liquidation Expenses(2)	0%



	Quantitative Information about Level 3 Fair Value Measurements
(dollars in thousands)	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
December 31, 2016
Impaired loans	$	1,473	Appraisal of collateral(1)	Appraisal adjustments(2)	10% (10%)
Impaired loans	$	1,151	Present value of future cash flows	Loan discount rate	4.00 - 5.25% (5.11%)
				Probability of default	0%

Foreclosed real estate owned	$	5,302	Appraisal of collateral(1)	Liquidation Expenses(2)	10%

(1)	Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable, less any associated allowance.

(2)	Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

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 September 30, 2017 and December 31, 2016.

Cash and cash equivalents (carried at cost):

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

Securities:

Loans receivable (carried at cost):

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

Impaired loans (generally carried at fair value):

As of September 30, 2017, the fair value investment in impaired loans totaled $1,405,000 which included six loan relationships that did not require a valuation allowance since either the estimated realizable value of the collateral or the discounted cash flows exceeded the recorded investment in the loan. As of September 30, 2017, the Company has recognized charge-offs against the allowance for loan losses on these impaired loans in the amount of $886,000 over the life of the loans.

As of December 31, 2016, the fair value investment in impaired loans totaled $2,624,000 which included seven loans that did not require a valuation allowance since the estimated realizable value of the collateral exceeded the recorded investment in the loan. As of December 31, 2016, the Company had recognized charge-offs against the allowance for loan losses on these impaired loans in the amount of $831,000 over the life of the loans.

Mortgage servicing rights (generally carried at cost)

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

Foreclosed real estate owned (carried at fair value):

Regulatory 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 except certificates of deposit which are at fair value):

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

Short-term borrowings (carried at cost):

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

Other borrowings (carried at cost):

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

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

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

The estimated fair values of the Bank's financial instruments were as follows at September 30, 2017 and December 31, 2016. (In thousands)



	Fair Value Measurements at September 30, 2017
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	14,315	$	14,315	$	14,315	$	-	$	-
Securities		285,706		285,706		236		285,470		-
Loans receivable, net		748,254		751,637		-		-		751,637
Mortgage servicing rights		208		239		-		-		239
Regulatory stock		3,115		3,115		3,115		-		-
Bank owned life insurance		36,839		36,839		36,839		-		-
Accrued interest receivable		3,729		3,729		3,729		-		-

Financial liabilities:
Deposits		924,022		923,452		647,046		-		276,406
Short-term borrowings		47,229		47,229		47,229		-		-
Other borrowings		31,771		31,549		-		-		31,549
Accrued interest payable		1,167		1,167		1,167		-		-

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



	Fair Value Measurements at December 31, 2016
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	17,174	$	17,174	$	17,174	$	-	$	-
Securities		302,564		302,564		424		302,140		-
Loans receivable, net		707,426		716,661		-		-		716,661
Mortgage servicing rights		232		250		-		-		250
Regulatory stock		2,119		2,119		2,119		-		-
Bank owned life insurance		36,133		36,133		36,133		-		-
Accrued interest receivable		3,643		3,643		3,643		-		-

Financial liabilities:
Deposits		925,385		925,561		629,829		-		295,732
Short-term borrowings		32,811		32,811		32,811		-		-
Other borrowings		32,001		31,863		-		-		31,863
Accrued interest payable		1,069		1,069		1,069		-		-

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

9. New and 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. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities, we do not expect the new standard, or any of the amendments, to result in a material change from our current accounting for revenue because the majority of the Company's financial instruments are not within the scope of Topic 606. However, we do expect that the standard will result in new disclosure requirements, which are currently being evaluated.

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606). The amendments in this Update defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company is evaluating the effect of adopting this new accounting Update.

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. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of the standard will have on the Company's financial position or results of operations.

In February 2016, the FASB issued ASU 2016-02, 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 a right-of-use asset

representing its right to use the underlying asset for the lease term. A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently assessing the practical expedients it may elect at adoption, but does not anticipate the amendments will have a significant impact on the financial statements. Based on the Company's preliminary analysis of its current portfolio, the impact to the Company's balance sheet is estimated to result in less than a 1 percent increase in assets and liabilities. The Company also anticipates additional disclosures to be provided at adoption.

In March 2016, the FASB issued ASU 2016-04, Liabilities – Extinguishments of Liabilities (Subtopic 405-20). The standard provides that liabilities related to the sale of prepaid stored-value products within the scope of this Update are financial liabilities. The amendments in the Update provide a narrow-scope exception to the guidance in Subtopic 405-20 to require that breakage for those liabilities be accounted for consistent with the breakage guidance in Topic 606. The amendments in this Update are effective for public business entities, certain not-for-profit entities, and certain employee benefit plans for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Earlier application is permitted, including adoption in an interim period. This Update is not expected to have a significant impact on the Company's financial statements.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606). The amendments in this Update affect entities with transactions included within the scope of Topic 606, which includes entities that enter into contracts with customers to transfer goods or services (that are an output of the entity's ordinary activities) in exchange for consideration. The amendments in this Update do not change the core principle of the guidance in Topic 606; they simply clarify the implementation guidance on principal versus agent considerations. The amendments in this Update are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements of Update 2014-09. ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. 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 April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606). The amendments in this Update affect entities with transactions included within the scope of Topic 606, which includes entities that enter into contracts with customers to transfer goods or services in exchange for consideration. The amendments in this Update do not change the core principle for revenue recognition in Topic 606. Instead, the amendments provide (1) more detailed guidance in a few areas and (2) additional implementation guidance and examples based on feedback the FASB received from its stakeholders. The amendments are expected to reduce the degree of judgment necessary to comply with Topic 606, which the FASB expects will reduce the potential for diversity arising in practice and reduce the cost and complexity of applying the guidance. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers

(Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. 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 May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606), which among other things clarifies the objective of the collectability criterion in Topic 606, as well as certain narrow aspects of Topic 606. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. This Update is not expected to have a significant impact on the Company's financial statements

In June 2016, the FASB issued ASU 2016-13, 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. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing diversity in practice. Among these include recognizing cash payments for debt prepayment or debt extinguishment as cash outflows for financing activities; cash proceeds received from the settlement of insurance claims should be classified on the basis of the related insurance coverage; and cash proceeds received from the settlement of bank-owned life insurance policies should be classified as cash inflows from investing activities while the cash payments for premiums on bank-owned policies may be classified as cash outflows for investing activities, operating activities, or a combination of investing and operating activities. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact the adoption of the standard will have on the Company's statement of cash flows.

In October 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), which requires that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in this Update should be applied using a retrospective transition method to each period presented. The Company is currently evaluating the impact the adoption of the standard will have on the Company's statement of cash flows.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business, which provides a more robust framework to use in determining when a set of assets and activities (collectively referred to as a "set") is a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. Public business entities should apply the amendments in this Update to annual periods beginning after December 15, 2017, including interim periods within those periods. All other entities should apply the amendments to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The amendments in this Update should be applied prospectively on or after the effective date. This Update is not expected to have a significant impact on the Company's financial statements.

In January 2017, the FASB issued ASU 2017-04, 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, including not-for-profit entities, that are adopting the amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. This Update is not expected to have a significant impact on the Company's financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). 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 May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718), which affects any entity that changes the terms or conditions of a share-based payment award. This Update amends the definition of modification by qualifying that modification accounting does not apply to changes to outstanding share-based payment awards that do not affect the total fair value, vesting requirements, or equity/liability classification of the awards. The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied prospectively to an award modified on or after the adoption date. This Update is not expected to have a significant impact on the Company's financial statements.

In May 2017, the FASB issued ASU 2017-10, Service Concession Arrangements (Topic 853), which applies to the accounting by operating entities for service concession arrangements within the scope of Topic 853. The amendments in this Update clarify that the grantor (government), rather than the third-party drivers, is the customer of the operation services in all cases for service concession arrangements within the scope of Topic 853. For an entity that has not adopted Topic 606 before the issuance of this Update, the effective date and transition requirements for the amendments in this Update generally are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by ASU 2014-09, Revenue from Contracts with Customers (Topic 606)). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, deferred the effective date of Update 2014-09 by one year. This Update is not expected to have a significant impact on the Company's financial statements.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivative and Hedging (Topic 815). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down-round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down-round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity's own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down-round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share ("EPS") in accordance with Topic 260 to recognize the effect of the down-round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down- round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Accounting Standards Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of

the beginning of the fiscal year that includes that interim period. The amendments in Part I of this Update should be applied either retrospectively to outstanding financial instruments with a down-round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first fiscal year and interim period(s) in which the pending content that links to this paragraph is effective or retrospectively to outstanding financial instruments with a down-round feature for each prior reporting period presented in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10. The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect. This Update is not expected to have a significant impact on the Company's financial statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 850), the objective of which is to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. In addition, the amendments in this Update make certain targeted improvements to simplify the application and disclosure of the hedge accounting guidance in current general accepted accounting principles. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. Early application is permitted in any period after issuance. For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the amendments in this Update. The amended presentation and disclosure guidance is required only prospectively.

10. Acquisition of Delaware Bancshares, Inc.

On July 31, 2016, Norwood Financial Corp. (the "Company") closed on its acquisition of Delaware Bancshares, Inc. ("Delaware") pursuant to the terms of the Agreement and Plan of Merger, dated March 10, 2016, by and among the Company, Wayne Bank, Delaware and The National Bank of Delaware County (the "Merger Agreement").

Pursuant to the terms of the Merger Agreement, Delaware was merged with and into the Company, with the Company as the surviving corporation of the merger (the "Merger"). At the effective time of the Merger, each outstanding share of the common stock of Delaware was converted into, at the election of the holder but subject to the limitations and allocation and proration provisions set forth in the Merger Agreement, either $16.68 in cash or 0.6221 of a share of the common stock, par value $0.10 per share (the "Common Stock") of the Company. In the aggregate, the merger consideration paid to Delaware shareholders consisted of approximately $3,860,000 in cash and 431,605 shares of Norwood common stock. Immediately following the Merger, The National Bank of Delaware County ("NBDC") was merged with and into Wayne Bank, a wholly-owned subsidiary of the Company, with Wayne Bank as the surviving entity.

In connection with the Merger, the Company assumed the obligations of Delaware under the Indenture, dated as of October 31, 2007, by and between Delaware, as issuer, and Wells Fargo Bank, National Association, as trustee (the "Indenture") and Delaware's Junior Subordinated Debt Securities, due January 1, 2038 (the "Debt Securities") issued thereunder. The Debt Securities were issued by Delaware in connection with a private placement completed on October 31, 2007 of $8.0 million of trust preferred securities issued through the Delaware Bancshares Capital Trust I (the "Trust"). The proceeds from the initial sale of the trust preferred securities on October 31, 2007 were used by the Trust to purchase the Debt Securities. The Debt Securities bore interest at a variable rate which reset quarterly at LIBOR plus 2.4%, and were redeemable, in whole or in part, without penalty, at the option of the Company, beginning on January 1, 2013 and on any January 1, April 1, July 1 or October 1 thereafter. The interest payments on the Debt Securities made by the Company were

used to pay the quarterly distributions payable by the Trust to the holders of the trust preferred securities. The Company redeemed the debt securities and the trust preferred securities in full on October 3, 2016.

The acquired assets and assumed liabilities were measured at estimated fair values. Management made significant estimates and exercised significant judgment in accounting for the acquisition. Management measured loan fair values based on loan file reviews, appraised collateral values, expected cash flows, and historical loss factors of NBDC. The Company also recorded an identifiable intangible asset representing the core deposit base of NBDC based on management's evaluation of the cost of such deposits relative to alternative funding sources. Management used significant estimates including the average lives of depository accounts, future interest rate levels, and the cost of servicing various depository products. Management used market quotations to determine the fair value of investment securities.

The business combination resulted in the acquisition of loans with and without evidence of credit quality deterioration. NBDC loans were deemed impaired at the acquisition date if the Company did not expect to receive all contractually required cash flows due to concerns about credit quality. Such loans were fair valued and the difference between contractually required payments at the acquisition date and cash flows expected to be collected was recorded as a non-accretable difference. At the acquisition date, the Company recorded $1,410,000 of purchased credit-impaired loans subject to a non-accretable difference of $260,000. The method of measuring carrying value of purchased loans differs from loans originated by the Company (originated loans), and as such, the Company identifies purchased loans and purchased loans with a credit quality discount and originated loans at amortized cost.

NBDC's loans without evidence of credit deterioration were fair valued by discounting both expected principal and interest cash flows using an observable discount rate for similar instruments that a market participant would consider in determining fair value. Additionally, consideration was given to management's best estimates of default rates and payment speeds. At acquisition, NBDC's loan portfolio without evidence of deterioration totaled $111,307,000 and was recorded at a fair value of $109,693,000.

The following table summarizes the purchase of Delaware Bancshares, Inc. as of July 31, 2016:



(Dollars in Thousands, Except Per Share Data)

Purchase Price Consideration in Common Stock
Delaware Bancshares, Inc. common shares settled for stock		694,114
Exchange Ratio		0.6221
Norwood Financial Corp. shares issued		431,605
Value assigned to each Norwood Financial Corp. common share	$	28.15
Purchase price assigned to Delaware Bancshares, Inc. common shares			$	12,150
exchanged for Norwood Financial Corp. shares

Purchase Price Consideration - Cash for Common Stock
Delaware Bancshares, Inc. shares exchanged for cash		231,385
Purchase price paid to each Delaware Bancshares, Inc. common share exchanged for cash	$	16.68
Purchase price assigned to Delaware Bancshares, Inc. common shares exchanged for cash			$	3,860
Purchase price consideration - Cash-in-lieu of Fractional Shares				6
Total Purchase Price			$	16,016

Net Assets Acquired:

Delaware Bancshares, Inc. shareholders' equity	$	19,357
Delaware Bancshares, Inc. goodwill and intangibles		(7,640)
Total tangible equity		11,717

Adjustments to reflect assets acquired at fair value:
Investments		219
Loans
Interest rate		1,486
General credit		(1,614)
Specific credit - non-amortizing		(260)
Specific credit - amortizing		(239)
Core deposit intangible		449
Deferred loan fees		(296)
Premises and equipment		3,053
Allowance for loan and lease losses		1,651
Deferred tax assets		(1,417)
Other		(97)

Adjustments to reflect liabilities acquired at fair value:
Time deposits		(252)
				14,400
Goodwill resulting from merger			$	1,616

The following condensed statement reflects the values assigned to Delaware Bancshares, Inc. net assets as of acquisition date:



(In Thousands)

Total purchase price			$	16,016

Net assets acquired:
Cash	$	14,977
Securities available for sale		208,488
Loans		116,674
Premises and equipment, net		7,292
Regulatory stock		279
Accrued interest receivable		1,626
Bank-owned life insurance		14,762
Core deposit intangible		449
Deferred tax assets		3,034
Other assets		3,282
Time deposits		(71,342)
Deposits other than time deposits		(255,921)
Borrowings		(21,232)
Accrued interest payable		(95)
Other liabilities		(7,873)
				14,400

Goodwill resulting from Delaware Bancshares, Inc. Merger			$	1,616

The Company recorded goodwill and other intangibles associated with the purchase of Delaware Bancshares, Inc. totaling $1,616,000. Goodwill is not amortized, but is periodically evaluated for impairment. The Company did not recognize any impairment during the nine months ended September 30, 2017. The carrying amount of the goodwill at September 30, 2017 related to the Delaware acquisition was $1,616,000.

Identifiable intangibles are amortized to their estimated residual values over the expected useful lives. Such lives are also periodically reassessed to determine if any amortization period adjustments are required. During the nine months ended September 30, 2017, no such adjustments were recorded. The identifiable intangible assets consist of a core deposit intangible which is being amortized on an accelerated basis over the useful life of such assets. The gross carrying amount of the core deposit intangible at September 30, 2017 was $449,000 with $94,000 accumulated amortization as of that date.

As of September 30, 2017, the estimated future amortization expense for the core deposit intangible is:



(In thousands)

2017	$	18
2018		70
2019		62
2020		54
2021		46
After five years		105
	$	355

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
	•	availability of capital
	•	regional economic factors
	•	loss of senior officers
	•	comparatively low legal lending limits
	•	risks of new capital requirements
	•	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 cost
	•	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, 2016 (incorporated by reference in Item 8 of the Form 10-K) lists significant accounting policies used in the development and presentation of its financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, the fair value of financial instruments, the determination of goodwill impairment and the determination of other-than-temporary impairment on securities. 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. Although realization is not assured, the Company believes that it is more likely than not that all deferred tax assets will be realized.

Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each Consolidated Balance Sheet date.

Declines in the fair value of available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, 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 September 30, 2017 and December 31, 2016 represent temporary impairment of the securities, related to changes in interest rates.

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 restricted stock has no quoted market value and is carried at cost.

Management evaluates the restricted stock for impairment. Management's determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the

FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB.

Management considered that the FHLB's regulatory capital ratios have increased from prior years, liquidity appears adequate, and the new shares of FHLB stock continue to change hands at the $100 par value. Management believes no impairment charge is necessary related to FHLB stock as of September 30, 2017.

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 September 30, 2017 were $1.132 billion compared to $1.111 billion as of December 31, 2016. The increase was due primarily to loan growth.

Securities

The fair value of securities available for sale as of September 30, 2017 was $285.7 million compared to $302.6 million as of December 31, 2016. 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 Sale) consisted of the following:



	September 30, 2017				December 31, 2016
(dollars in thousands)		Amount	% of portfolio			Amount	% of portfolio

U.S. Treasury securities	$	1,996	0.7	%	$	1,997	0.7	%
States and political subdivisions		119,705	41.9			125,101	41.4
Corporate obligations		10,089	3.5			10,112	3.3
Mortgage-backed securities-
government sponsored entities		153,680	53.8			164,930	54.5
Equity securities-financial services		236	0.1			424	0.1
Total	$	285,706	100.0	%	$	302,564	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 $756.0 million at September 30, 2017 compared to $713.9 million as of December 31, 2016. The increase in loans receivable reflects a $24.8 million increase in commercial real estate loans and a $16.0 million increase in consumer loans.

The allowance for loan losses totaled $7,760,000 as of September 30, 2017 and represented 1.03% of total loans outstanding, compared to $6,463,000, or 0.91% of total loans, at December 31, 2016. The Company had net charge-offs for the nine months ended September 30, 2017 of $503,000 compared to $2,734,000 in the corresponding period in 2016. 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 September 30, 2017 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 September 30, 2017, non-performing loans totaled $2.0 million, or 0.27% of total loans compared to $1.9 million, or 0.27%, of total loans at December 31, 2016. At September 30, 2017, non-performing assets totaled $6.2 million, or 0.55%, of total assets compared to $7.2 million, or 0.64%, of total assets at December 31, 2016.

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



(dollars in thousands)	September 30, 2017			December 31, 2016
Loans accounted for on a non-accrual basis:
Real Estate
Residential	$	1,504		$	1,136
Commercial		503			762
Construction		-			28
Commercial, financial and agricultural		-			-
Consumer loans to individuals		-			-
Total non-accrual loans *		2,007			1,926

Accruing loans which are contractually
past due 90 days or more		-			1
Total non-performing loans		2,007			1,927
Foreclosed real estate		4,243			5,302
Total non-performing assets	$	6,250		$	7,229
Allowance for loans losses	$	7,760		$	6,463
Coverage of non-performing loans		386.65	%		335.39	%
Non-performing loans to total loans		0.27	%		0.27	%
Non-performing loans to total assets		0.18	%		0.17	%
Non-performing assets to total assets		0.55	%		0.64	%

*Includes non-accrual TDRs of $321,000 as of September 30, 2017 and $477,000 on December 31, 2016. The Company also had $1.0 million of accruing TDRs on September 30, 2017 and December 31, 2016.

Deposits

During the nine-month period ending September 30, 2017, total deposits decreased $1.4 million due primarily to a $22.5 million decrease in time deposits over $100,000 due to the seasonal nature of the deposits, while all other deposits increased $21.1 million including a $21.4 million increase in non-interest bearing demand deposits. During the first quarter of 2017, the Company sold a community office and its $13.7 million of deposits, including $11.5 million of certificates of deposit.

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



(dollars in thousands)	September 30, 2017		December 31, 2016

Non-interest bearing demand	$	212,844	$	191,445
Interest bearing demand		85,546		93,485
Money market deposit accounts		157,710		153,020
Savings		190,945		191,878
Time deposits <$100,000		161,500		157,564
Time deposits >$100,000		115,477		137,993

Total	$	924,022	$	925,385

Borrowings

Other borrowings as of September 30, 2017 totaled $31.8 million compared to $32.0 million as of December 31, 2016. Short-term borrowings, which consist of securities sold under agreements to repurchase and overnight borrowings from the FHLB, increased $14.4 million due to a $17.9 million increase in overnight borrowings partially offset by a $3.5 million decrease in repurchase agreement balances.

Other borrowings consisted of the following:

(dollars in thousands)



	September 30, 2017		December 31, 2016
Notes with the FHLB:
Convertible note due January 2017 at 4.710%	$	-	$	10,000
Amortizing fixed rate borrowing due December 2017 at 1.275%		1,011		4,025
Amortizing fixed rate borrowing due January 2018 at 0.910%		204		662
Amortizing fixed rate borrowing due December 2018 at 1.425%		1,027		1,634
Amortizing fixed rate borrowing due January 2019 at 1.393%		6,698		-
Term fixed rate borrowing due August 2019 at 1.606%		10,000		-
Amortizing fixed rate borrowing due June 2020 at 1.490%		5,592		7,078
Amortizing fixed rate borrowing due December 2020 at 1.706%		3,298		4,034
Amortizing fixed rate borrowing due March 2022 at 1.748%		3,941		4,568
	$	31,771	$	32,001

Stockholders' Equity and Capital Ratios

As of September 30, 2017, stockholders' equity totaled $117.7 million, compared to $111.1 million as of December 31, 2016. The net change in stockholders' equity included $8.0 million of net income that was partially offset by $4.0 million of dividends declared, and a $1.3 million decrease due to the acquisition of Treasury Stock, and a $1.1 million increase, net, due to the exercise and vesting of stock options and restricted stock. In addition, total equity increased $2.8 million due to an increase in the fair value of securities in the available for sale portfolio, net of tax. This 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 and year-end period.

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



	September 30, 2017	December 31, 2016
Tier 1 Capital
(To average assets)	9.39%	9.16%
Tier 1 Capital
(To risk-weighted assets)	13.15%	13.27%
Common Equity Tier 1 Capital
(To risk-weighted assets)	13.15%	13.27%
Total Capital
(To risk-weighted assets)	14.12%	14.12%

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" securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt out is exercised which the Company and the Bank have done. The final rule limits a banking organization's dividends, stock repurchases and other capital distributions, and certain discretionary bonus payments to executive officers, if the banking organization does not hold a "capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above regulatory minimum risk-based requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective. The Company and the Bank are in compliance with their respective new capital requirements, including the capital conservation buffer, as of September 30, 2017.

Liquidity

As of September 30, 2017, the Company had cash and cash equivalents of $14.3 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 $285.7 million which could be used for liquidity needs. This totals $300.0

million of liquidity and represents 26.5% of total assets compared to $319.8 million and 28.8% of total assets as of December 31, 2016. The Company also monitors other liquidity measures, all of which were within the Company's policy guidelines as of September 30, 2017 and December 31, 2016. 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, 2018. There were no borrowings under this line as of September 30, 2017 and December 31, 2016.

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 September 30, 2017 and December 31, 2016.

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 September 30, 2017 and December 31, 2016.

The Bank's maximum borrowing capacity with the Federal Home Loan Bank was approximately $354,145,000 as of September 30, 2017, of which $49,699,000 and $32,001,000 was outstanding at September 30, 2017 and December 31, 2016, respectively. Advances 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 are non-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 34%. 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 and tax-exempt sources and is consistent with industry practice. Net interest income (fte) is reconciled to GAAP net interest income on pages 45 and 49. Although the Company believes that these non-GAAP financial measures enhance investors' understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP measures.

Results of Operations

NORWOOD FINANCIAL CORP.

Consolidated Average Balance Sheets with Resultant Interest and Rates



(Tax-Equivalent Basis,	Three Months Ended September 30,
dollars in thousands)	2017						2016
	Average				Average		Average				Average
	Balance		Interest		Rate		Balance		Interest		Rate
	(2)		(1)		(3)		(2)		(1)		(3)
Assets
Interest-earning assets:
Interest bearing deposits with banks	$	695	$	2		1.15%	$	15,756	$	22		0.53%
Securities available for sale:
Taxable		180,029		877		1.95		141,751		625		1.77
Tax-exempt (1)		120,930		1,103		3.65		100,538		930		3.70
Total securities available for sale (1)		300,959		1,980		2.63		242,289		1,555		2.57
Loans receivable (1) (4) (5)		744,395		8,463		4.55		661,781		7,437		4.50
Total interest-earning assets		1,046,049		10,445		3.99		919,826		9,014		3.92
Non-interest earning assets:
Cash and due from banks		14,768						13,340
Allowance for loan losses		(7,701)						(5,980)
Other assets		77,923						73,091
Total non-interest earning assets		84,990						80,451
Total Assets	$	1,131,039					$	1,000,277
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest bearing demand and money market	$	243,571	$	103		0.17	$	231,303	$	91		0.16
Savings		192,826		24		0.05		155,896		23		0.06
Time		279,023		701		1.00		245,406		563		0.92
Total interest-bearing deposits		715,420		828		0.46		632,605		677		0.43
Short-term borrowings		49,826		82		0.66		34,192		65		0.76
Other borrowings		30,035		116		1.54		35,386		216		2.44
Total interest-bearing liabilities		795,281		1,026		0.52		702,183		958		0.55
Non-interest bearing liabilities:
Demand deposits		206,721						171,329
Other liabilities		10,617						12,542
Total non-interest bearing liabilities		217,338						183,871
Stockholders' equity		118,420						114,223
Total Liabilities and Stockholders' Equity	$	1,131,039					$	1,000,277

Net interest income (tax equivalent basis)				9,419		3.48%				8,056		3.37%
Tax-equivalent basis adjustment				(549)						(486)
Net interest income			$	8,870					$	7,570
Net interest margin (tax equivalent basis)						3.60%						3.50%

(1)	Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 34%.

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

(3)	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.

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 September 30, 2017 Compared to
	Three months ended September 30, 2016
	Variance due to
	Volume		Rate		Net

	(dollars in thousands)

Interest earning assets:
Interest bearing deposits with banks	$	(21)	$	1	$	(20)
Securities available for sale:
Taxable		176		76		252
Tax-exempt securities		188		(15)		173
Total securities		364		61		425
Loans receivable		934		92		1,026
Total interest earning assets		1,277		154		1,431

Interest bearing liabilities:
Interest-bearing demand and money market		5		7		12
Savings		6		(5)		1
Time		83		55		138
Total interest bearing deposits		94		57		151
Short-term borrowings		29		(12)		17
Other borrowings		(24)		(76)		(100)
Total interest bearing liabilities		99		(31)		68
Net interest income (tax-equivalent basis)	$	1,178	$	185	$	1,363

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.

Comparison of Operating Results for the Three Months Ended September 30, 2017 to September 30, 2016

General

For the three months ended September 30, 2017, net income totaled $2,941,000 compared to $612,000 earned in the similar period in 2016. The increase in net income for the three months ended September 30, 2017 was due primarily to a $1.3 million improvement in net interest income due to the increased size of the balance sheet resulting from the acquisition of Delaware Bancshares, Inc. in the third quarter of 2016, combined with the $1.7 million of non-recurring merger-related expenses recognized in the 2016 period. Net gains on sales of securities increased $129,000 over the 2016 period, while income tax expense increased $720,000 due to the higher level of pre-tax income. Earnings per share for the current period were $0.47 per share for basic and fully diluted shares compared to $0.10 per share for basic and fully diluted shares for the three months ended September 30, 2016, 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 three months ended September 30, 2017 were 1.03%% and 9.85%, respectively, compared to 0.24% and 2.13%, respectively, for the similar period in 2016.

The following table sets forth changes in net income:



(dollars in thousands)	Three months ended
	September 30, 2017 to September 30, 2016
Net income three months ended September 30, 2016	$	612
Change due to:
Net interest income		1,300
Provision for loan losses		(150)
Net gains on sales		129
Other income		330
Salaries and employee benefits		(139)
Occupancy, furniture and equipment		(44)
Foreclosed real estate		(184)
Merger related		1,659
All other expenses		148
Income tax expense		(720)

Net income three months ended September 30, 2017	$	2,941

Net Interest Income

Net interest income on a fully taxable equivalent basis (fte) for the three months ended September 30, 2017 totaled $9,419,000 which was $1,363,000 higher than the comparable period in 2016. The increase in net interest income includes a $1,026,000 increase in interest income (fte) on loans and a $425,000 increase in interest income (fte) on securities resulting from the acquisition and organic growth. The fte net interest spread and net interest margin were 3.48% and 3.60%, respectively, for the three months ended September 30, 2017 compared to 3.37% and 3.50%, respectively, for the similar period in 2016. The increase in the net interest spread and the net interest margin reflects the mix of the balance sheet resulting from the acquisition and organic growth.

Interest income (fte) totaled $10,445,000 with a yield on average earning assets of 3.99% compared to $9,014,000 and 3.92% for the 2016 period. Average loans increased $82.6 million over the comparable period of last year due to both the acquisition and organic growth, while average securities increased $58.7 million. Average earning assets totaled $1.046 billion for the three months ended September 30, 2017, an increase of $126.2 million over the average for the similar period in 2016 due to the acquisition.

Interest expense for the three months ended September 30, 2017 totaled $1,026,000 at an average cost of 0.52% compared to $958,000 and 0.55% for the similar period in 2016. The decline in average cost reflects the increase in lower costing deposits acquired. The cost of time deposits, which is the most significant component of funding, increased to 1.00% from 0.92% for the similar period in the prior year.

Provision for Loan Losses

The Company's provision for loan losses for the three months ended September 30, 2017 was $600,000 compared to $450,000 for the three months ended September 30, 2016. 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 $259,000 for the quarter ended September 30, 2017 compared to $84,000 for the similar period in 2016.

Other Income

Other income totaled $1,858,000 for the three months ended September 30, 2017 compared to $1,399,000 for the similar period in 2016. Service charges and fees increased $276,000 due primarily to the accounts acquired, while other fee income categories increased $54,000, net. Net gains from sales of securities increased $129,000.

Other Expense

Other expense for the three months ended September 30, 2017 totaled $6,239,000 which was $1,440,000 lower than the same period of 2016 due primarily to $1,659,000 of non-recurring merger-related expenses recognized in the 2016 period. All other operating expenses increased $219,000, net.

Income Tax Expense

Income tax expense totaled $948,000 for an effective tax rate of 24.4% for the period ending September 30, 2017 compared to $228,000 for an effective tax rate of 27.1% for the similar period in 2016. The increase in tax expense reflects an increase in the amount of taxable income, while the decrease in the effective tax rate reflects an increased level of tax-exempt income.

Results of Operations

NORWOOD FINANCIAL CORP.

Consolidated Average Balance Sheets with Resultant Interest and Rates



(Tax-Equivalent Basis,	Nine Months Ended September 30,
dollars in thousands)	2017						2016
	Average				Average		Average				Average
	Balance		Interest		Rate		Balance		Interest		Rate
	(2)		(1)		(3)		(2)		(1)		(3)
Assets
Interest-earning assets:
Interest bearing deposits with banks	$	5,066	$	37		0.97%	$	7,117	$	28		0.52%
Securities available for sale:
Taxable		182,291		2,680		1.96		101,851		1,503		1.97
Tax-exempt (1)		121,884		3,297		3.61		72,763		2,279		4.18
Total securities available for sale (1)		304,175		5,977		2.62		174,614		3,782		2.89
Loans receivable (1) (4) (5)		729,350		24,537		4.49		598,808		20,187		4.49
Total interest-earning assets		1,038,591		30,551		3.92		780,539		23,997		4.10
Non-interest earning assets:
Cash and due from banks		14,067						10,034
Allowance for loan losses		(7,210)						(6,845)
Other assets		76,677						56,345
Total non-interest earning assets		83,534						59,534
Total Assets	$	1,122,125					$	840,073
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand and money market	$	247,849	$	298		0.16	$	195,501	$	243		0.17
Savings		195,850		73		0.05		104,281		42		0.05
Time		287,066		2,021		0.94		213,518		1,553		0.97
Total interest-bearing deposits		730,765		2,392		0.44		513,300		1,838		0.48
Short-term borrowings		39,136		138		0.47		42,931		142		0.44
Other borrowings		29,769		360		1.61		37,656		669		2.37
Total interest bearing liabilities		799,670		2,890		0.48		593,887		2,649		0.59
Non-interest bearing liabilities:
Demand deposits		197,234						132,263
Other liabilities		9,574						6,955
Total non-interest bearing liabilities		206,808						139,218
Stockholders' equity		115,647						106,968
Total Liabilities and Stockholders' Equity	$	1,122,125					$	840,073

Net interest income (tax equivalent basis)				27,661		3.44%				21,348		3.50%
Tax-equivalent basis adjustment				(1,638)						(1,209)
Net interest income			$	26,023					$	20,139
Net interest margin (tax equivalent basis)						3.55%						3.65%

(1)	Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 34%.

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

(3)	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.

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)
	Nine months ended September 30, 2017 Compared to
	Nine months ended September 30, 2016
	Variance due to
	Volume		Rate		Net

	(dollars in thousands)

Interest earning assets:
Interest bearing deposits with banks	$	(12)	$	21	$	9
Securities available for sale:
Taxable		1,182		(5)		1,177
Tax-exempt securities		1,231		(213)		1,018
Total securities		2,413		(218)		2,195
Loans receivable		4,350		-		4,350
Total interest earning assets		6,751		(197)		6,554

Interest bearing liabilities:
Interest-bearing demand and money market		71		(16)		55
Savings		31		-		31
Time		530		(62)		468
Total interest bearing deposits		632		(78)		554
Short-term borrowings		(13)		9		(4)
Other borrowings		(111)		(198)		(309)
Total interest bearing liabilities		508		(267)		241
Net interest income (tax-equivalent basis)	$	6,243	$	70	$	6,313

Comparison of Operating Results for the Nine Months Ended September 30, 2017 to September 30, 2016

General

For the nine months ended September 30, 2017, net income totaled $8,041,000 compared to $4,365,000 earned in the similar period in 2016. The increase in net income for the nine months ended September 30, 2017 was due primarily to a $5.9 million improvement in net interest income due to the increased size of the balance sheet resulting from the acquisition of Delaware Bancshares, Inc. in the third quarter of 2016. Other income increased $1,469,000 due to increases in fee income from the accounts acquired. Gains from sales included a $209,000 gain resulting from the sale of deposits and the Company's former West Scranton Office in the first quarter of 2017. All operating expense categories increased $2,428,000, net, due to the twelve branch offices acquired, and includes $1,664,000 on non-recurring merger related expenses in the 2016 period. Earnings per share for the current period were $1.29 per share for basic and $1.28 per fully diluted shares compared to $0.77 per share for basic and fully diluted shares for the nine months ended September 30, 2016, after adjusting for the retroactive effect of the 50% stock dividend declared August 8, 2017. The resulting annualized return on average assets and annualized return on average equity for the nine months ended September 30, 2017 were 0.96% and 9.30%, respectively, compared to 0.69% and 5.45%, respectively, for the similar period in 2016.

The following table sets forth changes in net income:




(dollars in thousands)	Nine months ended
	September 30, 2017 to September 30, 2016
Net income nine months ended September 30, 2016	$	4,365
Change due to:
Net interest income		5,884
Provision for loan losses		(200)
Net gains on sales		120
Other income		1,349
Salaries and employee benefits		(2,019)
Occupancy, furniture and equipment		(783)
Foreclosed real estate		(446)
Merger related		1,664
All other expenses		(844)
Income tax expense		(1,049)

Net income nine months ended September 30, 2017	$	8,041

Net interest income on a fully taxable equivalent basis (fte) for the nine months ended September 30, 2017 totaled $27,661,000 which was $6,313,000 higher than the comparable period in 2016. The increase in net interest income includes a $4,350,000 increase in interest income (fte) on loans and a $2,195,000 increase in interest income (fte) on securities resulting primarily from the acquisition. The fte net interest spread and net interest margin were 3.44% and 3.55%, respectively, for the nine months ended September 30, 2017 compared to 3.50% and 3.65%, respectively, for the similar period in 2016. The decrease in the net interest spread and the net interest margin reflects the mix of the balance sheet resulting from the acquisition.

Interest income (fte) totaled $30,551,000 with a yield on average earning assets of 3.92% compared to $23,997,000 and 4.10% for the 2016 period. Average loans increased $130.5 million over the comparable period of last year primarily due to the acquisition, while average securities increased $129.6 million. Average earning assets totaled $1.039 billion for the nine months ended September 30, 2017, an increase of $258.1 million over the average for the similar period in 2016 due to the acquisition.

Interest expense for the nine months ended September 30, 2017 totaled $2,890,000 at an average cost of 0.48% compared to $2,649,000 and 0.59% for the similar period in 2016. The decline in average cost reflects the increase in lower costing deposits acquired. The cost of time deposits, which is the most significant component of funding, decreased to 0.94% from 0.97% for the similar period in the prior year.

Provision for Loan Losses

The Company's provision for loan losses for the nine months ended September 30, 2017 was $1,800,000 compared to $1,600,000 for the nine months ended September 30, 2016. 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 $503,000 for the nine month period ended September 30, 2017 compared to $2,734,000 for the similar period in 2016.

Other Income

Other income totaled $5,158,000 for the nine months ended September 30, 2017 compared to $3,689,000 for the similar period in 2016. Service charges and fees increased $1,056,000 due primarily to the accounts acquired, while other fee income categories increased $293,000, net, and gains on sales increased $120,000, net. Included in gains on sales for 2017 was a non-recurring gain of $209,000 related to the sale of deposits and the Company's former West Scranton Office in the first quarter of 2017.

Other Expense

Other expense for the nine months ended September 30, 2017 totaled $18,984,000 which was $2,428,000 higher than the same period of 2016 due primarily to costs related to the operations of the offices acquired. Expenses related to foreclosed real estate increased $446,000.

Income Tax Expense

Income tax expense totaled $2,356,000 for an effective tax rate of 22.7% for the period ending September 30, 2017 compared to $1,307,000 for an effective tax rate of 23.0% for the similar period in 2016. The increase in tax expense reflects a higher level of pre-tax earnings, while the decrease in the effective tax rate reflects an increase in the amount of tax-exempt income.

Item 3. Quantitative and 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 September 30, 2017, the level of net interest income at risk in a rising 200 basis point change in interest rates was within the Company's policy limits, while a 200 basis point decline in rates resulted in a change that exceeded the policy limit by .09%. 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 September 30, 2017, the Company had a positive 90-day interest sensitivity gap of $26.7 million or 2.4% of total assets, compared to the $34.7 million or 3.1% of total assets as of December 31, 2016. Rate sensitive assets repricing within 90 days decreased $11.7 million due primarily to an $8.5 million decrease in loans repricing. Rate sensitive liabilities repricing within 90 days decreased $3.8 million since year end due to a $12.8 million reduction in time deposits repricing which was partially offset by an $8.7 million increase 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 the 90-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 industry-wide statistical information and do not represent historical results.

September 30, 2017

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	$	268		$	100		$	-		$	-		$	368
Securities		6,219			25,443			58,819			195,225			285,706
Loans Receivable		149,509			162,520			218,459			225,526			756,014
Total RSA	$	155,996		$	188,063		$	277,278		$	420,751		$	1,042,088

Non-maturity interest-bearing deposits	$	65,305		$	63,407		$	168,969		$	136,520		$	434,201
Time Deposits		35,979			103,266			105,345			32,387			276,977
Borrowings		27,962			17,115			32,314			1,609			79,000
Total RSL	$	129,246		$	183,788		$	306,628		$	170,516		$	790,178


Interest Sensitivity Gap	$	26,750		$	4,275		$	(29,350	)	$	250,235		$	251,910
Cumulative Gap		26,750			31,025			1,675			251,910
RSA/RSL-cumulative		120.7	%		109.9	%		100.3	%		131.9	%

December 31, 2016

Interest Sensitivity Gap	$	34,669		$	(21,445	)	$	(23,293	)	$	230,044		$	219,975
Cumulative Gap		34,669			13,224			(10,069	)		219,975
RSA/RSL-cumulative		126.1	%		103.9	%		98.4	%		127.5	%

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.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

Reference is made to Part II, Item 1 in the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

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 Form 10-K for the year ended December 31, 2016.

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

None

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)	Articles of Incorporation of Norwood Financial Corp.⁽¹⁾
3(ii)	Bylaws of Norwood Financial Corp.⁽²⁾
4.0	Specimen Stock Certificate of Norwood Financial Corp.⁽¹⁾
10.1	Employment Agreement with Lewis J. Critelli ⁽³⁾
10.2	Change in Control Severance Agreement with William S. Lance ⁽³⁾
10.3	Change in Control Severance Agreement with Robert J. Mancuso ⁽⁴⁾
10.4	Salary Continuation Agreement between the Bank and William W. Davis, Jr. ⁽⁵⁾
10.5	Amended and Restated Salary Continuation Agreement, dated September 1, 2017, between the Bank and Lewis J. Critelli ⁽⁶⁾
10.6	Salary Continuation Agreement between the Bank and John H. Sanders ⁽⁷⁾
10.7	2006 Stock Option Plan ⁽⁸⁾
10.8	First and Second Amendments to Salary Continuation Agreement with William W. Davis, Jr. ⁽⁹⁾
10.9	First and Second Amendments to Salary Continuation Agreement with John H. Sanders ⁽⁹⁾
10.10	Change In Control Severance Agreement with James F. Burke ⁽¹⁰⁾
10.11	2014 Equity Incentive Plan⁽¹¹⁾
10.12	Addendum to Change in Control Severance Agreement with William S. Lance ⁽¹²⁾
10.13	Salary Continuation Agreement, dated September 1, 2017, between Wayne Bank and William S. Lance ⁽⁶⁾
10.14	Salary Continuation Agreement, dated September 1, 2017, between Wayne Bank and Robert J. Mancuso ⁽⁶⁾
10.15	Salary Continuation Agreement, dated September 1, 2017, between Wayne Bank and James F. Burke ⁽⁶⁾

31.1	Rule 13a-14(a)/15d-14(a) Certification of CEO
31.2	Rule 13a-14(a)/15d-14(a) Certification of CFO
32	Certification pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of Sarbanes Oxley Act of 2002
101	Interactive Data Files

(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, Registration No. 0-28364

(2)	Incorporated by reference into this document from the identically numbered exhibit to the Registrant's Form 10-Q filed with the Commission on August 8, 2014.

(3)	Incorporated by reference into this document from the identically numbered exhibits to the Registrant's Form 10-K filed with the Commission on March 15, 2010.

(4)	Incorporated by reference into this document from Exhibit 10.4 to the Registrant's Form 10-K filed with the Commission on March 14, 2013, File No. 0-28364.

(5)	Incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-K filed with the Commission on March 23, 2000.

(6)	Incorporated by reference from the exhibits to the Current Report on Form 8-K filed with the Commission on September 5, 2017.

(7)	Incorporated herein by reference to Exhibit 10.11 to the Registrant's Form 10-K filed with the Commission on March 22, 2004.

(8)	Incorporated by reference to this document from Exhibit 4.1 to Registrant's Registration Statement on Form S-8 (File No. 333-134831) filed with the Commission on June 8, 2006.

(9)	Incorporated herein by reference from the Exhibits to the Registrant's Current Report on Form 8-K filed on April 4, 2006.

(10)	Incorporated by reference from Exhibit 10.13 to the Registrant's Form 10-Q filed with the Commission on November 7, 2013.

(11)	Incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-8 (File No. 333-195643) filed with the Commission on May 2, 2014.

(12)	Incorporated by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K filed on February 18, 2015.

Signature

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:	November 9, 2017	By:	/s/ Lewis J. Critelli
			Lewis J. Critelli
			President and Chief Executive Officer
			(Principal Executive Officer)

Date:	November 9, 2017	By:	/s/ William S. Lance
			William S. Lance
			Executive Vice President and
			Chief Financial Officer
			(Principal Financial Officer)