UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K


(Mark
One):





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


For the
fiscal year ended December 31,
2009


or


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


For the
transition period from ________ to _________




Commission
File No. 0-28364





NORWOOD
      FINANCIAL CORP.(Exact
      Name of Registrant as Specified in its
Charter)





Pennsylvania
            
            23-2828306(State
      or Other Jurisdiction of
              Incorporation
      or Organization)
            
            (I.R.S.
      Employer Identification No.)





717
      Main Street, Honesdale, Pennsylvania
            
            
            18431(Address
      of Principal Executive Offices)
            
            
            (Zip
      Code)





Registrant’s
Telephone Number, Including Area Code: (570)
253-1455





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





Title
      of Each Class
            Name
      of Each Exchange on Which RegisteredCommon
      Stock, $.10 par value
            The
      Nasdaq Stock Market LLC





Securities
registered pursuant to Section 12(g) of the Act:  None




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. o
YES     x
NO




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. o
YES     x
NO




Indicate
by check mark 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.  x
YES     o
NO




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  o
YES     o
NO




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.  x]




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





Large
      accelerated filer o
            
            Accelerated
      filer xNon-accelerated
      filer  o
      (Do not check if a smaller reporting company)
            
            Smaller
      reporting company o





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).o
Yes     x
No




As of
March 9, 2010, there were 2,773,436 shares outstanding of the registrant’s
Common Stock.




The
Registrant’s voting stock trades on the NASDAQ Global Market under the symbol
“NWFL.”  The aggregate market value of the voting stock held by
non-affiliates of the registrant, based on the last price the registrant’s
Common Stock was sold as of June 30, 2009, $31.36 per share, was $74.3 million
based on 2,368,633 shares of Common Stock outstanding.  For purposes
of this calculation, the term “affiliate” refers to all directors and executive
officers of the registrant, and all persons beneficially owning more than 5% of
the registrant’s common stock.




DOCUMENTS
INCORPORATED BY REFERENCE




1.          
 Portions of the Annual Report to Stockholders for the Fiscal Year Ended
December 31, 2009. (Parts I, II, and IV)


Portions
of the definitive Proxy Statement for the 2010 Annual Meeting of Stockholders.
(Part III)













NORWOOD
FINANCIAL CORP.


ANNUAL
REPORT ON FORM 10-K





Table of
Contents





Part
      I
            
            PageItem
      1.
            Business
            2Item
      1A.
            Risk
      Factors
            19Item
      1B.
            Unresolved
      Staff Comments
            26Item
      2.
            Properties
            26Item
      3.
            Legal
      Proceedings
            27Item
      4.
            [Reserved]
            27Part
      IIItem
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases
              of
      Equity Securities
            27Item
      6.
            Selected
      Financial Data
            27Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            27Item
      7A.
            Quantitative
      and Qualitative Disclosure about Market Risk
            27Item
      8.
            Financial
      Statements and Supplementary Data
            27Item
      9
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            27Item
      9A.
            Controls
      and Procedures
            27Item
      9B.
            Other
      Information
            28Part
      IIIItem
      10.
            Directors,
      Executive Officers and Corporate Governance
            28Item
      11.
            Executive
      Compensation
            28Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            28Item
      13.
            Certain
      Relationships and Related Transactions and Director
      Independence
            29Item
      14.
            Principal
      Accounting Fees and Services
            29Part
      IVItem
      15.
            Exhibits,
      Financial Statement Schedules
            29SIGNATURES











1


PART
I





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 as detailed in
Item 1A include:





•
            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•
            higher
      deposit insurance premiums•
            soundness
      of other financial institutions•
            risk
      of failure to stabilize the financial system•
            current
      market volatility•
            potential
      liquidity risk•
            availability
      of capital•
            regional
      economic factors•
            loss
      of senior officers•
            comparatively
      low legal lending limits•
            limited
      market for the Company’s stock•
            restrictions
      on ability to pay dividends•
            common
      stock may lose value•
            competitive
      environment•
            issuing
      additional shares may dilute ownership•
            extensive
      and complex governmental regulation and associated cost•
            interest
      rate risks





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.





Item 1.
Business





General





Norwood
Financial Corp. (the “Company”), a Pennsylvania corporation, is the holding
company for Wayne Bank. On March 29, 1996, the Bank completed a holding company
reorganization and became a wholly owned subsidiary of the Company. As of
December 31, 2009, the Company had total assets of $529.7 million, deposits of
$391.5 million, and stockholders’ equity of $64.5 million. The Company’s ratio
of average equity to average assets was 12.09%, 11.57% and 11.48% for fiscal
years 2009, 2008 and 2007, respectively.





Wayne
Bank is a Pennsylvania chartered commercial bank headquartered in Honesdale,
Pennsylvania. The Bank was originally chartered on February 17, 1870 as Wayne
County Savings Bank. Wayne County Savings Bank changed its name to Wayne County
Bank and Trust in December 1943. In September 1993, the Bank adopted the name
Wayne Bank. The Bank’s deposits are currently insured to








2





applicable
limits by the Deposit Insurance Fund (“DIF”) as administered by the Federal
Deposit Insurance Corporation (“FDIC”). The Bank is regulated by the
Pennsylvania Department of Banking (“PDB”) and the FDIC.





The Bank
is an independent community bank with five offices in Wayne County, three
offices in Pike County and three offices in Monroe County. The Bank offers a
wide variety of personal and business credit services and trust and investment
products and real estate settlement services to the consumers, businesses,
nonprofit organizations, and municipalities in each of the communities that the
Bank serves. The Bank primarily serves the Pennsylvania counties of Wayne, Pike
and Monroe, and to a much lesser extent, the counties of Lackawanna and
Susquehanna. In addition, the Bank operates elevenautomated teller
machines, one in each of its branch locations.





The
Company’s main office is located at 717 Main Street, Honesdale, Pennsylvania and
its telephone number is (570) 253-1455. The Company maintains a website at www.waynebank.com.  Information
on our website should not be treated as part of this Annual Report on Form
10-K.  The Company makes copies of its SEC filings available free of
charge as soon as reasonably practicable after they are filed, through a link on
its website to the SEC’s website.





Competition





The
competition for deposit products comes from other insured financial institutions
such as commercial banks, thrift institutions, credit unions, and multi-state
regional banks in the Company’s market area of Wayne, Pike and Monroe Counties,
Pennsylvania. Based on data compiled by the FDIC as of June 30, 2009 (the latest
date for which data is available), the Bank had the third largest share of
FDIC-insured deposits in Wayne County with approximately 19.6%, third largest in
Pike County with 16.5%, and 11th in
Monroe County with 1.5%. This data does not reflect deposits held by credit
unions with which the Bank also competes. Deposit competition also includes a
number of insurance products sold by local agents and investment products such
as mutual funds and other securities sold by local and regional brokers. Loan
competition varies depending upon market conditions and comes from other insured
financial institutions such as commercial banks, thrift institutions, credit
unions, multi-state regional banks, and mortgage bankers.





Personnel





As of
December 31, 2009, the Bank had 115 full-time and 5 part-time employees. None of
the Bank’s employees are represented by a collective bargaining
group.





Lending
Activities





The
Bank’s loan products include loans for personal and business use. Personal
lending includes mortgage lending to finance principal residences and to a
lesser extent second home dwellings. The products include fixed rate mortgage
products with terms up to 30 years which may be sold, in the secondary market
through the Federal National Mortgage Association (Fannie Mae) or held in the
Bank’s portfolio subject to the extent consistent with our asset/liability
management strategies. Fixed-rate home equity loans are originated on terms up
to 180 months, as well as offering a home equity line of credit tied to prime
rate. The Bank to a lesser extent also offers indirect dealer financing of
automobiles (new and used), boats, and recreational vehicles through a limited
network of dealers in Northeast Pennsylvania, but is allowing this portfolio to
run-off. At December 31, 2009, there were $8.4 million of indirect loans in the
portfolio.






3





Commercial
loans and commercial mortgages are provided to local small and mid-sized
businesses at a variety of terms and rate structures. Commercial lending
activities include lines of credit, revolving credit, term loans, mortgages,
various forms of secured lending and a limited amount of letter of credit
facilities. The rate structure may be fixed, immediately repricing tied to the
prime rate or adjustable at set intervals.





The
Bank’s construction lending has primarily involved lending for commercial
construction projects and for single-family residences. All loans for the
construction of speculative sale homes have a loan value ratio of not more than
80%. For both commercial and single-family projects loan proceeds are disbursed
during the construction phase according to a draw schedule based on the stage of
completion. Construction projects are inspected by contracted inspectors or bank
personnel. Construction loans are underwritten on the basis of the estimated
value of the property as completed. For commercial projects, the Bank typically
also provides the permanent financing after the construction period, as a
commercial mortgage.





The Bank
also, from time to time originates loans secured by undeveloped land. Land loans
granted to individuals have a term of up to 5 years. Land loans granted to
developers may have an interest only period during development. The substantial
majority of land loans have a loan-to-value ratio not exceeding 75%. The Bank
has limited its exposure to land loans but may expand its lending on raw land,
as market conditions allow, to qualified borrowers experienced in the
development and sale of raw land.





Loans
involving construction financing and loans on raw land have a higher level of
risk than loans for the purchase of existing homes since collateral values, land
values, development costs and construction costs can only be estimated at the
time the loan is approved. The Bank has sought to minimize its risk in
construction lending and in lending for the purchase of raw land by offering
such financing primarily to builders and developers to whom the Bank has loaned
funds in the past and to persons who have previous experience in such projects.
The Bank also limits construction lending and loans on raw land to its market
area, with which management is familiar.





Adjustable-rate
loans decrease the risks associated with changes in interest rates by
periodically repricing, but involve other risks because as interest rates
increase, the underlying payments by the borrower increase, thus increasing the
potential for payment default. At the same time, the marketability of the
underlying collateral may be adversely affected by higher interest rates. Upward
adjustment of the contractual interest rate may also be limited by the maximum
periodic interest rate adjustment permitted in certain adjustable-rate mortgage
loan documents, and, therefore is potentially limited in effectiveness during
periods of rapidly rising interest rates. These risks have not had an adverse
effect on the Bank.





Consumer
lending, including indirect financing provides benefits to the Bank’s
asset/liability management program by reducing the Bank’s exposure to interest
rate changes, due to their generally shorter terms. Such loans may entail
additional credit risks compared to owner-occupied residential mortgage lending
especially when unsecured or secured by collateral such as automobiles that
depreciate rapidly. As a result, the Bank has de-emphasized the indirect lending
product line.





Commercial
lending including real-estate related loans entail significant additional risks
when compared with residential real estate and consumer lending. For example,
commercial loans typically involve larger loan balances to single borrowers or
groups of related borrowers. The payment experience on such loans typically is
dependent on the successful operation of the project and these risks can be
significantly impacted by the cash flow of the borrowers and market conditions
for commercial office, retail, and warehouse space. In periods of decreasing
cash flows, the commercial borrower may permit a lapse in general maintenance of
the property causing the value of the underlying collateral to deteriorate. The
liquidation of commercial property is often more costly and may involve more
time to sell than








4




residential
real estate. The Bank offsets such factors with requiring more owner equity, a
lower loan to value ratio and by obtaining the personal guaranties of the
principals. In addition, a majority of the Bank’s commercial real estate
portfolio is owner occupied property.





Due to
the type and nature of the collateral, consumer lending generally involves more
credit risk when compared with residential real estate lending. Consumer lending
collections are typically dependent on the borrower’s continuing financial
stability, and thus, are more likely to be adversely affected by job loss,
divorce, illness and personal bankruptcy. In most cases, any repossessed
collateral for a defaulted consumer loan will not provide an adequate source of
repayment of the outstanding loan balance. The remaining deficiency is usually
turned over to a collection agency.





There are
additional risks associated with indirect automobile lending since we must rely
on the automobile dealer to provide accurate information to us and accurate
disclosures to the borrowers. These loans are principally done on a non-recourse
basis. We seek to mitigate these risks by only dealing with dealers with whom we
have a long-standing relationship.





Loan
Solicitation and Processing





The Bank
has established various lending limits for its officers and also maintains an
Officer Loan Committee to approve higher loan amounts. The loan committee is
comprised of the President and Chief Executive Officer, Senior Lending Officer
and other Bank officers. The Loan Committee has the authority to approve all
loans up to set limits based on the type of loan and the collateral. Requests in
excess of these limits must be submitted to the Directors’ Loan Committee or
Board of Directors for approval. Additionally, the President and Chief Executive
Officer, and the Senior Lending Officer and other officers have the authority to
approve secured and unsecured loans up to amounts approved by the Board of
Directors and maintained in the Bank’s Loan Policy. Notwithstanding individual
lending authority, certain loan policy exceptions must be submitted to the loan
committee for approval.





Hazard
insurance coverage is required on all properties securing loans made by the
Bank. Flood insurance is also required, when applicable.





Loan
applicants are notified of the credit decision by letter. If the loan is
approved, the loan commitment specifies the terms and conditions of the proposed
loan including the amount, interest rate, amortization term, a brief description
of the required collateral, and the required insurance coverage. The borrower
must provide proof of fire, flood (if applicable) and casualty insurance on the
property serving as collateral and title insurance, and these applicable
insurances must be maintained during the full term of the loan.











5


Loan Portfolio Composition.
Set forth below is selected data relating to the composition of the Bank’s loan
portfolio at the dates indicated.








As
      of December 31,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005$
            
            
            
            %
            
            
            $
            
            
            
            %
            
            
            $
            
            
            
            %
            
            
            $
            
            
            
            %
            
            
            $
            
            
            
            %(Dollars
      in thousands)Commercial,
      Financial and Agricultural
            
            $
            24,116
            
            
            
            6.6
            
            
            $
            25,886
            
            
            
            7.4
            
            
            $
            29,159
            
            
            
            8.8
            
            
            $
            34,019
            
            
            
            10.8
            
            
            $
            26,755
            
            
            
            9.2Real
      Estate-Construction
            
            
            14,405
            
            
            
            4.0
            
            
            
            14,856
            
            
            
            4.2
            
            
            
            20,404
            
            
            
            6.2
            
            
            
            18,955
            
            
            
            6.0
            
            
            
            5,944
            
            
            
            2.0Real
      Estate-Mortgage
            
            
            310,584
            
            
            
            85.3
            
            
            
            292,893
            
            
            
            83.8
            
            
            
            263,481
            
            
            
            79.5
            
            
            
            241,423
            
            
            
            76.4
            
            
            
            234,200
            
            
            
            80.4Consumer
      Loans to Individuals
            
            
            14,850
            
            
            
            4.1
            
            
            
            16,087
            
            
            
            4.6
            
            
            
            18,526
            
            
            
            5.5
            
            
            
            21,520
            
            
            
            6.8
            
            
            
            24,353
            
            
            
            8.4363,955
            
            
            
            100.0
            
            
            
            349,722
            
            
            
            100.0
            
            
            
            331,570
            
            
            
            100.0
            
            
            
            315,917
            
            
            
            100.0
            
            
            
            291,252
            
            
            
            100.0Unearned
      income and deferred fees
            
            
            (481
            )
            
            
            
            
            
            
            (318
            )
            
            
            
            
            
            
            (274
            )
            
            
            
            
            
            
            (350
            )
            
            
            
            
            
            
            (362
            )Allowance
      for loan losses
            
            
            (5,453
            )
            
            
            
            
            
            
            (4,233
            )
            
            
            
            
            
            
            (4,081
            )
            
            
            
            
            
            
            (3,828
            )
            
            
            
            
            
            
            (3,669
            )$
            358,021
            
            
            
            
            
            
            $
            345,171
            
            
            
            
            
            
            $
            327,215
            
            
            
            
            
            
            $
            311,739
            
            
            
            
            
            
            $
            287,221



































6





Maturities and Sensitivities of Loans
to Changes in Interest Rates. The following table sets forth maturities
and interest rate sensitivity for selected categories of loans as of December
31, 2009. Scheduled repayments are reported in the maturity category in which
payment is due.  Demand loans, loans having no stated schedule of
repayments and no stated maturity and overdrafts are reported as due in one year
or less.





One
      Year
              or
      Less
            
            
            After
      One to
              Five
      Years
            
            
            Over
              Five
      Years
            
            
            Total(In
      thousands)Commercial,
      Financial
              and
      Agricultural
            
            $
            6,524
            
            
            $
            9,748
            
            
            $
            7,844
            
            
            $
            24,116Real
      Estate - Construction
            
            
            14,405
            
            
            
            -
            
            
            
            -
            
            
            
            14,405Total
            
            $
            20,929
            
            
            $
            9,748
            
            
            $
            7,844
            
            
            $
            38,521Loans
      with fixed rates
            
            $
            9,982
            
            
            $
            7,789
            
            
            $
            4,225
            
            
            $
            21,996Loans
      with floating rates
            
            
            10,947
            
            
            
            1,959
            
            
            
            3,619
            
            
            
            16,525Total
            
            $
            20,929
            
            
            $
            9,748
            
            
            $
            7,844
            
            
            $
            38,521





Non-Performing Assets.The
following table sets forth information regarding non-accrual loans, foreclosed
real estate owned and loans that are 90 days or more delinquent but on which the
Bank was accruing interest at the dates indicated. For the year ended December
31, 2009, interest income that would have been recorded on loans accounted for
on a non-accrual basis under the original terms of such loans was $188,000 of
which $4,000 was collected.








As
      of December 31,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005(dollars
      in thousands)Non-accrual
      loans:Commercial
      and all other
            
            $
            ---
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —Real
      estate
            
            
            4,916
            
            
            
            2,087
            
            
            
            109
            
            
            
            392
            
            
            
            330Consumer
            
            
            --
            
            
            
            —
            
            
            
            2
            
            
            
            17
            
            
            
            11Total
            
            
            4,916
            
            
            
            2,087
            
            
            
            111
            
            
            
            409
            
            
            
            341Accruing
      loans which are contractually past-due 90 days or more:Commercial
      and all other
            
            
            9
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Real
      estate
            
            
            90
            
            
            
            —
            
            
            
            49
            
            
            
            —
            
            
            
            —Consumer
            
            
            --
            
            
            
            —
            
            
            
            3
            
            
            
            —
            
            
            
            12Total
            
            
            99
            
            
            
            —
            
            
            
            52
            
            
            
            —
            
            
            
            12Total
      non-performing loans
            
            
            5,015
            
            
            
            2,087
            
            
            
            163
            
            
            
            409
            
            
            
            353Foreclosed
      real estate
            
            
            392
            
            
            
            660
            
            
            
            —
            
            
            
            —
            
            
            
            —Total
      non-performing assets
            
            $
            5,407
            
            
            $
            2,747
            
            
            $
            163
            
            
            $
            409
            
            
            $
            353Total
      non-performing loans to total loans
            
            
            1.38
            %
            
            
            0.60
            %
            
            
            0.05
            %
            
            
            0.13
            %
            
            
            0.12
            %Total
      non-performing loans to total assets
            
            
            0.95
            %
            
            
            0.41
            %
            
            
            0.03
            %
            
            
            0.09
            %
            
            
            0.08
            %Total
      non-performing assets to total assets
            
            
            1.02
            %
            
            
            0.54
            %
            
            
            0.03
            %
            
            
            0.09
            %
            
            
            0.08
            %






7





The
recorded investment in impaired loans, not requiring an allowance for loan
losses was $6,962,000  (net of a charge-off against the allowance for
loan losses of $154,000) and $2,976,000 at December 31, 2009 and 2008,
respectively. The recorded investment in impaired loans requiring an allowance
for loan losses was $1,065,000 (net of charge-off against the allowance for loan
losses of $480,000) and $-0- at December 31, 2009 and 2008. For the years ended
December 31, 2009, 2008 and 2007, the average recorded investment in these
impaired loans was $3,585,000, $3,311,000 and $3,127,000 and the interest income
recognized on these impaired loans was $139,000, $143,000 and $290,000,
respectively.





Potential Problem Loans.As of
December 31, 2009, there were no loans not previously disclosed, where known
information about possible credit problems of borrowers causes management to
have serious doubts as to the ability of such borrowers to comply with the
present loan repayment terms.





Analysis of the Allowance for Loan
Losses. The following table sets forth information with respect to the
Bank’s allowance for loan losses for the years indicated:





As
      of December 31,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005(dollars
      in thousands)Total
      loans receivable net of unearned income
            
            $
            363,474
            
            
            $
            349,404
            
            
            $
            331,296
            
            
            $
            315,567
            
            
            $
            290,890Average
      loans receivable
            
            
            356,345
            
            
            
            335,137
            
            
            
            323,444
            
            
            
            301,533
            
            
            
            274,053Allowance
      balance at beginning of period
            
            $
            4,233
            
            
            $
            4,081
            
            
            $
            3,828
            
            
            $
            3,669
            
            
            $
            3,448Charge-offs:Commercial
      and all other
            
            
            (17
            )
            
            
            (7
            )
            
            
            —
            
            
            
            —
            
            
            
            (4
            )Real
      Estate
            
            
            (358
            )
            
            
            (465
            )
            
            
            (4
            )
            
            
            —
            
            
            
            (6
            )Consumer
            
            
            (139
            )
            
            
            (171
            )
            
            
            (117
            )
            
            
            (150
            )
            
            
            (200
            )Total
            
            
            (514
            )
            
            
            (643
            )
            
            
            (121
            )
            
            
            (150
            )
            
            
            (210
            )Recoveries:Commercial
      and all other
            
            
            11
            
            
            
            —
            
            
            
            —
            
            
            
            18
            
            
            
            12Real
      Estate
            
            
            4
            
            
            
            1
            
            
            
            2
            
            
            
            2
            
            
            
            18Consumer
            
            
            34
            
            
            
            59
            
            
            
            54
            
            
            
            65
            
            
            
            46Leases
            
            
            --
            
            
            
            —
            
            
            
            3
            
            
            
            4
            
            
            
            5Total
            
            
            49
            
            
            
            60
            
            
            
            59
            
            
            
            89
            
            
            
            81Net
      Charge-offs
            
            
            (465
            )
            
            
            (583
            )
            
            
            (62
            )
            
            
            (61
            )
            
            
            (129
            )Provision
      Expense
            
            
            1,685
            
            
            
            735
            
            
            
            315
            
            
            
            220
            
            
            
            350Allowance
      balance at end of period
            
            $
            5,453
            
            
            $
            4,233
            
            
            $
            4,081
            
            
            $
            3,828
            
            
            $
            3,669Allowance
      for loan losses as a percent of total loans outstanding.
            
            
            1.50
            %
            
            
            1.21
            %
            
            
            1.23
            %
            
            
            1.21
            %
            
            
            1.26
            %Net
      loans charged off as a percent of average loans
outstanding
            
            
            0.13
            %
            
            
            0.17
            %
            
            
            0.02
            %
            
            
            0.02
            %
            
            
            0.05
            %








8


Allocation of the Allowance For Loan
Losses. The following table sets forth the allocation of the Bank’s
allowance for loan losses by loan category and the percent of loans in each
category to total loans at the date indicated. The allocation is made for
analytical purposes and is not necessarily indicative of the categories in which
credit losses may occur. The total allowance is available to absorb losses from
any type of loan.




As
      of December 31,2009
              
              2008
              
              2007
              
              2006
              
              
              2005Amount
              
              %
      of
                Loans
                to
      Total
                Loans
              
              Amount
              
              %
      of
                Loans
                to
      Total
                Loans
              
              Loans
              
              %
      of
                Loans
                to
      Total
                Loans
              
              Amount
              
              %
      of
                Loans
                to
      Total
                Loans
              
              
              Amount
              
              %
      of
                Loans
                to
      Total
                Loans(dollars
      in thousands)Commercial,
      financial and agricultural
              
              $
              333
              
              6.6
              %
              $
              491
              
              7.4
              %
              $
              413
              
              8.8
              %
              $
              505
              
              10.8
              %
              
              $
              427
              
              9.2
              %Real
      estate – construction
              
              
              136
              
              4.0
              
              
              138
              
              4.2
              
              
              148
              
              6.2
              
              
              44
              
              6.0
              
              
              
              36
              
              2.0Real
      estate – mortgage
              
              
              4,748
              
              85.3
              
              
              3,315
              
              83.8
              
              
              2,939
              
              79.5
              
              
              2,667
              
              76.4
              
              
              
              2,713
              
              80.4Consumer
      loans to individuals
              
              
              236
              
              4.1
              
              
              289
              
              4.6
              
              
              362
              
              5.5
              
              
              388
              
              6.8
              
              
              
              442
              
              8.4General
      Risk Allocation
              
              
              —
              
              —
              
              
              —
              
              —
              
              
              219
              
              —
              
              
              224
              
              —
              
              
              
              51
              
              —Total
              
              $
              5,453
              
              100.0
              %
              $
              4,233
              
              100.0
              %
              $
              4,081
              
              100.0
              %
              $
              3,828
              
              100.0
              %
              
              $
              3,669
              
              100.0
              %

















9


Investment
Activities





General.The Company maintains
a portfolio of investment securities consisting principally of obligations of
the U.S. Government and its agencies including mortgage-backed securities and
obligations of states, counties and municipalities including school districts.
To a lesser extent, the Company also has corporate debt obligations in the
portfolio as well as a portfolio of equity instruments of other financial
services companies. The Company considers its investment portfolio a source of
earnings and liquidity. Investment securities may also be pledged to secure
public deposits and customer repurchase agreements.





Securities Portfolio.Carrying
values of securities at the dates indicated are as follows:








As
      of December 31,2009
            
            
            2008
            
            
            2007(dollars
      in thousands)Securities:
              (carrying
      value)U.S.
      Government agencies
            
            $
            39,772
            
            
            $
            35,813
            
            
            $
            41,508State
      and political subdivisions
            
            
            32,343
            
            
            
            25,916
            
            
            
            22,622Corporate
      obligations
            
            
            5,240
            
            
            
            5,625
            
            
            
            4,994Mortgage-backed
      securities
            
            
            53,154
            
            
            
            62,318
            
            
            
            54,082Equity
      securities
            
            
            776
            
            
            
            1,155
            
            
            
            1,486Total
      Securities
            
            $
            131,285
            
            
            $
            130,827
            
            
            $
            124,692Fair
      Value of Securities
            
            $
            131,299
            
            
            $
            130,840
            
            
            $
            124,708











10


Maturity Distribution of Securities.The following table sets forth certain information regarding carrying
values, weighted average yields, and maturities of the Company’s securities
portfolio as of December 31, 2009. Yields on tax-exempt securities are stated on
a fully taxable equivalent basis using a Federal tax rate of 34%. Actual
maturities may differ from contractual maturities as certain instruments have
call features which allow prepayment of obligations. Maturity on the
mortgage-backed securities is based upon contractual terms, the average life may
differ as a result of changes in cash flow. Equity securities with no stated
maturity are classified as “one year or less.”








One
      Year or Less
            
            
            After
      One
              Through
      Five Years
            
            
            After
      Five
              Through
      Ten Years
            
            
            After
      Ten Years
            
            
            Total
      Investment SecuritiesCarrying
              Value
            
            
            Average
              Yield
            
            
            Carrying
              Value
            
            
            Average
              Yield
            
            
            Carrying
              Value
            
            
            Average
              Yield
            
            
            Carrying
              Value
            
            
            Average
              Yield
            
            
            Carrying
              Value
            
            
            Average
              Yield(dollars
      in thousands)U.S.
      Government agencies
            
            $
            -
            
            
            
            -
            %
            
            $
            27,139
            
            
            
            3.56
            %
            
            $
            12,633
            
            
            
            3.80
            %
            
            $
            -
            
            
            
            -
            %
            
            $
            39,772
            
            
            
            3.63
            %State
      and political subdivision
            
            
            286
            
            
            
            6.44
            %
            
            
            4,875
            
            
            
            5.09
            %
            
            
            13,866
            
            
            
            5.79
            %
            
            
            13,316
            
            
            
            6.13
            %
            
            
            32,343
            
            
            
            5.83
            %Corporate
      obligations
            
            
            997
            
            
            
            0.99
            %
            
            
            4,243
            
            
            
            5.05
            %
            
            
            -
            
            
            
            -
            %
            
            
            -
            
            
            
            -
            %
            
            
            5,240
            
            
            
            4.23
            %Mortgage-backed
      securities
            
            
            1,928
            
            
            
            4.02
            %
            
            
            1,012
            
            
            
            4.80
            %
            
            
            9,997
            
            
            
            4.78
            %
            
            
            40,217
            
            
            
            4.43
            %
            
            
            53,154
            
            
            
            4.48
            %Equity
      securities
            
            
            776
            
            
            
            3.74
            %
            
            
            -
            
            
            
            -
            %
            
            
            -
            
            
            
            -
            %
            
            
            -
            
            
            
            -
            %
            
            
            776
            
            
            
            3.14
            %Total
      Investment Securities
            
            $
            3,987
            
            
            
            3.38
            %
            
            $
            37,269
            
            
            
            3.96
            %
            
            $
            36,496
            
            
            
            4.82
            %
            
            $
            53,533
            
            
            
            4.85
            %
            
            $
            131,285
            
            
            
            4.54
            %











11


Deposit
Activities





General.The Bank provides a
full range of deposit products to its retail and business customers. These
include interest-bearing and noninterest bearing transaction accounts, statement
savings and money market accounts. Certificate of deposit terms range up to 5
years for retail instruments. The Bank has no brokered deposits. The Bank
participates in the Jumbo CD ($100,000 and over) markets with local
municipalities and school districts which are typically priced on a competitive
bid basis. Other services the Bank offers its customers on a limited basis
include cash management, direct deposit, Remote Deposit Capture and Automated
Clearing House (ACH) activity. The Bank operates elevenautomated teller
machines and is affiliated with the STAR and MoneyPass ATM networks. Internet
banking including bill-pay is offered through the website at
www.waynebank.com.





The
following table sets forth information regarding deposit categories of the
Company.








Years
      Ended December 31,2009
            
            2008
            
            2007Average
            
            Average
            
            AverageBalance
            
            Rate
      Paid
            
            Balance
            
            Rate
      Paid
            
            Balance
            
            Rate
      Paid(dollars
      in thousands)Non-interest
      bearing demand
            
            $
            59,224
            
            —%
            
            $
            59,759
            
            —%
            
            $
            56,523
            
            —
            %Interest-bearing
      demand
            
            
            35,808
            
            0.10
            
            
            36,839
            
            0.10
            
            
            36,594
            
            0.10Money
      Market
            
            
            63,160
            
            1.10
            
            
            65,519
            
            2.15
            
            
            53,798
            
            3.37Savings
            
            
            44,526
            
            0.35
            
            
            44,510
            
            0.47
            
            
            45,858
            
            0.47Time
            
            
            174,201
            
            2.80
            
            
            160,462
            
            3.81
            
            
            172,986
            
            4.57Total
            
            $
            376,919
            
            
            
            $
            367,089
            
            
            
            $
            365,759





Maturities of Time Deposits.The following table indicates the amount of the Bank’s time deposits of
$100,000 or more by time remaining until maturity as of December 31,
2009.








(dollars
      in thousands)Maturity
      PeriodWithin
      three months
            
            $
            26,480Over
      three through six months
            
            
            12,897Over
      six through twelve months
            
            
            13,315Over
      twelve months
            
            
            13,939$
            66,631








12





Short-Term
Borrowings





The
following table sets forth information concerning short-term borrowings (those
maturing within one year) which consist principally of securities sold under
agreements to repurchase, short-term Federal Home Loan Bank (FHLB) advances,
federal funds purchased and U.S. Treasury demand notes that the Company had
during the periods indicated.





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007(dollars
      in thousands)Short
      term borrowings:Average
      balance during the year
            
            $
            26,402
            
            
            $
            32,238
            
            
            $
            22,443Maximum
      month-end balance during the year
            
            
            35,323
            
            
            
            42,061
            
            
            
            33,024Average
      interest rate during the year
            
            
            1.11
            %
            
            
            2.14
            %
            
            
            4.15
            %Total
      short-term borrowings at end of the year
            
            $
            25,803
            
            
            $
            38,126
            
            
            $
            26,686Weighted
      average interest rate at the end of the year
            
            
            0.56
            %
            
            
            1.11
            %
            
            
            3.60
            %





Trust
Activities





The Bank
operates a Wealth Management/Trust Department which provides estate planning,
investment management and financial planning to customers for which it is
generally compensated based on a percentage of assets under management. As of
December 31, 2009, the Bank had $99.4 million of assets under management
compared to $90.1 million as of December 31, 2008. The increase is partially due
to improvement in stock market performance which can affect the value of a
customer’s investment portfolio.





Subsidiary
Activities





The Bank,
a Pennsylvania chartered bank, is the only wholly owned subsidiary of the
Company. Norwood Investment Corp. (NIC), a Pennsylvania Corporation incorporated
in 1996 and a Pennsylvania licensed insurance agency, is a wholly-owned
subsidiary of the Bank. NIC’s business is annuity and mutual fund sales and
discount brokerage activities primarily to customers of the Bank. The annuities,
mutual funds and other investment products are not insured by the FDIC or any
other government agency. They are not deposits, obligations of or guaranteed by
any bank. The securities are offered through Invest Financial a registered
broker/dealer. NIC generated gross revenues for the Company of $112,000,
compared to $105,000 in 2008 which is included in Other Income.





WCB
Realty Corp., a Pennsylvania Corporation, is a wholly-owned real estate
subsidiary of the Bank whose principal asset is the administrative offices of
the Company, which also includes the Main Office of the Bank.





WTRO
Properties Inc., a Pennsylvania Corporation, is a wholly-owned real estate
subsidiary of the Bank established to hold title to certain real estate upon
which the Bank has foreclosed. WTRO did not hold title to any property as of
December 31, 2009 and 2008.





Norwood
Settlement Services, LLC, a Pennsylvania Limited Liability Company, was
established in 2004 to provide title and settlement service to bank customers
and non-customers.  Gross revenues, included in other income, for 2009
totaled $93,000 and $83,000 in 2008.





13


Regulation





Set forth
below is a brief description of certain laws which relate to the regulation of
the Registrant and the Bank. The description does not purport to be complete and
is qualified in its entirety by reference to applicable laws and
regulations.





Regulation
of the Company





General.The Company, as a bank holding company registered under the Bank Holding
Company Act of 1956, as amended (“BHCA”), is subject to regulation and
supervision by the Board of Governors of the Federal Reserve System (“Federal
Reserve”) and by the Pennsylvania Department of Banking (the
“Department”).  The Company is required to file annually a report of
its operations with, and is subject to examination by, the Federal Reserve and
the Department. This regulation and oversight is generally intended to ensure
that the Company limits its activities to those allowed by law and that it
operates in a safe and sound manner without endangering the financial health of
its subsidiary banks.





Under the
BHCA, the Company must obtain the prior approval of the Federal Reserve before
it may acquire control of another bank or bank holding company, merge or
consolidate with another bank holding company, acquire all or substantially all
of the assets of another bank or bank holding company, or acquire direct or
indirect ownership or control of any voting shares of any bank or bank holding
company if, after such acquisition, the bank holding company would directly or
indirectly own or control more than 5% of such shares.





Federal
statutes impose restrictions on the ability of a bank holding company and its
nonbank subsidiaries to obtain extensions of credit from its subsidiary bank, on
the subsidiary bank’s investments in the stock or securities of the holding
company, and on the subsidiary bank’s taking of the holding company’s stock or
securities as collateral for loans to any borrower. A bank holding company and
its subsidiaries are also prevented from engaging in certain tie-in arrangements
in connection with any extension of credit, lease or sale of property, or
furnishing of services by the subsidiary bank.





A bank
holding company is required to serve as a source of financial and managerial
strength to its subsidiary banks and may not conduct its operations in an unsafe
or unsound manner. In addition, it is the policy of the Federal Reserve that a
bank holding company should stand ready to use available resources to provide
adequate capital to its subsidiary banks during periods of financial stress or
adversity and should maintain the financial flexibility and capital-raising
capacity to obtain additional resources for assisting its subsidiary banks. A
bank holding company’s failure to meet its obligations to serve as a source of
strength to its subsidiary banks will generally be considered by the Federal
Reserve to be an unsafe and unsound banking practice or a violation of the
Federal Reserve regulations, or both.





Non-Banking
Activities.The business activities of the Company, as a bank holding
company, are restricted by the BHCA. Under the BHCA and the Federal Reserve’s
bank holding company regulations, the Company may only engage in, or acquire or
control voting securities or assets of a company engaged in, (1) banking or
managing or controlling banks and other subsidiaries authorized under the BHCA
and (2) any BHCA activity the Federal Reserve has determined to be so closely
related to banking or managing or controlling banks to be a proper incident
thereto. These include any incidental activities necessary to carry on those
activities, as well as a lengthy list of activities that the Federal Reserve has
determined to be so closely related to the business of banking as to be a proper
incident thereto.





Financial
Modernization.The Gramm-Leach-Bliley Act, permits greater affiliation
among banks, securities firms, insurance companies, and other companies under a
new type of financial services company known as a “financial holding
company.”  A financial holding company essentially is a bank holding
company with significantly expanded powers. Financial holding companies are
authorized by statute to engage in a number of financial activities previously
impermissible for bank holding companies, including








14








securities
underwriting, dealing and market making; sponsoring mutual funds and investment
companies; insurance underwriting and agency; and merchant banking activities.
The Act also permits the Federal Reserve and the Treasury Department to
authorize additional activities for financial holding companies if they are
“financial in nature” or “incidental” to financial activities. A bank holding
company may become a financial holding company if each of its subsidiary banks
is well capitalized, well managed, and has at least a “satisfactory” CRA rating.
A financial holding company must provide notice to the Federal Reserve within 30
days after commencing activities previously determined by statute or by the
Federal Reserve and Department of the Treasury to be permissible. The Company
has not submitted notice to the Federal Reserve of its intent to be deemed a
financial holding company.





Regulatory
Capital Requirements.The Federal Reserve has adopted capital adequacy
guidelines pursuant to which it assesses the adequacy of capital in examining
and supervising a bank holding company and in analyzing applications to it under
the BHCA. The Federal Reserve’s capital adequacy guidelines are similar to those
imposed on the Bank by the Federal Deposit Insurance Corporation (“FDIC”). See
“Regulation of the Bank-Regulatory Capital Requirements.”





Regulation
of the Bank





General.As a Pennsylvania chartered, FDIC insured commercial bank, the Bank is
subject to extensive regulation and examination by the Department and by the
FDIC, which insures its deposits to the maximum extent permitted by law. The
federal and state laws and regulations applicable to banks regulate, among other
things, the scope of their business, their investments, the reserves required to
be kept against deposits, the timing of the availability of deposited funds and
the nature and amount of and collateral for certain loans. The laws and
regulations governing the Bank generally have been promulgated to protect
depositors and not for the purpose of protecting stockholders. This regulatory
structure also gives the federal and state banking agencies extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the Department, the FDIC or the United
States Congress, could have a material impact on the Company, the Bank and their
operations.





Pennsylvania  Banking
Law.The Pennsylvania Banking Code (“Banking Code”) contains detailed
provisions governing the organization, location of offices, rights and
responsibilities of directors, officers, and employees, as well as corporate
powers, savings and investment operations and other aspects of the Bank and its
affairs. The Banking Code delegates extensive rule-making power and
administrative discretion to the Department so that the supervision and
regulation of state chartered banks may be flexible and readily responsive to
changes in economic conditions and in savings and lending
practices.





The
Federal Deposit Insurance Corporation Act (“FDIA”), however, prohibits state
chartered banks from making new investments, loans, or becoming involved in
activities as principal and equity investments which are not permitted for
national banks unless (1) the FDIC determines the activity or investment
does not pose a significant risk of loss to the Deposit Insurance Fund and
(2) the bank meets all applicable capital requirements. Accordingly, the
additional operating authority provided to the Bank by the Banking Code is
significantly restricted by the FDIA.





Federal Deposit
Insurance.The Bank’s deposits are insured to applicable limits by the
FDIC.  The maximum deposit insurance amount has been increased from
$100,000 to $250,000 until December 31, 2013.  On October 13, 2008,
the FDIC established a Temporary Liquidity Guarantee Program under which the
FDIC fully guarantees all non-interest-bearing transaction accounts until
December 31, 2009 (the “Transaction Account Guarantee Program”) and all senior
unsecured debt of insured depository institutions or their qualified holding
companies issued between October 14, 2008 and June 30, 2009, with the FDIC’s
guarantee expiring by June 30, 2012 (the “Debt Guarantee
Program”).  Senior unsecured debt would include federal funds
purchased and certificates of deposit standing to the credit of the
bank.  After November 12, 2008,








15








institutions
that did not opt out of the Programs by December 5, 2008 were assessed at the
rate of ten basis points for transaction account balances in excess of $250,000
and at a rate between 50 and 100 basis points of the amount of debt
issued.  In May, 2009, the Debt Guarantee Program issue end date and
the guarantee expiration date were both extended, to October 31, 2009 and
December 31, 2012, respectively.  Participating holding companies that
have not issued FDIC-guaranteed debt prior to April 1, 2009 must apply to remain
in the Debt Guarantee Program.  Participating institutions will be
subject to surcharges for debt issued after that date.  Effective
October 1, 2009, the Transaction Account Guarantee Program was extended until
June 30, 2010, with an increased assessment after December 31,
2009.  The Company and the Bank did not opt out of the Debt Guarantee
Program.  The Bank did not opt out of the original Transaction Account
Guarantee Program or its extension.





The FDIC
has adopted a risk-based premium system that provides for quarterly assessments
based on an insured institution’s ranking in one of four risk categories based
on their examination ratings and capital ratios. Well-capitalized institutions
with the CAMELS ratings of 1 or 2 are grouped in Risk Category I and, until
2009, were assessed for deposit insurance at an annual rate of between five and
seven basis points with the assessment rate for an individual institution
determined according to a formula based on a weighted average of the
institution’s individual CAMELS component ratings plus either five financial
ratios or the average ratings of its long-term debt. Institutions in Risk
Categories II, III and IV were assessed at annual rates of 10, 28 and 43 basis
points, respectively.  Insured depository institutions that were in
existence on December 31, 1996 and paid assessments prior to that date (or their
successors) were entitled to a one-time credit against future assessments based
on their past contributions to the predecessor to the Deposit Insurance
Fund.  The Bank used its special assessment credit to offset the cost
of its deposit insurance premium until the fourth quarter of calendar 2007 when
the credit was exhausted.





Pursuant
to the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”), the FDIC
is authorized to set the reserve ratio for the Deposit Insurance Fund annually
at between 1.15% and 1.5% of estimated insured deposits.  Due to
recent bank failures, the FDIC determined that the reserve ratio was 1.01% as of
June 30, 2008.  In accordance with the Reform Act, as amended by the
Helping Families Save Their Home Act of 2009, the FDIC has established and
implemented a plan to restore the reserve ratio to 1.15% within eight
years.  For the quarter beginning January 1, 2009, the FDIC raised the
base annual assessment rate for institutions in Risk Category I to between 12
and 14 basis points while the base annual assessment rates for institutions in
Risk Categories II, III and IV were increased to 17, 35 and 50 basis points,
respectively.  For the quarter beginning April 1, 2009 the FDIC
set the base annual assessment rate for institutions in Risk Category I to
between 12 and 16 basis points and the base annual assessment rates for
institutions in Risk Categories II, III and IV at 22, 32 and 45 basis points,
respectively.  An institution’s assessment rate could be lowered by as
much as five basis points based on the ratio of its long-term unsecured debt to
deposits or, for smaller institutions based on the ratio of certain amounts of
Tier 1 capital to adjusted assets.  The assessment rate may be
adjusted for Risk Category I institutions that have a high level of brokered
deposits and have experienced higher levels of asset growth (other than through
acquisitions) and could be increased by as much as ten basis points for
institutions in Risk Categories II, III and IV whose ratio of brokered deposits
to deposits exceeds 10%.  Reciprocal deposit arrangements like CDARS®
were treated as brokered deposits for Risk Category II, III and IV institutions
but not for institutions in Risk Category I.  An institution’s base
assessment rate would also be increased if an institution’s ratio of secured
liabilities (including FHLB advances and repurchase agreements) to deposits
exceeds 25%.  The maximum adjustment for secured liabilities for
institutions in Risk Categories I, II, III and IV would be 8, 11, 16 and 22.5
basis points, respectively, provided that the adjustment may not increase an
institution’s base assessment rate by more than 50%.





The FDIC
imposed a special assessment equal to five basis points of assets less Tier 1
capital as of June 30, 2009, payable on September 30, 2009, and reserved the
right to impose additional special assessments.  In November, 2009,
instead of imposing additional special assessments, the FDIC amended the
assessment regulations to require all insured depository institutions to prepay
their estimated risk-based assessments for the fourth quarter of 2009, and for
all of 2010, 2011 and 2012 on December 30, 2009.  For








16





purposes
of estimating the future assessments, each institution’s base assessment rate in
effect on September 30, 2009 was used, assuming a 5% annual growth rate in the
assessment base and a 3 basis point increase in the assessment rate in 2011 and
2012.  The prepaid assessment will be applied against actual quarterly
assessments until exhausted.  Any funds remaining after June 30, 2013
will be returned to the institution.  If the prepayment would impair
an institution’s liquidity or otherwise create significant hardship, it may
apply for an exemption.  Requiring this prepaid assessment does not
preclude the FDIC from changing assessment rates or from further revising the
risk-based assessment system.





In
addition, all FDIC-insured institutions are required to pay assessments to the
FDIC to fund interest payments on bonds issued by the Financing Corporation
(“FICO”), an agency of the Federal government established to recapitalize the
Federal Savings and Loan Insurance Corporation.  The FICO assessment
rates, which are determined quarterly, averaged .01% of insured deposits on an
annualized basis in fiscal year 2009.  These assessments will continue
until the FICO bonds mature in 2017.





Regulatory
Capital Requirements.The FDIC has promulgated capital adequacy
requirements for state-chartered banks that, like the Bank, are not members of
the Federal Reserve System. At December 31, 2009, the Bank exceeded all
regulatory capital requirements and was classified as “well
capitalized.”





The
FDIC’s capital regulations establish a minimum 3% Tier I leverage capital
requirement for the most highly-rated state-chartered, non-member banks, with an
additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively increases the minimum Tier
I leverage ratio for such other banks to 4% to 5%. Under the FDIC’s regulation,
the highest-rated banks are those that the FDIC determines are not anticipating
or experiencing significant growth and have well diversified risk, including no
undue interest rate risk exposure, excellent asset quality, high liquidity, good
earnings and, in general, which are considered a strong banking organization,
rated composite 1 under the Uniform Financial Institutions Rating System. Tier I
or core capital is defined as the sum of common stockholders’ equity (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
and minority interests in consolidated subsidiaries, minus all intangible assets
other than certain servicing and purchased credit card relationships, and minus
certain other listed assets.





The
FDIC’s regulations also require that state-chartered, non-member banks meet a
risk-based capital standard. The risk-based capital standard requires the
maintenance of total capital (which is defined as Tier I capital and
supplementary (Tier 2) capital) to risk weighted assets of 8%. In determining
the amount of risk-weighted assets, all assets, plus certain off balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item. The components of Tier
I capital for the risk-based standards are the same as those for the leverage
capital requirement. The components of supplementary (Tier 2) capital include
cumulative perpetual preferred stock, mandatory subordinated debt, perpetual
subordinated debt, intermediate-term preferred stock, up to 45% of unrealized
gains on equity securities and a bank’s allowance for loan and lease losses.
Allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
supplementary capital that may be included in total capital is limited to 100%
of Tier I capital.





A bank
that has less than the minimum leverage capital requirement is subject to
various capital plan and activities restriction requirements. The FDIC’s
regulations also provide that any insured depository institution with a ratio of
Tier I capital to total assets that is less than 2.0% is deemed to be operating
in an unsafe or unsound condition pursuant to Section 8(a) of the FDIA and could
be subject to potential termination of deposit insurance.





The Bank
is also subject to minimum capital requirements imposed by the Department on
Pennsylvania-chartered depository institutions. Under the Department’s capital
regulations, a Pennsylvania bank or savings bank must maintain a minimum
leverage ratio of Tier 1 capital (as defined under the FDIC’s capital
regulations) to total assets of 4%. In addition, the Department has the
supervisory discretion to require








17




a higher
leverage ratio for any institutions based on the institution’s substandard
performance in any of a number of areas. The Bank was in compliance in both the
FDIC and Pennsylvania capital requirements as of December 31, 2009.





Affiliate
Transaction Restrictions.Federal laws strictly limit the ability of
banks to engage in transactions with their affiliates, including their bank
holding companies. In particular loans by a subsidiary bank and its parent
company or the nonbank subsidiaries of the bank holding company are limited to
10% of a bank subsidiary’s capital and surplus and, with respect to such parent
company and all such nonbank subsidiaries, to an aggregate of 20% of the bank
subsidiary’s capital and surplus. Further, loans and other extensions of credit
generally are required to be secured by eligible collateral in specified
amounts. Federal law also requires that all transactions between a bank and its
affiliates be on terms as favorable to the bank as transactions with
non-affiliates.





Loans to One
Borrower.Under Pennsylvania law, commercial banks have, subject to
certain exemptions, lending limits to one borrower in an amount equal to 15% of
the institution’s capital accounts. An institution’s capital account includes
the aggregate of all capital, surplus, undivided profits, capital securities and
general reserves for loan losses. Pursuant to the national bank parity
provisions of the Pennsylvania Banking Code, the Bank may also lend up to the
maximum amounts permissible for national banks, which are allowed to make loans
to one borrower of up to 25% of capital and surplus in certain circumstances. As
of December 31, 2009, loans-to-one-borrower limitation was $9.9 million and the
Bank was in compliance with such limitation.





Federal Home Loan
Bank System.The Bank is a member of the FHLB of Pittsburgh, which is one
of 12 regional FHLBs. Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from funds deposited
by member institutions and proceeds from the sale of consolidated obligations of
the FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Trustees of the
FHLB.





As a
member, the Bank is required to purchase and maintain restricted stock in the
FHLB of Pittsburgh in an amount equal to the greater of 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year or 5% of the Bank’s outstanding
advances from the FHLB. At December 31, 2009, the Bank was in compliance with
this requirement. In December 2008, the FHLB of Pittsburgh notified member banks
that is was suspending dividend payments and the repurchase of excess capital
stock. Management evaluates the restricted stock for impairment in accordance
with Statement of Position (SOP) 01-6, Accounting by Certain Entities (Including
Entities with Trade Receivables) That Lend to or Finance the Activities of
Others. Management’s determination of whether these investments are impaired is
based on the assessment of the ultimate recoverability of their costs rather
than by recognizing temporary declines in value. Management believes no
impairment charge is necessary related to FHLB stock as of December 31,
2009.





Federal Reserve
System.The Federal Reserve requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking and NOW accounts) and non-personal time
deposits. The balances maintained to meet the reserve requirements imposed by
the Federal Reserve may be used to satisfy the liquidity requirements that are
imposed by the Department. At December 31, 2009, the Bank met its reserve
requirements.





Restrictions on
Dividends. The Pennsylvania Banking Code states, in part, that dividends
may be declared and paid only out of accumulated net earnings and may not be
declared or paid unless surplus (retained earnings) is at least equal to
contributed capital. The Bank has not declared or paid any dividends which cause
the Bank’s retained earnings to be reduced below the amount required. Finally,
dividends may not be declared or paid if the Bank is in default in payment of
any assessment due the FDIC.









18


The
Federal Reserve has issued a policy statement on the payment of cash dividends
by bank holding companies, which expresses the Federal Reserve’s view that a
bank holding company should pay cash dividends only to the extent that the
holding company’s net income for the past year is sufficient to cover both the
cash dividends and a rate of earnings retention that is consistent with the
holding company’s capital needs, asset quality and overall financial condition.
The Federal Reserve also indicated that it would be inappropriate for a company
experiencing serious financial problems to borrow funds to pay dividends. In a
recent Supervisory Letter, the Federal Reserve staff has stated that, as a
general matter, bank holding companies should eliminate cash dividends if net
income available to shareholders for the past four quarters, net of dividends
previously paid, is not sufficient to fully fund the dividend. Furthermore,
under the federal prompt corrective action regulations, the Federal Reserve may
prohibit a bank holding company from paying any dividends if the holding
company’s bank subsidiary is classified as “undercapitalized.”





Item 1A. Risk
Factors





In
determining whether to invest in our securities, investors should consider,
among other factors, the following:





Risks
Related to Our Business





Our
success will depend upon our ability to effectively manage our future
growth.





We
believe that we have in place the management and systems, including data
processing systems, internal controls and a strong credit culture, to support
continued growth. However, our continued growth and profitability depend on the
ability of our officers and key employees to manage such growth effectively, to
attract and retain skilled employees and to maintain adequate internal controls
and a strong credit culture. Accordingly, there can be no assurance that we will
be successful in managing our expansion, and the failure to do so would
adversely affect our financial condition and results of operations.





If
we experience loan losses in excess of our allowance, our earnings will be
adversely affected.





The risk
of credit losses on loans varies with, among other things, general economic
conditions, the type of loan being made, the creditworthiness of the borrower
over the term of the loan and, in the case of a collateralized loan, the value
and marketability of the collateral for the loan. Management maintains an
allowance for loan losses based upon, among other things, historical experience,
an evaluation of economic conditions and regular reviews of delinquencies and
loan portfolio quality. Based upon such factors, management makes various
assumptions and judgments about the ultimate collectibility of the loan
portfolio and provides an allowance for loan losses based upon a percentage of
the outstanding balances and for specific loans when their ultimate
collectibility is considered questionable. If management’s assumptions and
judgments prove to be incorrect and the allowance for loan losses is inadequate
to absorb future losses, or if the bank regulatory authorities require us to
increase the allowance for loan losses as a part of their examination process,
our earnings and capital could be significantly and adversely
affected.





As of
December 31, 2009, our allowance for loan losses was $5,453,000 which
represented 1.50% of outstanding loans. At such date, we had 18 nonperforming
loans totaling $5,015,000 and seven impaired loans totaling $8,027,000. We
actively manage our nonperforming loans in an effort to minimize credit losses.
Although management believes that its allowance for loan losses is adequate,
there can be no assurance that the allowance will prove sufficient to cover
future loan losses. Further, although management uses the best information
available to make determinations with respect to the allowance for loan losses,
future adjustments may be necessary if economic conditions differ substantially
from the assumptions used or adverse developments arise with respect to our
non-performing or performing loans. Material additions to our allowance for loan
losses would result in a decrease in our net income and capital, and could have
a material adverse effect on our financial condition and results of
operations.





19





Most
of our loans are to commercial borrowers, which have a higher degree of risk
than other types of loans.





Commercial
loans are often larger and may involve greater risks than other types of
lending. Because payments onsuch loans are often
dependent on the successful operation of the property or business involved,
repayment of such loans may be more sensitive than other types of loans due to
adverse conditions in the real estate market or the economy. Unlike residential
mortgage loans, which generally are made on the basis of the borrower’s ability
to make repayment from his or her employment and other income and which are
secured by real property whose value tends to be more easily ascertainable,
commercial loans typically are made on the basis of the borrower’s ability to
make repayment from the cash flow of the borrower’s business. As a result, the
availability of funds for the repayment of commercial loans may be substantially
dependent on the success of the business itself and the general economic
environment. If the cash flow from business operations is reduced, the
borrower’s ability to repay the loan may be impaired.





Most
of our loans are secured, in whole or in part, with real estate collateral which
is subject to declines in value.





In
addition to the financial strength and cash flow characteristics of the borrower
in each case, we often secure our loans with real estate collateral. As of
December 31, 2009, approximately 85.3% of our loans, had real estate as a
primary, secondary or tertiary component of collateral. In addition,
approximately 40% of our securities portfolio consisted of mortgage-backed
securities issued by either Fannie Mae (FNMA), Freddie Mac (FHLMC) or Government
National Mortgage Association (GNMA). Real estate values and real estate markets
are generally affected by, among other things, changes in national, regional or
local economic conditions, fluctuations in interest rates and the availability
of loans to potential purchasers, changes in tax laws and other governmental
statutes, regulations and policies, and acts of nature. The real estate
collateral in each case provides an alternate source of repayment in the event
of default by the borrower. If real estate prices in our markets decline, the
value of the real estate collateral securing our loans could be reduced. If we
are required to liquidate the collateral securing a loan during a period of
reduced real estate values to satisfy the debt, our earnings and capital could
be adversely affected.





We
may be required to record other-than-temporary impairment charges in respect of
our investment securities portfolio and restricted stock.




As of
December 31, 2009, we had approximately $131.3 million in investments, including
mortgage-backed securities on which we had unrealized losses of $173,000. In
addition, we had $3,538,000 of restricted stock in the FHLB of Pittsburgh, which
has suspended the payment of dividends and repurchases of excess capital stock.
We may be required to record impairment charges on our investments and FHLB
stock if they suffer a decline in value that is considered other-than-temporary.
Numerous factors, including lack of liquidity for resales of certain investment
securities, absence of reliable pricing information for investment securities,
adverse changes in the business climate, or adverse actions by regulators could
have a negative effect on the value of our investments and mortgage backed
securities. If an impairment charge is significant enough to result in a loss
for the period, it could affect the ability of our bank subsidiary to upstream
dividends to us, which could have a material adverse effect on our liquidity and
our ability to pay dividends to stockholders and could also negatively impact
our regulatory capital ratios and result in us not being classified as “well
capitalized” for regulatory purposes.




Higher
FDIC deposit insurance premiums and assessments could adversely affect our
earnings and financial condition.





FDIC
insurance premiums increased substantially in 2009 and we may be required to pay
higher FDIC premiums in the future.  The large number of bank failures
has significantly depleted the deposit insurance fund and reduced the ratio of
reserves to insured deposits below the designated reserve ratio.  To
restore the deposit insurance fund, the FDIC adopted a revised risk-based
deposit insurance assessment







20





schedule,
which significantly raised deposit insurance premiums on all insured
banks.  The FDIC also imposed a five basis point special assessment
payable September 30, 2009 on each insured depository institution’s assets
minus Tier 1 capital as of June 30, 2009.   In order to
increase the funds available to the Deposit Insurance Fund, the FDIC required
all insured depository institutions to prepay their federal deposit insurance
assessments through 2012.  The prepayment was based on the
institution’s assessment base and assessment rate as of September 30, 2009
assuming 5% annual growth in deposits and a three basis point increase in the
assessment rate during years 2011 and 2012.  The prepayment was
recorded on the balance sheet as a non-earning prepaid expense asset against
which future quarterly assessments will be charged.




We also
participate in the FDIC’s Temporary Liquidity Guarantee Program which provides
federal deposit insurance coverage for noninterest-bearing transaction deposit
accounts in excess of $250,000.  For this additional coverage, we paid
the FDIC an annual assessment of 10 basis points on the amounts in excess of
$250,000 during 2009.  To the extent that these assessments are
insufficient to cover any loss or expenses arising from the program, the FDIC is
authorized to impose an emergency special assessment on all FDIC-insured
depository institutions.  After December 31, 2009, the fee for
participation in transaction account guarantee program of the Temporary
Liquidity Guarantee Program was increased to between 15 and 25 basis points,
depending on the institution’s risk category.  These changes will
cause our deposit insurance expense to increase. These actions could
significantly increase our noninterest expense in and for the foreseeable
future.






The
soundness of other financial institutions could adversely affect
us.




Our
ability to engage in routine funding transactions could be adversely affected by
the actions and commercial soundness of other financial
institutions.  Defaults by, or even rumors or questions about, one or
more financial services institutions, or the financial services industry
generally, have led to market-wide liquidity problems and could lead to losses
or defaults by us or by other institutions.  There is no assurance
that any such losses would not materially and adversely affect our results of
operations.




Recent
legislative and regulatory initiatives to address difficult market and economic
conditions may not stabilize the U.S. banking system.




The
recently enacted Emergency Economic Stabilization Act of 2008 (the “EESA”)
authorizes Treasury to purchase from financial institutions and their holding
companies up to $700 billion in mortgage loans, mortgage-related securities and
certain other financial instruments, including debt and equity securities issued
by financial institutions and their holding companies, under a troubled asset
relief program, or “TARP.” The purpose of TARP is to restore confidence and
stability to the U.S. banking system and to encourage financial institutions to
increase their lending to customers and to each other. The Treasury has
allocated $250 billion towards the TARP Capital Purchase Program. Under the TARP
Capital Purchase Program, Treasury is purchasing equity securities from
participating institutions. The EESA also increased federal deposit insurance on
most deposit accounts from $100,000 to $250,000. This increase is in place until
the end of 2009 and is not covered by deposit insurance premiums paid by the
banking industry.




The EESA
followed, and has been followed by, numerous actions by the Board of Governors
of the Federal Reserve System, the U.S. Congress, Treasury, the FDIC, the SEC
and others to address the current liquidity and credit crisis that has followed
the sub-prime meltdown that commenced in 2007. These measures include
homeowner relief that encourage loan restructuring and modification; the
establishment of significant liquidity and credit facilities for financial
institutions and investment banks; the lowering of the federal funds rate;
emergency action against short selling practices; a temporary guaranty program
for money market funds; the establishment of a commercial paper funding facility
to provide back-stop liquidity to commercial paper issuers; and coordinated
international efforts to address illiquidity and other weaknesses in the banking
sector. The purpose of these legislative and regulatory actions is to stabilize
the U.S. banking system. The EESA and the other regulatory initiatives described
above may not have their desired effects. If








21




the
volatility in the markets continues and economic conditions fail to improve or
worsen, our business, financial condition and results of operations could be
materially and adversely affected.




Additionally,
legislation has been introduced into each house of Congress proposing sweeping
financial reforms, including the creation of a Consumer Financial Protection
Agency with extensive powers.  If enacted, the legislation would
significantly alter not only how financial firms are regulated but also how they
conduct their business.




Current
levels of market volatility are unprecedented.




The
capital and credit markets have been experiencing volatility and disruption for
more than a year. In recent months, the volatility and disruption has reached
unprecedented levels. In some cases, the markets have produced downward
pressure on stock prices and credit availability for certain issuers without
regard to those issuers’ underlying financial strength. If current levels of
market disruption and volatility continue or worsen, there can be no assurance
that we will not experience an adverse effect, which may be material, on our
ability to access capital and on our business, financial condition and results
of operations.




Liquidity
risk could impair our ability to fund operations and jeopardize our financial
condition.




Liquidity
is essential to our business. An inability to raise funds through deposits,
borrowings, the sale of loans and investments and other sources could have a
substantial negative effect on our liquidity. Our access to funding sources
in amounts adequate to finance our activities or on terms which are acceptable
to us could be impaired by factors that affect us specifically or the financial
services industry or economy in general. Factors that could detrimentally
impact our access to liquidity sources include a decrease in the level of our
business activity as a result of a downturn in the markets in which our loans
are concentrated or adverse regulatory action against us. Our ability to
borrow could also be impaired by factors that are not specific to us, such as a
disruption in the financial markets or negative views and expectations about the
prospects for the financial services industry in light of the recent turmoil
faced by banking organizations and the continued deterioration in credit
markets.




We
may elect or be compelled to seek additional capital in the future, but that
capital may not be available when it is needed.




We are
required by federal and state regulatory authorities to maintain adequate levels
of capital to support our operations. In addition, we may elect to raise
additional capital to support our business or to finance acquisitions, if any,
or we may otherwise elect or be required to raise additional capital. In
that regard, a number of financial institutions have recently raised
considerable amounts of capital in response to a deterioration in their results
of operations and financial condition arising from the turmoil in the mortgage
loan market, deteriorating economic conditions, declines in real estate values
and other factors. Should we be required by regulatory authorities to raise
additional capital, we may seek to do so through the issuance of, among other
things, our common stock or preferred stock.




Our
ability to raise additional capital, if needed, will depend on conditions in the
capital markets, economic conditions and a number of other factors, many of
which are outside our control, and on our financial performance. Accordingly, we
cannot assure you of our ability to raise additional capital if needed or on
terms acceptable to us. If we cannot raise additional capital when needed, it
may have a material adverse effect on our financial condition, results of
operations and prospects.




Our
business is geographically concentrated and is subject to regional economic
factors that could have an adverse impact on our business.





Substantially
all of our business is with customers in our market area of Northeastern
Pennsylvania. Most of our customers are consumers and small and medium-sized
businesses which are dependent upon the regional economy. Adverse changes in
economic and business conditions in our markets could adversely








22





affect
our borrowers, their ability to repay their loans and to borrow additional
funds, and consequently our financial condition and performance.




Additionally,
we often secure our loans with real estate collateral, most of which is located
in Northeastern Pennsylvania. A decline in local economic conditions could
adversely affect the values of such real estate. Consequently, a decline in
local economic conditions may have a greater effect on our earnings and capital
than on the earnings and capital of larger financial institutions whose real
estate loan portfolios are geographically diverse.




The
loss of senior executive officers and certain other key personnel could hurt our
business.





Our
success depends, to a great extent, upon the services of Lewis J. Critelli, our
President and Chief Executive Officer.  Although we have an employment
agreement with non-compete provisions with Mr.  Critelli, the existence of
such agreement does not assure that we will retain his services. The unexpected
loss of Mr. Critelli could have a material adverse effect on our operations.
From time to time, we also need to recruit personnel to fill vacant positions
for experienced lending officers and branch managers. Competition for qualified
personnel in the banking industry is intense, and there can be no assurance that
we will continue to be successful in attracting, recruiting and retaining the
necessary skilled managerial, marketing and technical personnel for the
successful operation of our existing lending, operations, accounting and
administrative functions or to support the expansion of the functions necessary
for our future growth. Our inability to hire or retain key personnel could have
a material adverse effect on our results of operations.




Our
legal lending limits are relatively low and restrict our ability to compete for
larger customers.





At
December 31, 2009, our lending limit per borrower was approximately $9.9
million, or 15% of our capital plus allowance for loan losses. Accordingly, the
size of loans that we can offer to potential borrowers is less than the size of
loans that many of our competitors with larger capitalization are able to offer.
We may engage in loan participations with other banks for loans in excess of our
legal lending limits. However, there can be no assurance that such
participations will be available at all or on terms which are favorable to us
and our customers.





Risks
Related to Our Common Stock





There
is a limited trading market for our common stock, which may adversely impact
your ability to sell your shares and the price you receive for your
shares.





Although
our common stock is quoted on the Nasdaq Global Market, there has been limited
trading activity in our stock and an active trading market is not expected to
develop. This means that there may be limited liquidity for our common stock,
which may make it difficult to buy or sell our common stock, may negatively
affect the price of our common stock and may cause volatility in the price of
our common stock.





There
are restrictions on our ability to pay cash dividends.





Although
we have paid cash dividends on a quarterly basis since 1996, and the Bank has
paid dividends for many previous years, there is no assurance that we will
continue to pay cash dividends. Future payment of cash dividends, if any, will
be at the discretion of the Board of Directors and will be dependent upon our
financial condition, results of operations, capital requirements and such other
factors as the Board may deem relevant and will be subject to applicable federal
and state laws that impose restrictions on our ability to pay
dividends.





23


Our
common stock is not insured and you could lose the value of your entire
investment.





An
investment in shares of our common stock is not a deposit and is not insured
against loss by the government.





Our
management and significant shareholders control a substantial percentage of our
stock and therefore have the ability to exercise substantial control over our
affairs.





As of
December 31, 2009, our directors and executive officers beneficially owned
approximately 250,465 shares, or approximately 8.8% of our common stock,
including options to purchase 87,593 shares, in the aggregate, of our common
stock at exercise prices ranging from $10.36 to $31.50 per share. Because of the
large percentage of stock held by our directors and executive officers and other
significant shareholders, these persons could influence the outcome of any
matter submitted to a vote of our shareholders.





We
may issue additional shares of common or preferred stock, which may dilute the
ownership and voting power of our shareholders and the book value of our common
stock.





We are
currently authorized to issue up to 10,000,000 shares of common stock of which
2,772,436 shares are currently outstanding and up to 5,000,000 shares of
preferred stock of which no shares are outstanding. Our Board of Directors has
authority, without action or vote of the shareholders, to issue all or part of
the authorized but unissued shares and to establish the terms of any series of
preferred stock. These authorized but unissued shares could be issued on terms
or in circumstances that could dilute the interests of other stockholders. In
addition, a total of 250,000 shares of common stock have been reserved for
issuance under the Norwood Financial Corp 2006 Stock Option Plan, of which
116,645 were issued as of December 31, 2009. As of December 31, 2009, options to
purchase a total of 146,915 shares were exercisable and had exercise prices
ranging from $10.36 to $31.50. Any such issuance will dilute the percentage
ownership interest of shareholders and may further dilute the book value of our
common stock.





Provisions
of our Articles of Incorporation and the Pennsylvania Business Corporation Law
could deter takeovers which are opposed by the Board of Directors.





Our
articles of incorporation require the approval of 80% of our outstanding shares
for any merger or consolidation unless the transaction meets certain fair price
criteria or the business combination has been approved or authorized by the
Board of Directors. In addition, our articles of incorporation may require the
disgorgement of profits realized by any person who attempts to acquire control
of the Company. As a Pennsylvania corporation with a class of securities
registered with the Securities and Exchange Commission, the Company is governed
by certain provisions of the Pennsylvania Business Corporation Law that, inter alia, permit the
disparate treatment of certain shareholders; prohibit calls of special meetings
of shareholders; require unanimous written consent for shareholder action in
lieu of a meeting; require shareholder approval for certain transactions in
which a shareholder has an interest; and impose additional requirements on
business combinations with persons who are the beneficial owners of more than
20% of the Company’s stock.





Risks
Related to Our Industry





We
operate in a competitive market which could constrain our future growth and
profitability.





We
operate in a competitive environment, competing for deposits and loans with
commercial banks, savings associations and other financial entities. Competition
for deposits comes primarily from other commercial banks, savings associations,
credit unions, money market and mutual funds and other investment alternatives.
Competition for loans comes primarily from other commercial banks, savings
associations, mortgage banking firms, credit unions and other financial
intermediaries. Many of the financial intermediaries operating in our market
area offer certain services, such as international banking services,








24





which we
do not offer. Moreover, banks with a larger capitalization and financial
intermediaries not subject to bank regulatory restrictions have larger lending
limits and are thereby able to serve the needs of larger customers.





We
are required to comply with extensive and complex governmental regulation which
can adversely affect our business.





Our
operations are and will be affected by current and future legislation and by the
policies established from time to time by various federal and state regulatory
authorities. We are subject to supervision and periodic examination by the
Federal Reserve Board (the “FRB”), “FDIC” and the Pennsylvania Department of
Banking. Banking regulations, designed primarily for the safety of depositors,
may limit a financial institution’s growth and the return to its investors by
restricting such activities as the payment of dividends, mergers with or
acquisitions by other institutions, investments, loans and interest rates,
interest rates paid on deposits, expansion of branch offices, and the offering
of securities or trust services. We are also subject to capitalization
guidelines established by federal law and could be subject to enforcement
actions to the extent that we are found by regulatory examiners to be
undercapitalized. It is not possible to predict what changes, if any, will be
made to existing federal and state legislation and regulations or the effect
that any such changes may have on our future business and earnings prospects.
Further, the cost of compliance with regulatory requirements may adversely
affect our ability to operate profitability.





In
addition, the monetary policies of the FRB have had a significant effect on the
operating results of banks in the past and are expected to continue to do so in
the future. Among the instruments of monetary policy used by the FRB to
implement its objectives are changes in the discount rate charged on bank
borrowings and changes in the reserve requirements on bank deposits. It is not
possible to predict what changes, if any, will be made to the monetary policies
of the FRB or to existing federal and state legislation or the effect that such
change may have on our future business and earnings prospects.





During
the past several years, significant legislative attention has been focused on
the regulation and deregulation of the financial services industry. Non-bank
financial institutions, such as securities brokerage firms, insurance companies
and money market funds, have been permitted to engage in activities which
compete directly with traditional bank business.





We
realize income primarily from the difference between interest earned on loans
and investments and interest paid on deposits and borrowings, and changes in
interest rates may adversely affect our profitability and assets.





Changes
in prevailing interest rates may hurt our business. We derive our income mainly
from the difference or “spread” between the interest earned on loans, securities
and other interest-earning assets, and interest paid on deposits, borrowings and
other interest-bearing liabilities. In general, the larger the spread, the more
we earn. When market rates of interest change, the interest we receive on our
assets and the interest we pay on our liabilities will fluctuate. This can cause
decreases in our spread and can adversely affect our income.





Interest
rates affect how much money we can lend. For example, when interest rates rise,
the cost of borrowing increases and loan originations tend to decrease. In
addition, changes in interest rates can affect the average life of loans and
investment securities. A reduction in interest rates generally results in
increased prepayments of loans and mortgage-backed securities, as borrowers
refinance their debt in order to reduce their borrowing cost. This causes
reinvestment risk, because we generally are not able to reinvest prepayments at
rates that are comparable to the rates we earned on the prepaid loans or
securities. Changes in market interest rates could also reduce the value of our
financial assets. If we are unsuccessful in managing the effects of changes in
interest rates, our financial condition and results of operations could
suffer.





25





As
a public company, we are subject to numerous reporting requirements that are
currently evolving and could substantially increase our operating expenses and
divert management’s attention from the operation of our business.





The
Sarbanes-Oxley Act of 2002, which became law in July 2002, has required changes
in some of our corporate governance, securities disclosure and compliance
practices. In response to the requirements of that Act, the SEC has promulgated
new rules covering a variety of subjects. Compliance with these new rules has
significantly increased our legal and financial and accounting costs, and we
expect these increased costs to continue. In addition, compliance with the
requirements has taken a significant amount of management’s and the Board of
Directors’ time and resources. Likewise, these developments may make it more
difficult for us to attract and retain qualified members of our board of
directors, particularly independent directors, or qualified executive
officers.





As
directed by Section 404 of the Sarbanes-Oxley Act, the SEC adopted rules
requiring public companies to include a report of management on the company’s
internal control over financial reporting in their annual reports on Form 10-K
that contains an assessment by management of the effectiveness of the company’s
internal control over financial reporting. In addition, the independent
registered public accounting firm auditing the company’s financial statements
must report on the effectiveness of the company’s internal control over
financial reporting. If we are ever unable to conclude that we have effective
internal control over financial reporting or, if our independent auditors are
unable to provide us with an unqualified report as to the effectiveness of our
internal control over financial reporting for any future year-ends as required
by Section 404, investors could lose confidence in the reliability of our
financial statements, which could result in a decrease in the value of our
securities.







Item 1B. Unresolved Staff
Comments





None





Item  2.
Properties





The Bank
operates from its main office located at 717 Main Street, Honesdale,
Pennsylvania and ten additional branch offices. The Bank’s total investment in
office property and equipment is $14.0 million with a net book value of $5.2
million as of December 31, 2009. The Bank currently operates automated teller
machines at all eleven of its facilities. The Bank leases fourof its locations with
minimum lease commitments of $3,347,000 through 2029. Three of the locations
have various renewal options.





26


Item 3. Legal
Proceedings





Neither
the Company nor its subsidiaries are involved in any pending legal proceedings,
other than routine legal matters occurring in the ordinary course of business,
which in the aggregate involve amounts which are believed by management to be
immaterial to the consolidated financial condition or results of operations of
the Company.





Item
4.[Reserved]


PART
II





Item 5. Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities





Information
relating to the market for Registrant’s common equity and related stockholder
matters appears under “Capital and Dividends” in the Registrant’s Annual Report
to Stockholders for the fiscal year ended December 31, 2009 (“Annual Report”)
and is incorporated herein by reference.





Item 6. Selected Financial
Data





The
above-captioned information appears under “Summary of Selected Financial Data”
in the Annual Report, and is incorporated herein by reference.





Item 7. Management’s
Discussion and Analysis of Financial Conditions and Results of
Operations





The
above-captioned information appears under “Management’s Discussion and Analysis”
in the Annual Report and is incorporated herein by reference from the Annual
Report.





Item 7A. Quantitative and
Qualitative Disclosure About Market Risk





The
above-captioned information appears under “Management’s Discussion and Analysis
-- Market Risk” in the Annual Report and is incorporated herein by
reference.





Item 8. Financial Statements
and Supplementary Data





The
Company’s consolidated financial statements listed in Item 15 and the Summary of
Quarterly Results (unaudited) are incorporated herein by reference from the
Annual Report.





Item 9. Changes In and
Disagreements with Accountants on Accounting and Financial
Disclosure





The
above-captioned information appears under “Change in Auditors” in the Annual
Report and is incorporated herein by reference.





Item 9A.
Controls and Procedures





The
above-captioned information appears under “Change in Auditors” in the Annual
Report and is incorporated herein by references.





(a)  Disclosure
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 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,








27





processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms.





(b)  Internal Control
over Financial Reporting.Management’s Report on Internal Control over
Financial Reporting and the Report of the Company’s Independent Registered
Public Accounting Firm are incorporated herein by reference from the Annual
Report. 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.





Item 9B. Other
Information





None.





PART
III





Item 10. Directors,
Executive Officers and Corporate Governance





The
information contained under the sections captioned “Section 16(a) Beneficial
Ownership Reporting Compliance” and “Proposal 1 -- Election of Directors” and
“Corporate Governance” in the Proxy Statement for the 2010 Annual Meeting of
Stockholders (the “Proxy Statement”) are incorporated herein by
reference.





The
Company has adopted a Code of Ethics that applies to its principal executive
officer, principal financial officer and principal accounting officer or
controller. The Company undertakes to provide a copy of the Code of Ethics to
any person without charge, upon request to Joseph A. Kneller, Senior Vice
President, Norwood Financial Corp., 717 Main Street, Honesdale,
PA  18431.





Item 11. Executive
Compensation





The
information contained under the section captioned “Director and Executive
Compensation” in the Proxy Statement is incorporated herein by
reference.





Item 12. Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder
Matters





(a)           Security Ownership of Certain
Beneficial Owners





Information
required by this item is incorporated herein by reference to the Section
captioned  “Principal Holders of Our Common Stock” of the Proxy
Statement.





(b)           Security Ownership of
Management





Information
required by this item is incorporated herein by reference to the sections
captioned  “Proposal 1 -- Election of Directors” of the Proxy
Statement.





(c)
            Changes in
      Control





Management
      of the Company knows of no arrangements, including any pledge by any
      person of securities of the Company, the operation of which may at a
      subsequent date result in a change in control of the
      registrant.





28


(d)           Equity Compensation Plan
Information








EQUITY
COMPENSATION PLAN INFORMATION





(a)
            (b)
            
            (c)Number
      of Securities to be issued upon exercise of outstanding options, warrants
      and rights
            Weighted-average
      exercise price of outstanding options, warrants and rights
            
            Number
      of securities remaining available for future issuance under equity
      compensation plans, (excluding securities reflected in column
      (a))Equity
      compensation plans
              approved
      by security holdersStock
      Option Plan
            
            
            50,262
            
            
            $
            24.73
            
            
            
            --2006
      Stock Option Plan
            
            
            116,675
            
            
            
            29.81
            
            
            
            132,300Equity
      compensation plans not
              approved
      by security holders1999
      Directors Stock Compensation Plan
            
            
            3,978
            
            
            
            19.25
            
            
            
            --TOTAL
            
            
            170,915
            
            
            $
            28.07
            
            
            
            132,300








The 1999
Directors Stock Compensation Plan provides for annual grants of options to
non-employee directors as of the close of business on the day of the first
regularly scheduled board meeting in December of each year. The amounts of such
awards are determined by the board or a committee thereof. The exercise price
for each option is equal to the fair market value of the stock as of the date of
grant. Options generally have terms of ten years and one day from the date of
grant and vest over periods ranging from six months to one year from the date of
grant. Except in the event of death or disability, optionees may not sell shares
acquired on exercise of options within six months of the date of grant. Options
are not transferable except in the event of the death of the
optionee.





Item 13. Certain
Relationships and Related Transactions and Director
Independence





The
information required by this item is incorporated herein by reference to the
section in the Proxy Statement captioned “Related Party Transactions” and
“Corporate Governance”.





Item 14. Principal
Accounting Fees and Services





The
information required by this item is incorporated herein by reference to the
section in the Proxy Statement captioned “Proposal 2 -- Ratification of
Appointment of Independent Registered Public Accounting Firm.”





PART
IV





Item 15. Exhibits, Financial
Statement, and Schedules





(a)
            Listed
      below are all financial statements, schedules and exhibits filed as part
      of this report, and are incorporated by
  reference.





1.
            The
      consolidated balance sheets of Norwood Financial Corp. and subsidiary as
      of December 31, 2009 and 2008, and the related consolidated statements of
      income, stockholders’ equity and cash flows for the years in the three
      year period ended December 31, 2009, together with








29




the
      related notes and the independent registered public accounting firm
      reports of S.R. Snodgrass, A.C. and ParenteBeard LLC, independent
      registered public accounting
firms.


2.
            Schedules
      omitted as they are not applicable.





3.
            Exhibits





No.
            Description3(i)
            Articles
      of Incorporation of Norwood Financial Corp.(1)3(ii)
            Bylaws
      of Norwood Financial Corp.4.0
            Specimen
      Stock Certificate of Norwood Financial Corp.(1)10.1†
            Employment
      Agreement with Lewis J. Critelli10.2†
            Change
      in Control Severance Agreement with William S. Lance10.3†
            Norwood
      Financial Corp. Stock Option Plan (3)10.4†
            Salary
      Continuation Agreement between the Bank and William W. Davis, Jr. (2)10.5†
            Salary
      Continuation Agreement between the Bank and Lewis J. Critelli (2)10.6†
            Salary
      Continuation Agreement between the Bank and Edward C. Kasper (2)10.7†
            1999
      Directors Stock Compensation Plan (2)10.8†
            Salary
      Continuation Agreement between the Bank and Joseph A. Kneller (4)10.9†
            Salary
      Continuation Agreement between the Bank and John H. Sanders (4)10.10†
            2006
      Stock Option Plan (5)10.11†
            First
      and Second Amendments to Salary Continuation Agreement with William W.
      Davis, Jr. (6)10.12†
            First
      and Second Amendments to Salary Continuation Agreement with Lewis J.
      Critelli (6)10.13†
            First
      and Second Amendments to Salary Continuation Agreement with Edward C.
      Kasper (6)10.14†
            First
      and Second Amendments to Salary Continuation Agreement with Joseph A.
      Kneller (6)10.15†
            First
      and Second Amendments to Salary Continuation Agreement with John H.
      Sanders (6)13
            Annual
      Report to Stockholders for the fiscal year ended December 31,
      200916.1
            Letter
      re Change in Certifying Accountant (7)21
            Subsidiaries
      of Norwood Financial Corp. (see Item 1. Business, General and Subsidiary
      Activity)23.1
            Consent
      of S.R. Snodgrass, A.C.23.2
            Consent
      of ParenteBeard, LLC31
            Rule
      13a-14(a)/15d-14(a) Certifications of CEO and CFO32
            Certification
      pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of Sarbanes Oxley
      Act of 2002








†
            Management
      contract or compensatory plan arrangement.(1)
            Incorporated
      herein by reference into this document from the Exhibits to Form 10,
      Registration Statement initially filed with the Commission on April 29,
      1996, Registration No.0-28364.(2)
            Incorporated
      herein by reference into this document from the Exhibits to the
      Registrant’s Form 10-K filed with the Commission on March 23, 2000, File
      No. 0-28364.(3)
            Incorporated
      by reference into this document from the Exhibits to Form S-8 filed with
      the Commission on August 14, 1998, File No. 333-61487.(4)
            Incorporated
      by reference into this document from the identically numbered exhibits to
      the Registrant’s Form 10-K filed with the Commission on March 22, 2004,
      File No. 0-28364.(5)
            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.(6)
            Incorporated
      herein by reference from the Exhibits to the Registrant’s Current Report
      on Form 8-K filed April 4, 2006.(7)
            Incorporated
      by reference into this document from the identically numbered exhibit to
      the Registrant’s Current Report on Form 8-K filed with the Commission on
      August 14, 2009.








30





SIGNATURESPursuant
      to the requirements of Section 13 or 15(d) 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.Dated:
      March 15, 2010
            
            By:
            /s/
      Lewis J. CritelliLewis
      J. Critelli
              President
      and Chief Executive Officer
              (Duly
      Authorized Representative)Pursuant
      to the requirement of the Securities Exchange Act of 1934, this Report has
      been signed below by the following persons on March 15, 2010 on behalf of
      the Registrant and in the capacities indicated./s/
      Lewis J. Critelli
            
            /s/
      William W. Davis, Jr.Lewis
      J. Critelli
              President,
      Chief Executive Officer and  Director
              (Principal
      Executive Officer )
            
            William
      W. Davis, Jr.
              Director/s/
      Dr. Andrew A. Forte
            
            /s/
      Susan Gumble-CottellDr.
      Andrew A. Forte
              Director
            
            Susan
      Gumble-Cottell
              Director/s/
      Daniel J. O’Neill
            
            /s/
      John E. MarshallDaniel
      J. O’Neill
              Director
            
            John
      E. Marshall
              Director/s/
      Gary P. Rickard
            
            /s/
      Dr. Kenneth A. PhillipsGary
      P. Rickard
              Director
            
            Dr.
      Kenneth A. Phillips
              Director/s/
      Ralph A. Matergia
            
            /s/
      Richard L. SnyderRalph
      A. Matergia
              Director
            
            Richard
      L. Snyder
              Director/s/
      William S. LanceWilliam
      S. Lance
              Senior
      Vice President and Chief Financial Officer
              (Principal
      Financial and Accounting Officer)