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 endedDecember 31,                            2007, |
|---|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Or |
|--------|----|

| [ ] | 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 Registered                  |
|----------------------------------|--------|------------------------------------------------------------|
| **Common 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.                             x NO                             oYES |   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|

 

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

 

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. YESxNOo

 

Indicate by check mark if disclosure of delinquent filers pursuant to            Item 405 of Regulation S-K isnotcontained 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.o

             

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. (Check one):

 

|   | Large accelerated filero                           |   | Accelerated filer                            x |
|--------|----------------------------------------------------|--------|------------------------------------------------|
|   | Non-accelerated filer                            o |   | Smaller reporting companyo                     |
|   | (Do not check if a smaller reporting company)      |   |                                           |

 

| Indicate by check mark whether the registrant is a shell                            company (as defined in Rule 12b-2 of the Act). | oYesxNo |
|------------------------------------------------------------------------------------------------------------------------------------|---------|

 

As            of March 12, 2008, there were 2,740,149 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, 2007, $32.75 per share, was $76,038,655 based on            2,321,791 shares of Common Stock outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

             
| 1.                         | Portions of the Annual Report to Stockholders for the Fiscal                        Year ended December 31, 2007. (Parts I, II, and IV) |
|----------------------------|-----------------------------------------------------------------------------------------------------------------------------------------|
| 2.     | Portions of the Proxy Statement for the 2008 Annual Meeting                        of Stockholders. (Part III)                          |

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NORWOOD FINANCIAL CORP.

FORM 10-K

             

Table of Contents

             

| Part I           |                                                                                                                                           | Page       |
|------------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|             |                                                                                                                                           |       |
| Item 1.          | Business                                                                                                                                       | 3          |
| Item 1A.         | Risk Factors                                                                                                                                   | 19         |
| Item 1B.         | Unresolved Staff Comments                                                                                                                      | 25         |
| Item 2.          | Properties                                                                                                                                     | 25         |
| Item 3.          | Legal Proceedings                                                                                                                              | 25         |
| Item 4.          | Submission of Matters to a Vote of Security                            Holders                                                                 | 25         |
|  

Part II  |                                                                                                                                           |       |
|             |                                                                                                                                           |       |
| Item 5.          | Market for Registrant’s Common Equity, Related                            Stockholder Matters and Issuer Purchases

of Equity Securities |  

26 |
| Item 6.          | Selected Financial Data                                                                                                                        | 26         |
| Item 7.          | Management’s Discussion and Analysis of Financial                            Condition and Results of Operations                         | 26         |
| Item 7A.         | Quantitative and Qualitative Disclosure about Market                            Risk                                                           | 26         |
| Item 8.          | Financial Statements and Supplementary Data                                                                                                    | 26         |
| Item 9           | Changes in and Disagreements with Accountants on                            Accounting and Financial Disclosure                                | 26         |
| Item 9A.         | Controls and Procedures                                                                                                                        | 27         |
| Item 9B.         | Other Information                                                                                                                              | 27         |
|  

Part III |                                                                                                                                           |       |
|             |                                                                                                                                           |       |
| Item 10.         | Directors, Executive Officers and Corporate                            Governance                                                              | 27         |
| Item 11.         | Executive Compensation                                                                                                                         | 27         |
| Item 12.         | Security Ownership of Certain Beneficial Owners and                            Management and Related Stockholder Matters                      |  

28 |
| Item 13.         | Certain Relationships and Related Transactions and                            Director Independence                                            | 29         |
| Item 14.         | Principal Accounting Fees and Services                                                                                                         | 29         |
|  

Part IV  |                                                                                                                                           |       |
|             |                                                                                                                                           |       |
| Item 15.         | Exhibits, Financial Statement Schedules                                                                                                        | 29         |
|             | Signatures                                                                                                                                     | 31         |
|             |                                                                                                                                           |       |
|             |                                                                                                                                           |       |
|             |                                                                                                                                           |       |

 

 

2

 

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**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 |
|--------|--------|-----------------------------------------------------------------------------------------|

|   | • | 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, 2007, the Company had total assets of $480.6 million,            deposits of $370.0 million, and stockholders’ equity of $55.8 million. The            Company’s ratio of average equity to average assets was 11.48%, 11.23% and 11.19%            for fiscal years 2007, 2006 and 2005, 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 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 six 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.

 

 

3

 

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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 twelve automated 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 Bank maintains a website at            www.waynebank.com.

 

**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, 2007 (the            latest date for which data is available), the Bank had the third largest share of            FDIC-insured deposits in Wayne County with approximately 20.9%, second in Pike County            with 16.8%, and 10th in Monroe County with 2.0%. 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, 2007, the Bank had 112 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. This includes mortgage lending to finance principal residences and to a lesser            extent second home dwellings. The products include adjustable rate mortgages with terms            up to 30 years which are retained and serviced through the Bank, fixed rate mortgage            products which may be sold, servicing retained, 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, 2007, there were $11.6            million of indirect loans.

 

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            structure may be fixed, immediately repricing tied to the prime rate or adjustable at            set intervals.

 

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.

 

4

 

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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            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

 

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**Types of Loans**. Set forth below is selected            data relating to the composition of the Bank’s loan portfolio at the dates            indicated.

 

|                                    |   | As of December 31,     |
|-----------------------------------------|--------|------------------------|
|                                    |   | 2007                   |   | 2006 |   | 2005 |   | 2004 |   | 2003 |
|                                    |   | $                      |   | % |   | $ |   | % |   | $ |   | % |   | $ |   | % |   | $ |   | % |
|                                    |   | (dollars in thousands) |
| Type of Loans:                          |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial, Financial and Agricultural  |   | $                      | 29,159 |   | 8.8 |   |   | $ | 34,019 |   | 10.8 |   |   | $ | 26,755 |   | 9.2 |   |   | $ | 20,263 |   | 7.9 |   |   | $ | 17,022 |   | 7.3 |   |
| Real Estate-Construction                |   |                   | 20,404 |   | 6.2 |   |   |   | 18,955 |   | 6.0 |   |   |   | 5,944 |   | 2.0 |   |   |   | 4,890 |   | 1.9 |   |   |   | 5,904 |   | 2.5 |   |
| Real Estate-Mortgage                    |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential.                            |   |                   | 129,888 |   | 39.2 |   |   |   | 113,783 |   | 36.0 |   |   |   | 100,705 |   | 34.6 |   |   |   | 90,606 |   | 35.5 |   |   |   | 77,459 |   | 33.1 |   |
| Commercial                              |   |                   | 133,593 |   | 40.3 |   |   |   | 127,640 |   | 40.4 |   |   |   | 133,495 |   | 45.8 |   |   |   | 111,164 |   | 43.6 |   |   |   | 96,276 |   | 41.1 |   |
| Lease financing, net of unearned income |   |                   | — |   | — |   |   |   | — |   | — |   |   |   | — |   | — |   |   |   | — |   | — |   |   |   | 316 |   | .1 |   |
| Consumer Loans to Individuals.          |   |                   | 18,526 |   | 5.5 |   |   |   | 21,520 |   | 6.8 |   |   |   | 24,353 |   | 8.4 |   |   |   | 28,193 |   | 11.1 |   |   |   | 37,219 |   | 15.9 |   |
|                                    |   |                   | 331,570 |   | 100.0 |   |   |   | 315,917 |   | 100.0 |   |   |   | 291,252 |   | 100.0 |   |   |   | 255,116 |   | 100.0 |   |   |   | 234,196 |   | 100.0 |   |
| Unearned income and deferred fees       |   |                   | (274 | ) |   |   |   |   | (350 | ) |   |   |   |   | (362 | ) |   |   |   |   | (359 | ) |   |   |   |   | (463 | ) |   |   |
| Allowance for loan losses               |   |                   | (4,081 | ) |   |   |   |   | (3,828 | ) |   |   |   |   | (3,669 | ) |   |   |   |   | (3,448 | ) |   |   |   |   | (3,267 | ) |   |   |
|                                    |   | $                      | 327,215 |   |   |   |   | $ | 311,739 |   |   |   |   | $ | 287,221 |   |   |   |   | $ | 251,309 |   |   |   |   | $ | 230,466 |   |   |   |

             

             

             

             

 

6

 

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**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, 2007. Scheduled            repayments are reported in the maturity category in which payment is due.

             

 

|                                  |   | Less thanOne Year |   | One toFive Years |   | OverFive Years |   | Total  |    |
|---------------------------------------|--------|-------------------|--------|------------------|--------|----------------|--------|--------|---------|
|                                  |   | (In thousands)    |   |
| Commercial, Financialand Agricultural |   | $                 | 10,210 |             | $      | 7,838          |   | $      | 11,111  |   | $ | 29,159 |   |
| Real Estate - Construction            |   |              | 20,404 |             |   | —        |   |   | — |   |   | 20,404 |   |
|                                  |   |              |   |             |   |           |   |   |    |   |   |   |   |
| Total                                 |   | $                 | 30,614 |             | $      | 7,838          |   | $      | 11,111  |   | $ | 49,563 |   |
|                                  |   |              |   |             |   |           |   |   |    |   |   |   |   |
| Loans with fixed rates                |   | $                 | 11,249 |             | $      | 5,444          |   | $      | 6,345   |   | $ | 15,518 |   |
| Loans with floating rates             |   |              | 19,635 |             |   | 2,394          |   |   | 4,766   |   |   | 26,795 |   |
| Total                                 |   | $                 | 30,614 |             | $      | 7,838          |   | $      | 11,111  |   | $ | 49,563 |   |
|                                  |   |              |   |             |   |           |   |   |    |   |   |   |   |

             

**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. The Bank did not have any loans accounted for as troubled debt            restructurings at the dates indicated. For the year ended December 31, 2007, interest            income that would have been recorded on loans accounted for on a non-accrual basis            under the original terms of such loans was $6,000 of which $1,000 was            collected.

             

 

7

 

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|                                                                                        |   | As of December 31,     |    |
|---------------------------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                                        |   | 2007                   |    |   | 2006 |   |   | 2005 |   |   | 2004 |   |   | 2003 |   |
|                                                                                        |   | (dollars in thousands) |    |
| Non-accrual loans:                                                                          |   |                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial and all other                                                                    |   | $                      | — |   |   | $ | — |   |   | $ | — |   |   | $ | — |   |   | $ | — |   |
| Real estate                                                                                 |   |                   | 109     |   |   |   | 392 |   |   |   | 330 |   |   |   | 32 |   |   |   | 125 |   |
| Consumer                                                                                    |   |                   | 2       |   |   |   | 17 |   |   |   | 11 |   |   |   | 8 |   |   |   | — |   |
| Total                                                                                       |   |                   | 111     |   |   |   | 409 |   |   |   | 341 |   |   |   | 40 |   |   |   | 125 |   |
|                                                                                        |   |                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accruing loans which are contractually past-due 90 days                            or more: |   |                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial and all other                                                                    |   |                   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |
| Real estate                                                                                 |   |                   | 49      |   |   |   | — |   |   |   | — |   |   |   | 5 |   |   |   | — |   |
| Consumer                                                                                    |   |                   | 3       |   |   |   | — |   |   |   | 12 |   |   |   | 22 |   |   |   | 18 |   |
| Total                                                                                       |   |                   | 52      |   |   |   | — |   |   |   | 12 |   |   |   | 27 |   |   |   | 18 |   |
|                                                                                        |   |                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total non-performing loans                                                                  |   |                   | 163     |   |   |   | 409 |   |   |   | 353 |   |   |   | 67 |   |   |   | 143 |   |
| Foreclosed real estate                                                                      |   |                   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |
| Total non-performing assets                                                                 |   | $                      | 163     |   |   | $ | 409 |   |   | $ | 353 |   |   | $ | 67 |   |   | $ | 143 |   |
| Total non-performing loans to total loans                                                   |   |                   | .05     | % |   |   | .13 | % |   |   | .12 | % |   |   | .03 | % |   |   | .06 | % |
| Total non-performing loans to total assets                                                  |   |                   | .03     | % |   |   | .09 | % |   |   | .08 | % |   |   | .02 | % |   |   | .04 | % |
| Total non-performing assets to total assets                                                 |   |                   | .03     | % |   |   | .09 | % |   |   | .08 | % |   |   | .02 | % |   |   | .04 | % |

             

The recorded investment in impaired loans, not requiring an allowance            for loan losses was $3,208,000 and $290,000 at December 31, 2007 and 2006,            respectively. The recorded investment in impaired loans requiring an allowance for loan            losses was $-0- at December 31, 2007 and 2006. The related allowance for loan losses            associated with these loans was $-0- at December 31, 2007 and 2006. For the years ended            December 31, 2007, 2006 and 2005, the average recorded investment in these impaired            loans was $3,127,000, $286,000 and $316,000 and the interest income recognized on these            impaired loans was $290,000, $1,000 and $11,000, respectively. The increase in impaired            loans is due to two related credits, which are collateral dependent, with no required            allowance. The loans were current as of December 31, 2007.

             

**Potential Problem Loans.**As of December 31,            2007, 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:

 

 

8

 

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|                                                                                        |   | Year Ended December 31, |    |
|---------------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                        |   | 2007                    |    | 2006 |   |   | 2005 |   |   | 2004 |   |   | 2003 |   |
|                                                                                        |   | (dollars in thousands)  |    |
|                                                                                        |   |                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total loans receivable net of unearned income                                               |   | $                       | 331,296 |   | $ | 315,567 |   |   | $ | 290,890 |   |   | $ | 254,757 |   |   | $ | 233,733 |   |
| Average loans receivable                                                                    |   |                    | 323,444 |   |   | 301,533 |   |   |   | 274,053 |   |   |   | 245,783 |   |   |   | 225,680 |   |
|                                                                                        |   |                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance balance at beginning of period                                                    |   | $                       | 3,828   |   | $ | 3,669 |   |   | $ | 3,448 |   |   | $ | 3,267 |   |   | $ | 3,146 |   |
|                                                                                        |   |                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Charge-offs:                                                                                |   |                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial and all other                                                                    |   |                    | — |   |   | — |   |   |   | (4 | ) |   |   | (19 | ) |   |   | (121 | ) |
| Real Estate                                                                                 |   |                    | (4      | ) |   | — |   |   |   | (6 | ) |   |   | (10 | ) |   |   | — |   |
| Consumer                                                                                    |   |                    | (117    | ) |   | (150 | ) |   |   | (200 | ) |   |   | (342 | ) |   |   | (478 | ) |
| Leases                                                                                      |   |                    | — |   |   | — |   |   |   | — |   |   |   | (11 | ) |   |   | (36 | ) |
|                                                                                        |   |                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                                                                       |   |                    | (121    | ) |   | (150 | ) |   |   | (210 | ) |   |   | (382 | ) |   |   | (635 | ) |
|                                                                                        |   |                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Recoveries:                                                                                 |   |                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial and all other                                                                    |   |                    | — |   |   | 18 |   |   |   | 12 |   |   |   | 13 |   |   |   | 5 |   |
| Real Estate                                                                                 |   |                    | 2       |   |   | 2 |   |   |   | 18 |   |   |   | 8 |   |   |   | 24 |   |
| Consumer                                                                                    |   |                    | 54      |   |   | 65 |   |   |   | 46 |   |   |   | 78 |   |   |   | 64 |   |
| Leases                                                                                      |   |                    | 3       |   |   | 4 |   |   |   | 5 |   |   |   | 9 |   |   |   | 3 |   |
|                                                                                        |   |                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                                                                       |   |                    | 59      |   |   | 89 |   |   |   | 81 |   |   |   | 108 |   |   |   | 96 |   |
|                                                                                        |   |                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Charge-offs                                                                             |   |                    | (62     | ) |   | (61 | ) |   |   | (129 | ) |   |   | (274 | ) |   |   | (539 | ) |
|                                                                                        |   |                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision Expense                                                                           |   |                    | 315     |   |   | 220 |   |   |   | 350 |   |   |   | 455 |   |   |   | 660 |   |
| Allowance balance at end of period                                                          |   | $                       | 4,081   |   | $ | 3,828 |   |   | $ | 3,669 |   |   | $ | 3,448 |   |   | $ | 3,267 |   |
|                                                                                        |   |                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for loan losses as a percent of total                            loansoutstanding |   |                    | 1.23    | % |   | 1.21 | % |   |   | 1.26 | % |   |   | 1.35 | % |   |   | 1.40 | % |
|                                                                                        |   |                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loans charged off as a percent of average loans                            outstanding  |   |                    | .02     | % |   | .02 | % |   |   | .05 | % |   |   | .11 | % |   |   | .24 | % |

             

**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.

             

9

 

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|                                   |   | As of December 31,     |    |
|----------------------------------------|--------|------------------------|---------|
|                                   |   | 2007                   |    | 2006 |   | 2005 |   | 2004 |   |   | 2003 |   |
|                                   |   | Amount                 |    | % ofLoansto TotalLoans |   | Amount |   | % ofLoansto TotalLoans |   | Amount |   | % ofLoansto TotalLoans |   | Amount |   | % ofLoansto TotalLoans |   |   | Amount |   | % ofLoansto TotalLoans |   |
|                                   |   | (dollars in thousands) |    |
|                                   |   |                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial, financial and agricultural |   | $                      | 413     |   | 8.8 | % | $ | 505 |   | 10.8 | % | $ | 427 |   | 9.2 | % | $ | 337 |   | 7.9 | % |   | $ | 291 |   | 7.3 | % |
| Real estate – construction       |   |                   | 148     |   | 6.2 |   |   | 44 |   | 6.0 |   |   | 36 |   | 2.0 |   |   | 20 |   | 1.9 |   |   |   | 27 |   | 2.5 |   |
| Real estate – mortgage           |   |                   | 2,939   |   | 79.5 |   |   | 2,667 |   | 76.4 |   |   | 2,713 |   | 80.4 |   |   | 2,480 |   | 79.1 |   |   |   | 2,222 |   | 74.2 |   |
| Consumer loans to individuals          |   |                   | 362     |   | 5.5 |   |   | 388 |   | 6.8 |   |   | 442 |   | 8.4 |   |   | 483 |   | 11.1 |   |   |   | 634 |   | 15.9 |   |
| Lease Financing                        |   |                   | — |   | — |   |   | — |   | — |   |   | — |   | — |   |   | — |   | — |   |   |   | 9 |   | .1 |   |
| General Risk Allocation                |   |                   | 219     |   | — |   |   | 224 |   | — |   |   | 51 |   | — |   |   | 128 |   | — |   |   |   | 84 |   | — |   |
| Total                                  |   | $                      | 4,081   |   | 100.0 | % | $ | 3,828 |   | 100.0 | % | $ | 3,669 |   | 100.0 | % | $ | 3,448 |   | 100.0 | % |   | $ | 3,267 |   | 100.0 | % |
|                                        |        |                        |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

 

10

 

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**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.

 

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

 

 

|                             |   | As of December 31,     |    |
|----------------------------------|--------|------------------------|---------|
|                             |   | 2007                   |    | 2006 |   | 2005 |   |
|                             |   | (dollars in thousands) |    |
| Securities:(carrying value)      |   |                   |    |   |   |   |   |   |   |   |
| U.S. Treasury Securities         |   | $                      | — |   | $ | — |   | $ | 1,989 |   |
| U.S. Government Agencies         |   |                   | 41,508  |   |   | 47,581 |   |   | 51,996 |   |
| State and political Subdivisions |   |                   | 22,622  |   |   | 17,419 |   |   | 21,175 |   |
| Corporate Obligations            |   |                   | 4,994   |   |   | 8,439 |   |   | 10,450 |   |
| Mortgage-backed securities       |   |                   | 54,082  |   |   | 38,652 |   |   | 29,954 |   |
| Equity Securities                |   |                   | 1,486   |   |   | 1,775 |   |   | 1,702 |   |
| Total Securities                 |   | $                      | 124,692 |   | $ | 113,866 |   | $ | 117,266 |   |
| Fair value of Securities         |   | $                      | 124,708 |   | $ | 113,883 |   | $ | 117,294 |   |

 

 

 

11

 

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**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, 2007. 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 OneThrough Five Years |   | After FiveThrough Ten Years |   | After Ten Years |    | Total Investment Securities |
|                            |   | CarryingValue          |   | AverageYield                |   | CarryingValue               |   | AverageYield    |    | CarryingValue               |    | AverageYield |   | CarryingValue |    | AverageYield |    | CarryingValue |   | AverageYield |
|                            |   | (dollars in thousands) |
|                            |   |                   |   |                        |   |                        |   |            |    |                        |    |         |   |          |    |         |    |          |   |         |    |   |    |   |   |   |    |   |   |   |
| U.S. Government Agencies        |   | $                      | 5,988  |                        | 3.68   | %                           |   | $               | 20,247  |                        | 4.93    | %            |   | $             | 15,273  |         | 5.47    | %             |   | $            | — |   | — |   |   | $      | 41,508  |   | 4.94   | %      |
| State and political subdivision |   |                   | 2,168  |                        | 3.50   | %                           |   |            | 5,304   |                        | 4.14    | %            |   |          | 6,345   |         | 6.12    | %             |   |         | 8,856   |   | 5.91    | %      |   |   | 22,622  |   | 5.33   | %      |
| Corporate Obligations           |   |                   | 999    |                        | 3.28   | %                           |   |            | 2,983   |                        | 4.50    | %            |   |          | 1,012   |         | 5.25    | %             |   |         | — |   | — |   |   |   | 4,994   |   | 3.32   | %      |
| Mortgage-backed Securities      |   |                   | 1,394  |                        | 4.05   | %                           |   |            | 7,458   |                        | 4.17    | %            |   |          | 7,673   |         | 5.40    | %             |   |         | 37,557  |   | 5.31    | %      |   |   | 54,082  |   | 4.71   | %      |
| Equity Securities               |   |                   | 1,486  |                        | 3.22   | %                           |   |            | — |                        | — |         |   |          | — |         | — |          |   |         | — |   | — |   |   |   | 1,486   |   | 3.14   | %      |
|                            |   |                   |   |                        |   |                        |   |            |    |                        |    |         |   |          |    |         |    |          |   |         |    |   |    |   |   |   |    |   |   |   |
| Total Investment Securities     |   | $                      | 11,984 |                        | 3.60   | %                           |   | $               | 35,992  |                        | 4.62    | %            |   | $             | 30,303  |         | 5.58    | %             |   | $            | 46,413  |   | 5.43    | %      |   | $      | 124,692 |   | 4.83   | %      |
|                            |   |                   |   |                        |   |                        |   |            |    |                        |    |         |   |          |    |         |    |          |   |         |    |   |    |   |   |   |    |   |   |   |
|                            |   |                   |   |                        |   |                        |   |            |    |                        |    |         |   |          |    |         |    |          |   |         |    |   |    |   |   |   |    |   |   |   |

 

             

 

12

 

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**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 participates in 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 and Automated Clearing House (ACH) activity. The Bank operates twelve automated            teller machines and is affiliated with the STAR and surcharge-free            MoneyPass  ATM networks. Internet banking including bill-pay is offered            through the website atwww.waynebank.com.

             

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

 

|                       |   |                   |    |     |    |    |   |     |   |    |   |     |    |   |    |   |
|----------------------------|--------|------------------------|---------|----------|---------|---------|--------|----------|--------|---------|--------|----------|---------|--------|---------|--------|
|                       |   | 2007                   |    | 2006     |    | 2005    |   |
|                       |   | Average                |    | Average  |    | Average |   |
|                       |   | Balance                |    | RatePaid |    | Balance |   | RatePaid |   | Balance |   | RatePaid |    |
|                       |   | (dollars in thousands) |    |
| Non-interest bearingdemand |   | $                      | 56,523  |     | — | %       | $      | 54,798   |   | — | %      | $        | 52,109  |   | — | %      |
| Interest-bearing demand    |   |                   | 36,594  |     | .10     |    |   | 39,472   |   | .10     |   |     | 44,026  |   | .10     |   |
| Money Market               |   |                   | 53,798  |     | 3.37    |    |   | 57,410   |   | 2.87    |   |     | 49,721  |   | 1.86    |   |
| Savings                    |   |                   | 45,858  |     | .47     |    |   | 49,937   |   | .46     |   |     | 57,128  |   | .47     |   |
| Time                       |   |                   | 172,986 |     | 4.57    |    |   | 146,344  |   | 3.96    |   |     | 128,704 |   | 2.82    |   |
|                       |   |                   |    |     |    |    |   |     |   |    |   |     |    |   |    |   |
| Total                      |   | $                      | 365,759 |     |    |    | $      | 347,961  |   |    |   | $        | 331,688 |   |    |   |
|                       |   |                   |    |     |    |    |   |     |   |    |   |     |    |   |    |   |

 

 

**Maturities of Time Deposits.**The following            table indicates the amount of the Bank’s certificates of deposit in amounts of            $100,000 or more and other time deposits of $100,000 or more by time  remaining            until maturity as of December 31, 2007.

 

 

| (dollars in thousands)         |   |   |   |
|--------------------------------|--------|--------|--------|
|                           |   |   |   |
| Maturity Period                |   |   |   |
|                           |   |   |   |
| Within three months            |   | $      | 35,309 |
| Over three through six months  |   |   | 11,156 |
| Over six through twelve months |   |   | 9,311  |
| Over twelve months             |   |   | 6,487  |
|                           |   | $      | 62,263 |

 

             

 

13

 

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**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, federal funds purchased and U.S. Treasury demand            notes, that the Company had during the periods indicated.

             

 

|                                                                             |   | Year Ended December 31, |   |
|----------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                             |   | 2007                    |   |   | 2006 |   |   | 2005 |   |
|                                                                             |   | (dollars in thousands)  |   |
| Short term borrowings:                                                           |   |                    |   |   |   |   |   |   |   |   |   |   |
| Average balance during the year                                                  |   | $                       | 22,443 |   |   | $ | 22,209 |   |   | $ | 15,059 |   |
| Maximum month-end balance during the year                                        |   |                    | 33,024 |   |   |   | 29,677 |   |   |   | 24,956 |   |
| Average interest rate during the year                                            |   |                    | 4.15   | % |   |   | 4.39 | % |   |   | 2.76 | % |
| Total short-term borrowings at end of the                            year        |   | $                       | 26,686 |   |   | $ | 22,736 |   |   | $ | 18,564 |   |
| Weighted average interest rate at the end of the                            year |   |                    | 3.60   | % |   |   | 4.20 | % |   |   | 3.76 | % |

 

             

**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, 2007, the Bank had $101.7 million of assets under management compared to            $96.9 million as of December 31, 2006.

             

**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, 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 had sales volume            of $8.9 million in 2007, generating gross revenues for the Company of $120,000,            compared to $131,000 in 2006 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, 2007 and 2006.

 

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. The subsidiary is 70% owned by Wayne Bank and 30% owned by            Title Strategies, LLC. Gross revenues, included in other income, for 2007 totaled            $29,000 and $37,000 in 2006.

 

 

14

 

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| **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

 

15

 

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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            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 FDIC            is an independent federal agency that insures the deposits, up to prescribed statutory            limits, of federally insured banks and savings institutions and safeguards the safety            and soundness of the banking and savings industries. The FDIC previously administered            two

 

16

 

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separate insurance funds, the Bank Insurance Fund (“BIF”),            which generally insured commercial bank and state savings bank deposits, and the            Savings Insurance Fund (“SAIF”), which generally insured savings            association deposits.

 

Under the Federal Deposit Insurance Reform Act of 2005 (the            “Reform Act”), which was signed into law on February 15, 2006 (i) the Bank            Insurance Fund and the Savings Association Insurance Fund were merged into a new            combined fund, called the Deposit Insurance Fund effective March 31, 2006, (ii) the            current $100,000 deposit insurance coverage will be indexed for inflation (with            adjustments every five years, commencing January 1, 2011); and (iii) deposit insurance            coverage for retirement accounts were increased to $250,000 per participant subject to            adjustment for inflation. The FDIC has been given greater latitude in setting the            assessment rates for insured depository institutions which could be used to impose            minimum assessments.

 

The FDIC is authorized to set the reserve ratios for the Deposit            Insurance Fund annually at between 1.15% and 1.5% of estimated insured deposits. If the            Deposit Insurance Fund’s reserves exceed the designated reserve ratio, the FDIC            is required to pay out all or, if the reserve ratio is less than 1.5%, a portion of the            excess as a dividend to insured depository institutions based on the percentage of            insured deposits held on December 31, 1996 adjusted for subsequently paid premiums.            Insured depository institutions that were in existence on December 31, 1996 and paid            assessments prior to that date (or their successors) are entitled to a one-time credit            against future assessments based on their past contributions to the BIF or            SAIF.

 

Pursuant to the Reform Act, the FDIC has determined to maintain the            designated reserve ratio at its current 1.25%. The FDIC has also adopted a new            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. Beginning in 2007, well-capitalized institutions with the            CAMELS ratings of 1 or 2 will be grouped in Risk Category I and will be assessed for            deposit insurance at an annual rate of between five and seven basis points with the            assessment rate for an individual institution to be determined according to a formula            based on a weighted average of the institution’s individual CAMEL component            ratings plus either five financial ratios or the average ratings of its long-term debt.            Institutions in Risk Categories II, III and IV will be assessed at annual rates of 10,            28 and 43 basis points, respectively. The Bank anticipates that it will be able to            offset the majority of its deposit insurance premium for 2008 with the special            assessment credit.

 

In addition, all insured institutions of the FDIC are required to pay            assessments to fund interest payments on bonds issued by the Financing Corporation, an            agency of the Federal government established to finance resolutions of insolvent            thrifts. These assessments, the current quarterly rate of which is approximately .0154            of insured deposits, will continue until the Financing Corporation 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, 2007, 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,

 

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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 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, 2007.

 

***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, 2007, loans-to-one-borrower limitation was $8.6            million and the Bank was in compliance with such limitation.

 

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***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 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, 2007, the Bank was in compliance with this requirement.

 

***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, 2007, 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.

 

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. 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:

 

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**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, 2007, our allowance for loan losses was $4,081,000            which represented 1.23% of outstanding loans. At such date, we had 5 nonperforming            loans totaling $111,000 and two impaired loans which are collateral dependent of            $3,208,000. 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.

 

**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 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

 

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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, 2007, approximately 86% of our loans, had real estate as a primary,            secondary or tertiary component of collateral. In addition, approximately 43% of our            securities portfolio consisted of mortgage-backed securities issued by either Federal            National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) or            Guaranteed 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.

 

**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 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 William W.            Davis, Jr., our President and Chief Executive Officer, and Lewis J. Critelli, our            Executive Vice President, Secretary and Chief Financial Officer. Although we have            employment agreements with non-compete provisions with Messrs. Davis and Critelli,            the existence of such agreements does not assure that we will retain their services.            The unexpected loss of these individuals 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.

 

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

 

At December 31, 2007, our lending limit per borrower was approximately            $8.6 million, or approximately 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.

             

**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, 2007, our directors and executive officers            beneficially owned approximately 273,363 shares, or approximately 9.5% of our common            stock, including options to purchase 113,082 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            2,753,616 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

 

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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 69,700 were issued as of            December 31, 2007. As of December 31, 2007, options to purchase a total of 158,422            shares were exercisable and had exercise prices ranging from $10.37 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, 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”), the Federal Deposit Insurance            Corporation (the “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

             

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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.

 

**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.

             

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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 beginning with the annual report on Form 10-K for our fiscal            year ending December 31, 2007. 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. This            requirement is first applicable to our annual report on Form 10-K for fiscal 2007 and            for all future annual reports. The costs associated with the implementation of this            requirement, including documentation and testing, totaled $125,000. 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 eleven additional branch offices. The Bank’s total            investment in office property and equipment is $13.6 million with a net book value of            $5.7 million as of December 31, 2007. The Bank currently operates automated teller            machines at all twelve of its facilities. The Bank leases four of its locations with            minimum lease commitments of $3,813,000 through 2029. The four locations have various            renewal options.

 

**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. Submission of Matters to a Vote of            Security-Holders**

 

None.

 

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**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, 2007 (“Annual Report”) and is incorporated herein by            reference.

 

 

|                   |   | Issuer Purchases of Equity Securities |   |
|------------------------|--------|---------------------------------------|--------|
|                   |   | Total Numberof Sharespurchased        |   | Average Price PaidPer Share |   | Total Number ofShares Purchased as Part of PubliclyAnnounced Plansor Programs * |   | Maximum Number(or ApproximateDollar Value) of Shares that May Yet be Purchased Under                            the Plans or Programs |   |
|                   |   |                                  |   |   |   |   |   |   |   |
| October 1 to 31, 2007  |   | —                               |   | $ | — |   | — |   | — |   |
| November 1 to 30, 2007 |   | 29,200                                |   |   | 31.80 |   | 29,200 |   | 24,363 |   |
| December 1 to 31, 2007 |   | —                               |   |   | — |   | — |   | — |   |
| Total                  |   | 29,200                                |   | $ | 31.80 |   | 29,200 |   | 24,363 |   |

 

* On            June 15, 2005, the Registrant announced its intention to repurchase up to 5% of its            outstanding common stock (approximately 140,700 shares) in the open market.

 

**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            are incorporated herein by reference from the Annual Report.

 

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

 

|   | None. |
|--------|-------|

 

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**Item 9A. Controls and Procedures** 

 

(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, 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 I --            Election of Directors” and “Corporate Governance” in the Proxy            Statement for the 2008 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 Lewis J. Critelli, Executive Vice President,            Secretary and Chief Financial Officer, Norwood Financial Corp., 717 Main Street,            Honesdale, PA 18431.

 

**Item 11. Executive Compensation**

 

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

 

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**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 I -- 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.

             

|   | (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 plansapproved by shareholders         |   |                                                                                                                   |    |                                                                                                   |   |                                                                                                                                                                                               |   |   |   |   |   |   |   |   |
| Stock Option Plan                                         |   |                                                                                                                   | 103,829 |                                                                                                   |   |                                                                                                                                                                                               | $      | 19.95 |   |   |   | — |   |   |
| 2006 Stock Option Plan                                    |   |                                                                                                                   | 68,675  |                                                                                                   |   |                                                                                                                                                                                               |   | 31.02 |   |   |   | 180,300 |   |   |
|                                                      |   |                                                                                                                   |    |                                                                                                   |   |                                                                                                                                                                                               |   |   |   |   |   |   |   |   |
| Equity compensation plans notapproved by security holders |   |                                                                                                                   |    |                                                                                                   |   |                                                                                                                                                                                               |   |   |   |   |   |   |   |   |
| 1999 Directors Stock Compensation Plan                    |   |                                                                                                                   | 7,918   |                                                                                                   |   |                                                                                                                                                                                               |   | 17.10 |   |   |   | — |   |   |
| TOTAL                                                     |   |                                                                                                                   | 180,422 |                                                                                                   |   |                                                                                                                                                                                               | $      | 24.04 |   |   |   | 180,300 |   |   |

 

 

28

 

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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 on 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 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, 2007 and 2006, and the related                            consolidated statements of income, stockholders’ equity and cash                            flows for each of the years in the three year period ended December 31,                            2007, together with the related notes and the independent registered                            public accounting firm reports of Beard Miller Company LLP, independent                            registered public accounting firm. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | 2. | Schedules omitted as they are not applicable. |
|--------|----|-----------------------------------------------|

             

29

 

----

|   | 3. | Exhibits |
|--------|----|----------|

             

| 3(i)   | Articles of Incorporation of Norwood Financial                            Corp.*                                                    |
|--------|-------------------------------------------------------------------------------------------------------------------------------------|
| 3(ii)  | Bylaws of Norwood Financial Corp.                                                                                                   |
| 4.0    | Specimen Stock Certificate of Norwood Financial                            Corp.*                                                   |
| 10.1+  | Amended Employment Agreement with William W. Davis,                            Jr.**                                                |
| 10.2+  | Amended Employment Agreement with Lewis J.                            Critelli**                                                    |
| 10.3+  | Form of Change-in-Control Severance Agreement with seven                            key employees of the Bank***                    |
| 10.5+  | Norwood Financial Corp. Stock Option Plan****                                                                                       |
| 10.6+  | Salary Continuation Agreement between the Bank and                            William W. Davis, Jr.***                              |
| 10.7+  | Salary Continuation Agreement between the Bank and Lewis                            J. Critelli***                                  |
| 10.8+  | Salary Continuation Agreement between the Bank and                            Edward C. Kasper***                                   |
| 10.9+  | 1999 Directors Stock Compensation Plan***                                                                                           |
| 10.10+ | Salary Continuation Agreement between the Bank and                            Joseph A. Kneller*****                                |
| 10.11+ | Salary Continuation Agreement between the Bank and John                            H. Sanders*****                                  |
| 10.12+ | 2006 Stock Option Plan******                                                                                                        |
| 10.13+ | First and Second Amendments to Salary Continuation                            Agreement with William W. Davis, Jr.*******           |
| 10.14+ | First and Second Amendments to Salary Continuation                            Agreement with Lewis J. Critelli *******              |
| 10.15+ | First and Second Amendments to Salary Continuation                            Agreement with Edward C. Kasper*******                |
| 10.16+ | First and Second Amendments to Salary Continuation                            Agreement with Joseph A. Kneller *******              |
| 10.17+ | First and Second Amendments to Salary Continuation                            Agreement with John H. Sanders******                  |
| 13     | Annual Report to Stockholders for the fiscal year ended                            December 31, 2007                                |
| 21     | Subsidiaries of Norwood Financial Corp. (see Item 1.                            Business, General and Subsidiary Activity)          |
| 23     | Consent of Independent Registered Public Accounting                            Firm                                                 |
| 31.1   | Rule 13a-14(a)/15d-14(a) Certification of CEO                                                                                       |
| 31.2   | Rule 13a-14(a)/15d-14(a) Certification of CFO                                                                                       |
| 32     | Certification pursuant to 18 U.S.C. SS.1350, as adopted                            pursuant to SS.906 of Sarbanes Oxley Act of 2002 |

             

| +       | Management contract or compensatory plan                            arrangement.                                                                                                                                                               |
|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *       | 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. |
| **      | Incorporated by reference into this document from the                            identically numbered exhibits to the registrant’s Form 8-K filed                            with the Commission March 6, 2006.                          |
| ***     | 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.                 |
| ****    | 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.                                             |
| *****   | 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.   |
| ******  | 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.    |
| ******* | Incorporated herein by reference from the Exhibits to                            the Registrant’s Current Report on Form 8-K filed April 4,                            2006.                                                             |

 

 

30

 

----

 

| **SIGNATURES**                                                                                                                                                                                                                                                                                    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                              |
| Pursuant 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 14, 2008                                                                                                                                                                                                                                 |   |  

                             

                              | /s/ William W. Davis, Jr. |
|                                                                                                                                                                                                                                                                                              |   | By: | William W. Davis, Jr.

President, Chief Executive Officer and                            Director

(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 14, 2008 on behalf of the Registrant and in the capacities                            indicated.    |
|  

                             

/s/ William W. Davis, Jr.                                                                                                                                                                                                                             |   | /s/ Lewis J. Critelli |
| William W. Davis, Jr.

President, Chief Executive Officer and                            Director

(Principal Executive Officer)                                                                                                                                                                  |   | Lewis J. Critelli

Executive Vice President, Secretary and Chief Financial                            Officer

(Principal Financial Accounting Officer) |
|  

                             

/s/ Andrew A. Forte                                                                                                                                                                                                                                   |   | /s/ John E. Marshall |
| Andrew A. Forte

Director                                                                                                                                                                                                                                                                         |   | John E. Marshall

Director |
|  

                             

/s/ Daniel J. O’Neill                                                                                                                                                                                                                           |   | /s/ Dr. Kenneth A. Phillips |
| Daniel J. O’Neill

Director                                                                                                                                                                                                                                                                 |   | Dr. Kenneth A. Phillips

Director |
|  

                             

/s/ Gary P. Rickard                                                                                                                                                                                                                                   |   | /s/ Richard L. Snyder |
| Gary P. Rickard

Director                                                                                                                                                                                                                                                                         |   | Richard L. Snyder

Director |
|  

                             

/s/ Ralph A. Matergia                                                                                                                                                                                                                                 |   | /s/ Susan Gumble-Cottell |
| Ralph A. Matergia

Director                                                                                                                                                                                                                                                                       |   | Susan Gumble-Cottell

Director |
|                                                                                                                                                                                                                                                                                                   |  |  |  |  |

 

 

31