SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549  FORM 10-Q (Mark One) x

                        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the quarterly period ended September 30, 2008
 OR o

                        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from _________________ to _________________
  Commission file number 0-28366  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)
  (570) 253-1455(Registrant’s telephone number, including area code)
  NA(Former name, former address and former fiscal year, if changed since last report))
  Indicate by check (x) whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
            xNo 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.  Large accelerated filer o

                        

                        Accelerated filer xNon-accelerated filer o

                            (Do not check if a smaller reporting company)

                        

                        Smaller reporting company o
  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): o Yesx No  Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  Class

                        

                        Outstanding as of November 7, 2008Common stock, par value $0.10 per share

                        

                        2,735,861
   1
  
  NORWOOD FINANCIAL CORP. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2008 INDEX   Page

                            NumberPART I -

                        CONSOLIDATED FINANCIAL INFORMATION OF NORWOOD

                            FINANCIAL CORP.Item 1.

                        Financial Statements

                        3Item 2.

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

                        15Item 3.

                        Quantitative and Qualitative Disclosures about Market Risk

                        31Item 4.

                        Controls and Procedures

                        32PART II -

                        OTHER INFORMATIONItem 1.

                        Legal Proceedings

                        32Item 1A.

                        Risk Factors

                        32Item 2.

                        Unregistered Sales of Equity Securities and Use of Proceeds

                        33Item 3.

                        Defaults upon Senior Securities

                        33Item 4.

                        Submission of Matters to a Vote of Security Holders

                        34Item 5.

                        Other Information

                        34Item 6.

                        Exhibits

                        34Signatures

                        

                        35
       2
  
 PART I. FINANCIAL INFORMATION Item 1. Financial Statements NORWOOD FINANCIAL CORP. Consolidated Balance Sheets (unaudited) (dollars in thousands, except per share data)  September 30,

                        

                        December 31,2008

                        

                        2007ASSETSCash and due from banks

                        

                        $

                        9,277

                        

                        $

                        9,014Interest bearing deposits with banks

                        

                        

                        74

                        

                        

                        50Federal funds sold

                        

                        

                        450

                        

                        

                        —Cash and cash equivalents

                        

                        

                        9,801

                        

                        

                        9,064Securities available for sale

                        

                        

                        128,287

                        

                        

                        123,987Securities held to maturity, fair value 2008:$724, 2007: $721

                        

                        

                        706

                        

                        

                        705Loans receivable (net of unearned income)

                        

                        

                        341,217

                        

                        

                        331,296Less: Allowance for loan losses

                        

                        

                        4,331

                        

                        

                        4,081Net loans receivable

                        

                        

                        336,886

                        

                        

                        327,215Investment in FHLB Stock, at cost

                        

                        

                        3,545

                        

                        

                        2,072Bank premises and equipment, net

                        

                        

                        5,601

                        

                        

                        5,742Bank owned life insurance

                        

                        

                        7,992

                        

                        

                        7,767Foreclosed real estate owned

                        

                        

                        660

                        

                        

                        —Accrued interest receivable

                        

                        

                        2,394

                        

                        

                        2,343Other assets

                        

                        

                        2,763

                        

                        

                        1,715TOTAL ASSETS

                        

                        $

                        498,635

                        

                        $

                        480,610LIABILITIESDeposits:Non-interest bearing demand

                        

                        $

                        63,474

                        

                        $

                        60,061Interest bearing

                        

                        

                        297,083

                        

                        

                        309,939Total deposits

                        

                        

                        360,557

                        

                        

                        370,000Short-term borrowings

                        

                        

                        33,575

                        

                        

                        26,686Other borrowings

                        

                        

                        43,000

                        

                        

                        23,000Accrued interest payable

                        

                        

                        2,319

                        

                        

                        3,198Other liabilities

                        

                        

                        3,070

                        

                        

                        1,907TOTAL LIABILITIES

                        

                        

                        442,521

                        

                        

                        424,791STOCKHOLDERS’ EQUITYCommon stock, $.10 par value, authorized 10,000,000shares, issued: 2,840,872

                        

                        

                        284

                        

                        

                        284Surplus

                        

                        

                        9,953

                        

                        

                        10,159Retained earnings

                        

                        

                        49,550

                        

                        

                        47,030Treasury stock at cost: 2008: 105,616 shares, 2007:87,256 shares

                        

                        

                        (3,272

                        )

                        

                        (2,708

                        )Accumulated other comprehensive income (loss)

                        

                        

                        (401

                        )

                        

                        1,054TOTAL STOCKHOLDERS’ EQUITY

                        

                        

                        56,114

                        

                        

                        55,819TOTAL LIABILITIES ANDSTOCKHOLDERS’ EQUITY

                        

                        $

                        498,635

                        

                        $

                        480,610
  See accompanying notes to the unaudited consolidated financial statements   3
  
  NORWOOD FINANCIAL CORP. Consolidated Statements of Income (unaudited) (dollars in thousands, except per share data)  Three Months Ended

                        

                        Nine Months EndedSeptember 30,

                        

                        September 30,2008

                        

                        2007

                        

                        2008

                        

                        2007INTEREST INCOMELoans receivable, including fees

                        

                        $

                        5,509

                        

                        $

                        6,054

                        

                        $

                        16,560

                        

                        $

                        17,772Securities

                        

                        

                        1,549

                        

                        

                        1,370

                        

                        

                        4,575

                        

                        

                        3,866Other

                        

                        

                        1

                        

                        

                        33

                        

                        

                        26

                        

                        

                        144Total interest income

                        

                        

                        7,059

                        

                        

                        7,457

                        

                        

                        21,161

                        

                        

                        21,782INTEREST EXPENSEDeposits

                        

                        

                        1,780

                        

                        

                        2,489

                        

                        

                        6,114

                        

                        

                        7,449Short-term borrowings

                        

                        

                        200

                        

                        

                        195

                        

                        

                        565

                        

                        

                        656Other borrowings

                        

                        

                        303

                        

                        

                        281

                        

                        

                        808

                        

                        

                        808Total interest expense

                        

                        

                        2,283

                        

                        

                        2,965

                        

                        

                        7,487

                        

                        

                        8,913NET INTEREST INCOME

                        

                        

                        4,776

                        

                        

                        4,492

                        

                        

                        13,674

                        

                        

                        12,869PROVISION FOR LOAN LOSSES

                        

                        

                        130

                        

                        

                        90

                        

                        

                        315

                        

                        

                        195NET INTEREST INCOME AFTERPROVISION FOR LOAN LOSSES

                        

                        

                        4,646

                        

                        

                        4,402

                        

                        

                        13,359

                        

                        

                        12,674OTHER INCOMEService charges and fees

                        

                        

                        656

                        

                        

                        635

                        

                        

                        1,964

                        

                        

                        1,876Income from fiduciary activities

                        

                        

                        91

                        

                        

                        117

                        

                        

                        293

                        

                        

                        335Net realized gains (losses) on sales of securities

                        

                        

                        (27

                        )

                        

                        —

                        

                        

                        (18

                        )

                        

                        15Gain on sale of loans and servicing rights

                        

                        

                        90

                        

                        

                        8

                        

                        

                        486

                        

                        

                        16Other

                        

                        

                        163

                        

                        

                        153

                        

                        

                        472

                        

                        

                        422Total other income

                        

                        

                        973

                        

                        

                        913

                        

                        

                        3,197

                        

                        

                        2,664OTHER EXPENSESSalaries and employee benefits

                        

                        

                        1,477

                        

                        

                        1,432

                        

                        

                        4,521

                        

                        

                        4,367Occupancy, furniture & equipment, net

                        

                        

                        403

                        

                        

                        400

                        

                        

                        1,247

                        

                        

                        1,231Data processing related

                        

                        

                        183

                        

                        

                        173

                        

                        

                        551

                        

                        

                        515Taxes, other than income

                        

                        

                        130

                        

                        

                        54

                        

                        

                        387

                        

                        

                        293Professional fees

                        

                        

                        72

                        

                        

                        75

                        

                        

                        250

                        

                        

                        258Foreclosed real estate owned

                        

                        

                        519

                        

                        

                        —

                        

                        

                        571

                        

                        

                        —Other

                        

                        

                        577

                        

                        

                        653

                        

                        

                        1,767

                        

                        

                        1,831Total other expenses

                        

                        

                        3,361

                        

                        

                        2,787

                        

                        

                        9,294

                        

                        

                        8,495INCOME BEFORE INCOME TAXES

                        

                        

                        2,258

                        

                        

                        2,528

                        

                        

                        7,262

                        

                        

                        6,843INCOME TAX EXPENSE

                        

                        

                        666

                        

                        

                        722

                        

                        

                        2,170

                        

                        

                        2,004NET INCOME

                        

                        $

                        1,592

                        

                        $

                        1,806

                        

                        $

                        5,092

                        

                        $

                        4,839BASIC EARNINGS PER SHARE

                        

                        $

                        0.58

                        

                        $

                        0.65

                        

                        $

                        1.86

                        

                        $

                        1.74DILUTED EARNINGS PER SHARE

                        

                        $

                        0.58

                        

                        $

                        0.64

                        

                        $

                        1.84

                        

                        $

                        1.71
  See accompanying notes to the unaudited consolidated financial statements   4
  
 NORWOOD FINANCIAL CORP. Consolidated Statements of Changes in Stockholders’ Equity (unaudited)  (dollars in thousands, except per share data)  Number ofsharesissued

                        

                        CommonStock

                        

                        Surplus

                        

                        RetainedEarnings

                        

                        TreasuryStock

                        

                        AccumulatedOtherComprehensiveIncome (Loss)

                        

                        TotalBalance December 31, 2006

                        2,840,872

                        

                        $

                        284

                        

                        $

                        10,149

                        

                        $

                        43,125

                        

                        ($1,283

                        )

                        $

                        (44

                        )

                        $

                        52,231Comprehensive Income:Net Income

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        4,839

                        

                        

                        

                        

                        

                        

                        

                        4,839Change in unrealized gains on securitiesavailable for sale, net of reclassificationadjustment and tax effects

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        468

                        

                        

                        468Total comprehensive income

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        5,307Cash dividends declared, $.69 per share

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        (1,918

                        )

                        

                        

                        

                        

                        

                        

                        (1,918

                        )Acquisition of treasury stock 43,675 shs

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        (1,385

                        )

                        

                        

                        

                        

                        (1,385

                        )Stock options exercised, 14,483 shs

                        

                        

                        

                        

                        

                        

                        (243

                        )

                        

                        

                        

                        431

                        

                        

                        

                        

                        

                        188Tax benefit of stock options exercised

                        

                        

                        

                        

                        

                        

                        98

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        98Compensation expense related to stock options

                        

                        

                        

                        

                        

                        

                        199

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        199Balance, September 30, 2007

                        2,840,872

                        

                        $

                        284

                        

                        $

                        10,203

                        

                        $

                        46,046

                        

                        ($2,237

                        )

                        $

                        424

                        

                        $

                        54,720
   Number ofsharesissued

                        

                        CommonStock

                        

                        Surplus

                        

                        RetainedEarnings

                        

                        TreasuryStock

                        

                        AccumulatedOtherComprehensiveIncome (Loss)

                        

                        TotalBalance December 31, 2007

                        2,840,872

                        

                        $

                        284

                        

                        $

                        10,159

                        

                        $

                        47,030

                        

                        ($2,708

                        )

                        $

                        1,054

                        

                        $

                        55,819Comprehensive Income:Net Income

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        5,092

                        

                        

                        

                        

                        

                        

                        

                        5,092Change in unrealized losses on securitiesavailable for sale, net of reclassificationadjustment and tax effects

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        (1,455

                        )

                        

                        (1,455

                        )Total comprehensive income

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        3,637Cash dividends declared, $.75 per share

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        (2,052

                        )

                        

                        

                        

                        

                        

                        

                        (2,052

                        )Acquisition of treasury stock 46,338 shs

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        (1,439

                        )

                        

                        

                        

                        

                        (1,439

                        )Stock options exercised, 27,978 shs

                        

                        

                        

                        

                        

                        

                        (455

                        )

                        

                        

                        

                        875

                        

                        

                        

                        

                        

                        420Tax benefit of stock options exercised

                        

                        

                        

                        

                        

                        

                        134

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        134Compensation expense related to stock options

                        

                        

                        

                        

                        

                        

                        115

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        115Cumulative effect of net periodic postretirement benefit

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        (520

                        )

                        

                        

                        

                        

                        

                        

                        (520

                        )Balance, September 30, 2008

                        2,840,872

                        

                        $

                        284

                        

                        $

                        9,953

                        

                        $

                        49,550

                        

                        ($3,272

                        )

                        $

                        (401

                        )

                        $

                        56,114
   See accompanying notes to the unaudited consolidated financial statements  5
  
  NORWOOD FINANCIAL CORP. Consolidated Statements of Cash Flows (unaudited) (dollars in thousands)
  Nine Months EndedSeptember 30,2008

                            

                            2007CASH FLOWS FROM OPERATING ACTIVITIESNet Income

                            

                            $

                            5,092

                            

                            $

                            4,839Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan losses

                            

                            

                            315

                            

                            

                            195Depreciation

                            

                            

                            430

                            

                            

                            425Amortization of intangible assets

                            

                            

                            39

                            

                            

                            39Deferred income taxes

                            

                            

                            (268

                            )

                            

                            207Net amortization of securities premiums and discounts

                            

                            

                            33

                            

                            

                            101Net realized (gain) loss on sales of securities

                            

                            

                            18

                            

                            

                            (15

                            )Earnings on life insurance policy

                            

                            

                            (225

                            )

                            

                            (215

                            )Loss on foreclosed real estate owned

                            

                            

                            540

                            

                            

                            —Net gain on sale of mortgage loans and servicing rights

                            

                            

                            (486

                            )

                            

                            (16

                            )Mortgage loans originated for sale

                            

                            

                            (866

                            )

                            

                            (801

                            )Proceeds from sale of mortgage loans and servicing rights originated for sale

                            

                            

                            881

                            

                            

                            817Compensation expense related to stock options

                            

                            

                            115

                            

                            

                            199Increase in accrued interest receivable and other assets

                            

                            

                            (68

                            )

                            

                            (651

                            )Decrease in accrued interest payable and other liabilities

                            

                            

                            (232

                            )

                            

                            (3,549

                            )Net cash provided by operating activities

                            

                            

                            5,318

                            

                            

                            1,575CASH FLOWS FROM INVESTING ACTIVITIESSecurities available for sale:Proceeds from sales

                            

                            

                            68

                            

                            

                            74Proceeds from maturities and principal reductions on mortgage-backed securities

                            

                            

                            31,475

                            

                            

                            37,761Purchases

                            

                            

                            (38,102

                            )

                            

                            (43,046

                            )Securities held to maturity, proceeds from calls

                            

                            

                            —

                            

                            

                            250Increase in investment in FHLB stock

                            

                            

                            (1,473

                            )

                            

                            (302

                            )Net increase in loans

                            

                            

                            (24,740

                            )

                            

                            (13,107

                            )Proceeds from sale of mortgage loans and servicing rights

                            

                            

                            13,975

                            

                            

                            —Purchase of bank premises and equipment

                            

                            

                            (289

                            )

                            

                            (169

                            )Net cash used in investing activities

                            

                            

                            (19,086

                            )

                            

                            (18,539

                            )CASH FLOWS FROM FINANCING ACTIVITIESNet increase (decrease) in deposits

                            

                            

                            (9,443

                            )

                            

                            9,450Net increase (decrease) in short-term borrowings

                            

                            

                            6,889

                            

                            

                            (108

                            )Repayments of other borrowing

                            

                            

                            (5,000

                            )

                            

                            —Proceeds from other borrowings

                            

                            

                            25,000

                            

                            

                            10,000Stock options exercised

                            

                            

                            420

                            

                            

                            188Tax benefit of stock options exercised

                            

                            

                            134

                            

                            

                            98Acquisition of treasury stock

                            

                            

                            (1,439

                            )

                            

                            (1,385

                            )Cash dividends paid

                            

                            

                            (2,056

                            )

                            

                            (1,922

                            )Net cash provided by financing activities

                            

                            

                            14,505

                            

                            

                            16,321Increase (decrease) in cash and cash equivalents

                            

                            

                            737

                            

                            

                            (643

                            )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

                            

                            

                            9,064

                            

                            

                            9,517CASH AND CASH EQUIVALENTS, END OF PERIOD

                            

                            $

                            9,801

                            

                            $

                            8,874
 See accompanying notes to the unaudited consolidated financial statements  6
  
 Notes to Unaudited Consolidated Financial Statements 1. Basis of Presentation  The unaudited consolidated financial statements include the accounts of Norwood Financial Corp. (Company) and its wholly-owned subsidiary, Wayne Bank (Bank) and the Bank’s wholly-owned subsidiaries, WCB Realty Corp., Norwood Investment Corp. and WTRO Properties. All significant intercompany transactions have been eliminated in consolidation.  The accompanying unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles for interim financial statements and with instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In preparing the
            consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. The consolidated financial statements reflect, in the opinion of management all normal, recurring adjustments necessary to present fairly the financial position of the Company. The operating results for the
            three and nine month periods ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008 or any other future interim period.  These statements should be read in conjunction with the consolidated financial statements and related notes which are incorporated by reference in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2007.  2. Earnings Per Share  Basic earnings per share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed
            issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.  The following table sets forth the weighted average number of common shares used in the computations of basic and diluted earnings per share:  (in thousands)

                        

                        Three Months Ended

                        

                        Nine Months EndedSeptember 30,

                        

                        September 30,2008

                        

                        2007

                        

                        2008

                        

                        2007Basic EPS weighted average shares outstanding

                        

                        2,736

                        

                        2,773

                        

                        2,742

                        

                        2,783Dilutive effect of stock options

                        

                        26

                        

                        46

                        

                        32

                        

                        52Diluted EPS weighted average shares outstanding

                        

                        2,764

                        

                        2,819

                        

                        2,774

                        

                        2,835
  Stock options which had no intrinsic value because their effect would be anti-dilutive and therefore would not be included in the diluted EPS calculation were 89,150 and 22,500 for the periods ended September 30, 2008 and 2007, respectively.  7
  
  3. Stock-Based Compensation  The Company’s shareholders approved the Norwood Financial Corp 2006 Stock Option Plan at the annual meeting on April 25, 2006 and the Company awarded 47,700 options in 2006, and 22,000 options in 2007, all of which have a twelve month vesting period. As of September 30, 2008, there was approximately $38,000 of total unrecognized compensation cost related to nonvested options
            under the plan, which will be fully amortized by December 31, 2008.  No stock options were granted for the nine months ended September 30, 2008. A summary of stock options from all plans, adjusted for stock dividends declared, is shown below.  Options

                        

                        Weighted Average Exercise Price

                            Per Share

                        

                        Weighted Average Remaining Contractual Term

                        

                        Aggregate Intrinsic Value ($000)Outstanding at January 1, 2008

                        180,422

                        

                        $

                        24.04

                        

                        

                        5.5

                        Yrs.

                        

                        $

                        895Exercised

                        (27,978

                        )

                        

                        14.98Outstanding at September 30, 2008

                        152,444

                        

                        $

                        25.70

                        

                        

                        5.3

                        

                        

                        $

                        503Exerciseable at September 30, 2008

                        130,444

                        

                        $

                        24.14

                        

                        

                        5.5

                        

                        

                        $

                        634
  Intrinsic value represents the amount by which the market price of the stock on the measurement date exceeded the exercise price of the option. The intrinsic value of options exercised during the nine months ended September 30, 2008 was $436,000, cash received from such exercises was $420,000 and the tax benefit recognized was $134,000.  4. Cash Flow Information For the purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits with banks and federal funds sold, all of which mature within 90 days.  Cash payments for interest for the nine months ended September 30, 2008 and 2007 were $8,366,000 and $9,218,000 respectively. Cash payments for income taxes in 2008 were $2,236,000 compared to $1,966,000 in 2007. Non-cash investing activities for 2008 and 2007 included foreclosed mortgage loans and repossession of other assets of $1,250,000 and $47,000, respectively.  5. Borrowings In August 2008 the Company borrowed $10 million in the form of a convertible note from the Federal Home Loan Bank of Pittsburgh (FHLB). The note has a three year term with a fixed interest rate of 2.69% for six months. The convertible note contains an option that allows the FHLB, at quarterly intervals to change the note to an adjustable-rate advance at three-month Libor plus 16 basis
            points. If the note is converted, the Company has the option to put the funds back to the FHLB without penalty. In September 2008, the Company borrowed $5 million in the form of a fixed rate note from the FHLB at a rate of 3.53% maturing September 2010 and $5 million at a fixed rate of 4.06% maturing in September 2011.  In April 2008, a $5 million fixed rate advance from the FHLB matured and was paid off by the Company. In May 2008, the Company borrowed $5 million in the form of a convertible  8
  
 note from the FHLB with a five year term with fixed interest rate of 3.015% for two years. The convertible note contains an option that allows the FHLB, at quarterly intervals, to change the note to an adjustable rate advance at three month Libor plus 19 basis points. If converted, the Company may put the funds back to the FHLB without penalty.  6. Comprehensive Income Accounting principles generally accepted in the United States of America require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with
            net income, are components of comprehensive income. The components of other comprehensive income and related tax effects are as follows.  Three Months Ended

                        

                        Nine Months Ended(in thousands)

                        

                        September 30,

                        

                        September 30,2008

                        

                        

                        2007

                        

                        2008

                        

                        2007Unrealized holding gains (losses) onavailable for sale securities

                        

                        $

                        (953

                        )

                        

                        $

                        1,123

                        

                        $

                        (2,225

                        )

                        $

                        715Reclassification adjustment for (gains)losses realized in net income

                        

                        

                        27

                        

                        

                        

                        —

                        

                        

                        18

                        

                        

                        (15

                        )Net unrealized gains (losses)

                        

                        

                        (926

                        )

                        

                        

                        1,123

                        

                        

                        (2,207

                        )

                        

                        700Income tax (benefit)

                        

                        

                        (313

                        )

                        

                        

                        380

                        

                        

                        (752

                        )

                        

                        232Other comprehensive income (loss)

                        

                        $

                        (613

                        )

                        

                        $

                        743

                        

                        $

                        (1,455

                        )

                        $

                        468
  7.

                        Off-Balance Sheet Financial Instruments and Guarantees
 The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance
            sheets. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.  A summary of the Bank’s financial instrument commitments is as follows: (in thousands)   September 30,2008

                        

                        2007Commitments to grant loans

                        

                        $

                        19,138

                        

                        $

                        15,687Unfunded commitments under lines of credit

                        

                        

                        35,904

                        

                        

                        31,911Standby letters of credit

                        

                        

                        2,065

                        

                        

                        2,751$

                        57,107

                        

                        $

                        50,349
  Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed  9
  
 expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon
            extension of credit, is based on management’s credit evaluation of the customer and generally consists of real estate.  The Bank does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued have expiration dates within one year. The credit risks
            involved in issuing letters of credit are essentially the same as those that are involved in extending loan facilities to customers. The Bank, generally, holds collateral and/or personal guarantees supporting these commitments. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payment required under the corresponding guarantees. The current amount of the
            liability as of September 30, 2008 for guarantees under standby letters of credit issued is not material.  8. Fair Value Measurements  In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value
            measurements. The standard is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. The Company adopted SFAS 157 effective for its fiscal year beginning January 1, 2008. In December 2007, the FASB issued FASB Staff Position (FSP) No. SFAS 157-2, “Effective date of FAS 157” for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value on a
            recurring basis (at least annually) to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. In October 2008, the FASB issued FSP SFAS No. 157-3, “Determining the Fair Value of a Financial Asset When The Market for That Asset Is Not Active” (FSP 157-3), to clarify the application of the provisions of SFAS 157 in an inactive market and how an entity would determine fair value in an inactive market. FSP 157-3 is effective immediately
            and applies to our September 30, 2008 financial statements. The adoption of SFAS 157 and FSP No. FAS 157-2 and FSP No. FAS 157-3 had no impact on the amounts reported in the consolidated financial statements.  The primary effect of SFAS 157 on the Company was to expand the required disclosures pertaining to the methods used to determine fair values.  SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy
            under SFAS 157 are as follows:  Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.  10
  
  Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.  Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and are unobservable (i.e. supported with little or no market activity).  An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.  For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2008 are as follows:   Fair Value Measurement Reporting Date usingDescription

                        

                        September 30,2008

                        

                        (Level 1)Quoted Prices inActive MarketsFor IdenticalAssets

                        

                        (Level 2)SignificantOtherObservableInputs

                        

                        (Level 3)SignificantUnobservableInputs(In thousands)Securities available for sale

                        

                        $

                        128,287

                        

                        $

                        1,338

                        

                        $

                        126,949

                        

                        $

                        —Loans

                        

                        

                        1,662

                        

                        

                        —

                        

                        

                        —

                        

                        

                        1,662Other Real Estate

                        

                        

                        660

                        

                        

                        —

                        

                        

                        —

                        

                        

                        660Total

                        

                        $

                        130,609

                        

                        $

                        1,338

                        

                        $

                        126,949

                        

                        $

                        2,322
  The following valuation techniques were used to measure fair value of assets in the table above on a recurring basis as of September 30, 2008:  Available for Sale Securities: The Company holds equity securities which are traded with quoted prices, on an active market. Such securities are carried at a market price quote and considered Level 1 Fair Values.  The Company also holds debt offerings of U.S. Government Agencies, state and political subdivisions, high-grade corporate obligations and mortgage-backed securities issued by U.S. Government agencies. The Company utilizes a third party source to provide fair value of its fixed income securities. The methodology consists of pricing models based on asset class and include available
            trade, bid, other market information, broker quotes, proprietary models, various databases and trading desk quotes. This valuation is based on observable inputs and is considered Level 2.  Impaired Loans: Impaired loans are evaluated and valued at the time the loan is first considered impaired. The realizable value is measured based on the value of the collateral securing the loan and is considered a Level 3 measurement. The value of real estate related collateral is established by a formal appraisal performed for the Company. The loan is carried at the lower of cost or market, net of
            any valuation allowance. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted as needed.  11
  
  Foreclosed Real Estate Owned: The realizable value is measured based on the value of the real estate less cost to sell and is considered a Level 3 measurement. The value of the real estate is established by formal appraisal performed by the Company.  The following is a reconciliation of the beginning and ending balances of recurring value measurements of impaired loans and other real estate owned using significant unobservable (Level 3) inputs:  Three Months Ended

                        

                        Nine Months Ended(Dollars in thousands)

                        

                        September 30, 2008

                        

                        September 30, 2008Impaired Loans

                        

                        Other RealEstate Owned

                        

                        Impaired Loans

                        

                        Other RealEstateOwnedBalance at the beginning of the period

                        

                        $

                        1,785

                        

                        $

                        1,200

                        

                        $

                        3,208

                        

                        $

                        —Transfer from impaired loans

                        

                        

                        —

                        

                        

                        —

                        

                        

                        —

                        

                        

                        1,200Loan advances

                        

                        

                        —

                        

                        

                        —

                        

                        

                        22

                        

                        

                        —Loan payments

                        

                        

                        (8

                        )

                        

                        —

                        

                        

                        (61

                        )

                        

                        —Specific allowance

                        

                        

                        (115

                        )

                        

                        (540

                        )

                        

                        (307

                        )

                        

                        (540

                        )Transfer to Other Real Estate owned

                        

                        

                        —

                        

                        

                        —

                        

                        

                        (1,200

                        )

                        

                        —Balance at the end of the period

                        

                        $

                        1,662

                        

                        $

                        660

                        

                        $

                        1,662

                        

                        $

                        660
  9. New and Recently Adopted Accounting Pronouncements  In September 2006, the FASB’s Emerging Issues Task Force (EITF) issued EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements” (EITF 06-4). EITF 06-4 requires the recognition of a liability related to the postretirement benefits covered by an endorsement split-dollar life
            insurance arrangement. The consensus highlights that the employer (who is also the policyholder) has a liability for the benefit it is providing to its employee. As such, if the policyholder has agreed to maintain the insurance policy in force for the employee’s benefit during his or her retirement, then the liability recognized during the employee’s active service period should be based on the future cost of insurance to be incurred during the employee’s
            retirement. Alternatively, if the policyholder has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the guidance in SFAS No. 106 or Accounting Principles Board (APB) Opinion No. 12, as appropriate. For transition, an entity can choose to apply the guidance using either the following approaches: (a) a change in accounting principle through retrospective application to all periods presented or (b) a
            change in accounting principle through a cumulative-effect adjustment to the balance in retained earnings at the beginning of the year of adoption. The EITF is effective for fiscal years beginning after December 15, 2007, with early adoption permitted. The Company has chosen approach (b) and recorded a cumulative effect adjustment as of January 1, 2008 to the balance of retained earnings of $520,000, with $90,000 of Net Periodic Postretirement Benefit expense expected for the year
            ended December 31, 2008.  In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115”. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been  12
  
 elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for our Company January 1, 2008. The adoption of SFAS No. 159 did not have a material impact on our consolidated financial statements.  FASB Statement No. 141 (R) “Business Combinations” was issued in December of 2007. This Statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The Statement also provides guidance for
            recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. This new pronouncement will impact the Company’s accounting for business combinations beginning January 1,
            2009.  FASB Statement No. 160 “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” was issued in December of 2007. This Statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance will become effective as of the beginning of a
            company’s fiscal year beginning after December 15, 2008. The Company believes that this new pronouncement will have an immaterial impact on the Company’s consolidated financial statements in future periods.  Staff Accounting Bulletin No. 109 (SAB 109), “Written Loan Commitments Recorded at Fair Value Through Earnings” expresses the views of the staff regarding written loan commitments that are accounted for at fair value through earnings under generally accepted accounting principles. To make the staff’s views consistent with current authoritative accounting guidance,
            the SAB revises and rescinds portions of SAB No. 105, “Application of Accounting Principles to Loan Commitments.” Specifically, the SAB revises the SEC staff’s views on incorporating expected net future cash flows related to loan servicing activities in the fair value measurement of a written loan commitment. The SAB retains the staff’s views on incorporating expected net future cash flows related to internally-developed intangible assets in the fair value
            measurement of a written loan commitment. The staff expects registrants to apply the views in Question 1 of SAB 109 on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. SAB 109 did not have a material impact on the Company’s consolidated financial statements.  In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (Statement 161). Statement 161 requires entities that utilize derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well as any details of
            credit-risk-related contingent features contained within derivatives. Statement 161 also requires entities to disclose additional information about the amounts and location of derivatives located within the financial statements, how the provisions of SFAS 133 have been applied, and the impact that hedges have on an entity’s financial position, financial performance, and cash flows. Statement 161 is effective for fiscal years and interim periods beginning after November 15,
            2008, with early application encouraged. The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.  13
  
 In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting
            Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company believes that his new pronouncement will have an immaterial impact on the Company’s consolidated financial statements in future periods.  In April 2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible
            Assets” (“SFAS 142”). The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R, and other GAAP. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company is
            evaluating the potential impact the new pronouncement will have on its consolidated financial statements.  In May 2008, the FASB issued FASB Staff Position (FSP) APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” which clarifies the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. The FSP requires issuers to account
            separately for the liability and equity components of certain convertible debt instruments in a manner that reflects the issuer’s nonconvertible debt borrowing rate when interest cost is recognized. The FSP requires bifurcation of a component of the debt, classification of that component in equity and the accretion of the resulting discount on the debt to be recognized as part of interest expense. The FSP requires retrospective application to the terms of instruments as if
            they existed for all periods presented. The FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. Early adoption is not permitted. The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.  In June 2008, the FASB issued FASB Staff Position (FSP) EITF 03—6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” This FSP clarifies that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders.
            Awards of this nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied. This FSP is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.  In June 2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock” (EITF 07-5). EITF 07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the
            instrument’s contingent exercise and settlement provisions. It also clarifies the impact of foreign currency denominated strike prices and market-based employee stock option valuation  14
  
 instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.  In October 2008, the FASB issued FSP SFAS No. 157-3, “Determining the Fair Value of a Financial Asset When The Market for That Asset Is Not Active” (FSP 157-3), to clarify the application of the provisions of SFAS 157 in an inactive market and how an entity would determine fair value in an inactive market. FSP 157-3 is effective immediately and applies to our September 30,
            2008 financial statements. The application of the provisions of FSP 157-3 did not materially affect our results of operations or financial condition as of and for the periods ended September 30, 2008.  In September 2008, the FASB issued FSP 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161” (FSP 133-1 and FIN 45-4). FSP 133-1 and FIN 45-4 amends and enhances disclosure requirements for sellers of credit
            derivatives and financial guarantees. It also clarifies that the disclosure requirements of SFAS No. 161 are effective for quarterly periods beginning after November 15, 2008, and fiscal years that include those periods. FSP 133-1 and FIN 45-4 is effective for reporting periods (annual or interim) ending after November 15, 2008. The implementation of this standard will not have a material impact on our consolidated financial position and results of operations.  In September 2008, the FASB ratified EITF Issue No. 08-5, “Issuer’s Accounting for Liabilities Measured at Fair Value With a Third-Party Credit Enhancement” (EITF 08-5). EITF 08-5 provides guidance for measuring liabilities issued with an attached third-party credit enhancement (such as a guarantee). It clarifies that the issuer of a liability with a third-party
            credit enhancement should not include the effect of the credit enhancement in the fair value measurement of the liability. EITF 08-5 is effective for the first reporting period beginning after December 15, 2008. The Company is currently assessing the impact of EITF 08-5 on its consolidated financial position and results of operations.  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  Forward-Looking Statements  The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words believes, anticipates, contemplates, expects, and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to
            differ materially from those projected. Those risks and uncertainties include changes in interest rates, risks associated with the effect of opening a new branch, the ability to control costs and expenses, demand for real estate and general economic conditions. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence
            of unanticipated events.  15
  
 Critical Accounting Policies  Note 2 to the Company’s consolidated financial statements for the year ended December 31, 2007 (incorporated by reference in Item 8 of the Form 10-K) lists significant accounting policies used in the development and presentation of its consolidated financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures
            identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, accounting for stock options, the valuation of deferred tax assets and the determination of other-than-temporary impairment losses on securities. Please refer to the discussion of the allowance for loan losses calculation under
            “Non-performing Assets and Allowance for Loan Losses” in the “Changes in Financial Condition” section.  The deferred income taxes reflect temporary differences in the recognition of the revenue and expenses for tax reporting and financial statement purposes, principally because certain items are recognized in different periods for financial reporting and tax return purposes. Although realization is not assured, the Company believes that it is more likely than not that all deferred tax
            assets will be realized.  In estimating other-than-temporary impairment losses on securities, the Company considers 1) the length of time and extent to which the fair value has been less than cost 2) the financial condition of the issuer and 3) the intent and ability of the Company to hold the security to allow for a recovery to fair value. The Company believes that the unrealized losses at September 30, 2008
            and December 31, 2007 represent temporary impairment of the securities, and the Company has the intent and ability to hold until recovery, excluding an other-than-temporary impairment charge of $27,000 taken for 1,000 shares of Wachovia Common Stock as of September 30, 2008 recorded in net realized gains (losses) on sale of securities in Other Income.  Emergency Economic Stabilization Act of 2008  In response to recent unprecedented market turmoil, the Emergency Economic Stabilization Act (“EESA”) was enacted on October 3, 2008. EESA authorizes the Secretary of the Treasury to purchase up to $700 billion in troubled assets from financial institutions under the Troubled Asset Relief Program or TARP. Troubled assets include residential or commercial mortgages and
            related instruments originated prior to March 14, 2008 and any other financial instrument that the Secretary determines, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, the purchase of which is necessary to promote financial stability. If the Secretary exercises his authority under TARP, EESA directs the Secretary of Treasury to establish a program to guarantee troubled assets originated or issued prior to March 14, 2008. The Secretary
            is authorized to purchase up to $250 billion in troubled assets immediately and up to $350 billion upon certification by the President that such authority is needed. The Secretary’s authority will be increased to $700 billion if the President submits a written report to Congress detailing the Secretary’s plans to use such authority unless Congress passes a joint resolution disapproving such amount within 15 days after receipt of the report. The Secretary’s
            authority under TARP expires on December 31, 2009 unless the Secretary certifies to  16
  
 Congress that extension is necessary provided that his authority may not be extended beyond October 3, 2010.  Institutions selling assets under TARP will be required to issue warrants for common or preferred stock or senior debt to the Secretary. If the Secretary purchases troubled assets directly from an institution without a bidding process and acquires a meaningful equity or debt position in the institution as a result or acquires more than $300 million in troubled assets from an
            institution regardless of method, the institution will be required to meet certain standards for executive compensation and corporate governance, including a prohibition against incentives to take unnecessary and excessive risks, recovery of bonuses paid to senior executives based on materially inaccurate earnings or other statements and a prohibition against agreements for the payment of golden parachutes. Institutions that sell more than $300 million in assets under TARP auctions
            will not be entitled to a tax deduction for compensation in excess of $500,000 paid to its chief executive or chief financial official or any of its other three most highly compensated officers. In addition, any severance paid to such officers for involuntary termination or termination in connection with a bankruptcy or receivership will be subject to the golden parachute rules under the Internal Revenue Code.  EESA increases the maximum deposit insurance amount up to $250,000 until December 31, 2009 and removes the statutory limits on the FDIC’s ability to borrow from the Treasury during this period. The FDIC may not take the temporary increase in deposit insurance coverage into account when setting assessments. EESA allows financial institutions to treat any loss on the preferred
            stock of the Federal National Mortgage Association or Federal Home Loan Mortgage Corporation as an ordinary loss for tax purposes. This provision is effective October 3, 2008.  Pursuant to his authority under EESA, the Secretary of the Treasury has created the TARP Capital Purchase Plan under which the Treasury Department will invest up to $250 billion in senior preferred stock of U.S. banks and savings associations or their holding companies. Qualifying financial institutions may issue senior preferred stock with a value equal to not less than 1% of
            risk-weighted assets and not more than the lesser of $25 billion or 3% of risk-weighted assets. The senior preferred stock will pay dividends at the rate of 5% per annum until the fifth anniversary of the investment and thereafter at the rate of 9% per annum. The senior preferred stock may not be redeemed for three years except with the proceeds from an offering of common stock or preferred stock qualifying as Tier 1 capital in an amount equal to not less than 25% of the amount of
            the senior preferred. After three years, the senior preferred may be redeemed at any time in whole or in part by the financial institution. No dividends may be paid on common stock unless dividends have been paid on the senior preferred stock. Until the third anniversary of the issuance of the senior preferred, the consent of the U.S. Treasury will be required for any increase in the dividends on the common stock or for any stock repurchases unless the senior preferred has been
            redeemed in its entirety or the Treasury has transferred the senior preferred to third parties. The senior preferred will not have voting rights other than the right to vote as a class on the issuance of any preferred stock ranking senior, any change in its terms or any merger, exchange or similar transaction that would adversely affect its rights. The senior preferred will also have the right to elect two directors if dividends have not been paid for six periods. The senior
            preferred will be freely transferable and participating institutions will be required to file a shelf registration statement covering the senior preferred. The issuing institution must grant the Treasury piggyback registration rights. Prior to issuance, the financial institution and its senior executive officers must modify or terminate all benefit plans and arrangements to comply with EESA. Senior executives must also waive any claims against the Department of Treasury.  17
  
  In connection with the issuance of the senior preferred, participating institutions must issue to the Secretary immediately exercisable 10-year warrants to purchase common stock with an aggregate market price equal to 15% of the amount of senior preferred. The exercise price of the warrants will equal the market price of the common stock on the date of the investment. The Secretary
            may only exercise or transfer one-half of the warrants prior to the earlier of December 31, 2009 or the date the issuing financial institution has received proceeds equal to the senior preferred investment form one or more offerings of common or preferred stock qualifying as Tier 1 capital. The Secretary will not exercise voting rights with respect to any shares of common stock acquired through exercise of the warrants. The financial institution must file a shelf registration
            statement covering the warrants and underlying common stock as soon as practicable after issuance and grant piggyback registration rights. The number of warrants will be reduced by one-half if the financial institution raises capital equal to the amount of the senior preferred through one or more offerings of common stock or preferred stock qualifying a Tier 1 capital. If the financial institution does not have sufficient authorized shares of common stock available to satisfy the
            warrants or their issuance otherwise requires shareholder approval, the financial institution must call a meeting of shareholders for that purpose as soon as practicable after the date of investment. The exercise price of the warrants will be reduced by 15% for each six months that lapse before shareholder approval subject to a maximum reduction of 45%.  The Company has a filing deadline of November 14, 2008 to participate in the Capital Purchase Plan (CPP). The Company is currently evaluating the impact of participating or not participating in the CPP.  Changes in Financial Condition  General Total assets as of September 30, 2008 were $498.6 million compared to $480.6 million as of December 31, 2007, an increase of $18.0 million. The increase reflects a $4.3 million increase in securities available for sale and a $9.9 million increase in loans receivable, funded by an increase in borrowings.  Securities The fair value of securities available for sale as of September 30, 2008 was $128.3 million compared to $124 million as of December 31, 2007. The Company purchased $38.1 million of securities using the proceeds from $31.5 million of securities called, maturities and principal reductions and from borrowings.  The carrying value of the Company’s securities portfolio (Available-For-Sale and Held-to-Maturity) consisted of the following:  September 30, 2008

                        

                        December 31, 2007(dollars in thousands)

                        

                        Amount

                        

                        % of portfolio

                        

                        Amount

                        

                        % of portfolioUS Government agencies

                        

                        $

                        37,036

                        

                        28.7

                        %

                        $

                        41,508

                        

                        33.4

                        %States and political subdivisions

                        

                        

                        22,968

                        

                        17.8

                        

                        

                        22,622

                        

                        18.1Corporate securities

                        

                        

                        5,194

                        

                        4.0

                        

                        

                        4,994

                        

                        4.0Mortgage-backed securities

                        

                        

                        62,457

                        

                        48.5

                        

                        

                        54,082

                        

                        43.3Equity securities

                        

                        

                        1,338

                        

                        1.0

                        

                        

                        1,486

                        

                        1.2Total

                        

                        $

                        128,993

                        

                        100.0

                        %

                        $

                        124,692

                        

                        100.0

                        %
   18
  
 The Company has securities in an unrealized loss position. In Management’s opinion the unrealized losses in the debt portfolio reflect a widening of spreads due to liquidity and credit concerns in the financial sector. The unrealized losses are most evident in the municipal and corporate sector. The Company’s municipal bond portfolio consists of 51 issues of which 45 are
            General Obligation instruments, 24 are issues of PA school districts. A majority of the bonds are backed by insurance and carry an underlying rating of A or better. The Company’s corporate bond portfolio consists of six issues of which five were initial participants in the Treasury’s Capital Purchase Program which the Company believes adds strength to each. The Company has the intent and ability to hold its investments until maturity or until spreads and market price
            recover. The Company recorded a $27,000 other than temporary impairment charge on 1,000 shares of Wachovia Common Stock. The Company has no common or preferred stock in Fannie Mae or Freddie Mac.  Loans Receivable  Loans receivable totaled $341.2 million compared to $331.3 million as of December 31, 2007. Residential real estate loans decreased $2.5 million due to the sale of $14.4 million of 30 year fixed rate residential mortgages. The loans were sold for interest rate risk management to shorten the average life of the mortgage loan portfolio. Commercial real estate loans increased $18.3
            million during the period, reflecting new activity and the completion of $5.2 million of construction projects. The activity was principally centered in the Pike and Monroe County, Pennsylvania market area.  Set forth below is selected data relating to the composition of the loan portfolio at the dates indicated:  Types of loans(dollars in thousands)

                        

                        September 30, 2008

                        

                        December 31, 2007Real Estate-Residential

                        

                        $

                        127,430

                        

                        37.3

                        %

                        $

                        129,888

                        

                        39.2

                        %Commercial

                        

                        

                        151,917

                        

                        44.5

                        

                        

                        133,593

                        

                        40.2Construction

                        

                        

                        15,976

                        

                        4.7

                        

                        

                        20,404

                        

                        6.2Commercial, financial and agricultural

                        

                        

                        29,120

                        

                        8.5

                        

                        

                        29,159

                        

                        8.8Consumer loans to individuals

                        

                        

                        17,011

                        

                        5.0

                        

                        

                        18,526

                        

                        5.6Total loans

                        

                        

                        341,454

                        

                        100.0

                        %

                        

                        331,570

                        

                        100.0

                        %Deferred fees (net)

                        

                        

                        (237

                        )

                        

                        

                        

                        (274

                        )341,217

                        

                        

                        

                        

                        331,296Allowance for loan losses

                        

                        

                        (4,331

                        )

                        

                        

                        

                        (4,081

                        )Net loans receivable

                        

                        $

                        336,886

                        

                        

                        

                        $

                        327,215
   19
  
 Allowance for Loan Losses and Non-performing Assets  Following is a summary of changes in the allowance for loan losses for the periods indicated:  Three Months Ended

                        

                        Nine Months EndedSeptember 30,

                        

                        September 30,(dollars in thousands)

                        

                        2008

                        

                        2007

                        

                        2008

                        

                        2007Balance, beginning

                        

                        $

                        4,237

                        

                        $

                        3,900

                        

                        $

                        4,081

                        

                        $

                        3,828Provision for loan losses

                        

                        

                        130

                        

                        

                        90

                        

                        

                        315

                        

                        

                        195Charge-offs

                        

                        

                        (45

                        )

                        

                        (16

                        )

                        

                        (116

                        )

                        

                        (83

                        )Recoveries

                        

                        

                        9

                        

                        

                        5

                        

                        

                        51

                        

                        

                        39Net charge-offs

                        

                        

                        (36

                        )

                        

                        (11

                        )

                        

                        (65

                        )

                        

                        (44

                        )Balance, ending

                        

                        $

                        4,331

                        

                        $

                        3,979

                        

                        $

                        4,331

                        

                        $

                        3,979Allowance to total loans

                        

                        

                        1.27

                        %

                        

                        1.21

                        %

                        

                        1.27

                        %

                        

                        1.21

                        %Net charge-offs to average loans(annualized)

                        

                        

                        .04

                        %

                        

                        .01

                        %

                        

                        .03

                        %

                        

                        .02

                        %
   The allowance for loan losses totaled $4,331,000 as of September 30, 2008 and represented 1.27% of total loans compared to $4,081,000 at year end, and $3,979,000 as of September 30, 2007. The Company had net charge-offs for the nine months ended September 30, 2008 of $65,000 compared to $44,000 in the comparable period in 2007. The Company’s loan review process assesses the
            adequacy of the allowance for loan losses on a quarterly basis. The process includes an analysis of the risks inherent in the loan portfolio. It includes an analysis of impaired loans and a historical review of credit losses by loan type. Other factors considered include: concentration of credit in specific industries; economic and industry conditions; trends in delinquencies and loan classifications, large dollar exposures and loan growth. Management considers the allowance
            adequate at September 30, 2008 based on the Company’s criteria. However, there can be no assurance that the allowance for loan losses will be adequate to cover significant losses, if any; that might be incurred in the future.  As of September 30, 2008, non-performing loans totaled $2,268,000, which is .66% of total loans compared to $163,000, or .05% of total loans at December 31, 2007. The increase was principally due to a commercial real estate loan in Monroe County with collateral consisting of several parcels of real estate. The loan, currently on non-accrual, was previously restructured with a reduced
            interest rate to improve the borrower’s cash flow. The recorded investment in this impaired loan is $1,969,000 with a specific allowance reserve of $307,000. The Company acquired a property with a deed in lieu of foreclosure with an initial carrying value of $1,200,000. During the third quarter, the Company had a write down on the property to “as is” value of $660,000. The property consists of undeveloped residential building lots in Monroe County, PA. The Company
            has retained an engineering firm to complete the permit process with the municipality and plans to market the property upon completion of the permitting.  20
  
 The following table sets forth information regarding non-performing loans and foreclosed real estate at the dates indicated:  (dollars in thousands)

                        

                        September 30, 2008

                        

                        December 31, 2007Loans accounted for on a non accrual basis:Commercial and all other

                        

                        $

                        —

                        

                        $

                        —Real Estate

                        

                        

                        2,251

                        

                        

                        109Consumer

                        

                        

                        —

                        

                        

                        2Total

                        

                        

                        2,251

                        

                        

                        111Accruing loans which are contractuallypast due 90 days or more

                        

                        

                        17

                        

                        

                        52Total non-performing loans

                        

                        

                        2,268

                        

                        

                        163Foreclosed real estate

                        

                        

                        660

                        

                        

                        —Total non-performing assets

                        

                        $

                        2,928

                        

                        $

                        163Allowance for loan losses

                        

                        $

                        4,331

                        

                        $

                        4,081Coverage of non-performing loans

                        

                        

                        1.9

                        x

                        

                        25.0

                        xNon-performing loans to total loans

                        

                        

                        .66

                        %

                        

                        .05

                        %Non-performing assets to total assets

                        

                        

                        .59

                        %

                        

                        .03

                        %
  Deposits Total deposits as of September 30, 2008 were $360.6 million decreasing from $370.0 million as of December 31, 2007 primarily due to the decrease in time deposits greater than $100,000.  Time deposits greater than $100,000 decreased $28.5 million due to the scheduled maturities of school districts and various large commercial CDs. A portion of these funds remained on deposit in money market and interest-bearing demand accounts. The Company expects to bid on school district time deposits in the fourth quarter of 2008.  The following table sets forth deposit balances as of the dates indicated  (dollars in thousands)

                        

                        September 30, 2008

                        

                        December 31, 2007Non-interest bearing demand

                        

                        $

                        63,474

                        

                        $

                        60,061Interest bearing demand

                        

                        

                        39,172

                        

                        

                        32,426Money Market Deposit Accounts

                        

                        

                        65,717

                        

                        

                        57,970Savings

                        

                        

                        45,456

                        

                        

                        42,962Time deposits <$100,000

                        

                        

                        113,000

                        

                        

                        114,318Time deposits >$100,000

                        

                        

                        33,738

                        

                        

                        62,263Total

                        

                        $

                        360,557

                        

                        $

                        370,000
  Borrowings Short-term borrowings as of September 30, 2008 totaled $33.6 million compared to $26.7 million as of December 31, 2007. The increase in short-term borrowings were principally used to offset the decrease in time deposits greater than $100,000.  21
  
 Short-term borrowings consist of the following:  (dollars in thousands)  September 30, 2008

                        

                        December 31, 2007Securities sold under agreements to repurchase

                        

                        $

                        17,454

                        

                        $

                        24,885FHLB Short-term borrowings

                        

                        

                        16,000

                        

                        

                        —Federal Funds Purchased

                        

                        

                        —

                        

                        

                        800U.S. Treasury demand notes

                        

                        

                        121

                        

                        

                        1,001$

                        33,575

                        

                        $

                        26,686
   Other borrowings consisted of the following: (dollars in thousands)  September 30, 2008

                        

                        December 31, 2007Notes with the FHLB:Fixed rate note due April 2008 at 4.17%

                        

                        $

                        —

                        

                        $

                        5,000Fixed rate note due September 2010 at 3.53%

                        

                        

                        5,000

                        

                        

                        —Convertible note due January 2011 at 5.24%

                        

                        

                        3,000

                        

                        

                        3,000Convertible note due August 2011 at 2.69%

                        

                        

                        10,000

                        

                        

                        —Fixed rate note due September 2011 at 4.06%

                        

                        

                        5,000

                        

                        

                        —Convertible note due October 2012 at 4.37%

                        

                        

                        5,000

                        

                        

                        5,000Convertible note due May 2013 at 3.015%

                        

                        

                        5,000

                        

                        

                        —Convertible note due January 2017 at 4.71%

                        

                        

                        10,000

                        

                        

                        10,000$

                        43,000

                        

                        $

                        23,000
  The convertible notes contain an option that allows the FHLB, at quarterly intervals to change the note to an adjustable-rate advance at three-month LIBOR plus 11 to 19 basis points. If the notes are converted, the option allows the Bank to put the funds back to the FHLB at no charge.  Off- Balance Sheet Arrangements The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance
            sheet.  The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.  22
  
 A summary of the contractual amount of the Company’s financial instrument commitments is as follows:  September 30,2008

                        

                        December 31,2007Commitments to grant loans

                        

                        $

                        19,138

                        

                        $

                        10,835Unfunded commitments under lines of credit

                        

                        

                        35,904

                        

                        

                        34,146Standby letters of credit

                        

                        

                        2,065

                        

                        

                        2,348$

                        57,107

                        

                        $

                        47,329
  The increase in commitments to grant loans is principally due to a higher level of commercial real estate construction.  Stockholders’ Equity and Capital Ratios At September 30, 2008, total stockholders’ equity totaled $56.1 million, compared to $55.8 million as of December 31, 2007. The net change in stockholders’ equity was primarily due to $5,092,000 in net income, that was partially offset by $2,052,000 of cash dividends declared. The Company also repurchased $1,439,000 of common stock in the nine months ended September 30,
            2008. In addition, accumulated other comprehensive income declined due to a decrease in fair value of securities in the available for sale portfolio, net of tax. Because of volatility in the credit markets, the Company’s accumulated other comprehensive income could materially fluctuate for each interim and year-end period.  A comparison of the Company’s regulatory capital ratios is as follows:   September 30, 2008

                        

                        December 31, 2007Tier 1 Capital(To average assets)

                        

                        

                        11.39%

                        

                        

                        11.38%Tier 1 Capital(To risk-weighted assets)

                        

                        

                        16.01%

                        

                        

                        16.26%Total Capital(To risk-weighted assets)

                        

                        

                        17.36%

                        

                        

                        17.60%
  The minimum capital requirements imposed by the FDIC on the Bank for leverage, Tier 1 and Total Capital are 4%, 4% and 8%, respectively. The Company has similar capital requirements imposed by the Board of Governors of the Federal Reserve System (FRB). The Bank is also subject to more stringent Pennsylvania Department of Banking (PDB) guidelines. The Bank’s capital ratios do not
            differ significantly from the Company’s ratios. Although not adopted in regulation form, the PDB utilizes capital standards requiring a minimum of 6.5% leverage capital and 10% total capital. The Company and the Bank were in compliance with the FRB, FDIC and PDB capital requirements as of September 30, 2008 and December 31, 2007.  Liquidity As of September 30, 2008, the Company had cash and cash equivalents of $9.8 million in the form of cash, due from banks, federal funds sold and short-term deposits with other institutions. In addition, the Company had total securities available for sale of $128.3 million which could be used for liquidity needs. This totals $138.1 million and represents 27.7% of total assets compared
            to $133.1 million and 27.7% of total assets as of December 31, 2007. The Company also monitors other liquidity measures, all of which were within the Company’s policy  23
  
 guidelines as of September 30, 2008 and December 31, 2007. Based upon these measures, the Company believes its liquidity is adequate.  Capital Resources The Company has an unsecured line of credit commitment available from the Federal Home Loan Bank (FHLB) of Pittsburgh for borrowings of up to $20,000,000 which expires in December 2011. There were $16,000,000 of borrowings under this line at September 30, 2008 and $-0- at December 31, 2007.  The Company has a line of credit commitment from Atlantic Central Bankers Bank for $7,000,000, which expires in May 2009. There were no borrowings under this line as of September 30, 2008 and December 31, 2007. The Company has an unsecured line of credit commitment available which has no stated expiration date from PNC for $12,000,000. Borrowings under this line were $-0- as of
            September 30, 2008 and $800,000 as of December 31, 2007.  The Bank’s maximum borrowing capacity with the Federal Home Loan Bank was approximately $236,000,000 of which $59,000,000 was outstanding at September 30, 2008 and $23,000,000 at December 31, 2007. Advances from the Federal Home Loan Bank are secured by qualifying assets of the Bank.  Non-GAAP Financial Measures This report contains or references fully taxable-equivalent (fte) interest income and net interest income, which are non-GAAP financial measures. Interest income (fte) and net interest income (fte) are derived from GAAP interest income and net interest income using an assumed tax rate of 34%. We believe the presentation of interest income (fte) and net interest income (fte) ensures
            comparability of interest income and net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Net interest income (fte) is reconciled to GAAP net interest income on page 24 and 28. Although the Company believes that these non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP measures.  24
  
  Results of Operations NORWOOD FINANCIAL CORP. Consolidated Average Balance Sheets with Resultant Interest and Rates (Tax-Equivalent Basis, dollars in thousands)
  Three Months Ended September 30,2008

                        

                        2007Average Balance(2)

                        

                        Interest(1)

                        

                        AverageRate(3)

                        

                        AverageBalance(2)

                        

                        Interest(1)

                        

                        AverageRate(3)AssetsInterest-earning assets:Federal funds sold

                        

                        $

                        180

                        

                        $

                        1

                        

                        2.22

                        %

                        $

                        1,907

                        

                        $

                        26

                        

                        5.45

                        %Interest bearing deposits with banks

                        

                        

                        65

                        

                        

                        —

                        

                        0.00

                        

                        

                        581

                        

                        

                        7

                        

                        4.82Securities held-to-maturity(1)

                        

                        

                        706

                        

                        

                        16

                        

                        9.07

                        

                        

                        708

                        

                        

                        17

                        

                        9.60Securities available for sale:Taxable

                        

                        

                        110,684

                        

                        

                        1,333

                        

                        4.82

                        

                        

                        98,780

                        

                        

                        1,181

                        

                        4.78Tax-exempt (1)

                        

                        

                        21,550

                        

                        

                        312

                        

                        5.79

                        

                        

                        19,761

                        

                        

                        239

                        

                        4.84Total securities available for sale (1)

                        

                        

                        132,234

                        

                        

                        1,645

                        

                        4.98

                        

                        

                        118,541

                        

                        

                        1,420

                        

                        4.79Loans receivable (4) (5)

                        

                        

                        335,859

                        

                        

                        5,553

                        

                        6.61

                        

                        

                        325,352

                        

                        

                        6,092

                        

                        7.49Total interest earning assets

                        

                        

                        469,044

                        

                        

                        7,215

                        

                        6.15

                        

                        

                        447,089

                        

                        

                        7,562

                        

                        6.77Non-interest earning assets:Cash and due from banks

                        

                        

                        8,358

                        

                        

                        

                        

                        

                        

                        

                        7,753Allowance for loan losses

                        

                        

                        (4,282

                        )

                        

                        

                        

                        

                        

                        

                        (3,938

                        )Other assets

                        

                        

                        18,962

                        

                        

                        

                        

                        

                        

                        

                        17,606Total non-interest earning assets

                        

                        

                        23,038

                        

                        

                        

                        

                        

                        

                        

                        21,421Total Assets

                        

                        $

                        492,082

                        

                        

                        

                        

                        

                        

                        $

                        468,510Liabilities and Stockholders’ EquityInterest bearing liabilities:Interest bearing demand and money market

                        

                        $

                        107,663

                        

                        

                        355

                        

                        1.32

                        

                        $

                        93,153

                        

                        

                        489

                        

                        2.10Savings

                        

                        

                        46,196

                        

                        

                        54

                        

                        0.47

                        

                        

                        47,612

                        

                        

                        56

                        

                        0.47Time

                        

                        

                        149,204

                        

                        

                        1,371

                        

                        3.68

                        

                        

                        169,363

                        

                        

                        1,944

                        

                        4.59Total interest bearing deposits

                        

                        

                        303,063

                        

                        

                        1,780

                        

                        2.35

                        

                        

                        310,128

                        

                        

                        2,489

                        

                        3.21Short-term borrowings

                        

                        

                        36,803

                        

                        

                        200

                        

                        2.17

                        

                        

                        18,477

                        

                        

                        195

                        

                        4.22Other borrowings

                        

                        

                        27,783

                        

                        

                        303

                        

                        4.36

                        

                        

                        23,000

                        

                        

                        281

                        

                        4.89Total interest bearing liabilities

                        

                        

                        367,649

                        

                        

                        2,283

                        

                        2.48

                        

                        

                        351,605

                        

                        

                        2,965

                        

                        3.37Non-interest bearing liabilities:Demand deposits

                        

                        

                        62,667

                        

                        

                        

                        

                        

                        

                        

                        58,531Other liabilities

                        

                        

                        5,107

                        

                        

                        

                        

                        

                        

                        

                        4,472Total non-interest bearing liabilities

                        

                        

                        67,774

                        

                        

                        

                        

                        

                        

                        

                        63,003Stockholders’ equity

                        

                        

                        56,659

                        

                        

                        

                        

                        

                        

                        

                        53,902Total Liabilities and Stockholders’ Equity

                        

                        $

                        492,082

                        

                        

                        

                        

                        

                        

                        $

                        468,510Net interest income (tax equivalent basis)

                        

                        

                        

                        

                        

                        4,932

                        

                        3.67

                        %

                        

                        

                        

                        

                        4,597

                        

                        3.39

                        %Tax-equivalent basis adjustment

                        

                        

                        

                        

                        

                        (156

                        )

                        

                        

                        

                        

                        

                        

                        (105

                        )Net interest income

                        

                        

                        

                        

                        $

                        4,776

                        

                        

                        

                        

                        

                        

                        $

                        4,492Net interest margin (tax equivalent basis)

                        

                        

                        

                        

                        

                        

                        

                        4.21

                        %

                        

                        

                        

                        

                        

                        

                        4.11

                        %
  (1)

                        Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 34%.
 (2)

                        Average balances have been calculated based on daily balances.
 (3)

                        Annualized
 (4)

                        Loan balances include non-accrual loans and are net of unearned income.
 (5)

                        Loan yields include the effect of amortization of deferred fees, net of costs.
   25
  
  Rate/Volume Analysis. The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense. Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated proportionately to changes in volume and changes in rate.   Increase (Decrease)Three Months Ended September 30, 2008 Compared toThree Months Ended September 30, 2007Variance due toVolume

                        

                        Rate

                        

                        Net(Dollars in thousands)Interest earning assets:Federal funds sold

                        

                        $

                        (15

                        )

                        $

                        (10

                        )

                        $

                        (25

                        )Interest bearing deposits with banks

                        

                        

                        (3

                        )

                        

                        (4

                        )

                        

                        (7

                        )Securities held to maturity

                        

                        

                        —

                        

                        

                        (1

                        )

                        

                        (1

                        )Securities available for sale:Taxable

                        

                        

                        143

                        

                        

                        9

                        

                        

                        152Tax-exempt securities

                        

                        

                        23

                        

                        

                        50

                        

                        

                        73Total securities

                        

                        

                        166

                        

                        

                        59

                        

                        

                        225Loans receivable

                        

                        

                        1,117

                        

                        

                        (1,656

                        )

                        

                        (539

                        )Total interest earning assets

                        

                        

                        1,265

                        

                        

                        (1,612

                        )

                        

                        (347

                        )Interest bearing liabilities:Interest-bearing demand and money market

                        

                        

                        390

                        

                        

                        (524

                        )

                        

                        (134

                        )Savings

                        

                        

                        (2

                        )

                        

                        —

                        

                        

                        (2

                        )Time

                        

                        

                        (214

                        )

                        

                        (359

                        )

                        

                        (573

                        )Total interest bearing deposits

                        

                        

                        174

                        

                        

                        (883

                        )

                        

                        (709

                        )Short-term borrowings

                        

                        

                        512

                        

                        

                        (507

                        )

                        

                        5Other borrowings

                        

                        

                        174

                        

                        

                        (152

                        )

                        

                        22Total interest bearing liabilities

                        

                        

                        860

                        

                        

                        (1,542

                        )

                        

                        (682

                        )Net interest income (tax-equivalent basis)

                        

                        $

                        405

                        

                        

                        ($70

                        )

                        $

                        335
       26
  
  Comparison of Operating Results for Three Months Ended September 30, 2008 and September 30, 2007  General For the three months ended September 30, 2008, net income totaled $1,592,000, a decrease of $214,000, from the $1,806,000 earned in the similar period of 2007. Earnings per share for the current period were $.58 basic and on a diluted basis compared to $.65 basic and $.64 on a diluted basis for the three months ended September 30, 2007. The resulting annualized return on average
            assets and return on average equity for the three months ended September 30, 2008 were 1.28% and 11.15%, respectively, compared to 1.53% and 13.29% respectively, for the similar period in 2007.  The following table sets forth changes in net income:  (dollars in thousands)

                        

                        Three Months EndedSeptember 30, 2008to September 30, 2007Net income three months ended September 30, 2007

                        

                        $

                        1,806Change due to:Net interest income

                        

                        

                        284Provision for loan losses

                        

                        

                        (40

                        )Net realized gains (losses) on sales of securities

                        

                        

                        (27

                        )Gains on sale of mortgage loans and servicing rights

                        

                        

                        82All other income

                        

                        

                        5Salaries and employee benefits

                        

                        

                        (45

                        )Foreclosed real estate owned

                        

                        

                        (519

                        )All other expenses

                        

                        

                        (10

                        )Income tax effect

                        

                        

                        56Net income three months ended September 30, 2008

                        

                        $

                        1,592
  Net Interest Income  Net interest income on a fully taxable equivalent basis (fte) for the three months ended September 30, 2008 totaled $4,932,000, an increase of $335,000, or 7.3% over the similar period in 2007. The fte net interest spread and net interest margin were 3.67% and 4.21%, respectively for the three months ended September 30, 2008 compared to 3.39% and 4.11%, respectively, for the similar
            period in 2007. Interest income (fte) totaled $7,215,000 with a yield on average earning assets of 6.15% compared to $7,562,000 and 6.77% for the 2007 period. The decrease was principally due to a decrease in the yield on loans, 6.61% compared to 7.49%, for the 2007 period. The drop in the loan yield was primarily caused by the decrease in the prime interest rate which was 5.00% on September 30, 2008
            compared to 7.75% on September 30, 2007. The prime rate decreased to 4.00% as of October 30, 2008 which will put additional pressure on loan yields. The Company has $70 million of floating rate loans tied to prime. The yield on the securities available for sale portfolio increased to 4.98% for the three months ended September 30, 2008 from 4.79% for the same period in 2007. Also, an increase of $22.0 million in average earnings assets partially offset the lower yield on
            loans.  27
  
  Interest expense for the three months ended September 30, 2008 totaled $2,283,000 at an average cost of 2.48% compared to $2,965,000 and 3.37% for the 2007 period. With the decline in short term interest rates the Company reduced rates paid on its money market and cash management product, which is included in short-term borrowings. The cost of time deposits decreased to 3.68% for the
            current period from 4.59% in 2007 period. As time deposits matured in 2008, they repriced at the current lower rates resulting in the decrease. In addition, the liabilities mix shifted from higher costing time deposits, 3.68% to lower costing money market accounts, 1.32%, and short-term borrowings 2.17%.  Other Income  Other income totaled $973,000 for the three months ended September 30, 2008 an increase of $60,000 from $913,000 in the similar period in 2007. Service charges and fees increased $21,000 principally due to a higher volume of fees on checks presented with non-sufficient funds. Revenues from the sale of title insurance included in other, increased $23,000 due to additional commercial
            real estate transactions. The Company had a gain of $90,000 on the sale of its mortgage servicing rights portfolio in the 2008 period compared to $8,000 in loan sale gains in the 2007 period. The Company recorded a $27,000 other-than-temporary-impairment charge on 1,000 shares of Wachovia common stock in the 2008 period.  Other Expense  Other expense totaled $3,361,000 for the three months ended September 30, 2008, an increase of $574,000 over $2,787,000 for the similar period in 2007. Salaries and employee benefits costs increased $45,000, or 3.1%. A write down related to a property acquired with a deed in lieu of foreclosure totaled $540,000 for the 2008 period. Excluding expenses related to foreclosed real estate,
            the Company’s efficiency ratio was 48.1% for the current period compared to 50.6% in the prior year.  The Company anticipates a significant increase in the cost of federal deposit insurance from current levels of five to seven basis points. The FDIC has recently proposed to increase the assessment rate for the most highly rated institutions to between 12 and 14 basis points for the first quarter of 2009 and to between 10 and 14 basis points thereafter. Assessment rates could be
            further increased if an institution’s FHLB advances exceed 15% of deposits. The FDIC has also established a program under which it fully guarantees all non-interest bearing transaction accounts and senior unsecured debt of a bank or its holding company. Institutions that do not opt out of the program by November 14, 2008 will be assessed ten basis points for non-interest bearing transaction account balances in excess of $250,000 and 75 basis points of the amount of debt
            issued.  Income Tax Expense  Income tax expense totaled $666,000 for an effective tax rate of 29.50% for the current period compared to $722,000 and an effective tax rate of 28.6% for the similar period in 2007.  28
  
  Results of Operations NORWOOD FINANCIAL CORP. Consolidated Average Balance Sheets with Resultant Interest and Rates (Tax-Equivalent Basis, dollars in thousands)
  Nine Months Ended September 30,2008

                        

                        2007AverageBalance(2)

                        

                        Interest(1)

                        

                        AverageRate(3)

                        

                        AverageBalance(2)

                        

                        Interest(1)

                        

                        AverageRate(3)AssetsInterest-earning assets:Federal funds sold

                        

                        $

                        1,239

                        

                        $

                        25

                        

                        2.69

                        %

                        $

                        3,118

                        

                        $

                        123

                        

                        5.26

                        %Interest bearing deposits with banks

                        

                        

                        81

                        

                        

                        1

                        

                        1.65

                        

                        

                        549

                        

                        

                        21

                        

                        5.10Securities held-to-maturity(1)

                        

                        

                        706

                        

                        

                        46

                        

                        8.69

                        

                        

                        871

                        

                        

                        59

                        

                        9.03Securities available for sale:Taxable

                        

                        

                        108,849

                        

                        

                        3,928

                        

                        4.81

                        

                        

                        98,076

                        

                        

                        3,321

                        

                        4.51Tax-exempt (1)

                        

                        

                        22,067

                        

                        

                        936

                        

                        5.66

                        

                        

                        18,814

                        

                        

                        767

                        

                        5.44Total securities available for sale (1)

                        

                        

                        130,916

                        

                        

                        4,864

                        

                        4.95

                        

                        

                        116,890

                        

                        

                        4,088

                        

                        4.66Loans receivable (4) (5)

                        

                        

                        331,920

                        

                        

                        16,700

                        

                        6.71

                        

                        

                        321,812

                        

                        

                        17,889

                        

                        7.41Total interest earning assets

                        

                        

                        464,862

                        

                        

                        21,636

                        

                        6.21

                        

                        

                        443,240

                        

                        

                        22,180

                        

                        6.67Non-interest earning assets:Cash and due from banks

                        

                        

                        7,840

                        

                        

                        

                        

                        

                        

                        

                        8,098Allowance for loan losses

                        

                        

                        (4,196

                        )

                        

                        

                        

                        

                        

                        

                        (3,895

                        )Other assets

                        

                        

                        17,671

                        

                        

                        

                        

                        

                        

                        

                        17,348Total non-interest earning assets

                        

                        

                        21,315

                        

                        

                        

                        

                        

                        

                        

                        21,551Total Assets

                        

                        $

                        486,177

                        

                        

                        

                        

                        

                        

                        $

                        464,791Liabilities and Stockholders’ EquityInterest bearing liabilities:Interest bearing demand and money market

                        

                        $

                        103,064

                        

                        

                        1,158

                        

                        1.50

                        

                        $

                        90,244

                        

                        

                        1,382

                        

                        2.04Savings

                        

                        

                        44,163

                        

                        

                        155

                        

                        0.47

                        

                        

                        46,563

                        

                        

                        163

                        

                        0.47Time

                        

                        

                        161,842

                        

                        

                        4,801

                        

                        3.96

                        

                        

                        171,983

                        

                        

                        5,904

                        

                        4.58Total interest bearing deposits

                        

                        

                        309,069

                        

                        

                        6,114

                        

                        2.64

                        

                        

                        308,790

                        

                        

                        7,449

                        

                        3.22Short-term borrowings

                        

                        

                        32,131

                        

                        

                        565

                        

                        2.34

                        

                        

                        20,211

                        

                        

                        656

                        

                        4.33Other borrowings

                        

                        

                        23,913

                        

                        

                        808

                        

                        4.51

                        

                        

                        22,084

                        

                        

                        808

                        

                        4.88Total interest bearing liabilities

                        

                        

                        365,113

                        

                        

                        7,487

                        

                        2.73

                        

                        

                        351,085

                        

                        

                        8,913

                        

                        3.38Non-interest bearing liabilities:Demand deposits

                        

                        

                        59,604

                        

                        

                        

                        

                        

                        

                        

                        55,886Other liabilities

                        

                        

                        4,944

                        

                        

                        

                        

                        

                        

                        

                        4,447Total non-interest bearing liabilities

                        

                        

                        64,548

                        

                        

                        

                        

                        

                        

                        

                        60,333Stockholders’ equity

                        

                        

                        56,516

                        

                        

                        

                        

                        

                        

                        

                        53,373Total Liabilities and Stockholders’ Equity

                        

                        $

                        486,177

                        

                        

                        

                        

                        

                        

                        $

                        464,791Net interest income (tax equivalent basis)

                        

                        

                        

                        

                        

                        14,149

                        

                        3.47

                        %

                        

                        

                        

                        

                        13,267

                        

                        3.29

                        %Tax-equivalent basis adjustment

                        

                        

                        

                        

                        

                        (475

                        )

                        

                        

                        

                        

                        

                        

                        (398

                        )Net interest income

                        

                        

                        

                        

                        $

                        13,674

                        

                        

                        

                        

                        

                        

                        $

                        12,869Net interest margin (tax equivalent basis)

                        

                        

                        

                        

                        

                        

                        

                        4.06

                        %

                        

                        

                        

                        

                        

                        

                        3.99

                        %
  (1)

                        Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 34%.
 (2)

                        Average balances have been calculated based on daily balances.
 (3)

                        Annualized
 (4)

                        Loan balances include non-accrual loans and are net of unearned income.
 (5)

                        Loan yields include the effect of amortization of deferred fees, net of costs.
  29
  
  Rate/Volume Analysis  The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense. Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated proportionately to changes in volume and changes in rate.  Increase/(Decrease)Nine Months Ended September 30, 2008 Compared toNine Months Ended September 30, 2007Variance due toVolume

                        

                        Rate

                        

                        Net(dollars in thousands)Interest earning assets:Federal funds sold

                        

                        $

                        (54

                        )

                        $

                        (44

                        )

                        $

                        (98

                        )Interest bearing deposits with banks

                        

                        

                        (11

                        )

                        

                        (9

                        )

                        

                        (20

                        )Securities held to maturity

                        

                        

                        (11

                        )

                        

                        (2

                        )

                        

                        (13

                        )Securities available for sale:Taxable

                        

                        

                        380

                        

                        

                        227

                        

                        

                        607Tax-exempt securities

                        

                        

                        137

                        

                        

                        32

                        

                        

                        169Total securities

                        

                        

                        517

                        

                        

                        259

                        

                        

                        776Loans receivable

                        

                        

                        830

                        

                        

                        (2,019

                        )

                        

                        (1,189

                        )Total interest earning assets

                        

                        

                        1,271

                        

                        

                        (1,815

                        )

                        

                        (544

                        )Interest bearing liabilities:Interest-bearing demand and money market

                        

                        

                        263

                        

                        

                        (487

                        )

                        

                        (224

                        )Savings

                        

                        

                        (9

                        )

                        

                        1

                        

                        

                        (8

                        )Time

                        

                        

                        (334

                        )

                        

                        (769

                        )

                        

                        (1,103

                        )Total interest bearing deposits

                        

                        

                        (80

                        )

                        

                        (1,255

                        )

                        

                        (1,335

                        )Short-term borrowings

                        

                        

                        400

                        

                        

                        (491

                        )

                        

                        (91

                        )Other borrowings

                        

                        

                        86

                        

                        

                        (86

                        )

                        

                        —Total interest bearing liabilities

                        

                        

                        406

                        

                        

                        (1,832

                        )

                        

                        (1,426

                        )Net interest income (tax-equivalent basis)

                        

                        $

                        865

                        

                        $

                        17

                        

                        $

                        882
  Comparison of Operating Results for Nine Months Ended September 30, 2008 and September 30, 2007  General Net income for the nine months ended September 30, 2008 totaled $5,092,000, increasing $253,000, or 5.2% over the $4,839,000 earned in the similar period in 2007. Basic and diluted earnings per share were $1.86 and $1.84, respectively, in the 2008 period compared to $1.74 and $1.71, respectively, for the similar period in 2007. The resulting annualized return on average assets for the
            nine months ended September 30, 2008 was 1.40%, with an annualized return on average equity of 12.00% as compared to 1.39% and 12.12% for the 2007 period.  30
  
   The following table sets forth changes in net income:  Nine Months EndedSeptember 30, 2008 toSeptember 30, 2007(dollars in thousands)Net income nine months ended September 30, 2007

                        

                        $

                        4,839Change due to:Net interest income

                        

                        

                        805Provision for loan losses

                        

                        

                        (120

                        )Net realized gains on sales of securities

                        

                        

                        (33

                        )Gains on sales of mortgage loans and servicing rights

                        

                        

                        470All other income

                        

                        

                        96Salaries and employee benefits

                        

                        

                        (154

                        )Foreclosed real estate owned

                        

                        

                        (571

                        )All other expenses

                        

                        

                        (74

                        )Income tax effect

                        

                        

                        (166

                        )Net income nine months ended September 30, 2008

                        

                        $

                        5,092
  Net Interest Income Net interest income on a fully taxable equivalent basis (fte) for the nine months ended September 30, 2008 totaled $14,149,000, an increase of $882,000, or 6.7%, over the similar period in 2007. The fte net interest spread and net interest margin were 3.47% and 4.06%, respectively for the nine months ended September 30, 2008 compared to 3.29% and 3.99% respectively for the similar
            period in 2007. Interest income totaled $21,636,000 with a yield on average earning assets of 6.21% compared to $22,180,000 with a yield of 6.67% for the 2007 period. The prime rate of interest declined to 5.00% as of September 30, 2008 from 7.75% as of September 30, 2007. As a result, the fte yield on loans declined 70 basis points to 6.71% for the nine months ended September 30, 2008. The Company
            has $70 million dollars of floating rate loans tied to prime rate. Lower yielding securities matured during the current period and were reinvested at higher rates. As a result, the fte yield on the available for sale portfolio increased 29 basis points to 4.95%. Interest income was also favorably impacted by a $21.6 million increase in average earning assets. Interest expense for the nine months ended September 30, 2008 totaled $7,487,000 at an average cost of 2.73% compared to $8,913,000 at an average cost of 3.38% in the 2007 period. As short-term interest rates began declining in the third quarter of 2007, the Company steadily reduced the rates paid on money market accounts and cash management products, which are included in other
            borrowings. The cost of time deposits also declined to 3.96% in 2008 from 4.58% for the similar period in 2007. As time deposits matured in 2008, they repriced at the current lower rates resulting in the decrease. In addition, the liabilities mix shifted from higher costing time deposits, 3.96%, to lower costing money market accounts, 1.50%, and short-term borrowings, 2.34%.  31
  
  Other Income Other income totaled $3,197,000 for the nine months ended September 30, 2008 compared to $2,664,000 for the similar period in 2007, an increase of $533,000. The increase was principally due to the gain of $486,000 on the sale of $14.4 million of 30 year fixed rate residential mortgages to FNMA and the sale of servicing associated with the loans compared to $16,000 of similar gains in
            2007. The loans were sold for interest rate risk management purposes. Service charges and fees increased $88,000 due to a $77,000 increase in fees related to checks presented with non-sufficient funds. Title insurance revenues increased $43,000 principally due to higher volume of commercial transactions.  Other Expense Other expense totaled $9,294,000 for the nine months ended September 30, 2008, an increase of $799,000 over $8,495,000 in the similar period of 2007. Salaries and employee benefit costs increased $154,000, or 3.5%. Data processing related expenses increased $36,000 or 7.0% principally due to costs associated with the Bank’s remote deposit capture product and branch image
            capture. The current period includes $571,000 of expense and write down related to a property acquired by deed in lieu of foreclosure with no such costs in 2007 period. The efficiency ratio, other expense as a percentage of net interest income (fte) plus other income, excluding costs related to foreclosed real estate was 50.2% for the nine months ended September 30, 2008 compared to 53.3% for the similar period in 2007.  Income Tax Expense Income tax expense totaled $2,170,000 for an effective tax rate of 29.9% for the period ending September 30, 2008 compared to $2,004,000 and 29.3% for the similar period in 2007.  Item 3. Quantitative and Qualitative Disclosures about Market Risk  Market Risk Interest rate sensitivity and the repricing characteristics of assets and liabilities are managed by the Asset and Liability Management Committee (ALCO). The principal objective of ALCO is to maximize net interest income within acceptable levels of risk, which are established by policy. Interest rate risk is monitored and managed by using financial modeling techniques to measure the
            impact of changes in interest rates.  Net interest income, which is the primary source of the Company’s earnings, is impacted by changes in interest rates and the relationship of different interest rates. To manage the impact of the rate changes, the balance sheet must be structured so that repricing opportunities exist for both assets and liabilities at approximately the same time intervals. The Company uses net
            interest simulation to assist in interest rate risk management. The process includes simulating various interest rate environments and their impact on net interest income. As of September 30, 2008, the level of net interest income at risk in a 200 basis points change in interest rates was within the Company’s policy limits. The Company’s policy allows for a decline of no more than 8% of net interest income.  Imbalance in repricing opportunities at a given point in time reflect interest-sensitivity gaps measured as the difference between rate-sensitive assets and rate-sensitive liabilities. These are static gap measurements that do not take into account any future activity, and as such are principally used as early indications of potential interest rate exposures over specific
            intervals.  32
  
 As of September 30, 2008, the Bank had a positive 90 day interest sensitivity gap of $7.1 million or 1.4% of total assets, compared to $6.0 million, 1.3% of total assets as of December 31, 2007. A positive gap means that rate-sensitive assets are greater than rate-sensitive liabilities at the time interval. This would indicate that in a declining rate environment, the yield on
            interest-earning assets would decrease faster than the cost of interest-bearing liabilities in the 90 day time frame. The repricing intervals are managed by ALCO strategies, including adjusting the average life of the investment portfolio, pricing of deposit liabilities to attract longer or shorter term time deposits, loan pricing to encourage variable or fixed rate products and evaluation of loan sales of long-term fixed rate mortgages.  September 30, 2008 Rate Sensitivity Table (dollars in thousands)  3 Months

                        

                        3-12 Months

                        

                        1 to 3 Years

                        

                        3 Years

                        

                        TotalFederal funds sold and interest bearing deposits

                        

                        $

                        524

                        

                        $

                        —

                        

                        $

                        —

                        

                        $

                        —

                        

                        $

                        524Securities

                        

                        

                        13,691

                        

                        

                        32,663

                        

                        

                        36,296

                        

                        

                        46,343

                        

                        

                        128,993Loans Receivable

                        

                        

                        90,167

                        

                        

                        48,191

                        

                        

                        86,254

                        

                        

                        116,605

                        

                        

                        341,217Total RSA

                        

                        

                        104,382

                        

                        

                        80,854

                        

                        

                        122,550

                        

                        

                        162,948

                        

                        

                        470,734Non-maturity interest-bearing deposits

                        

                        

                        24,200

                        

                        

                        26,163

                        

                        

                        69,708

                        

                        

                        30,274

                        

                        

                        150,345Time deposits

                        

                        

                        44,732

                        

                        

                        51,373

                        

                        

                        31,934

                        

                        

                        16,699

                        

                        

                        144,738Other

                        

                        

                        28,340

                        

                        

                        15,789

                        

                        

                        32,446

                        

                        

                        —

                        

                        

                        76,575Total RSL

                        

                        

                        97,272

                        

                        

                        93,325

                        

                        

                        134,088

                        

                        

                        46,973

                        

                        

                        371,658Interest Sensitivity Gap

                        

                        $

                        7,110

                        

                        

                        ($12,471

                        )

                        $

                        (11,538

                        )

                        $

                        115,975

                        

                        $

                        99,076Cumulative gap

                        

                        

                        7,110

                        

                        

                        (5,361

                        )

                        

                        (16,899

                        )

                        

                        99,076RSA/RSL-Cumulative

                        

                        

                        107.3

                        %

                        

                        97.2

                        %

                        

                        94.8

                        %

                        

                        126.7

                        %December 31, 2007Interest Sensitivity Gap

                        

                        $

                        5,996

                        

                        $

                        (33,969

                        )

                        $

                        17,012

                        

                        $

                        107,374

                        

                        $

                        96,413Cumulative gap

                        

                        

                        5,996

                        

                        

                        (27,973

                        )

                        

                        (10,961

                        )

                        

                        96,413RSA/RSL-Cumulative

                        

                        

                        105.7

                        %

                        

                        86.9

                        %

                        

                        96.6

                        %

                        

                        126.8

                        %
  Item 4. Controls and Procedures  The Company’s management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the
            Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  33
  
 There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.  PART II. OTHER INFORMATION  Item 1. Legal Proceedings  Not applicable  Item 1A. Risk Factors  There have been no material changes in the risk factors affecting the Company that were identified in Item 1A of Part I of the Company’s Form 10-K for the year ended December 31, 2007.  Item 2. Unregistered Sales of Securities and Use of Proceeds  Issuer Purchases of Equity SecuritiesTotal numberof sharespurchased

                        

                        Average pricepaid pershare

                        

                        Total number ofshares purchasedas part of publiclyannounced plansor programs(1)

                        

                        Maximum numberof shares (or approximatedollar value) that

                            may yetbe purchasedunder the plansor programsJuly 1 – July 31, 2008

                        

                        --

                        

                        $

                        --

                        

                        --

                        

                        --August 1 – August 31, 2008

                        

                        --

                        

                        

                        --

                        

                        --

                        

                        --September 1 – September 30, 2008

                        

                        12,000

                        

                        

                        30.55

                        

                        12,000

                        

                        117,00012,000

                        

                        $

                        30.55

                        

                        12,000

                        

                        117,000
  (1) On March 19, 2008, the Registrant announced its intention to repurchase up to 5% of its outstanding common stock (approximately 137,000 shares) in the open market.  Item 3. Defaults Upon Senior Securities  Not applicable  34
  
 Item 4. Submission of Matters to a Vote of Security Holders  None  Item 5. Other Information  None  Item 6. Exhibits  (a)

                        

                        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*10.4

                        

                        Wayne Bank Stock Option Plan*10.5

                        

                        Salary Continuation Agreement between the Bank and William W. Davis, Jr.*****10.6

                        

                        Salary Continuation Agreement between the Bank and Lewis J. Critelli*****10.7

                        

                        Salary Continuation Agreement between the Bank and Edward C. Kasper*****10.8

                        

                        1999 Directors Stock Compensation Plan***10.9

                        

                        Salary Continuation Agreement between the Bank and Joseph A. Kneller*****10.10

                        

                        Salary Continuation Agreement between the Bank and John H. Sanders*****10.11

                        

                        2006 Stock Option Plan******10.12

                        

                        First and Second Amendments to Salary Continuation Agreement with William W. Davis, Jr.*******10.13

                        

                        First and Second Amendments to Salary Continuation Agreement with Lewis J. Critelli*******10.14

                        

                        First and Second Amendments to Salary Continuation Agreement with Edward C. Kasper*******10.15

                        

                        First and Second Amendments to Salary Continuation Agreement with Joseph A. Kneller*******10.16

                        

                        First and Second Amendments to Salary Continuation Agreement with John H. Sanders*******31.1

                        

                        Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer)31.2

                        

                        Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer)32.1

                        

                        Section 1350 Certification (Chief Executive Officer)32.2

                        

                        Section 1350 Certification (Chief Financial Officer)
  *

                        Incorporated herein by reference to the identically numbered exhibits of the Registrant’s Form 10 Registration Statement initially filed with the Commission on April 29, 1996.
   35
  
  **

                        Incorporated herein by reference to the identically numbered exhibit to the Registrant’s Annual Report on Form 10-K Filed with the Commission on March 14, 2008.***

                        Incorporated herein by reference to the identically numbered exhibits to the Registrant’s Form 8-K filed with the Commission on March 6, 2006.****

                        Incorporated herein by reference to the identically numbered exhibits of the Registrant’s Form 10-K filed with the Commission on March 20, 2000.*****

                        Incorporated herein by reference to the identically numbered exhibit to the Registrants Form 10-K filed with the Commission on March 22, 2004.******

                        Incorporated herein by reference to the Registrant’s Form 8-K filed with the Commission on April 25, 2006.*******

                        Incorporated herein by reference from the Exhibits to the Registrant’s Current Report on Form 8-K filed on April 4, 2006.
   36
  
   Signatures  Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.    NORWOOD FINANCIAL CORP.Date:  November 6, 2008

                        

                        By:

                        /s/ William W. Davis, Jr.William W. Davis, Jr.

                            President and Chief Executive Officer

                            (Principal Executive Officer)Date:  November 6, 2008

                        

                        By:

                        /s/ Lewis J. CritelliLewis J. Critelli

                            Executive Vice President, Chief Operating Officer and Chief Financial Officer

                            (Principal Financial Officer)
   37