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 endedJune 30, 2009 OR o

                        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from _________________ to ________________  Commission file number0-28366  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. YesxNo o  Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
            files). Yes o No

                        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 filero

                        

                        Accelerated filerxNon-accelerated filero

                            (Do not check if a smaller reporting company)

                        

                        Smaller reporting companyo
  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

                        o Yes

                        x No
  Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  Class

                        

                        Outstanding as of August 7, 2009Common stock, par value $0.10 per share

                        

                        2,748,206
   1
  
  NORWOOD FINANCIAL CORP. FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2009 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

                        18Item 3.

                        Quantitative and Qualitative Disclosures about Market Risk

                        33Item 4.

                        Controls and Procedures

                        34PART II -

                        OTHER INFORMATIONItem 1.

                        Legal Proceedings

                        35Item 1A.

                        Risk Factors

                        35Item 2.

                        Unregistered Sales of Equity Securities and Use of Proceeds

                        35Item 3.

                        Defaults upon Senior Securities

                        35Item 4.

                        Submission of Matters to a Vote of Security Holders

                        35Item 5.

                        Other Information

                        35Item 6.

                        Exhibits

                        36Signatures

                        

                        38
       2
  
 PART I. FINANCIAL INFORMATION Item 1. Financial Statements NORWOOD FINANCIAL CORP. Consolidated Balance Sheets (unaudited) (dollars in thousands, except per share data)  June 30,

                        

                        December 31,2009

                        

                        2008ASSETSCash and due from banks

                        $

                        7,548

                        

                        $

                        6,463Interest bearing deposits with banks

                        

                        6

                        

                        

                        17Cash and cash equivalents

                        

                        7,554

                        

                        

                        6,480Securities available for sale

                        

                        122,601

                        

                        

                        130,120Securities held to maturity, fair value 2009$721, 2008: $720

                        

                        708

                        

                        

                        707Loans receivable (net of unearned income)

                        

                        360,593

                        

                        

                        349,404Less: Allowance for loan losses

                        

                        4,574

                        

                        

                        4,233Net loans receivable

                        

                        356,019

                        

                        

                        345,171Investment in FHLB Stock, at cost

                        

                        3,538

                        

                        

                        3,538Bank premises and equipment, net

                        

                        5,297

                        

                        

                        5,490Bank owned life insurance

                        

                        8,234

                        

                        

                        8,068Foreclosed real estate owned

                        

                        798

                        

                        

                        660Accrued interest receivable

                        

                        2,117

                        

                        

                        2,179Other assets

                        

                        1,629

                        

                        

                        1,883TOTAL ASSETS

                        $

                        508,495

                        

                        $

                        504,296LIABILITIESDeposits:Non-interest bearing demand

                        $

                        60,444

                        

                        $

                        56,839Interest bearing

                        

                        313,709

                        

                        

                        302,796Total deposits

                        

                        374,153

                        

                        

                        359,635Short-term borrowings

                        

                        24,596

                        

                        

                        38,126Other borrowings

                        

                        43,000

                        

                        

                        43,000Accrued interest payable

                        

                        2,210

                        

                        

                        2,247Other liabilities

                        

                        3,435

                        

                        

                        2,598TOTAL LIABILITIES

                        

                        447,394

                        

                        

                        445,606STOCKHOLDERS’ EQUITYCommon stock, $.10 par value, authorized 10,000,000shares, issued: 2,840,872

                        

                        284

                        

                        

                        284Surplus

                        

                        9,879

                        

                        

                        9,972Retained earnings

                        

                        52,402

                        

                        

                        50,398Treasury stock at cost: 2009: 92,666 shares, 2008:104,310 shares

                        

                        (2,871

                        )

                        

                        (3,243

                        )Accumulated other comprehensive income

                        

                        1,407

                        

                        

                        1,279TOTAL STOCKHOLDERS’ EQUITY

                        

                        61,101

                        

                        

                        58,690TOTAL LIABILITIES ANDSTOCKHOLDERS’ EQUITY

                        $

                        508,495

                        

                        $

                        504,296
  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

                        

                        Six Months EndedJune 30,

                        

                        June 30,2009

                        

                        2008

                        

                        2009

                        

                        2008INTEREST INCOMELoans receivable, including fees

                        $

                        5,426

                        

                        $

                        5,410

                        

                        $

                        10,713

                        

                        $

                        11,051Securities

                        

                        1,316

                        

                        

                        1,537

                        

                        

                        2,713

                        

                        

                        3,026Other

                        

                        1

                        

                        

                        6

                        

                        

                        7

                        

                        

                        25Total interest income

                        

                        6,743

                        

                        

                        6,953

                        

                        

                        13,433

                        

                        

                        14,102INTEREST EXPENSEDeposits

                        

                        1,420

                        

                        

                        1,963

                        

                        

                        2,921

                        

                        

                        4,334Short-term borrowings

                        

                        73

                        

                        

                        178

                        

                        

                        169

                        

                        

                        365Other borrowings

                        

                        415

                        

                        

                        238

                        

                        

                        827

                        

                        

                        505Total interest expense

                        

                        1,908

                        

                        

                        2,379

                        

                        

                        3,917

                        

                        

                        5,204NET INTEREST INCOME

                        

                        4,835

                        

                        

                        4,574

                        

                        

                        9,516

                        

                        

                        8,898PROVISION FOR LOAN LOSSES

                        

                        220

                        

                        

                        110

                        

                        

                        445

                        

                        

                        185NET INTEREST INCOME AFTERPROVISION FOR LOAN LOSSES

                        

                        4,615

                        

                        

                        4,464

                        

                        

                        9,071

                        

                        

                        8,713OTHER INCOMEService charges and fees

                        

                        642

                        

                        

                        670

                        

                        

                        1,240

                        

                        

                        1,308Income from fiduciary activities

                        

                        82

                        

                        

                        110

                        

                        

                        164

                        

                        

                        202Net realized gains on sales of securities

                        

                        172

                        

                        

                        9

                        

                        

                        333

                        

                        

                        9Gain on sale of loans and servicing rights

                        

                        121

                        

                        

                        8

                        

                        

                        254

                        

                        

                        396Gain on sale of deposits

                        

                        —

                        

                        

                        —

                        

                        

                        150

                        

                        

                        —Other

                        

                        151

                        

                        

                        165

                        

                        

                        308

                        

                        

                        309Total other income

                        

                        1,168

                        

                        

                        962

                        

                        

                        2,449

                        

                        

                        2,224OTHER EXPENSESSalaries and employee benefits

                        

                        1,595

                        

                        

                        1,498

                        

                        

                        3,209

                        

                        

                        3,044Occupancy, furniture & equipment, net

                        

                        379

                        

                        

                        414

                        

                        

                        864

                        

                        

                        844Data processing related

                        

                        203

                        

                        

                        180

                        

                        

                        399

                        

                        

                        368Taxes, other than income

                        

                        139

                        

                        

                        131

                        

                        

                        275

                        

                        

                        257Professional fees

                        

                        104

                        

                        

                        88

                        

                        

                        202

                        

                        

                        178FDIC Insurance assessment

                        

                        358

                        

                        

                        12

                        

                        

                        484

                        

                        

                        13Foreclosed real estate owned

                        

                        6

                        

                        

                        52

                        

                        

                        18

                        

                        

                        52Other

                        

                        536

                        

                        

                        597

                        

                        

                        1,144

                        

                        

                        1,177Total other expenses

                        

                        3,320

                        

                        

                        2,972

                        

                        

                        6,595

                        

                        

                        5,933INCOME BEFORE INCOME TAXES

                        

                        2,463

                        

                        

                        2,454

                        

                        

                        4,925

                        

                        

                        5,004INCOME TAX EXPENSE

                        

                        714

                        

                        

                        733

                        

                        

                        1,439

                        

                        

                        1,504NET INCOME

                        $

                        1,749

                        

                        $

                        1,721

                        

                        $

                        3,486

                        

                        $

                        3,500BASIC EARNINGS PER SHARE

                        $

                        0.64

                        

                        $

                        0.63

                        

                        $

                        1.27

                        

                        $

                        1.28DILUTED EARNINGS PER SHARE

                        $

                        0.63

                        

                        $

                        0.62

                        

                        $

                        1.26

                        

                        $

                        1.26
  See accompanying notes to the unaudited consolidated financial statements  4
  
 NORWOOD FINANCIAL CORP. Consolidated Statements of Changes in Stockholders’ Equity (unaudited) Six Months Ended June 30, 2009 and 2008   AccumulatedOtherCommon Stock

                        

                        

                        

                        Retained

                        

                        Treasury Stock

                        

                        ComprehensiveShares

                        

                        

                        Amount

                        

                        

                        Surplus

                        

                        

                        Earnings

                        

                        Shares

                        

                        Stock

                        

                        Income (Loss)

                        

                        

                        TotalBalance December 31, 2007

                        

                        2,840,872

                        

                        $

                        284

                        

                        $

                        10,159

                        

                        $

                        47,030

                        

                        87,256

                        

                        ($2,708

                        )

                        $

                        1,054

                        

                        $

                        55,819Comprehensive Income:Net Income

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        3,500

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        3,500Change in unrealized gains onsecurities available for sale, netof reclassification adjustment and tax effects

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        (842

                        )

                        

                        (842

                        )Total comprehensive income

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        2,658Cash dividends declared $.50 per share

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        (1,368

                        )

                        

                        

                        

                        

                        

                        

                        

                        

                        (1,368

                        )Acquisition of treasury stock

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        34,338

                        

                        (1,072

                        )

                        

                        

                        

                        

                        (1,072

                        )Stock options exercised

                        

                        

                        

                        

                        

                        

                        

                        (276

                        )

                        

                        

                        

                        (16,953

                        )

                        530

                        

                        

                        

                        

                        

                        254Tax benefit of stock options exercised

                        

                        

                        

                        

                        

                        

                        

                        83

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        83Compensation expense related to stock options

                        

                        

                        

                        

                        

                        

                        

                        77

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        77Cumulative effect of periodicNet periodic postretirementBenefit

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        (520

                        )

                        

                        

                        

                        

                        

                        

                        

                        

                        (520

                        )Balance, June 30, 2008

                        

                        2,840,872

                        

                        $

                        284

                        

                        $

                        10,043

                        

                        $

                        48,642

                        

                        104,641

                        

                        ($3,250

                        )

                        $

                        212

                        

                        $

                        55,931
  Balance December 31, 2008

                        

                        2,840,872

                        

                        $

                        284

                        

                        $

                        9,972

                        

                        $

                        50,938

                        

                        104,310

                        

                        ($3,243

                        )

                        $

                        1,279

                        

                        $

                        59,690Comprehensive Income:Net Income

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        3,486

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        3,486Change in unrealized gains on securities available for sale,Net of reclassification

                            adjustments and tax effects

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        128

                        

                        

                        128Total comprehensive income

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        3,614Cash dividends declared $.54 per share

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        (1,482

                        )

                        

                        

                        

                        

                        

                        

                        

                        

                        (1,482

                        )Acquisition of treasury stock

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        2,519

                        

                        (68

                        )

                        

                        

                        

                        

                        (68

                        )Stock options exercised

                        

                        

                        

                        

                        

                        

                        

                        (225

                        )

                        

                        

                        

                        (14,163

                        )

                        440

                        

                        

                        

                        

                        

                        215Tax benefit on stock options exercised

                        

                        

                        

                        

                        

                        

                        

                        67

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        67Compensation expense related tostock options

                        

                        

                        

                        

                        

                        

                        

                        65

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        65Balance, June 30, 2009

                        

                        2,840,872

                        

                        $

                        284

                        

                        $

                        9,879

                        

                        $

                        52,402

                        

                        92,666

                        

                        ($3,871

                        )

                        $

                        1,407

                        

                        $

                        61,101
  See accompanying notes to the unaudited consolidated financial statements  5
  
   NORWOOD FINANCIAL CORP. Consolidated Statements of Cash Flows (unaudited) (dollars in thousands)
  Six Months EndedJune 30,2009

                        

                        2008CASH FLOWS FROM OPERATING ACTIVITIESNet Income

                            Adjustments to reconcile net income to net cash provided by operating activities:

                        $

                        3,486

                        

                        $

                        3,500Provision for loan losses

                        

                        445

                        

                        

                        185Depreciation

                        

                        290

                        

                        

                        283Amortization of intangible assets

                        

                        26

                        

                        

                        26Deferred income taxes

                        

                        144

                        

                        

                        (59

                        )Net amortization of securities premiums and discounts

                        

                        60

                        

                        

                        26Net realized gain on sales of securities

                        

                        (333

                        )

                        

                        (9

                        )Gain on sale of deposits

                        

                        (150

                        )

                        

                        —Net increase in investment in life insurance

                        

                        (166

                        )

                        

                        (149

                        )Net gain on sale of mortgage loans and servicing rights

                        

                        (254

                        )

                        

                        (396

                        )Loss on sale of bank premises and equipment and foreclosed real estate

                        

                        1

                        

                        

                        0Mortgage loans originated for sale

                        

                        (15,674

                        )

                        

                        (866

                        )Proceeds from sale of mortgage loans originated for sale

                        

                        15,928

                        

                        

                        881Compensation expense related to stock options

                        

                        65

                        

                        

                        77Decrease (increase) in accrued interest receivable and other assets

                        

                        144

                        

                        

                        (130

                        )Increase in accrued interest payable and other liabilities

                        

                        800

                        

                        

                        26Net cash provided by operating activities

                        

                        4,812

                        

                        

                        3,395CASH FLOWS FROM INVESTING ACTIVITIESSecurities available for sale:Proceeds from sales

                        

                        11,141

                        

                        

                        59Proceeds from maturities and principal reductions on mortgage-backed securities

                        

                        25,278

                        

                        

                        26,234Purchases

                        

                        (28,428

                        )

                        

                        (34,416

                        )Increase in investment in FHLB stock

                        

                        0

                        

                        

                        (585

                        )Net increase in loans

                        

                        (11,506

                        )

                        

                        (16,214

                        )Proceeds from sale of mortgage loans

                        

                        0

                        

                        

                        13,885Purchase of bank premises and equipment

                        

                        (100

                        )

                        

                        (243

                        )Proceeds from sale of bank premises and equipment and foreclosed real estate

                        

                        2

                        

                        

                        —Net cash used in investing activities

                        

                        (3,613

                        )

                        

                        (11,280

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

                        

                        18,274

                        

                        

                        (4,729

                        )Deposits sold

                        

                        (3,606

                        )

                        

                        —Net increase (decrease) in short-term borrowings

                        

                        (13,530

                        )

                        

                        15,374Repayments of long- term debt

                        

                        —

                        

                        

                        (5,000

                        )Proceeds from other borrowings

                        

                        —

                        

                        

                        5,000Tax benefit of stock options exercised

                        

                        67

                        

                        

                        83Stock options exercised

                        

                        215

                        

                        

                        254Acquisition of treasury stock

                        

                        (68

                        )

                        

                        (1,072

                        )Cash dividends paid

                        

                        (1,477

                        )

                        

                        (1,374

                        )Net cash provided by (used in) financing activities

                        

                        (125

                        )

                        

                        8,536Increase in cash and cash equivalents

                        

                        1,074

                        

                        

                        651CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

                        

                        6,480

                        

                        

                        9,064CASH AND CASH EQUIVALENTS, END OF PERIOD

                        $

                        7,554

                        

                        $

                        9,715
  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 principles for complete financial statements. In preparing the financial
            statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. The financial statements reflect, in the opinion of management all normal, recurring adjustments necessary to present fairly the financial position of the Company. The operating results for the three and six month periods ended
            June 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009 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, 2008.  The Company has evaluated events and transactions occurring subsequent to the balance sheet date of June 30, 2009 for items that should potentially be recognized or disclosed in these financial statements. The evaluation was conducted through August 10, 2009, the date these financial statements were issued.  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:  Three Months Ended

                        

                        Six Months EndedJune 30,

                        

                        June 30,2009

                        

                        2008

                        

                        2009

                        

                        2008Basic EPS weighted average shares outstanding

                        

                        2,741

                        

                        2,736

                        

                        2,739

                        

                        2,744Dilutive effect of stock options

                        

                        19

                        

                        35

                        

                        19

                        

                        35Diluted EPS weighted average shares outstanding

                        

                        2,760

                        

                        2,771

                        

                        2,758

                        

                        2,779
  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 114,150 and 44,000 as of June 30, 2009 and 2008, 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, 24,000 options in 2008 and 1,000 options in 2009, all of which have a twelve-month vesting period. As of June 30, 2009, there was approximately $65,000 of total unrecognized
            compensation cost related to nonvested options under the plan, which will be fully amortized by December 31, 2009.  There were 1,000 stock options granted for the six months ended June 30, 2009. 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, 2009

                        176,443

                        

                        

                        

                        $25.95

                        

                        

                        6.5

                        Yrs.

                        

                        

                        $273Exercised

                        (14,163)

                        

                        

                        

                        15.09Granted

                        1,000

                        

                        

                        

                        28.90

                        

                        

                        9.7Outstanding at June 30, 2009

                        163,280

                        

                        

                        

                        $26.91

                        

                        

                        6.1

                        

                        

                        

                        $727Exercisable at June 30, 2009

                        138,280

                        

                        

                        

                        $26.79

                        

                        

                        4.7

                        

                        

                        

                        $632
  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 six months ended June 30, 2009 was $199,000, cash received from such exercises was $215,000 and the tax benefit recognized was $67,000.  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.  Cash payments for interest for the six months ended June 30, 2009 and 2008 were $3,954,000 and $5,717,000 respectively. Cash payments for income taxes in 2009 were $1,153,000 compared to $1,583,000 in 2008. Non-cash investing activity for 2009 and 2008 included foreclosed mortgage loans transferred to real estate owned and repossession of other assets of $213,000 and $1,223,000,
            respectively.  5.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.   8
  
  (in thousands)  Three Months Ended

                        

                        Six Months EndedJune 30,

                        

                        June 30,2009

                        

                        2008

                        

                        2009

                        

                        2008Unrealized holding gains (losses) onavailable for sale securities

                        

                        $

                        (368

                        )

                        $

                        (2,279

                        )

                        $

                        533

                        

                        $

                        (1,272

                        )Reclassification adjustment for gainsrealized in net income

                        

                        

                        (172

                        )

                        

                        (9

                        )

                        

                        (333

                        )

                        

                        (9

                        )Net unrealized gains (losses)

                        

                        

                        (540

                        )

                        

                        (2,288

                        )

                        

                        200

                        

                        

                        (1,281

                        )Income tax (benefit), expense

                        

                        

                        (182

                        )

                        

                        (780

                        )

                        

                        72

                        

                        

                        (439

                        )Other comprehensive income (loss)

                        

                        $

                        (358

                        )

                        $

                        (1,508

                        )

                        $

                        128

                        

                        $

                        (842

                        )
   6.

                        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)  June 30,2009

                        

                        2008Commitments to grant loans

                        $

                        15,991

                        

                        $

                        12,507Unfunded commitments under lines of credit

                        

                        41,482

                        

                        

                        36,067Standby letters of credit

                        

                        2,079

                        

                        

                        2,677$

                        59,522

                        

                        $

                        51,251
  Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily
            represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the customer and generally consists of real estate.  The Bank does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.  9
  
 Generally, all letters of credit, when issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Bank, generally, holds collateral and/or personal guarantees supporting these commitments. Management believes that the proceeds obtained through a liquidation of
            collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payment required under the corresponding guarantees. The current amount of the liability as of June 30, 2009 for guarantees under standby letters of credit issued is not material.  7.Securities  The amortized cost and fair value of securities were as follows:  June 30, 2009AmortizedCost

                        

                        GrossUnrealizedGains

                        

                        GrossUnrealizedLosses

                        

                        FairValue(In Thousands)Available for Sale:U.S. Government agencies

                        

                        $

                        25,126

                        

                        $

                        409

                        

                        $

                        (52

                        )

                        $

                        25,483States and political subdivisions

                        

                        

                        30,185

                        

                        

                        176

                        

                        

                        (523

                        )

                        

                        29,838Corporate obligations

                        

                        

                        5,054

                        

                        

                        44

                        

                        

                        (12

                        )

                        

                        5,086Mortgage-backed securities

                        

                        

                        59,743

                        

                        

                        1,651

                        

                        

                        (23

                        )

                        

                        61,371120,108

                        

                        

                        2,280

                        

                        

                        (610

                        )

                        

                        121,778Equity securities

                        

                        

                        361

                        

                        

                        507

                        

                        

                        (45

                        )

                        

                        823$

                        120,469

                        

                        $

                        2,787

                        

                        $

                        (655

                        )

                        $

                        122,601Held to Maturity:States and political subdivisions

                        

                        $

                        708

                        

                        $

                        13

                        

                        $

                        —

                        

                        $

                        721December 31, 2008AmortizedCost

                        

                        GrossUnrealizedGains

                        

                        GrossUnrealizedLosses

                        

                        FairValue(In Thousands)Available for Sale:U.S. Government agencies

                        

                        $

                        34,989

                        

                        $

                        836

                        

                        $

                        (12

                        )

                        $

                        35,813States and political subdivisions

                        

                        

                        25,436

                        

                        

                        110

                        

                        

                        (337

                        )

                        

                        25,209Corporate obligations

                        

                        

                        6,065

                        

                        

                        —

                        

                        

                        (440

                        )

                        

                        5,625Mortgage-backed securities

                        

                        

                        61,198

                        

                        

                        1,340

                        

                        

                        (220

                        )

                        

                        62,318127,688

                        

                        

                        2,286

                        

                        

                        (1,009

                        )

                        

                        128,965Equity securities

                        

                        

                        500

                        

                        

                        754

                        

                        

                        (99

                        )

                        

                        1,155$

                        128,188

                        

                        $

                        3,040

                        

                        $

                        (1,108

                        )

                        $

                        130,120Held to Maturity:States and political subdivisions

                        

                        $

                        707

                        

                        $

                        13

                        

                        $

                        —

                        

                        $

                        720
   10
  
  The following tables show the Company’s investments’ gross unrealized losses and fair value aggregated by length of time that individual securities have been in a continuous unrealized loss position (in thousands):  June 30, 2009Less than 12 Months

                        

                        12 Months or More

                        

                        TotalFair

                            Value

                        

                        Unrealized

                            **Losses**

                        

                        Fair

                            Value

                        

                        Unrealized Losses

                        

                        Fair

                            Value

                        

                        Unrealized LossesU.S. Government agencies

                        

                        $

                        4,958

                        

                        $

                        (52

                        )

                        $

                        —

                        

                        $

                        —

                        

                        $

                        4,958

                        

                        $

                        (52

                        )States and political subdivisions

                        

                        

                        15,853

                        

                        

                        (523

                        )

                        

                        —

                        

                        

                        —

                        

                        

                        15,853

                        

                        

                        (523

                        )Corporate obligations

                        

                        

                        —

                        

                        

                        —

                        

                        

                        2,998

                        

                        

                        (12

                        )

                        

                        2,998

                        

                        

                        (12

                        )Mortgage-backed securities

                        

                        

                        5,132

                        

                        

                        (23

                        )

                        

                        —

                        

                        

                        —

                        

                        

                        5,132

                        

                        

                        (23

                        )Equity securities

                        

                        

                        8

                        

                        

                        (16

                        )

                        

                        19

                        

                        

                        (29

                        )

                        

                        27

                        

                        

                        (45

                        )$

                        25,951

                        

                        $

                        (614

                        )

                        $

                        3,017

                        

                        $

                        (41

                        )

                        $

                        28,968

                        

                        $

                        (655

                        )
  The Company has 42 securities in the less than twelve month category and 5 securities in the twelve or more category. In Management’s opinion the unrealized losses principally reflect changes in interest rates subsequent to the acquisition of specific securities. The unrealized losses in the state and political subdivisions portfolio (municipals) also reflect a widening of
            spreads due to liquidity and credit concerns. The majority of the Company’s municipal portfolio consists of debt obligations of Pennsylvania school districts. The Company holds a small amount of equity securities in other financial institutions, the value of which has been impacted by the overall weakness in the financial sector. Management believes that the unrealized losses represent temporary impairment of the the securities as the Company has the intent and ability to hold
            these investments until maturity or market price recovery.  December 31, 2008Less than 12 Months

                        

                        12 Months or More

                        

                        TotalFair

                            Value

                        

                        Unrealized

                            **Losses**

                        

                        Fair

                            Value

                        

                        Unrealized

                            **Losses**

                        

                        Fair

                            Value

                        

                        Unrealized

                            **Losses**U.S. Government agencies

                        

                        $

                        988

                        

                        $

                        (12

                        )

                        $

                        —

                        

                        $

                        —

                        

                        $

                        988

                        

                        $

                        (12

                        )States and political subdivisions

                        

                        

                        13,653

                        

                        

                        (337

                        )

                        

                        —

                        

                        

                        —

                        

                        

                        13,653

                        

                        

                        (337

                        )Corporate obligations

                        

                        

                        3,886

                        

                        

                        (180

                        )

                        

                        1,739

                        

                        

                        (260

                        )

                        

                        5,625

                        

                        

                        (440

                        )Mortgage-backed securities

                        

                        

                        13,610

                        

                        

                        (220

                        )

                        

                        —

                        

                        

                        —

                        

                        

                        13,610

                        

                        

                        (220

                        )Equity securities

                        

                        

                        20

                        

                        

                        (3

                        )

                        

                        69

                        

                        

                        (96

                        )

                        

                        89

                        

                        

                        (99

                        )$

                        32,157

                        

                        $

                        (752

                        )

                        $

                        1,808

                        

                        $

                        (356

                        )

                        $

                        33,965

                        

                        $

                        (1,108

                        )
  11  
 The amortized cost and fair value of debt securities as of June 30, 2009 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with our without call or prepayment penalties.   Available for Sale

                        

                        Held to MaturityAmortized Cost

                        

                        FairValue

                        

                        AmortizedCost

                        

                        FairValue(In Thousands)Due in one year or less

                        

                        $

                        2,431

                        

                        $

                        2,441

                        

                        $

                        —

                        

                        $

                        —Due after one year through five years

                        

                        

                        25,310

                        

                        

                        25,661

                        

                        

                        —

                        

                        

                        —Due after five years through ten years

                        

                        

                        18,241

                        

                        

                        18,335

                        

                        

                        708

                        

                        

                        721Due after ten years

                        

                        

                        14,383

                        

                        

                        13,970

                        

                        

                        —

                        

                        

                        —60,365

                        

                        

                        60,407

                        

                        

                        708

                        

                        

                        721Mortgage-backed securities

                        

                        

                        59,743

                        

                        

                        61,371

                        

                        

                        —

                        

                        

                        —$

                        120,108

                        

                        $

                        121,778

                        

                        $

                        708

                        

                        $

                        721
  Gross realized gains and gross realized losses on sales of securities available for sale were as follows (in thousands):  Three months

                        

                        Six MonthsEnded June 30

                        

                        Ended June 302009

                        

                        2008

                        

                        2009

                        

                        2008Gross realized gains

                        

                        $

                        172

                        

                        $

                        44

                        

                        $

                        436

                        

                        $

                        44Gross realized losses

                        

                        

                        -

                        

                        

                        35

                        

                        

                        103

                        

                        

                        35Net realized gains

                        

                        $

                        172

                        

                        $

                        9

                        

                        $

                        333

                        

                        $

                        9
  8.Fair Value Measurements  Generally accepted accounting principles in the United States of America establishe 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 are as follows:  Level 1:     Unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities.
  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).  12  
 An asset’s 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 June 30, 2009 and December 31, 2008 are as follows:  Fair Value Measurement Reporting Date Using(Level1)

                        

                        (Level2)QuotedPricesin

                        

                        Significant

                        

                        (Level3)ActiveMarkets

                        

                        Other

                        

                        SignificantForIdentical

                        

                        Observable

                        

                        UnobservableDescription

                        

                        Total

                        

                        Assets

                        

                        Inputs

                        

                        Inputs(In thousands)June 30, 2009Securities available for sale

                        

                        $

                        122,601

                        

                        $

                        823

                        

                        $

                        121,778

                        

                        $

                        —December 31, 2008Securities available for sale

                        

                        $

                        130,120

                        

                        $

                        1,155

                        

                        $

                        128,965

                        

                        $

                        —
  For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2009 and December 31, 2008 are as follows:   Fair Value Measurement Reporting Date Using(Level1)

                        

                        (Level2)QuotedPricesin

                        

                        Significant

                        

                        (Level3)(In Thousands)

                        

                        

                        

                        ActiveMarkets

                        

                        Other

                        

                        SignificantForIdentical

                        

                        Observable

                        

                        UnobservableDescription

                        

                        Total

                        

                        Assets

                        

                        Inputs

                        

                        InputsJune 30, 2009Impaired Loans

                        

                        $

                        2,602

                        

                        $

                        -

                        

                        $

                        -

                        

                        $

                        2,602Foreclosed real estate owned

                        

                        

                        798

                        

                        

                        -

                        

                        

                        -

                        

                        

                        798$

                        3,400

                        

                        $

                        -

                        

                        $

                        -

                        

                        $

                        3,400December 31, 2008Impaired Loans

                        

                        $

                        2,976

                        

                        $

                        -

                        

                        $

                        -

                        

                        $

                        2,976
  The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other
            companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at June 30, 2009 and December 31, 2008.  Cash and cash equivalents (carried at cost):  The carrying amounts reported in the consolidated balance sheet for cash and short-term instruments approximate those assets’ fair values.  13
  
 Securities:  The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted
            market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, management’s best estimate is used.
            Management’s best estimate consists of both internal and external support on certain Level 3 investments. Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) are used to support fair values of certain Level 3 investments, if applicable.  Loans receivable (carried at cost):  The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice
            frequently and with no significant change in credit risk, fair values are based on carrying values.  Impaired loans (generally carried at fair value):  Impaired loans are those that are accounted for under FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan (“SFAS 114”), in which the Bank has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the property or discounted cash flows
            based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value investment in impaired loans requiring an allowance for loan losses was $1,235,000 net of a valuation allowance of $50,000 and $1,367,000 not requiring an allowance for loan losses as of June 30, 2009. The fair value investment in impaired loans not requiring an allowance for loan losses was
            $2,976,000, net of a charge-off against the allowance for loan losses of $380,000 at December 31, 2008.  Foreclosed real estate owned:  Real estate properties acquired through, or in lieu of loan foreclosure are to be sold and are carried at fair value less cost to sell. Fair value is based upon independent market prices, appraised value of the collateral or management’s estimation of the value of the collateral. These assets are included in Level 3 fair value based upon the lowest level of input that is
            significant to the fair value measurement. For the six months ended June 30, 2009, a property consisting of a residential one family residence was acquired through foreclosure and is carried at its net realizable value of $108,000, based on a current appraisal and a residential building lot is carried at its net realizable value of $30,000 based on an appraisal. At June 30, 2009 the Company was also carrying a property it acquired in the previous year with a net realizable value of
            $660,000 based on an appraisal at the time the property was acquired.  Restricted investment in Federal Home Loan Bank stock (carried at cost):  Restricted stock which represents required investment in the common stock of correspondent banks is carried at cost and as of June 30, 2009 and December 31, 2008, consists of the common stock of Federal Home Loan Bank of Pittsburgh. In December 2008, the FHLB of Pittsburgh notified member banks that it was suspending dividend payments and the repurchase of capital stock.  14
  
 Management evaluates the restricted stock for impairment in accordance with Statement of Position (SOP) 01-6, Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost
            rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating
            performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB. Management believes no impairment charge is necessary related to FHLB stock as of June 30, 2009.  Accrued interest receivable and payable (carried at cost):  The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.  Deposit liabilities (carried at cost):  The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates
            currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.  Short-term borrowings (carried at cost):  The carrying amounts of short-term borrowings approximate their fair values.
  Other borrowings (carried at cost):  Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.  Off-balance sheet financial instruments (disclosed at cost):  Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.   15
  
 The estimated fair values of the Bank’s financial instruments were as follows at June 30, 2009 and December 31, 2008.  June 30, 2009

                        

                        December31,2008Carrying

                        

                        Fair

                        

                        Carrying

                        

                        FairAmount

                        

                        Value

                        

                        Amount

                        

                        Value(InThousands)Financial assets:Cash and due from banks, interest-bearing

                            deposits with banks and federal funds sold

                        

                        $

                        7,554

                        

                        $

                        7,554

                        

                        $

                        6,480

                        

                        $

                        6,480Securities

                        

                        

                        123,309

                        

                        

                        123,322

                        

                        

                        130,827

                        

                        

                        130,840Loans receivable, net

                        

                        

                        356,019

                        

                        

                        374,050

                        

                        

                        345,171

                        

                        

                        363,219Investment in FHLB stock

                        

                        

                        3,538

                        

                        

                        3,538

                        

                        

                        3,538

                        

                        

                        3,538Accrued interest receivable

                        

                        

                        2,117

                        

                        

                        2,117

                        

                        

                        2,179

                        

                        

                        2,179Financial liabilities:Deposits

                        

                        

                        374,153

                        

                        

                        375,657

                        

                        

                        359,635

                        

                        

                        361,223Short-term borrowings

                        

                        

                        24,596

                        

                        

                        24,596

                        

                        

                        38,126

                        

                        

                        38,126Other borrowings

                        

                        

                        43,000

                        

                        

                        45,479

                        

                        

                        43,000

                        

                        

                        46,281Accrued interest payable

                        

                        

                        2,210

                        

                        

                        2,210

                        

                        

                        2,247

                        

                        

                        2,247Off-balance sheet financial instruments:Commitments to extend credit and outstanding letters of credit

                        

                        

                        —

                        

                        

                        —

                        

                        

                        —

                        

                        

                        —
  9.

                        New Accounting Pronouncements
  In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4). FASB Statement 157, Fair Value Measurements, defines fair value as the price
            that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. FSP FAS 157-4 provides additional guidance on determining when the volume and level of activity for the asset or liability has significantly decreased. The FSP also includes guidance on identifying circumstances when a transaction may not be considered
            orderly.  FSP FAS 157-4 provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the
            asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with Statement 157.  This FSP clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The FSP provides a list of circumstances that may indicate that a transaction is not orderly. A
            transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.  16
  
  This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting FSP FAS 157-4 must also early adopt FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. The adoption of this pronouncement did not have a material
            impact on the Company’s Consolidated Financial Statements.  In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2). FSP FAS 115-2 and FAS 124-2 clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management must assess
            whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. Previously, this assessment required management to assert it has both the intent and the ability to hold a security for a period of time sufficient to allow for an anticipated recovery in fair value to
            avoid recognizing an other-than-temporary impairment. This change does not affect the need to forecast recovery of the value of the security through either cash flows or market price.  In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FSP FAS 115-2 and FAS 124-2 changes the presentation and amount of the other-than-temporary impairment recognized in
            the income statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total
            other-than-temporary impairment related to all other factors is recognized in other comprehensive income.  This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting FSP FAS 115-2 and FAS 124-2 must also early adopt FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
            Identifying Transactions That Are Not Orderly. The adoption of this pronouncement did not have a material impact on the Company’s Financial Statements.  In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140. This statement prescribes the information that a reporting entity must provide in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash flows; and a
            transferor’s continuing involvement in transferred financial assets. Specifically, among other aspects, SFAS 166 amends Statement of Financial Standard No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, or SFAS 140, by removing the concept of a qualifying special-purpose entity from SFAS 140 and removes the exception from applying FIN 46(R) to variable interest entities that are qualifying
            special-purpose entities. It also modifies the financial-components approach used in SFAS 140. SFAS 166 is effective for fiscal years beginning after November 15, 2009. We have not determined the effect that the adoption of SFAS 166 will have on our financial position or results of operations.  17
  
 In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). This statement amends FASB Interpretation No. 46, Consolidation of Variable Interest Entities (revised December 2003) — an interpretation of ARB No. 51, or FIN 46(R), to require an enterprise to determine whether it’s variable interest or interests give it a
            controlling financial interest in a variable interest entity. The primary beneficiary of a variable interest entity is the enterprise that has both (1) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could
            potentially be significant to the variable interest entity. SFAS 167 also amends FIN 46(R) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. SFAS 167 is effective for fiscal years beginning after November 15, 2009. We have not determined the effect that the adoption of SFAS 167 will have on our financial position or results of operations.  In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. SFAS 168 replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, to establish the FASB Accounting Standards Codification as the source of
            authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with generally accepted accounting principles in the United States. SFAS 168 is effective for interim and annual periods ending after September 15, 2009. We do not expect the adoption of this standard to have an impact on our financial position or results of operations.  10. Branch Closure  On December 26, 2008, the Company filed notifications with the Pennsylvania Department of Banking and the FDIC, requesting authorization to discontinue branch operations at its Hamlin Office, as the lease for the location expires in 2009, with no renewal options available. The Company entered into an agreement with NBT Bank to assume the deposits of the Hamlin location and the office
            was closed on March 31, 2009. The gain on the transaction was $150,000 with expense related to the closing, including final lease payments, of $46,000, included in other expense in the consolidated income statement.  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.   18
  
 **Critical Accounting Policies**  Note 2 to the Company’s consolidated financial statements for the year ended December 31, 2008 (incorporated by reference in Item 8 of the Form 10-K) lists significant accounting policies used in the development and presentation of its financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and
            address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, potential impairment of restricted stock, accounting for stock options, the valuation of deferred tax assets and the determination of other-than-temporary impairment losses on investments in securities. Please refer to the
            discussion of the allowance for loan losses calculation under “Non-performing Assets and Allowance for Loan Losses” in the “Financial Condition” section.  The Company adopted SFAS No. 123(R), “Share-Based Payment” as of January 1, 2006, using the modified prospective transition method. Under this method companies are required to record compensation expense, based on the fair value of options over the vesting period.  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.  Restricted stock which represents required investment in the common stock of correspondent banks is carried at cost and as of June 30, 2009 and December 31, 2008, consists of the common stock of Federal Home Loan Bank of Pittsburgh. In December 2008, the FHLB of Pittsburgh notified member banks that it was suspending dividend payments and the repurchase of excess capital
            stock.  Management evaluates the restricted stock for impairment in accordance with Statement of Position (SOP) 01-6, Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost
            rather than by recognizing temporary decline in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating
            performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB. Management believes no impairment charge is necessary related to the restricted stock as of June 30, 2009 and December 31, 2008.  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 in certain specific
            securities at June 30, 2009 and December 31, 2008 represent temporary impairment of the securities, related to changes in interest rates.  19
  
  Changes in Financial Condition  General Total assets as of June 30, 2009 were $508.5 million compared to $504.3 million as of December 31, 2008, an increase of $4.2 million. The increase reflects a $11.2 million increase in loans funded by a $14.5 million increase in deposits.  Securities The fair value of securities available for sale as of June 30, 2009 was $122.6 million compared to $130.1 million as of December 31, 2008. The Company purchased $28.4 million of securities using the proceeds from $25.3 million of securities called, maturities and principal reductions and from short-term borrowings.  Securities with a carrying value of $49,720,000 and $51,444,000 at June 30, 2009 and at December 31, 2008 respectively, were pledged to secure public deposits, U.S. Treasury demand notes, securities sold under agreements to repurchase and for other purposes as required or permitted by law.  Loans Receivable  Loans receivable totaled $360.6 million compared to $349.7 million as of December 31, 2008.  Commercial real estate loans increased $8.5 million during the period, reflecting new activity principally centered in the Monroe County, Pennsylvania market area. Commercial loans increased $4.4 million principally due to tax-exempt financing of a municipal sewer authority.  Set forth below is selected data relating to the composition of the loan portfolio at the dates indicated:  Types of loans

                        

                        June 30, 2009

                        

                        December 31, 2008(dollars in thousands)Real Estate-Residential

                        

                        $

                        133,237

                        

                        36.9

                        %

                        $

                        133,417

                        

                        38.1

                        %Commercial

                        

                        

                        167,947

                        

                        46.5

                        

                        

                        159,476

                        

                        45.6Construction

                        

                        

                        14,291

                        

                        4.0

                        

                        

                        14,856

                        

                        4.2Commercial, financial and agricultural

                        

                        

                        30,242

                        

                        8.4

                        

                        

                        25,886

                        

                        7.4Consumer loans to individuals

                        

                        

                        15,258

                        

                        4.2

                        

                        

                        16,087

                        

                        4.6Total loans

                        

                        

                        360,975

                        

                        100.0

                        %

                        

                        349,722

                        

                        100.0

                        %Deferred fees (net)

                        

                        

                        (382

                        )

                        

                        

                        

                        (318

                        )360,593

                        

                        

                        

                        

                        349,404Allowance for loan losses

                        

                        

                        (4,574

                        )

                        

                        

                        

                        (4,233

                        )Net loans receivable

                        

                        $

                        356,019

                        

                        

                        

                        $

                        345,171
   20
  
 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

                        

                        Six MonthsEnded June 30

                        

                        Ended June 30(dollars in thousands)

                        

                        2009

                        

                        2008

                        

                        2009

                        

                        2008Balance, beginning

                        

                        $

                        4,413

                        

                        $

                        4,137

                        

                        $

                        4,233

                        

                        $

                        4,081Provision for loan losses

                        

                        

                        220

                        

                        

                        110

                        

                        

                        445

                        

                        

                        185Charge-offs

                        

                        

                        (80

                        )

                        

                        (36

                        )

                        

                        (142

                        )

                        

                        (71

                        )Recoveries

                        

                        

                        21

                        

                        

                        26

                        

                        

                        38

                        

                        

                        42Net charge-offs

                        

                        

                        (59

                        )

                        

                        (10

                        )

                        

                        (104

                        )

                        

                        (29

                        )Balance, ending

                        

                        $

                        4,574

                        

                        $

                        4,237

                        

                        $

                        4,574

                        

                        $

                        4,237Allowance to total loans

                        

                        

                        1.27

                        %

                        

                        1.27

                        %

                        

                        1.27

                        %

                        

                        1.27

                        %Net charge-offs to average loans (annualized)

                        

                        

                        .07

                        %

                        

                        .01

                        %

                        

                        .06

                        %

                        

                        .02

                        %
  The allowance for loan losses totaled $4,574,000 as of June 30, 2009 and represented 1.27% of total loans compared to $4,233,000 at the prior year end, and $4,237,000 as of June 30, 2008. The Company had net charge-offs for the six months of $104,000 compared to $29,000 in the comparable period in 2008. 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 June 30, 2009 based on
            the Company’s criteria. However, there can be no assurance that the allowance for loan losses will be adequate to cover significant losses, if any, that might be incurred in the future.  As of June 30, 2009, non-performing loans totaled $1,800,000, which is .50% of total loans compared to $2,087,000, or 0.60% of total loans at December 31, 2008. The decrease was principally due to a pay down as a result of a third party refinance on a portion of a land development loan. The recorded investment for impaired loans requiring a specific allowance for loan losses was
            $1,235,000 of which $50,000 was specifically reserved due to a shortfall in the collateral. Foreclosed real estate totals $798,000 as of June 30, 2009 compared to $660,000 as of year-end. The balance principally consists of undeveloped residential building lots in Monroe County, PA.     21
  
 The following table sets forth information regarding non-performing loans and foreclosed real estate at the dates indicated:  (dollars in thousands)

                        

                        June 30, 2009

                        

                        December 31, 2008Loans accounted for on a non-accrual basis:Commercial and all other

                        

                        $

                        —

                        

                        $

                        —Real Estate

                        

                        

                        1,781

                        

                        

                        2,087Consumer

                        

                        

                        —

                        

                        

                        —Total

                        

                        

                        1,781

                        

                        

                        2,087Accruing loans which are contractuallypast due 90 days or more

                        

                        

                        19

                        

                        

                        —Total non-performing loans

                        

                        

                        1,800

                        

                        

                        2,087Foreclosed real estate

                        

                        

                        798

                        

                        

                        660Total non-performing assets

                        

                        $

                        2,598

                        

                        $

                        2,747Allowance for loan losses

                        

                        $

                        4,574

                        

                        $

                        4,233Coverage of non-performing loans

                        

                        

                        2.54

                        x

                        

                        2.03

                        xNon-performing loans to total loans

                        

                        

                        .50

                        %

                        

                        .60

                        %Non-performing assets to total assets

                        

                        

                        .51

                        %

                        

                        .54

                        %
  Deposits Total deposits as of June 30, 2009 were $374.2 million increasing from $359.6 million as of December 31, 2008, an increase of $14.6 million. The growth in deposits is net of the sale of $3.6 million in deposits related to a branch closure as described in Note 9. Non-interest bearing demand deposits increased $3.6 million to $60.4 million reflecting seasonal growth in certain
            commercial and municipal accounts. Time deposits less than $100,000 totaled $123.2 million as of June 30, 2009, an increase of $6.0 million. The increase was principally due to the results of a 13 month CD product. The growth in deposits was used to fund loan growth and pay down short-term borrowings.  The following table sets forth deposit balances as of the dates indicated.
  (dollars in thousands)

                        

                        June 30, 2009

                        

                        December 31, 2008Non-interest bearing demand

                        

                        $

                        60,444

                        

                        $

                        56,839Interest bearing demand

                        

                        

                        36,999

                        

                        

                        35,322Money Market Deposit Accounts

                        

                        

                        62,699

                        

                        

                        60,623Savings

                        

                        

                        44,565

                        

                        

                        44,577Time deposits <$100,000

                        

                        

                        123,212

                        

                        

                        117,179Time deposits >$100,000

                        

                        

                        46,234

                        

                        

                        45,095Total

                        

                        $

                        374,153

                        

                        $

                        359,635
   22
  
 Borrowings Short-term borrowings as of June 30, 2009 totaled $24.6 million compared to $38.1 million as of December 31, 2008. Securities sold under agreements to repurchase declined $4.8 million principally due to the seasonality of school district cash management accounts. Short-term borrowings consist of the following:  (dollars in thousands)  June 30, 2009

                        

                        December 31, 2008Securities sold under agreements to repurchase

                        

                        $

                        18,599

                        

                        $

                        23,404Federal Funds Purchased

                        

                        

                        —

                        

                        

                        3,600Federal Reserve Discount Window

                        

                        

                        5,800

                        

                        

                        —Short-term FHLB advances

                        

                        

                        —

                        

                        

                        11,000U.S. Treasury demand notes

                        

                        

                        197

                        

                        

                        122$

                        24,596

                        

                        $

                        38,126
  Other borrowings consisted of the following:
  (dollars in thousands)

                        

                        June 30, 2009

                        

                        December 31, 2008Notes with the FHLB:Fixed rate note due September 2010 at 3.53%

                        

                        $

                        5,000

                        

                        $

                        5,000Convertible note due January 2011 at 5.24%

                        

                        

                        3,000

                        

                        

                        3,000Convertible note due August 2011 at 2.69%

                        

                        

                        10,000

                        

                        

                        10,000Fixed rate note due September 2011 at 4.06%

                        

                        

                        5,000

                        

                        

                        5,000Convertible note due October 2012 at 4.37%

                        

                        

                        5,000

                        

                        

                        5,000Convertible note due May 2013 at 3.015%

                        

                        

                        5,000

                        

                        

                        5,000Convertible note due January 2017 at 4.71%

                        

                        

                        10,000

                        

                        

                        10,000$

                        43,000

                        

                        $

                        43,000
  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 17 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.  23
  
 A summary of the contractual amount of the Company’s financial instrument commitments is as follows:  June 30,

                        

                        December31,2009

                        

                        2008(in thousands)Commitments to grant loans

                        

                        $

                        15,991

                        

                        $

                        19,254Unfunded commitments under lines of credit

                        

                        

                        41,482

                        

                        

                        36,980Standby letters of credit

                        

                        

                        2,079

                        

                        

                        1,897$

                        59,522

                        

                        $

                        58,131
  Stockholders’ Equity and Capital Ratios At June 30, 2009, total stockholders’ equity totaled $61.1 million, compared to $58.7 million as of December 31, 2008. The net change in stockholders’ equity included $3,486,000 in net income, that was partially offset by $1,482,000 of dividends declared. In addition, accumulated other comprehensive income increased $128,000 due to an increase in fair value of securities
            in the available for sale portfolio, net of tax. This increase in fair value is the result of a change in interest rates, which may impact the value of the securities. Because of interest rate volatility, 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:  June 30, 2009

                        

                        December 31, 2008Tier 1 Capital(To average assets)

                        

                        11.89

                        %

                        

                        11.45

                        %Tier 1 Capital(To risk-weighted assets)

                        

                        16.41

                        %

                        

                        16.22

                        %Tier 1 Capital(To risk-weighted assets)

                        

                        17.72

                        %

                        

                        17.50

                        %
  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 June 30, 2009 and December 31, 2008.  24
  
 Liquidity As of June 30, 2009, the Company had cash and cash equivalents of $7.6 million in the form of cash and due from banks, and short-term deposits with other institutions. In addition, the Company had total securities available for sale of $122.6 million which could be used for liquidity needs. This totals $130.2 million and represents 25.6% of total assets compared to $136.6 million and
            27.1% of total assets as of December 31, 2008. The Company also monitors other liquidity measures, all of which were within the Company’s policy guidelines as of June 30, 2009 and December 31, 2008. Based upon these measures, the Company believes its liquidity is adequate.  Capital Resources The Company has a 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 no borrowings under this line at June 30, 2009 and December 31, 2008.  The Company has a line of credit commitment from Atlantic Central Bankers Bank for $7,000,000 which expires in May 2010. There were no borrowings under these lines as of June 30, 2009 and December 31, 2008. The Company has a 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 June 30, 2009 and
            $3,600,000 as of December 31, 2008. The Bank has access to the Federal Reserve Discount Window with total availability of $8,000,000 based upon qualifying collateral held by the Federal Reserve Bank. There was $5,800,000 outstanding as of June 30, 2009 and -0- as of December 31, 2008.  The Bank’s maximum borrowing capacity with the Federal Home Loan Bank was approximately $235,056,000 of which $43,000,000 was outstanding at June 30, 2009 and $54,000,000 at December 31, 2008. 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 26 and page 30. 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.  25


Results of Operations NORWOOD FINANCIAL CORP. Consolidated Average Balance Sheets with Resultant Interest and Rates (Tax-Equivalent Basis, dollars in thousands)  Three Months Ended June 30,2009

                        

                        2008Average

                            Balance(2)

                        

                        Interest(1)

                        

                        AverageRate(3)

                        

                        AverageBalance(2)

                        

                        Interest(1)

                        

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

                        

                        $

                        1,082

                        

                        $

                        1

                        

                        0.37

                        %

                        $

                        1,146

                        

                        $

                        6

                        

                        2.09

                        %Interest bearing deposits with banks

                        

                        

                        512

                        

                        

                        —

                        

                        —

                        

                        

                        97

                        

                        

                        1

                        

                        4.12Securities held-to-maturity(1)

                        

                        

                        707

                        

                        

                        16

                        

                        9.05

                        

                        

                        706

                        

                        

                        15

                        

                        8.50Securities available for sale:Taxable

                        

                        

                        99,290

                        

                        

                        1,032

                        

                        4.16

                        

                        

                        110,352

                        

                        

                        1,318

                        

                        4.78Tax-exempt

                        

                        

                        28,589

                        

                        

                        398

                        

                        5.57

                        

                        

                        22,570

                        

                        

                        318

                        

                        5.64Total securities available for sale (1)

                        

                        

                        127,879

                        

                        

                        1,430

                        

                        4.47

                        

                        

                        132,922

                        

                        

                        1,636

                        

                        4.92Loans receivable (4) (5)

                        

                        

                        354,284

                        

                        

                        5,466

                        

                        6.17

                        

                        

                        331,509

                        

                        

                        5,458

                        

                        6.59Total interest earning assets

                        

                        

                        484,464

                        

                        

                        6,913

                        

                        5.71

                        

                        

                        466,380

                        

                        

                        7,116

                        

                        6.10Non-interest earning assets:Cash and due from banks

                        

                        

                        6,932

                        

                        

                        

                        

                        

                        

                        

                        8,051Allowance for loan losses

                        

                        

                        (4,483

                        )

                        

                        

                        

                        

                        

                        

                        (4,184

                        )Other assets

                        

                        

                        17,263

                        

                        

                        

                        

                        

                        

                        

                        17,176Total non-interest earning assets

                        

                        

                        19,712

                        

                        

                        

                        

                        

                        

                        

                        21,043Total Assets

                        

                        $

                        504,176

                        

                        

                        

                        

                        

                        

                        $

                        487,423Liabilities and Stockholders’ EquityInterest bearing liabilities:Interest bearing demand and money market

                        

                        $

                        100,663

                        

                        

                        183

                        

                        0.73

                        

                        $

                        105,965

                        

                        

                        371

                        

                        1.40Savings

                        

                        

                        45,053

                        

                        

                        42

                        

                        0.37

                        

                        

                        43,715

                        

                        

                        52

                        

                        0.48Time

                        

                        

                        167,474

                        

                        

                        1,195

                        

                        2.85

                        

                        

                        161,209

                        

                        

                        1,540

                        

                        3.82Total interest bearing deposits

                        

                        

                        313,190

                        

                        

                        1,420

                        

                        1.81

                        

                        

                        310,889

                        

                        

                        1,963

                        

                        2.53Short-term borrowings

                        

                        

                        23,558

                        

                        

                        73

                        

                        1.24

                        

                        

                        33,764

                        

                        

                        178

                        

                        2.11Other borrowings

                        

                        

                        43,000

                        

                        

                        415

                        

                        3.86

                        

                        

                        20,912

                        

                        

                        238

                        

                        4.55Total interest bearing liabilities

                        

                        

                        379,748

                        

                        

                        1,908

                        

                        2.01

                        

                        

                        365,565

                        

                        

                        2,379

                        

                        2.60Non-interest bearing liabilities:Demand deposits

                        

                        

                        58,710

                        

                        

                        

                        

                        

                        

                        

                        60,431Other liabilities

                        

                        

                        4,631

                        

                        

                        

                        

                        

                        

                        

                        4,812Total non-interest bearing liabilities

                        

                        

                        63,341

                        

                        

                        

                        

                        

                        

                        

                        65,243Stockholders’ equity

                        

                        

                        61,087

                        

                        

                        

                        

                        

                        

                        

                        56,615Total Liabilities and Stockholders’ Equity

                        

                        $

                        504,176

                        

                        

                        

                        

                        

                        

                        $

                        487,423Net interest income (tax equivalent basis)

                        

                        

                        

                        

                        

                        5,005

                        

                        3.70

                        %

                        

                        

                        

                        

                        4,737

                        

                        3.50

                        %Tax-equivalent basis adjustment

                        

                        

                        

                        

                        

                        (170

                        )

                        

                        

                        

                        

                        

                        

                        (163

                        )Net interest income

                        

                        

                        

                        

                        $

                        4,835

                        

                        

                        

                        

                        

                        

                        $

                        4,574Net interest margin (tax equivalent basis)

                        

                        

                        

                        

                        

                        

                        

                        4.13

                        %

                        

                        

                        

                        

                        

                        

                        4.06

                        %
  (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
 (5)

                        Loan balances include non-accrual loans and are net of unearned income.
 (6)

                        Loan yields include the effect of amortization of deferred fees, net of costs.
  26
  
  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 June 30, 2009 Compared to Three Months Ended June 30, 2008 Variance due to   Volume

                        

                        Rate

                        

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

                        

                        $

                        —

                        

                        $

                        (5

                        )

                        $

                        (5

                        )Interest bearing deposits with banks

                        

                        

                        6

                        

                        

                        (7

                        )

                        

                        (1

                        )Securities held to maturity

                        

                        

                        —

                        

                        

                        1

                        

                        

                        1Securities available for sale:Taxable

                        

                        

                        (125

                        )

                        

                        (161

                        )

                        

                        (286

                        )Tax-exempt securities

                        

                        

                        106

                        

                        

                        (26

                        )

                        

                        80Total securities

                        

                        

                        (19

                        )

                        

                        (187

                        )

                        

                        (206

                        )Loans receivable

                        

                        

                        1,438

                        

                        

                        (1,430

                        )

                        

                        8Total interest earning assets

                        

                        

                        1,424

                        

                        

                        (1,627

                        )

                        

                        (203

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

                        

                        

                        (18

                        )

                        

                        (170

                        )

                        

                        (188

                        )Savings

                        

                        

                        10

                        

                        

                        (20

                        )

                        

                        (10

                        )Time

                        

                        

                        369

                        

                        

                        (714

                        )

                        

                        (345

                        )Total interest bearing deposits

                        

                        

                        361

                        

                        

                        (904

                        )

                        

                        (543

                        )Short-term borrowings

                        

                        

                        (44

                        )

                        

                        (61

                        )

                        

                        (105

                        )Other borrowings

                        

                        

                        408

                        

                        

                        (231

                        )

                        

                        177Total interest bearing liabilities

                        

                        

                        725

                        

                        

                        (1,196

                        )

                        

                        (471

                        )Net interest income (tax-equivalent basis)

                        

                        $

                        700

                        

                        $

                        (432

                        )

                        $

                        268
     27    
 Comparison of Operating Results for Three Months Ended June 30, 2009 and June 30, 2008  General For the three months ended June 30, 2009, net income totaled $1,749,000, compared to $1,721,000 earned in the similar period in 2008. Earnings per share for the current period were $.64 for basic and $.63 fully diluted compared to $.63 per share basic and $.62 per share on a fully diluted basis for the three months ended June 30, 2008. The resulting annualized return on average
            assets and annualized return on average equity for the three months ended June 30, 2009 were 1.39% and 11.49%, respectively, compared to 1.42% and 12.19%, respectively, for the similar period in 2008.  The following table sets forth changes in net income:  (dollars in thousands)

                        

                        Three Months EndedJune 30, 2009 to June 30, 2008Net income three months ended June 30, 2008

                        

                        $

                        1,721Change due to:Net interest income

                        

                        

                        261Provision for loan losses

                        

                        

                        (110

                        )Gain on sales of loans, securities & deposits

                        

                        

                        276Other income

                        

                        

                        (70

                        )Salaries and employee benefits

                        

                        

                        (97

                        )FDIC insurance assessment

                        

                        

                        (346

                        )All other expenses

                        

                        

                        95Income tax expense

                        

                        

                        19Net income three months ended June 30, 2009

                        

                        $

                        1,749
  Net Interest Income  Net interest income on a fully taxable equivalent basis (fte) for the three months ended June 30, 2009 totaled $5,005,000, an increase of $268,000 or 5.7%, over the similar period in 2008. The fte net interest spread and net interest margin were 3.70% and 4.13%, respectively for the three months ended June 30, 2009 compared to 3.50% and 4.06% respectively, for the similar period in
            2008. Interest income (fte) totaled $6,913,000 with a yield on average earning assets of 5.71% compared to $7,116,000 and 6.10% for the 2008 period. The decrease in yield was due in part to lower prime interest rate which was 3.25% as of June 30, 2009 compared to 5.00% as of June 30, 2008. The Company has $69 million of floating rate loans tied to prime rate. In addition, residential
            mortgage rates have declined causing a portion of the portfolio to refinance at lower rates. As a result, the fte yield on loans declined to 6.17% in the current period from 6.59% for the same period in the prior year. The yield on investment securities also declined 45 basis points reflecting the reinvestment of cash flow, maturities and calls at the current lower rates. Average earning assets totaled $484.5 million for the three months ended June 30, 2009, an increase of $18.1
            million over the average for the similar period in 2008. This increase in average earning assets helped offset the decline in asset yields. In addition, the mix of earning assets improved, with loans receivable reflecting 73.1% of average earning assets compared to 71.1% for the similar period in 2008. Interest expense for the three months ended June 30, 2009 totaled $1,908,000 at an average cost of 2.01% compared to $2,379,000 at an average cost of 2.60% for the similar period in 2008. As a result of the decrease in short-term interest rates, the Company reduced rates paid on its money market accounts and cash management products, which are included in short-term borrowings. The
            cost of time deposits, which  28      
 is the most significant component of funding, declined to 2.85% from 3.82% for the similar period in the prior year. As time deposits matured, they repriced at the current lower rates resulting in the decrease.  Other Income  Other income totaled $1,168,000 for the three months ended June 30, 2009 compared to $962,000 for the similar period in 2008. The increase was principally due to a $172,000 gain on the sales of investment securities and $121,000 in gains on the sales of mortgage loans compared to $9,000 and $8,000, respectively, in similar gains for the same period in 2008.  Other Expenses
  Other expense for the three months ended June 30, 2009 totaled $3,320,000, an increase of $348,000 from $2,972,000 for the similar period in 2008. FDIC insurance assessments increased $346,000 which includes a special assessment of $225,000. The FDIC has doubled the assessment rate for the majority of banks in the current year. The efficiency ratio, which is other expense as a
            percentage of net interest income (fte) plus other income was 53.8% for the three months ended June 30, 2009, compared to 52.2% for the similar period in 2008.  Income Tax Expense
  Income tax expense totaled $714,000 for an effective tax rate of 29.0% for the period ending June 30, 2009 compared to $733,000 for an effective tax rate of 29.9% for the similar period in 2008. The decrease in the effective tax rate was principally due to a higher level of tax-exempt income related to purchases of municipal obligations in the available-for-sale investment
            portfolio.  29   
  
 **Results of Operations** NORWOOD FINANCIAL CORP. Consolidated Average Balance Sheets with Resultant Interest and Rates (Tax-Equivalent Basis, dollars in thousands)  Six Months Ended June 30,2009

                        

                        2008Average

                            Balance(2)

                        

                        Interest(1)

                        

                        AverageRate(3)

                        

                        AverageBalance(2)

                        

                        Interest(1)

                        

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

                        

                        $

                        2,048

                        

                        $

                        3

                        

                        0.29

                        %

                        $

                        1,774

                        

                        $

                        24

                        

                        2.71

                        %Interest bearing deposits with banks

                        

                        

                        3,067

                        

                        

                        4

                        

                        0.26

                        

                        

                        90

                        

                        

                        1

                        

                        2.22Securities held-to-maturity(1)

                        

                        

                        707

                        

                        

                        31

                        

                        8.77

                        

                        

                        706

                        

                        

                        30

                        

                        8.50Securities available for sale:Taxable

                        

                        

                        100,847

                        

                        

                        2,174

                        

                        4.31

                        

                        

                        107,920

                        

                        

                        2,595

                        

                        4.81Tax-exempt

                        

                        

                        27,039

                        

                        

                        770

                        

                        5.70

                        

                        

                        22,329

                        

                        

                        624

                        

                        5.59Total securities available for sale (1)

                        

                        

                        127,886

                        

                        

                        2,944

                        

                        4.60

                        

                        

                        130,249

                        

                        

                        3,219

                        

                        4.94Loans receivable (4) (5)

                        

                        

                        352,807

                        

                        

                        10,782

                        

                        6.11

                        

                        

                        329,927

                        

                        

                        11,147

                        

                        6.76Total interest earning assets

                        

                        

                        486,515

                        

                        

                        13,764

                        

                        5.66

                        

                        

                        462,746

                        

                        

                        14,421

                        

                        6.23Non-interest earning assets:Cash and due from banks

                        

                        

                        6,804

                        

                        

                        

                        

                        

                        

                        

                        7,576Allowance for loan losses

                        

                        

                        (4,400

                        )

                        

                        

                        

                        

                        

                        

                        (4,152

                        )Other assets

                        

                        

                        17,458

                        

                        

                        

                        

                        

                        

                        

                        17,020Total non-interest earning assets

                        

                        

                        19,862

                        

                        

                        

                        

                        

                        

                        

                        20,444Total Assets

                        

                        $

                        506,377

                        

                        

                        

                        

                        

                        

                        $

                        483,190Liabilities and Stockholders’ EquityInterest bearing liabilities:Interest bearing demand and money market

                        

                        $

                        99,281

                        

                        

                        383

                        

                        0.77

                        

                        $

                        100,738

                        

                        

                        803

                        

                        1.59Savings

                        

                        

                        44,880

                        

                        

                        83

                        

                        0.37

                        

                        

                        43,135

                        

                        

                        101

                        

                        0.47Time

                        

                        

                        167,467

                        

                        

                        2,455

                        

                        2.93

                        

                        

                        168,230

                        

                        

                        3,430

                        

                        4.08Total interest bearing deposits

                        

                        

                        311,628

                        

                        

                        2,921

                        

                        1.87

                        

                        

                        312,103

                        

                        

                        4,334

                        

                        2.78Short-term borrowings

                        

                        

                        29,396

                        

                        

                        169

                        

                        1.15

                        

                        

                        29,770

                        

                        

                        365

                        

                        2.45Other borrowings

                        

                        

                        43,000

                        

                        

                        827

                        

                        3.85

                        

                        

                        21,956

                        

                        

                        505

                        

                        4.60Total interest bearing liabilities

                        

                        

                        384,024

                        

                        

                        3,917

                        

                        2.04

                        

                        

                        363,829

                        

                        

                        5,204

                        

                        2.86Non-interest bearing liabilities:Demand deposits

                        

                        

                        57,507

                        

                        

                        

                        

                        

                        

                        

                        58,055Other liabilities

                        

                        

                        4,459

                        

                        

                        

                        

                        

                        

                        

                        4,862Total non-interest bearing liabilities

                        

                        

                        61,966

                        

                        

                        

                        

                        

                        

                        

                        62,917Stockholders’ equity

                        

                        

                        60,387

                        

                        

                        

                        

                        

                        

                        

                        56,444Total Liabilities and Stockholders’ Equity

                        

                        $

                        506,377

                        

                        

                        

                        

                        

                        

                        $

                        483,190Net interest income (tax equivalent basis)

                        

                        

                        

                        

                        

                        9,847

                        

                        3.62

                        %

                        

                        

                        

                        

                        9,217

                        

                        3.37

                        %Tax-equivalent basis adjustment

                        

                        

                        

                        

                        

                        (331

                        )

                        

                        

                        

                        

                        

                        

                        (319

                        )Net interest income

                        

                        

                        

                        

                        $

                        9,516

                        

                        

                        

                        

                        

                        

                        $

                        8,898Net interest margin (tax equivalent basis)

                        

                        

                        

                        

                        

                        

                        

                        4.05

                        %

                        

                        

                        

                        

                        

                        

                        3.98

                        %
  (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.
  30      
  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) Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008 Variance due to   Volume

                        

                        Rate

                        

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

                        

                        $

                        10

                        

                        $

                        (31

                        )

                        $

                        (21

                        )Interest bearing deposits with banks

                        

                        

                        6

                        

                        

                        (3

                        )

                        

                        3Securities held to maturity

                        

                        

                        —

                        

                        

                        1

                        

                        

                        1Securities available for sale:Taxable

                        

                        

                        (163

                        )

                        

                        (258

                        )

                        

                        (421

                        )Tax-exempt securities

                        

                        

                        134

                        

                        

                        12

                        

                        

                        146Total securities

                        

                        

                        (29

                        )

                        

                        (246

                        )

                        

                        (275

                        )Loans receivable

                        

                        

                        1,638

                        

                        

                        (2,003

                        )

                        

                        (365

                        )Total interest earning assets

                        

                        

                        1,624

                        

                        

                        (2,281

                        )

                        

                        (657

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

                        

                        

                        (11

                        )

                        

                        (409

                        )

                        

                        (420

                        )Savings

                        

                        

                        11

                        

                        

                        (29

                        )

                        

                        (18

                        )Time

                        

                        

                        (15

                        )

                        

                        (960

                        )

                        

                        (975

                        )Total interest bearing deposits

                        

                        

                        (16

                        )

                        

                        (1,397

                        )

                        

                        (1,413

                        )Short-term borrowings

                        

                        

                        (5

                        )

                        

                        (191

                        )

                        

                        (196

                        )Other borrowings

                        

                        

                        558

                        

                        

                        (236

                        )

                        

                        322Total interest bearing liabilities

                        

                        

                        538

                        

                        

                        (1,825

                        )

                        

                        (1,288

                        )Net interest income (tax-equivalent basis)

                        

                        $

                        1,087

                        

                        $

                        (457

                        )

                        $

                        630
   Comparison of Operating Results for Six Months Ended June 30, 2009 and June 30, 2008  General For the six months ended June 30, 2009, net-income totaled $3,486,000 compared to $3,500,000 earned in the similar period of 2008. Earnings per share for the current period were $1.27 per share basic and a $1.26 per share fully diluted compared to $1.28 per share basic and $1.26 per share diluted for the six months ended June 30, 2008. The resulting annualized return on average
            assets and annualized return on average equity for the six months ended June 30, 2009 was 1.39% and 11.64% and 1.45% and 12.44%, respectively, for the similar period in 2008.  31      
 The following table sets forth changes in net income:   Six Months EndedJune 30, 2009 toJune 30, 2008(dollars in thousands)Net income six months ended June 30, 2008

                        

                        

                        

                        

                        $

                        3,500Change due to:Net interest income

                        

                        

                        

                        

                        

                        618Provision for loan losses

                        

                        

                        

                        

                        

                        (250

                        )Gain on sales of loans, securities & deposits

                        

                        

                        

                        

                        

                        332Other income

                        

                        

                        

                        

                        

                        (107

                        )Salaries and employee benefits

                        

                        

                        

                        

                        

                        (165

                        )FDIC insurance assessment

                        

                        

                        

                        

                        

                        (471

                        )All other expenses

                        

                        

                        

                        

                        

                        (26

                        )Income tax expense

                        

                        

                        

                        

                        

                        65Net income six months ended June 30, 2009

                        

                        

                        

                        

                        $

                        3,486
   Net Interest Income Net interest income on a fully taxable equivalent basis (fte) for the six months ended June 30, 2009 totaled $9,847,000, an increase of $630,000, or 6.8% over the similar period in 2008. The fte net interest spread and net interest margin were 3.62% and 4.05% respectively, increasing from 3.37% and 3.98% respectively for the similar period in 2008. Interest income (fte) totaled $13,764,000 with a yield on average earning assets of 5.66% compared to $14,421,000 and 6.23% for the similar period in 2008. The decrease in yield was due in part to the lower prime interest rate which was 3.25% as of June 30, 2009 declining from 5.00% as of June 30, 2008. The Company has $69 million of floating rate loans tied to prime rate. In
            addition, residential mortgage rates have declined causing a portion of the portfolio to refinance at lower rates. As a result, the fte yield on average loans in the current period was 6.11% down from 6.76% in the 2008 period. The yield on investment securities also declined 34 basis points reflecting the reinvestment of cash flow, maturities and calls at the current lower rate. Average earning assets totaled $486.5 million for the six months ended June 30, 2009 an increase of $23.8
            million over the similar period in 2008. The growth in average earning assets helped offset the decline in asset yields. The mix in earning assets also improved as higher yielding loans receivable represented 72.5% of average earning assets compared to 71.3% for the similar period in 2008. Interest expense for the six months ended June 30, 2009 totaled $3,917,000 with an average cost of 2.04% compared to $5,204,000 and 2.86% for the 2008 period, with the decrease in short-term interest rates the Company reduced rates paid on its money-market accounts by 82 basis points and short-term borrowings by 130 basis points. The cost of time deposits which is the largest
            component of interest expense was 2.93% for the 2009 period decreasing from 4.08% in 2008. This reflects time deposits maturing and repricing at the current lower rates.  32  
  
  Other Income Other income totaled $2,449,000 for the six months ended June 30, 2009 compared to $2,224,000 for the similar period in 2008. The current period includes $254,000 in gains on the sale of $15.7 million of residential mortgage loans compared to $396,000 in similar gains on the sales of $14.4 million of mortgage loans in the 2008 period. Gains on the sale investment securities totaled
            $333,000 on sales of $11.1 million for the 2009 period compared to $9,000 in gains in the similar 2008 period. The proceeds from investment securities sales were used to fund loan growth. The Company also had a gain of $150,000 on the sale of deposits related to a branch closure in 2009 period.  Other Expenses Other expense totaled $6,595,000 for the six months ended June 30, 2009 an increase of $662,000 compared to $5,933,000 for the similar period in 2008. Higher FDIC insurance assessments, including a $225,000 special assessment accounted for $471,000 of the increase. The FDIC has doubled the assessment rate for the majority of banks in the current year. Salaries and employee benefits
            increased $165,000 or 5.4% reflecting staff increases and higher health insurance expense. The efficiency ratio for the 2009 period was 53.6% compared to 51.9% in the 2008 period.  Income Tax Expense Income tax expense totaled $1,439,000 for an effective tax rate of 29.2% in the 2009 period compared to $1,504,000 and 30.1% in 2008. The decrease in the effective tax rate was principally due to a higher level of tax-exempt income related to purchases of municipal obligations held in the available-for-sale portfolio.  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 June 30, 2009, 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 (RSA) and rate-sensitive liabilities (RSL). These are static gap measurements that do not take into account any future activity, and as such are principally used as early indications of potential interest rate exposures over specific
            intervals.  As of June 30, 2009, the Bank had a positive 90 day interest sensitivity gap of $35.1 million or 6.9% of total assets, increasing from $20.4 million, 4.0% of total assets as of December 31, 2008. The change was principally due to a decrease in time deposits maturing in 90 days. A positive gap means that rate-sensitive assets are greater than rate-sensitive liabilities at the time
            interval. This would indicate that in  33      
 a falling 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.  June 30, 2009 Rate Sensitivity Table (dollars in thousands)
  3Months

                        

                        3-12Months

                        

                        1to3Years

                        

                        3Years

                        

                        TotalFederal funds sold and interest

                            bearing deposits****

                        

                        $

                        6

                        

                        $

                        —

                        

                        $

                        —

                        

                        $

                        —

                        

                        $

                        6Securities

                        

                        

                        16,027

                        

                        

                        33,055

                        

                        

                        27,864

                        

                        

                        46,363

                        

                        

                        123,309Loans Receivable

                        

                        

                        81,723

                        

                        

                        57,188

                        

                        

                        89,788

                        

                        

                        131,894

                        

                        

                        360,593Total RSA

                        

                        

                        97,756

                        

                        

                        90,243

                        

                        

                        117,652

                        

                        

                        178,257

                        

                        

                        483,908Non-maturity interest-bearing

                            deposits

                        

                        

                        22,734

                        

                        

                        25,452

                        

                        

                        66,850

                        

                        

                        29,227

                        

                        

                        144,263Time deposits

                        

                        

                        29,721

                        

                        

                        88,455

                        

                        

                        32,346

                        

                        

                        18,924

                        

                        

                        169,446Other

                        

                        

                        10,214

                        

                        

                        6,733

                        

                        

                        30,649

                        

                        

                        20,000

                        

                        

                        67,596Total RSL

                        

                        

                        62,669

                        

                        

                        120,640

                        

                        

                        129,845

                        

                        

                        68,151

                        

                        

                        381,305Interest Sensitivity Gap

                        

                        $

                        35,087

                        

                        

                        ($30,397

                        )

                        $

                        (12,193

                        )

                        $

                        110,106

                        

                        $

                        102,603Cumulative gap

                        

                        

                        35,087

                        

                        

                        4,690

                        

                        

                        (7,503

                        )

                        

                        102,603RSA/RSL-Cumulative

                        

                        

                        156.0

                        %

                        

                        102.6

                        %

                        

                        97.6

                        %

                        

                        126.9

                        %December 31, 2008Interest Sensitivity Gap

                        

                        $

                        20,390

                        

                        $

                        (10,272

                        )

                        $

                        (16,051

                        )

                        $

                        102,259

                        

                        $

                        96,326Cumulative gap

                        

                        

                        20,390

                        

                        

                        10,118

                        

                        

                        (5,933

                        )

                        

                        96,326RSA/RSL-Cumulative

                        

                        

                        123.1

                        %

                        

                        105.5

                        %

                        

                        98.1

                        %

                        

                        125.1

                        %
  Item 4. Controls and Procedures  The Company’s management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the
            Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.  34      
 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, 2008.  Item 2. Unregistered Sales of Securities and Use of Proceeds  Not applicable.  Item 3. Defaults Upon Senior Securities  Not applicable  Item 4. Submission of Matters to a Vote of Security Holders  The Annual Meeting of Shareholders of the Company was held on April 28, 2009. The following incumbent directors were nominated and duly elected to the Board of Directors for a three-year term expiring in 2012.   FOR

                        

                        WITHHELDWilliam W. Davis, Jr.

                        

                        2,227,801

                        

                        69,876John E. Marshall

                        

                        2,236,970

                        

                        60,707Susan Gumble-Cottell

                        

                        2,281,446

                        

                        16,231
  There were no abstentions or broker non-votes.  Ratify the appointment of Beard Miller Company LLP as independent accountant of the Company for the fiscal year ending December 31, 2009.  FOR

                        

                        AGAINST

                        

                        ASTAIN2,282,078

                        

                        3,499

                        

                        12,100
  There were no broker non-votes.
  Item 5. Other Information  None  35      
 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)
  36      
  ___________________________
  *

                        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.
  **

                        Incorporated by reference to the identically numbered exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed with the Commission on March 14, 2008.
  ***

                        Incorporated herein by reference to the identically numbered exhibits of 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 23, 2000.
   *****

                        Incorporated herein by reference to the identically numbered exhibits of Registrant’s 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 April 4, 2006.
  37     
 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:

                        August 10, 2009

                        

                        By:

                        /s/ William W. Davis, Jr.William W. Davis, Jr.President and Chief Executive Officer(Principal Executive Officer)
   Date:

                        August 10, 2009

                        

                        By:

                        /s/ Lewis J. CritelliLewis J. CritelliExecutive Vice President and Chief Financial Officer(Principal Financial Officer)
  38