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

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

                        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from _________________ to ________________  Commission file number 0-28366  Norwood Financial Corp.(Exact name of Registrant as specified in its charter)
  Pennsylvania

                        

                        23-2828306(State or other jurisdiction of

                            Incorporation or organization)

                        

                        (I.R.S. Employer Identification No.)
  717 Main Street, Honesdale, Pennsylvania

                        

                        18431(Address of principal executive offices)

                        

                        (Zip Code)
  (570) 253-1455(Registrant’s telephone number, including area code)
  NA(Former name, former address and former fiscal year, if changed since last report))
  Indicate by check (x) whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes
            x 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. (Check one):  Large accelerated filer o

                        

                        Accelerated filer xNon-accelerated filer o

                            (Do not check if a smaller reporting company)

                        

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

                        

                        Outstanding as of August 8, 2008Common stock, par value $0.10 per share

                        

                        2,736,836
   1
  
  NORWOOD FINANCIAL CORP. FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2008 INDEX   Page

                            NumberPART I -

                        CONSOLIDATED FINANCIAL INFORMATION OF NORWOOD FINANCIAL CORP.Item 1.

                        Financial Statements

                        3Item 2.

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

                        14Item 3.

                        Quantitative and Qualitative Disclosures about Market Risk

                        29Item 4.

                        Controls and Procedures

                        32PART II -

                        OTHER INFORMATIONItem 1.

                        Legal Proceedings

                        32Item 1A.

                        Risk Factors

                        32Item 2.

                        Unregistered Sales of Equity Securities and Use of Proceeds

                        32Item 3.

                        Defaults upon Senior Securities

                        33Item 4.

                        Submission of Matters to a Vote of Security Holders

                        33Item 5.

                        Other Information

                        33Item 6.

                        Exhibits

                        33Signatures

                        

                        35
       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 31,2008

                        

                        2007ASSETSCash and due from banks

                        

                        $

                        9,664

                        

                        $

                        9,014Interest bearing deposits with banks

                        

                        

                        51

                        

                        

                        50Cash and cash equivalents

                        

                        

                        9,715

                        

                        

                        9,064Securities available for sale

                        

                        

                        130,811

                        

                        

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

                        

                        

                        706

                        

                        

                        705Loans receivable (net of unearned income)

                        

                        

                        332,754

                        

                        

                        331,296Less: Allowance for loan losses

                        

                        

                        4,237

                        

                        

                        4,081Net loans receivable

                        

                        

                        328,517

                        

                        

                        327,215Investment in FHLB Stock, at cost

                        

                        

                        2,657

                        

                        

                        2,072Bank premises and equipment, net

                        

                        

                        5,702

                        

                        

                        5,742Bank owned life insurance

                        

                        

                        7,916

                        

                        

                        7,767Foreclosed real estate owned

                        

                        

                        1,200

                        

                        

                        —Accrued interest receivable

                        

                        

                        2,221

                        

                        

                        2,343Other assets

                        

                        

                        2,464

                        

                        

                        1,715TOTAL ASSETS

                        

                        $

                        491,909

                        

                        $

                        480,610LIABILITIESDeposits:Non-interest bearing demand

                        

                        $

                        59,496

                        

                        $

                        60,061Interest bearing

                        

                        

                        305,775

                        

                        

                        309,939Total deposits

                        

                        

                        365,271

                        

                        

                        370,000Short-term borrowings

                        

                        

                        42,060

                        

                        

                        26,686Other borrowings

                        

                        

                        23,000

                        

                        

                        23,000Accrued interest payable

                        

                        

                        2,686

                        

                        

                        3,198Other liabilities

                        

                        

                        2,961

                        

                        

                        1,907TOTAL LIABILITIES

                        

                        

                        435,978

                        

                        

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

                        

                        

                        284

                        

                        

                        284Surplus

                        

                        

                        10,043

                        

                        

                        10,159Retained earnings

                        

                        

                        48,642

                        

                        

                        47,030Treasury stock at cost: 2008: 104,641 shares, 2007:87,256 shares

                        

                        

                        (3,250

                        )

                        

                        (2,708

                        )Accumulated other comprehensive income

                        

                        

                        212

                        

                        

                        1,054TOTAL STOCKHOLDERS’ EQUITY

                        

                        

                        55,931

                        

                        

                        55,819TOTAL LIABILITIES ANDSTOCKHOLDERS’ EQUITY

                        

                        $

                        491,909

                        

                        $

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

                        

                        Six Months EndedJune 30,

                        

                        June 30,2008

                        

                        2007

                        

                        2008

                        

                        2007INTEREST INCOMELoans receivable, including fees

                        

                        $

                        5,410

                        

                        $

                        5,878

                        

                        $

                        11,051

                        

                        $

                        11,718Securities

                        

                        

                        1,537

                        

                        

                        1,278

                        

                        

                        3,026

                        

                        

                        2,496Other

                        

                        

                        6

                        

                        

                        90

                        

                        

                        25

                        

                        

                        111Total interest income

                        

                        

                        6,953

                        

                        

                        7,246

                        

                        

                        14,102

                        

                        

                        14,325INTEREST EXPENSEDeposits

                        

                        

                        1,963

                        

                        

                        2,474

                        

                        

                        4,334

                        

                        

                        4,960Short-term borrowings

                        

                        

                        178

                        

                        

                        205

                        

                        

                        365

                        

                        

                        461Other borrowings

                        

                        

                        238

                        

                        

                        281

                        

                        

                        505

                        

                        

                        527Total interest expense

                        

                        

                        2,379

                        

                        

                        2,960

                        

                        

                        5,204

                        

                        

                        5,948NET INTEREST INCOME

                        

                        

                        4,574

                        

                        

                        4,286

                        

                        

                        8,898

                        

                        

                        8,377PROVISION FOR LOAN LOSSES

                        

                        

                        110

                        

                        

                        55

                        

                        

                        185

                        

                        

                        105NET INTEREST INCOME AFTERPROVSION FOR LOAN LOSSES

                        

                        

                        4,464

                        

                        

                        4,231

                        

                        

                        8,713

                        

                        

                        8,272OTHER INCOMEService charges and fees

                        

                        

                        670

                        

                        

                        635

                        

                        

                        1,308

                        

                        

                        1,241Income from fiduciary activities

                        

                        

                        110

                        

                        

                        93

                        

                        

                        202

                        

                        

                        218Net realized gains on sales of securities

                        

                        

                        9

                        

                        

                        15

                        

                        

                        9

                        

                        

                        15Gain on sale of loans

                        

                        

                        8

                        

                        

                        1

                        

                        

                        396

                        

                        

                        8Other

                        

                        

                        165

                        

                        

                        113

                        

                        

                        309

                        

                        

                        269Total other income

                        

                        

                        962

                        

                        

                        857

                        

                        

                        2,224

                        

                        

                        1,751OTHER EXPENSESSalaries and employee benefits

                        

                        

                        1,498

                        

                        

                        1,438

                        

                        

                        3,044

                        

                        

                        2,935Occupancy, furniture & equipment, net

                        

                        

                        414

                        

                        

                        416

                        

                        

                        844

                        

                        

                        831Data processing related

                        

                        

                        180

                        

                        

                        168

                        

                        

                        368

                        

                        

                        342Taxes, other than income

                        

                        

                        131

                        

                        

                        121

                        

                        

                        257

                        

                        

                        239Professional fees

                        

                        

                        88

                        

                        

                        94

                        

                        

                        178

                        

                        

                        183Other

                        

                        

                        661

                        

                        

                        610

                        

                        

                        1,242

                        

                        

                        1,178Total other expenses

                        

                        

                        2,972

                        

                        

                        2,847

                        

                        

                        5,933

                        

                        

                        5,708INCOME BEFORE INCOME TAXES

                        

                        

                        2,454

                        

                        

                        2,241

                        

                        

                        5,004

                        

                        

                        4,315INCOME TAX EXPENSE

                        

                        

                        733

                        

                        

                        671

                        

                        

                        1,504

                        

                        

                        1,282NET INCOME

                        

                        $

                        1,721

                        

                        $

                        1,570

                        

                        $

                        3,500

                        

                        $

                        3,033BASIC EARNINGS PER SHARE

                        

                        $

                        0.63

                        

                        $

                        0.56

                        

                        $

                        1.28

                        

                        $

                        1.09DILUTED EARNINGS PER SHARE

                        

                        $

                        0.62

                        

                        $

                        0.55

                        

                        $

                        1.26

                        

                        $

                        1.07
  See accompanying notes to the unaudited consolidated financial statements  4
 
 NORWOOD FINANCIAL CORP. Consolidated Statements of Changes in Stockholders’ Equity (unaudited)\  (dollars in thousands, except per share data)

                        Number of shares issued

                        

                        

                        Common Stock

                        

                        Surplus

                        

                        

                        Retained Earnings

                        

                        Treasury
                            Stock

                        Accumulated Other Comprehensive (Loss) Income

                        

                        TotalBalance December 31, 2006

                        2,840,872

                        

                        

                        $

                        284

                        

                        

                        $

                        10,149

                        

                        

                        

                        $

                        43,125

                        

                        

                        $

                        (1,283)

                        

                        $

                        (44

                        )

                        

                        $

                        52,231Comprehensive Income:Net Income

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        3,033

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        3,033Change in unrealized gains
                            on securities available for sale, net of reclassification adjustment and tax effects

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        (275

                        )

                        

                        

                        (285

                        )Total comprehensive income

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        2,758Cash dividends declared, $.46 per share

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        (1,281

                        )

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        (1,281

                        )Acquisition of 31,676 shares of
                            treasury stock

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        (1,011)

                        

                        

                        

                        

                        

                        

                        (1,011

                        )Stock options exercised (14,483 shares)

                        

                        

                        

                        

                        

                        

                        

                        

                        (243

                        )

                        

                        

                        

                        

                        

                        

                        

                        431

                        

                        

                        

                        

                        

                        

                        188Tax benefit of stock options exercised

                        

                        

                        

                        

                        

                        

                        

                        

                        98

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        98Compensation expense related to stock options

                        

                        

                        

                        

                        

                        

                        

                        

                        151

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        151Balance June 30, 2007

                        2,840,872

                        

                        

                        $

                        284

                        

                        

                        $

                        10,155

                        

                        

                        

                        $

                        44,877

                        

                        

                        $

                        (1,863)

                        

                        $

                        (319

                        )

                        

                        $

                        53,134
  (dollars in thousands, except per share data)

                        Number of shares issued

                        

                        

                        Common Stock

                        

                        Surplus

                        

                        

                        Retained Earnings

                        

                        Treasury Stock

                        Accumulated Other Comprehensive (Loss) Income

                        

                        TotalBalance December 31, 2007

                        2,840,872

                        

                        

                        $

                        284

                        

                        

                        $

                        10,159

                        

                        

                        

                        $

                        47,030

                        

                        

                        $

                        (2,708

                        )

                        $

                        1,054

                        

                        

                        $

                        55,819Comprehensive Income:Net Income

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        3,500

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        3,500Change in unrealized gains
                            on securities available for sale, net of reclassification adjustment and tax effects

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        (842

                        )

                        

                        

                        (842

                        )Total comprehensive income

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        2,658Cash dividends declared, $.50 per share

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        (1,368

                        )

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        (1,368

                        )Acquisition of 34,388 shares of
                            treasury stock

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        (1,072

                        )

                        

                        

                        

                        

                        

                        (1,072

                        )Stock options exercised (16,593 shares)

                        

                        

                        

                        

                        

                        

                        

                        

                        (276

                        )

                        

                        

                        

                        

                        

                        

                        

                        530

                        

                        

                        

                        

                        

                        

                        254Tax benefit of stock options exercised

                        

                        

                        

                        

                        

                        

                        

                        

                        83

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        83Compensation expense related to stock options

                        

                        

                        

                        

                        

                        

                        

                        

                        77

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        77Cumulative effect of net periodic postretirement benefit

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        (520

                        )

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        (520

                        )Balance June 30, 2008

                        2,840,872

                        

                        

                        $

                        284

                        

                        

                        $

                        10,043

                        

                        

                        

                        $

                        48,642

                        

                        

                        $

                        (3,250

                        )

                        $

                        212

                        

                        

                        $

                        55,931
  See accompanying notes to the consolidated financial statements  5
  
 NORWOOD FINANCIAL CORP. Consolidated Statements of Cash Flows (unaudited) (dollars in thousands)  Six Months EndedJune 30,CASH FLOWS FROM OPERATING ACTIVITIES

                        

                        2008

                        

                        2007Net IncomeAdjustments to reconcile net income to net cash provided by (used in) operating activities:

                        

                        $

                        3,500

                        

                        $

                        3,033Provision for loan losses

                        

                        

                        185

                        

                        

                        105Depreciation

                        

                        

                        283

                        

                        

                        287Amortization of intangible assets

                        

                        

                        26

                        

                        

                        26Deferred income taxes

                        

                        

                        (59

                        )

                        

                        (149

                        )Net amortization of securities premiums and discounts

                        

                        

                        26

                        

                        

                        92Net realized gain on sales of securities

                        

                        

                        (9

                        )

                        

                        (15

                        )Earnings on life insurance policy

                        

                        

                        (149

                        )

                        

                        (142

                        )Net gain on sale of mortgage loans

                        

                        

                        (396

                        )

                        

                        (8

                        )Mortgage loans originated for sale

                        

                        

                        (866

                        )

                        

                        (421

                        )Proceeds from sale of mortgage loans originated for sale

                        

                        

                        881

                        

                        

                        429Compensation expense related to stock options

                        

                        

                        77

                        

                        

                        151Increase in accrued interest receivable and other assets

                        

                        

                        (130

                        )

                        

                        (494

                        )Increase (decrease) in accrued interest payable and other liabilities

                        

                        

                        26

                        

                        

                        (3,145

                        )Net cash provided by (used in) operating activities

                        

                        

                        3,395

                        

                        

                        (251

                        )CASH FLOWS FROM INVESTING ACTIVITIESSecurities available for sale:Proceeds from sales

                        

                        

                        59

                        

                        

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

                        

                        

                        26,234

                        

                        

                        27,236Purchases

                        

                        

                        (34,416

                        )

                        

                        (31,196

                        )Increase in investment in FHLB stock

                        

                        

                        (585

                        )

                        

                        (246

                        )Net increase in loans

                        

                        

                        (16,214

                        )

                        

                        (6,156

                        )Proceeds from sale of mortgage loans

                        

                        

                        13,885

                        

                        

                        —Purchase of bank premises and equipment

                        

                        

                        (243

                        )

                        

                        (120

                        )Net cash used in investing activities

                        

                        

                        (11,280

                        )

                        

                        (10,408

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

                        

                        

                        (4,729

                        )

                        

                        15,641Net increase (decrease) in short-term borrowings

                        

                        

                        15,374

                        

                        

                        (3,589

                        )Repayments of other borrowings

                        

                        

                        (5,000

                        )

                        

                        —Proceeds from other borrowings

                        

                        

                        5,000

                        

                        

                        10,000Tax benefit of stock options exercised

                        

                        

                        83

                        

                        

                        98Stock options exercised

                        

                        

                        254

                        

                        

                        188Acquisition of treasury stock

                        

                        

                        (1,072

                        )

                        

                        (1,011

                        )Cash dividends paid

                        

                        

                        (1,374

                        )

                        

                        (1,283

                        )Net cash provided by financing activities

                        

                        

                        8,536

                        

                        

                        20,044Increase in cash and cash equivalents

                        

                        

                        651

                        

                        

                        9,385CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

                        

                        

                        9,064

                        

                        

                        9,517CASH AND CASH EQUIVALENTS, END OF PERIOD

                        

                        $

                        9,715

                        

                        $

                        18,902
  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, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008 or any other future interim period.  These statements should be read in conjunction with the consolidated financial statements and related notes which are incorporated by reference in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2007.  2. Earnings Per Share  Basic earnings per share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed
            issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.  The following table sets forth the weighted average number of common shares used in the computations of basic and diluted earnings per share:  (in thousands)

                        

                        Three Months Ended

                        

                        Six Months EndedJune 30,

                        

                        June 30,2008

                        

                        2007

                        

                        2008

                        

                        2007Basic EPS weighted average shares outstanding

                        

                        2,736

                        

                        2,786

                        

                        2,744

                        

                        2,789Dilutive effect of stock options

                        

                        35

                        

                        55

                        

                        35

                        

                        55Diluted EPS weighted average shares outstanding

                        

                        2,771

                        

                        2,841

                        

                        2,779

                        

                        2,844
  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 44,000 and 22,500 as of June 30, 2008 and 2007, respectively.  7
  
 3. Stock-Based Compensation  The Company’s stockholders approved the Norwood Financial Corp 2006 Stock Option Plan at the annual meeting on April 25, 2006 and the Company awarded 47,700 options in 2006, and 22,000 options in 2007, all of which have a twelve month vesting period. As of June 30, 2008, there was approximately $77,000 of total unrecognized compensation cost related to nonvested options under
            the plan, which will be fully amortized by December 31, 2008.  No stock options were granted for the six months ended June 30, 2008. A summary of stock options from all plans, adjusted for stock dividends declared, is shown below.  Options

                        

                        Weighted Average Exercise Price

                            Per Share

                        

                        Weighted Average Remaining Contractual Term

                        

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

                        180,422

                        

                        $

                        24.04

                        

                        

                        5.8

                        Yrs.

                        

                        $

                        895Exercised

                        (16,953

                        )

                        

                        14.96Outstanding at June 30, 2008

                        163,469

                        

                        $

                        24.98

                        

                        

                        5.6

                        

                        

                        $

                        657Exerciseable at June 30, 2008

                        141,469

                        

                        $

                        23.43

                        

                        

                        5.8

                        

                        

                        $

                        788
  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, 2008 was $265,000, cash received from such exercises was $254,000 and the tax benefit recognized was $83,000.  4. Cash Flow Information  For the purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits with banks and federal funds sold, all of which mature within 90 days.  Cash payments for interest for the six months ended June 30, 2008 and 2007 were $5,716,000 and $6,040,000 respectively. Cash payments for income taxes in 2008 were $1,583,000 compared to $1,333,000 in 2007. Non-cash investing activities for 2008 and 2007 included foreclosed mortgage loans and repossession of other assets of $1,223,000 and $35,000, 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
  
  Three Months

                        

                        Six MonthsEnded June 30,

                        

                        Ended June 30,2008

                        

                        2007

                        

                        2008

                        

                        2007Unrealized holding losses on available for sale securities

                        

                        $

                        (2,279

                        )

                        $

                        (702

                        )

                        $

                        (1,272

                        )

                        $

                        (408

                        )Reclassification adjustment for gainsrealized in net income

                        

                        

                        (9

                        )

                        

                        (15

                        )

                        

                        (9

                        )

                        

                        (15

                        )Net unrealized losses

                        

                        

                        (2,288

                        )

                        

                        (717

                        )

                        

                        (1,281

                        )

                        

                        (423

                        )Income tax benefit

                        

                        

                        (780

                        )

                        

                        (246

                        )

                        

                        (439

                        )

                        

                        (148

                        )Other comprehensive loss

                        

                        $

                        (1,508

                        )

                        $

                        (471

                        )

                        $

                        (842

                        )

                        $

                        (275

                        )
  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 30,2008

                        

                        2007Commitments to grant loans

                        

                        $

                        12,507

                        

                        $

                        12,085Unfunded commitments under lines of credit

                        

                        

                        36,067

                        

                        

                        31,940Standby letters of credit

                        

                        

                        2,677

                        

                        

                        7,302$

                        51,251

                        

                        $

                        51,327
  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.  9
  
 The Bank does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued have expiration dates within one year. The credit risks
            involved in issuing letters of credit are essentially the same as those that are involved in extending loan facilities to customers. The Bank, generally, holds collateral and/or personal guarantees supporting these commitments. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payment required under the corresponding guarantees. The current amount of the
            liability as of June 30, 2008 for guarantees under standby letters of credit issued is not material.  7. Fair Value Measurements  In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value
            measurements. The standard is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. The Company adopted SFAS 157 effective for its fiscal year beginning January 1, 2008. In December 2007, the FASB issued FASB Staff Position (FSP) No. SFAS 157-2, “Effective Date of FAS 157” for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value on a
            recurring basis (at least annually) to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The adoption of SFAS 157 and FSP No. FAS 157-2 had no impact on the amounts reported in the consolidated financial statements.  The primary effect of SFAS 157 on the Company was to expand the required disclosures pertaining to the methods used to determine fair values.  SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy
            under SFAS 157 are as follows:  Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.  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).  10
  
 An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.  For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2008 are as follows:  Fair Value Measurement Reporting Date usingDescription

                        

                        June 30,2008

                        

                        (Level 1)Quoted Prices inActive MarketsFor IdenticalAssets

                        

                        (Level 2)SignificantOtherObservableInputs

                        

                        (Level 3)SignificantUnobservableInputsSecurities available for sale

                        

                        $

                        130,811

                        

                        $

                        1,146

                        

                        $

                        129,665

                        

                        $

                        —Impaired loans

                        

                        

                        1,785

                        

                        

                        —

                        

                        

                        —

                        

                        

                        1,785Other Real Estate Owned

                        

                        

                        1,200

                        

                        

                        —

                        

                        

                        —

                        

                        

                        1,200Total

                        

                        $

                        133,796

                        

                        $

                        1,146

                        

                        $

                        129,665

                        

                        $

                        2,985
  The following valuation techniques were used to measure fair value of assets in the table above on a recurring basis as of June 30, 2008:  Available for Sale Securities: The Company holds equity securities which are traded with quoted prices, on an active market. Such securities are carried at a market price quote and considered Level 1 Fair Values.  The Company also holds debt offerings of U.S. Government Agencies, state and political subdivisions, high-grade corporate obligations and mortgage-backed securities issued by U.S. Government agencies. The Company utilizes a third party source to provide fair value of its fixed income securities. The methodology consists of pricing models based on asset class and include available
            trade, bid, other market information, broker quotes, proprietary models, various databases and trading desk quotes. This valuation is based on observable inputs and is considered Level 2.  Imparied Loasn: Impaired loans are evaluated and valued at the time the loan is first considered impaired. The realizable value is measured based on the value of the collateral securing the loan and is considered a Level 3 measurement. The value of real estate related collateral is established by a formal appraisal performed for the Company. The loan is carried at the lower of cost or market, net of
            any valuation allowance. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted as needed.  Other Real Estate Owned: The realizable value is measured based on the value of the real estate less cost to sell and is considered a Level 3 measurement. The value of the real estate is established by formal appraisal performed by the Company.  11
  
 The following is a reconciliation of the beginning and ending balances of recurring value measurements of impaired loans and other real estate owned using significant unobservable (Level 3) inputs:  Three Months Ended

                        

                        Six Months EndedJune 30,

                        

                        June 30,Impaired

                        

                        Other Real

                        

                        Impaired

                        

                        Other RealLoans

                        

                        Estate Owned

                        

                        Loans

                        

                        Estate OwnedBalance at the beginning of the period

                        

                        $

                        3,230

                        

                        $

                        —

                        

                        $

                        3,208

                        

                        $

                        —Transfer from impaired loans

                        

                        

                        —

                        

                        

                        1,200

                        

                        

                        —

                        

                        

                        1,200Loan advances

                        

                        

                        

                        

                        

                        

                        

                        

                        22

                        

                        

                        —Loan payments

                        

                        

                        (53

                        )

                        

                        —

                        

                        

                        (53

                        )

                        

                        —Specific allowance

                        

                        

                        (192

                        )

                        

                        —

                        

                        

                        (192

                        )

                        

                        —Transfer to Other Real Estate Owned

                        

                        

                        (1,200

                        )

                        

                        —

                        

                        

                        (1,200

                        )

                        

                        —Balance at the end of the period

                        

                        $

                        1,785

                        

                        $

                        1,200

                        

                        $

                        1,785

                        

                        $

                        1,200
  8. New and Recently Adopted Accounting Pronouncements  In September 2006, the FASB’s Emerging Issues Task Force (EITF) issued EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements: (EITF 06-4). EITF 06-4 requires the recognition of a liability related to the postretirement benefits covered by an endorsement split-dollar life
            insurance arrangement. The consensus highlights that the employer (who is also the policyholder) has a liability for the benefit it is providing to its employee. As such, if the policyholder has agreed to maintain the insurance policy in force for the employee’s benefit during his or her retirement, then the liability recognized during the employee’s active service period should be based on the future cost of insurance to be incurred during the employee’s
            retirement. Alternatively, if the policyholder has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the guidance in SFAS No. 106 or Accounting Principles Board (APB) Opinion No. 12, as appropriate. For transition, an entity can choose to apply the guidance using either the following approaches: (a) a change in accounting principle through retrospective application to all periods presented or (b) a
            change in accounting principle through a cumulative-effect adjustment to the balance in retained earnings at the beginning of the year of adoption. The EITF is effective for fiscal years beginning after December 15, 2007, with early adoption permitted. The Company has chosen approach (b) and recorded a cumulative effect adjustment as of January 1, 2008 to the balance of retained earnings of $520,000, with $90,000 of Net Periodic Postretirement Benefit expense expected for the year
            ended December 31, 2008.  In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115”. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected
            will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for our Company January 1, 2008. The adoption of SFAS No. 159 did not have a material impact on our consolidated financial statements.  FASB Statement No. 141 (R) “Business Combinations” was issued in December of 2007. This Statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The Statement also provides guidance for
            recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. This new pronouncement will impact the Company’s accounting for business combinations beginning January 1,
            2009.  12
  
  FASB Statement No. 160 “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” was issued in December of 2007. This Statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance will become effective as of the beginning of a
            company’s fiscal year beginning after December 15, 2008. The Company believes that this new pronouncement will have an immaterial impact on the Company’s consolidated financial statements in future periods.  Staff Accounting Bulletin No. 109 (SAB 109), “Written Loan Commitments Recorded at Fair Value Through Earnings” expresses the views of the staff regarding written loan commitments that are accounted for at fair value through earnings under generally accepted accounting principles. To make the staff’s views consistent with current authoritative accounting guidance,
            the SAB revises and rescinds portions of SAB No. 105, “Application of Accounting Principles to Loan Commitments.” Specifically, the SAB revises the SEC staff’s views on incorporating expected net future cash flows related to loan servicing activities in the fair value measurement of a written loan commitment. The SAB retains the staff’s views on incorporating expected net future cash flows related to internally-developed intangible assets in the fair value
            measurement of a written loan commitment. The staff expects registrants to apply the views in Question 1 of SAB 109 on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. SAB 109 did not have a material impact on the Company’s consolidated financial statements. In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (Statement 161). Statement 161 requires entities that utilize derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well as any details
                of credit-risk-related contingent features contained within derivatives. Statement 161 also requires entities to disclose additional information about the amounts and location of derivatives located within the financial statements, how the provisions of SFAS 133 have been applied, and the impact that hedges have on an entity’s financial position, financial performance, and cash flows. Statement 161 is effective for fiscal years and interim periods beginning after November
                15, 2008, with early application encouraged. The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.  In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting
                Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company believes that this new pronouncement will have an immaterial impact on the Company’s consolidated financial statements in future periods.  In April 2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142,
                “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R, and other GAAP. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.
                Early adoption is prohibited. The Company is evaluating the potential impact the new pronouncement will have on its consolidated financial statements.  13
  
   In May 2008, the FASB issued FASB Staff Position (FSP) APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” which clarifies the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. The FSP requires issuers to account
            separately for the liability and equity components of certain convertible debt instruments in a manner that reflects the issuer’s nonconvertible debt borrowing rate when interest cost is recognized. The FSP requires bifurcation of a component of the debt, classification of that component in equity and the accretion of the resulting discount on the debt to be recognized as part of interest expense. The FSP requires retrospective application to the terms of instruments as they
            existed for all periods presented. The FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. Early adoption is not permitted. The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.  In June 2008, the FASB issued FASB Staff Position (FSP) EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” This FSP clarifies that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. Awards of
            this nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied. This FSP is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements. In June 2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock” (EITF 07-5). EITF 07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the
            instrument’s contingent exercise and settlement provisions. It also clarifies the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements. In June 2008, the FASB ratified EITF Issue No. 08-3, “Accounting for Lessees for Maintenance Deposits Under Lease Arrangements” (EITF 08-3). EITF 08-3 provides guidance for accounting for nonrefundable maintenance deposits. It also provides revenue recognition accounting guidance for the lessor. EITF 08-3 is effective for fiscal years beginning after
            December 15, 2008. The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements. 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. 14
  
  Critical Accounting Policies  Note 2 to the Company’s consolidated financial statements for the year ended December 31, 2007 (incorporated by reference in Item 8 of the Form 10-K) lists significant accounting policies used in the development and presentation of its consolidated financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures
            identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, accounting for stock options, the valuation of deferred tax assets and the determination of other-than-temporary impairment losses on securities. Please refer to the discussion of the allowance for loan losses calculation under
            “Non-performing Assets and Allowance for Loan Losses” in the “Financial Condition” section.  The deferred income taxes reflect temporary differences in the recognition of the revenue and expenses for tax reporting and financial statement purposes, principally because certain items are recognized in different periods for financial reporting and tax return purposes. Although realization is not assured, the Company believes that it is more likely than not that all deferred tax
            assets will be realized.  In estimating other-than-temporary impairment losses on securities, the Company considers 1) the length of time and extent to which the fair value has been less than cost 2) the financial condition of the issuer and 3) the intent and ability of the Company to hold the security to allow for a recovery to fair value. The Company believes that the unrealized losses at June 30, 2008 and
            December 31, 2007 represent temporary impairment of the securities, related to changes in interest rates.  Changes in Financial Condition  General  Total assets as of June 30, 2008 were $491.9 million compared to $480.6 million as of December 31, 2007, an increase of $11.3 million. The increase reflects a $6.8 million increase in securities available for sale and a $1.5 million increase in loans receivable, funded by a $15.4 million increase in short-term borrowings. 15
  
  Securities  The fair value of securities available for sale as of June 30, 2008 was $130.8 million compared to $124.0 million as of December 31, 2007. The Company purchased $34.4 million of securities using the proceeds from $26.2 million of securities called, maturities and principal reductions and from short-term borrowings.  The carrying value of the Company’s securities portfolio (Available-For-Sale and Held-to-Maturity) consisted of the following:  June 30, 2008

                        

                        December 31, 2007Amount

                        

                        % of Portfolio

                        

                        Amount

                        

                        % of PortfolioUS Government agencies

                        

                        $

                        39,200

                        

                        29.8

                        %

                        $

                        41,508

                        

                        33.4

                        %States and political subdivisions

                        

                        

                        22,698

                        

                        17.3

                        

                        

                        22,622

                        

                        18.1Corporate securities

                        

                        

                        5,934

                        

                        4.5

                        

                        

                        4,994

                        

                        4.0Mortgage-backed securities

                        

                        

                        62,539

                        

                        47.5

                        

                        

                        54,082

                        

                        43.3Equity securities

                        

                        

                        1,146

                        

                        0.9

                        

                        

                        1,486

                        

                        1.2Total

                        

                        $

                        131,517

                        

                        100.0

                        %

                        $

                        124,692

                        

                        100.0

                        %
  The Company has securities in an unrealized loss position. In Management’s opinion, the unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. The Company’s available-for-sale portfolio has an average repricing term of 3.6 years. Interest rates in the 2-5 year section of the treasury yield curve decreased during the six
            months ended June 30, 2008 favorably impacting the fair value of individual securities. This has been somewhat offset by a widening of credit spreads in the market. Management believes that the unrealized losses represent temporary impairment of the securities and are the result of changes in interest rates. The Company has the intent and ability to hold these investments until maturity or market price recovery and spreads. The Company monitors the credit ratings of its securities
            which may impact the valuation of the securities. Credit ratings were within Company policy guidelines at June 30, 2008 and December 31, 2007.  Loans Receivable  Loans receivable totaled $332.8 million compared to $331.3 million as of December 31, 2007. Residential real estate loans decreased $5.7 million due to the sale of $14.4 million of 30 year fixed rate residential mortgages. The loans were sold for interest rate risk management to shorten the average life of the mortgage loan portfolio. Commercial real estate loans increased
            $12.8 million during the period, reflecting new activity and the completion of $3.6 million of construction projects. The activity was principally centered in the Monroe County, Pennsylvania market area. 16
  
  Set forth below is selected data relating to the composition of the loan portfolio at the dates indicated:  Types of loans(dollars in thousands)

                        

                        June 30, 2008

                        

                        December 31, 2007Real Estate-Residential

                        

                        $

                        124,185

                        

                        37.4

                        %

                        $

                        129,888

                        

                        39.2

                        %Commercial

                        

                        

                        146,347

                        

                        43.9

                        

                        

                        133,593

                        

                        40.3Construction

                        

                        

                        15,296

                        

                        4.6

                        

                        

                        20,404

                        

                        6.2Commercial, financial and agricultural

                        

                        

                        30,090

                        

                        9.0

                        

                        

                        29,159

                        

                        8.8Consumer loans to individuals

                        

                        

                        17,083

                        

                        5.1

                        

                        

                        18,526

                        

                        5.6Total loans

                        

                        

                        333,001

                        

                        100.0

                        %

                        

                        331,570

                        

                        100.0

                        %Deferred fees (net)

                        

                        

                        (247

                        )

                        

                        

                        

                        (274

                        )332,754

                        

                        

                        

                        

                        331,296Allowance for loan losses

                        

                        

                        (4,237

                        )

                        

                        

                        

                        (4,081

                        )Net loans receivable

                        

                        $

                        328,517

                        

                        

                        

                        $

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

                        

                        Six Months EndedJune 30,

                        

                        June 30,(dollars in thousands)

                        

                        2008

                        

                        2007

                        

                        2008

                        

                        2007Balance, beginning

                        

                        $

                        4,137

                        

                        $

                        3,871

                        

                        $

                        4,081

                        

                        $

                        3,828Provision for loan losses

                        

                        

                        110

                        

                        

                        55

                        

                        

                        185

                        

                        

                        105Charge-offs

                        

                        

                        (36

                        )

                        

                        (39

                        )

                        

                        (71

                        )

                        

                        (67

                        )Recoveries

                        

                        

                        26

                        

                        

                        13

                        

                        

                        42

                        

                        

                        34Net charge-offs

                        

                        

                        (10

                        )

                        

                        (26

                        )

                        

                        (29

                        )

                        

                        (33

                        )Balance, ending

                        

                        $

                        4,237

                        

                        $

                        3,900

                        

                        $

                        4,237

                        

                        $

                        3,900Allowance to total loans

                        

                        

                        1.27

                        %

                        

                        1.21

                        %

                        

                        1.27

                        %

                        

                        1.21

                        %Net charge-offs to average loans(annualized)

                        

                        

                        .01

                        %

                        

                        .03

                        %

                        

                        .02

                        %

                        

                        .02

                        %
  The allowance for loan losses totaled $4,237,000 as of June 30, 2008 and represented 1.27% of total loans compared to $4,081,000 at year end, and $3,900,000 as of June 30, 2007. The Company had net charge-offs for the six months of $29,000 compared to $33,000 in the comparable period in 2007. The Company’s loan review process assesses the adequacy of the allowance for loan
            losses on a quarterly basis. The process includes an analysis of the risks inherent in the loan portfolio. It includes an analysis of impaired loans and a historical review of credit losses by loan type. Other factors considered include: concentration of credit in specific industries; economic and industry conditions; trends in delinquencies and loan classifications, large dollar exposures and loan growth. Management considers the allowance adequate at June 30,
            2008 based on the Company’s criteria. However, there can be no assurance that the allowance for loan losses will be adequate to cover significant losses, if any; that might be incurred in the future. 17
 
  As of June 30, 2008, non-performing loans totaled $308,000, which is .09% of total loans compared to $163,000, or 0.05% of total loans at December 31, 2007. The company had $1,977,000 in restructured loans as of June 30, 2008 related to land development loan to a borrower. The interest rate on the loan was reduced to improve the borrower’s cash flow. The recorded investment for
            impaired loans requiring a specific allowance for loan losses was $1,977,000 of which $192,000 was specifically reserved due to a shortfall in the collateral. The Company acquired a property with a Deed in Lieu of Foreclosure carried at $1,200,000. The property consists of undeveloped residential building lots in Monroe County, PA. The Company has retained an engineering firm to determine the steps necessary to complete the municipal approval process for development.  The following table sets forth information regarding non-performing loans, restructured loans and foreclosed real estate at the dates indicated:  June 30, 2008

                        

                        December 31, 2007(dollars in thousands)Loans accounted for on a non accrual basis:Commercial and all other

                        

                        $

                        —

                        

                        $

                        —Real Estate

                        

                        

                        292

                        

                        

                        109Consumer

                        

                        

                        —

                        

                        

                        2Total

                        

                        

                        292

                        

                        

                        111Accruing loans which are contractuallypast due 90 days or more

                        

                        

                        16

                        

                        

                        52Total non-performing loans

                        

                        

                        308

                        

                        

                        163Foreclosed real estate

                        

                        

                        1,200

                        

                        

                        —Total non-performing assets

                        

                        $

                        1,508

                        

                        $

                        163Restructured Loans on Accrual Status

                        

                        $

                        1,977

                        

                        

                        —Allowance for loan losses

                        

                        $

                        4,237

                        

                        $

                        4,081Coverage of non-performing loans

                        

                        

                        13.7

                        x

                        

                        25.0

                        xNon-performing loans to total loans

                        

                        

                        .09

                        %

                        

                        .05

                        %Non-performing assets to total assets

                        

                        

                        .31

                        %

                        

                        .03

                        %
  Deposits  Total deposits as of June 30, 2008 were $365.3 million decreasing from $370.0 million as of December 31, 2007.  Time deposits greater than $100,000 decreased $25.3 million due to the scheduled maturities of school districts and various large commercial deposits. A portion remained on deposit in money market and interest-bearing demand accounts. The Company expects to bid on school district time deposits in the third and fourth quarter of 2008.  18
  
 The following table sets forth deposit balances as of the dates indicated.  (dollars in thousands)

                        

                        June 30, 2008

                        

                        December 31, 2007Non-interest bearing demand

                        

                        $

                        59,496

                        

                        $

                        60,061Interest bearing demand

                        

                        

                        40,716

                        

                        

                        32,426Money Market Deposit Accounts

                        

                        

                        70,052

                        

                        

                        57,970Savings

                        

                        

                        44,066

                        

                        

                        42,962Time deposits <$100,000

                        

                        

                        114,011

                        

                        

                        114,318Time deposits >$100,000

                        

                        

                        36,930

                        

                        

                        62,263Total

                        

                        $

                        365,271

                        

                        $

                        370,000
  Borrowings  Short-term borrowings as of June 30, 2008 totaled $42.1 million compared to $26.7 million as of December 31, 2007. The increase in short-term borrowings were principally used to offset the decrease in time deposits greater than $100,000 as well as fund investment purchases.  Short-term borrowings consist of the following: (dollars in thousands)  June 30, 2008

                        

                        December 31, 2007Securities sold under agreements to repurchase

                        

                        $

                        18,388

                        

                        $

                        24,885FHLB Short-term borrowings

                        

                        

                        13,000

                        

                        

                        —Federal Funds Purchased

                        

                        

                        10,551

                        

                        

                        800U.S. Treasury demand notes

                        

                        

                        121

                        

                        

                        1,001$

                        42,060

                        

                        $

                        26,686
  Long-term debt consisted of the following:  June 30, 2008

                        

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

                        

                        $

                        —

                        

                        $

                        5,000Convertible note due January 2011 at 5.24%

                        

                        

                        3,000

                        

                        

                        3,000Convertible note due October 2012 at 4.37%

                        

                        

                        5,000

                        

                        

                        5,000Convertible note due May 2013 at 3.015%

                        

                        

                        5,000

                        

                        

                        —Convertible note due January 2017 at 4.71%

                        

                        

                        10,000

                        

                        

                        10,000$

                        23,000

                        

                        $

                        23,000
  The convertible notes contain an option that allows the FHLB, at quarterly intervals to change the note to an adjustable-rate advance at three-month LIBOR plus 11 to 17 basis points. If the notes are converted, the option allows the Bank to put the funds back to the FHLB at no charge.  19
 
 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.  A summary of the contractual amount of the Company’s financial instrument commitments is as follows:  June 30, 2008

                        

                        December 31, 2007(in thousands)Commitments to grant loans

                        

                        $

                        12,507

                        

                        $

                        10,835Unfunded commitments under lines of credit

                        

                        

                        36,067

                        

                        

                        34,146Standby letters of credit

                        

                        

                        2,677

                        

                        

                        2,348$

                        51,251

                        

                        $

                        47,329
  Stockholders’ Equity and Capital Ratios  At June 30, 2008, total stockholders’ equity totaled $55.9 million, compared to $55.8 million as of December 31, 2007. The net change in stockholders’ equity was primarily due to $3,500,000 in net income, that was partially offset by $1,368,000 of cash dividends declared. In addition, accumulated other comprehensive income declined due to a decrease in fair value of
            securities in the available for sale portfolio, net of tax. This decrease 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, 2008

                        

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

                        

                        

                        11.43

                        %

                        

                        11.38

                        %Tier 1 Capital(To risk-weighted assets)

                        

                        

                        16.18

                        %

                        

                        16.26

                        %Total Capital(To risk-weighted assets)

                        

                        

                        17.49

                        %

                        

                        17.60

                        %
  The minimum capital requirements imposed by the FDIC on the Bank for leverage, Tier 1 and Total Capital are 4%, 4% and 8%, respectively. The Company has similar capital requirements imposed by the Board of Governors of the Federal Reserve System (FRB). The Bank is also subject to more stringent Pennsylvania Department of Banking (PDB) guidelines. The Bank’s capital ratios do not
            differ significantly from the Company’s ratios. Although not  20
  
 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, 2008 and December 31, 2007.  Liquidity  As of June 30, 2008, the Company had cash and cash equivalents of $9.7 million in the form of cash, due from banks, federal funds and short-term deposits with other institutions. In addition, the Company had total securities available for sale of $130.8 million which could be used for liquidity needs. This totals $140.5 million and represents 28.6% of total assets compared to $133.1
            million and 27.7% of total assets as of December 31, 2007. The Company also monitors other liquidity measures, all of which were within the Company’s policy guidelines as of June 30, 2008 and December 31, 2007. 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 $13,000,000 borrowings under this line at June 30, 2008 and $-0- at December 31, 2007.  The Company has a line of credit commitment from Atlantic Central Bankers Bank for $7,000,000, which expires in May 2009 and Wachovia Bank for $2,000,000 which has no stated expiration date. There were no borrowings under these lines as of June 30, 2008 and December 31, 2007. 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 $10,551,000 as of June 30, 2008 and $800,000 as of December 31, 2007.  The Bank’s maximum borrowing capacity with the Federal Home Loan Bank was approximately $221,000,000 of which $36,000,000 was outstanding at June 30, 2008 and $23,000,000 was outstanding at December 31, 2007. Advances from the Federal Home Loan Bank are secured by qualifying assets of the Bank.  Non-GAAP Financial Measures  This report contains or references fully taxable-equivalent (fte) interest income and net interest income, which are non-GAAP financial measures. Interest income (fte) and net interest income (fte) are derived from GAAP interest income and net interest income using an assumed tax rate of 34%. We believe the presentation of interest income (fte) and net interest income (fte) ensures
            comparability of interest income and net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Net interest income (fte) is reconciled to GAAP net interest income on pages 22 and 26. 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.  21
  
  Results of Operations NORWOOD FINANCIAL CORP. Consolidated Average Balance Sheets with Resultant Interest and Rates  Three Months Ended June 30,2008

                        

                        

                        2007Average

                        

                        

                        

                        

                        

                        Average

                        

                        

                        Average

                        

                        

                        

                        

                        

                        AverageBalance

                        

                        Interest

                        

                        

                        Rate

                        

                        

                        Balance

                        

                        Interest

                        

                        

                        Rate(2)

                        

                        (1)

                        

                        

                        (3)

                        

                        

                        (2)

                        

                        (1)

                        

                        

                        (3)AssetsInterest-earning assets:Federal funds sold

                        

                        $

                        1,146

                        

                        $

                        6

                        

                        

                        2.09

                        %

                        

                        $

                        5,997

                        

                        $

                        78

                        

                        

                        5.20

                        %Interest bearing deposits with banks

                        

                        

                        97

                        

                        

                        1

                        

                        

                        4.12

                        

                        

                        

                        909

                        

                        

                        12

                        

                        

                        5.28Securities held-to-maturity(1)

                        

                        

                        706

                        

                        

                        15

                        

                        

                        8.50

                        

                        

                        

                        955

                        

                        

                        20

                        

                        

                        8.38Securities available for sale:Taxable

                        

                        

                        110,352

                        

                        

                        1,318

                        

                        

                        4.78

                        

                        

                        

                        97,606

                        

                        

                        1,095

                        

                        

                        4.49Tax-exempt (1)

                        

                        

                        22,570

                        

                        

                        318

                        

                        

                        5.64

                        

                        

                        

                        18,903

                        

                        

                        287

                        

                        

                        6.07Total securities available for sale (1)

                        

                        

                        132,922

                        

                        

                        1,636

                        

                        

                        4.92

                        

                        

                        

                        116,509

                        

                        

                        1,382

                        

                        

                        4.74Loans receivable (4) (5)

                        

                        

                        331,509

                        

                        

                        5,458

                        

                        

                        6.59

                        

                        

                        

                        320,091

                        

                        

                        5,918

                        

                        

                        7.40Total interest earning assets

                        

                        

                        466,380

                        

                        

                        7,116

                        

                        

                        6.10

                        

                        

                        

                        444,461

                        

                        

                        7,410

                        

                        

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

                        

                        

                        8,051

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        8,409Allowance for loan losses

                        

                        

                        (4,184

                        )

                        

                        

                        

                        

                        

                        

                        

                        

                        (3,889

                        )Other assets

                        

                        

                        17,176

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        17,412Total non-interest earning assets

                        

                        

                        21,043

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        21,932Total Assets

                        

                        $

                        487,423

                        

                        

                        

                        

                        

                        

                        

                        

                        $

                        466,393Liabilities and Stockholders’ EquityInterest bearing liabilities:Interest bearing demand and money market

                        

                        $

                        105,965

                        

                        

                        371

                        

                        

                        1.40

                        

                        

                        $

                        91,807

                        

                        

                        463

                        

                        

                        2.02Savings

                        

                        

                        43,715

                        

                        

                        52

                        

                        

                        0.48

                        

                        

                        

                        47,384

                        

                        

                        56

                        

                        

                        0.47Time

                        

                        

                        161,209

                        

                        

                        1,540

                        

                        

                        3.82

                        

                        

                        

                        171,043

                        

                        

                        1,955

                        

                        

                        4.57Total interest bearing deposits

                        

                        

                        310,889

                        

                        

                        1,963

                        

                        

                        2.53

                        

                        

                        

                        310,234

                        

                        

                        2,474

                        

                        

                        3.19Short-term borrowings

                        

                        

                        33,764

                        

                        

                        178

                        

                        

                        2.11

                        

                        

                        

                        19,625

                        

                        

                        205

                        

                        

                        4.18Other borrowings

                        

                        

                        20,912

                        

                        

                        238

                        

                        

                        4.55

                        

                        

                        

                        23,000

                        

                        

                        281

                        

                        

                        4.89Total interest bearing liabilities

                        

                        

                        365,565

                        

                        

                        2,379

                        

                        

                        2.60

                        

                        

                        

                        352,859

                        

                        

                        2,960

                        

                        

                        3.36Non-interest bearing liabilities:Demand deposits

                        

                        

                        60,431

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        55,694Other liabilities

                        

                        

                        4,812

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        4,335Total non-interest bearing liabilities

                        

                        

                        65,243

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        60,029Stockholders’ equity

                        

                        

                        56,615

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        53,505Total Liabilities and Stockholders’ Equity

                        

                        $

                        487,423

                        

                        

                        

                        

                        

                        

                        

                        

                        $

                        466,393Net interest income (tax equivalent basis)

                        

                        

                        

                        

                        

                        4,737

                        

                        

                        3.50

                        %

                        

                        

                        

                        

                        

                        4,450

                        

                        

                        3.31

                        %Tax-equivalent basis adjustment

                        

                        

                        

                        

                        

                        (163

                        )

                        

                        

                        

                        

                        

                        

                        

                        

                        (164

                        )Net interest income

                        

                        

                        

                        

                        $

                        4,574

                        

                        

                        

                        

                        

                        

                        

                        

                        $

                        4,286Net interest margin (tax equivalent basis)

                        

                        

                        

                        

                        

                        

                        

                        

                        4.06

                        %

                        

                        

                        

                        

                        

                        

                        

                        

                        4.00

                        %
  (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.
  22
  
 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, 2008 Compared toThree Months Ended June 30, 2007Variance due to
  Volume

                        

                        Rate

                        

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

                        

                        $

                        (41

                        )

                        $

                        (31

                        )

                        $

                        (72

                        )Interest bearing deposits with banks

                        

                        

                        (9

                        )

                        

                        (2

                        )

                        

                        (11

                        )Securities held to maturity

                        

                        

                        (7

                        )

                        

                        2

                        

                        

                        (5

                        )Securities available for sale:Taxable

                        

                        

                        149

                        

                        

                        74

                        

                        

                        223Tax-exempt securities

                        

                        

                        143

                        

                        

                        (112

                        )

                        

                        31Total securities

                        

                        

                        292

                        

                        

                        (38

                        )

                        

                        254Loans receivable

                        

                        

                        1,161

                        

                        

                        (1,621

                        )

                        

                        (460

                        )Total interest earning assets

                        

                        

                        1,396

                        

                        

                        (1,690

                        )

                        

                        (294

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

                        

                        

                        349

                        

                        

                        (441

                        )

                        

                        (92

                        )Savings

                        

                        

                        (6

                        )

                        

                        2

                        

                        

                        (4

                        )Time

                        

                        

                        (108

                        )

                        

                        (307

                        )

                        

                        (415

                        )Total interest bearing deposits

                        

                        

                        235

                        

                        

                        (746

                        )

                        

                        (511

                        )Short-term borrowings

                        

                        

                        465

                        

                        

                        (492

                        )

                        

                        (27

                        )Other borrowings

                        

                        

                        (25

                        )

                        

                        (18

                        )

                        

                        (43

                        )Total interest bearing liabilities

                        

                        

                        675

                        

                        

                        (1,256

                        )

                        

                        (581

                        )Net interest income (tax-equivalent basis)

                        

                        $

                        721

                        

                        $

                        (434

                        )

                        $

                        287
   23
  
 Comparison of Operating Results for Three Months Ended June 30, 2008 and June 30, 2007  General  For the three months ended June 30, 2008, net income totaled $1,721,000, an increase of $151,000, or 9.6% over the $1,570,000 earned in the similar period of 2007. Earnings per share for the current period were $.63 basic and $.62 on a diluted basis compared to $.56 basic and $.55 on a diluted basis for the three months ended June 30, 2007. The resulting annualized return on average
            assets and return on average equity for the three months ended June 30, 2008 were 1.42% and 12.19%, respectively, compared to 1.35% and 11.77% respectively, for the similar period in 2007.  The following table sets forth changes in net income:  Three Months EndedJune 30, 2008 to June 30, 2007Net income three months ended June 30, 2007

                        

                        $

                        1,570Change due to:Net interest income

                        

                        

                        288Provision for loan losses

                        

                        

                        (55

                        )Net realized gains on sales of securities

                        

                        

                        (6

                        )Gains on sale of mortgage loans

                        

                        

                        7All other income

                        

                        

                        104Salaries and employee benefits

                        

                        

                        (60

                        )All other expenses

                        

                        

                        (65

                        )Income tax effect

                        

                        

                        (62

                        )Net income three months ended June 30, 2008

                        

                        $

                        1,721
  Net Interest Income  Net interest income on a fully taxable equivalent basis (fte) for the three months ended June 30, 2008 totaled $4,737,000, an increase of $287,000 or 6.5%, over the similar period in 2007. The fte net interest spread and net interest margin were 3.50% and 4.06%, respectively for the three months ended June 30, 2008 compared to 3.31% and 4.00% respectively, for the similar period in
            2007.  Interest income (fte) totaled $7,116,000 with a yield on average earning assets of 6.10% compared to $7,410,000 and 6.67% for the 2007 period. The decrease in yield was principally due to lower prime interest rate which was 5.00% as of June 30, 2008 compared to 8.25% as of June 30, 2007. The Company has $65 million of floating rate loans tied to prime. As a result, the fte yield on
            loans declined to 6.59% for the current period from 7.40% for the similar period in 2007. The yield on the securities available for sale portfolio increased to 4.92% for the three months ended June 30, 2008 from 4.74% for the three months ended June 30, 2007. The increase in yield was the result of lower yielding securities, originally purchased in the lower interest rate  24
  
 environment of 2003 and 2004, maturing with the proceeds invested in securities with higher yields. Also, an increase of $21.9 million in average earning assets partially offset the lower yield on loans.  Interest expense for the three months ended June 30, 2008 totaled $2,379,000 at an average cost of 2.60% compared to $2,960,000 at an average cost of 3.36% for the similar period in 2007. With the decline in short-term interest rates, the Company reduced rates paid on its money market accounts and cash management product, which is included in short-term borrowings. The cost of time
            deposits decreased to 3.82% in the current period from 4.57% for the similar period in 2007. As time deposits matured in 2008, they repriced at the current lower rates resulting in the decrease.  Other Income  Other income totaled $962,000 for the three months ended June 30, 2008 an increase of $105,000 from $857,000 in the similar period in 2007. Service charges and fees increased $35,000 principally due to a higher volume of non-sufficient fees. Revenues from the sale of title insurance included in other, increased $18,000. Commissions on annuities and mutual funds
            increased $29,000 on a higher volume of fixed annuity sales.  Other Expense  Other expense totaled $2,972,000 for the three months ended June 30, 2008, an increase of $125,000 or 4.4% over $2,847,000 for the similar period in 2007. Salaries and employee benefits costs increased $60,000, or 4.2%. Expenses related to a property acquired with a Deed in Lieu of Foreclosure totaled $52,000 which included delinquent real estate taxes and engineering costs included
            in Other.  Income Tax Expense  Income tax expense totaled $733,000 for an effective tax rate of 29.9% for the current period compared to $671,000 and an effective tax rate of 29.9% for the similar period in 2007.  25
  
 Results of Operations NORWOOD FINANCIAL CORP. Consolidated Average Balance Sheets with Resultant Interest and Rates  Six Months Ended June 30,2008

                        

                        

                        2007Average

                        

                        

                        

                        

                        Average

                        

                        

                        Average

                        

                        

                        

                        

                        

                        AverageBalance

                        

                        Interest

                        

                        Rate

                        

                        

                        Balance

                        

                        Interest

                        

                        

                        Rate(2)

                        

                        (1)

                        

                        

                        (3)

                        

                        

                        (2)

                        

                        (1)

                        

                        

                        (3)AssetsInterest-earning assets:Federal funds sold

                        

                        $

                        1,774

                        

                        $

                        24

                        

                        

                        2.71

                        %

                        

                        $

                        3,734

                        

                        $

                        97

                        

                        

                        5.20

                        %Interest bearing deposits with banks

                        

                        

                        90

                        

                        

                        1

                        

                        

                        2.22

                        

                        

                        

                        533

                        

                        

                        14

                        

                        

                        5.25Securities held-to-maturity(1)

                        

                        

                        706

                        

                        

                        30

                        

                        

                        8.50

                        

                        

                        

                        955

                        

                        

                        42

                        

                        

                        8.80Securities available for sale:Taxable

                        

                        

                        107,920

                        

                        

                        2,595

                        

                        

                        4.81

                        

                        

                        

                        97,717

                        

                        

                        2,140

                        

                        

                        4.38Tax-exempt (1)

                        

                        

                        22,329

                        

                        

                        624

                        

                        

                        5.59

                        

                        

                        

                        18,333

                        

                        

                        528

                        

                        

                        5.76Total securities available for sale (1)

                        

                        

                        130,249

                        

                        

                        3,219

                        

                        

                        4.94

                        

                        

                        

                        116,050

                        

                        

                        2,668

                        

                        

                        4.60Loans receivable (4) (5)

                        

                        

                        329,927

                        

                        

                        11,147

                        

                        

                        6.76

                        

                        

                        

                        320,013

                        

                        

                        11,797

                        

                        

                        7.37Total interest earning assets

                        

                        

                        462,746

                        

                        

                        14,421

                        

                        

                        6.23

                        

                        

                        

                        441,285

                        

                        

                        14,618

                        

                        

                        6.63Non-interest earning assets:Cash and due from banks

                        

                        

                        7,576

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        8,273Allowance for loan losses

                        

                        

                        (4,152

                        )

                        

                        

                        

                        

                        

                        

                        

                        

                        (3,873

                        )Other assets

                        

                        

                        17,020

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        17,216Total non-interest earning assets

                        

                        

                        20,444

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        21,616Total Assets

                        

                        $

                        483,190

                        

                        

                        

                        

                        

                        

                        

                        

                        $

                        462,901Liabilities and Stockholders’ EquityInterest bearing liabilities:Interest bearing demand and money market

                        

                        $

                        100,738

                        

                        

                        803

                        

                        

                        1.59

                        

                        

                        $

                        88,766

                        

                        

                        893

                        

                        

                        2.01Savings

                        

                        

                        43,135

                        

                        

                        101

                        

                        

                        0.47

                        

                        

                        

                        46,030

                        

                        

                        107

                        

                        

                        0.46Time

                        

                        

                        168,230

                        

                        

                        3,430

                        

                        

                        4.08

                        

                        

                        

                        173,315

                        

                        

                        3,960

                        

                        

                        4.57Total interest bearing deposits

                        

                        

                        312,103

                        

                        

                        4,334

                        

                        

                        2.78

                        

                        

                        

                        308,111

                        

                        

                        4,960

                        

                        

                        3.22Short-term borrowings

                        

                        

                        29,770

                        

                        

                        365

                        

                        

                        2.45

                        

                        

                        

                        21,093

                        

                        

                        461

                        

                        

                        4.37Other borrowings

                        

                        

                        21,956

                        

                        

                        505

                        

                        

                        4.60

                        

                        

                        

                        21,619

                        

                        

                        527

                        

                        

                        4.88Total interest bearing liabilities

                        

                        

                        363,829

                        

                        

                        5,204

                        

                        

                        2.86

                        

                        

                        

                        350,823

                        

                        

                        5,948

                        

                        

                        3.38Non-interest bearing liabilities:Demand deposits

                        

                        

                        58,055

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        54,542Other liabilities

                        

                        

                        4,862

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        4,432Total non-interest bearing liabilities

                        

                        

                        62,917

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        58,974Stockholders’ equity

                        

                        

                        56,444

                        

                        

                        

                        

                        

                        

                        

                        

                        

                        53,104Total Liabilities and Stockholders’ Equity

                        

                        $

                        483,190

                        

                        

                        

                        

                        

                        

                        

                        

                        $

                        462,901Net interest income (tax equivalent basis)

                        

                        

                        

                        

                        

                        9,217

                        

                        

                        3.37

                        %

                        

                        

                        

                        

                        

                        8,670

                        

                        

                        3.23

                        %Tax-equivalent basis adjustment

                        

                        

                        

                        

                        

                        (319

                        )

                        

                        

                        

                        

                        

                        

                        

                        

                        (293

                        )Net interest income

                        

                        

                        

                        

                        $

                        8,898

                        

                        

                        

                        

                        

                        

                        

                        

                        $

                        8,377Net interest margin (tax equivalent basis)

                        

                        

                        

                        

                        

                        

                        

                        

                        3.98

                        %

                        

                        

                        

                        

                        

                        

                        

                        

                        3.93

                        %
  (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.
  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)Six Months Ended June 30, 2008 Compared toSix Months Ended June 30, 2007Variance due to
  Volume

                        

                        Rate

                        

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

                        

                        $

                        (38

                        )

                        $

                        (35

                        )

                        $

                        (73

                        )Interest bearing deposits with banks

                        

                        

                        (8

                        )

                        

                        (5

                        )

                        

                        (13

                        )Securities held to maturity

                        

                        

                        (11

                        )

                        

                        (1

                        )

                        

                        (12

                        )Securities available for sale:Taxable

                        

                        

                        235

                        

                        

                        220

                        

                        

                        455Tax-exempt securities

                        

                        

                        140

                        

                        

                        (44

                        )

                        

                        96Total securities

                        

                        

                        374

                        

                        

                        176

                        

                        

                        551Loans receivable

                        

                        

                        890

                        

                        

                        (1,540

                        )

                        

                        (650

                        )Total interest earning assets

                        

                        

                        1,208

                        

                        

                        (1,405

                        )

                        

                        (197

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

                        

                        

                        257

                        

                        

                        (347

                        )

                        

                        (90

                        )Savings

                        

                        

                        (8

                        )

                        

                        2

                        

                        

                        (6

                        )Time

                        

                        

                        (114

                        )

                        

                        (416

                        )

                        

                        (530

                        )Total interest bearing deposits

                        

                        

                        135

                        

                        

                        (761

                        )

                        

                        (626

                        )Short-term borrowings

                        

                        

                        345

                        

                        

                        (441

                        )

                        

                        (96

                        )Other borrowings

                        

                        

                        21

                        

                        

                        (43

                        )

                        

                        (22

                        )Total interest bearing liabilities

                        

                        

                        501

                        

                        

                        (1,245

                        )

                        

                        (744

                        )Net interest income (tax-equivalent basis)

                        

                        $

                        707

                        

                        $

                        (160

                        )

                        $

                        547
  Comparison of Operating Results for Six Months Ended June 30, 2008 and June 30, 2007  General  Net income for the six months ended June 30, 2008 totaled $3,500,000, increasing $467,000, or 15.4% over the $3,033,000 earned in the similar period in 2007. Basic and diluted earnings per share were $1.28 and $1.26, respectively, in the 2008 period compared to $1.09 and $1.07, respectively, for the similar period in 2007. The resulting annualized return on average assets for the six
            months ended June 30, 2008 was 1.45%, with an annualized return on average equity of 12.44% as compared to 1.32% and 11.52% for the 2007 period.  27
  
   The following table sets forth changes in net income:  Six Months EndedJune 30, 2008 to June 30, 2007Net income three months ended June 30, 2007

                        

                        $

                        3,033Change due to:Net interest income

                        

                        

                        521Provision for loan losses

                        

                        

                        (80

                        )Net realized gains on sales of securities

                        

                        

                        (6

                        )Gains on sale of mortgage loans and servicing rights

                        

                        

                        388All other income

                        

                        

                        91Salaries and employee benefits

                        

                        

                        (109

                        )All other expenses

                        

                        

                        (116

                        )Income tax effect

                        

                        

                        (222

                        )Net income three months ended June 30, 2008

                        

                        $

                        3,500
  Net Interest Income  Net interest income on a fully taxable equivalent basis (fte) for the six months ended June 30, 2008 totaled $9,217,000, an increase of $547,000, or 6.3% over the similar period in 2007. The fte net interest spread and net interest margin were 3.37% and 3.98% respectively, for the six months ended June 30, 2008 compared to 3.23% and 3.93%, respectively, for the similar period in
            2007.  Interest income (fte) totaled $14,421,000 with a yield on average earning assets of 6.23% compared to $14,618,000 with a yield of 6.63% for the 2007 period. The decrease in yield was principally due to the lower prime interest rate which was 5.00% as of June 30, 2008 decreasing from 8.25% as of June 30, 2007. The Company has $65 million of floating rate loans tied to the prime rate.
            As a result, the fte yield on loans fell to 6.76% in the current period from 7.37% in the 2007 period. The yield on securities available for sale increased to 4.94% from 4.60% as lower yielding securities matured with the proceeds invested at higher rates. An increase of $21.5 million of average earning assets also helped to partially offset the lower yield on loans.  Interest expense for the six months ended June 30, 2008 totaled $5,204,000 at an average cost of 2.86% compared to $5,948,000 and 3.38% for the similar period in 2007. As a result of the decrease in short-term interest rates which began in the third quarter of 2007, the Company reduced rates paid on its money market deposit accounts and cash management products which are included in
            short-term borrowings. Also, the cost of time deposits declined to 4.08% in the current period from 4.57% for the similar period in 2007. As time deposits matured, they repriced at the current lower rates resulting in the decrease.  28
  
  Other Income  Other income totaled $2,224,000 for the six months ended June 30, 2008 compared to $1,751,000 for the similar period in 2007, an increase of $473,000. The increase was principally due to the gain of $396,000 on the sale of $14.4 million of 30 year fixed rate residential mortgages to FNMA compared to $8,000 of similar gains in 2007. The loans were sold for interest rate risk management
            purposes. Service charges and fees increased $67,000 due to $49,000 increase in non-sufficient fund and overdraft fees, due to higher volume of title insurance revenues, $17,000 and mortgage servicing income, $13,000.  Other Expense  Other expense totaled $5,933,000 for the six months ended June 30, 2008, an increase of $225,000 or 3.9% over $5,708,000 in the similar period of 2007. Salaries and employee benefit costs increased $109,000, or 3.7%. Data processing related expenses increased $26,000 or 7.6% principally due to costs associated with the Bank’s remote deposit capture product and branch image
            capture. The current period includes $52,000 of expense related to a property acquired by Deed in Lieu of Foreclosure with no such costs in 2007 period. The efficiency ratio, other expense as a percentage of net interest income (fte) plus other income, was 51.9% for the six months ended June 30, 2008 compared to 54.8% for the similar period in 2007.  Income Tax Expense  Income tax expense totaled $1,504,000 for an effective tax rate of 30.1% for the period ending June 30, 2008 compared to $1,282,000 and 29.7% for the similar period in 2007.  Item 3. Quantitative and Qualitative Disclosures about Market Risk  Market Risk  Interest rate sensitivity and the repricing characteristics of assets and liabilities are managed by the Asset and Liability Management Committee (ALCO). The principal objective of ALCO is to maximize net interest income within acceptable levels of risk, which are established by policy. Interest rate risk is monitored and managed by using financial modeling techniques to measure the
            impact of changes in interest rates.  Net interest income, which is the primary source of the Company’s earnings, is impacted by changes in interest rates and the relationship of different interest rates. To manage the impact of the rate changes, the balance sheet must be structured so that repricing opportunities exist for both assets and liabilities at approximately the same time intervals. The Company uses net
            interest simulation to assist in interest rate risk management. The process includes simulating various interest rate environments and  29
  
 their impact on net interest income. As of June 30, 2008, the level of net interest income at risk in a 200 basis points change in interest rates was within the Company’s policy limits. The Company’s policy allows for a decline of no more than 8% of net interest income.  Imbalance in repricing opportunities at a given point in time reflect interest-sensitivity gaps measured as the difference between rate-sensitive assets and rate-sensitive liabilities. These are static gap measurements that do not take into account any future activity, and as such are principally used as early indications of potential interest rate exposures over specific
            intervals.  As of June 30, 2008, the Bank had a positive 90 day interest sensitivity gap of $11.4 million or 2.3% of total assets, increasing from $6.0 million, 1.3% of total assets as of December 31, 2007. 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 a rising rate environment, the yield on interest-earning assets would increase faster than the cost of interest-bearing liabilities in the 90 day time frame. The repricing intervals are managed by ALCO strategies, including adjusting the average life of the investment portfolio, pricing of deposit liabilities to attract longer 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, 2008 Rate Sensitivity Table (dollars in thousands) 3 Months

                        

                        3-12Months

                        

                        1 to 3Years

                        

                        Over3 Years

                        

                        TotalFederal funds sold and interest bearing deposits

                        

                        $

                        51

                        

                        $

                        —

                        

                        $

                        —

                        

                        $

                        —

                        

                        $

                        51Securities

                        

                        

                        12,964

                        

                        

                        32,290

                        

                        

                        40,924

                        

                        

                        38,339

                        

                        

                        131,517Loans Receivable

                        

                        

                        89,568

                        

                        

                        49,886

                        

                        

                        86,484

                        

                        

                        106,816

                        

                        

                        332,754Total RSA

                        

                        

                        102,583

                        

                        

                        89,176

                        

                        

                        127,408

                        

                        

                        145,155

                        

                        

                        464,322Non-maturity interest-bearing deposits

                        

                        

                        24,486

                        

                        

                        27,553

                        

                        

                        72,415

                        

                        

                        30,380

                        

                        

                        154,834Time deposits

                        

                        

                        35,976

                        

                        

                        78,250

                        

                        

                        21,876

                        

                        

                        14,839

                        

                        

                        150,941Other

                        

                        

                        30,682

                        

                        

                        6,733

                        

                        

                        27,645

                        

                        

                        —

                        

                        

                        65,060Total RSL

                        

                        

                        91,144

                        

                        

                        112,536

                        

                        

                        121,936

                        

                        

                        45,219

                        

                        

                        370,835Interest Sensitivity Gap

                        

                        $

                        11,439

                        

                        $

                        (23,360

                        )

                        $

                        5,472

                        

                        $

                        99,936

                        

                        $

                        93,487Cumulative gap

                        

                        

                        11,439

                        

                        

                        (11,921

                        )

                        

                        (6,449

                        )

                        

                        93,487RSA/RSL-Cumulative

                        

                        

                        112.6

                        %

                        

                        94.1

                        %

                        

                        98.0

                        %

                        

                        125.2

                        %December 31, 2007Interest Sensitivity Gap

                        

                        $

                        5,996

                        

                        $

                        (33,969

                        )

                        $

                        17,012

                        

                        $

                        107,374

                        

                        $

                        96,413Cumulative gap

                        

                        

                        5,996

                        

                        

                        (27,973

                        )

                        

                        (10,961

                        )

                        

                        96,413
  30
 
  RSA/RSL-Cumulative

                        

                        

                        105.7

                        %

                        

                        86.9

                        %

                        

                        96.6

                        %

                        

                        126.8

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

                        

                        Average pricepaid pershare

                        

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

                        

                        Maximum numberof shares (or approximatedollar value) that may yetbe purchasedunder the plansor programs (2)April 1 – April 30, 2008

                        

                        6,488

                        

                        $

                        31.25

                        

                        --

                        

                        --May 1 – May 31, 2008

                        

                        --

                        

                        

                        --

                        

                        --

                        

                        --June 1 – June 30, 2008

                        

                        8,000

                        

                        

                        30.95

                        

                        8,000

                        

                        129,00014,338

                        

                        $

                        31.08

                        

                        8,000

                        

                        129,000
  (1) Purchases related to the Company’s Employee Stock Ownership Plan (ESOP) related to purchase of shares from terminated participants.  32
  
  (2) On March 19, 2008, the Registrant announced its intention to repurchase up to 5% of its outstanding common stock (approximately 137,000 shares) in the open market.  Item 3. Defaults Upon Senior Securities  Not applicable  Item 4. Submission of Matters to a Vote of Security Holders  The Annual Meeting of Shareholders of the Company was held on April 22, 2008. The following incumbent directors were nominated and duly elected to the Board of Directors for a three-year term expiring in 2011.  FOR

                        WITHHELDDaniel J. O’Neill

                        2,120,615

                        25,553Dr. Kenneth A. Phillips

                        2,122,280

                        23,888Gary P. Rickard

                        2,109,177

                        36,991
  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, 2008.  FOR

                        AGAINST

                        ABSTAIN2,139,505

                        5,669

                        994
  There were no broker non-votes.
  Item 5. Other Information  None  Item 6. Exhibits  (a)

                        

                        3(i)

                        

                        Articles of Incorporation of Norwood Financial Corp.*3(ii)

                        

                        Bylaws of Norwood Financial Corp.**4.0

                        

                        Specimen Stock Certificate of Norwood Financial Corp.*10.1

                        

                        Amended Employment Agreement with William W. Davis, Jr.***10.2

                        

                        Amended Employment Agreement with Lewis J. Critelli ***10.3

                        

                        Form of Change-In-Control Severance Agreement with seven key employees of the Bank*10.4

                        

                        Wayne Bank Stock Option Plan*10.5

                        

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

                        

                        Salary Continuation Agreement between the Bank and Lewis J. Critelli*****
   33
  
  10.7

                        

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

                        

                        1999 Directors Stock Compensation Plan***10.9

                        

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

                        

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

                        

                        2006 Stock Option Plan******10.12

                        

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

                        

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

                        

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

                        

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

                        

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

                        

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

                        

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

                        

                        Section 1350 Certification (Chief Executive Officer)32.2

                        

                        Section 1350 Certification (Chief Financial Officer)
  *

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

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

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

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

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

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

                        Incorporated herein by reference from the Exhibits to the Registrant’s Current Report on Form 8-K filed on April 4, 2006.
  34
 
 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 11, 2008

                        

                        By:

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

                            President and Chief Executive Officer

                            (Principal Executive Officer)Date:  August 11, 2008

                        

                        By:

                        /s/ Lewis J. CritelliLewis J. Critelli

                            Executive Vice President, Chief Operating Officer and Chief Financial Officer

                            (Principal Financial Officer)
    35