10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One):

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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 No. 0-28364

NORWOOD FINANCIAL CORP.

(Exact Name of Registrant as Specified in its Charter)

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

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

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

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

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

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

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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 x
Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

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

As of March 12, 2009, there were 2,736,567 shares outstanding of the registrant’s Common Stock.

The Registrant’s voting stock trades on the NASDAQ Global Market under the symbol “NWFL.” The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the last price the registrant’s Common Stock was sold as of June 30, 2008, $29.00 per share, was $68.5 million based on 2,363,456 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of the Annual Report to Stockholders for the Fiscal Year ended December 31, 2008. (Parts I, II, and IV)

2. Portions of the Proxy Statement for the 2008 Annual Meeting of Stockholders. (Part III)

NORWOOD FINANCIAL CORP.

FORM 10-K

Table of Contents

Part I		Page
Item 1.	Business	2
Item 1A.	Risk Factors	21
Item 1B.	Unresolved Staff Comments	28
Item 2.	Properties	28
Item 3.	Legal Proceedings	28
Item 4.	Submission of Matters to a Vote of Security Holders	28
Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	29
Item 6.	Selected Financial Data	29
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 7A.	Quantitative and Qualitative Disclosure about Market Risk	29
Item 8.	Financial Statements and Supplementary Data	29
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	29
Item 9A.	Controls and Procedures	30
Item 9B.	Other Information	30
Part III
Item 10.	Directors, Executive Officers and Corporate Governance	30
Item 11.	Executive Compensation	30
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	30
Item 13.	Certain Relationships and Related Transactions and Director Independence	31
Item 14.	Principal Accounting Fees and Services	31
Part IV
Item 15.	Exhibits, Financial Statement Schedules	33
	Signatures	34

PART I

Forward Looking Statements

The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words “believes,” “anticipates,” “contemplates,” “expects,” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Those risks and uncertainties as detailed in Item 1A include:

• our ability to effectively manage future growth

• loan losses in excess of our allowance

• risks inherent in commercial lending

• real estate collateral which is subject to declines in value

• potential other-than-temporary impairments

• risk of failure to stabilize the financial system

• current market volatility

• potential liquidity risk

• availability of capital

• regional economic factors

• loss of senior officers

• comparatively low legal lending limits

• limited market for the Company’s stock

• restrictions on ability to pay dividends

• common stock may lose value

• competitive environment

• issuing additional shares may dilute ownership

• extensive and complex governmental regulation and associated cost

• interest rate risks

Norwood Financial Corp. undertakes no obligation to publicly release the results of any revisions to those forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Item 1. Business

General

Norwood Financial Corp. (the “Company”), a Pennsylvania corporation, is the holding company for Wayne Bank. On March 29, 1996, the Bank completed a holding company reorganization and became a wholly owned subsidiary of the Company. As of December 31, 2008, the Company had total assets of $504.3 million, deposits of $359.6 million, and stockholders’ equity of $58.7 million. The Company’s ratio of average equity to average assets was 11.57%, 11.48% and 11.23% for fiscal years 2008, 2007 and 2006, respectively.

Wayne Bank is a Pennsylvania chartered commercial bank headquartered in Honesdale, Pennsylvania. The Bank was originally chartered on February 17, 1870 as Wayne County Savings Bank. Wayne County Savings Bank changed its name to Wayne County Bank and Trust in December 1943. In September 1993, the Bank adopted the name Wayne Bank. The Bank’s deposits are currently insured to applicable limits by the Deposit Insurance Fund (“DIF”) as administered by the Federal Deposit Insurance

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Corporation (“FDIC”). The Bank is regulated by the Pennsylvania Department of Banking (“PDB”) and the FDIC.

The Bank is an independent community bank with six offices in Wayne County, three offices in Pike County and three offices in Monroe County. The Bank offers a wide variety of personal and business credit services and trust and investment products and real estate settlement services to the consumers, businesses, nonprofit organizations, and municipalities in each of the communities that the Bank serves. The Bank primarily serves the Pennsylvania counties of Wayne, Pike and Monroe, and to a much lesser extent, the counties of Lackawanna and Susquehanna. In addition, the Bank operates twelve automated teller machines, one in each of its branch locations. The Company’s main office is located at 717 Main Street, Honesdale, Pennsylvania and its telephone number is (570) 253-1455. The Bank maintains a website at www.waynebank.com.

Competition

The competition for deposit products comes from other insured financial institutions such as commercial banks, thrift institutions, credit unions, and multi-state regional banks in the Company’s market area of Wayne, Pike and Monroe Counties, Pennsylvania. Based on data compiled by the FDIC as of June 30, 2008 (the latest date for which data is available), the Bank had the third largest share of FDIC-insured deposits in Wayne County with approximately 20.5%, second largest in Pike County with 17.3%, and 13^th in Monroe County with 1.2%. This data does not reflect deposits held by credit unions with which the Bank also competes. Deposit competition also includes a number of insurance products sold by local agents and investment products such as mutual funds and other securities sold by local and regional brokers. Loan competition varies depending upon market conditions and comes from other insured financial institutions such as commercial banks, thrift institutions, credit unions, multi-state regional banks, and mortgage bankers.

Personnel

As of December 31, 2008, the Bank had 118 full-time and 6 part-time employees. None of the Bank’s employees are represented by a collective bargaining group.

Lending Activities

The Bank’s loan products include loans for personal and business use. Personal lending includes mortgage lending to finance principal residences and to a lesser extent second home dwellings. The products include fixed rate mortgage products with terms up to 30 years which may be sold, in the secondary market through the Federal National Mortgage Association (Fannie Mae) or held in the Bank’s portfolio subject to the extent consistent with our asset/liability management strategies. Fixed-rate home equity loans are originated on terms up to 180 months, as well as offering a home equity line of credit tied to prime rate. The Bank to a lesser extent also offers indirect dealer financing of automobiles (new and used), boats, and recreational vehicles through a limited network of dealers in Northeast Pennsylvania, but is allowing this portfolio to run-off. At December 31, 2008, there were $10.0 million of indirect loans in the portfolio.

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

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

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

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

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

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

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

Due to the type and nature of the collateral, consumer lending generally involves more credit risk when compared with residential real estate lending. Consumer lending collections are typically dependent

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on the borrower’s continuing financial stability, and thus, are more likely to be adversely affected by job loss, divorce, illness and personal bankruptcy. In most cases, any repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan balance. The remaining deficiency is usually turned over to a collection agency.

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

Loan Solicitation and Processing

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

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

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

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

	As of December 31,
	2008				2007				2006				2005				2004
	$			%	$			%	$			%	$			%	$			%
	(Dollars in thousands)
Type of Loans:
Commercial, Financial and Agricultural	$	25,886		7.4	$	29,159		8.8	$	34,019		0.8	$	26,755		9.2	$	20,263		7.9
Real Estate-Construction		14,856		4.2		20,404		6.2		18,955		6.0		5,944		2.0		4,890		1.9
Real Estate-Mortgage
Residential. .		133,417		38.2		129,888		39.2		113,783		36.0		100,705		34.6		90,606		35.5
Commercial		159,476		45.6		133,593		40.3		127,640		40.4		133,495		45.8		111,164		43.6
Consumer Loans to Individuals.		16,087		4.6		18,526		5.5		21,520		6.8		24,353		8.4		28,193		11.1
		349,722		100.0		331,570		100.0		315,917		100.0		291,252		100.0		255,116		100.0
Unearned income and deferred fees		(318	)			(274	)			(350	)			(362	)			(359	)
Allowance for loan losses		(4,233	)			(4,081	)			(3,828	)			(3,669	)			(3,448	)
	$	345,171			$	327,215			$	311,739			$	287,221			$	251,309

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Maturities and Sensitivities of Loans to Changes in Interest Rates. The following table sets forth maturities and interest rate sensitivity for selected categories of loans as of December 31, 2008. Scheduled repayments are reported in the maturity category in which payment is due.

	Less than One Year		One to Five Years		Over Five Years		Total
	(In thousands)
Commercial, Financial and Agricultural	$	10,679	$	6,903	$	8,304	$	25,886
Real Estate - Construction		14,856		—		—		14,856
Total	$	25,535	$	6,903	$	8,304	$	40,742
Loans with fixed rates	$	10,384	$	4,766	$	4,399	$	19,549
Loans with floating rates		15,151		2,137		3,905		21,193
Total	$	25,535	$	6,903	$	8,304	$	40,742

Non-performing Assets. The following table sets forth information regarding non-accrual loans, foreclosed real estate owned and loans that are 90 days or more delinquent but on which the Bank was accruing interest at the dates indicated. For the year ended December 31, 2008, interest income that would have been recorded on loans accounted for on a non-accrual basis under the original terms of such loans was $31,000 of which $-0- was collected.

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	As of December 31,
	2008			2007			2006			2005			2004
	(dollars in thousands)
Non-accrual loans:
Commercial and all other	$	—		$	—		$	—		$	—		$	—
Real estate		2,087			109			392			330			32
Consumer		—			2			17			11			8
Total		2,087			111			409			341			40
Accruing loans which are contractually past-due 90 days or more:
Commercial and all other		—			—			—			—			—
Real estate		—			49			—			—			5
Consumer		—			3			—			12			22
Total		—			52			—			12			27
Total non-performing loans		2,087			163			409			353			67
Foreclosed real estate		660			—			—			—			—
Total non-performing assets	$	2,747		$	163		$	409		$	353		$	67
Total non-performing loans to total loans....		.60	%		.05	%		.13	%		.12	%		.03	%
Total non-performing loans to total assets		.41	%		.03	%		.09	%		.08	%		.02	%
Total non-performing assets to total assets		.54	%		.03	%		.09	%		.08	%		.02	%

The recorded investment in impaired loans, not requiring an allowance for loan losses was $2,976,000 (net of a charge-off against the allowance for loan losses of $380,000) and $3,208,000 at December 31, 2008 and 2007, respectively. The recorded investment in impaired loans requiring an allowance for loan losses was $-0- at December 31, 2008 and 2007. For the years ended December 31, 2008, 2007 and 2006, the average recorded investment in these impaired loans was $3,311,000, $3,127,000 and $286,000 and the interest income recognized on these impaired loans was $143,000, $290,000 and $1,000, respectively.

Potential Problem Loans. As of December 31, 2008, there were no loans not previously disclosed, where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms.

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

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	As of December 31,
	2008			2007			2006			2005			2004
	(dollars in thousands)
Total loans receivable net of unearned income	$	349,404		$	331,296		$	315,567		$	290,890		$	254,757
Average loans receivable		335,137			323,444			301,533			274,053			245,783
Allowance balance at beginning of period	$	4,081		$	3,828		$	3,669		$	3,448		$	3,267
Charge-offs:
Commercial and all other		(7	)		—			—			(4	)		(19	)
Real Estate		(465	)		(4	)		—			(6	)		(10	)
Consumer		(171	)		(117	)		(150	)		(200	)		(342	)
Leases		—			—			—			—			(11	)
Total		(643	)		(121	)		(150	)		(210	)		(382	)
Recoveries:
Commercial and all other		—			—			18			12			13
Real Estate		1			2			2			18			8
Consumer		59			54			65			46			78
Leases		—			3			4			5			9
Total		60			59			89			81			108
Net Charge-offs		(583	)		(62	)		(61	)		(129	)		(274	)
Provision Expense		735			315			220			350			455
Allowance balance at end of period	$	4,233		$	4,081		$	3,828		$	3,669		$	3,448
Allowance for loan losses as a percent of total loans outstanding.		1.21	%		1.23	%		1.21	%		1.26	%		1.35	%
Net loans charged off as a percent of average loans outstanding		.17	%		.02	%		.02	%		.05	%		.11	%

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

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	As of December 31,
	2008				2007				2006				2005					2004
	Amount		% of Loans to Total Loans		Amount		% of Loans to Total Loans		Loans		% of Loans to Total Loans		Amount		% of Loans to Total Loans			Amount			% of Loans to Total Loans
	(dollars in thousands)
Commercial, financial and agricultural	$	491	7.4	%	$	413	8.8	%	$	505	10.8	%	$	427	9.2	%	$		337	7.9		%
Real estate – construction		138	4.2			148	6.2			44	6.0			36	2.0				20	1.9
Real estate – mortgage		3,315	83.8			2,939	79.5			2,667	76.4			2,713	80.4				2,480	79.1
Consumer loans to individuals		289	4.6			362	5.5			388	6.8			442	8.4				483	11.1
General Risk Allocation		—	—			219	—			224	—			51	—				128	—
Total	$	4,233	100.0	%	$	4,081	100.0	%	$	3,828	100.0	%	$	3,669	100.0	%	$		3,448	100.0		%

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Investment Activities

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

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

	As of December 31,
	2008		2007		2006
	(dollars in thousands)
Securities: (carrying value)
U.S. Government Agencies	$	35,813	$	41,508	$	47,581
State and political Subdivisions		25,916		22,622		17,419
Corporate Obligations		5,625		4,994		8,439
Mortgage-backed securities		62,318		54,082		38,652
Equity Securities		1,155		1,486		1,775
Total Securities	$	130,827	$	124,692	$	113,866
Fair value of Securities	$	130,840	$	124,708	$	113,883

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Maturity Distribution of Securities. The following table sets forth certain information regarding carrying values, weighted average yields, and maturities of the Company’s securities portfolio as of December 31, 2008. Yields on tax-exempt securities are stated on a fully taxable equivalent basis using a Federal tax rate of 34%. Actual maturities may differ from contractual maturities as certain instruments have call features which allow prepayment of obligations. Maturity on the mortgage-backed securities is based upon contractual terms, the average life may differ as a result of changes in cash flow. Equity securities with no stated maturity are classified as “one year or less.”

	One Year or Less				After One Through Five Years				After Five Through Ten Years				After Ten Years				Total Investment Securities
	Carrying Value		Average Yield		Carrying Value		Average Yield		Carrying Value		Average Yield		Carrying Value		Average Yield		Carrying Value		Average Yield
	(dollars in thousands)
U.S. Government Agencies	$	1,000	3.13	%	$	19,424	4.67	%	$	15,389	4.93	%	$	—	—		$	35,813	4.94	%
State and political subdivision		2,787	3.66	%		3,259	5.25	%		7,917	6.00	%		11,953	6.01	%		25,916	5.32	%
Corporate Obligations		999	3.35	%		3,720	4.06	%		906	5.38	%		—	—			5,625	3.32	%
Mortgage-backed Securities		1,431	4.76	%		6,079	4.29	%		11,066	5.07	%		43,472	5.09	%		62,318	4.71	%
Equity Securities		1,155	2.30	%		—	—			—	—			—	—			1,155	3.14	%
Total Investment Securities	$	7,372	3.55	%	$	32,482	4.59	%	$	35,278	5.23	%	$	55,695	5.29	%	$	130,827	4.82	%

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Deposit Activities

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

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

	2008				2007				2006
	Average				Average				Average
	Balance		Rate Paid		Balance		Rate Paid		Balance		Rate Paid
Non-interest bearing Demand	$	59,759	—	%	$	56,523	—	%	$	54,798	—	%
Interest-bearing demand		36,839	.10			36,594	.10			39,472	.10
Money Market		65,519	2.15			53,798	3.37			57,410	2.87
Savings		44,510	.47			45,858	.47			49,937	.46
Time		160,462	3.81			172,986	4.57			146,344	3.96
Total	$	367,089			$	365,759			$	347,961

               Maturities of Time Deposits. The following table indicates the amount of the Bank’s time deposits of $100,000 or more by time remaining until maturity as of December 31, 2008.

(dollars in thousands)
Maturity Period
Within three months	$	22,012
Over three through six months		4,814
Over six through twelve months		4,555
Over twelve months		13,714
	$	45,095

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Short-Term Borrowings

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

	Years Ended December 31,
	2008			2007			2006
	(dollars in thousands)
Short term borrowings:
Average balance during the year	$	32,238		$	22,443		$	22,209
Maximum month-end balance during the year		42,061			33,024			29,677
Average interest rate during the year		2.14	%		4.15	%		4.39	%
Total short-term borrowings at end of the year	$	38,126		$	26,686		$	22,736
Weighted average interest rate at the end of the year		1.11	%		3.60	%		4.20	%

Trust Activities

The Bank operates a Wealth Management/Trust Department which provides estate planning, investment management and financial planning to customers for which it is generally compensated based on a percentage of assets under management. As of December 31, 2008, the Bank had $90.1 million of assets under management compared to $101.7 million as of December 31, 2007. The decrease is partially due to lower stock market conditions which can affect the value of a customer’s investment portfolio.

Subsidiary Activities

The Bank, a Pennsylvania chartered bank, is the only wholly owned subsidiary of the Company. Norwood Investment Corp. (NIC), a Pennsylvania Corporation incorporated in 1996 and a Pennsylvania licensed insurance agency, is a wholly-owned subsidiary of the Bank. NIC’s business is annuity and mutual fund sales and discount brokerage activities primarily to customers of the Bank. The annuities, mutual funds and other investment products are not insured by the FDIC or any other government agency. They are not deposits, obligations of or guaranteed by any bank. The securities are offered through Invest Financial a registered broker/dealer. NIC had sales volume of $7.2 million in 2008, generating gross revenues for the Company of $105,000, compared to $120,000 in 2007 which is included in Other Income.

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

WTRO Properties Inc., a Pennsylvania Corporation, is a wholly-owned real estate subsidiary of the Bank established to hold title to certain real estate upon which the Bank has foreclosed. WTRO did not hold title to any property as of December 31, 2008 and 2007.

Norwood Settlement Services, LLC, a Pennsylvania Limited Liability Company, was established in 2004 to provide title and settlement service to bank customers and non-customers. The subsidiary is 70% owned by Wayne Bank and 30% owned by Title Strategies, LLC. Gross revenues, included in other income, for 2008 totaled $83,000 and $29,000 in 2007.

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Regulation

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

Regulation of the Company

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

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

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

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

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

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

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

Emergency Economic Stabilization Act of 2008

In response to recent unprecedented market turmoil, the Emergency Economic Stabilization Act (“EESA”) was enacted on October 3, 2008. EESA authorizes the Secretary of the Treasury to purchase up to $700 billion in troubled assets from financial institutions under the Troubled Asset Relief Program or TARP. Troubled assets include residential or commercial mortgages and related instruments originated prior to March 14, 2008 and any other financial instrument that the Secretary determines, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, the purchase of which is necessary to promote financial stability. If the Secretary exercises his authority under TARP, EESA directs the Secretary of Treasury to establish a program to guarantee troubled assets originated or issued prior to March 14, 2008. The Secretary is authorized to purchase up to $250 billion in troubled assets immediately and up to $350 billion upon certification by the President that such authority is needed. The Secretary’s authority will be increased to $700 billion if the President submits a written report to Congress detailing the Secretary’s plans to use such authority unless Congress passes a joint resolution disapproving such amount within 15 days after receipt of the report. The Secretary’s authority under TARP expires on December 31, 2009 unless the Secretary certifies to Congress that extension is necessary provided that his authority may not be extended beyond October 3, 2010.

Institutions selling assets under TARP will be required to issue warrants for common or preferred stock or senior debt to the Secretary. If the Secretary purchases troubled assets directly from an institution without a bidding process and acquires a meaningful equity or debt position in the institution as a result or acquires more than $300 million in troubled assets from an institution regardless of method, the institution will be required to meet certain standards for executive compensation and corporate governance, including a prohibition against incentives to take unnecessary and excessive risks, recovery of bonuses paid to senior executives based on materially inaccurate earnings or other statements and a prohibition against agreements for the payment of golden parachutes. Institutions that sell more than $300 million in assets under TARP auctions will not be entitled to a tax deduction for compensation in excess of $500,000 paid to its chief executive or chief financial official or any of its other three most highly compensated officers. In addition, any severance paid to such officers for involuntary termination or termination in connection with a bankruptcy or receivership will be subject to the golden parachute rules under the Internal Revenue Code.

EESA increases the maximum deposit insurance amount up to $250,000 until December 31, 2009 and removes the statutory limits on the FDIC’s ability to borrow from the Treasury during this period. The FDIC may not take the temporary increase in deposit insurance coverage into account when setting assessments. EESA allows financial institutions to treat any loss on the preferred stock of the Federal National Mortgage Association or Federal Home Loan Mortgage Corporation as an ordinary loss for tax purposes. This provision was effective October 3, 2008.

Pursuant to his authority under EESA, the Secretary of the Treasury has created the TARP Capital Purchase Plan under which the Treasury Department will invest up to $250 billion in senior preferred stock of U.S. banks and savings associations or their holding companies. Qualifying financial institutions may issue senior preferred stock with a value equal to not less than 1% of risk-weighted assets and not more than the lesser of $25 billion or 3% of risk-weighted assets. The senior preferred stock will pay dividends at the

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rate of 5% per annum until the fifth anniversary of the investment and thereafter at the rate of 9% per annum. The senior preferred stock may not be redeemed for three years except with the proceeds from an offering of common stock or preferred stock qualifying as Tier 1 capital in an amount equal to not less than 25% of the amount of the senior preferred. After three years, the senior preferred may be redeemed at any time in whole or in part by the financial institution. No dividends may be paid on common stock unless dividends have been paid on the senior preferred stock. Until the third anniversary of the issuance of the senior preferred, the consent of the U.S. Treasury will be required for any increase in the dividends on the common stock or for any stock repurchases unless the senior preferred has been redeemed in its entirety or the Treasury has transferred the senior preferred to third parties. The senior preferred will not have voting rights other than the right to vote as a class on the issuance of any preferred stock ranking senior, any change in its terms or any merger, exchange or similar transaction that would adversely affect its rights. The senior preferred will also have the right to elect two directors if dividends have not been paid for six periods. The senior preferred will be freely transferable and participating institutions will be required to file a shelf registration statement covering the senior preferred. The issuing institution must grant the Treasury piggyback registration rights. Prior to issuance, the financial institution and its senior executive officers must modify or terminate all benefit plans and arrangements to comply with EESA. Senior executives must also waive any claims against the Department of Treasury.

In connection with the issuance of the senior preferred, participating publicly traded institutions must issue to the Secretary immediately exercisable 10-year warrants to purchase common stock with an aggregate market price equal to 15% of the amount of senior preferred. The exercise price of the warrants will equal the market price of the common stock on the date of the investment. The Secretary may only exercise or transfer one-half of the warrants prior to the earlier of December 31, 2009 or the date the issuing financial institution has received proceeds equal to the senior preferred investment form one or more offerings of common or preferred stock qualifying as Tier 1 capital. The Secretary will not exercise voting rights with respect to any shares of common stock acquired through exercise of the warrants. The financial institution must file a shelf registration statement covering the warrants and underlying common stock as soon as practicable after issuance and grant piggyback registration rights. The number of warrants will be reduced by one-half if the financial institution raises capital equal to the amount of the senior preferred through one or more offerings of common stock or preferred stock qualifying a Tier 1 capital. If the financial institution does not have sufficient authorized shares of common stock available to satisfy the warrants or their issuance otherwise requires shareholder approval, the financial institution must call a meeting of shareholders for that purpose as soon as practicable after the date of investment. The exercise price of the warrants will be reduced by 15% for each six months that lapse before shareholder approval subject to a maximum reduction of 45%.

The recently enacted American Recovery and Reinvestment Act of 2009 (“ARRA”) has imposed additional compensation restrictions on companies participating in the TARP Capital Purchase Program. ARRA directs the Secretary of the Treasury to adopt standards for executive compensation that include limits on compensation that exclude incentives to take unnecessary and excessive risks that threaten the value of the participant while any assistance remains outstanding and provision for recovery by the participant of any bonus, retention award or incentive compensation paid to any senior executive office and up to 20 next mostly highly compensated employees of the participant based on statements of earnings, revenues, gains or other criteria that are later found to be materially inaccurate. The board of directors of any TARP participant must adopt policies on excessive or luxury expenditures, as identified by the Secretary. TARP participants will be required to annually allow shareholders to have a separate non-binding vote on executive compensation while a TARP investment is outstanding.

Due to its strong capital position the Company did not participate in the Treasury’s Capital Purchase Plan.

Regulatory Capital Requirements. The Federal Reserve has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the BHCA. The Federal Reserve’s capital adequacy guidelines are

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similar to those imposed on the Bank by the Federal Deposit Insurance Corporation (“FDIC”). See “Regulation of the Bank-Regulatory Capital Requirements.”

Regulation of the Bank

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

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

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

Federal Deposit Insurance. The Bank’s deposits are insured to applicable limits by the Federal Deposit Insurance Corporation. Pursuant to the Emergency Economic Stabilization Act of 2008, the maximum deposit insurance amount has been increased from $100,000 to $250,000 until December 31, 2009. On October 13, 2008, the FDIC established a Temporary Liquidity Guarantee Program under which the FDIC will fully guarantee all non-interest-bearing transaction accounts until December 31, 2009 (the “Transaction Account Guarantee Program”) and all senior unsecured debt of insured depository institutions or their qualified holding companies issued between October 14, 2008 and June 30, 2009 (the “Debt Guarantee Program”). Senior unsecured debt would include federal funds purchased and certificates of deposit standing to the credit of the bank. All eligible institutions participated in the program without cost for the first 30 days of the program. After November 12, 2008, institutions are assessed at the rate of ten basis points for transaction account balances in excess of $250,000 and at the rate of between 50 and 100 basis points of the amount of debt issued. Institutions must have opted out of the Temporary Liquidity Guarantee Program by December 5, 2008 if they did not wish to participate. The Bank is participating in both the Transaction Account Guarantee Program and the Debt Guarantee Program.

The FDIC has adopted a risk-based premium system that provides for quarterly assessments based on an insured institution’s ranking in one of four risk categories based on their examination ratings and capital ratios. Well-capitalized institutions with the CAMELS ratings of 1 or 2 are grouped in Risk Category I and have been assessed for deposit insurance at an annual rate of between five and seven basis points with the assessment rate for an individual institution determined according to a formula based on a weighted average of the institution’s individual CAMELS component ratings plus either five financial ratios or the

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average ratings of its long-term debt. Institutions in Risk Categories II, III and IV are currently assessed at annual rates of 10, 28 and 43 basis points, respectively.

For the quarter beginning January 1, 2009, the FDIC has raised the base annual assessment rate for institutions in Risk Category I to between 12 and 14 basis points while the base annual assessment rates for institutions in Risk Categories II, III and IV would be increased to 17, 35 and 50 basis points, respectively. For the quarter beginning April 1, 2009 the FDIC has set the base annual assessment rate for institutions in Risk Category I to between 12 and 16 basis points and the base annual assessment rates for institutions in Risk Categories II, III and IV at 22, 32 and 45 basis points, respectively. An institution’s assessment rate could be lowered by as much as five basis points based on the ratio of its long-term unsecured debt to deposits or, for smaller institutions based on the ratio of certain amounts of Tier 1 capital to deposits. The assessment rate would be adjusted for Risk Category I institutions that have a high level of brokered deposits and have experienced higher levels of asset growth (other than through acquisitions) and could be increased by as much as ten basis points for institutions in Risk Categories II, III and IV whose ratio of brokered deposits to deposits exceeds 10% of assets. An institution’s base assessment rate would also be increased if an institution’s ratio of secured liabilities (including FHLB advances) to deposits exceeds 25%. The maximum adjustment for secured liabilities for institutions in Risk Categories I, II, III and IV would be 8, 11, 16 and 22.5 basis points, respectively, provided that the adjustment may not increase the assessment rate by more than 50%.

The FDIC has further proposed to collect a special assessment of 20 basis points based on insured deposits as of June 30, 2009. This special assessment would be payable on September 30, 2009.

In addition, all insured institutions of the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, an agency of the Federal government established to finance resolutions of insolvent thrifts. These assessments, the current quarterly rate of which is approximately .0154 of insured deposits, will continue until the Financing Corporation bonds mature in 2017.

Regulatory Capital Requirements. The FDIC has promulgated capital adequacy requirements for state-chartered banks that, like the Bank, are not members of the Federal Reserve System. At December 31, 2008, the Bank exceeded all regulatory capital requirements and was classified as “well capitalized.”

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

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

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gains on equity securities and a bank’s allowance for loan and lease losses. Allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital that may be included in total capital is limited to 100% of Tier I capital.

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

The Bank is also subject to minimum capital requirements imposed by the Department on Pennsylvania-chartered depository institutions. Under the Department’s capital regulations, a Pennsylvania bank or savings bank must maintain a minimum leverage ratio of Tier 1 capital (as defined under the FDIC’s capital regulations) to total assets of 4%. In addition, the Department has the supervisory discretion to require a higher leverage ratio for any institutions based on the institution’s substandard performance in any of a number of areas. The Bank was in compliance in both the FDIC and Pennsylvania capital requirements as of December 31, 2008.

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

Loans to One Borrower. Under Pennsylvania law, commercial banks have, subject to certain exemptions, lending limits to one borrower in an amount equal to 15% of the institution’s capital accounts. An institution’s capital account includes the aggregate of all capital, surplus, undivided profits, capital securities and general reserves for loan losses. Pursuant to the national bank parity provisions of the Pennsylvania Banking Code, the Bank may also lend up to the maximum amounts permissible for national banks, which are allowed to make loans to one borrower of up to 25% of capital and surplus in certain circumstances. As of December 31, 2008, loans-to-one-borrower limitation was $8.6 million and the Bank was in compliance with such limitation.

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

As a member, the Bank is required to purchase and maintain restricted stock in the FHLB of Pittsburgh in an amount equal to the greater of 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5% of the Bank’s outstanding advances from the FHLB. At December 31, 2008, the Bank was in compliance with this requirement. In December 2008, the FHLB of Pittsburgh notified member banks that is was suspending dividend payments and the repurchase of capital stock. Management evaluates the restricted stock for impairment in accordance with Statement of Position (SOP) 01-6, Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or Finance the Activities of Others. Management’s determination of whether these investments are impaired is based on the assessment of the ultimate recoverability of their costs rather than

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by recognizing temporary declines in value. Management believes no impairment charge is necessary related to FHLB stock as of December 31, 2008.

Federal Reserve System. The Federal Reserve requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking and NOW accounts) and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy the liquidity requirements that are imposed by the Department. At December 31, 2008, the Bank met its reserve requirements.

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

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

Item 1A. Risk Factors

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

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Risks Related to Our Business

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

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

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

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

As of December 31, 2008, our allowance for loan losses was $4,233,000 which represented 1.21% of outstanding loans. At such date, we had nine nonperforming loans totaling $2,087,000 and two impaired loans which are collateral dependent of $2,976,000. We actively manage our nonperforming loans in an effort to minimize credit losses. Although management believes that its allowance for loan losses is adequate, there can be no assurance that the allowance will prove sufficient to cover future loan losses. Further, although management uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ substantially from the assumptions used or adverse developments arise with respect to our non-performing or performing loans. Material additions to our allowance for loan losses would result in a decrease in our net income and capital, and could have a material adverse effect on our financial condition and results of operations.

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

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

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

In addition to the financial strength and cash flow characteristics of the borrower in each case, we often secure our loans with real estate collateral. As of December 31, 2008, approximately 86% of our loans, had real estate as a primary, secondary or tertiary component of collateral. In addition, approximately 43% of our securities portfolio consisted of mortgage-backed securities issued by either Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) or Government National Mortgage Association (GNMA). Real estate values and real estate markets are generally affected by, among other things, changes in national, regional or local economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies, and acts of nature. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower. If real estate prices in our markets decline, the value of the real estate collateral securing our loans could be reduced. If we are required to liquidate the collateral securing a loan during a period of reduced real estate values to satisfy the debt, our earnings and capital could be adversely affected.

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

As of December 31, 2008, we had approximately $130.8 million in investments, including mortgage-backed securities on which we had unrealized losses of $1.1 million. In addition, we had $3.5 million of restricted stock in the Federal Home Loan Bank of Pittsburgh, which has suspended the payment of dividends and repurchases of capital stock. We may be required to record impairment charges on our investments and Federal Home Loan Bank stock if they suffer a decline in value that is considered other-than-temporary. Numerous factors, including lack of liquidity for resales of certain investment securities, absence of reliable pricing information for investment securities, adverse changes in the business climate, or adverse actions by regulators could have a negative effect on the value of our investments and mortgage backed securities. If an impairment charge is significant enough to result in a loss for the period, it could affect the ability of our bank subsidiary to upstream dividends to us, which could have a material adverse effect on our liquidity and our ability to pay dividends to stockholders and could also negatively impact our regulatory capital ratios and result in us not being classified as “well capitalized” for regulatory purposes.

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

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

The EESA followed, and has been followed by, numerous actions by the Board of Governors of the Federal Reserve System, the U.S. Congress, Treasury, the FDIC, the SEC and others to address the current liquidity and credit crisis that has followed the sub-prime meltdown that commenced in 2007. These measures include homeowner relief that encourage loan restructuring and modification; the establishment of significant liquidity and credit facilities for financial institutions and investment banks; the lowering of the federal funds rate; emergency action against short selling practices; a temporary guaranty program for money market funds; the establishment of a commercial paper funding facility to provide back-stop liquidity to

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commercial paper issuers; and coordinated international efforts to address illiquidity and other weaknesses in the banking sector. The purpose of these legislative and regulatory actions is to stabilize the U.S. banking system. The EESA and the other regulatory initiatives described above may not have their desired effects. If the volatility in the markets continues and economic conditions fail to improve or worsen, our business, financial condition and results of operations could be materially and adversely affected.

Current levels of market volatility are unprecedented.

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

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

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

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

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

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

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

Substantially all of our business is with customers in our market area of Northeastern Pennsylvania. Most of our customers are consumers and small and medium-sized businesses which are dependent upon the regional economy. Adverse changes in economic and business conditions in our markets could adversely affect our borrowers, their ability to repay their loans and to borrow additional funds, and consequently our financial condition and performance.

24

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

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

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

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

At December 31, 2008, our lending limit per borrower was approximately $9.1 million, or 15% of our capital plus allowance for loan losses. Accordingly, the size of loans that we can offer to potential borrowers is less than the size of loans that many of our competitors with larger capitalization are able to offer. We may engage in loan participations with other banks for loans in excess of our legal lending limits. However, there can be no assurance that such participations will be available at all or on terms which are favorable to us and our customers.

Risks Related to Our Common Stock

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

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

There are restrictions on our ability to pay cash dividends.

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

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

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

25

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

As of December 31, 2008, our directors and executive officers beneficially owned approximately 262,259 shares, or approximately 9.2% of our common stock, including options to purchase 103,243 shares, in the aggregate, of our common stock at exercise prices ranging from $10.36 to $31.50 per share. Because of the large percentage of stock held by our directors and executive officers and other significant shareholders, these persons could influence the outcome of any matter submitted to a vote of our shareholders.

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

We are currently authorized to issue up to 10,000,000 shares of common stock of which 2,736,567 shares are currently outstanding and up to 5,000,000 shares of preferred stock of which no shares are outstanding. Our Board of Directors has authority, without action or vote of the shareholders, to issue all or part of the authorized but unissued shares and to establish the terms of any series of preferred stock. These authorized but unissued shares could be issued on terms or in circumstances that could dilute the interests of other stockholders. In addition, a total of 250,000 shares of common stock have been reserved for issuance under the Norwood Financial Corp 2006 Stock Option Plan, of which 93,700 were issued as of December 31, 2008. As of December 31, 2008, options to purchase a total of 152,443 shares were exercisable and had exercise prices ranging from $10.36 to $31.50. Any such issuance will dilute the percentage ownership interest of shareholders and may further dilute the book value of our common stock.

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

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

Risks Related to Our Industry

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

We operate in a competitive environment, competing for deposits and loans with commercial banks, savings associations and other financial entities. Competition for deposits comes primarily from other commercial banks, savings associations, credit unions, money market and mutual funds and other investment alternatives. Competition for loans comes primarily from other commercial banks, savings associations, mortgage banking firms, credit unions and other financial intermediaries. Many of the financial intermediaries operating in our market area offer certain services, such as international banking services, which we do not offer. Moreover, banks with a larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the needs of larger customers.

26

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

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

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

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

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

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

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

27

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

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

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

Item 1B. Unresolved Staff Comments

None

Item 2. Properties

The Bank operates from its main office located at 717 Main Street, Honesdale, Pennsylvania and eleven additional branch offices. The Bank’s total investment in office property and equipment is $13.9 million with a net book value of $5.5 million as of December 31, 2008. The Bank currently operates automated teller machines at all twelve of its facilities. The Bank leases five of its locations with minimum lease commitments of $3,535,000 through 2029. Four of the locations have various renewal options. The Bank’s lease for its location in Hamlin, PA expires in 2009 and has no renewal options. The Bank has filed notice with the Pennsylvania Department of Banking and the FDIC to discontinue operations at this office.

Item 3. Legal Proceedings

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

Item 4. Submission of Matters to a Vote of Security-Holders

None.

28

PART II

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

Information relating to the market for Registrant’s common equity and related stockholder matters appears under “Capital and Dividends” in the Registrant’s Annual Report to Stockholders for the fiscal year ended December 31, 2008 (“Annual Report”) and is incorporated herein by reference.

	Issuer Purchases of Equity Securities
	Total Number of Shares purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs *	Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs
October 1 to 31, 2008	—	$	—	—	—
November 1 to 30, 2008	—		—	—	—
December 1 to 31, 2008	5,000		28.75	5,000	112,000
Total	5,000	$	28.75	5,000	112,000

* 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 6. Selected Financial Data

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

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

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

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

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

Item 8. Financial Statements and Supplementary Data

The Company’s consolidated financial statements listed in Item 15 are incorporated herein by reference from the Annual Report.

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

None.

29

Item 9A. Controls and Procedures

(a) Disclosure Controls and Procedures. The Company’s management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

(b) Internal Control over Financial Reporting. Management’s Report on Internal Control over Financial Reporting and the Report of the Company’s Independent Registered Public Accounting Firm are incorporated herein by reference from the Annual Report. There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information contained under the sections captioned “Section 16(a) Beneficial Ownership Reporting Compliance” and “Proposal I-- Election of Directors” and “Corporate Governance” in the Proxy Statement for the 2009 Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated herein by reference.

The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer and principal accounting officer or controller. The Company undertakes to provide a copy of the Code of Ethics to any person without charge, upon request to Lewis J. Critelli Executive Vice President, Secretary and Chief Financial Officer, Norwood Financial Corp., 717 Main Street, Honesdale, PA 18431.

Item 11. Executive Compensation

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

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

(a) Security Ownership of Certain Beneficial Owners

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

(b) Security Ownership of Management

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

30

(c) Changes in Control

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

(d) Equity Compensation Plan Information

EQUITY COMPENSATION PLAN INFORMATION

	(a)		(b)			(c)
	Number of Securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights			Number of securities remaining available for future issuance under equity compensation plans, (excluding securities reflected in column (a))
Equity compensation plans approved by shareholders
Stock Option Plan		79,415		$	21.54		—
2006 Stock Option Plan		92,675			30.11		156,30
Equity compensation plans not approved by security holders
1999 Directors Stock Compensation Plan		4,353			17.88		—
TOTAL		176,443		$	25.95		156,300

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

Item 13. Certain Relationships and Related Transactions and Director Independence

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

Item 14. Principal Accounting Fees and Services

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

31

PART IV

Item 15. Exhibits, Financial Statement, and Schedules

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

1. The consolidated balance sheets of Norwood Financial Corp. and subsidiary as of December 31, 2008 and 2007, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the three year period ended December 31, 2008, together with the related notes and the independent registered public accounting firm reports of Beard Miller Company LLP, independent registered public accounting firm.

2. Schedules omitted as they are not applicable.

3. Exhibits

3(i)	Articles of Incorporation of Norwood Financial Corp.*
3(ii)	Bylaws of Norwood Financial Corp.**
4.0	Specimen Stock Certificate of Norwood Financial Corp.*
10.1+	Amended Employment Agreement with William W. Davis, Jr.***
10.2+	Amended Employment Agreement with Lewis J. Critelli***
10.3+	Form of Change-in-Control Severance Agreement with seven key employees of the Bank****
10.4+	Norwood Financial Corp. Stock Option Plan******
10.5+	Salary Continuation Agreement between the Bank and William W. Davis, Jr.****
10.6+	Salary Continuation Agreement between the Bank and Lewis J. Critelli****
10.7+	Salary Continuation Agreement between the Bank and Edward C. Kasper****
10.8+	1999 Directors Stock Compensation Plan****
10.9+	Salary Continuation Agreement between the Bank and Joseph A. Kneller*******
10.10+	Salary Continuation Agreement between the Bank and John H. Sanders*******
10.11+	2006 Stock Option Plan********
10.12+	First and Second Amendments to Salary Continuation Agreement with William W. Davis, Jr.*********
10.13+	First and Second Amendments to Salary Continuation Agreement with Lewis J. Critelli *********
10.14+	First and Second Amendments to Salary Continuation Agreement with Edward C. Kasper*********
10.15+	First and Second Amendments to Salary Continuation Agreement with Joseph A. Kneller *********
10.16+	First and Second Amendments to Salary Continuation Agreement with John H. Sanders*********
13	Annual Report to Stockholders for the fiscal year ended December 31, 2008
21	Subsidiaries of Norwood Financial Corp. (see Item 1. Business, General and Subsidiary Activity)
23	Consent of Independent Registered Public Accounting Firm
31.1	Rule 13a-14(a)/15d-14(a) Certification of CEO
31.2	Rule 13a-14(a)/15d-14(a) Certification of CFO
32	Certification pursuant to 18 U.S. C. SS.1350, as adopted pursuant to SS.906 of Sarbanes Oxley Act of 2002

+	Management contract or compensatory plan arrangement.
*	Incorporated herein by reference into this document from the Exhibits to Form 10, Registration Statement initially filed with the Commission on April 29, 1996, Registration No.0-28364.
**	Incorporated by reference to the identical numbered exhibit to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 14, 2008.

32

***	Incorporated by reference into this document from the identically numbered exhibits to the registrant’s Form 8-K filed with the Commission March 6, 2006.
****	Incorporated herein by reference into this document from the Exhibits to the Registrant’s Form 10-K filed with the Commission on March 23, 2000, File No. 0-28364.
*****	Incorporated by reference into this document from the Exhibits to Form S-8 filed with the Commission on August 14, 1998, File No. 333-61487.
******	Incorporated by reference into this document from the identically numbered exhibits to the Registrant’s Form 10-K filed with the Commission on March 22, 2004, File No. 0-28364.
*******	Incorporated by reference to this document from Exhibit 4.1 to Registrant’s Registration Statement on Form S-8 (File No. 333-134831) filed with the Commission on June 8, 2006.
********	Incorporated herein by reference from the Exhibits to the Registrant’s Current Report on Form 8-K filed April 4, 2006.

33

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
	NORWOOD FINANCIAL CORP.
Dated: March 13, 2009		/s/ William W. Davis, Jr.
	By:	William W. Davis, Jr. President, Chief Executive Officer and Director (Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on March 13, 2009 on behalf of the Registrant and in the capacities indicated.
/s/ William W. Davis, Jr.	/s/ Lewis J. Critelli
William W. Davis, Jr. President, Chief Executive Officer and Director (Principal Executive Officer)	Lewis J. Critelli Executive Vice President, Secretary and Chief Financial Officer (Principal Financial Accounting Officer)
/s/ Andrew A. Forte	/s/ John E. Marshall
Andrew A. Forte Director	John E. Marshall Director
/s/ Daniel J. O’Neill	/s/ Dr. Kenneth A. Phillips
Daniel J. O’Neill Director	Dr. Kenneth A. Phillips Director
/s/ Gary P. Rickard	/s/ Richard L. Snyder
Gary P. Rickard Director	Richard L. Snyder Director
/s/ Ralph A. Matergia	/s/ Susan Gumble-Cottell
Ralph A. Matergia Director	Susan Gumble-Cottell Director

34

EX-13

                               [GRAPHIC OMITTED]




                                    NORWOOD
                                 --------------
                                 FINANCIAL CORP









                             BANK WITH CONFIDENCE.















                       2008 ANNUAL REPORT TO SHAREHOLDERS



                               [GRAPHIC OMITTED]





            NORWOOD FINANCIAL CORP SUMMARY OF SELECTED FINANCIAL DATA
                  (dollars in thousands, except per share data)



For the years ended December 31,              2008         2007        2006        2005        2004
- -----------------------------------------------------------------------------------------------------
                                                                           
Net interest income                        $  18,401    $  17,272   $  16,183   $  15,263   $  14,012
Provision for loan losses                        735          315         220         350         455

Other income                                   4,105        3,507       3,517       3,506       3,088
Net realized gains (losses)
  on sales of securities                         (18)          17          66          42         458

Other expense                                 12,240       11,341      10,957      10,623      10,090
Income before income taxes                     9,513        9,140       8,589       7,838       7,013
Income tax expense                             2,836        2,629       2,679       2,341       2,003
NET INCOME                                 $   6,677    $   6,511   $   5,910   $   5,497   $   5,010

Net income per share - Basic               $    2.44    $    2.34   $    2.11   $    1.96   $    1.80
Net income per share - Diluted             $    2.41    $    2.30   $    2.07   $    1.92   $    1.77
Cash dividends declared                         1.02         0.94        0.85        0.71        0.66
Dividend pay-out ratio                        41.80%       40.17%      40.28%      36.41%      36.51%

Return on average assets                       1.36%        1.39%       1.33%       1.31%       1.27%
Return on average equity                      11.79%       12.10%      11.85%      11.72%      11.39%

BALANCES AT YEAR-END
Total assets                               $ 504,296    $ 480,610   $ 454,356   $ 433,556   $ 411,626
Loans receivable                             349,404      331,296     315,567     290,890     254,757
Allowance for loan losses                      4,233        4,081       3,828       3,669       3,448
Total deposits                               359,635      370,000     358,103     340,603     318,645
Shareholders' equity                          58,690       55,819      52,231      48,108      45,685
Trust assets under management                 90,069      101,714      96,879      86,972      83,397

Book value per share                       $   21.45    $   20.27   $   18.67   $   17.07   $   16.14

Tier 1 Capital to risk-adjusted assets        16.22%       16.26%      15.67%      15.29%      15.91%
Total Capital to risk-adjusted assets         17.50%       17.60%      16.99%      16.63%      17.34%
Allowance for loan losses to total loans       1.21%        1.23%       1.21%       1.26%       1.35%
Non-performing assets to total assets          0.54%        0.03%       0.09%       0.08%       0.02%






                     
[GRAPHIC OMITTED]       FROM THE PRESIDENT

"This marks the         It is truly a pleasure to report to you that your Company had a very
seventeenth             strong financial performance in what was an extremely challenging
consecutive year        economic environment in 2008.  We had record earnings of
of increased cash       $6,677,000 for the year ended December 31, 2008, an increase of
dividends for our       $166,000, or 2.6% over the prior year.  Earnings per share on a fully
shareholders."          diluted basis were $2.41 for the current year, compared to $2.30 in
                        2007.  Your Company declared dividends totaling $1.02 per share in
                        2008, an increase of $.08 per share, or 8.5% over the $.94 declared
                        in 2007.  This marks the seventeenth consecutive year of increased
                        cash dividends for our shareholders.  The return on average assets
                        for the year was 1.36% with a return on average equity of 11.79%.

                        Total assets exceeded $500 million for the first time in 2008 and
                        reached $504.3 million as of December 31, 2008.  Loan receivable
                        totaled $349.4 million as of year-end 2008, with total deposits of
                        $359.6 million and stockholders' equity of $58.7 million. Our capital
                        position is extremely strong and we are at the top level of our peer
                        group in all measures of capital.  With our strong capital position
                        we elected not to participate in the Treasury Department's TARP
                        Capital Purchase Program.

                        Loan receivable increased $18.1 million or 5.5% from the prior
                        year.  The increase in loans centered in commercial real estate
                        which grew by 19.4%.  As a result of the general slow down in the
                        local economy and a softer real estate market, the Company did
                        experience an increase in non-performing assets and net charge-offs
                        in 2008.  As of December 31, 2008, total non-performing assets were
                        $2,747,000 and represented .54% of total assets compared to $613,000,
                        or .03% as of December 31, 2007.  The increase was principally due
                        to two credit facilities to one borrower, both of which have been
                        written-down to their net realizable value.  Net charge-offs for


                                                                               1





                                             
"...we realize that                             the year total $583,000 compared to $62,000 in 2007.  With the
each down-trend                                 increase in non-performing loans and charge-offs we increased our
also creates                                    provision for loan losses to $735,000 in 2008 compared to $315,000
opportunities."                                 in 2007.  As of December 31, 2008, the allowance for loan losses was
                                                $4,233,000 increasing from $4,081,000 at December 31, 2007.  We
- -------------------------------------           are continually monitoring our credit quality and are aggressively
                                                addressing any issues as they arise, as we certainly recognize the
              NET INCOME                        current stress on the economy and its impact on our customers.
            --------------
            (in thousands)                      For the year, net interest income (fully taxable equivalent) totaled
                                                $19,030,000, an increase of $1,219,000 or 6.8% over 2007.  Our net
[Bar graph with following data points]          interest margin increased nine basis points to 4.07% in 2008.  During
$5,010  $5,497  $5,910  $6,511  $6,677          2008, we offset a 400 basis point decrease in prime rate from 7.25%
  04      05      06      07      08            to 3.25% by managing our costs of funds and growing the loan
                                                portfolio.

[GRAPHIC OMITTED]                               Other income for 2008 total $4,087,000 compared to $3,524,000 in
                                                2007.  The increase was principally due to a $499,000 gain on the sale
                                                of $14.4 million of mortgage loans and servicing rights in 2008.  For
                                                the year, other expenses totaled $12,240,000, an increase of $899,000
                                                or 7.9% over the prior year.  The increase, was due in part to $582,000
                                                of costs related to a parcel of foreclosed real estate and includes a
                                                write-down of the property to its current realizable value.

                                                We strongly encourage you to read the financial section of this
                                                Annual Report for a more detailed analysis of our results.

                                                During the year, the national media reported that the banking
                                                industry was hesitant to lend money in 2008.  This was not the
                                                case at Wayne Bank.  Our retail banking division generated
                                                over $50 million of loans in 2008.  We continued to use the same
                                                mortgage underwriting standards that have served us so well for 137
                                                years.  Making sound loans to credit-worthy borrowers benefits the


2





                                                                           
customer, the community and the Bank.                                           [GRAPHIC OMITTED]

Our Commercial Lending Division was also very active in 2008.  The
Bank's Commercial Lenders worked with our local businesses to                                TOTAL LOANS
develop commercial real estate projects, generate jobs, expand tourism                      -------------
efforts and stimulate the local economy.  We were instrumental in                           (in millions)
financing motels, summer camps, shopping centers and many other
local projects.  Although we are facing challenging economic times,             [Bar graph with following data points]
we believe investing in the business community is crucial both to the           $254.8  $290.9  $315.6  $331.3  $349.5
local community and to the Bank.                                                  04      05      06      07      08

We are well aware that 2008 presented one of the most challenging               --------------------------------------
periods for the financial and investment markets.  Our Wealth
Management and Trust Services Division was certainly not immune                  "...the same
from the turbulent markets.  However, by maintaining investment                 mortgage
discipline, on a relative basis we are encouraged by our results.               underwriting
Market cycles are nothing new, and we realize that each down-trend              standards that
also creates opportunities.                                                     have served us so
                                                                                well for 137 years."
Wayne Bank's success in 2008, and in prior years, can be attributed
to many components such as maintaining expenses within the
organization, having a seasoned staff of committed employees, and
cost effectively promoting our products and services to existing
and new customers.  In addition, another factor that contributed
to our success is the due diligence in basing loans on solid credit
fundamentals.  Our philosophy is to grow at a sustainable and
consistent rate that best serves our shareholders in the long-
term.  That has been proven, year after year, to be the best course. A
very important and integral part of this is the fact that Wayne Bank
is a locally managed community bank.  This differentiates us from
regional and national banks as we are much more entrenched in local
events and organizations within the communities we serve.  We live


                                                                               3




                                             
            ALLOWANCE FOR                       and work in our marketplace, our customers know us, and we know
            -------------                       them.  In many cases, we know their parents, or their brothers and
             LOAN LOSSES                        sisters too.  We have a history together - Wayne Bank founded in
             -----------                        1871 has been the financial institution of choice for generations in
            (in thousands)                      Wayne County and we hope to continue that trend with our locations
                                                in Pike and Monroe Counties.
[Bar graph with following data points]
$3,448  $3,669  $3,828  $4,081  $4,233          By supporting the communities we operate in, the Bank is a vital
  04      05      06      07      08            link to many nonprofit organizations that help a great number of
                                                people, primarily children and families.  Whether it is the local high
- --------------------------------------          school band, the church bingo, the Historical Society, conservation
                                                groups, the local Chamber of Commerce, the Red Cross or United
"...doing our part                              Way, Wayne Bank has donated to these causes and more.  Wayne
to support the                                  Bank gives not only monetary donations, but also through employee
"green" philosophy                              involvement, as many Directors, Officers and Employees give of their
and cutting costs                               time and energy to nonprofit boards, as well as, being members of an
at the same time"                               organization - from The Dorflinger-Suydam Wildlife Sanctuary to
                                                the Wayne County YMCA, Wayne Bank has helped support many
[GRAPHIC OMITTED]                               local organizations.

                                                Wayne Bank has been pursing a strategy with the use of technology
                                                to improve customer service and attract new business.  In the first
                                                quarter of 2008, Business Link, a Remote Deposit Capture system
                                                for business customers who routinely deposit checks, launched.  This
                                                service, using Internet technology, a personal computer and a
                                                specially designed document-scanning device adds convenience,
                                                efficiency and speed in collecting checks deposited directly at the
                                                customer's location, any time of day, 7-days a week.  Using resources
                                                similar to remote deposit technology enable our community offices
                                                to convert all teller transaction documents to digital images for
                                                electronic transmission to our central processing headquarters and
                                                eliminated significant weekly expenditures for courier services. Of


4


                                     [GRAPHIC OMITTED]



                                                                             
course, this too, contributes to the environment by reducing the                         SENIOR MANAGEMENT
emissions and fuel usage of courier vehicles.                                            -----------------

Other technology based services including online banking and                         Standing From Left to Right:
bill payment, direct deposit of payroll and benefit payments,                   Wayne D. Wilcha, William W. Davis, Jr.
electronic collection of loan payments, debit cards, ATMs and other                       Lewis J. Critelli
electronic funds transfer options all promote customer convenience,
operational efficiencies and make the world we live in cleaner and                   Seated, From Left to Right:
greener.  Wayne Bank is doing our part to support the "green"                     Edward C. Kasper, John H. Sanders,
philosophy and cutting costs at the same time.  For example, in just                      Joseph A. Kneller
one year, Wayne Bank recycled over 15,026 pounds of paper and we
have been converting our processes to paperless transactions.                   --------------------------------------

As with any organization, the foundation of success lies in acquiring                   TIER 1 CAPITAL RATIO
and retaining a strong workforce.  During 2008, in keeping with                         --------------------
tradition, a number of employees were duly recognized and promoted
for their contributions and commitment to the Bank.  Karen Gasper,              [Bar graph with following data points]
Internal Auditor and Assistant Vice President promoted to Vice                  15.91%  15.29%  15.67%  16.26%  16.22%
President, and Marianne Glamann, Community Office Manager of                      04      05      06      07      08
the Marshalls Creeks Office promoted to Assistant Vice President and
Regional Manager of the Monroe County market.  Other promotions
included Julie Kuen promoted to Electronic Banking Officer, Wendy


                                                                               5





                                             
"Even in these                                  Davis to Community Office Manager of Wayne Bank's Shohola
unprecedented                                   Office and Rossie Demorizi-Ortiz to Community Office Manager
times,                                          of the Tannersville Office.  Gary Henry, Consumer Lending Officer
we are extremely                                is now the Community Officer Manager in Waymart.  Notably, we
pleased with our                                had a number of employees who attained significant years of tenure
operating results."                             with the Bank including Sally Timko who achieved the status of
                                                twenty-five years, as well as four employees who attained ten-years
                                                of service and five employees who reached five years of service.
            NET INTEREST INCOME
            -------------------                 Even in these unprecedented times, we are extremely pleased with
            (FTE $ in 000)                      our operating results.  Our core earnings are strong, our net interest
                                                margin has improved and our loan pipeline is encouraging.  We
[Bar graph with following data points]          should also emphasize Wayne Bank never participated in the sub-
$14,653  $15,889  $16,708  $17,811  $19,030     prime mortgage business.  However, we are certainly aware that a
   04       05        06       07      08       slowing economy and increasing unemployment will continue to
                                                affect some cusomters' ability to save or borrow funds in 2009.
- -------------------------------------------
                                                Wayne Bank will continue to monitor the economy and to take
           DILUTED EARNINGS                     advantage of every opportunity that presents itself throughtout 2009
           ----------------                     as we continue to market our products and services aggressively as
              PER SHARE                         we have in the past to garner new deposits and loans suitable for the
             ----------                         Bank and our customers.

[Bar graph with following data points]          For almost 140 years, Wayne Bank has been a symbol of strength,
$1.77   $1.92   $2.07   $2.30   $2.41           safety and security for the communities, customers and stockholders
  04      05      06      07      08            we serve.  We are proud to continue that tradition.  Please consider
                                                us for all your financial needs.  We genuinely appreciate all your
                                                support.

                                                Sincerely yours,


                                                /s/ William W. Davis, Jr.

                                                William W. Davis, Jr.
                                                President & Chief Executive Officer



6



                 Norwood Financial Corp 2008 Board of Directors


[GRAPHIC OMITTED]             [GRAPHIC OMITTED]             [GRAPHIC OMITTED]
John E. Marshall,             Gary P. Rickard               Daniel J. O'Neill
Chairman of the Board


[GRAPHIC OMITTED]             [GRAPHIC OMITTED]             [GRAPHIC OMITTED]
William W. Davis, Jr.         Dr. Kenneth A. Phillips        Richard L. Snyder
President and CEO


[GRAPHIC OMITTED]             [GRAPHIC OMITTED]             [GRAPHIC OMITTED]
Susan Gumble-Cottell          Ralph A. Matergia, Esq.        Dr. Andrew A. Forte


Russell L. Ridd - Director Emeritus

                                                                               7



[GRAPHIC OMITTED]                       Administrative Office:
                                        717 Main Street
                                        P.O. Box 269
                                        Honesdale, PA 18431

                                        Community Offices:
                                        717 Main Street
                                        Honesdale, PA 18431

                                        245 Willow Avenue
                                        Honesdale, PA 18431

                                        Belmont & Water Streets
                                        Waymart, PA 18472

                                        Route 6 East
                                        Hawley, PA 18428

                                        111 West Harford Street
                                        Milford, PA 18337

                                        107 Richardson Avenue
                                        Shohola, PA 18458

                                        Route 370 & Lake Como Road
                                        Lakewood, PA 18439

                                        Route 611 & Stroud Mall
                                        Stroudsburg, PA 18360

                                        637 Route 739
                                        Lords Valley Shopping Plaza
                                        Lords Valley, PA 18428

                                        Route 209, 5165 Milford Road
                                        Marshalls Creek, PA 18335

                                        Route 611, Fountain Springs East II
                                        Tannersville, PA 18372

                                        Online at: waynebank.com
                                        (800) 598-5002

8



                                    NORWOOD
                                 FINANCIAL CORP



                                      2008
                         CONSOLIDATED FINANCIAL REPORT

- --------------------------------------------------------------------------------

MANAGEMENT'S DISCUSSION & ANALYSIS                                            10

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING              31

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                      32

CONSOLIDATED BALANCE SHEETS                                                   34

CONSOLIDATED STATEMENTS OF INCOME                                             35

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY                               36

CONSOLIDATED STATEMENTS OF CASH FLOWS                                         37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                    38

INVESTOR INFORMATION                                                          64



MANAGEMENT'S DISCUSSION AND ANALYSIS

INTRODUCTION
     This  Management's  Discussion and Analysis and related  financial data are
presented  to  assist  in the  understanding  and  evaluation  of the  financial
condition and results of operations for Norwood Financial Corp (the Company) and
its  subsidiary  Wayne Bank (the Bank) as of December  31, 2008 and 2007 and for
the years ended  December  31,  2008,  2007,  and 2006.  All share and per share
amounts  have been  adjusted  to  reflect  the  effect of the 5% stock  dividend
distributed  to  shareholders  on May 26, 2006.  This section  should be read in
conjunction with the consolidated financial statements and related footnotes.


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,  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.

CRITICAL ACCOUNTING POLICIES
     Note 2 to the Company's consolidated financial statements  (incorporated by
reference in Item 8 of the Form 10-K) lists significant accounting policies used
in the development and presentation of its financial statements. This discussion
and analysis, the significant accounting policies, and other financial statement
disclosures  identify  and  address  key  variables  and other  qualitative  and
quantitative  factors that are necessary for an understanding  and evaluation of
the Company and its results of operations.

     Material estimates that are particularly  susceptible to significant change
in the near term relate to the  determination  of the allowance for loan losses,
the potential impairment of restricted stock,  accounting for stock options, the
valuation of deferred tax assets and the  determination of  other-than-temporary
impairment losses on 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.

     For periods  ending  prior to January 1, 2006,  the Company  accounted  for
stock option  plans under the  recognition  and  measurement  principles  of APB
Opinion  No.  25,  "Accounting  for Stock  Issued  to  Employees",  and  related
interpretations.  Under APB Opinion No. 25, no stock-based employee compensation
was reflected in net income,  as all options granted had an exercise price equal
to the  market  value of the  underlying  common  stock on the grant  date.  The
Company  adopted SFAS No. 123(R),  "Share-Based  Payment" as of January 1, 2006,
using the modified  prospective  transition method.  Under this method companies
are required to record compensation expense,  based on the fair value of options
over  the  vesting  period.  See  Note  2  for  additional  discussion  of  this
pronouncement's impact on the Company's consolidated financial statements.



     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 it is more likely than not that all deferred tax
assets will be realized.

     Restricted stock which represents  required  investment in the common stock
of correspondent  banks is carried at cost and as of December 31, 2008 and 2007,
consists  of the  common  stock of  Federal  Home  Loan Bank of  Pittsburgh.  In
December  2008,  the  FHLB  of  Pittsburgh  notified  member  banks  that it was
suspending dividend payments and the repurchase of capital stock.

     Management evaluates the restricted stock for impairment in accordance with
Statement  of Position  (SOP)01-6,  Accounting  by Certain  Entities  (Including
Entities  With Trade  Receivables)  That Lend to or Finance  the  Activities  of
Others.  Management's determination of whether these investments are impaired is
based on their  assessment of the ultimate  recoverability  of their cost rather
than by recognizing  temporary  decline in value. The determination of whether a
decline  affects the  ultimate  recoverability  of their cost is  influenced  by
criteria such as (1) the  significance  of the decline in net assets of the FHLB
as  compared to the  capital  stock  amount for the FHLB and length of time this
situation has persisted,  (2) commitments by the FHLB to make payments  required
by law or regulation and the level of such payments in relation to the operating
performance  of the FHLB,  and (3) the  impact  of  legislative  and  regulatory
changes on  institutions  and,  accordingly,  on the customer  base of the FHLB.
Management  believes no impairment charge is necessary related to the restricted
stock as of December 31, 2008.

     In estimating  other-than-temporary  impairment  losses on securities,  the
Company  considers  1) the length of time and extent to which the fair value has
been less than cost 2) the  financial  condition of the issuer and 3) the intent
and ability of the Company to hold the  security to allow for a recovery to fair
value. The Company believes that the unrealized losses, at December 31, 2008 and
2007 represent temporary impairment of the securities.

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008
     In response to recent  unprecedented market turmoil, the Emergency Economic
Stabilization  Act of 2008  ("ESSA")  was  enacted  on  October  3,  2008.  EESA
authorizes  the  Secretary  of the  Treasury to  purchase up to $700  billion in
troubled  assets from  financial  institutions  under the Troubled  Asset Relief
Program or TARP.

     Among its many provisions, the EESA increased the maximum deposit insurance
amount up to $250,000 until  December 31, 2009 and removes the statutory  limits
on the FDIC's ability to borrow from the Treasury  during this period.  The FDIC
may not take the temporary  increase in deposit insurance  coverage into account
when setting assessments.  EESA allows financial  institutions to treat any loss
on the preferred stock of the Federal National  Mortgage  Association or Federal
Home Loan Mortgage Corporation as an ordinary loss for tax purposes.

     Pursuant to his authority under EESA, the Secretary of the Treasury created
the TARP Capital  Purchase Plan (CPP) under which the Treasury  Department  will
invest up to $250 billion in senior  preferred  stock of U.S.  banks and savings
associations or their holding companies.  Qualifying financial  institutions may
issue

                                                                              11


senior  preferred stock with a value equal to not less than 1% of  risk-weighted
assets  and not more  than the  lesser  of $25  billion  or 3% of  risk-weighted
assets.  The senior  preferred  stock will pay  dividends  at the rate of 5% per
annum until the fifth  anniversary  of the investment and thereafter at the rate
of 9% per annum.  The senior preferred stock may not be redeemed for three years
except with the proceeds  from an offering of common  stock or  preferred  stock
qualifying  as Tier 1  capital  in an  amount  equal to not less than 25% of the
amount of the senior  preferred.  After three years, the senior preferred may be
redeemed  at any  time in  whole  or in part by the  financial  institution.  No
dividends  may be paid on common  stock unless  dividends  have been paid on the
senior  preferred  stock.  Until the third  anniversary  of the  issuance of the
senior  preferred,  the consent of the U.S.  Treasury  will be required  for any
increase  in the  dividends  on the  common  stock or for any stock  repurchases
unless the senior  preferred  has been  redeemed in its entirety or the Treasury
has transferred the senior preferred to third parties. The senior preferred will
not have voting  rights  other than the right to vote as a class on the issuance
of any preferred  stock ranking  senior,  any change in its terms or any merger,
exchange or similar transaction that would adversely affect its rights. Prior to
issuance,  the  financial  institution  and its senior  executive  officers must
modify or  terminate  all benefit  plans and  arrangements  to comply with EESA.
Senior executives must also waive any claims against the Department of Treasury.
In  connection  with the  issuance  of the  senior  preferred,  publicly  traded
participating  institutions  must issue the  Secretary  immediately  exercisable
10-year  warrants to purchase common stock with an aggregate  market price equal
to 15% of the amount of senior preferred.

     Due to its strong capital position,  the Company decided not to participate
in the CPP.

RESULTS OF OPERATIONS - SUMMARY
     Net income for the Company for the  year-ended  December  31, 2008  totaled
$6,677,000, an increase of $166,000, or 2.6% over the $6,511,000 earned in 2007.
Basic and  diluted  earnings  per share  were  $2.44  and  $2.41,  respectively,
increasing  from $2.34 and $2.30,  respectively  in 2007.  The return on average
assets  (ROA) for the year ended  December  31,  2008 was 1.36% with a return on
average equity (ROE) of 11.79% compared to an ROA of 1.39% and ROE of 12.10% for
the prior year.  The increase in earnings  was  principally  attributable  to an
increase in net interest  income on a  fully-taxable  equivalent  basis (fte) of
$1,219,000  which  offset a higher  provision  for loan losses of  $420,000  and
$582,000  of  write-down  and costs to maintain a property  in  foreclosed  real
estate.

     Net  interest  income (fte)  totaled  $19,030,000  in 2008,  an increase of
$1,219,000 or 6.8% over the  $17,811,000 in the prior year. Net interest  income
was favorably impacted by a $20.5 million increase in average earning assets for
2008  compared  to  average  earning  assets in 2007.  The net  interest  margin
increased 9 basis points to 4.07% in 2008.  The Company offset a 400 basis point
decrease in prime rate of interest by managing  its cost of funds.  During 2008,
the cost of interest-bearing liabilities declined 76 basis points to offset a 52
basis point drop in earning asset yields.

     Loans  receivable  increased $18.1 million or 5.5% from the prior year end.
The increase in loans was  centered in  commercial  real estate which  increased
$25.9  million,  which was  partially  offset by a lower  level of  construction
financing and commercial  term loans.  As a result of the general  economic slow
down and a softer real estate market,  the Company did experience an increase in
non-performing assts and net charge-offs in 2008. As of December 31, 2008, total
non-performing  assets were  $2,747,000  and  represented  .54% of total  assets
compared  to  $163,000,  or .03% as of  December  31,  2007.  The  increase  was
principally  due to

12



two credit  facilities to one borrower,  both of which have been written-down to
their net  realizable  value.  Net  charge-offs  for the year  totaled  $583,000
compared to $62,000 in 2007. The Company increased its provision for loan losses
to $735,000 in the current year compared to $315,000 in 2007.

     Other  income for the year  ended  December  31,  2008  totaled  $4,087,000
increasing  $563,000  from  $3,524,000  in the  prior  year.  The  increase  was
principally  due to a $499,000  gain on the sale of $14.4  million  of  mortgage
loans and servicing rights compared to $23,000 in similar gains in 2007. For the
current year,  other expenses  totaled  $12,240,000,  an increase of $899,000 or
7.9% over the  prior  year.  The  increase  was  principally  due to a  $582,000
write-down to current  realizable  value of a foreclosed real estate property as
well as costs to maintain the real estate. Excluding costs related to foreclosed
real estate, other expenses increased 2.8%.

     The following table sets forth changes in net income (in thousands):

Net income 2007                                                         $ 6,511
Net interest income                                                       1,129
Provision for loan losses                                                  (420)
Gain on sale of mortgage loans and servicing rights                         476
Other income                                                                 87
Salaries and employee benefits                                             (221)
Foreclosed real estate owned                                               (582)
Other expense                                                               (96)
Income tax expense                                                         (207)
                                                                        -------
Net income for 2008                                                     $ 6,677
                                                                        =======

     Net income for the Company  for the year ended  December  31, 2007  totaled
$6,511,000, an increase of $601,000 or 10.2% over the $5,910,000 earned in 2006.
Basic  and  diluted  earnings  per  share  were  $2.34  and  $2.30  respectively
increasing  from $2.11 and $2.07,  respectively  in 2006.  The return on average
assets (ROA) for the year ended December 31, 2007 was 1.39% improving from 1.33%
for 2006.  Return on average  equity  (ROE)  increased to 12.10% for the current
year from 11.85% in 2006.

     The increase in earnings was principally attributable to an increase in net
interest income which totaled  $17,811,000 on a fully taxable  equivalent  (fte)
basis in 2007 compared to $16,708,000 (fte) in 2006. This represents an increase
of $1,103,000,  or 6.6%. Net interest  income was favorably  impacted by a $21.9
million,  or 7.3%  increase in average  loans  receivable  for 2007  compared to
average  loans  receivable  in  2006.  The  yield  on the  securities  portfolio
increased  76 basis points which also  favorably  impacted net interest  income.
These two items were  partially  offset by a 59 basis point increase in the cost
of interest bearing deposits, principally short-term time deposits.

     Loans  receivable  increased  $15.7  million to total $331.3  million as of
December 31, 2007.  The increase in loans was centered in  residential  mortgage
activity and to a lesser extent,  in the commercial real estate  portfolio.  The
majority  of the loan  growth  was  funded  with an $11.9  million  increase  in
deposits,   principally  in  money  market  accounts  and  non-interest  bearing
checking.

                                                                              13



     The  Company's  loan quality  metrics  improved with  non-performing  loans
decreasing to .05% of total loans at December 31, 2007 from .13% as of the prior
year end. Net  charge-offs  were $62,000 for the year, or .02% of average loans.
Loan loss provision expense increased to $315,000 in 2007, from $220,000 in 2006
as the Company recognized a general slow down in the local economy.

     Other income for 2007 totaled  $3,524,000  compared to  $3,583,000 in 2006.
The  decrease  was  principally  due to a lower  level of gains on the  sales of
mortgage  loans which  totaled  $23,000 in 2007 and  $147,000 in the prior year,
which  included  $110,000 gain on the sale of a portfolio of mortgage  servicing
rights.  Other expenses totaled  $11,341,000 in 2007, an increase of $384,000 or
3.5% over the prior year. The increase was principally  due to costs  associated
with the Tannersville Office which opened in December 2006.

         The following table sets forth changes in net income (in thousands):

Net income for 2006                                                     $ 5,910

Net interest income                                                       1,089
Provision for loan losses                                                   (95)
Gain on sale of mortgage loans and servicing rights                        (124)
Other income                                                                 65
Salaries and employee benefits                                             (170)
Occupancy                                                                  (119)
Other expense                                                               (95)
Income tax expense                                                           50
                                                                        -------
Net income for 2007                                                     $ 6,511
                                                                        =======

FINANCIAL CONDITION

TOTAL ASSETS
     Total  assets as of December  31,  2008,  were $504.3  million  compared to
$480.6 million as of year-end 2007, an increase of $23.7 million or 4.9%.

LOANS RECEIVABLE
     As of December 31, 2008, loans  receivable  totaled $349.4 million compared
to $331.3 million as of year-end  2007, an increase of $18.1  million,  or 5.5%.
Loan growth,  principally  in  commercial  real estate and to a lesser extent in
residential  mortgages was  partially  offset by lower  construction  financing,
commercial  term  loans  and  lines of  credit  and a net  run-off  in  indirect
automobile financing, which is included in consumer loans to individuals.

     Residential real estate, which includes home equity lending, totaled $133.4
million as of December 31, 2008, compared to $129.9 million as of year-end 2007,
an increase of $3.5 million.  Fixed rate mortgage products were preferred by the
Bank's  customers and  accounted  for the majority of the activity.  The Company
does not originate any  non-traditional  mortgage products such as interest-only
loans  or  option  adjustable  rate  mortgages  and  has no  sub-prime  mortgage
exposure.  The Company  evaluates sales of its long-term fixed rate  residential
loan production for interest rate risk management, with $14.4 million of 30 year
fixed rate loans sold into the secondary  market during 2008. In the current low
interest rate  environment,  the

14


Company expects to continue selling mortgage loans in 2009. The Company also had
growth  in home  equity  lending  in  2008  through  its  branch  system.  Total
outstandings  increased  $1.2 million to $53.7  million as of December 31, 2008.
The increase was principally in home equity lines of credit.

     Commercial  loans  consist  principally  of loans made to small  businesses
within the  Company's  market and are  usually  secured by real  estate or other
assets of the borrower.  Commercial  real estate loans totaled $159.5 million as
of December 31, 2008, increasing from $133.6 million as of December 31, 2007, an
increase of $25.9 million or 19.4%.  The terms for commercial  real estate loans
are  typically 15 to 20 years,  with  adjustable  rates based on a spread to the
prime rate or fixed for the initial three to five year period then  adjusting to
a spread to the prime rate. The majority of the Company's commercial real estate
portfolio  is  owner  occupied  and  includes  the  personal  guarantees  of the
principals.  The growth in  commercial  real estate  lending was centered in the
Pike and Monroe County market areas.  Commercial loans consisting principally of
lines of credit and term loans  secured by equipment  or other assets  decreased
$3.3  million  to $25.9  million as of  December  31,  2008.  The  decrease  was
principally  due to  pay-offs  in  equipment  loans and lower  usage on lines of
credit.

     The Company's  indirect  lending  portfolio  (included in consumer loans to
individuals) declined $1.6 million to $10.0 million as of December 31, 2008. The
Company has de-emphasized indirect automobile lending and has also experienced a
general slow down in marine and non-titled vehicle indirect financing.

ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS
     The  allowance  for loan losses was  $4,233,000 as of December 31, 2008 and
represented 1.21% of total loans receivable  compared to $4,081,000 and 1.23% of
total loans as of year end 2007. Net charge-offs  for 2008 totaled  $583,000 and
represented  .17% of average loans compared to $62,000 and .02% of average loans
in  2007.  The  increase  in  charge-offs  was  principally  due  to a  $380,000
write-down of a commercial  real estate land  development  loan with  collateral
consisting of several  parcels of real estate.  With  increasing net charge-offs
and recognizing the softness in the economy, the Company increased its loan loss
provision to $735,000  for the year end December 31, 2008 from  $315,000 for the
year 2007.

     The Company's  loan review  process  assesses the adequacy of the allowance
for loan losses on a quarterly basis. The process includes a review of the risks
inherent in the loan portfolio.  It includes an analysis of impaired loans and a
historical review of losses.  Other factors  considered in the analysis include:
concentrations of credit in specific industries in the commercial portfolio; the
local and regional economic conditions;  trends in delinquencies,  internal risk
rating classification,  large dollar loans of over $2 million, and growth in the
portfolio.  As of December 31, 2008, the Company considered its concentration of
credit risk profile to be acceptable. As a result of weaker economic conditions,
the Company has seen an increase in its internally  risk-rated loans. The local,
regional  and  national  economy  weakened  in 2008 as  unemployment  increased,
financial markets declined and the real estate market slowed which has caused an
increasing trend in loan  delinquencies.  The Company has modestly increased its
number of large commercial credits. As a result of its analysis,  after applying
these  factors,  management  considers  the  allowance  as of December 31, 2008,
adequate.  However, there can be no assurance that the allowance for loan losses
will be  adequate  to cover all  losses,  if any that might be  incurred  in the
future.

                                                                              15



     The following  table sets forth  information  with respect to the Company's
allowance for loan losses for the periods indicated:



                                                                     Year-ended December 31,
                                                   -------------------------------------------------------
                                                                     (dollars in thousands)
                                                      2008        2007        2006        2005        2004
                                                   -------------------------------------------------------
                                                                                  
Allowance balance at beginning of period           $ 4,081     $ 3,828     $ 3,669     $ 3,448     $ 3,267
Charge-offs:
  Commercial and all other                              (7)          -           -          (4)        (19)
  Real Estate                                         (465)         (4)          -          (6)        (10)
  Consumer                                            (171)       (117)       (150)       (200)       (342)
  Lease Financing                                        -           -           -           -         (11)
                                                   -------------------------------------------------------
Total                                                 (643)       (121)       (150)       (210)       (382)
Recoveries:
  Commercial and all other                               -           -          18          12          13
  Real Estate                                            1           2           2          18           8
  Consumer                                              59          54          65          46          78
  Lease Financing                                        -           3           4           5           9
                                                   -------------------------------------------------------
Total                                                   60          59          89          81         108
Provision expense                                      735         315         220         350         455
                                                   -------------------------------------------------------
Allowance balance at end of period                 $ 4,233     $ 4,081     $ 3,828     $ 3,669     $ 3,448
                                                   =======================================================
Allowance for loan losses as a percent
         of total loans outstanding                   1.21%       1.23%       1.21%       1.26%       1.35%
Net loans charged off as a percent of
         average loans outstanding                     .17%        .02%        .02%        .05%        .11%
Allowance coverage of non-performing loans             2.0x       25.0x        9.4x       10.4x       51.5x


     Non-performing assets consist of non-performing loans and real estate owned
as a result  of  foreclosure,  which is held  for  sale.  Loans  are  placed  on
non-accrual  status  when  management  believes  that  a  borrower's   financial
condition is such that  collection of interest is doubtful.  Commercial and real
estate  related loans are generally  placed on  non-accrual  when interest is 90
days  delinquent.  When loans are placed on  non-accrual,  accrued  interest  is
reversed from current earnings.

     As of December  31,  2008,  non-performing  loans  totaled  $2,087,000  and
represented .60% of total loans increasing from $163,000 and .05% of total loans
as of December 31, 2007. The increase is principally  due to one commercial real
estate land development loan of $1,693,000, which reflects a $380,000 write-down
taken in 2008. In 2008,  the Company  acquired a property with a deed in lieu of
foreclosure  with a net realizable value of $660,000.  The property  consists of
undeveloped residential building lots in Monroe County.

16



     The following table sets forth information regarding non-performing assets.
As of December 31, 2008,  the Company had  $2,976,000 of impaired and collateral
dependent  loans  compared  to  $3,208,000  at year-end  2007,  with no required
allowance as of years-end December 31, 2008 and 2007.




                                                            December 31,
                                         ----------------------------------------------
                                                       (dollars in thousands)
                                           2008      2007      2006      2005      2004
                                         ----------------------------------------------
                                                                
Non-accrual loans:
  Commercial and all other               $    -    $    -    $    -    $    -    $    -
  Real estate                             2,087       109       392       330        32
  Consumer                                    -         2        17        11         8
                                         ----------------------------------------------
Total                                     2,087       111       409       341        40

Accruing loans which are contractually
  past due 90 days or more                    -        52         -        12        27
                                         ----------------------------------------------

Total non-performing loans                2,087       163       409       353        67

Foreclosed real estate                      660         -         -         -         -
                                         ----------------------------------------------

Total non-performing assets              $2,747    $  163    $  409    $  353    $   67
                                         ==============================================

Non-performing loans to total loans         .60%      .05%      .13%      .12%      .03%

Non-performing loans to total assets        .41%      .03%      .09%      .08%      .02%

Non-performing assets to total assets       .54%      .03%      .09%      .08%      .02%


SECURITIES
     The securities  portfolio  consists  principally of issues of United States
Government agencies, including mortgage-backed securities, municipal obligations
and  corporate  debt. In accordance  with SFAS No. 115  "Accounting  for Certain
Investments  in  Debt  and  Equity   Securities"  the  Company   classifies  its
investments  into two categories:  held to maturity (HTM) and available for sale
(AFS). The Company does not have a trading account. Securities classified as HTM
are  those in which  the  Company  has the  ability  and the  intent to hold the
security until contractual  maturity. As of December 31, 2008, the HTM portfolio
totaled  $707,000  and  consisted  of  two  municipal  obligations.   Securities
classified  as AFS are  eligible to be sold due to  liquidity  needs or interest
rate risk management. These securities are adjusted to and carried at their fair
market value with any unrealized gains or losses recorded net of deferred income
taxes,  as an  adjustment  to capital and reported in the equity  section of the
balance sheet as other  comprehensive  income  (loss).  As of December 31, 2008,
$130.1 million in securities were so classified and carried at their fair market
value,  with  unrealized  appreciation;  net of tax, of $1,279,000,  included in
Accumulated other comprehensive income in stockholders' equity.

                                                                              17



         As of December 31, 2008, the average life of the portfolio was 2.6
years. The Company has maintained a relatively short average life in the
portfolio in order to generate cash flow to support loan growth. Purchases for
the year totaled $45.3 million with securities called, maturities and cash flow
of $39.3 million and proceeds from sales of $67,000. The purchases were funded
principally by cash flow from the portfolio. As of December 31, 2008 the
carrying value of the Company's securities portfolio (HTM and AFS) totaled
$130.8 million with the mix as follows:



                                             2008                      2007
                                   --------------------------------------------------
                                              (dollars in thousands)
                                   Carrying                  Carrying
                                     Value   % of portfolio    Value   % of portfolio
                                   --------------------------------------------------
                                                             
US Government agencies             $ 35,813      27.5%       $ 41,508      33.4%
States & political subdivisions      25,916      19.8%         22,622      18.1%
Corporate Securities                  5,625       4.3%          4,994       4.0%
Mortgage-backed securities           62,318      47.5%         54,082      43.3%
Equity securities                     1,155       0.9%          1,486       1.2%
                                   --------------------------------------------------
Total                              $130,827     100.0%       $124,692     100.0%
                                   ==================================================



     The portfolio had $15.2 million of adjustable rate instruments, principally
adjustable rate mortgage  backed  securities as of December 31, 2008 compared to
$19.1  million  at year end 2007.  The  portfolio  contained  no  private  label
mortgage  backed  securities,  collateralized  debt  obligations  (CDOs),  trust
preferreds, structured notes, step-up bonds and no off-balance sheet derivatives
were in use.  The U.S.  Government  agency  portfolio  consists  principally  of
callable  notes with final  maturities  of generally  less than five years.  The
mortgage  backed  securities are  pass-through  bonds with the Federal  National
Mortgage  Association  (FNMA),  Federal Home Loan  Mortgage  Corp  (FHLMC),  and
Government National Mortgage  Association (GNMA). The Company has no exposure to
common or preferred stock of FNMA or FHLMC.  During 2008, the Company  increased
its holdings of  mortgage-backed  securities with the expectation that the bonds
will provide regular cash flow, provide liquidity and support loan growth.

FAIR VALUE OF FINANCIAL INSTRUMENTS
     The Company uses fair value  measurements to record fair value  adjustments
to certain financial instruments and determine fair value disclosures. (See Note
16 of Notes to the Consolidated Financial Statements).

     Approximately  $130.1 million,  which  represents  25.8% of total assets at
December 31, 2008, consisted of financial  instruments recorded at fair value on
a recurring basis. This amount consists entirely of the Company's  available for
sale securities portfolio.  The Company uses valuation  methodologies  involving
market-based  or  market  derived  information,   collectively  Level  1  and  2
measurements,  to measure  fair value.  There were no  transfers  into or out of
Level 3 for any instruments for the year ending December 31, 2008.

     The Company  utilizes a third party  provider to perform  valuations of the
investments. Methods used to perform the valuations include: pricing models that
vary  based  on  asset  class,  available  trade  and  bid

18



information,  actual transacted prices, and proprietary models for valuations of
state and  municipal  obligations.  In  addition,  the  Company  has a sample of
fixed-income  securities valued by an other independent source.  Generally,  the
Company does not adjust values received from its providers, unless it is evident
that fair value measurement is not consistent with SFAS No. 157.


DEPOSITS
     The Company, through the twelve branches of the Bank, provides a full range
of deposit products to its retail and business customers. These products include
interest-bearing  and  non-interest  bearing  transaction  accounts,   statement
savings and money market  accounts.  Time deposits  consist of  certificates  of
deposit (CDs) with terms of up to five years and include  Individual  Retirement
Accounts. The Bank participates in the Jumbo CD ($100,000 and over) markets with
local  municipalities  and school  districts,  which are typically  awarded on a
competitive bid basis. The Company has no brokered deposits.

     Total deposits as of December 31, 2008,  totaled $359.6 million  decreasing
from  $370.0  million as of year-end  2007,  a decrease  of $10.4  million.  The
decrease was  principally  due to a lower level of time deposits over  $100,000,
which  declined by $17.2  million.  This was partially  offset by an increase in
money market deposit accounts of $2.7 million,  savings accounts of $1.6 million
and interest-bearing checking accounts of $2.9 million.

     Time deposits over $100,000,  which consist  principally of school district
funds,  other  public  funds  and  short-term  deposits  from  large  commercial
customers with maturities generally less than one year, totaled $45.1 million as
of December 31, 2008,  compared to $62.3 million at year-end  2007. The decrease
was  principally  due  to the  scheduled  maturities  of  time  deposits  from a
commercial customer.  The Company also had a lower level of jumbo CDs with local
school districts.  These deposits are subject to competitive bid and the Company
bases its bid on current  interest  rates,  loan  demand,  investment  portfolio
structure and the relative cost of other funding sources.

     As of December 31, 2008, non-interest bearing demand deposits totaled $56.8
million  compared to $60.1 million at year-end 2007.  This decrease is partially
attributable to a lower level of commercial deposits, as a result of the general
slow down in economic  activity.  Interest bearing demand accounts totaled $35.3
million as of December 31, 2008 compared to $32.4 million at year end 2007.  The
increase  was  principally  due to a higher level of  municipal  accounts.  Cash
management accounts included in short-term borrowings,  totaled $23.4 million at
year end 2008 compared to $24.0 million as of December 31, 2007.  These balances
represent  commercial  and  municipal  customers'  funds  invested in over-night
securities. The Company considers these accounts as a source of core funding.

                                                                              19



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 the 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
should be structured so that repricing  opportunities  exist for both assets and
liabilities  at  approximately  the same time  intervals.  The Company  uses net
interest  simulation  to assist in interest  rate risk  management.  The process
includes  simulating  various interest rate environments and their impact on net
interest  income.  As of December 31, 2008, the level of net interest  income at
risk in a 200 basis points increase or decrease was within the Company's  policy
limits, of a decline of less 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.

     At December 31, 2008,  the Bank had a positive 90 day interest  sensitivity
gap of $20.4 million or 4.0% of total assets.  A positive gap indicates that the
balance  sheet  has  a  higher  level  of   rate-sensitive   assets  (RSA)  than
rate-sensitive  liabilities  (RSL) at the  specific  time  interval.  This would
indicate that in a declining  rate  environment,  the yield on  interest-earning
assets would decrease  faster than the cost of  interest-bearing  liabilities in
the 90 day time  frame.  The level of RSA and RSL for an  interval is managed by
ALCO  strategies,  including  adjusting  the  average  life  of  the  investment
portfolio through purchases and sales, pricing of deposit liabilities to attract
longer  term time  deposits,  utilizing  borrowings  to fund loan  growth,  loan
pricing to encourage  variable  rate  products and  evaluation  of loan sales of
long-term fixed rate mortgages.

     The Company  analyzes  and  measures  the time periods in which RSA and RSL
will  mature  or  reprice  in  accordance  with  their   contractual  terms  and
assumptions.  Management believes that the assumptions used are reasonable.  The
interest rate sensitivity of assets and liabilities could vary  substantially if
differing  assumptions  were  used or if  actual  experience  differs  from  the
assumptions  used in the  analysis.  For example,  although  certain  assets and
liabilities may have similar maturities or periods to repricing,  they may react
in differing  degrees to changes in market interest rates. The interest rates on
certain types of assets and  liabilities  may fluctuate in advance of changes in
market  interest  rates,  while  interest  rates on other  types may lag  behind
changes in market rates.  Interest rates may change at different  rates changing
the shape of the yield curve.  The level of rates on the  investment  securities
may also be affected by the spread relationship  between different  investments.
This was evident in 2008 as the spread  between  certain  asset  classes were at
historical  highs in relation to treasuries due to lack of market  liquidity and
credit  concerns.  Further,  in the event of a  significant  change in  interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from  those  assumed.  Finally,  the  ability  of  borrowers  to  service  their
adjustable-rate debt may decrease in the event of an interest rate increase.  It
should be noted that the  operating  results of the  Company  are not subject to
foreign currency exchange or commodity price risk.

20



         The following table displays interest-sensitivity as of December 31,
2008 (in thousands):



Rate Sensitivity Table                    3 Months        3-12                        Over
                                           or Less       Months       1-3 Years      3 Years         Total
                                         --------------------------------------------------------------------
                                                                                   
Federal Funds Sold and
  interest bearing deposits              $       17    $        -     $        -     $        -    $       17

Securities                                   23,215        26,814         32,507         48,291       130,827
Loans Receivable                             85,608        59,004         84,180        120,612       349,404
                                         --------------------------------------------------------------------
Total Rate Sensitive Assets (RSA)        $  108,840    $   85,818     $  116,687     $  168,903    $  480,248
                                         ====================================================================

Non-maturity interest bearing deposits   $   22,164        24,565     $   65,086     $   28,707    $  140,522
Time Deposits                                46,278        53,407         44,652         17,937       162,274
Other                                        20,008        18,118         23,000         20,000        81,126
                                         --------------------------------------------------------------------
Total Rate Sensitive Liabilities (RSL)   $   88,450    $   96,090     $  132,738     $   66,644    $  383,922
                                         ====================================================================

Interest Sensitivity Gap                 $   20,390    $  (10,272)    $  (16,051)    $  102,259    $   96,326
Cumulative gap                               20,390        10,118         (5,933)        96,326
RSA/RSL-cumulative                            123.1%        105.5%          98.1%         125.1%

As of December 31, 2007
Interest Sensitivity gap                 $    5,996    $  (33,969)    $   17,012     $  107,374    $   96,413
Cumulative gap                                5,996       (27,973)       (10,961)        96,413
RSA/RSL-Cumulative                            105.7%         86.9%          96.6%         126.8%


LIQUIDITY
     Liquidity  is the  ability  to fund  customers'  borrowing  needs and their
deposit withdrawal requests while supporting asset growth. The Company's primary
sources of liquidity include deposit  generation,  asset  maturities,  cash flow
from payments on loans and  securities  and access to borrowing from the Federal
Home Loan Bank and other correspondent banks.

     As of December 31, 2008, the Company had cash and cash  equivalents of $6.5
million in the form of cash, due from banks, and short-term  deposits with other
institutions.  In addition,  the Company had total securities available for sale
of $130.1 million,  which could be used for liquidity needs.  This totals $136.6
million and  represents  27.1% 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 December  31,  2008.  Based upon these  measures,  the Company  believes  its
liquidity position is adequate.

     The Company  maintains  established  lines of credit with the Federal  Home
Loan Bank of Pittsburgh  (FHLB),  the Atlantic  Central  Bankers Bank (ACBB) and
other  correspondent  banks,  which support liquidity needs. The total available
under all the lines was $39 million,  with $3.6 million  outstanding at December
31, 2008 and $800,000  outstanding at December 31, 2007.  The maximum  borrowing
capacity from FHLB was $240.6 million.  As of December 31, 2008, the Company had
$54 million in term  borrowings  from the FHLB,  increasing  from $23 million in
similar  borrowings  from the FHLB as of  December  31,  2007.  The  increase in
borrowings was used to offset a decrease in Jumbo CDs and to fund loan growth.

                                                                              21



OFF-BALANCE SHEET ARRANGEMENTS
     The Company's financial  statements do not reflect various commitments that
are made in the normal  course of  business,  which may involve  some  liquidity
risk. These  commitments  consist mainly of unfunded loans and letters of credit
made  under  the  same  standards  as  on-balance  sheet   instruments.   Unused
commitments,  as of December 31, 2008 totaled $58.1  million.  They consisted of
$22.7  million in commercial  real estate,  construction  and land  developments
loans,  $14.5  million in home equity  lines of credit,  $1.9 million in standby
letters of credit  and $19.0  million in other  unused  commitments  principally
commercial lines of credit.  Because these instruments have fixed maturity dates
and because  many of them will  expire  without  being  drawn upon,  they do not
represent any significant liquidity risk.

     Management  believes that any amounts  actually drawn upon can be funded in
the normal course of  operations.  The Company has no investment in or financial
relationship with any unconsolidated entities that are reasonably likely to have
a material effect on liquidity or the availability of capital resources.

CONTRACTUAL OBLIGATIONS
     The following  table  represents  the aggregate of on and off balance sheet
contractual obligations to make future payments (in thousands):

                                            December 31, 2008
                    ------------------------------------------------------------
                      Total   Less than 1 year 1-3 years  4-5 years Over 5 years
                    ------------------------------------------------------------
Time deposits       $162,274      $ 99,685      $ 44,651   $ 17,938   $      -
Long-term debt        43,000             -        23,000     10,000     10,000
Operating leases       3,535           266           467        498      2,304
                    ------------------------------------------------------------
                    $208,809      $ 99,951      $ 68,118   $ 28,436   $ 12,304
                    ============================================================

RESULTS OF OPERATIONS

NET INTEREST INCOME
     The following analysis should be read in conjunction with the "Consolidated
Average  Balance  Sheets with  Resultant  Interest  and Rates" and  "Rate/Volume
Analysis" tables.

     Net  interest  income is the most  significant  source of  revenue  for the
Company and  represented  81.9% of total revenue for the year ended December 31,
2008. Net interest income (fte) totaled  $19,030,000 for the year ended December
31, 2008  compared to  $17,811,000  for 2007, an increase of $1,219,000 or 6.8%.
The  resulting  fte net interest  spread and net interest  margin were 3.51% and
4.07%, respectively, in 2008 compared to 3.27% and 3.98%, respectively, in 2007.

     Interest  income  (fte)  for the  year  ended  December  31,  2008  totaled
$28,724,000  compared to $29,794,000  for 2007. The fte yield on average earning
assets  for 2008 was  6.14%,  decreasing  52 basis  points  from  6.66% in 2007.
Interest  income  was  unfavorably  impacted  by  the  significant  decrease  in
short-term  interest  rates.  During 2008,  the prime interest rate declined 400
basis points from 7.25% to 3.25%.  This decline in short-term  rates impacts the
Company's  floating  rate loans  principally  commercial  real estate,  lines of
credit and home equity lines of credit.  As of December 31, 2008,  $67.1 million
of loans were immediately repricable. The decrease in yield was partially offset
by a $20.5 million increase in average earning assets for the year 2008 compared
to 2007.

     Interest  income (fte)  earned on loans  totaled  $22,161,000  for the year
ended  December  31,  2008  with a  resulting  fte  yield of 6.61%  compared  to
$23,876,000  with an fte  yield of 7.38% in 2007.  The  decrease  was due to the
lower prime interest rate in 2008,  partially  offset by growth of $11.7 million
in average loans. The securities  available-for-sale  portfolio  averaged $130.9
million in 2008 with interest  income (fte) of

22



$6,473,000  and a yield (fte) of 4.94%  compared to $118.7 million with interest
income  (fte) of  $5,623,000  and yield (fte) of 4.74% in 2007.  The increase in
yield in 2008 was partially due to higher yielding investments purchased in 2007
having a favorable impact on the yield in 2008.

     Interest  expense for the year-ended  December 31, 2008 totaled  $9,694,000
with an  average  cost of  interest-bearing  liabilities  of 2.63%  compared  to
interest  expense  of  $11,983,000  with an average  cost of 3.39% in 2007.  The
decrease was principally due to the lower level of short-term interest rates. In
the lower rate  environment,  the  Company  reduced  rates paid on money  market
accounts and time deposits.  The cost of time deposits decreased 76 basis points
to 3.81% in 2008 from 4.57% in 2007, as higher costing time deposits matured and
were replaced at lower rates. The Company also utilized short-term borrowings to
replace higher priced time deposits.  Average  short-term  borrowings  increased
$9.9  million to  average  $32.3  million  at an  average  cost of 2.14% in 2008
compared to $22.4 million at an average cost of 4.15% in 2007.

     Net interest income  represented  83.0% of total revenue for the year ended
December 31, 2007. Net interest  income (fte) totaled  $17,811,000  for the year
ended  December  31,  2007  compared  to  $16,708,000  for 2006,  an increase of
$1,103,000,  or 6.6%.  The  resulting  fte net interest  spread and net interest
margin were 3.27% and 3.98%,  respectively,  in 2007 compared to 3.36% and 3.96%
respectively, in 2006.

     Interest  income  (fte)  for the  year  ended  December  31,  2007  totaled
$29,794,000,  an increase of $3,320,000 over $26,474,000 earned in 2006. The fte
yield on average earning assets for 2007 was 6.66%,  increasing 39 basis points,
from 6.27% in 2006.  The  increase in  interest  income was  principally  due to
higher yields on the securities  available for sale portfolio and loan portfolio
and a higher percentage of loans on the balance sheet.

     The prime  interest  rate was flat at 8.25% from  January to  mid-September
2007 and  decreased to 7.25% by December 31,  2007.  This decline in  short-term
rates impacts the Company's  floating rate loans,  principally  commercial  real
estate and  commercial  lines of credit which are tied to the prime rate.  As of
December 31, 2007, $69.1 million of loans were immediately repriceable.  Average
earning  assets for 2007 totaled  $447.4  million,  an increase of $25.4 million
over the average for 2006.  The mix of earning  assets also improved with higher
yielding loans  representing  72.3% of average  earning assets compared to 71.2%
during 2006.

     Interest  income (fte)  earned on loans  totaled  $23,876,000  for the year
ended  December  31,2007  with a  resulting  fte  yield  of  7.38%  compared  to
$21,600,000  with a yield (fte) of 7.16% in 2006. The increase was due to growth
in average  volume of loans of $21.9 million and a higher average prime interest
rate in 2007 than in 2006.

     The securities  available for sale portfolio averaged $118.7 million during
2007 with interest  income (fte) of $5,623,000 and yield (fte) of 4.74% compared
to $116.6  million with interest  income (fte) of $4,637,000  and yield (fte) of
3.98% in 2006.  The increase in yield was due to the  reinvestment  of cash flow
and maturities from the portfolio into higher yielding instruments.

     Interest  expense for the year ended December 31, 2007 totaled  $11,983,000
with a cost of  interest-bearing  liabilities  of  3.39%  compared  to  interest
expense of  $9,766,000  at an average  cost of 2.91% for 2006.  The increase was
principally due to a more expensive mix of  interest-bearing  liabilities with a
higher  percentage of average time deposits in 2007,  50.7% compared to 43.6% on
average in 2006. In addition,  the cost of time deposits increased on average to
4.57% in 2007 as compared to 3.96% in 2006. The increase was  principally due to
higher  average  short-term  rates in 2007 and a  competitive  market  for these
deposits.

                                                                              23



OTHER INCOME
     Other  income  totaled  $4,087,000  for the  year-ended  December  31, 2008
compared to $3,524,000 in 2007. The increase was  principally due to $499,000 of
gains on the sale of $14.4  million of mortgage  loans and  servicing  rights in
2008  compared  to  $23,000 of  similar  gains in 2007.  The loans were sold for
interest-rate  risk  management  purposes.  Service  charges and fees  increased
$91,000 to $2,600,000  principally due to a higher volume of non-sufficient fund
fees  (NSF).  The  Company  offers  title  and  settlement  services  through  a
subsidiary of the Bank. Revenues (included in other) from this subsidary totaled
$83,000 in 2008 compared to $29,000 in 2007 principally due to a higher level of
commercial real estate transactions.

     The Company  recorded a $27,000  other-than-temporary-impairment  charge on
1,000 shares of Wachovia  Common stock in 2008 which is included in net realized
gains  (losses) on sale of securities.  The Company has no holdings of common or
preferred stock of FNMA or FHLMC.

     Other  income  totaled  $3,524,000  for the year ended  December  31,  2007
compared to $3,583,000 in 2006.  Service  charges and fees increased  $54,000 to
$2,509,000  in 2007.  The increase  was due to an $87,000  increase in overdraft
(NSF) fees to  $1,347,000  which was  partially  offset by $39,000  decrease  in
business  account  analysis  fees as the Bank  began  offering  a free  business
checking account with no analysis fees. Income from fiduciary activities totaled
$423,000 in 2007  increasing  $68,000  from 2006.  The  increase  was due to new
business and a higher level of estate fees.  Assets under  management  increased
$4.8 million to $101.7  million.  Gains on sales of mortgage loans and servicing
rights  totaled  $23,000 for the 2007 period  compared to $147,000 in 2006.  The
decrease  was due to the gain in 2006 on the sale of $13.7  million of  mortgage
servicing rights on loans previously sold in the secondary market.

Other Income (dollars in thousands)
For the year-ended December 31

                                                        2008      2007      2006
                                                     ---------------------------
Service charges on deposit accounts                  $   194   $   226   $   296
ATM Fees                                                 280       241       224
NSF Fees                                               1,424     1,347     1,260
Safe Deposit Box Rental                                   55        55        55
Loan related service fees                                281       236       271
Debit Card                                               376       328       282
Fiduciary activities                                     404       423       355
Commissions on mutual funds & annuities                  105       120       131
Gain on sales of mortgage loans                          499        23       147
Earnings on bank-owned life insurance                    345       333       309
Other income                                             142       175       187
                                                     ---------------------------
                                                       4,105     3,507     3,517
Net realized gains (losses) on sales of securities       (18)       17        66
                                                     ---------------------------

Total                                                $ 4,087   $ 3,524   $ 3,583
                                                     ===========================

OTHER EXPENSES
     Other expenses  totaled  $12,240,000  for the year-ended  December 31, 2008
compared to  $11,341,000  in 2007, an increase of $899,000 or 7.9%. The increase
was principally due to $582,000 of costs  associated with a parcel of foreclosed
real estate. Excluding these expenses, other expenses increased 2.8%.

     Salaries and employee  benefits  expense which  represented  49.4% of total
other  expenses  increased  $221,000 or 3.8% to  $6,046,000  in 2008.  Equipment
expense decreased $46,000 to $507,000.  The decline was principally due to lower
maintenance  expenses  as  the  Bank  utilized  branch  document  image  capture
technology which reduced back-office check processing costs. The same technology
also reduced  courier  expense  (included in other) by $48,000.  Data processing
related costs totaled $753,000, an increase of

24



$63,000 principally due to branch and remote deposit capture and enhancements to
the Bank's internet banking system.  The efficiency ratio,  which is total other
expenses as a percentage of net interest  income (fte) plus other income for the
year ended December 31, 2008 was 52.9% improving from 53.2% in 2007.

     The  Company  anticipates  a  significant  increase  in the cost of federal
deposit  insurance  from the current  levels of five to seven basis points.  The
FDIC has  recently  increased  the  assessment  rate for the most  highly  rated
institutions to between 12 and 14 basis points for the first quarter of 2009 and
to between 12 and 16 basis points thereafter.  Assessment rates could be further
increased if an  institution's  FHLB advances  exceed 25% of deposits.  The FDIC
adopted an interim rule imposing a 20 basis point emergency  special  assessment
on June 30, 2009 payable  September  30, 2009.  The FDIC may  impose  additional
assessments  of  up to 10  basis  points  after  June  30.  The  FDIC  has  also
established a program under which it fully guarantees all  non-interest  bearing
transaction accounts and senior unsecured debt of a bank or its holding company.
The Bank is  participating in this program and will be assessed ten basis points
for non-interest  bearing transaction account balances in excess of $250,000 and
75 basis points of the amount of any debt issued.  At this time, the Bank has no
plans to issue any debt.

     Other expenses for the year ended December 31, 2007 totaled $11,341,000, an
increase of $384,000, or 3.50% over the $10,957,000 in 2006.

     Salaries and employee  benefits  expense which  represented  51.4% of total
other  expenses,  increased  $170,000 or 3.0% to $5,825,000 in 2007. The Company
incurred  $251,000  of expense  related to stock  options in 2007,  compared  to
$136,000 in 2006 with the  increase  related to the timing of grants  awarded in
2006.  The  Company  had  expense  of  $444,000  related to its  Employee  Stock
Ownership Plan (ESOP) in 2006 with no similar  expense in 2007 as the plan had a
ten year life and was fully allocated as of September 30, 2006. This decrease in
expense  was  partially  offset by higher  401k Plan  expense  of  $220,000  and
incentives of $62,000.

     Occupancy  expenses  increased  $119,000 to $1,087,000 in 2007  principally
with $71,000 of the increase related to the Tannersville  branch which opened in
December 2006. Furniture and equipment expense increased $74,000 to $553,000 due
to maintenance expense on imaging equipment and $31,000 of costs associated with
Tannersville.  The  efficiency  ratio for the year ended  December  31, 2007 was
53.2% improving from 54.0% for 2006.

INCOME TAXES
     Income tax expense for the year ended December 31, 2008 totaled  $2,836,000
for an effective tax rate of 29.8%  compared to an expense of $2,629,000  and an
effective tax rate of 28.8% for 2007.

     Income tax expense for the year ended December 31, 2007 totaled  $2,629,000
for an effective tax rate of 28.8%  compared to an expense of $2,679,000  and an
effective  tax rate of 31.2% in 2006.  The decrease in the effective tax rate is
partially due to a higher level of tax-exempt income in 2007.

CAPITAL AND DIVIDENDS
     Total  stockholders'  equity as of December  31, 2008,  was $58.7  million,
compared to $55.8 million as of year-end 2007. The increase was  principally due
to  retention  of  earnings  of  $3,888,000  after cash  dividends  declared  of
$2,789,000.  This was  partially  offset  by net  treasury  stock  purchases  of
$535,000.  Accumulated other  comprehensive  income increased $225,000 due to an
increase in the fair value of securities in the Company's portfolio  principally
as a result of a change in interest  rates.  As of December 31, 2008 the Company
had a

                                                                              25


leverage capital ratio of 11.45%,  Tier 1 risk-based capital of 16.22% and total
risk-based   capital  of  17.50%   compared  to,  11.38%,   16.26%  and  17.60%,
respectively,  in 2007. Due to its strong capital position,  the Company elected
not to participate in the Treasury Department's TARP Capital Purchase Program.

     The Company's stock is traded on the Nasdaq Global market under the symbol,
NWFL. As of December 31, 2008, there were approximately 1,500 shareholders based
on transfer agent mailings.

     The following table sets forth the price range and cash dividends  declared
per share regarding the common stock for the periods indicated:

                             Closing Price Range
                         ----------------------------    Cash dividends
                             High             Low      declared per share
                         ------------------------------------------------
Year 2007
- ---------
First Quarter            $   33.75        $   30.50        $   .23
Second Quarter               33.35            31.45            .23
Third Quarter                32.65            30.05            .23
Fourth Quarter               32.50            29.90            .25

Year 2008
- ---------
First Quarter            $   31.99        $   28.90        $   .25
Second Quarter               31.00            29.00            .25
Third Quarter                30.75            27.50            .25
Fourth Quarter               32.00            27.00            .27

     The book  value of the  common  stock was $21.45 as of  December  31,  2008
compared to $20.27 as of December 31,  2007.  As of year-end  2008,  the closing
stock  price was $27.50 per share,  compared  to $31.25 per share as of December
31, 2007.

NON-GAAP FINANCIAL MEASURES
     This annual report  contains or references  tax-equivalent  interest income
and net interest income, which are non-GAAP financial  measures.  Tax-equivalent
interest  income and net interest income are derived from  GAAP interest  income
and net  interest  income  using an  assumed  tax rate of 34%.  We  believe  the
presentation  of interest  income and net  interest  income on a  tax-equivalent
basis ensures  comparability  of interest income and net interest income arising
from both  taxable  and tax exempt  sources  and its  consistent  with  industry
practice.  Tax-equivalent net interest income is reconciled to GAAP net interest
income on page 29. 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.

26



STOCK PERFORMANCE GRAPH
     Set forth below is a stock performance graph comparing the cumulative total
shareholder return on the Common Stock with (a) the cumulative total stockholder
return  on  stocks  included  in the  Nasdaq  Stock  Market  index  and  (b) the
cumulative total stockholder return on stocks included in the Nasdaq Bank index,
as prepared  by the Center for  Research in  Securities  Prices  ("CRSP") at the
University of Chicago. All three investment comparisons assume the investment of
$100 at the market close on December 31, 2003 and the  reinvestment of dividends
paid.  The graph  provides  comparison at December 31, 2003 and each fiscal year
through December 31, 2008.

                                    Comparison of 5 Year Cumulative Total Return
                                          Assumes Initial Investment of $100
                                                    December 2008

                                    [LINE GRAPH SHOWING FIVE-YEAR TOTAL RETURNS
                                      ON NORWOOD FINANCIAL COMMON STOCK VERSUS
                                        NASDAQ U.S. AND NASDAQ BANK INDEXES.
                                                DATA POINTS BELOW.]




- ----------------------------------------------------------------------------------------------------------------------------
                                     Legend

Symbol    CRSP Total Returns Index for:       12/31/03  12/31/04  12/31/05  12/31/06  12/31/07  12/31/08
- ------    -----------------------------       --------  --------  --------  --------  --------  --------

                                                                           
          Norwood Financial Corp                100.0     138.3     129.0     135.8     138.9     126.2
          CRSP Nasdaq U.S. Index                100.0     108.8     111.1     122.1     132.4      63.8
          CRSP Nasdaq Bank Index                100.0     114.5     111.8     125.5      99.5      72.5
          SIC 6020-6029, 6710-6719 US & Foreign

Notes:
- ------
        A.  The lines represent monthly index levels derived from compounded daily returns that include all dividends.
        B.  The indexes are reweighted daily, using the market capitalizaion on the previous trading day.
        C.  If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used.
        D.  The index level for all series was set to $100.0 on 12/31/2003.
- ----------------------------------------------------------------------------------------------------------------------------


     There can be no assurance that the Company's future stock  performance will
be the same or similar to the historical  performance  shown in the above graph.
The Company neither makes nor endorses any predictions as to stock performance.

                                                                              27



NORWOOD FINANCIAL CORP.
SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
(Dollars in thousands, except per share amounts)



2008
                                                       December 31    September 30        June 30         March 31
                                                     --------------------------------------------------------------
                                                                                          
Interest income                                      $       6,934   $       7,059    $       6,953   $       7,149
Interest expense                                             2,207           2,283            2,379           2,825
                                                     --------------------------------------------------------------
  Net interest income                                        4,727           4,776            4,574           4,324
Provision for loan losses                                      420             130              110              75
Other income                                                   890           1,000              953           1,262
Net realized gains (losses) on sales of securities               -             (27)               9            --
Other expense                                                2,946           3,361            2,972           2,961
                                                     --------------------------------------------------------------

Income before income taxes                                   2,251           2,258            2,454           2,550
Income tax expense                                             666             666              733             771
                                                     --------------------------------------------------------------
NET INCOME                                           $       1,585   $       1,592    $       1,721   $       1,779
                                                     ==============================================================

Basic earnings per share                             $        0.58   $        0.58    $        0.63   $        0.65
                                                     ==============================================================

Diluted earnings per share                           $        0.58   $        0.58    $        0.62   $        0.64
                                                     ==============================================================




2007
                                                       December 31    September 30        June 30         March 31
                                                     --------------------------------------------------------------
                                                                                          

Interest income                                      $       7,473   $       7,457    $       7,246   $       7,079
Interest expense                                             3,070           2,965            2,960           2,988
                                                     --------------------------------------------------------------
  Net interest income                                        4,403           4,492            4,286           4,091
Provision for loan losses                                      120              90               55              50
Other income                                                   858             913              842             894
Net realized gains on sales of securities                        2               -               15               -
Other expense                                                2,846           2,787            2,847           2,861
                                                     --------------------------------------------------------------

Income before income taxes                                   2,297           2,528            2,241           2,074
Income tax expense                                             625             722              671             611
                                                     --------------------------------------------------------------
NET INCOME                                           $       1,672   $       1,806    $       1,570   $       1,463
                                                     ==============================================================

Basic earnings per share                             $        0.61   $        0.65    $        0.56   $        0.52
                                                     ==============================================================

Diluted earnings per share                           $        0.60   $        0.64    $        0.55   $        0.51
                                                     ==============================================================


28




NORWOOD FINANCIAL CORP. CONSOLIDATED AVERAGE BALANCE SHEETS WITH RESULTANT
INTEREST AND RATES
(Tax-Equivalent Basis, dollars in thousands)



Year Ended December 31                       2008                           2007                            2006
                                 --------------------------------------------------------------------------------------------
                                 Average                  Ave   Average                  Ave   Average                  Ave
                                 Balance(2) Interest (1)  Rate  Balance(2) Interest (1)  Rate  Balance(2) Interest (1)  Rate
                                 --------------------------------------------------------------------------------------------
                                                                                            
ASSETS
Interest Earning Assets:
  Federal funds sold             $  1,082    $    28      2.59% $   3,895  $   195       5.01% $  2,778      $   142    5.11%
  Interest bearing deposits
    with banks                         66          1      1.52        483       26       5.38        98            5    5.10
  Securities held to maturity         706         61      8.64        830       74       8.92       981           90    9.17
  Securities available for sale
    Taxable                       108,809      5,207      4.79     99,399    4,571       4.60    99,571        3,712    3.73
    Tax-exempt                     22,108      1,266      5.73     19,320    1,052       5.45    17,070          925    5.42
                                 -------------------            ------------------             ---------------------
      Total securities
        available for sale        130,917      6,473      4.94    118,719    5,623       4.74   116,641        4,637    3.98
Loans receivable (3,4)            335,137     22,161      6.61    323,444   23,876       7.38   301,533       21,600    7.16
                                 -------------------            ------------------             ---------------------
      Total interest
        earning assets            467,908     28,724      6.14    447,371   29,794       6.66   422,031       26,474    6.27
Non-interest earning assets:
  Cash and due from banks           8,102                           8,128                         8,857
  Allowance for loan losses        (4,013)                         (3,925)                       (3,785)
  Other assets                     17,687                          17,318                        16,976
                                 --------                        --------                      --------
    Total non-interest
      earning assets               21,776                          21,521                        22,048
                                 --------                        --------                      --------
TOTAL ASSETS                     $489,684                        $468,892                      $444,079
                                 ========                        ========                      ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Bearing Liablities:
  Interest- bearing demand
    and money market             $102,358      1,449      1.42   $ 90,392    1,852       2.05  $ 96,882        1,688    1.74
  Savings                          44,510        208      0.47     45,858      215       0.47    49,937          232    0.46
  Time                            160,462      6,116      3.81    172,986    7,900       4.57   146,344        5,798    3.96
                                 -------------------            ------------------             ---------------------
      Total interest-bearing
        deposits                  307,330      7,773      2.53    309,236    9,967       3.22   293,163        7,718    2.63
Short-term borrowings              32,328        693      2.14     22,443      932       4.15    19,284          823    4.27
Other borrowings                   28,710      1,228      4.28     22,315    1,084       4.86    23,419        1,225    5.23
                                 -------------------            ------------------             ---------------------
      Total interest
        bearing liabilities       368,368      9,694      2.63    353,994   11,983       3.39   335,866        9,766    2.91
                                             -------                       -------             --------
Non-interest bearing liabilities:
Non-interest bearing
  demand deposits                  59,759                          56,523                        54,798
Other liabilities                   4,908                           4,545                         3,526
                                 --------                        --------                      --------
      Total non-interest
        bearing liabilities        64,667                          61,068                        58,324
                                 --------                        --------                      --------
Stockholders' equity               56,649                          53,830                        49,889
                                 --------                        --------                      --------
TOTAL LIABILITIES AND
  STOCKHOLDERS' EQUITY           $489,684                        $468,892                      $444,079
                                 ========                        ========                      ========
Net interest income
  (tax-equivalent basis)                      19,030      3.51%             17,811       3.27%                16,708    3.36%
Tax-equivalent basis adjustment                 (629)     ====                (539)      ====                   (525)   ====
                                             -------                       -------                          --------
     Net Interest Income                     $18,401                       $17,272                          $ 16,183
                                             =======                       =======                          ========
Net Interest margin
  (tax-equivalent basis)                                  4.07%                          3.98%                          3.96%
                                                          ====                           ====                           ====


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.   Loan balances include non-accrual loans and are net of unearned income.
4.   Loan yields  include  the effect of  amortization  of deferred  fees net of
     costs.

                                                                              29


RATE/VOLUME ANALYSIS
         The following table shows the fully taxable equivalent effect of
changes in volumes and rates on interest income and interest expense.



                                                                 Increase/(Decrease)
                                               ------------------------------------------------------------
(dollars in thousands)                           2008 compared to 2007        2007 compared to 2006
                                               ------------------------------------------------------------
                                                    Variance due to              Variance due to
                                               ------------------------------------------------------------
                                               Volume     Rate        Net     Volume       Rate       Net
                                               ------------------------------------------------------------
                                                                                 
INTEREST EARNING ASSETS:
- -----------------------------------------------------------------------------------------------------------
Federal funds sold                           $  (100)   $   (67)   $  (167)   $    56    $    (3)   $    53
Interest bearing deposits
  with banks                                     (14)       (11)       (25)        21       --           21
Securities held to maturity                      (11)        (2)       (13)       (14)        (2)       (16)
Securities available for sale
  Taxable                                        445        191        636         (6)       865        859
  Tax-exempt                                     158         56        214        122          5        127
                                               ------------------------------------------------------------
    Total securities available
      for sale                                   603        247        850        116        870        986

Loans receivable                                 840     (2,555)    (1,715)     1,603        673      2,276
                                               ------------------------------------------------------------
    Total interest earning assets              1,318     (2,388)    (1,070)     1,783      1,537      3,320
                                               ------------------------------------------------------------

INTEREST BEARING LIABILITIES:
- -----------------------------------------------------------------------------------------------------------
Interest- bearing demand
  and money market                               222       (625)      (403)      (119)       283        164
Savings                                           (6)        (1)        (7)       (19)         2        (17)
Time                                            (543)    (1,241)    (1,784)     1,143        959      2,102
                                               ------------------------------------------------------------
    Total interest-bearing deposits             (327)    (1,867)    (2,194)     1,006      1,243      2,249
Short-term borrowings                            316       (555)      (239)       132        (23)       109
Other borrowings                                 284       (140)       144        (56)       (85)      (141)
                                               ------------------------------------------------------------
    Total interest bearing liabilities           273     (2,562)    (2,289)     1,081      1,136      2,217
                                               ------------------------------------------------------------
Net interest income
  (tax-equivalent basis)                     $ 1,045    $   174    $ 1,219    $   701    $   401    $ 1,103
                                             ==============================================================



     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.

30



        MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

TO THE STOCKHOLDERS OF NORWOOD FINANCIAL CORP.

     Management  of Norwood  Financial  Corp.  and its  subsidiary  (Norwood) is
responsible for  establishing  and maintaining  adequate  internal  control over
financial  reporting  as  defined in Rules  13a-15(f)  and  15d-15(f)  under the
Securities  Exchange Act of 1934.  Norwood's  internal  control  over  financial
reporting is designed to provide reasonable  assurance regarding the reliability
of  financial  reporting  and  the  preparation  of the  consolidated  financial
statements  for  external  purposes in  accordance  with  accounting  principles
generally accepted in the Untied States of America.

     Norwood's internal control over financial reporting includes those policies
and  procedures  that:  (1)  pertain  to the  maintenance  of records  that,  in
reasonable   detail,   accurately  and  fairly  reflect  the   transactions  and
dispositions  of the assets of Norwood;  (2) provide  reasonable  assurance that
transactions  are  recorded as  necessary  to permit  preparation  of  financial
statements in accordance with generally accepted accounting principles, and that
our  receipts  and   expenditures   are  being  made  only  in  accordance  with
authorizations of Norwood's management and directors; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized  acquisition,
use or disposition of Norwood's  assets that could have a material effect on the
consolidated financial statements.

     Because  of its  inherent  limitations,  internal  control  over  financial
reporting  may not prevent or detect  misstatements.  Also,  projections  of any
evaluation  of  effectiveness  to future  periods  are  subject to the risk that
controls may become  inadequate  because of changes in  conditions,  or that the
degree of compliance with the policies or procedures may deteriorate.

     Management  assessed the  effectiveness of Norwood's  internal control over
financial  reporting  as of  December  31,  2008.  In  making  this  assessment,
management   used  the  criteria  set  forth  by  the  Committee  of  Sponsoring
Organizations  of the  Treadway  Commission  in  "Internal  Control - Integrated
Framework."  Based on our assessment and those criteria,  management  determined
that Norwood maintained  effective internal control over financial  reporting as
of December 31, 2008.

     Norwood's  Independent  Registered  Public  Accounting Firm has audited the
effectiveness  of Norwood's  internal  control over financial  reporting.  Their
report appears on page 33.




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

William W. Davis, Jr.                               Lewis J. Critelli
President and Chief                                 Executive Vice President,
Exeutive Officer                                    Secretary and Chief
                                                    Financial Officer


                                                                              31



BMC

            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Norwood Financial Corp.
Honesdale, Pennsylvania

     We have audited the  accompanying  consolidated  balance  sheets of Norwood
Financial  Corp.  and its  subsidiary as of December 31, 2008 and 2007,  and the
related consolidated  statements of income,  stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 2008.  Norwood
Financial  Corp.  and its  subsidiary's  management  is  responsible  for  these
consolidated  financial statements.  Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.

     We  conducted  our audits in  accordance  with the  standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
consolidated  financial statements are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the  consolidated  financial  statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present  fairly,  in all material  respects,  the financial  position of Norwood
Financial  Corp.  and its  subsidiary as of December 31, 2008 and 2007,  and the
results  of their  operations  and their cash flows for each of the years in the
three-year  period  ended  December  31,  2008  in  conformity  with  accounting
principles generally accepted in the United States of America.

     We also have  audited,  in  accordance  with the  standards  of the  Public
Company Accounting Oversight Board (United States),  Norwood Financial Corp. and
its subsidiary's  internal  control over financial  reporting as of December 31,
2008, based on criteria  established in Internal Control - Integrated  Framework
issued by the Committee of Sponsoring  Organizations of the Treadway  Commission
(COSO), and our report dated March 10, 2009 expressed an unqualified opinion.


                                /s/Beard Miller Company LLP

Beard Miller Company LLP
Lancaster, Pennsylvania
March 10, 2009

32

BMC

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Norwood Financial Corp.
Honesdale, Pennsylvania

     We have audited  Norwood  Financial  Corp.  and its  subsidiary's  internal
control over  financial  reporting  as of December  31, 2008,  based on criteria
established in Internal  Control - Integrated  Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Norwood Financial
Corp. and its subsidiary's  management is responsible for maintaining  effective
internal  control  over  financial  reporting  and  for  its  assessment  of the
effectiveness  of internal  control  over  financial  reporting  included in the
accompanying  Management's Report on Internal Control Over Financial  Reporting.
Our  responsibility  is to express an opinion on the Company's  internal control
over financial reporting based on our audit.

     We  conducted  our audit in  accordance  with the  standards  of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and  perform  the audit to obtain  reasonable  assurance  about  whether
effective  internal  control over  financial  reporting  was  maintained  in all
material  respects.  Our audit of  internal  control  over  financial  reporting
included   obtaining  an   understanding  of  internal  control  over  financial
reporting,  assessing the risk that a material weakness exists,  and testing and
evaluating the design and operating  effectiveness  of internal control based on
the assessed risk. Our audit also included  performing such other  procedures as
we considered necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.

     A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (1) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions  of the assets of the company;  (2)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use, or  disposition  of the company's
assets that could have a material effect on the financial statements.

     Because  of its  inherent  limitations,  internal  control  over  financial
reporting  may not prevent or detect  misstatements.  Also,  projections  of any
evaluation  of  effectiveness  to future  periods  are  subject to the risk that
controls may become  inadequate  because of changes in  conditions,  or that the
degree of compliance with the policies or procedures may deteriorate.

     In our opinion,  Norwood Financial Corp. and its subsidary  maintained,  in
all material respects, effective internal control over financial reporting as of
December  31,  2008,  based  on  criteria  established  in  Internal  Control  -
Integrated Framework issued by the Committee of Sponsoring  Organizations of the
Treadway Commission (COSO).

     We have also  audited,  in  accordance  with the  standards  of the  Public
Company  Accounting  Oversight Board (United States),  the consolidated  balance
sheets and the related consolidated  statements of income,  stockholders' equity
and cash flows of Norwood  Financial  Corp. and its  subsidiary,  and our report
dated March 10, 2009 expressed an unqualified opinion.


                                /s/Beard Miller Company LLP

Beard Miller Company, LLP
Lancaster, Pennsylvania
March 10, 2009

                                                                              33


CONSOLIDATED BALANCE SHEETS



                                                                                   December 31,
                                                                              ----------------------
                                                                                 2008        2007
                                                                              ----------------------
                                                                                  (In Thousands,
                                                                                 Except Share Data)
                                                                                    
                                       ASSETS
Cash and due from banks                                                       $   6,463    $   9,014
Interest bearing deposits with banks                                                 17           50
                                                                              ----------------------

    Cash and Cash Equivalents                                                     6,480        9,064

Securities available for sale                                                   130,120      123,987
Securities held to maturity, fair value 2008 $720; 2007 $721                        707          705
Loans receivable, net of allowance for loan losses 2008 $4,233; 2007 $4,081     345,171      327,215
Investment in FHLB stock, at cost                                                 3,538        2,072
Bank premises and equipment, net                                                  5,490        5,742
Bank owned life insurance                                                         8,068        7,767
Accrued interest receivable                                                       2,179        2,343
Foreclosed real estate owned                                                        660         --
Other assets                                                                      1,883        1,715
                                                                              ----------------------

    Total Assets                                                              $ 504,296    $ 480,610
                                                                              ======================

                        LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
  Non-interest bearing demand                                                 $  56,839    $  60,061
  Interest-bearing demand                                                        35,322       32,426
  Money market deposit accounts                                                  60,623       57,970
  Savings                                                                        44,577       42,962
  Time                                                                          162,274      176,581
                                                                              ----------------------

    Total Deposits                                                              359,635      370,000

Short-term borrowings                                                            38,126       26,686
Other borrowings                                                                 43,000       23,000
Accrued interest payable                                                          2,247        3,198
Other liabilities                                                                 2,598        1,907
                                                                              ----------------------

    Total Liabilities                                                           445,606      424,791
                                                                              ----------------------

Stockholders' Equity
  Common stock, par value $.10 per share; authorized 10,000,000 shares;
    issued: 2,840,872                                                               284          284
  Surplus                                                                         9,972       10,159
  Retained earnings                                                              50,398       47,030
  Treasury stock, at cost 2008 104,310 shares; 2007 87,256 shares                (3,243)      (2,708)
  Accumulated other comprehensive income                                          1,279        1,054
                                                                              ----------------------

    Total Stockholders' Equity                                                   58,690       55,819
                                                                              ----------------------

    Total Liabilities and Stockholders' Equity                                $ 504,296    $ 480,610
                                                                              ======================


See notes to consolidated financial statements.

34



CONSOLIDATED STATEMENTS OF INCOME


                                                                         Years Ended December 31,
                                                            -----------------------------------------------
                                                                    2008             2007           2006
                                                            -----------------------------------------------
                                                                 (In Thousands, Except per Share Data)

                                                                                   
INTEREST INCOME
  Loans receivable, including fees                          $      21,983    $      23,720   $      21,422
  Securities:
    Taxable                                                         5,207            4,571           3,712
    Tax exempt                                                        876              743             668
  Other                                                                29              221             147
                                                            -----------------------------------------------

      Total Interest Income                                        28,095           29,255          25,949
                                                            -----------------------------------------------

INTEREST EXPENSE
  Deposits                                                          7,773            9,967           7,718
  Short-term borrowings                                               693              932             823
  Other borrowings                                                  1,228            1,084           1,225
                                                            -----------------------------------------------

      Total Interest Expense                                        9,694           11,983           9,766
                                                            -----------------------------------------------

      Net Interest Income                                          18,401           17,272          16,183

PROVISION FOR LOAN LOSSES                                             735              315             220
                                                            -----------------------------------------------

      Net Interest Income after Provision for Loan Losses          17,666           16,957          15,963
                                                            -----------------------------------------------

OTHER INCOME
  Service charges and fees                                          2,600            2,509           2,455
  Income from fiduciary activities                                    404              423             355
  Net realized gains (losses) on sales of securities                  (18)              17              66
  Gain on sales of loans and servicing rights                         499               23             147
  Earnings on life insurance policies                                 344              333             309
  Other                                                               258              219             251
                                                            -----------------------------------------------

      Total Other Income                                            4,087            3,524           3,583
                                                            -----------------------------------------------

OTHER EXPENSES
  Salaries and employee benefits                                    6,046            5,825           5,655
  Occupancy                                                         1,118            1,087             968
  Furniture and equipment                                             507              553             479
  Data processing related operations                                  753              690             700
  Advertising                                                         213              235             224
  Professional fees                                                   331              349             340
  Postage and telephone                                               521              491             471
  Taxes, other than income                                            504              414             354
  Foreclosed real estate owned                                        582                -               -
  Amortization of intangible assets                                    52               52              52
  Other                                                             1,613            1,645           1,714
                                                            -----------------------------------------------

      Total Other Expenses                                         12,240           11,341          10,957
                                                            -----------------------------------------------

      Income before Income Taxes                                    9,513            9,140           8,589

INCOME TAX EXPENSE                                                  2,836            2,629           2,679
                                                            -----------------------------------------------

      Net Income                                            $       6,677    $       6,511   $       5,910
                                                            ==============================================

EARNINGS PER SHARE
Basic                                                       $        2.44    $        2.34   $        2.11
                                                            ==============================================
Diluted                                                     $        2.41    $        2.30   $        2.07
                                                            ==============================================


See notes to consolidated financial statements.
                                                                              35



CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY



                                                                 Years Ended December 31, 2008, 2007 and 2006
                                  --------------------------------------------------------------------------------------------------
                                                                                                     Accumulated
                                      Common Stock                                  Treasury Stock      Other      Unearned
                                  ---------------------                Retained    ----------------  Comprehensive   ESOP
                                   Shares       Amount      Surplus    Earnings    Shares    Amount  Income (Loss)  Shares    Total
                                  --------------------------------------------------------------------------------------------------
                                                            (Dollars in Thousands, Except Per Share Data)
                                                                                               
BALANCE - DECEMBER 31, 2005       2,705,715   $     270   $   5,648    $  43,722   21,189  $   (633)    $    (772) $ (127) $ 48,108
                                                                                                                            -------
Comprehensive income:
  Net income                                                               5,910        -                                     5,910
  Change in unrealized
    gains (losses) on
    securities available
    for sale, net of
    reclassification
    adjustment and tax effects            -           -           -            -        -         -           728       -       728
                                                                                                                            -------
    Total Comprehensive Income                                                                                                6,638
                                                                                                                            -------
  Cash dividends declared,
    $0.85 per share                       -           -           -       (2,368)       -         -             -       -    (2,368)
  5% stock dividend at $30.59
    per share                       135,157          14       4,121       (4,139)   1,933         -             -       -        (4)
  Acquisition of treasury stock           -           -           -            -   28,746      (890)            -       -      (890)
  Stock options exercised                 -           -         (68)           -   (4,331)      128             -       -        60
  Tax benefit of stock options
    exercised                             -           -          10            -        -         -             -       -        10
  Sale of treasury stock for ESOP         -           -           8            -   (3,816)      112             -       -       120
  Compensation expense
    related to stock options              -           -         136            -        -         -             -       -       136
  Release of earned ESOP
    shares, net                           -           -         294            -        -         -             -     127       421
                                  --------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2006       2,840,872         284      10,149       43,125   43,721    (1,283)          (44)      -    52,231
Comprehensive income:
Net income                                -           -           -        6,511        -         -             -       -     6,511
  Change in unrealized gains on
    securities available
    for sale, net of
    reclassification
    adjustment and tax effects            -           -           -            -        -         -         1,098       -     1,098
                                                                                                                            -------

    Total Comprehensive Income            -           -           -            -        -         -             -       -     7,609
                                                                                                                            -------

  Cash dividends declared,
    $0.94 per share                       -           -           -       (2,606)       -         -             -       -    (2,606)
  Acquisition of treasury stock           -           -           -            -   72,875    (2,313)            -       -    (2,313)
  Stock options exercised                 -           -        (404)           -  (24,720)      745             -       -       341
  Tax benefit of stock options
    exercised                             -           -         162            -        -         -             -       -       162
  Sale of treasury stock for ESOP         -           -           1            -   (4,620)      143             -       -       144
  Compensation expense related
    to stock options                      -           -         251            -        -         -             -       -       251
                                  --------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2007       2,840,872         284      10,159       47,030   87,256    (2,708)        1,054       -    55,819
Comprehensive income:
  Net income                              -           -           -        6,677        -         -             -       -     6,677
  Change in unrealized gains on
    securities available for
    sale, net of
    reclassification
    adjustment and tax effects            -           -           -            -        -         -           225       -       225
                                                                                                                            -------
    Total Comprehensive Income            -           -           -            -        -         -             -       -     6,902
                                                                                                                            -------
  Cash dividends declared,
    $1.02 per share                       -           -           -       (2,789)       -         -             -       -    (2,789)
  Acquisition of treasury stock           -           -           -            -   50,632    (1,583)            -       -    (1,583)
  Stock options exercised                 -           -        (455)           -  (27,979)      875             -       -       420
  Tax benefit of stock options
    exercised                             -           -         134            -        -         -             -       -       134
  Sale of treasury stock for ESOP         -           -         (20)           -   (5,599)      173             -       -       153
  Compensation expense related
    to stock options                      -           -         154            -        -         -             -       -       154
  Cumulative effect of net
    periodic postretirement benefit       -           -           -         (520)       -         -             -       -      (520)
                                  --------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2008       2,840,872   $     284   $   9,972    $  50,398  104,310  $ (3,243)    $   1,279  $ --    $ 58,690
                                  =================================================================================================


See notes to consolidated financial statements.

36



CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                                                         Years Ended December 31,
                                                                                    -------------------------------------
                                                                                       2008        2007            2006
                                                                                    -------------------------------------
                                                                                              (In Thousands)
                                                                                                       
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                                          $  6,677    $  6,511         $  5,910
Adjustments to reconcile net income to net cash provided by
  operating activities:
    Provision for loan losses                                                            735         315              220
    Depreciation                                                                         577         566              503
    Amortization of intangible assets                                                     52          52               52
    Deferred income taxes                                                                 36        (151)            (108)
    Net amortization of securities premiums and discounts                                 44         113              301
    Net realized (gains) losses on sales of securities                                    18         (17)
    Earnings on life insurance                                                          (301)       (288)            (266)
    (Gain) loss on sale of bank premises and equipment and
      foreclosed real estate                                                             540          (1)             (12)
    Net gain on sale of mortgage loans and servicing rights                             (499)        (23)
    Mortgage loans originated for sale                                                  (866)       (794)          (2,065)
    Proceeds from sale of mortgage loans and servicing rights originated for sale        881         817            2,212
    Release of ESOP shares                                                                 -           -              421
    Compensation expense related to stock options                                        154         251              136
    Decrease (increase) in accrued interest receivable and
      other assets                                                                       (68)       (414)           1,137
    Increase (decrease) in accrued interest payable and other liabilities               (829)     (3,228)           4,543
                                                                                    -------------------------------------
      Net Cash Provided by Operating Activities                                        7,151       3,709           12,771
                                                                                    -------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
  Securities available for sale:
    Proceeds from sales                                                                   67          74               96
    Proceeds from maturities and principal reductions on
      mortgage-backed securities                                                      39,319      52,408           35,962
    Purchases                                                                        (45,254)    (62,005)         (32,291)
  Securities held to maturity, proceeds from maturities                                    -         250              505
  Increase in investment in FHLB stock                                                (1,466)       (385)             (67)
  Net  increase in loans                                                             (33,523)    (15,839)         (24,892)
  Proceeds from sale of mortgage loans and servicing rights                           13,988           -                -
  Purchase of bank premises and equipment                                               (325)       (288)          (1,130)
  Proceeds from sales of premises and equipment and foreclosed
    real estate                                                                            -           1               64
                                                                                    -------------------------------------
      Net Cash Used in Investing Activities                                          (27,194)    (25,784)         (21,753)
                                                                                    -------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net increase (decrease) in deposits                                                (10,365)     11,897           17,500
  Net increase in short-term borrowings                                               11,440       3,950            4,172
  Proceeds  from other borrowings                                                     25,000      15,000                -
  Repayments of other borrowings                                                      (5,000)     (5,000)         (10,000)
  Stock options exercised                                                                420         341               60
  Tax benefit of stock options exercised                                                 134         162               10
  Purchase of ESOP shares from treasury stock                                            153         144              120
  Acquisition of treasury stock                                                       (1,583)     (2,313)            (890)
  Cash dividends paid                                                                 (2,740)     (2,559)          (2,289)
                                                                                    -------------------------------------
      Net Cash Provided by Financing Activities                                       17,459      21,622            8,683
                                                                                    -------------------------------------
      Net Decrease in Cash and Cash Equivalents                                       (2,584)       (453)            (299)

CASH AND CASH EQUIVALENTS - BEGINNING                                                  9,064       9,517            9,816
                                                                                    -------------------------------------
CASH AND CASH EQUIVALENTS - ENDING                                                  $  6,480    $  9,064         $  9,517
                                                                                    =====================================


See notes to consolidated financial statements.

                                                                              37


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - NATURE OF OPERATIONS
     Norwood Financial Corp. (Company) is a one bank holding company. Wayne Bank
(Bank)  is  a   wholly-owned   subsidiary   of  the  Company.   The  Bank  is  a
state-chartered  bank located in Honesdale,  Pennsylvania.  The Company  derives
substantially  all of its income from the bank related  services  which  include
interest  earnings on commercial  mortgages,  residential real estate mortgages,
commercial  and  consumer  loans,  as well as interest  earnings  on  investment
securities  and fees from  deposit  services  to its  customers.  The Company is
subject to regulation  and  supervision  by the Federal  Reserve Board while the
Bank is subject to regulation and supervision by the Federal  Deposit  Insurance
Corporation and the Pennsylvania Department of Banking.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
     The consolidated  financial  statements include the accounts of the Company
and  its  wholly-owned  subsidiary,   the  Bank,  and  the  Bank's  wholly-owned
subsidiaries,  WCB Realty Corp.,  Norwood  Investment Corp. and WTRO Properties.
All   intercompany   accounts  and   transactions   have  been   eliminated   in
consolidation.

Estimates
     The  preparation  of financial  statements  in conformity  with  accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management to make estimates and assumptions that affect the reported amounts of
assets and  liabilities  and disclosure of contingent  assets and liabilities at
the date of the financial  statements  and the reported  amounts of revenues and
expenses  during the reporting  period.  Actual  results could differ from those
estimates.  Material estimates that are particularly  susceptible to significant
change in the near term relate to the  determination  of the  allowance for loan
losses and the potential  impairment  of  restricted  stock and the valuation of
deferred tax assets and the determination of other-than-temporary  impairment on
securities and accounting for stock options.

Group Concentrations of Credit Risk
     Most  of  the  Company's  activities  are  with  customers  located  within
northeastern  Pennsylvania.  Note 4 discusses the types of  securities  that the
Company  invests  in.  Note 5  discusses  the types of lending  that the Company
engages in. The Company does not have any significant  concentrations to any one
industry or customer.

Concentrations of Credit Risk
     The  Bank  operates   primarily  in  Wayne,   Pike  and  Monroe   Counties,
Pennsylvania  and,  accordingly,  has extended  credit  primarily to  commercial
entities and  individuals in this area whose ability to honor their contracts is
influenced  by the  region's  economy.  These  customers  are also  the  primary
depositors of the Bank. The Bank is limited in extending credit by legal lending
limits to any single borrower or group of borrowers.

Securities
     Securities  classified as available for sale are those  securities that the
Company intends to hold for an indefinite  period of time but not necessarily to
maturity. Any decision to sell a security classified as available for sale would
be based on various factors,  including  significant movement in interest rates,
changes in  maturity  mix of the  Company's  assets and  liabilities,  liquidity
needs,  regulatory capital considerations and other similar factors.  Securities
available  for sale are carried at fair value.  Unrealized  gains and losses are
reported in other comprehensive  income, net of the related deferred tax effect.
Realized  gains or losses,  determined  on the basis of the cost of the specific
securities sold, are included in earnings. Premiums and discounts are recognized
in interest  income using a method which  approximates  the interest method over
the term of the security.

     Bonds,  notes and debentures for which the Company has the positive  intent
and ability to hold to maturity are reported at cost,  adjusted for premiums and
discounts that are recognized in interest  income using the interest method over
the term of the security.

38



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
     Management determines the appropriate  classification of debt securities at
the time of purchase and re-evaluates  such designation as of each balance sheet
date.

     Declines  in the fair  value of held to  maturity  and  available  for sale
securities  below  their  cost that are deemed to be other  than  temporary  are
reflected in earnings as realized  losses.  In  estimating  other-than-temporary
impairment losses, management considers (1) the length of time and the extent to
which the fair value has been less than cost,  (2) the  financial  condition and
near-term prospects of the issuer, and (3) the intent and ability of the Company
to retain its investment in the issuer for a period of time  sufficient to allow
for any anticipated recovery in fair value.

     Federal law  requires a member  institution  of the Federal  Home Loan Bank
system to hold  stock of its  district  Federal  Home Loan Bank  according  to a
predetermined formula. This restricted stock is carried at cost.

     Restricted stock which represents  required  investment in the common stock
of correspondent  banks is carried at cost and as of December 31, 2008 and 2007,
consists  of the  common  stock of  Federal  Home  Loan Bank of  Pittsburgh.  In
December  2008,  the  FHLB  of  Pittsburgh  notified  member  banks  that it was
suspending dividend payments and the repurchase of capital stock.

     Management evaluates the restricted stock for impairment in accordance with
Statement of Position  (SOP) 01-6,  Accounting  by Certain  Entities  (Including
Entities  With Trade  Receivables)  That Lend to or Finanace the  Activities  of
Others.  Management's determination of whether these investments are impaired is
based on their  assessment of the ultimate  recoverability  of their cost rather
than by recognizing  temporary declines in value. The determination of whether a
decline  affects the  ultimate  recoverability  of their cost is  influenced  by
criteria such as (1) the  significance  of the decline in net assets of the FHLB
as compared to the capital stock amount for the FHLB and the length of time this
situation has persisted,  (2) commitments  by the FHLB to make payments required
by law or regulation and the level of such payments in relation to the operating
performance  of the FHLB,  and  (3) the  impact of  legislative  and  regulatory
changes on  institutions  and,  accordingly,  on the customer  base of the FHLB.
Management  believes no impairment  charge is necessary related to FHLB stock as
of December 31, 2008.

Loans Receivable
     Loans receivable that management has the intent and ability to hold for the
foreseeable  future or until maturity or payoff are stated at their  outstanding
unpaid principal balances,  net of an allowance for loan losses and any deferred
fees.  Interest  income  is  accrued  on  the  unpaid  principal  balance.  Loan
origination  fees are  deferred and  recognized  as an  adjustment  of the yield
(interest  income) of the related  loans.  The Company is  generally  amortizing
these amounts over the contractual life of the loan.

     The accrual of  interest is  generally  discontinued  when the  contractual
payment of principal or interest has become 90 days past due or  management  has
serious  doubts about  further  collectibility  of  principal or interest,  even
though the loan is currently performing.  A loan may remain on accrual status if
it is in the process of  collection  and is either  guaranteed  or well secured.
When a loan is placed on nonaccrual  status,  unpaid interest credited to income
in the current  year is reversed and unpaid  interest  accrued in prior years is
charged against the allowance for loan losses.  Interest  received on nonaccrual
loans  generally  is either  applied  against  principal or reported as interest
income,   according  to  management's  judgment  as  to  the  collectibility  of
principal.  Generally,  loans are restored to accrual status when the obligation
is brought current, has performed in accordance with the contractual terms for a
reasonable  period  of  time  and  the  ultimate  collectibility  of  the  total
contractual principal and interest is no longer in doubt.

                                                                              39



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Allowance for Loan Losses
     The allowance for loan losses is  established  through  provisions for loan
losses charged  against  income.  Loans deemed to be  uncollectible  are charged
against the allowance for loan losses,  and subsequent  recoveries,  if any, are
credited to the allowance.

     The allowance for loan losses is maintained at a level considered  adequate
to provide for losses that can be reasonably anticipated.  Management's periodic
evaluation of the adequacy of the allowance is based on the Company's  past loan
loss experience,  known and inherent risks in the portfolio,  adverse situations
that may affect the  borrower's  ability to repay,  the  estimated  value of any
underlying  collateral,  composition  of the loan  portfolio,  current  economic
conditions and other relevant factors.  This evaluation is inherently subjective
as it  requires  material  estimates  that  may be  susceptible  to  significant
revision as more information becomes available.

     The allowance consists of specific, general and unallocated components. The
specific  component  relates to loans that are  classified  as either  doubtful,
substandard  or special  mention.  For such loans  that are also  classified  as
impaired,  an  allowance  is  established  when the  discounted  cash  flows (or
collateral value or observable  market price) of the impaired loan is lower than
the carrying value of that loan.  The general  component  covers  non-classified
loans  and is based on  historical  loss  experience  adjusted  for  qualitative
factors.  An  unallocated  component is maintained to cover  uncertainties  that
could affect management's estimate of probable losses. The unallocated component
of the allowance  reflects the margin of imprecision  inherent in the underlying
assumptions used in the methodologies for estimating specific and general losses
in the portfolio.

     A loan is  considered  impaired  when,  based on  current  information  and
events,  it is probable that the Company will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement.  Factors considered by management in determining  impairment
include  payment  status,  collateral  value and the  probability  of collecting
scheduled  principal  and  interest  payments  when due.  Loans that  experience
insignificant payment delays and payment shortfalls generally are not classified
as  impaired.  Management  determines  the  significance  of payment  delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay,  the reasons for the delay,  the borrower's  prior payment record and the
amount  of the  shortfall  in  relation  to the  principal  and  interest  owed.
Impairment is measured on a loan by loan basis for commercial  and  construction
loans by either the present  value of expected  future cash flows  discounted at
the loan's effective  interest rate, the loan's  obtainable  market price or the
fair value of the collateral if the loan is collateral dependent.

     Large  groups  of  smaller  balance   homogeneous  loans  are  collectively
evaluated for impairment.  Accordingly, the Company does not separately identify
individual   consumer  and   residential   real  estate  loans  for   impairment
disclosures, unless such loans are the subject of a restructuring agreement.

Premises and Equipment
     Premises and  equipment are stated at cost less  accumulated  depreciation.
Depreciation expense is calculated  principally on the straight-line method over
the respective assets estimated useful lives as follows:

                                                   Years
                                                  -------
           Buildings and improvements             10 - 40
           Furniture and equipment                 3 - 10

Transfers of Financial Assets
     Transfers of financial assets, including loan and loan participation sales,
are accounted for as sales,  when control over the assets has been  surrendered.
Control over transferred  assets is deemed to be surrendered when (1) the assets
have been isolated from the Company,  (2) the transferee obtains the right (free
of

40



NOTE 2 - SUMMARY OF SIGNIFICANT  ACCOUNTING POLICIES (CONTINUED)

conditions  that constrain it from taking  advantage of that right) to pledge or
exchange the transferred  assets and (3) the Company does not maintain effective
control over the  transferred  assets  through an agreement to  repurchase  them
before their maturity.

Foreclosed Real Estate
     Real estate properties  acquired  through,  or in lieu of, loan foreclosure
are to be sold and are initially recorded at fair value less cost to sell at the
date of foreclosure establishing a new cost basis. After foreclosure, valuations
are  periodically  performed by management and the real estate is carried at the
lower of its  carrying  amount  or fair  value  less cost to sell.  Revenue  and
expenses from operations and changes in the valuation  allowance are included in
other expenses.

Bank Owned Life Insurance
     The Company  invests in bank owned life  insurance  ("BOLI") as a source of
funding for employee  benefit  expenses.  BOLI  involves the  purchasing of life
insurance by the Bank on a chosen group of  employees.  The Company is the owner
and  beneficiary of the policies.  This life insurance  investment is carried at
the cash surrender value of the underlying policies. Income from the increase in
cash  surrender  value of the policies is included in other income on the income
statement.

Intangible Assets
     At  December  31,  2008 and 2007,  the  Company  had  intangible  assets of
$117,000 and $169,000,  arising from the purchase of deposits in 1996,  which is
net of accumulated  amortization of $663,000 and $611,000, which are included in
other  assets.  These  intangible  assets  will  continue to be  amortized  on a
straight-line  basis  over  fifteen  years.   Amortization  expense  related  to
intangible  assets was $52,000 for each of the years ended  December  31,  2008,
2007 and 2006.  The  amortization  expense will be $52,000 for each of the years
ended  December 31, 2009,  and 2010 and $13,000 for the year ended  December 31,
2011.

Income Taxes
     Deferred  income tax assets and  liabilities  are  determined  based on the
differences  between financial  statement  carrying amounts and the tax basis of
existing assets and liabilities.  These  differences are measured at the enacted
tax rates that will be in effect when these  differences  reverse.  Deferred tax
assets are reduced by a valuation  allowance when, in the opinion of management,
it is more likely than not that some portion of the deferred tax assets will not
be realized.  As changes in tax laws or rates are  enacted,  deferred tax assets
and liabilities are adjusted through the provision for income taxes. The Company
and its subsidiary file a consolidated federal income tax return.

     In July 2006, the Financial  Accounting  Standards  Board  ("FASB")  issued
FASB Interpretation  ("FIN") No. 48, Accounting for Uncertainty in Income Taxes.
This Interpretation requires an entity to analyze each tax position taken in its
tax returns and  determine  the  likelihood  that the position will be realized.
Only  tax  positions  that  are  "more-likely-than-not" to  be  realized  can be
recognized in an entity's  financial  statements.  For tax positions that do not
meet this  recognition  threshold,  an entity  will record an  unrecognized  tax
benefit for the difference  between the position taken on the tax return and the
amuont  recognized  in  the  financial  statements.  The  Company  adopted  this
Interpretation  on January 1, 2007.  The Company does not have any  unrecognized
tax  benefits  at December  31, 2008 or 2007 or during the years then ended.  No
unrecognized tax benefits are expected to arise within the next twelve months.

Advertising Costs
     The  Company  follows the policy of charging  the costs of  advertising  to
expense as incurred.

                                                                              41



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Earnings per Share
     On April 11, 2006, the Company declared a 5% stock dividend on common stock
outstanding  payable May 26, 2006 to shareholders of record on May 12, 2006. The
stock dividend resulted in the issuance of 135,157 additional common shares. All
share  amounts and per share data have been adjusted for the effect of the stock
dividend.

     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.

Stock Option Plans
     In December 2004, the Financial  Accounting  Standards  Board (FASB) issued
Statement  No. 123 (R),  "Share-Based  Payment."  Statement No. 123 (R) replaces
Statement No. 123, "Accounting for Stock-Based Compensation," and supersedes APB
Opinion No. 25,  "Accounting  for Stock Issued to Employees."  Statement No. 123
(R) requires the fair value of share-based payment transactions to be recognized
as  compensation  costs in the  financial  statements  over the  period  that an
employee  provides  service in  exchange  for the  award.  The fair value of the
share-based payments is estimated using the Black-Scholes  option-pricing model.
The Company adopted  Statement No. 123 (R) effective  January 1, 2006, using the
modified-prospective  transition method.  Under the modified prospective method,
companies are required to record  compensation  cost for new and modified awards
over the  related  vesting  period of such awards and record  compensation  cost
prospectively for the unvested portion,  at the date of adoption,  of previously
issued and outstanding  awards over the remaining vesting period of such awards.
No change to prior periods presented is permitted under the modified prospective
method.

Fair Value Measurements
     In  September  2006,  the FASB issued FASB  Statement  No. 157,  Fair Value
Measurements ("SFAS 157"), which defines fair value, establishes a framework for
measuring  fair value  under  GAAP,  and  expands  disclosures  about fair value
measurements.  SFAS 157 applies to other accounting  pronouncements that require
or permit fair value  measurements.  The  standard is  effective  for  financial
statements  issued for fiscal years  beginning  after November 15, 2007, and for
interim  periods  within  those  fiscal  years.  The  Company  adopted  SFAS 157
effective for its fiscal year  beginning  January 1, 2008. In December 2007, the
FASB issued FASB Staff  Position  (FSP) No. SFAS 157-2,  "Effective  Date of FAS
157"  for all  non-financial  assets  and  liabilities,  except  those  that are
recognized or disclosed at fair value on a recurring  basis (at least  annually)
to fiscal years  beginning  after  November 15, 2008 and interim  periods within
those fiscal  years.  In October 2008,  the FASB issued FSP SFAS No.  157-3,  to
clarify the  application of the provisions of SFAS 157 in an inactive market and
how an entity would  determine  fair value in an inactive  market.  FSP 157-3 is
effective immediately and applies to our December 31, 2008 financial statements.
The  adoption  of SFAS 157 and FSP No.  FAS 157-2  and FSP No.  FAS 157-3 had no
impact on the amounts reported in the  consolidated  financial  statements.  The
primary effect of SFAS 157 on the Company was to expand the required disclosures
pertaining to the methods used to determine fair values.

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 of purchase.

42



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     Cash payments for interest for the years ended December 31, 2008,  2007 and
2006 were $10,645,000,  $11,679,000, and $8,563,000, respectively. Cash payments
for income  taxes for the years  ended  December  31,  2008,  2007 and 2006 were
$3,138,000,  $2,845,000,  and  $2,677,000,   respectively.   Non-cash  investing
activities  for  2008,  2007  and  2006  included   foreclosed   mortgage  loans
transferred  to  foreclosed  real  estate and  repossession  of other  assets of
$1,328,000, $48,000, and $154,000, respectively.

Off-Balance Sheet Financial Instruments
     In  the  ordinary  course  of  business,   the  Company  has  entered  into
off-balance  sheet  financial  instruments  consisting of  commitments to extend
credit,  letters  of  credit  and  commitments  to sell  loans.  Such  financial
instruments  are recorded in the balance  sheets when they become  receivable or
payable.

Trust Assets
     Assets held by the Company in a fiduciary  capacity for  customers  are not
included  in the  financial  statements  since  such items are not assets of the
Company. Trust income is reported on the accrual method.

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:



                                                                     Years Ended December 31,
                                                                    --------------------------
                                                                      2008      2007     2006
                                                                    --------------------------
                                                                         (In Thousands)
                                                                             
Unrealized holding gains on available for sale securities           $  311    $1,665   $1,173
Reclassification adjustment for gains (losses) realized in income      (18)       17       66
                                                                    --------------------------
         Net Unrealized Gains                                          329     1,648    1,107

Income tax expense                                                     104       550      379
                                                                    --------------------------
         Net of Tax Amount                                          $  225    $1,098   $  728
                                                                    ==========================


Segment Reporting
     The Company acts as an independent community financial service provider and
offers  traditional  banking  and  related  financial  services  to  individual,
business  and  government  customers.  Through its branch and  automated  teller
machine  network,  the  Company  offers a full  array of  commercial  and retail
financial  services,  including the taking of time, savings and demand deposits;
the making of commercial, consumer and mortgage loans; and the providing of safe
deposit services.  The Company also performs  personal,  corporate,  pension and
fiduciary services through its Trust Department.  Management does not separately
allocate  expenses,  including  the cost of funding  loan  demand,  between  the
commercial,  retail,  mortgage banking and trust  operations of the Company.  As
such,  discrete  information is not available and segment reporting would not be
meaningful.

New Accounting Standards
     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  recongizes 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

                                                                              43


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
statements  to  evaluate  the  nature  and  financial  effects  of the  business
combination.  The  guidance  will  become  effective  as of the  beginning  of a
company's fiscal year beginning after December 15, 2008. This new  pronouncement
will impact the Company's accounting for business combinations beginning January
1, 2009.

     FASB Statement No. 160 "Noncontrolling  Interests in Consolidated Financial
Statements-an  amendment  of APB No. 51" was issued in  December  of 2007.  This
Statement establishes  accounting and reporting standards for the noncontrolling
interest in a subsidary and for the deconsolidation of a subsidary. 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.

     In February 2008, the FASB issued a FASB Staff Position  ("FSP") FAS 140-3,
"Accounting  for  Transfers  of  Financial   Assets  and  Repurchase   Financing
Transactions." This FSP addresses the issue of whether or not these transactions
should be viewed as two separate  transactions  or as one "linked"  transaction.
The FSP includes a "rebuttable  presumption"  that  presumes  linkage of the two
transactions unless the presumption can be overcome by meeting certain criteria.
The FSP will be effective for fiscal years beginning after November 15, 2008 and
will apply only to original  transfers made after that date; early adoption will
not be allowed. The Company is currently evaluating the potential impact the new
pronouncement will have on its 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 has 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 impact to the Company will be
to require  the  Company  to expand  its  disclosure  regarding  its  derivative
instruments, if applicable.

     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  141(R),  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 expects that FSP FAS 142-3 will not have an
impact 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

44



NOTE 2 - SUMMARY OF SIGNIFICANT  ACCOUNTING POLICIES  (CONTINUED)
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
expects  that  (FSP)  FAS  142-3  will not have an  impact  on its  consolidated
financial statements.

     In May  2008,  the FASB  issued  FASB  Staff  Position  ("FSP")  APB  14-1,
"Accounting for Convertible  Debt  Instruments  That May Be Settled in Cash upon
Conversion  (Including  Partial Cash Settlement)" which clarifies the accounting
for convertible debt instruments that may be settled in cash (including  partial
cash settlement) upon conversion. The FSP requires issuers to account separately
for the liability and equity components of certain  convertible debt instruments
in a manner that reflects the issuer's  nonconvertible  debt borrowing rate when
interest cost is recognized.  The FSP requires bifurcation of a component of the
debt,  classification  of that  component  in equity  and the  accretion  of the
resulting discount on the debt to be recognized as part of interest expense. The
FSP  requires  retrospective  application  to the terms of  instruments  as 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  expects FSP APB 14-1 will not have an
impact 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  September  2008,  the FASB issued FSP 133-1 and FIN 45-4,  "Disclosures
about Credit Derivatives and Certain Guarantees:  An Amendment of FASB Statement
No. 133 and FASB  Interpretation No. 45; and Clarification of the Effective Date
of FASB  Statement  No. 161" ("FSP 133-1 and FIN 45-4").  FSP 133-1 and FIN 45-4
amends and enhances  disclosure  requirements for sellers of credit  derivatives
and financial guarantees.  It also clarifies that the disclosure requirements of
SFAS No. 161 are effective for quarterly  periods  beginning  after November 15,
2008,  and fiscal years that include  those  periods.  FSP 133-1 and FIN 45-4 is
effective for reporting  periods  (annual or interim)  ending after November 15,
2008. The implementation of this standard will not have a material impact on our
consolidated  financial position and results of operations.

                                                                              45


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
     In  September  2008,  the FASB  ratified  EITF  Issue No.  08-5,  "Issuer's
Accounting  for  Liabilities  Measured at Fair Value With a  Third-Party  Credit
Enhancement"   ("EITF  08-5").   EITF  08-5  provides   guidance  for  measuring
liabilities  issued with an attached  third-party  credit enhancement (such as a
guarantee).  It  clarifies  that the issuer of a  liability  with a  third-party
credit  enhancement  should not include the effect of the credit  enhancement in
the fair value  measurement  of the  liability.  EITF 08-5 is effective  for the
first  reporting  period  beginning  after  December  15,  2008.  The Company is
currently  assessing  the  impact  of EITF  08-5 on its  consolidated  financial
position  and  results of  operations.

     In  November  2008,  the SEC  released a  proposed  roadmap  regarding  the
potential  use by U.S.  issuers of financial  statements  prepared in accordance
with International Financial Reporting Standards (IFRS). IFRS is a comprehensive
series  of  accounting  standards  published  by  the  International  Accounting
Standards  Board  ("IASB").  Under the  proposed  roadmap,  the  Company  may be
required to prepare  financial  statements in  accordance  with IFRS as early as
2014. The SEC will make a determination in 2011 regarding the mandatory adoption
of IFRS.  The Company is  currently  assessing  the impact  that this  potential
change would have on its consolidated financial statements, and it will continue
to monitor the development of the potential implementation of IFRS.

     In December 2008, the FASB issued FSP FAS 132(R)-1, "Employers' Disclosures
about  Postretirement  Benefit  Plan  Assets".  This  FSP  amends  SFAS  132(R),
"Employers'  Disclosures about Pensions and Other Postretirement  Benefits",  to
provide  guidance on an  employer's  disclosures  about plan assets of a defined
benefit pension or other  postretirement plan. The disclosures about plan assets
required by this FSP shall be provided for fiscal  years  ending after  December
15, 2009. The Company is currently  reviewing the effect this new  pronouncement
will have on its consolidated financial statements.

     In November  2008,  the FASB ratified  Emerging  Issues Task Force ("EITF")
Issue No. 08-6, "Equity Method Investment Accounting Considerations".  EITF 08-6
clarifies the accounting for certain transactions and impairment  considerations
involving  equity  method  investments.  EITF 08-6 is effective for fiscal years
beginning after December 15, 2008, with early adoption  prohibited.  The Company
is  currently  reviewing  the  effect  this new  pronouncement  will have on its
consolidated financial statements.

     In November  2008, the FASB ratified  Emerging  Issues Task Force Issue No.
08-7,  "Accounting  for Defensive  Intangible  Assets".  EITF 08-7 clarifies the
accounting  for  certain  separately  identifiable  intangible  assets  which an
acquirer  does not intend to  actively  use but  intends to hold to prevent  its
competitors  from obtaining  access to them. EITF 08-7 requires an acquirer in a
business  combination to account for a defensive  intangible asset as a separate
unit of  accounting  which  should be  amortized  to expense over the period the
asset  diminishes in value.  EITF 08-7 is effective  for fiscal years  beginning
after December 15, 2008, with early adoption prohibited.  This new pronouncement
will  impact  the  Company's  accounting  for any  defensive  intangible  assets
acquired in a business combination completed beginning January 1, 2009.

     In December  2008,  the FASB issued FSP SFAS 140-4 and FASB  Interpretation
(FIN) 46(R)-8,  "Disclosures by Public Entities (Enterprises) about Transfers of
Financial Assets and Interests in Variable  Interest  Entities" ("FSP SFAS 140-4
and FIN  46(R)-8").  FSP  SFAS  140-4  and FIN  46(R)-8  amends  FASB  SFAS  140
"Accounting for Transfers and Servicing of Financial Assets and  Extinguishments
of Liabilities",  to require public entities to provide  additional  disclosures
about transfers of financial assets. It also amends FIN 46(R), "Consolidation of
Variable Interest Entities",  to require public enterprises,  including sponsors

46



NOTE 2 - SUMMARY OF  SIGNIFICANT  ACCOUNTING  POLICIES  (CONTINUED)
that  have a  variable  interest  in a  variable  interest  entity,  to  provide
additional  disclosures about their involvement with variable interest entities.
Additionally,  this FSP requires certain  disclosures to be provided by a public
enterprise  that is (a) a sponsor of a qualifying  special  purpose entity (SPE)
that holds a variable  interest in the qualifying SPE but was not the transferor
of financial assets to the qualifying SPE and (b) a servicer of a qualifying SPE
that holds a significant variable interest in the qualifying SPE but was not the
transferor of financial  assets to the qualifying SPE. The disclosures  required
by FSP SFAS 140-4 and FIN 46(R)-8 are intended to provide  greater  transparency
to financial  statement users about a transferor's  continuing  involvement with
transferred  financial  assets and an  enterprise's  involvement  with  variable
interest entities and qualifying SPEs. FSP SFAS 140-4 and FIN 46(R) is effective
for reporting  periods  (annual or interim)  ending after December 15, 2008. The
adoption of this  pronouncement  did not have a material impact on the Company's
consolidated financial statements.

     In January  2009,  the FASB  issued FSP EITF  99-20-1,  "Amendments  to the
Impairment  Guidance of EITF Issue No.  99-20"  ("FSP EITF  99-20-1").  FSP EITF
99-20-1 amends the impairment guidance in EITF Issue No. 99-20,  "Recognition of
Interest Income and Impairment on Purchased  Beneficial Interests and Beneficial
Interests  That  Continue to Be Held by a Transferor  in  Securitized  Financial
Assets",   to   achieve   more   consistent    determination   of   whether   an
other-than-temporary  impairment has occurred. FSP EITF 99-20-1 also retains and
emphasizes the objective of an  other-than-temporary  impairment  assessment and
the related  disclosure  requirements  in SFAS No. 115,  "Accounting for Certain
Investments in Debt and Equity Securities", and other related guidance. FSP EITF
99-20-1 is  effective  for interim and annual  reporting  periods  ending  after
December 15, 2008, and shall be applied prospectively. Retrospective application
to a prior interim or annual reporting period is not permitted.  The adoption of
this pronouncement did not have a material impact on the Company's  consolidated
financial statements.

NOTE 3 - CHANGE IN ACCOUNTING PRINCIPLE
     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 as 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  for the year  ended
December 31, 2008.

                                                                              47



NOTE 4 - SECURITIES
     The amortized cost and fair value of securities were as follows:



                                                    December 31, 2008
                                      ------------------------------------------------
                                                    Gross        Gross
                                       Amortized  Unrealized   Unrealized     Fair
                                          Cost      Gains        Losses       Value
                                      ------------------------------------------------
                                                       (In Thousands)
AVAILABLE FOR SALE:
                                                               
  U.S. Government agencies            $  34,989   $     836    $     (12)   $  35,813
  States and political subdivisions      25,436         110         (337)      25,209
  Corporate obligations                   6,065           -         (440)       5,625
  Mortgage-backed securities             61,198       1,340         (220)      62,318
                                      -----------------------------------------------
                                        127,688       2,286       (1,009)     128,965
  Equity securities                         500         754          (99)       1,155
                                      -----------------------------------------------
                                      $ 128,188   $   3,040    $  (1,108)   $ 130,120
                                      ===============================================
HELD TO MATURITY:
  States and political subdivisions   $     707   $      13    $       -    $     720
                                      ===============================================




                                                    December 31, 2007
                                      -----------------------------------------------
                                                    Gross        Gross
                                       Amortized  Unrealized   Unrealized     Fair
                                          Cost      Gains        Losses       Value
                                      -----------------------------------------------
                                                       (In Thousands)
AVAILABLE FOR SALE:
                                                               
  U.S. Government agencies            $  41,110   $     435    $     (37)   $  41,508
  States and political subdivisions      21,765         196          (44)      21,917
  Corporate obligations                   5,078           -          (84)       4,994
  Mortgage-backed securities             53,846         458         (222)      54,082
                                      -----------------------------------------------
                                        121,799       1,089         (387)     122,501
  Equity securities                         585         941          (40)       1,486
                                      -----------------------------------------------
                                      $ 122,384   $   2,030    $    (427)   $ 123,987
                                      ===============================================
HELD TO MATURITY:
  States and political subdivisions   $     705   $      16    $       -    $     721
                                      ===============================================


48


NOTE 4 - SECURITIES  (CONTINUED)
     The  following  tables show the  Company's  investments'  gross  unrealized
losses and fair value  aggregated by length of time that  individual  securities
have been in a continuous unrealized loss position:



                                                              December 31, 2008
                                    ---------------------------------------------------------------------
                                      Less than 12 Months     12 Months or More           Total
                                    ---------------------------------------------------------------------
                                      Fair      Unrealized    Fair     Unrealized     Fair     Unrealized
                                      Value       Losses      Value      Losses       Value      Losses
                                    ---------------------------------------------------------------------
                                                               (In Thousands)
                                                                              
U.S. Government agencies            $    988    $    (12)   $      -    $      -    $    988    $    (12)
States and political subdivisions     13,653        (337)          -           -      13,653        (337)
Corporate obligations                  3,886        (180)      1,739        (260)      5,625        (440)
Mortgage-backed securities            13,610        (220)          -           -      13,610        (220)
Equity securities                         20          (3)         69         (96)         89         (99)
                                    --------------------------------------------------------------------
                                    $ 32,157    $   (752)   $  1,808    $   (356)   $ 33,965    $ (1,108)
                                    ====================================================================




                                                              December 31, 2007
                                    ---------------------------------------------------------------------
                                      Less than 12 Months     12 Months or More           Total
                                    ---------------------------------------------------------------------
                                      Fair      Unrealized    Fair     Unrealized     Fair     Unrealized
                                      Value       Losses      Value      Losses       Value      Losses
                                    ---------------------------------------------------------------------
                                                               (In Thousands)
                                                                             
U.S. Government agencies            $      -    $      -    $  9,461    $    (37)   $  9,461    $    (37)
States and political subdivisions        344          (1)      5,401         (43)      5,745         (44)
Corporate obligations                  3,006         (67)      1,988         (17)      4,994         (84)
Mortgage-backed securities             8,095         (19)     10,854        (203)     18,949        (222)
Equity securities                        178         (40)          -           -         178         (40)
                                    --------------------------------------------------------------------
                                    $ 11,623    $   (127)   $ 27,704    $   (300)   $ 39,327    $   (427)
                                    ====================================================================


     The Company has 67 securities in the less than twelve month  category and 5
securities in the twelve months or more category.  In management's  opinion, the
unrealized  losses  in the  U.S.  Government  agencies  and the  mortgage-backed
securities  reflect  changes in interest rates  subsequent to the acquisition of
specific   securities.   The  unrealized  losses  in  the  State  and  Political
Subdivisions and Corporate Obligations also reflect a widening of spreads due to
liquidity  and credit  concerns in the  financial  markets.  The Company holds a
small amount of equity securities in other finanacial institutions, the value of
which has been  impacted by the weakening  conditions of the financial  markets.
Management believes that the unrealized losses represent temporary impairment of
the  securities,  as the  Company  has the  intent  and  ability  to hold  these
investments until maturity or market price recovery.

     The  amortized  cost and fair value of debt  securities  as of December 31,
2008 by contractual  maturity,  are shown below.  Expected maturities may differ
from  contractual  maturities  because  borrowers  may have the  right to prepay
obligations with or without call or prepayment penalties.



                                         Available for Sale    Held to Maturity
                                         -----------------------------------------
                                          Amortized   Fair     Amortized    Fair
                                            Cost      Value      Cost       Value
                                         -----------------------------------------
                                                      (In Thousands)
                                                             
Due in one year or less                  $  4,780   $  4,786   $      -   $      -
Due after one year through five years      26,296     26,403          -          -
Due after five years through ten years     23,167     23,505        707        720
Due after ten years                        12,247     11,953          -          -
                                         -----------------------------------------
                                           66,490     66,647        707        720
Mortgage-backed securities                 61,198     62,318          -          -
                                         -----------------------------------------
                                         $127,688   $128,965   $    707   $    720
                                         =========================================

                                                                              49


NOTE 4 - SECURITIES  (CONTINUED)

Gross realized gains and gross realized losses on sales of securities  available
for sale were $44,000 and $62,000,  respectively,  in 2008, $40,000 and $23,000,
respectively, in 2007, $66,000 and $-0-, respectively, in 2006.

     Securities with a carrying value of $51,444,000 and $56,398,000 at December
31, 2008 and 2007,  respectively,  were pledged to secure public deposits,  U.S.
Treasury demand notes,  securities  sold under  agreements to repurchase and for
other purposes as required or permitted by law.

NOTE 5 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
     The components of loans receivable at December 31 were as follows:

                                                 2008         2007
                                              ----------------------
                                                   (In Thousands)
Real estate:
  Residential                                 $ 133,417    $ 129,888
  Commercial                                    159,476      133,593
  Construction                                   14,856       20,404
Commercial, financial and agricultural           25,886       29,159
Consumer loans to individuals                    16,087       18,526
                                              ----------------------
                                                349,722      331,570
Unearned income and deferred fees                  (318)        (274)
Allowance for loan losses                        (4,233)      (4,081)
                                              ----------------------
                                              $ 345,171    $ 327,215
                                              ======================

The following table presents changes in the allowance for loan losses:

                                           Years Ended December 31,
                                        -----------------------------
                                          2008       2007       2006
                                        -----------------------------
                                                (In Thousands)

Balance, beginning                      $ 4,081    $ 3,828    $ 3,669
   Provision for loan losses                735        315        220
   Recoveries                                60         59         89
   Loans charged off                       (643)      (121)      (150)
                                        -----------------------------
Balance, ending                         $ 4,233    $ 4,081    $ 3,828
                                        =============================

     The recorded  investment in impaired loans,  not requiring an allowance for
loan losses was $2,976,000  (net of a charge-off  against the allowance for loan
losses of $380,000) and $3,208,000 at December 31, 2008 and 2007,  respectively.
The recorded investment in impaired loans requiring an allowance for loan losses
was $-0- at December 31, 2008 and 2007.  For the years ended  December 31, 2008,
2007 and 2006,  the average  recorded  investment  in these  impaired  loans was
$3,311,000,  $3,127,000,  and $286,000,  and the interest  income  recognized on
these impaired loans was $143,000, $290,000, and $1,000, respectively.

     Loans on which the accrual of interest  has been  discontinued  amounted to
$2,087,000  and  $111,000 at  December  31,  2008 and 2007,  respectively.  Loan
balances  past  due 90 days or more  and  still  accruing  interest,  but  which
management expects will eventually be paid in full, amounted to $-0- and $52,000
at December 31, 2008 and 2007, respectively.

50


NOTE 6 - PREMISES AND EQUIPMENT
     Components of premises and equipment at December 31 are as follows:

                                         2008                 2007
                                      -----------------------------
                                             (In Thousands)
Land and improvements                 $    925             $    925
Buildings and improvements               7,948                7,875
Furniture and equipment                  5,050                4,798
                                      -----------------------------
                                        13,923               13,598
Accumulated depreciation                (8,433)              (7,856)
                                      -----------------------------
                                      $  5,490             $  5,742
                                      =============================


     Certain  facilities  are leased  under  various  operating  leases.  Rental
expense for these leases was $280,000,  $283,000,  and  $222,000,  for the years
ended December 31, 2008, 2007 and 2006. Future minimum rental  commitments under
noncancellable leases as of December 31, 2008 were as follows (in thousands):


                                       2009              $        266
                                       2010                       228
                                       2011                       239
                                       2012                       248
                                       2013                       250
                                       Thereafter               2,304
                                                         ------------
                                                         $      3,535
                                                         ============
NOTE 7 - DEPOSITS
     Aggregate  time  deposits  in   denominations  of  $100,000  or  more  were
$45,095,000 and $62,263,000 at December 31, 2008 and 2007, respectively.

     At December 31, 2008,  the  scheduled  maturities  of time  deposits are as
follows (in thousands):


                                       2009              $     99,685
                                       2010                    34,433
                                       2011                    10,218
                                       2012                    11,754
                                       2013                     6,184
                                                         ------------
                                                         $    162,274
                                                         ============

NOTE 8 - BORROWINGS
     Short-term borrowings at December 31 consist of the following:

                                                   2008      2007
                                                 -----------------
                                                   (In Thousands)

Securities sold under agreements to repurchase   $23,404   $24,885
Federal funds purchased                            3,600       800
Short-term FHLB advances                          11,000         -
U.S. Treasury demand notes                           122     1,001
                                                 -----------------
                                                 $38,126   $26,686
                                                 =================

                                                                              51


NOTE 8 - BORROWINGS (CONTINUED)
     The outstanding  balances and related information of short-term  borrowings
are summarized as follows:

                                                       Years Ended December 31,
                                                       ------------------------
                                                            2008     2007
                                                       ------------------------
                                                       (Dollars In Thousands)

Average balance during the year                        $   32,238   $   22,443
Average interest rate during the year                        2.14%        4.15%
Maximum month-end balance during the year              $   42,061   $   33,024
Weighted average interest rate at the end of the year        1.11%        3.60%


     Securities sold under agreements to repurchase  generally mature within one
day to one year from the transaction date. Securities with an amortized cost and
fair value of $26,617,000  and  $27,314,000 at December 31, 2008 and $27,127,000
and  $27,410,000  at December  31,  2007 were  pledged as  collateral  for these
agreements.  The securities  underlying the agreements  were under the Company's
control.

     The Company has a line of credit commitment available from the Federal Home
Loan Bank (FHLB) of Pittsburgh for borrowings of up to $20,000,000 which expires
in December 2011.  There were no borrowings under this line at December 31, 2008
and 2007.  At  December  31,  2008 the  Company  had an  $11,000,000  short-term
borrowing at FHLB due in January 2009 at .671%. The Company has a line of credit
commitment  available from Atlantic  Central  Bankers Bank for $7,000,000  which
expires  in May 2009.  There  were no  borrowings  under  this line of credit at
December  31,  2008  and  2007.  The  Company  has a line of  credit  commitment
available which has no expiration date from PNC Bank for $12,000,000 at December
31,  2008.  Borrowings  under  this line of credit as  federal  funds  purchased
totaled  $3,600,000 at December 31, 2008 and $800,000 at December 31, 2007.  The
Company had a line of credit with Wachovia  Bank for  $2,000,000 at December 31,
2007 with no borrowing as of December 31, 2007.  The Company  canceled this line
of credit in December 2008.

     The Bank maintains a U.S. Treasury tax and loan note option account for the
deposit of withholding taxes,  corporate income taxes and certain other payments
to the federal government.  Deposits are subject to withdrawal and are evidenced
by an  open-ended  interest-bearing  note.  Borrowings  under  this note  option
account  were   $122,000  and   $1,001,000   at  December  31,  2008  and  2007,
respectively.

     Other borrowings consisted of the following at December 31, 2008 and 2007:

                                                      2008          2007
                                                    ---------------------
                                                        (In Thousands)
Notes with the Federal Home Loan Bank (FHLB):
Fixed rate note due April 2008 at 4.17%             $     -       $ 5,000
Fixed rate note due September 2010 at 3.53%           5,000             -
Convertible note due January 2011 at 5.24%            3,000         3,000
Convertible note due August 2011 at 2.69%            10,000             -
Fixed rate note due September 2011 at 4.06%           5,000             -
Convertible note due October 2012 at 4.37%            5,000         5,000
Convertible note due May 2013 at 3.015%               5,000             -
Convertible note due January 2017 at 4.71%           10,000        10,000
                                                    ---------------------
                                                    $43,000       $23,000
                                                    =====================


52



NOTE 8 - BORROWINGS (CONTINUED)
     The convertible notes contain an option which allows the FHLB, at quarterly
intervals, to change the note to an adjustable-rate advance at three-month LIBOR
plus 11 to 19 basis points.  If the notes are  converted,  the option allows the
Bank to put the funds back to the FHLB at no charge.

     Contractual  maturities  of other  borrowings  at December  31, 2008 are as
follows (in thousands):

                                       2009              $          -
                                       2010                     5,000
                                       2011                    18,000
                                       2012                     5,000
                                       2013                     5,000
                                       Thereafter              10,000
                                                         ------------
                                                         $     43,000
                                                         ============

     The Bank's maximum  borrowing  capacity with the Federal Home Loan Bank was
$240,607,000 of which $54,000,000 was outstanding at December 31, 2008. Advances
from the Federal Home Loan Bank are secured by qualifying assets of the Bank.

NOTE 9 - EMPLOYEE BENEFIT PLANS
     The Company has a defined  contributory  profit-sharing plan which includes
provisions  of a  401(k)  plan.  The  plan  permits  employees  to make  pre-tax
contributions  up  to  15%  of  the  employee's  compensation.   The  amount  of
contributions  to  the  plan,  including  matching  contributions,   is  at  the
discretion  of the  Board of  Directors.  All  employees  over the age of 21 are
eligible  to  participate  in the plan  after one year of  employment.  Employee
contributions  are vested at all times, and any Company  contributions are fully
vested after five years. The Company's contributions are expensed as the cost is
incurred, funded currently, and amounted to $317,000, $400,000, and $181,000 for
the years ended December 31, 2008, 2007 and 2006, respectively.

     The Company has a non-qualified  supplemental executive retirement plan for
the benefit of certain executive officers.  At December 31, 2008 and 2007, other
liabilities  include  approximately  $1,062,000  and $966,000  accrued under the
Plan.  Compensation  expense  includes  approximately  $96,000,   $108,000,  and
$138,000,  relating to the supplemental executive retirement plan for 2008, 2007
and 2006, respectively. To fund the benefits under this plan, the Company is the
owner  of  single  premium  life  insurance  policies  on  participants  in  the
non-qualified  retirement plan. At December 31, 2008 and 2007, the cash value of
these policies was $8,068,000 and $7,767,000, respectively.

     The Company has a leveraged  employee stock ownership plan ("ESOP") for the
benefit of employees who meet the eligibility  requirements which include having
completed  one  year of  service  with  the  Company  and  having  attained  age
twenty-one.  The ESOP Trust purchased  shares of the Company's common stock with
proceeds from a loan from the Company.  The Bank made cash  contributions to the
ESOP on an annual basis  sufficient to enable the ESOP to make the required loan
payments. The loan bears interest at the prime rate adjusted annually.  Interest
is payable annually and principal payable in equal annual  installments over ten
years.  The loan was secured by the shares of the stock  purchased  and was paid
off in 2006.

                                                                              53



NOTE 9 - EMPLOYEE BENEFIT PLANS (CONTINUED)
     As the debt was repaid,  shares were released from collateral and allocated
to qualified employees based on the proportion of debt service paid in the year.
The Company  accounts for its  leveraged  ESOP in accordance  with  Statement of
Position  93-6.  Accordingly,  the shares  pledged as collateral are reported as
unallocated  ESOP  shares in the  consolidated  balance  sheets.  As shares  are
released from collateral,  the Company reports compensation expense equal to the
current  market  price of the  shares,  and the shares  become  outstanding  for
earnings per share computations. Dividends on allocated ESOP shares are recorded
as a reduction of retained earnings and dividends on unallocated ESOP shares are
recorded as a reduction of debt.

     Compensation  expense for the ESOP was $-0-,  $-0-,  and  $444,000  for the
years ended December 31, 2008, 2007, and 2006, respectively.

     The status of the ESOP shares at December 31 are as follows:

                                             2008               2007
                                          ---------------------------
Allocated shares                           157,591            160,243
Shares released from allocation             33,318             30,666
Unreleased shares                                -                  -
                                          ---------------------------
  Total ESOP shares                        190,909            190,909
                                          ===========================

Fair value of unreleased shares           $      -           $      -
                                          ===========================

NOTE 10 - INCOME TAXES
     The components of the provision for federal income taxes are as follows:

                                         Years Ended December 31,
                             ----------------------------------------------
                               2008               2007               2006
                             ----------------------------------------------
                                             (In Thousands)
Current                      $ 2,800            $ 2,780             $ 2,787
Deferred                          36               (151)               (108)
                             ----------------------------------------------
                             $ 2,836            $ 2,629             $ 2,679
                             ==============================================

     Deferred income taxes reflect  temporary  differences in the recognition of
revenue  and  expenses  for tax  reporting  and  financial  statement  purposes,
principally  because  certain items,  such as, the allowance for loan losses and
loan fees are  recognized in different  periods for financial  reporting and tax
return purposes. A valuation allowance has not been established for deferred tax
assets.  Realization  of the  deferred  tax assets is  dependent  on  generating
sufficient  taxable  income.  Although  realization  is not assured,  management
believes it is more likely than not that all of the  deferred  tax asset will be
realized. Deferred tax assets are recorded in other assets.

     Income tax  expense of the  Company is less than the  amounts  computed  by
applying  statutory  federal  income  tax rates to income  before  income  taxes
because of the following:



                                                                        Percentage of Income
                                                                         before Income Taxes
                                                                       ------------------------
                                                                       Years Ended December 31,
                                                                       ------------------------
                                                                       2008      2007      2006
                                                                       ------------------------
                                                                                 
Tax at statutory rates                                                 34.0 %    34.0 %    34.0 %
Tax exempt interest income, net of interest expense disallowance       (3.9)     (3.4)     (3.6)
Increase in fair market value of ESOP                                     -        -        1.2
Incentive Stock Options                                                 0.5       0.8       0.5
Earnings on life insurance                                              (.7)     (1.1)     (1.0)
Other                                                                   (.1)     (1.5)      0.1
                                                                       ------------------------
                                                                       29.8 %    28.8 %    31.2 %
                                                                       =========================


54



NOTE 10 - INCOME TAXES (CONTINUED)
     The net  deferred tax asset  included in other  assets in the  accompanying
balance  sheets  includes  the  following  amounts  of  deferred  tax assets and
liabilities:

                                                2008             2007
                                               -----------------------
                                                    (In Thousands)
Deferred tax assets:
   Allowance for loan losses                   $1,266           $1,271
   Deferred compensation                          361              345
   Intangible Assets                               47               68
   Other                                           59               29
                                               -----------------------
     Total Deferred Tax Assets                  1,733            1,713
                                               -----------------------

Deferred tax liabilities:
  Premises and equipment                          328              226
  Deferred loan fees                              261              307
  Net unrealized gains on securities              653              549
                                               -----------------------
    Total Deferred Tax Liabilities              1,242            1,082
                                               -----------------------
Net Deferred Tax Asset                         $  491           $  631
                                               =======================


NOTE 11 - TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS
     Certain directors and executive officers of the Company, their families and
their affiliates are customers of the Bank. Any transactions  with such parties,
including  loans and  commitments,  were in the  ordinary  course of business at
normal terms, including interest rates and collateralization,  prevailing at the
time and did not represent more than normal risks. At December 31, 2008 and 2007
such loans amounted to $5,960,000 and $5,635,000, respectively. During 2008, new
loans  to such  related  parties  totaled  $635,000  and  repayments  and  other
reductions aggregated $310,000.

NOTE 12 - REGULATORY MATTERS AND STOCKHOLDERS' EQUITY
     The Company and Bank are subject to various regulatory capital requirements
administered  by the federal banking  agencies.  Failure to meet minimum capital
requirements   can  initiate   certain   mandatory   and   possibly   additional
discretionary  actions by regulators  that, if  undertaken,  could have a direct
material effect on the Company's  financial  statements.  Under capital adequacy
guidelines  and the  regulatory  framework  for prompt  corrective  action,  the
Company must meet specific capital guidelines that involve quantitative measures
of the Company's  assets,  liabilities  and certain  off-balance  sheet items as
calculated under regulatory accounting practices.  The Company's capital amounts
and classification  are also subject to qualitative  judgments by the regulators
about components, risk-weightings and other factors.

     Quantitative  measures established by regulation to ensure capital adequacy
require the Company  and the Bank to  maintain  minimum  amounts and ratios (set
forth in the  table  below)  of total  and Tier 1  capital  (as  defined  in the
regulations) to risk-weighted  assets,  and of Tier 1 capital to average assets.
Management believes, as of December 31, 2008, that the Company and the Bank meet
all capital adequacy requirements to which they are subject.

     As of December 31, 2008, the most recent  notification  from the regulators
has categorized the Bank as well capitalized under the regulatory  framework for
prompt  corrective  action.  There  are  no  conditions  or  events  since  that
notification that management believes have changed the Bank's category.

                                                                              55


NOTE 12 - REGULATORY MATTERS AND STOCKHOLDERS' EQUITY (CONTINUED)
     The Bank's actual capital amounts and ratios are presented in the table:



                                                                                   To Be Well Capitalized
                                                                                         under Prompt
                                                                For Capital Adequacy   Corrective Action
                                                   Actual              Purposes             Provisions
                                              -----------------------------------------------------------
                                              Amount     Ratio     Amount     Ratio     Amount      Ratio
                                              -----------------------------------------------------------
                                                             (Dollars in Thousands)
                                                                                 
As of December 31, 2008:
  Total capital (to risk-weighted assets)     $60,577    17.24%   $>28,110    >8.00%   $>35,137    >10.00%
                                                                   =          =         =          =
  Tier 1 capital (to risk-weighted assets)     56,051    15.95     >14,057    >4.00     >21,085    > 6.00
                                                                   =          =         =          =
  Tier 1 capital (to average assets)           56,051    11.20     >20,018    >4.00     >25,023    > 5.00
                                                                   =          =         =          =

As of December 31, 2007:
  Total capital (to risk-weighted assets)     $57,968    17.43%   $>26,606    >8.00%   $>33,258    >10.00%
                                                                   =          =         =          =
  Tier 1 capital (to risk-weighted assets)     53,545    16.10     >13,303    >4.00     >19,955    > 6.00
                                                                   =          =         =          =
  Tier 1 capital (to average assets)           53,545    11.15     >19,226    >4.00     >24,033    > 5.00
                                                                   =          =         =          =



     The  Company's  ratios do not differ  significantly  from the Bank's ratios
presented above.

     The Bank is required to maintain  average  cash  reserve  balances in vault
cash or with the  Federal  Reserve  Bank.  The amount of these  restricted  cash
reserve  balances at December 31, 2008 and 2007 was  approximately  $284,000 and
$266,000, respectively.

     Under Pennsylvania banking law, the Bank is subject to certain restrictions
on the  amount  of  dividends  that  it may  declare  without  prior  regulatory
approval. At December 31, 2008,  $49,558,000 of retained earnings were available
for  dividends  without prior  regulatory  approval,  subject to the  regulatory
capital  requirements  discussed above. Under Federal Reserve  regulations,  the
Bank is limited as to the amount it may lend affiliates,  including the Company,
unless such loans are collateralized by specific obligations.

NOTE 13 - STOCK OPTION PLANS
     The Company's  shareholders  approved the Norwood Financial Corp 2006 Stock
Option Plan at the Annual  Meeting on April 26,  2006.  An  aggregate of 250,000
shares of authorized but unissued  Common Stock of the Company were reserved for
future  issuance under the Plan. This includes up to 40,000 shares for awards to
outside directors.  Under this plan, the Company granted 24,000 options in 2008,
which  included  4,000  options  granted to outside  directors  in 2008,  22,000
options in 2007 which  included 4,000 options  granted to outside  directors and
47,700  options  in 2006,  which  included  7,675  options  granted  to  outside
directors.  The  Company  adopted  a Stock  Option  Plan  for the  officers  and
employees of the Company in 1995.  An aggregate of 750,000  shares of authorized
but unissued common stock of the Company were reserved for future issuance under
the Plan. In 1999, the Company  adopted the Directors  Stock  Compensation  Plan
with an aggregate of 26,400  shares  reserved for issuance  under the Plan.  The
stock options  typically have  expiration  terms of ten years subject to certain
extensions and early  terminations and vest over periods ranging from six months
to one year from the date of  grant.  The per  share  exercise  price of a stock
option  shall be,  at a  minimum,  equal to the fair  value of a share of common
stock on the date the option is granted. Both plans expired in 2005.

56



NOTE 13 - STOCK OPTION PLANS  (CONTINUED)
     Total unrecognized compensation cost related to nonvested options under the
Plan was $130,000 as of December 31, 2008,  $154,000 as of December 31, 2007 and
$251,000 as of  December  31,  2006.  Salaries  and  employee  benefits  expense
includes $154,000,  $251,000 and $136,000 for the years ended December 31, 2008,
2007 and 2006,  respectively  related  to stock  option  grants.  Net income was
reduced by $144,000,  $236,000  and  $129,000  for the years ended  December 31,
2008, 2007 and 2006, respectively.

     A summary of the Company's  stock option  activity and related  information
for the years ended December 31 follows:



                              2008                                                  2007                     2006
                      --------------------------------------------------------------------------------------------------
                                  Weighted                                  Weighted                             Weighted
                                   Average     Average                      Average      Average                 Average
                                  Exercise    Intrinsic                     Exercise    Intrinsic                Exercise
                      Options       Price      Value             Options     Price        Value      Options      Price
                      --------------------------------------------------------------------------------------------------
                                                                                        
Outstanding,
  beginning of year   180,422    $   24.04                       183,645   $  21.81                  140,296      $18.45
  Granted              24,000        27.50                        22,000      31.25                   47,700       30.91
  Exercised           (27,979)       14.98                       (24,723)     13.76                   (4,351)      13.05
  Forfeited                 -            -                          (500)     31.50                        -           -
                      --------------------------------------------------------------------------------------------------
Outstanding,
  end of year         176,443    $   25.95    $273,487           180,422   $  24.04    $1,301,000    183,645      $21.81
                      ==================================================================================================
Exercisable,
  end of year         152,443    $   25.70    $274,397
                      ================================


     Exercise prices for options outstanding as of December 31, 2008 ranged from
$10.36 to $31.50 per share. The weighted average  remaining  contractual life is
6.5 years.

     The fair value of each option grant is estimated on the date of grant using
the  Black-Scholes  option  pricing  model with the following  weighted  average
assumptions:

                                                    Years Ended December 31,
                                                 ------------------------------
                                                   2008      2007      2006
                                                 ------------------------------
Dividend yield                                     2.79%     2.75%     2.70%
Expected life                                      7 years   7 years   7 years
Expected volatility                               25.08%    24.17%    25.12%
Risk-free interest rate                            2.01%     3.53%     4.85%
Weighted average fair value of options granted   $ 5.43    $ 6.99    $ 8.11

     The expected  volatility is based on historical  volatility.  The risk-free
interest rates for periods within the  contractual  life of the awards are based
on the U.S.  Treasury  yield  curve in  effect  at the  time of the  grant.  The
expected life is based on historical  exercise  experience.  The dividend  yield
assumption  is  based on the  Company's  history  and  expectation  of  dividend
payouts.

     Proceeds  from stock  option  exercises  totaled  $420,000 in 2008.  Shares
issued in  connection  with stock options  exercises  are issued from  available
treasury shares. If no treasury shares are available, new shares are issued from
available  authorized  shares.  During 2008, all the shares issued in connection
with stock option exercises,  27,979 shares in total, were issued from available
treasury shares.

                                                                              57



NOTE 13 - STOCK OPTION PLANS  (CONTINUED)
     As  of  December  31,  2008,  outstanding  stock  options  consist  of  the
following:

                        Average                                       Average
            Options     Exercise         Remaining         Options    Exercise
          Outstanding     Price         Life, Years      Exercisable    Price
          -------------------------------------------------------------------

              3,935    $  14.12             1.0               3,935   $ 14.12
              8,661       10.36             2.0               8,661     10.36
             15,751       16.98             3.0              15,751     16.98
             15,748       19.05             4.0              15,748     19.05
             19,198       23.95             5.0              19,198     23.95
             20,475       30.00             6.0              20,475     30.00
             24,675       30.38             7.3              24,675     30.38
             22,000       31.50             8.0              22,000     31.50
             22,000       31.25             9.0              22,000     31.25
             24,000       27.50            10.0                   -         -
            -------                                         -------
Total       176,443    $  25.95             6.5             152,443   $ 25.70
            =======                                         =======


NOTE 14 - EARNINGS PER SHARE
     The  following  table  sets  forth the  computations  of basic and  diluted
earnings per share:



                                                                         Years Ended December 31,
                                                                        ---------------------------
                                                                          2008      2007      2006
                                                                        ---------------------------
                                                                   (In Thousands, Except per Share Data)

                                                                                  
Numerator, net income                                                   $ 6,677   $ 6,511   $ 5,910
Denominator:
  Denominator for basic earnings per share, weighted
    average shares                                                        2,740     2,777     2,795
  Effect of dilutive securities, employee stock options                      29        49        55
                                                                        ---------------------------
Denominator for diluted earnings per share, adjusted weighted average
  shares and assumed conversions                                          2,769     2,826     2,850
                                                                        ===========================

Basic earnings per common share                                         $  2.44   $  2.34   $  2.11
                                                                        ===========================

Diluted earnings per common share                                       $  2.41   $  2.30   $  2.07
                                                                        ===========================


NOTE 15 - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
     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:

                                                        December 31,
                                                  ----------------------
                                                    2008          2007
                                                  ----------------------
                                                       (In Thousands)

Commitments to grant loans                        $19,254        $10,835
Unfunded commitments under lines of credit         36,980         34,146
Standby letters of credit                           1,897          2,348
                                                  ----------------------
                                                  $58,131        $47,329
                                                  ======================

58


NOTE 15 - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (CONTINUED)
     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.

     Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party.  The majority of these
standby letters of credit expire within the next twelve months.  The credit risk
involved in issuing  letters of credit is essentially  the same as that involved
in extending other loan  commitments.  The Bank requires  collateral  supporting
these  letters of credit when deemed  necessary.  Management  believes  that the
proceeds  obtained  through a liquidation of such collateral would be sufficient
to cover the maximum  potential  amount of future  payments  required  under the
corresponding guarantees. The current amount of the liability as of December 31,
2008 for guarantees under standby letters of credit issued is not material.

NOTE 16 - FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS
     Management  uses its best  judgment  in  estimating  the fair  value of the
Company's financial  instruments;  however, there are inherent weaknesses in any
estimation technique.  Therefore,  for substantially all financial  instruments,
the fair value estimates  herein are not  necessarily  indicative of the amounts
the Company could have realized in a sales  transaction on the dates  indicated.
The  estimated  fair value  amounts  have been  measured as of their  respective
year-ends  and have not been  re-evaluated  or  updated  for  purposes  of these
consolidated financial statements subsequent to those respective dates. As such,
the  estimated  fair values of these  financial  instruments  subsequent  to the
respective  reporting  dates may be different than the amounts  reported at each
year-end.

     In September 2006, the Financial Accounting Standards Board ("FASB") issued
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  Company
adopted SFAS 157 effective for its fiscal year beginning January 1, 2008.

     In December 2007, the FASB issued FASB Staff Position 157-2, Effective Date
of FASB Statement No. 157 ("FSP 157-2").  FSP 157-2 delays the effective date of
SFAS 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.  As such, the Company only partially  adopted the provisions
of SFAS 157, and will begin to account and report for  non-financial  assets and
liabilities in 2009. In October 2008, the FASB issued FASB Staff Position 157-3,
Determining  the Fair Value of a Financial  Asset When the Market for that Asset
is Not Active ("FSP  157-3"),  to clarify the  application  of the provisions of
SFAS 157 in an inactive  market and how an entity would  determine fair value in
an  inactive  market.  FSP 157-3 is  effective  immediately  and  applies to the
Company's December 31, 2008 consolidated  financial statements.  The adoption of
SFAS 157 and FSP 157-3 had no impact on the amounts reported in the consolidated
financial statements.

     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:

                                                                              59


NOTE 16 - FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS
(CONTINUED)

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 unobservable (i.e.,
          supported with little or no market activity).

     An asset's or liability's level within the fair value hierarchy is based on
the lowest level of input that is significant to the fair value measurement.

     For financial  assets measured at fair value on a recurring basis, the fair
value measurements by level within the fair value hierarchy used at December 31,
2008 are as follows:



                                            Fair Value Measurement Reporting Date using
                                                (Level 1)      (Level 2)
                                            Quoted Prices in  Significant    (Level 3)
                                             Active Markets     Other       Significant
                              December 31,   for Identical    Observable   Unobservable
Description                       2008          Assets         Inputs         Inputs
- ----------------------------------------------------------------------------------------
                                                    (In thousands)
                                                                
Securities available for sale  $ 130,120        $ 1,155        $ 128,965     $     -
                               =========================================================



     For financial  assets measured at fair value on a nonrecurring  basis,  the
fair  value  measurements  by level  within  the fair  value  hierarchy  used at
December 31, 2008 are as follows:



                                            Fair Value Measurement Reporting Date using
                                                (Level 1)      (Level 2)
                                            Quoted Prices in  Significant    (Level 3)
                                             Active Markets     Other       Significant
                              December 31,   for Identical    Observable   Unobservable
Description                       2008          Assets         Inputs         Inputs
- ----------------------------------------------------------------------------------------
                                                  (In thousands)
                                                                
Impaired Loans                  $ 2,976        $    -         $    -         $ 2,976
                                ========================================================


     As discussed  above,  the Bank has delayed its disclosure  requirements  of
non-financial assets and liabilities. Certain real estate owned with write-downs
subsequent  to  foreclosure  are carried at fair value at the balance sheet date
for which the Bank has not yet adopted the provisions of SFAS 157.

     The following  information  should not be interpreted as an estimate of the
fair value of the entire Company since a fair value calculation is only provided
for a limited  portion of the Company's  assets and  liabilities.  Due to a wide
range of valuation  techniques and the degree of subjectivity used in making the
estimates,  comparisons  between the  Company's  disclosures  and those of other
companies may not be meaningful. The following methods and assumptions were used
to estimate the fair values of the Company's  financial  instruments at December
31, 2008 and 2007.

60


NOTE 16 - FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS
(CONTINUED)
Cash and cash equivalents (carried at cost):
     The carrying amounts  reported in the  consolidated  balance sheet for cash
and short-term instruments approximate those assets' fair values.

Securities:
     The fair value of securities available for sale (carried at fair value) and
held to maturity  (carried at amortized cost) are determined by obtaining quoted
market prices on nationally recognized securities exchanges (Level 1), or matrix
pricing (Level 2), which is a mathematical technique used widely in the industry
to value debt securities without relying exclusively on quoted market prices for
the specific securities but rather by relying on the securities' relationship to
other benchmark  quoted prices.  For certain  securities which are not traded in
active markets or are subject to transfer restrictions,  valuations are adjusted
to  reflect  illiquidy  and/or  non-transferability,  and such  adjustments  are
generally  based on available  market evidence (Level 3). In the absence of such
evidence,  management's  best  estimate  is  used.  Management's  best  estimate
consists of both internal and external  support on certain Level 3  investments.
Internal   cash  flow  models  using  a  present  value  formula  that  includes
assumptions  market  participants  would use along with  indicative exit pricing
obtained from  broker/dealers  (where available) are used to support fair values
of certain Level 3 investments, if applicable.

Loans receivable (carried at cost):
     The fair values of loans are estimated using discounted cash flow analyses,
using  market  rates at the  balance  sheet  date that  reflect  the  credit and
interest  rate-risk  inherent  in the  loans.  Projected  future  cash flows are
calculated based upon contractual  maturity or call dates,  projected repayments
and  prepayments of principal.  Generally,  for variable rate loans that reprice
frequently and with no significant  change in credit risk, fair values are based
on carrying values.

Impaired loans (generally carried at fair value):
     Impaired  loans are those that are accounted  for under FASB  Statement No.
114, Accounting by Creditors for Impairment of a Loan ("SFAS 114"), in which the
Bank has  measured  impairment  generally  based on the fair value of the loan's
collateral.   Fair  value  is  generally   determined   based  upon  independent
third-party  appraisals of the  properties,  or discounted cash flows based upon
the expected proceeds.  These assets are included as Level 3 fair values,  based
upon  the  lowest  level  of  input  that  is  significant  to  the  fair  value
measurements.  The fair value  investment  in impaired  loans not  requiring  an
allowance  for loan  losses was  $2,976,000,  net of a  charge-off  against  the
allowance for loan losses of $380,000.

Restricted investment in Federal Home Loan Bank stock (carried at cost):
     The carrying  amount of restricted  investment  in FHLB stock  approximates
fair value, and considers the limited marketability of such securities.

Accrued interest receivable and payable (carried at cost):
     The carrying  amount of accrued  interest  receivable and accrued  interest
payable approximates its fair value.

Deposit liabilities (carried at cost):
     The  fair  values  disclosed  for  demand  deposits  (e.g.,   interest  and
noninterest  checking,  passbook  savings  and money  market  accounts)  are, by
definition,  equal to the amount  payable on demand at the reporting date (i.e.,
their carrying amounts).  Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow  calculation  that applies interest rates
currently  being  offered  in  the  market  on  certificates  to a  schedule  of
aggregated expected monthly maturities on time deposits.

                                                                              61



NOTE 16 - FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS
(CONTINUED)
Short-term borrowings (carried at cost):
     The  carrying  amounts  of  short-term  borrowings  approximate  their fair
values.

Other borrowings (carried at cost):
     Fair values of FHLB  advances  are  estimated  using  discounted  cash flow
analysis,  based on quoted prices for new FHLB advances with similar credit risk
characteristics,  terms and remaining maturity.  These prices obtained from this
active market  represent a market value that is deemed to represent the transfer
price if the liability were assumed by a third party.

Off-balance sheet financial instruments (disclosed at cost):
     Fair  values for the  Company's  off-balance  sheet  financial  instruments
(lending  commitments and letters of credit) are based on fees currently charged
in the  market to enter  into  similar  agreements,  taking  into  account,  the
remaining terms of the agreements and the counterparties' credit standing.

     The  estimated  fair  values of the Bank's  financial  instruments  were as
follows at December 31, 2008 and 2007.



                                                         December 31, 2008     December 31, 2007
                                                        ------------------------------------------
                                                          Carrying Fair         Carrying Fair
                                                         Amount     Value      Amount      Value
                                                        ------------------------------------------
                                                                    (In Thousands)
                                                                            
Financial assets:
  Cash and due from banks, interest-bearing
   deposits with banks and federal funds sold           $  6,480   $  6,480   $  9,064   $  9,064
  Securities                                             130,827    130,840    124,692    124,708
  Loans receivable, net                                  345,171    363,219    327,215    326,482
  Investment in FHLB stock                                 3,538      3,538      2,072      2,072
  Accrued interest receivable                              2,179      2,179      2,343      2,343

Financial liabilities:
  Deposits                                               359,635    361,223    370,000    370,159
  Short-term borrowings                                   38,126     38,126     26,686     26,686
  Other borrowings                                        43,000     46,281     23,000     22,097
  Accrued interest payable                                 2,247      2,247      3,198      3,198

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


62


NOTE 17 - NORWOOD FINANCIAL CORP.  (PARENT COMPANY ONLY) FINANCIAL INFORMATION


                                 BALANCE SHEETS

                                                                December 31,
                                                            -------------------
                                                              2008        2007
                                                            -------------------
                                                               (In Thousands)
                             ASSETS
  Cash on deposit in bank subsidiary                        $   216     $   148
  Securities available for sale                                 408         623
  Investment in bank subsidiary                              57,440      54,678
  Other assets                                                1,363       1,058
                                                            -------------------
                                                            $59,427     $56,507
                                                            ===================

                LIABILITIES AND STOCKHOLDERS' EQUITY
  Liabilities                                               $   737     $   688
  Stockholders' equity                                       58,690      55,819
                                                            -------------------
                                                            $59,427     $56,507
                                                            ===================
                              STATEMENTS OF INCOME

                                                     Years Ended December 31,
                                                    ---------------------------
                                                      2008      2007       2006
                                                    ---------------------------
                                                           (In Thousands)
Income:
  Dividends from bank subsidiary                    $ 3,990  $ 4,156    $ 2,369
  Interest income from bank subsidiary                    -        -          5
  Other interest income                                  25       30         28
  Net realized gain (loss) on sales of securities       (62)      17         15
                                                    ---------------------------
                                                      3,953    4,203      2,417
Expenses                                                164      177        175
                                                    ---------------------------
                                                      3,789    4,026      2,242
Income tax expense (benefit)                            (68)     (51)       (43)
                                                    ---------------------------
                                                      3,857    4,077      2,285
Equity in undistributed earnings of subsidiary        2,820    2,434      3,625
                                                    ---------------------------
Net Income                                          $ 6,677  $ 6,511    $ 5,910
                                                    ===========================

                            STATEMENTS OF CASH FLOWS


                                                                   Years Ended December 31,
                                                                ------------------------------
                                                                   2008      2007       2006
                                                                ------------------------------
                                                                       (In Thousands)
                                                                            
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                   $ 6,677    $ 6,511    $ 5,910
   Adjustments to reconcile net income to
     net cash provided by operating activities:
       Undistributed earnings of bank subsidiary                 (2,820)    (2,434)    (3,625)
       Release of ESOP shares                                         -          -        421
       Other, net                                                   (56)      (168)      (131)
                                                                -----------------------------
         Net Cash Provided by Operating Activities                3,801      3,909      2,575
                                                                -----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
  Proceeds from sale of securities                                   17         74         30
  Purchase of securities available for sale                           -          -        (43)
                                                                -----------------------------
         Net Cash Provided by (Used) in Investing Activities         17         74        (13)
                                                                -----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
  Stock options exercised                                           420        341         60
  ESOP purchase of shares from treasury stock                       153        144        120
  Acquisition of treasury stock                                  (1,583)    (2,313)      (890)
  Cash dividends paid                                            (2,740)    (2,559)    (2,289)
                                                                -----------------------------
         Net Cash Used in Financing Activities                   (3,750)    (4,387)    (2,999)
                                                                -----------------------------
         Net Increase (Decrease) in Cash and Cash Equivalents        68       (404)      (437)

CASH AND CASH EQUIVALENTS - BEGINNING                               148        552        989
                                                                -----------------------------
CASH AND CASH EQUIVALENTS - ENDING                              $   216    $   148    $   552
                                                                =============================


NOTE 18 - BRANCH CLOSURE
     On December 26, 2008, the Company filed notifications with the Pennsylvania
Department  of Banking  and the FDIC  requesting  authorization  to  discontinue
branch  operations  at its  Hamlin  Office,  as the lease for the  location  has
expired. The Company has subsequently entered into an agreement with NBT Bank to
assume the  deposits of the Hamlin  location.  The  Company  expects to record a
nominal gain when the transaction is completed early in 2009 and does not expect
these events to have a material impact on its operations.

                                                                              63



INVESTOR INFORMATION

STOCK LISTING
     Norwood  Financial Corp.  stock is traded on the Nasdaq Global Market under
the symbol NWFL. The following firms are known to make a market in the Company's
stock:

Ferris Baker Watts                       Janney Montgomery Scott, LLC
Baltimore, MD                            Scranton, PA  18503
410-659-4616                             800-638-4417

Legg Mason, Inc.                         Boenning & Scattergood, Inc.
Scranton, PA  18507                      West Conshohocken, PA
570-346-9300                             800-496-1170

Stifel Nicolaus
800-793-7226


TRANSFER AGENT
     Illinois  Stock  Transfer  Company,  209 West  Jackson  Blvd.,  Suite  903,
Chicago,  IL 60606.  Stockholders  who may have questions  regarding their stock
ownership should contact the Transfer Agent at 312-427-2953.

DIVIDEND CALENDAR
     Dividends on Norwood Financial Corp. common stock, if approved by the Board
of Directors are  customarily  paid on or about  February 1, May 1, August 1 and
November 1.

AUTOMATIC DIVIDEND REINVESTMENT PLAN
     The  Plan,  open to all  shareholders,  provides  the  opportunity  to have
dividends automatically reinvested into Norwood stock.  Participants in the Plan
may also  elect to make cash  contributions  to  purchase  additional  shares of
common  stock.   Shareholders  do  not  incur  brokerage   commissions  for  the
transactions.  Please  contact  the  transfer  agent or Lewis  J.  Critelli  for
additional information.

SEC REPORTS AND ADDITIONAL INFORMATION
     A copy of the  Company's  annual  report on Form 10-K for its  fiscal  year
ended December 31, 2008 including  financial  statements and schedules  thereto,
required to be filed with the Securities and Exchange Commission may be obtained
upon written request of any stockholder, investor or analyst by contacting Lewis
J. Critelli,  Executive Vice President,  Secretary, and Chief Financial Officer,
Norwood  Financial  Corp.,  717 Main Street,  PO Box 269,  Honesdale,  PA 18431,
570-253-1455.



                                              DIRECTORY OF OFFICERS


                                                                          
NORWOOD FINANCIAL CORP
- ----------------------
John E. Marshall        Chairman of the Board           |       Eli Tomlinson           Vice President
William W. Davis, Jr.   President &                     |       Karyn Vashlishan        Vice President
                        Chief Executive Officer         |
Lewis J. Critelli       Executive Vice President and    |       Marianne M. Glamann     Assistant Vice President
                        Chief Financial Officer,        |       Sandra Halas            Assistant Vice President
                        Treasurer and Secretary         |       Wendy L. Davis          Community Office Manager
Edward C. Kasper        Senior Vice President           |       Gary Henry              Community Office Manager
John H. Sanders         Senior Vice President           |       Teresa Melucci          Community Office Manager
Joseph A. Kneller       Senior Vice President           |       Sandra Mruczkewycz      Community Office Manager
                                                        |       Rossie Demorizi-Ortiz   Community Office Manager
WAYNE BANK                                              |       Nancy M. Worobey        Community Office Manager
- ----------                                              |       Laurie J. Bishop        Assistant Community
John E. Marshall        Chairman of the Board           |                               Office Manager
William W. Davis, Jr.   President &                     |       Christine Ferdinando    Assistant Community
                        Chief Executive Officer         |                               Office Manager
Lewis J. Critelli       Executive Vice President and    |       Jill Melody             Assistant Community
                        Chief Financial Officer,        |                               Office Manager
                        and Secretary                   |       Diane L. Richter        Assistant Community
Edward C. Kasper        Senior Vice President &         |                               Office Manager
                        Senior Loan Officer/            |       Toni M. Stenger         Assistant Community
                        Corporate Bank                  |                               Office Manager
John H. Sanders         Senior Vice President/          |       Thomas Kowalski         Resource Recovery Manager
                        Retail Bank                     |       Julie Kuen              Electronic Banking Officer
Joseph A. Kneller       Senior Vice President           |       William E. Murray       Mortgage Originator
Wayne D. Wilcha         Senior Vice President           |       Karen Peach             Training Officer
                        and Trust Officer               |       Sally J. Rapp           Human Resources Officer
Robert J. Behrens, Jr.  Vice President                  |       Doreen A. Swingle       Residential Mortgage
John Carmody            Vice President                  |                               Lending Officer
Joann Fuller            Vice President                  |
Karen R. Gasper         Internal Auditor and            |       NORWOOD INVESTMENT CORP
                        Vice President                  |       -----------------------
Carolyn K. Gwozdziewycz Vice President                  |       William W. Davis, Jr.   President &
Nancy A. Hart           Vice President, Controller,     |                               Chief Executive Officer
                        Assistant Treasurer &           |       Lewis J. Critelli       Executive Vice President
                        Assistant Secretary             |       Scott C. Rickard        Senior Investment
Raymond C. Hebden       Vice President                  |                               Representative,
William J. Henigan, Jr. Vice President                  |                               Invest Financial Corp
Jennifer Jaycox         Vice President                  |
Kelley J. Lalley        Vice President &                |       MONROE COUNTY ASSOCIATE BOARD
                        Assistant Secretary             |       ----------------------------
Linda M. Moran          Vice President                  |       Michael J. Baxter       James H. Ott
MaryAlice Petzinger     Vice President                  |       Sara Cramer             Marvin Papillon
Barbara A. Ridd         Vice President &                |       Dr. Andrew A. Forte     Ray Price
                        Assistant Secretary             |       Ralph A. Matergia, Esq. Ron Sarajian
Gary H. Sipe            Vice President                  |





                                    NORWOOD
                                 --------------
                                 FINANCIAL CORP





                                  VIST US AT:
                                 WAYNEBANK.COM

EX-23

Exhibit 23

Consent of Independent Registered Public Accounting Firm

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No.’s 333-61487 and 333-134831) of Norwood Financial Corp. of our reports dated March 10, 2009, relating to the consolidated financial statements and Norwood Financial Corp.’s internal control over financial reporting, which appears in the Annual Report on Form 10-K for the year ended December 31, 2008.

/s/ Beard Miller Company LLP

Beard Miller Company LLP

Lancaster, Pennsylvania

March 10, 2009

EX-31

Exhibit 31.1

CERTIFICATION

I, William W. Davis, Jr., certify that:

1. I have reviewed this annual report on Form 10-K of Norwood Financial Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(e) and 15d-14(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 13, 2009	By:	/s/ William W. Davis, Jr.
		William W. Davis, Jr. President and Chief Executive Officer

EX-31

Exhibit 31.2

CERTIFICATION

I, Lewis J. Critelli, certify that:

1. I have reviewed this annual report on Form 10-K of Norwood Financial Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(e) and 15d-14(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over

financial reporting to be designed under our supervision, to provide reasonable assurance

regarding the reliability of financial reporting and the preparation of financial statements for

external purpose in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 13, 2009	By:	/s/ Lewis J. Critelli
		Lewis J. Critelli Executive Vice President, Secretary and Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Norwood Financial Corp. (the Company) on Form 10-K for the year ending December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the Report), we, William W. Davis, Jr., President and Chief Executive Officer, and Lewis J. Critelli, Executive Vice President and Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)        The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)        The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ William W. Davis, Jr.	/s/ Lewis J. Critelli
William W. Davis, Jr.	Lewis J. Critelli
President and Chief Executive Officer	Executive Vice President, Secretary and Chief Financial Officer

March 13, 2009