Norwood Financial (NWFL) 8-K Announces Second Quarter Earnings

    FOR IMMEDIATE RELEASE

NORWOOD FINANCIAL CORP

ANNOUNCES SECOND QUARTER EARNINGS

July 25, 2011-Honesdale, PA

Lewis J. Critelli, President and Chief Executive Officer of Norwood Financial Corp (Nasdaq Global Market-NWFL) and its subsidiary, Wayne Bank announced earnings for the three months ended June 30, 2011 of $1,484,000.  This represents a decrease of $334,000 from the $1,818,000 earned in the similar period of 2010.  Included in the second quarter earnings were approximately $500,000 of expenses related to the acquisition of North Penn Bancorp, Inc.  Earnings per share (fully diluted) were $.50 in the 2011 period, decreasing from the $.66 earned in the similar period of 2010 due to the acquisition costs.  Annualized return on average assets for the three months ended June 30, 2011 was 1.00% with an annualized return on average equity of 7.88%.  Net income for the six months ended June 30, 2011 totaled $3,144,000, which is $471,000 lower than the same six month period of last year.  For the year, merger related costs approximate $755,000 which negatively impacted net income.  Earnings per share (fully diluted) for the six months ended June 30, 2011 and 2010 totaled $1.10 and $1.31 per share, respectively.

Total assets as of June 30, 2011 were $703.8 million with loans receivable of $464.6 million, deposits of $538.3 million and stockholders’ equity of $84.6 million.  Total assets increased $157.2 million, during the twelve months ended June 30, 2011 due primarily to balances acquired in the North Penn transaction.

1

Loans receivable increased $110.7 million since June 30, 2010 due to the addition of the North Penn portfolio.  The commercial loan portfolio, principally real estate related, increased $79.3 million, while installment loans increased $3.9 million.  Residential mortgage loans increased $24.5 million also due to the addition of balances from North Penn.  The Company also sold $6.5 million of fixed-rate residential mortgages, principally with 30 year terms, for purposes of interest rate risk management.

Non-performing assets, which include non-performing loans and foreclosed assets, totaled $10.6 million and represented 1.50% of total assets as of June 30, 2011 compared to $4.8 million and .90% of assets as of December 31, 2010 and $4.1 million, or .76% of total assets, as of June 30, 2010.  Included in the June 30, 2011 balances are $2.8 million of non-performing assets acquired from North Penn.  Net charge-offs were $943,000 for the quarter and totaled $1.0 million for the six months ended June 30, 2011 compared to $91,000 and $512,000, respectively, for the similar periods in 2010.  The increase in charge-offs during the second quarter is due primarily to one credit which has been carried in nonaccrual status.  Based on the increase in charge-offs, the Company determined that it was appropriate to provide $430,000 and $650,000 for potential future loan losses for the three and six month periods ended June 30, 2011, respectively, compared to $150,000 and $480,000, respectively, for the similar periods in 2010.  The allowance for loan losses totaled $5,267,000 as of June 30, 2011.

For the three months ended June 30, 2011, net interest income, on a fully taxable equivalent basis (fte), totaled $5,593,000, an increase of $527,000 or 10.4% over the similar period in 2010.  The increase can be attributed to the benefits realized since closing on the North Penn transaction.  Net interest margin (fte) for the 2011 period was 3.98% increasing from 3.96%

2

for the similar period in 2010 due to a decrease of 37 basis points in the cost of funds which more than offset the 26 basis point decrease in the yield on interest earning assets.  Yields on loans in excess of the cost of deposits acquired from North Penn contributed to the improved margin.  Net interest income (fte) for the six months ended June 30, 2011 totaled $10,643,000, which was a $374,000, or 3.6% increase, over the similar period in 2010.  The net interest margin (fte) was 3.98% in the 2011 period and 4.05% during the first six months of 2010.

Other income for the three months ended June 30, 2011 totaled $993,000 compared to $1,016,000 for the similar period in 2010.  The decrease was due to an $84,000 reduction in gains on the sales of loans and investment securities.  Service charges improved $22,000 in comparison to the second quarter of last year.  For the six months ended June 30, 2011, other income totaled $2,201,000 compared to $2,018,000 in the 2010 period.  The 2011 period includes $241,000 of gains on the sale of $6.5 million of residential mortgage loans compared to $205,000 in similar gains on sales of $10.5 million of mortgage loans in the 2010 period.  Gains on the sales of investment securities totaled $224,000 on sales of $10.3 million for the 2011 period compared to $219,000 in similar gains in the 2010 period.  The proceeds from investment securities sales were reinvested to improve credit quality in the Company’s municipal bond portfolio.

Other expenses totaled $3,936,000 for the three months ended June 30, 2011, an increase of $760,000 from the $3,176,000 reported in the similar period of 2010.  The increase was principally related to the $488,000 of merger related costs incurred as a result of the North Penn transaction which are included in salaries and benefits, professional fees and other expenses.  For the six months ended June 30, 2011, other

3

expenses totaled $7,470,000 compared to $6,336,000 for the similar period in 2010, an increase of $1.1 million due primarily to $755,000 of merger related expenses.

Mr. Critelli commented, “Even though our earnings are down from last year due to the expenses of the North Penn acquisition, we are pleased that the merger costs are in line with our pre-merger analysis. Our core earnings will benefit in the future from the acquisition, our net interest margin remains close to 4.00% and our capital levels are well above the regulatory “Well Capitalized” levels.  We remain aware that the slow down in the economy, high unemployment and the soft real estate market will continue to impact our customers for the foreseeable future.  However, we are optimistic that the opportunities available to us within the markets we serve, including our new market in Lackawanna County, will enable us to maintain our status as one of the area’s premier financial institutions.  We believe that we are well positioned to take advantage of the opportunities available as the economy rebounds.”

Norwood Financial Corp., through its subsidiary Wayne Bank, operates sixteen offices in Wayne, Pike, Monroe and Lackawanna Counties, Pennsylvania.  The Company’s stock is traded on the Nasdaq Global Market, under the symbol, “NWFL”.

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 federal and state laws, changes in

4

interest rates, risks associated with the acquisition of North Penn Bancorp, 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.

Non-GAAP Financial Measures

This release 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 is consistent with industry practice.

The following reconciles net interest income to net interest income on a fully taxable equivalent basis:

	Three months ended June 30				Six months ended June 30
(dollars in thousands)	2011		2010		2011		2010
Net Interest Income	$	5,318	$	4,833	$	10,099	$	9,829
Taxable equivalent basis adjustment   using 34% marginal tax rate		275		233		544		439
Net interest income on a fully taxable   equivalent basis	$	5,593	$	5,066	$	10,643	$	10,269

5

Contact: William S. Lance

               Senior Vice President &

               Chief Financial Officer

 NORWOOD FINANCIAL CORP

               570-253-8505

               www.waynebank.com

6

NORWOOD FINANCIAL CORP.
Consolidated Balance Sheets
(dollars in thousands, except share data)
(unaudited)
	June 30
	2011			2010
ASSETS
Cash and due from banks	$	9,269		$	6,168
Interest-bearing deposits with banks		34,213			25,374
Federal funds sold		1,729			3,000
Cash and cash equivalents		45,211			34,542
Securities available for sale		152,275			141,245
Securities held to maturity,  fair value 2011: $178 and 2010:  $179		170			169
Loans receivable (net of unearned Income)		464,646			353,933
Less: Allowance for loan losses		5,267			5,421
Net loans receivable		459,379			348,512
Investment in FHLB Stock, at cost		3,981			3,538
Bank premises and equipment, net		7,672			5,061
Bank owned life insurance		11,648			8,074
Foreclosed real estate owned		1,755			382
Accrued interest receivable		2,539			2,113
Goodwill and other intangibles		10,364			39
Other assets		8,801			2,905
TOTAL ASSETS	$	703,795		$	546,580
LIABILITIES
Deposits:
Non-interest bearing demand	$	73,718		$	63,408
Interest-bearing		464,571			344,355
Total deposits		538,289			407,763
Short-term borrowings		32,181			24,378
Other borrowings		42,761			43,000
Accrued interest payable		1,473			1,617
Other liabilities		4,456			3,056
TOTAL LIABILITIES		619,160			479,814
STOCKHOLDERS' EQUITY
Common Stock, $.10 par value, authorized 10,000,000 shares
issued: 2011: 3,371,866 shares,  2010: 2,840,872 shares		337			284
Surplus		24,603			9,777
Retained earnings		60,036			56,526
Treasury stock, at cost: 2011: 79,500 shares, 2010: 80,977 shares		(2,404	)		(2,467	)
Accumulated other comprehensive income		2,063			2,646
TOTAL STOCKHOLDERS' EQUITY		84,635			66,766
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY	$	703,795		$	546,580

7

NORWOOD FINANCIAL CORP.
Consolidated Statements of Income
(dollars in thousands, except per share data)
(unaudited)
	Three Months Ended June 30				YTD as of June 30
	2011		2010		2011		2010
INTEREST INCOME
Loans receivable, including fees	$	5,468	$	5,218	$	10,396	$	10,628
Securities		1,135		1,141		2,225		2,362
Other		16		18		24		29
Total Interest income		6,619		6,377		12,645		13,019
INTEREST EXPENSE
Deposits		932		1,102		1,817		2,301
Short-term borrowings		27		27		51		61
Other borrowings		342		416		678		828
Total Interest expense		1,301		1,545		2,546		3,190
NET INTEREST INCOME		5,318		4,832		10,099		9,829
PROVISION FOR LOAN LOSSES		430		150		650		480
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		4,888		4,682		9,449		9,349
OTHER INCOME
Service charges and fees		592		570		1,141		1,093
Income from fiduciary activities		105		93		218		179
Net realized gains on sales of securities		12		64		224		219
Gains on sale of loans and servicing rights		98		130		241		205
Earnings and proceeds on life insurance policies		106		96		200		198
Other		80		63		177		124
Total other income		993		1,016		2,201		2,018
OTHER EXPENSES
Salaries and  employee benefits		1,882		1,572		3,583		3,187
Occupancy, furniture and equipment		408		408		806		802
Data processing related		187		216		402		412
Taxes, other than income		143		150		272		297
Professional Fees		429		138		830		277
FDIC Insurance assessment		95		118		215		236
Foreclosed real estate owned		17		13		36		29
Other		775		561		1,326		1,096
Total other expenses		3,936		3,176		7,470		6,336
INCOME BEFORE TAX		1,945		2,522		4,180		5,031
INCOME TAX EXPENSE		461		704		1,036		1,416
NET INCOME	$	1,484	$	1,818	$	3,144	$	3,615
Basic earnings per share	$	0.50	$	0.66	$	1.10	$	1.31
Diluted earnings per share	$	0.50	$	0.66	$	1.10	$	1.31

8

NORWOOD FINANCIAL CORP.
Financial Highlights (Unaudited)
(dollars in thousands, except per share data)
For the Three Months Ended June 30	2011			2010
Net interest income	$	5,318		$	4,832
Net income		1,484			1,818
Net interest spread (fully taxable equivalent)		3.75	%		3.64	%
Net interest margin (fully taxable equivalent)		3.98	%		3.96	%
Return on average assets		1.00	%		1.36	%
Return on average equity		7.88	%		11.03	%
Basic  earnings per share	$	0.50		$	0.66
Diluted earnings per share		0.50			0.66
For the Year Ended June 30
Net interest income	$	10,099		$	9,829
Net income		3,144			3,615
Net interest spread (fully taxable equivalent)		3.72	%		3.72	%
Net interest margin (fully taxable equivalent)		3.98	%		4.05	%
Return on average assets		1.12	%		1.37	%
Return on average equity		8.85	%		11.06	%
Basic  earnings per share	$	1.10		$	1.31
Diluted earnings per share		1.10			1.31
As of June 30
Total Assets	$	703,795		$	546,580
Total loans receivable		464,646			353,933
Allowance for loan losses		5,267			5,421
Total deposits		538,289			407,763
Stockholders' equity		84,635			66,766
Trust Assets  under management		115,540			99,137
Book value per share	$	25.71		$	24.16
Equity to total assets		12.03	%		12.22	%
Allowance to total loans receivable		1.13	%		1.53	%
Nonperforming loans to total loans		1.90	%		1.06	%
Nonperforming assets to total assets		1.50	%		0.76	%

9

NORWOOD FINANCIAL CORP.
Consolidated Balance Sheets (unaudited)
(dollars in thousands)
	June 30		March 31		Dec 31		Sept 30		June 30
	2011		2011		2010		2010		2010
ASSETS
Cash and due from banks	$	9,269	$	5,670	$	5,782	$	9,057	$	6,168
Interest-bearing deposits with banks		34,213		13,864		7,843		7,696		25,374
Federal funds sold		1,729		0		3,000		3,000		3,000
Cash and cash equivalents		45,211		19,534		16,625		19,753		34,542
Securities available for sale		152,275		143,104		145,815		139,308		141,245
Securities held to maturity		170		170		170		169		169
Loans receivable (net of unearned Income)		464,646		350,128		356,855		358,354		353,933
Less: Allowance for loan losses		5,267		5,780		5,616		5,513		5,421
Net loans receivable		459,379		344,348		351,239		352,841		348,512
Investment in FHLB stock		3,981		3,193		3,361		3,538		3,538
Bank premises and equipment, net		7,672		4,798		4,904		5,012		5,061
Foreclosed real estate owned		1,755		948		748		748		382
Other assets		33,352		14,831		14,143		13,188		13,131
TOTAL ASSETS	$	703,795	$	530,926	$	537,005	$	534,557	$	546,580
LIABILITIES
Deposits:
Non-interest bearing demand	$	73,718	$	62,736	$	62,238	$	66,331	$	63,408
Interest-bearing deposits		464,571		334,384		331,627		332,321		344,355
Total deposits		538,289		397,120		393,865		398,652		407,763
Other borrowings		74,942		60,465		71,309		62,530		67,378
Other liabilities		5,929		4,766		4,133		4,932		4,673
TOTAL LIABILITIES		619,160		462,351		469,307		466,114		479,814
STOCKHOLDERS' EQUITY		84,635		68,575		67,698		68,443		66,766
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY	$	703,795	$	530,926	$	537,005	$	534,557	$	546,580

10

NORWOOD FINANCIAL CORP.
Consolidated Statements of Income (unaudited)
(dollars in thousands, except per share data)
	30-Jun			31-Mar			31-Dec			30-Sep			30-Jun
Three months ended	2011			2011			2010			2010			2010
INTEREST INCOME
Loans receivable, including fees	$	5,468		$	4,928		$	5,207		$	5,266		$	5,218
Securities		1,135			1,090			1,052			1,115			1,141
Other		16			8			14			14			18
Total Interest income		6,619			6,026			6,273			6,395			6,377
INTEREST EXPENSE
Deposits		932			885			951			1,031			1,102
Borrowings		369			360			406			445			443
Total Interest expense		1,301			1,245			1,357			1,476			1,545
NET INTEREST INCOME		5,318			4,781			4,916			4,919			4,832
PROVISION FOR LOAN LOSSES		430			220			270			250			150
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES		4,888			4,561			4,646			4,669			4,682
OTHER INCOME
Service charges and fees		592			549			551			587			570
Income from fiduciary activities		105			113			105			121			93
Net realized gains (losses) on sales of securities		12			212			68			161			64
Gains on sale of loans and servicing rights		98			143			99			3			130
Earnings and proceeds on life insurance		106			94			97			96			96
Other		80			97			91			67			63
Total other income		993			1,208			1,011			1,035			1,016
OTHER EXPENSES
Salaries and  employee benefits		1,882			1,701			1,663			1,657			1,572
Occupancy, furniture and equipment , net		408			398			370			388			408
Foreclosed real estate owned		17			19			9			3			13
FDIC insurance assessment		95			120			117			121			118
Other		1,534			1,296			1,146			943			1,065
Total other expenses		3,936			3,534			3,305			3,112			3,176
INCOME BEFORE TAX		1,945			2,235			2,352			2,592			2,522
INCOME TAX EXPENSE		461			575			544			702			704
NET INCOME	$	1,484		$	1,660		$	1,808		$	1,890		$	1,818
Basic  earnings per share	$	0.50		$	0.60		$	0.65		$	0.68		$	0.66
Diluted earnings per share	$	0.50		$	0.60		$	0.65		$	0.68		$	0.66
Book Value per share	$	25.71		$	24.16		$	24.45		$	24.79		$	24.16
Return on average equity		7.88	%		9.76	%		10.38	%		10.98	%		11.03	%
Return on average assets		1.00	%		1.27	%		1.33	%		1.39	%		1.36	%
Net interest spread (fte)		3.75	%		3.70	%		3.74	%		3.71	%		3.64	%
Net interest margin (fte)		3.98	%		3.98	%		4.04	%		4.03	%		3.96	%
Allowance for loan losses to total loans		1.13	%		1.65	%		1.57	%		1.54	%		1.53	%
Net charge-offs to average loans (annualized)		1.02	%		0.06	%		0.19	%		0.18	%		0.10	%
Nonperforming loans to total loans		1.90	%		2.11	%		1.14	%		1.02	%		1.06	%
Nonperforming assets to total assets		1.50	%		1.57	%		0.90	%		0.82	%		0.76	%

11