SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter period ended March 31, 2001 -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------ -------------------------- Commission file number 0-28366 ----------- Norwood Financial Corp. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-2828306 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. employer identification no.) incorporation or organization) 717 Main Street, Honesdale, Pennsylvania 18431 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (717)253-1455 ------------- N/A - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicated by check (x) whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding as of April 30, 2001 - --------------------------------------- ----------------------------------- common stock, par value $0.10 per share 1,746,633 NORWOOD FINANCIAL CORP. FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001 INDEX Page Number Part I - CONSOLIDATED FINANCIAL INFORMATION OF NORWOOD FINANCIAL CORP. Item 1. Financial Statements 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3 Qualitative and Quantitative Disclosures about market risk 15 Part II - OTHER INFORMATION Item 1. Legal Proceedings 16 Item 2. Changes in Securities 16 Item 3. Defaults upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Materially Important Events 16 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements - ---------------------------- NORWOOD FINANCIAL CORP. Consolidated Balance Sheets (unaudited) (dollars in thousands) March 31, December 31, 2001 2000 --------- --------- ASSETS Cash and due from banks $ 6,239 $ 8,991 Interest bearing deposits with banks 196 153 Federal funds sold 1,700 2,550 --------- --------- Cash and cash equivalents 8,135 11,694 Securities available for sale 79,699 79,646 Securities held to maturity, fair value 2001 $7,852, 2000 $7,786 7,486 7,484 Loans receivable (net of unearned income) 214,827 216,477 Less: Allowance for loan losses 3,260 3,300 --------- --------- Net loans receivable 211,567 213,177 Bank premises and equipment, net 6,234 6,201 Other real estate 27 27 Accrued interest receivable 1,885 1,983 Other assets 5,855 6,519 --------- --------- TOTAL ASSETS $ 320,888 $ 326,731 ========= ========= LIABILITIES Deposits: Non-interest bearing demand $ 27,941 $ 28,688 Interest-bearing deposits 219,857 224,271 --------- --------- Total deposits 247,798 252,959 Short-term borrowings 6,558 7,860 Long-term debt 28,000 28,000 Accrued interest payable 2,859 3,128 Other liabilities 3,105 3,414 --------- --------- TOTAL LIABILITIES 288,320 295,361 STOCKHOLDERS' EQUITY Common Stock, $.10 par value, authorized 10,000,000 shares issued 1,803,824 shares 180 180 Surplus 4,639 4,629 Retained earnings 29,075 28,441 Treasury stock, at cost (59,831 shares) (1,213) (1,213) Unearned ESOP shares (1,140) (1,155) Accumulated other comprehensive income 1,027 488 --------- --------- TOTAL STOCKHOLDERS' EQUITY 32,568 31,370 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 320,888 $ 326,731 ========= ========= See accompanying notes to the unaudited consolidated financial statements 3 NORWOOD FINANCIAL CORP. Consolidated Statements of Income (unaudited) (dollars in thousands, except per share data) Three Months Ended March 31 --------------- 2001 2000 ------ ------ INTEREST INCOME Loans receivable including fees $4,674 $4,309 Securities 1,356 1,402 Other 12 7 ------ ------ Total interest income 6,042 5,718 INTEREST EXPENSE Deposits 2,263 2,066 Short-term borrowings 70 82 Long-term debt 423 451 ------ ------ Total interest expense 2,756 2,599 ------ ------ NET INTEREST INCOME 3,286 3,119 PROVISION FOR LOAN LOSSES 170 95 ------ ------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,116 3,024 OTHER INCOME Service charges and fees 418 364 Income from fiduciary activities 83 67 Net realized gains on sales of securities 11 1 Other 154 146 ------ ------ Total other income 666 578 OTHER EXPENSES Salaries and employee benefits 1,156 1,074 Occupancy, furniture & equipment, net 335 320 Data processing related 124 94 Losses on lease residuals 180 181 Taxes, other than income 71 66 Professional fees 50 71 Other 534 564 ------ ------ Total other expenses 2,450 2,370 INCOME BEFORE INCOME TAXES 1,332 1,232 INCOME TAX EXPENSE 363 344 ------ ------ NET INCOME $ 969 $ 888 ====== ====== BASIC AND DILUTED EARNINGS PER SHARE $ 0.58 $ 0.53 ====== ====== Dividends per share $ 0.20 $ 0.17 ====== ====== See accompanying notes to the unaudited consolidated financial statements. 4 NORWOOD FINANCIAL CORP. Consolidated Statement of Changes in Stockholders' Equity (unaudited) (dollars in thousands) Accumulated Unearned Other Common Retained Treasury ESOP Comprehensive Stock Surplus Earnings Stock Shares Income (loss) Total ----- ------- -------- ----- ------ ------------- ----- Balance, December 31, 1999 $180 $4,603 $25,763 ($1,214) ($1,359) ($1,319) $26,654 Comprehensive income: Net Income 888 888 Net change in unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effects (303) (303) ------- Total comprehensive income 585 ------- Cash dividends declared, $.17 per share (283) (283) Release of earned ESOP shares 8 29 37 ---- ------ ------- ------- ------- ------- ------- Balance, March 31, 2000 $180 $4,611 $26,368 ($1,214) ($1,330) ($1,622) $26,993 ==== ====== ======= ======= ======= ======= ======= See accompanying notes to the unaudited financial statements NORWOOD FINANCIAL CORP. Consolidated Statement of Changes in Stockholders' Equity (unaudited) (dollars in thousands) Accumulated Unearned Other Common Retained Treasury ESOP Comprehensive Stock Surplus Earnings Stock Shares Income (loss) Total ----- ------- -------- ----- ------ ------------- ----- Balance, December 31, 2000 $180 $4,629 $28,441 ($1,213) ($1,155) $488 $31,370 Comprehensive income: Net Income 969 969 Net change in unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effects 539 539 ------- Total comprehensive income 1,508 ------- Cash dividends declared, $.20 per share (335) (335) Release of earned ESOP shares 10 15 25 ---- ------ ------- ------- ------- ------ ------- Balance, March 31, 2001 $180 $4,639 $29,075 ($1,213) ($1,140) $1,027 $32,568 ==== ====== ======= ======= ======= ====== ======= See accompanying notes to the unaudited financial statements 5 NORWOOD FINANCIAL CORP. Consolidated Statements of Cashflows (Unaudited) (dollars in thousands) Three Months Ended March 31, ---------------------------- 2001 2000 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 969 $ 888 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 170 95 Depreciation 156 169 Amortization of intangible assets 44 44 Deferred income taxes (297) (317) Net realized gain on sales of securities (11) (1) Gain(loss) on sale of other real estate, net - - Net gain on sale of mortgage loans and servicing (130) (3) Mortgage loans originated for sale (1,270) (463) Proceeds from sale of mortgage loans 1,401 466 Decrease (increase) in accrued interest receivable 98 (99) Increase (decrease) in accrued interest payable (269) 117 (Increase) in cash surrender value of life insurance (42) (41) Other, net 763 723 -------- -------- Net cash provided by operating activities 1,582 1,578 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Securities available for sale: Proceeds from sales 5,224 2,002 Proceeds from maturities and principal reductions on mortgage-backed securities 9,995 971 Purchases (14,457) (4,788) Net decrease (increase) in loans 1,089 (2,201) Purchase of bank premises and equipment, net (189) (11) Proceeds from sales of other real estate 30 - -------- -------- Net cash used in investing activities 1,692 (4,027) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits (5,162) 2,353 Net increase (decrease) in short term borrowings (4,302) (1,846) Proceeds from other borrowings 3,000 - Release and (buyback) of ESOP shares (35) (19) Cash dividends paid (334) (283) -------- -------- Net cash used in financing activities (6,833) 205 -------- -------- (Decrease) in cash and cash equivalents (3,559) (2,244) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,694 10,798 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,135 $ 8,554 ======== ======== See accompanying notes to consolidated financial statement 6 Notes to Unaudited Consolidated Financial Statements - ---------------------------------------------------- 1. Basis of Presentation --------------------- The consolidated financial statements include the accounts of Norwood Financial Corp. (Company) and its wholly-owned subsidiary, Wayne Bank (Bank) and the Bank's wholly-owned subsidiaries, WCB Realty Corp., Norwood Investment Corp. and WTRO Properties. All significant intercompany transactions have been eliminated in consolidation. 2. Estimate -------- The financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. The financial statements reflect, in the opinion of management, all normal, recurring adjustments necessary to present fairly the financial position of the Company. The operating results for the three month period ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001 or any other future interim period. These statements should be read in conjunction with the consolidated financial statements and related notes which are incorporated by reference in the Company's Annual Report on Form 10-K for the year-ended December 31, 2000. 3. Earnings Per Share ------------------ Basic earnings per share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method. 4. Cash Flow Information --------------------- For the purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits with banks and federal funds sold. Cash payments for interest for the period March 31, 2001 and 2000 were $3,025,000 and $2,482,000 respectively. Cash payments for income taxes in 2001 were $132,000 compared to $406,000 in 2000. Non-cash investing activity for 2001 and 2000 included foreclosed mortgage loans transferred to real estate owned and repossession of other assets of $330,000 and $222,000. 5. Reclassification of Comparative Amounts --------------------------------------- Certain comparative amounts for the prior period have been reclassified to conform to the current period's presentation. Such reclassifications did not affect net income. 7 Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements - -------------------------- The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words "believes, "anticipates," "contemplates," "expects," and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Those risks and uncertainties include changes in interest rates, risks associated with the effect of opening a new branch, the ability to control costs and expenses, 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. Changes in Financial Condition - ------------------------------ General - ------- Total assets at March 31, 2001 were $320.9 million compared to $326.7 million at year-end 2000. Securities - ---------- The fair value of securities available for sale at March 31, 2001 was $79.7 million, compared to $79.6 million at December 31, 2000. Total purchases for the period were $14,457,000 with maturities and principal reductions of $9,995,000 and sales of $5,224,000. (See cash flow). Loans - ----- Total loans receivable, which include automobile leases, were $214.8 million at March 31, 2001 compared to $216.5 million at December 31, 2000. The decrease was principally due to $1.5 million of longer-term, high coupon residential mortgages sold in the secondary market. There was a gain on the sale of $45,000. The Company also experienced a slow down in its indirect automobile lending, with the balance decreasing $950,000 from December 31, 2000, to $55.2 million at March 31, 2001. With interest rates declining, the Company anticipates additional mortgage lending activity in the second quarter of 2001. The Company no longer originates automobile leases, and as a result the portfolio declined $1.9 million from December 31, 2000 to $11.8 million at March 31, 2001, which includes residual value of $9.4 million, at March 31, 2001 declining from $10.7 million at year-end. The Company liquidates its returned off-lease vehicles through various used car dealers and automobile auction centers. At March 31, 2001 the Company had an inventory of vehicles to liquidate of $781,000. Total losses incurred on off-lease vehicles was $105,000 for the quarter. The Company's reserve for future residual value losses was $475,000 at March 31, 2001 increasing from $400,000 at December 31, 2000. 8 Set forth below is selected data relating to the composition of the loan portfolio at the dates indicated: Types of loans (dollars in thousands) March 31, 2001 December 31, 2000 ------------------- ------------------- $ % $ % -------- ----- -------- -------- Real Estate-Residential $ 56,969 26.5 $ 59,517 27.5 Commercial 60,614 28.2 56,815 26.2 Construction 2,222 1.0 2,425 1.1 Commercial, financial and agricultural 17,844 8.3 17,102 7.9 Consumer loans to individuals 65,706 30.5 67,286 31.0 Lease financing, net of unearned income 11,770 5.5 13,644 6.3 -------- ----- -------- -------- Total loans 215,125 100.0% 216,789 100.0% Less: Unearned income and deferred fees 298 312 Allowance for loan losses 3,260 3,300 -------- -------- Total loans, net $211,567 $213,177 ======== ======== Allowance for Loan Losses and Non-performing Assets - --------------------------------------------------- Following is a summary of changes in the allowance for loan losses for the periods indicated: At or for the Three (dollars in thousands) Months Ended March 31 ----------------------- 2001 2000 ------- ------- Balance, beginning $ 3,300 $ 3,344 Provision for loan losses 170 95 Charge-offs (240) (198) Recoveries 30 107 ------- ------- Net charge-offs (210) (91) ------- ------- Balance, ending $ 3,260 $ 3,348 ======= ======= Allowance to total loans 1.52% 1.62% Net charge-offs to average loans (annualized) .39% .18% The allowance for loan losses totaled $3,260,000 at March 31, 2001 and represented 1.52% of total loans, compared to $3,300,000 at year-end, and $3,348,000 at March 31, 2000. Net charge-offs for the three month period ended March 31, 2001, totaled $210,000 and consisted principally of losses on the sale of repossessed automobiles. With the higher level of net charge-offs, the provision for loan losses increased to $170,000 compared to $95,000 in the similar period in 2000. Management's loan review function 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 a credit review and gives 9 consideration to areas of exposure such as concentration of credit, economic and industry conditions, trends in delinquencies, collections and collateral value coverage. General reserve percentages are identified by loan type and credit grading and allocated accordingly. Larger credit exposures are individually analyzed. Management considers the allowance adequate at March 31, 2001 based on the loan mix and level of classifications. However, there can be no assurance that the allowance for loan losses will be adequate to cover significant losses, if any, that might be incurred in the future. At March 31, 2001, non-performing loans totaled $475,000, which is .22% of total loans decreasing from $680,000, or .31% of total loans at December 31, 2000. The following table sets forth information regarding non-performing loans and other real estate owned at the date indicated: (dollars in thousands) March 31, 2001 December 31, 2000 -------------- ----------------- Loans accounted for on a non-accrual basis: Commercial and all other $ 64 $ 64 Real Estate 323 518 Instalment 69 -- ---- ---- Total 456 582 Accruing loans which are contractually past due 90 days or more 19 98 ---- ---- Total non-performing loans $475 $680 Other real estate owned 27 27 ---- ---- Total non-performing assets $502 $707 ==== ==== Allowance for loan losses as a percent of non-performing loans 686.3% 484.6% Non-performing loans to total loans .22% .31% Non-performing assets to total assets .16% .22% Deposits - -------- Total deposits at March 31, 2001 were $247.8 million compared to $253 million at December 31, 2000. Non-interest bearing demand deposits at March 31, 2001 were $27.9 million compared to $28.7 million at December 31, 2000. The change reflects a seasonal decline in commercial and municipal accounts. Time deposits in denominations of $100,000 or more decreased to $27.2 million at March 31, 2001 from $31.7 million at December 31, 2000 due to scheduled maturities of school district and other municipal deposits. This decrease was partially offset by growth in retail time deposits of $3.1 million. In addition, the Company had $6.0 million of commercial cash management accounts included in short-term borrowings, which represents excess funds invested in overnight securities, which the company considers core funding. 10 Stockholders' Equity and Capital Ratios - --------------------------------------- At March 31,2001, total stockholders' equity totaled $32.6 million, a net increase of $1.2 million from December 31, 2000. The net increase in stockholders' equity was primarily due to $969,000 in net income, that was partially offset by $324,000 of dividend payments. In addition, other comprehensive income increased $539,000 due to increase in fair value of securities in the available for sale portfolio. This increse in fair value is the result of decrease in interest rates, which favorably impacts the value of the securities. Because of interest rate volatility, the Company's accumulated other income comprehensive income could materially fluctuate for each interim and year-end period. A comparison of the Company's capital ratios is as follows: March 31, 2001 December 31, 2000 -------------- ----------------- Tier 1 Capital (To average assets) 9.85% 9.44% Tier 1 Capital (To risk-weighted assets) 13.02% 12.78% Total Capital (To risk-weighted assets) 14.52% 14.27% The minimum capital requirements imposed by the FDIC for leverage, Tier 1 and Total Capital are 4%, 4% and 8%, respectively. The Company has similar capital requirements imposed by the Board of Governors of the Federal Reserve System (FRB). The Bank is also subject to more stringent Pennsylvania Department of Banking (PDB) guidelines. The Bank's capital ratios do not differ significantly from the Company's ratios. Although not adopted in regulation form, the PDB utilizes capital standards requiring a minimum of 6.5% leverage capital and 10% total capital. The Company and the Bank were in compliance in FRB, FDIC and PDB capital requirements at March 31, 2001 and December 31, 2000. 11 Results of Operation NORWOOD FINANCIAL CORP. Consolidated Average Balance Sheets with Resultant Interest and Rates (Tax-Equivalent Basis, dollars in thousands) Three Months Ended March 31, ----------------------------------------------------------------------- 2001 2000 --------------------------------- ----------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate ------- -------- ------ ------- -------- ------ (2) (1) (3) (2) (1) (3) Assets Interest-earning assets: Federal funds sold $ 820 $ 11 5.37% $ 532 $ 7 5.26% Interest bearing deposits with banks 104 1 3.85 265 1 1.51 Securities held-to-maturity 7,485 166 8.87 7,477 162 8.67 Securities available for sale: Taxable 71,815 1,150 6.41 75,884 1,258 6.63 Tax-exempt 8,169 146 3,147 56 7.12 -------- ------ 7.15 -------- ------ Total securities available for sale 79,984 1,296 6.48 79,031 1,314 6.65 Loans receivable (4) (5) 215,735 4,681 8.68 206,798 4,323 8.36 -------- ------ -------- ------ Total interest earning assets 304,128 6,155 8.10 294,103 5,807 7.90 Non-interest earning assets: Cash and due from banks 6,699 6,546 Allowance for loan losses (3,264) (3,372) Other assets 14,495 15,595 -------- -------- Total non-interest earning assets 17,930 18,769 -------- -------- Total Assets $322,058 $312,872 ======== ======== Liabilities and Shareholders' Equity Interest bearing liabilities: Interest bearing demand deposits $ 59,268 365 2.46% $ 57,919 354 2.44% Savings 40,722 212 2.08 42,573 231 2.17 Time 119,914 1,686 5.62 113,948 1,481 5.20 -------- ------ -------- ------ Total interest bearing deposits 219,904 2,263 4.12 214,440 2,066 3.85 Short-term borrowings 7,792 70 3.59 9,021 81 3.59 Long-term debt 29,243 423 5.79 30,440 451 5.93 -------- ------ -------- ------ Total interest bearing liabilities 256,939 2,756 4.29 253,901 2,598 4.09 Non-interest bearing liabilities: Demand deposits 27,002 26,846 Other liabilities 6,273 5,627 -------- -------- Total non-interest bearing liabilities 33,275 32,473 Shareholders' equity 31,844 26,498 -------- -------- Total Liabilities and Shareholders' Equity $322,058 $312,872 ======== ======== Net interest income (tax equivalent basis) 3,399 3.81% 3,209 3.81% ==== ==== Tax-equivalent basis adjustment (113) (90) ------- ------ Net interest income $ 3,286 $3,119 ======= ====== Net interest margin (tax equivalent basis) 4.47% 4.36% ==== ==== (1) Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 34%. (2) Average balances have been calculated based on daily balances. (3) Annualized (4) Loan balances include non-accrual loans and are net of unearned income. (5) Loan yields include the effect of amortization of deferred fees, net of costs. 12 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) ------------------- Three months ended March 31,2001 Compared to -------------------------------------------- Three months ended March 31, 2000 --------------------------------- Variance due to --------------- Volume Rate Net ----------------------- (dollars in thousands) Assets Interest earning assets: Federal funds sold ...................... $ 4 $ - $ 4 Interest bearing deposits with banks .... (3) 3 - Securities held to maturity ............. - 4 4 Securities available for sale: Taxable .............................. (66) (42) (108) Tax-exempt securities ................ 90 - 90 ----- ----- ----- Total securities .................. 24 (42) (18) Loans receivable ........................ 191 167 358 ----- ----- ----- Total interest earning assets ......... 216 132 348 Interest bearing liabilities: Interest-bearing demand deposits ....... 8 3 11 Savings ................................ (10) (9) (19) Time ................................... 80 125 205 ----- ----- ----- Total interest bearing deposits ..... 78 119 197 Short-term borrowings ................... (11) - (11) Long Term debt ........................... (17) (11) (28) ----- ----- ----- Total interest bearing liabilities ...... 50 108 158 Net interest income (tax-equivalent basis) $ 165 $ 25 $ 190 ===== ===== ===== (1) 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. 13 Comparison of Operating Results for Three Months Ended March 31, 2001 and March - -------------------------------------------------------------------------------- 31, 2000 - -------- General - ------- For the three months ended March 31, 2001 net income totaled $969,000 or $.58 per share (basic and diluted) compared to $888,000, or $.53 per share (basic and diluted) earned in the first quarter of 2000. The resulting return on average assets and return on average equity for the quarter were 1.20% and 12.17% respectively compared to 1.13% and 13.40% respectively for the corresponding period in 1999. The Company paid dividends of $.20 per share in 2001 compared to $.17 per share in 2000. Net Interest Income - ------------------- Net interest income on a fully taxable basis (fte) for the first quarter of 2001 totaled $3,339,000 compared to $3,209,000 in 2000, an increase of $190,000 or 5.9%. The resultant fte net interest spread and net interest margin for the three months ended March 31, 2001 was 3.80% and 4.47% respectively, compared to 3.80% and 4.36% respectively in 2000. Interest income on an fte basis totaled $6,155,000 for the period in 2001 increasing $348,000 from $5,807,000 in 2000. The increase was due to $10 million growth in average earning assets and improvement in the yield on earning assets at 8.10% in 2001, and 7.90% in 2000. Securities available for sale averaged $80 million at a yield of 6.48% in 20001 compared to $79 million at a yield of 6.65% in 2000. The decrease in yield is principally due to the lower interst rate environment in 2001. Loan receivable averaged $215.7 million in 2001 at yield of 8.68% compared to $206.8 million yielding 8.36%. The increase in yield is due in part to growth in higher yielding commercial loans, which replaced run-off in the lower yielding automobile leasing portfolio. In addition, in the first quarter of 2001, the Company collected $30,000 of delinquent interest on two non-performing loans. Interest expense for the three months ending March 31, 2001 totaled $2,756,000 with a cost of interest-bearing liabilities of 4.29% compared to $2,598,000 of expense at 4.08% in 2000. The increase was principally due to time deposits at 5.62%, compared to 5.20% in 2000. The higher cost was due to shorter-term certificates of deposit generated in 2000, the majority of which will mature and reprice in 2001. Other Income - ------------ Other income, excluding net realized gains on sales of securities, totaled $655,000 for the period ended March 31, 2001, an increase of $78,000 or 13.5% over $577,000 in the same period in 2000. The increase was due in part to a loan promotion which generated $63,000 in fees and gain on sale of fixed rate residential mortgages of $45,000. For the quarter, fee income represented 16.1% of total revenues, increasing from 15.2% in 2000. Net realized gains on securities transactions were $11,000 for the first quarter of 2001 compared to $1,000 in 2000. 14 Other Expense - ------------- Other expenses totaled $2,450,000 for the period ending March 31, 2001, an increase of $80,000, or 3.4% from $2,370,000 in the prior year. The increase is principally due to higher salaries and employee benefit expense, $82,000 and data processing costs, $30,000. These increases were partially offset by lower legal fees of $32,000 in 2001, which are included in professional fees. Income Tax Expense - ------------------ Income tax expense totaled $363,000 for an effective rate of 27.3% compared to $344,000 and 27.9% in first quarter of 2000. The effective rate is below the statutory rate of 34% due to tax exempt income on loans and securities. Item 3: Quantitative and Qualitative Disclosures about Market Risk Market Risk - ----------- There were no significant changes for the three months ended March 31, 2001 from the information presented in the Form 10-k for the year-ended December 31, 2000. 15 Part II. Other Information Item 1. Legal Proceedings Not applicable Item 2. Changes in Securities and use of proceeds Not applicable Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Materially Important Events None Item 6. Exhibits and Reports on Form 8-K (a) 3(i) Articles of Incorporation of Norwood Financial Corp* 3(ii) Bylaws of Norwood Financial Corp.* 4.0 Specimen Stock Certificate of Norwood Financial Corp.* 10.1 Amended Employment Agreement with William W. Davis, Jr.*** 10.2 Amended Employment Agreement with Lewis J. Critelli *** 10.3 Form of Change-In-Control Severance Agreement with nine key employees of the Bank* 10.4 Consulting Agreement with Russell L. Ridd** 10.5 Wayne Bank Stock Option Plan* 10.6 Salary Continuation Agreement between the Bank and William W. Davis, Jr.*** 10.7 Salary Continuation Agreement between the Bank and Lewis J. Critelli*** 10.8 Salary Continuation Agreement between the Bank and Edward C. Kasper*** 10.9 1999 Directors Stock Compensation Plan*** (b) Reports on Form 8-k On January 11, 2001, the Registrant filed a Form 8k (Items 5 and 7) to announce a stock repurchase plan to purchase up to 3% or 50,230 shares, of the company's outstanding stock. - --------------------------- * Incorporated herein by reference into the identically numbered exhibits of the Registrant's Form 10 Registration Statement initially filed with the Commission on April 29, 1996. ** Incorporated herein by reference into the indentically numbered exhibits of the Registrant's Form 10-K filed with the Commission on March 31, 1997. *** Incorporated herein by reference into the indentically numbered exhibits of the Registrant's Form 10-K filed with the Commission on March 23, 2001. 17 Signatures Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NORWOOD FINANCIAL CORP. Date: May 14, 2001 By: /s/William W. Davis, Jr. ------------------------------------- William W. Davis, Jr. President and Chief Executive Officer (Principal Executive Officer) Date: May 14, 2001 By: /s/Lewis J. Critelli ------------------------------------- Lewis J. Critelli Executive Vice President and Chief Financial Officer (Principal Financial Officer) 18