Norwood Financial Corp. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Norwood Financial Corp. is a bank holding company whose wholly owned subsidiary is Wayne Bank. Unaudited consolidated results are compared with Q1 2022; balance-sheet figures are compared with December 31, 2022. Dollar amounts below are in millions unless noted.
Key financial results
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Total interest income | $21.711 | $17.347 in Q1 2022 |
| Net interest income | $16.093 | $16.101 in Q1 2022 |
| Provision for credit losses | $0.300 | $0.300 in Q1 2022 |
| Net income / diluted EPS | $5.782 / $0.71 | $7.128 / $0.87 in Q1 2022 |
| Net interest margin, fully taxable-equivalent | 3.25% | 3.32% in Q1 2022 |
| Return on average assets / equity | 1.13% / 13.61% | 1.39% / 14.22% in Q1 2022 |
| Total assets | $2,104.4 | $2,047.1 at December 31, 2022 |
| Total deposits | $1,755.9 | $1,727.7 at December 31, 2022 |
| Short-term / other borrowings | $108.6 / $40.2 | $93.2 / $40.0 at December 31, 2022 |
| Stockholders’ equity | $176.4 | $167.1 at December 31, 2022 |
Business, balance sheet, and cash flow
- Net loans were $1,516.2 million, up $59.3 million from year-end; gross loans increased $61.7 million, led by commercial real estate, commercial, and consumer lending. Available-for-sale securities were $418.2 million, nearly unchanged from year-end.
- Deposits rose $28.2 million, principally from a $78.1 million increase in certificates of deposit; other deposit categories declined by $49.9 million net. Short-term borrowings increased $15.3 million, primarily to fund liquidity needs. Other borrowings included a new $10 million Federal Reserve term borrowing due March 2024.
- Cash and cash equivalents were $29.0 million. Management reported total liquidity of $447.3 million, or 21.3% of assets, including available-for-sale securities, and considered liquidity adequate. Reported operating cash flow was $10.1 million; investing activities used $54.7 million and financing activities provided $41.7 million. Cash declined $2.9 million during the quarter.
- Regulatory capital ratios at March 31 included Tier 1 leverage of 9.34%, CET1 of 12.27%, and total capital of 13.38%. The company stated it was compliant with applicable capital requirements.
Changes and notable items
- Net income declined $1.3 million year over year. Net interest income was essentially flat: higher loan and securities income was offset by a $4.4 million increase in interest expense. Average earning-asset yield rose to 4.37% from 3.57%, while the average cost of interest-bearing liabilities rose to 1.54% from 0.35%.
- Other income fell $1.4 million, mainly because Q1 2022 included $0.9 million of income from payoffs of purchased impaired loans and a $0.4 million gain on foreclosed real estate sales. Other expense increased $0.3 million, largely from higher salaries and benefits.
- The allowance for credit losses was $19.4 million, or 1.27% of loans, versus $17.0 million, or 1.15%, at year-end. Net charge-offs were $0.32 million versus $0.08 million a year earlier. Nonperforming loans were $2.7 million (0.18% of loans), compared with $1.1 million (0.08%) at year-end; nonperforming assets were $3.1 million (0.15% of assets).
- The company adopted the CECL expected-credit-loss standard on January 1, 2023. Adoption reduced retained earnings by $2.0 million and increased the reported loan allowance by $2.5 million; the filing also reports a $0.329 million allowance for unfunded commitments. Q1 provision expense was $0.3 million.
- Accumulated other comprehensive loss improved to $50.0 million from $57.4 million at year-end, primarily from higher fair values of available-for-sale securities. Those securities still had $64.0 million of gross unrealized losses; management attributed them to interest rates, not credit deterioration, and said it did not intend, and was not more likely than not required, to sell them before recovery.
Outlook, risks, and contingencies
- The filing gives no specific earnings, revenue, or margin guidance. Management cautions that quarterly results are not necessarily indicative of full-year results.
- Management discussed Federal Reserve rate increases and possible further increases, inflation, recession risk, deposit flows and funding costs, recent bank failures, and possible effects on liquidity, capital, securities values, loan repayment, and operating expenses. It warns that significant or unexpected rate changes could adversely affect results.
- The company reported a negative 90-day interest-sensitivity gap of $55.1 million. It stated that modeled net interest income exposure to a plus or minus 200-basis-point rate shift was within policy limits; its policy permits a decrease of no more than 10% under that scenario.
- Credit exposure is concentrated in northeastern Pennsylvania and certain New York counties. Commercial rental loans were $142.3 million (9.3% of loans) and residential rental loans were $116.0 million (7.6%). The company reported no charge-offs in these named concentrations during the quarter. Off-balance-sheet commitments to grant loans, unfunded lines, and standby letters of credit totaled $274.6 million; actual funding may be lower.
- No legal proceedings or new risk factors were reported in the filing. No share repurchases occurred during the quarter. Disclosure controls were deemed effective; the company added or modified controls for CECL adoption.
Important facts for investors to verify
- Deposit stability and funding mix, including uninsured-deposit exposure; the supplied filing text does not provide a clear uninsured-deposit total.
- Whether higher deposit and borrowing costs continue to outpace asset-yield increases, and the resulting effect on net interest margin and earnings.
- Loan performance, charge-offs, nonperforming-loan trends, and the adequacy of the CECL allowance, particularly amid economic or regional stress.
- Liquidity and available borrowing capacity, including collateral requirements and the effect of securities’ unrealized losses if funding needs change.
- Interest-rate sensitivity assumptions and the potential effect of changing rates on earnings, capital, and securities values.