Norwood Financial Corp. — Q3 2018 Form 10-Q
Business context and reporting period. Norwood Financial Corp. is the holding company for Wayne Bank, serving northeastern Pennsylvania and parts of New York. This unaudited filing covers the quarter and nine months ended September 30, 2018. Financial amounts below are in millions unless otherwise noted.
Financial performance and condition
| Metric | Q3 2018 / September 30, 2018 | Comparable period / prior year-end |
|---|---|---|
| Net income | $3.71; diluted EPS $0.58 | Q3 2017: $2.94; diluted EPS $0.47 |
| Nine-month net income | $10.35; diluted EPS $1.64 | Nine months 2017: $8.04; diluted EPS $1.28 |
| Net interest income | Q3: $9.39; nine months: $27.41 | Q3 2017: $8.87; nine months 2017: $26.02 |
| Net interest margin, tax-equivalent | Q3: 3.57%; nine months: 3.52% | Q3 2017: 3.60%; nine months 2017: 3.55% |
| Total assets | $1,156.7 | December 31, 2017: $1,132.9 |
| Loans, net of allowance | $810.9; gross loans $819.2 | December 31, 2017: net $756.5; gross $764.1 |
| Deposits | $939.7 | December 31, 2017: $929.4 |
| Borrowings | Short-term $52.8; other $36.6 | December 31, 2017: short-term $42.5; other $35.9 |
| Stockholders’ equity | $116.7 | December 31, 2017: $115.7 |
- Q3 net income rose about 26% year over year; nine-month net income increased about 29%. Nine-month net interest income increased 5.3% year over year.
- For the first nine months, net cash from operating activities was $14.1; investing activities used $30.8, principally reflecting $56.3 of net loan growth; financing activities provided $17.4. Cash and equivalents increased $0.7 to $17.4.
- Cash and equivalents plus available-for-sale securities totaled $264.9, or 22.9% of assets, versus $297.8, or 26.3%, at year-end 2017. Management said liquidity was adequate and within policy guidelines.
- The allowance for loan losses was $8.28, or 1.01% of loans, versus $7.63, or 1.00%, at year-end. Nine-month net charge-offs were $0.70, compared with $0.50 in 2017.
- Nonperforming loans were $1.12, or 0.14% of loans, down from $2.48, or 0.32%, at year-end. Nonperforming assets were $2.32, or 0.20% of assets, versus $4.14, or 0.37%.
- Consolidated regulatory capital ratios at September 30 included Tier 1 capital to average assets of 9.76%, Tier 1 and Common Equity Tier 1 to risk-weighted assets of 13.19%, and total capital of 14.16%. The Company reported compliance with applicable requirements, including the capital conservation buffer.
Changes, outlook, and risks
- Loan growth drove higher interest income: gross loans increased $55.1 from year-end, while available-for-sale securities declined $33.6 to $247.5. Management said securities runoff was used to fund loan growth.
- Funding costs increased: nine-month interest expense rose to $3.84 from $2.89, and the average cost of interest-bearing liabilities rose to 0.63% from 0.48%. Management attributed this to higher rates on time deposits and borrowings. The tax-equivalent net interest margin was lower year over year.
- The 2018 effective tax rate was 16.2% for the nine-month period, compared with 22.7% in 2017; management attributed the decline primarily to the federal corporate tax rate reduction from 34% to 21%.
- Other income included $0.25 of nonrecurring income from a litigation settlement, following reversal of a prior-period accrual. The parties settled and dismissed the action in July 2018.
- Available-for-sale securities had gross unrealized losses of $11.6 at September 30, which management considered temporary and related to interest-rate changes; no other-than-temporary impairment charges were recorded. Accumulated other comprehensive loss was $8.5, net of tax, versus $2.7 at year-end. Management cautioned that interest-rate volatility may materially fluctuate this balance.
- The 90-day interest sensitivity gap shifted from positive $20.3 at year-end to negative $26.0, or 2.3% of assets. The filing notes that liabilities repricing faster than assets in this interval could pressure funding costs if rates rise. Simulated exposure to a plus or minus 200-basis-point rate change remained within policy limits.
- Credit risk includes commercial real estate and regional economic exposure. Commercial rental loans totaled $66.8 (8.2% of loans) and hospitality/lodging loans $60.2 (7.4%); charge-offs in these concentrations totaled $0.38 during 2018.
- Off-balance-sheet commitments totaled $133.7: $51.2 to grant loans, $78.0 of unfunded credit lines, and $4.4 of standby letters of credit. The filing notes commitments may not be fully drawn.
- No earnings guidance was provided. Management stated that interim results are not necessarily indicative of full-year results. The filing identifies risks including credit losses, commercial lending and collateral values, interest-rate and liquidity risk, regional economic conditions, competition, regulation, cybersecurity, and the limited market for the Company’s stock. It reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether loan growth and the shift from securities to loans sustain net interest income as deposit and borrowing costs rise.
- Credit quality trends, including charge-offs, criticized commercial exposures, and whether the allowance remains adequate as lending expands.
- How securities valuation losses and interest-rate movements affect equity, liquidity, and future interest income.
- The level and cost of deposits and borrowings, alongside the change in short-term interest-rate sensitivity.
- The impact of nonrecurring settlement income and lower taxes when assessing the sustainability of reported earnings.