Norwood Financial Corp. — Q1 2016 Form 10-Q
Business context and period. Norwood Financial Corp., parent of Wayne Bank, reported unaudited consolidated results for the three months ended March 31, 2016. The company primarily serves northeastern Pennsylvania. Income comparisons are year over year; balance-sheet comparisons are versus December 31, 2015. Dollar amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q1 2016 / March 31, 2016 | Comparable / prior date |
|---|---|---|
| Net income; diluted EPS | $1.876; $0.51 | Q1 2015: $2.041; $0.55 |
| Interest income; interest expense | $7.026; $0.851 | Q1 2015: $7.088; $0.781 |
| Net interest income; net interest margin (tax-equivalent) | $6.175 GAAP; 3.70% | Q1 2015: $6.307 GAAP; 3.94% |
| Provision for loan losses | $0.450 | Q1 2015: $0.620 |
| Other income; other expenses | $1.067; $4.349 | Q1 2015: $1.279; $4.187 |
| Total assets | $760.1 | December 31, 2015: $750.5 |
| Loans receivable; net loans | $565.8; $558.1 | December 31, 2015: $559.9; $552.6 |
| Deposits | $560.5 | December 31, 2015: $550.9 |
| Borrowings | $52.7 short-term; $38.9 other | December 31, 2015: $53.2; $41.1 |
| Stockholders’ equity | $102.7 | December 31, 2015: $101.0 |
| Cash and cash equivalents | $9.0 | December 31, 2015: $10.0 |
| Operating cash flow | $2.635 | Q1 2015: $2.606 |
Q1 2016 annualized return on average assets was 1.00% and return on average equity was 7.33%, versus 1.15% and 8.22%, respectively, a year earlier. The effective tax rate was 23.2%, compared with 26.6%.
At March 31, 2016, available-for-sale securities were $143.9 million. Cash plus available-for-sale securities totaled $152.9 million, or 20.1% of assets. The allowance for loan losses was $7.642 million, 1.35% of loans; net charge-offs were $0.106 million. Nonperforming loans were $6.867 million (1.21% of loans), and nonperforming assets were $9.722 million (1.28% of assets). Consolidated regulatory capital ratios included Tier 1 capital to average assets of 12.27% and total capital to risk-weighted assets of 16.99%; the company stated that it and the Bank met applicable capital requirements, including the conservation buffer.
Material changes versus the prior comparable period
- Net income declined $0.165 million, or about 8%, and diluted EPS fell from $0.55 to $0.51.
- GAAP net interest income declined $0.132 million. On a tax-equivalent basis, net interest income fell $0.068 million and net interest margin decreased 24 basis points to 3.70%. Lower loan yields and higher borrowing costs weighed on results; average loans grew $58.4 million year over year.
- Other income declined $0.212 million, mainly because securities gains fell to $0.064 million from $0.311 million. Other expenses increased $0.162 million, including a $0.166 million rise in salaries and benefits.
- The loan-loss provision decreased $0.170 million, while net charge-offs fell to $0.106 million from $0.488 million.
- Quarterly operating cash flow was nearly unchanged year over year. Investing used $8.922 million, chiefly reflecting securities purchases and loan growth; financing provided $5.240 million. Cash and cash equivalents declined $1.047 million during the quarter.
- From year-end, assets increased $9.6 million, loans $5.9 million, deposits $9.6 million and equity $1.7 million. Securities-related accumulated other comprehensive income increased $1.291 million, net of tax, reflecting fair-value changes.
Outlook, commentary, risks and unusual items
- Acquisition: On March 10, 2016, Norwood agreed to acquire Delaware Bancshares, with its bank expected to merge into Wayne Bank. Delaware Bancshares shareholders may elect $16.68 cash or 0.6221 Norwood shares per share; cash consideration is capped at 25% of Delaware Bancshares shares. Closing was expected in Q3 2016, subject to customary conditions, regulatory approvals and Delaware Bancshares shareholder approval. In certain circumstances, a greater-than-20% decline in Norwood’s share value may give Delaware Bancshares termination rights unless Norwood adjusts the share consideration. A $615,000 termination fee may apply in specified circumstances.
- Credit and concentration: Hospitality/lodging loans were $66.5 million, or 11.7% of loans. Troubled debt restructurings totaled $6.5 million and had $1.641 million in specific reserves; no new TDRs were identified during the quarter. The company recorded a $0.100 million write-down on a previously identified TDR. Management considered the allowance adequate but cautioned that future losses could exceed it.
- Rate and market risk: Management reported that modeled net interest income sensitivity under a ±200-basis-point rate change was within policy limits; policy permits a decline of no more than 8%. The 90-day interest-sensitivity gap was positive $35.8 million, or 4.7% of assets. Securities unrealized losses were attributed to interest-rate changes and deemed temporary; no other-than-temporary impairment charge was recorded.
- Liquidity and commitments: Management considered liquidity adequate. The Bank had approximately $293.0 million of FHLB borrowing capacity, with $54.5 million outstanding. Off-balance-sheet commitments totaled $75.768 million: $20.803 million to grant loans, $49.644 million in unfunded lines and $5.321 million in standby letters of credit. Commitment totals do not necessarily represent expected cash requirements.
- Other risks and outlook: The filing gives no specific earnings or financial guidance. Management cited risks including acquisition execution, loan losses, commercial real estate values, regional economic conditions, interest-rate volatility, liquidity, capital availability, regulation, competition and cybersecurity. Management stated that disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress, final consideration, approvals and expected timing for the Delaware Bancshares acquisition, including any share-price-related adjustment or termination provisions.
- Whether net interest margin and funding costs stabilize, given the year-over-year margin decline and increased borrowing expense.
- Credit quality trends: commercial real estate criticized loans, TDR performance, nonaccrual balances, hospitality concentration and allowance adequacy.
- Liquidity and funding: deposit growth and mix, borrowing levels, available FHLB capacity, and the conversion and repayment terms of the $10 million FHLB convertible note due January 2017.
- Potential volatility in available-for-sale securities values and accumulated other comprehensive income, as well as the eventual impact of new accounting standards.