Norwood Financial Corp. — Form 10-Q Summary
Business context and reporting period
Quarter ended June 30, 2021; financial statements are unaudited and consolidated with Wayne Bank and its subsidiaries. Norwood is a regional bank serving northeastern Pennsylvania and parts of New York. Results benefited materially from the July 2020 acquisition of UpState New York Bancorp, so comparisons with 2020 reflect a larger company in 2021.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $16.1 million | $9.9 million | $31.8 million | $19.5 million |
| Provision for loan losses | $1.5 million | $1.3 million | $3.0 million | $2.0 million |
| Net income | $5.8 million | $1.5 million | $11.3 million | $4.6 million |
| Diluted EPS | $0.70 | $0.24 | $1.38 | $0.73 |
| Tax-equivalent net interest margin | 3.44% | 3.25% | 3.51% | 3.36% |
- At June 30, 2021, total assets were $2.03 billion, up from $1.85 billion at year-end 2020. Deposits were $1.69 billion, versus $1.54 billion; loans were $1.39 billion, versus $1.41 billion.
- Cash and cash equivalents were $205.2 million; available-for-sale securities were $333.6 million. Management reported combined cash and securities liquidity of $538.8 million, or 26.6% of assets, compared with $338.3 million, or 18.3%, at year-end.
- Six-month operating cash flow was $14.8 million, compared with $0.6 million in 2020. Investing activities used $84.4 million, mainly reflecting $145.9 million of securities purchases, partly offset by loan reductions. Financing activities provided $163.1 million, principally from deposit growth.
- Total borrowings were $119.9 million: $83.6 million short-term and $36.3 million other borrowings. Stockholders’ equity was $200.5 million, compared with $194.8 million at year-end.
- The allowance for loan losses was $15.3 million, or 1.11% of loans, versus $13.2 million, or 0.93%, at year-end. Six-month net charge-offs were $810,000. Nonperforming loans were $3.9 million, or 0.28% of loans.
- Regulatory capital ratios at June 30 included Tier 1 capital to risk-weighted assets of 12.06% and total capital of 13.17%; the company stated it and the Bank met applicable requirements, including the capital conservation buffer.
Material changes versus the comparable period
- Q2 net income rose to $5.8 million from $1.5 million; six-month net income increased to $11.3 million from $4.6 million. Management attributed the main earnings driver to higher net interest income following the UpState acquisition and growth in average earning assets.
- Q2 tax-equivalent net interest income increased $6.2 million year over year; six-month tax-equivalent net interest income increased $12.3 million. Lower funding costs also helped: average cost of interest-bearing liabilities for the six months fell to 0.45% from 0.94%.
- Other expenses rose year over year, including costs to operate four acquired community offices. The 2020 comparison also included $1.6 million of merger-related expense, versus none in 2021.
- Deposits grew by $153.6 million during the first half, which management linked primarily to PPP activity and economic stimulus. Securities increased $107.0 million from year-end as excess liquidity was invested and securities were used to support public deposits.
- Loans declined $24.1 million from year-end, including a $20.8 million reduction in PPP balances due to forgiveness; commercial real estate lending increased $18.8 million.
- Six-month other comprehensive loss was $1.6 million, primarily reflecting changes in the fair value of available-for-sale securities, compared with $3.6 million of other comprehensive income in 2020.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management said liquidity was adequate and the loan-loss allowance was adequate under its criteria, while cautioning that future losses could exceed the allowance.
- COVID-19 and credit quality remain relevant risks. The allowance included $2.3 million for COVID-related qualitative factors. Of $274.3 million in loans granted forbearance since the program began, $1.0 million across 12 loans remained in forbearance at June 30, 2021.
- The company had $74.2 million of PPP loans outstanding at quarter-end and reported $77.6 million forgiven to date. It disclosed potential litigation and SBA-guaranty risks related to PPP loan processing and servicing.
- Management increased qualitative allowance factors related to lending management and external factors following the Chief Lending Officer’s resignation. It also cited regional economic conditions, commercial lending and real-estate collateral risks, interest-rate and liquidity risk, and possible loan losses beyond reserves.
- Commercial rental loans were $136.6 million, or 9.8% of loans; residential rental loans were $118.4 million, or 8.5%. Management reported no charge-offs in these named concentrations during 2021.
- Available-for-sale securities had $1.7 million of gross unrealized losses, all in positions held less than 12 months. Management attributed them to interest-rate changes and considered them temporary; no other-than-temporary impairment charge was recorded.
- The company reported a positive 90-day interest sensitivity gap of $147.6 million, or 7.3% of assets, and stated modeled exposure under a plus or minus 200-basis-point rate shift was within policy limits. These are estimates and actual results may differ.
- Off-balance-sheet commitments totaled $217.8 million, including $80.6 million to grant loans, $131.3 million of unfunded lines and $5.8 million of standby letters of credit; actual funding needs may be lower because some commitments may expire unused.
Important facts for investors to verify
- How much of earnings growth is sustainable after separating the UpState acquisition, PPP-related income and the unusually low prior-year comparison.
- Whether deposit growth persists as stimulus-related balances change, and how management plans to deploy excess liquidity without weakening returns or increasing interest-rate risk.
- Trends in loan delinquencies, COVID-related accommodations, criticized credits, charge-offs and the adequacy of the allowance, particularly after the lending officer departure.
- The effect of PPP forgiveness and remaining PPP balances on future loan yields and fee income, and whether any SBA guaranty or litigation issues emerge.
- Future securities valuation changes, capital effects and any changes to interest-rate sensitivity as rates and deposit behavior evolve.