Norwood Financial Corp. — Q1 2020 Form 10-Q
Period: Three months ended March 31, 2020. Unaudited consolidated results include Norwood Financial Corp. and Wayne Bank. Dollar amounts are in millions unless otherwise stated.
Financial results and position
| Metric | Q1 2020 / March 31, 2020 | Prior comparable / December 31, 2019 |
|---|---|---|
| Total assets | $1,242.3 | $1,230.6 |
| Net interest income | $9.665 | $9.271 in Q1 2019 |
| Net interest margin, tax-equivalent | 3.48% | 3.43% in Q1 2019 |
| Net income | $3.079 | $3.190 in Q1 2019 |
| Basic and diluted EPS | $0.49 | $0.51 in Q1 2019 |
| Loans receivable | $928.6 | $924.6 |
| Allowance for loan losses | $9.088; 0.98% of loans | $8.509; 0.92% of loans |
| Total deposits | $990.2 | $957.5 |
| Short-term and other borrowings | $92.0 combined | $118.7 combined |
| Stockholders’ equity | $142.2 | $137.4 |
- Interest income was $11.868 million and interest expense $2.203 million. The loan-loss provision was $700,000, versus $450,000 in Q1 2019. Other income was $1.654 million; other expenses were $7.059 million.
- Annualized return on average assets was 1.01%, versus 1.09%; return on average equity was 8.79%, versus 10.37%. The efficiency ratio rose to 61.08% from 59.91%. The effective tax rate declined to 13.5% from 14.6%.
- Cash and cash equivalents were $38.4 million. Available-for-sale securities were $197.0 million; together, these represented $235.4 million, or 18.9% of assets, compared with $225.6 million, or 18.3%, at year-end. Management said liquidity was adequate.
- Operating cash flow was $4.544 million. Cash increased $23.003 million during the quarter, ending at $38.418 million. Deposit growth and securities cash flows supported higher bank deposits, while borrowings declined.
- Regulatory capital ratios at March 31 included Tier 1 leverage of 10.32%, Common Equity Tier 1 of 13.23%, and total capital of 14.19%. The company and bank reported compliance with applicable capital requirements.
Material changes and credit quality
- Net income declined $111,000 year over year. Higher net interest income and other income were outweighed principally by the $250,000 increase in the loan-loss provision and higher operating expenses.
- Average loans increased $69.7 million year over year, while average securities declined $44.4 million. Tax-equivalent net interest income increased $367,000; the margin improved five basis points.
- Nonperforming loans rose to $2.743 million, or 0.30% of loans, from $795,000, or 0.09%, at year-end. Nonperforming assets were $3.820 million, or 0.31% of assets, versus $2.351 million, or 0.19%.
- Management increased the allowance in response to worsening economic conditions related to COVID-19. The economic-condition factor added $1.742 million, partly offset by a $1.087 million reduction associated with slower loan growth. Net charge-offs were $121,000, compared with $553,000 in Q1 2019.
- Commercial real estate loans included $88.8 million in commercial rentals and $65.3 million in hospitality/lodging. Management considered concentration risk acceptable, while noting exposure to the regional economy.
Outlook, risks, contingencies and unusual items
- The filing provides no quantified earnings or financial guidance. Management warned that COVID-19, business closures and economic disruption could adversely affect borrowers, credit quality, results and cash flows; actual outcomes may differ from estimates.
- As of April 30, the bank reported 472 approved Paycheck Protection Program applications totaling $59.2 million. The filing identifies possible PPP-related litigation and risk that the SBA could challenge loan origination, funding or servicing and limit or seek recovery of its guarantees.
- As of April 30, 754 loans totaling $165.360 million were in the disclosed forbearance/modification summary. Separately, the filing reported more than 100 customers had requested deferrals or interest-only payments on $52.8 million of loans as of March 31. These are different reporting dates and disclosures.
- Norwood had agreed to acquire UpState New York Bancorp. UpState had $439.6 million in assets at December 31, 2019. The transaction was subject to regulatory and shareholder approvals and was expected to close in Q3 2020. The stated consideration included an election of 0.939 Norwood shares or $33.33 cash per UpState share, subject to allocation provisions; a contingent special dividend of up to $0.67 per share was also described.
- Norwood declared a quarterly dividend of $0.25 per share. Available-for-sale securities generated $3.090 million of after-tax other comprehensive income in Q1; management cautioned that accumulated other comprehensive income may fluctuate with interest rates and spreads.
- Commitments to grant loans, unfunded credit lines and standby letters of credit totaled $127.631 million. The filing says these commitments do not necessarily represent future cash requirements; the standby-letter liability was not material.
- Management identified risks including COVID-19, loan losses exceeding the allowance, commercial lending and collateral values, regional economic conditions, interest-rate and liquidity risk, capital availability, regulation and cybersecurity.
Most important facts for investors to verify
- Subsequent-quarter trends in nonperforming loans, modifications/deferrals, charge-offs and allowance adequacy, especially in commercial real estate and hospitality/lodging.
- Actual PPP originations, forgiveness and servicing outcomes, including any SBA guarantee disputes or related litigation.
- Progress, approvals, final terms and closing of the proposed UpState acquisition, including consideration and integration effects.
- Whether deposit growth and liquidity remain stable, and how funding costs and net interest margin respond to interest-rate changes.
- Whether Q1 earnings, capital ratios and dividend capacity are sustained as COVID-19 impacts develop; Q1 results are not necessarily indicative of full-year results.