Norwood Financial Corp. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Norwood Financial Corp. is a Pennsylvania bank holding company operating through Wayne Bank. Results include the July 2020 acquisition of UpState New York Bancorp; year-over-year comparisons therefore reflect a larger business and are not strictly like-for-like.
Financial performance
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Net interest income | $15.8 million | $9.7 million |
| Net interest income, tax-equivalent | $16.0 million | $9.9 million; up $6.1 million |
| Net interest margin, tax-equivalent | 3.59% | 3.48% |
| Provision for loan losses | $1.5 million | $0.7 million |
| Other income | $2.0 million | $1.7 million |
| Other expenses | $9.5 million | $7.1 million |
| Net income | $5.5 million | $3.1 million |
| Basic / diluted EPS | $0.68 / $0.67 | $0.49 / $0.49 |
| Annualized return on average assets / equity | 1.18% / 11.39% | 1.01% / 8.79% |
Management attributed the earnings increase primarily to acquisition-related growth in net interest income, partly offset by an $0.8 million higher loan-loss provision and $2.4 million higher operating expenses. The tax-equivalent yield on average earning assets was 3.93%, versus 4.25%; average funding cost declined to 0.47% from 1.02%. The effective tax rate increased to 18.7% from 13.5%.
Financial position, cash flow and liquidity
- Assets: $2.010 billion at March 31, 2021, up from $1.852 billion at December 31, 2020. Cash and cash equivalents were $210.5 million, versus $111.7 million; available-for-sale securities were $275.2 million, versus $226.6 million.
- Loans and credit: Loans receivable were $1.422 billion, up from $1.411 billion. The allowance was $14.5 million, or 1.02% of loans, versus $13.2 million, or 0.93%. Net charge-offs were $141,000. Nonperforming loans were $3.2 million (0.22% of loans), and nonperforming assets were $4.0 million (0.20% of assets).
- Deposits and borrowings: Deposits grew $149.8 million to $1.685 billion. Short-term borrowings were $72.9 million and other borrowings $39.4 million; total borrowings were $112.3 million. Stockholders’ equity was $195.1 million.
- Cash flow: Operating activities provided $7.5 million; investing activities used $62.8 million, including $69.6 million of securities purchases; financing activities provided $154.1 million, principally reflecting deposit growth and higher short-term borrowings. Cash increased $98.8 million during the quarter.
- Liquidity and capital: Cash and available-for-sale securities totaled $485.7 million, or 24.2% of assets, compared with $338.3 million, or 18.3%, at year-end. Management considered liquidity adequate. Regulatory capital ratios included 11.92% Tier 1 and Common Equity Tier 1 capital to risk-weighted assets and 12.98% total capital; the company reported compliance with applicable requirements.
Material changes and notable items
- The UpState acquisition materially increased average loans and earning assets, and contributed to higher net interest income and operating costs. The acquisition added four community offices; purchase accounting remained subject to finalization within the measurement period.
- PPP loans outstanding were $119.3 million, up from $95.0 million at year-end; $30.0 million had been forgiven. The company reported approximately $3.6 million in PPP processing fees, deferred and amortized over loan lives.
- Available-for-sale securities increased, while their unrealized valuation reduced other comprehensive income by $3.1 million after tax; accumulated other comprehensive income declined to $2.0 million from $5.1 million.
- The quarterly dividend declared was $0.26 per share, compared with $0.25 in Q1 2020. A share repurchase program for up to approximately 400,000 shares was announced March 30; no program purchases were reported during Q1.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management said organic loan growth was constrained by pandemic-related social distancing and business closures. The allowance includes $2.3 million of COVID-related qualitative factors; management considered it adequate but cautioned that future losses could exceed it. Of $274.2 million in loans that had received forbearance since the program began, $41.8 million across 111 loans remained in forbearance at March 31.
Risks identified include COVID-19 and borrower performance, commercial and real-estate credit exposure, PPP-related litigation or SBA-guarantee deficiencies, interest-rate and liquidity risk, regional economic conditions, cybersecurity, and loss of senior officers. The filing notes potential PPP litigation exposure, but reports no applicable legal proceedings. A positive 90-day interest-sensitivity gap was $182.5 million; modeled net interest income exposure under a plus or minus 200-basis-point rate change was within company policy limits. Unrealized securities losses were attributed to interest-rate changes and considered temporary by management. Disclosure controls were deemed effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether remaining COVID-19 forbearances, local economic conditions, and commercial real-estate concentrations lead to higher delinquencies, charge-offs, or reserve needs.
- How much deposit growth is sustained versus stimulus-related, and how cash and securities are deployed as liquidity conditions change.
- Whether the acquired UpState operations deliver expected revenue and cost benefits, and whether purchase accounting or goodwill valuations change.
- The timing and effect of PPP forgiveness, fee amortization, and any SBA review, guarantee dispute, or related litigation.
- How interest-rate movements affect securities values, net interest margin, and capital, and whether the announced repurchase program proceeds.