Norwood Financial Corp. — Q2 2019 Form 10-Q
Business context and period: Regional bank holding company operating through Wayne Bank, serving northeastern Pennsylvania and Delaware and Sullivan counties in New York. This unaudited report covers the quarter and six months ended June 30, 2019; balance-sheet comparisons are to December 31, 2018. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income (GAAP) | $9.612 million | $9.215 million | $18.882 million | $18.022 million |
| Provision for loan losses | $0.300 million | $0.425 million | $0.750 million | $0.975 million |
| Other income | $1.641 million | $1.774 million | $3.201 million | $3.468 million |
| Other expenses | $6.785 million | $6.353 million | $13.433 million | $12.600 million |
| Net income | $3.522 million | $3.513 million | $6.712 million | $6.642 million |
| Basic / diluted EPS | $0.56 / $0.56 | $0.57 / $0.56 | $1.07 / $1.06 | $1.07 / $1.06 |
- Q2 annualized return on average assets was 1.16%, versus 1.23%; return on average equity was 10.93%, versus 12.25%. For the first half, those measures were 1.12% and 10.66%, compared with 1.18% and 11.63%.
- Tax-equivalent net interest margin was 3.49% in Q2 and 3.46% for the first half, down from 3.54% and 3.50%, respectively. The filing attributes margin pressure to higher funding costs. Tax-equivalent measures are non-GAAP.
- At June 30, total assets were $1.223 billion, loans receivable were $887.7 million, deposits were $981.2 million, and stockholders’ equity was $131.5 million. At year-end 2018, these were $1.185 billion, $850.2 million, $946.8 million, and $122.3 million.
- Six-month operating cash flow was $9.6 million, investing cash outflow was $27.5 million, and financing cash inflow was $18.0 million. Cash and cash equivalents ended at $18.5 million, up $0.1 million from year-end.
Material changes and balance-sheet developments
- Net interest income increased 4% in Q2 and 5% for the first half. Loan interest income benefited from growth in average loans; rising deposit and borrowing costs partly offset that benefit. Q2 interest expense rose to $2.2 million from $1.2 million.
- Loans grew $37.5 million from year-end, including growth in consumer and commercial lending. Deposits increased $34.4 million, primarily due to seasonal municipal demand deposits. Available-for-sale securities declined to $238.1 million from $243.3 million.
- Allowance for loan losses was $8.228 million, or 0.93% of loans, versus $8.452 million, or 0.99%, at year-end. First-half net charge-offs were $974,000 versus $283,000 a year earlier, including two commercial credits written down by $787,000 in aggregate.
- Nonperforming loans were $1.355 million (0.15% of loans) and nonperforming assets were $3.032 million (0.25% of assets), both higher than year-end. Foreclosed real estate increased to $1.677 million from $1.115 million.
- Available-for-sale securities’ accumulated other comprehensive income improved from a $5.020 million loss at year-end to $0.440 million income, chiefly reflecting lower unrealized losses as interest rates declined. Management characterized remaining unrealized losses as temporary and reported no 2019 other-than-temporary impairment charges.
Debt, liquidity, capital, and risks
- Short-term borrowings were $48.1 million and other borrowings were $44.0 million, compared with $53.0 million and $52.3 million at year-end. The company reported $256.6 million of cash and available-for-sale securities, or 21.0% of assets, and considered liquidity adequate.
- Unused committed lines totaled $40 million across three banks; the Bank also had approximately $413.0 million of FHLB borrowing capacity, subject to collateral and letters of credit. The filing states the company and Bank complied with applicable regulatory capital requirements; June 30 ratios included 12.87% Tier 1 risk-based capital and 13.76% total risk-based capital.
- Interest-rate simulations were within policy limits, which permit no more than a 10% net-interest-income decline under a plus or minus 200-basis-point change. The 90-day interest-sensitivity gap was negative $19.0 million; management notes that, in a rising-rate environment, funding costs could reprice faster than asset yields over that period.
- Off-balance-sheet commitments totaled $126.1 million: $49.9 million to grant loans, $71.9 million of unfunded credit lines, and $4.3 million of standby letters of credit. Draws are conditional and may not equal future funding needs.
- Management identified credit losses, commercial lending and real-estate collateral, regional economic conditions, interest-rate and liquidity risk, deposit competition, capital availability, regulation, cybersecurity, and other items as risks. It reported no material changes to the risk factors in the 2018 Form 10-K. No legal proceedings were reported.
Outlook, contingencies, and unusual items
- The filing provides no specific earnings or financial guidance. Management cautions that interim results are not necessarily indicative of full-year or future results.
- The current expected credit-loss standard, CECL, was expected to take effect for the company in 2020. Management anticipated a one-time opening allowance adjustment but said its size and overall financial-statement impact could not yet be determined.
- Adoption of the lease standard on January 1, 2019 resulted in recognition of right-of-use assets and lease liabilities of $5.3 million each.
- Net realized securities gains were $64,000 in the first half, compared with $200,000 in 2018; the company also recorded $110,000 of gains on loan sales, versus none in the prior-year period. Q2 foreclosed-real-estate expense was a net credit of $10,000.
- Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether loan growth and yields can continue to offset higher deposit and borrowing costs and declining net interest margin.
- Credit performance, including the elevated first-half charge-offs, increase in nonperforming assets, commercial real-estate exposure, and adequacy of the allowance.
- Deposit mix and pricing, liquidity levels, borrowing capacity, and compliance with regulatory capital requirements.
- Potential impact and implementation timing of CECL, along with sensitivity of securities values and earnings to interest-rate movements.
- Whether seasonal municipal deposit growth, loan commitments, and regional economic conditions materially change funding or credit risk.