Norwood Financial Corp. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparative figures are for fiscal 2020. This is an annual report, not a quarterly filing. Norwood is a bank holding company whose principal subsidiary, Wayne Bank, operates 30 community offices in Pennsylvania and upstate New York.
Financial performance and condition
| Metric | FY2021 / Dec. 31, 2021 | FY2020 / Dec. 31, 2020 |
|---|---|---|
| Net interest income | $65.3 million | $50.5 million |
| Total other income | $8.3 million | $7.8 million |
| Net income | $24.9 million | $15.1 million |
| Diluted earnings per share | $3.04 | $2.09 |
| Net interest margin, fully taxable equivalent | 3.50% | 3.55% |
| Net interest spread, fully taxable equivalent | 3.39% | 3.36% |
| Efficiency ratio | 51.8% | 58.2% |
| Total assets | $2.069 billion | $1.852 billion |
| Loans receivable, before allowance | $1.355 billion | $1.411 billion |
| Total deposits | $1.757 billion | $1.535 billion |
| Stockholders’ equity | $205.3 million | $194.8 million |
| Allowance for loan losses | $16.4 million; 1.21% of loans | $13.2 million; 0.93% of loans |
Net income rose $9.8 million year over year. Net interest income increased $14.8 million, while noninterest expense increased $4.1 million. Results benefited from the full-year contribution of the UpState acquisition, completed in July 2020. The effective tax rate was 19.3%, compared with 17.9%.
Net cash provided by operating activities was $29.2 million, investing activities used $131.0 million, and financing activities provided $196.8 million. Cash and cash equivalents ended the year at $206.7 million. Together with $406.8 million of available-for-sale securities, reported liquid resources were $613.5 million, or 29.7% of assets.
Year-end borrowings included $60.8 million of short-term borrowings, principally repurchase agreements, and $30.0 million of other borrowings. The Bank reported $190.0 million of available credit lines with no balance drawn; FHLB borrowing capacity was $607.1 million. The Bank was reported well capitalized, with a 12.49% Tier 1 risk-based capital ratio, 13.66% total risk-based capital ratio, and 8.51% leverage ratio.
Material changes and notable items
- Deposits grew $221.4 million, which management attributed in part to pandemic-related stimulus inflows. Noninterest-bearing demand deposits were $440.7 million.
- Loans declined $55.8 million, primarily because PPP loan balances fell $78.8 million following forgiveness. Commercial real estate loans grew $49.6 million.
- Net interest income increased with higher average loan and securities balances and lower funding costs. The net interest margin nevertheless declined 5 basis points as asset yields fell.
- Nonperforming loans declined to $734,000, or 0.05% of loans, from $3.4 million, or 0.24%, at year-end 2020. Foreclosed real estate increased to $1.7 million from $1.0 million.
- Available-for-sale securities totaled $406.8 million. Their unrealized losses were $4.8 million before tax; the after-tax reduction in accumulated other comprehensive income was $5.5 million during 2021. No impairment charge was recognized.
- Cash dividends declared were $1.06 per share. The Company repurchased 18,379 shares in the fourth quarter for an average $25.51 per share.
Outlook, risks and contingencies
The filing provides no numerical earnings or operating guidance. Management describes continuing uncertainty from COVID-19 and related economic effects. Risks identified include credit deterioration and collateral values, interest-rate and margin changes, deposit and funding competition, securities-market movements, regulatory changes, operational and cybersecurity events, and the ability to execute growth or acquisition plans. The filing’s Item 1A says “Not applicable,” while its forward-looking-statement discussion separately describes these risks.
Credit exposure is concentrated in commercial and residential rental lending: $135.7 million and $116.3 million, respectively, at year-end. The allowance for loan losses depends on management estimates and qualitative adjustments; COVID-related factors contributed $2.3 million to the required allowance at year-end, and large-balance loan factors contributed $1.4 million. The independent auditor identified qualitative factors in the allowance as a critical audit matter.
The Bank had $235.5 million of uninsured deposits and $257.2 million of time deposits above FDIC insurance limits. The Company also disclosed potential PPP-related litigation and the possibility that the SBA could deny or reduce its guarantee if it finds deficiencies in loan origination, funding, or servicing. No COVID-19 forbearance loans remained deferred at December 31, 2021. Approximately $14.8 million of loan participations referenced LIBOR, which was expected to be phased out by June 2023.
Management concluded that internal control over financial reporting was effective. The auditor issued an unmodified opinion on the financial statements and stated it was not engaged to audit internal control effectiveness.
Investor verification priorities
- Confirm the sustainability of earnings growth given the acquisition-related comparison, lower net interest margin, and changing rate environment.
- Review commercial real estate and rental-property concentrations, criticized loans, foreclosed properties, and the assumptions supporting the loan-loss allowance.
- Assess deposit stability and funding costs, especially uninsured deposits and large time deposits nearing maturity.
- Evaluate interest-rate exposure and potential market-value effects on the securities portfolio, including the reported unrealized losses.
- Monitor remaining PPP balances, SBA forgiveness/guarantee compliance, and any PPP-related claims or litigation.