Norwood Financial Corp — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The filing is unaudited. Norwood is a Pennsylvania bank holding company whose principal subsidiary is Wayne Bank. The UpState New York Bancorp acquisition closed in July 2020, affecting year-over-year comparisons, particularly for the nine-month period.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $17.0 million | $15.3 million | $48.8 million | $34.9 million |
| Provision for loan losses | $0.75 million | $1.85 million | $3.75 million | $3.85 million |
| Other income | $2.1 million | $2.1 million | $6.3 million | $5.1 million |
| Other expenses | $9.6 million | $9.4 million | $28.5 million | $24.5 million |
| Net income | $7.0 million | $5.0 million | $18.3 million | $9.6 million |
| Diluted EPS | $0.85 | $0.62 | $2.23 | $1.39 |
| Net interest margin, fully taxable-equivalent | 3.61% | 3.73% | 3.54% | 3.51% |
Q3 net income rose 40% year over year, with higher net interest income and a lower loan-loss provision as the main drivers. For the nine months, net income increased 91%; management attributed the larger net interest income primarily to the UpState acquisition and larger average loan balances. Higher salaries and employee benefits contributed to increased expenses. Q3 return on average assets/equity was 1.36%/13.50%; nine-month figures were 1.23%/12.19%.
Financial position, liquidity and cash flow
- Assets: $2.054 billion at September 30, up from $1.852 billion at year-end 2020. Securities available for sale were $362.0 million, and cash and cash equivalents were $219.9 million.
- Loans: $1.371 billion, down $39.7 million from year-end. Management cited a $59.2 million reduction in PPP loans from forgiveness, partly offset by organic loan growth. PPP balances were $35.8 million at quarter-end.
- Deposits and borrowings: Deposits totaled $1.723 billion, up about $187 million from year-end. Short-term borrowings were $78.2 million and other borrowings were $33.1 million.
- Liquidity: Cash and available-for-sale securities totaled $581.9 million, or 28.4% of assets, versus $338.3 million, or 18.3%, at year-end. Management said liquidity was adequate. Additional FHLB borrowing capacity was available, subject to collateral and outstanding letters of credit.
- Capital: Stockholders’ equity was $202.6 million, compared with $194.8 million at year-end. The company reported regulatory capital ratios of 12.17% Tier 1 and Common Equity Tier 1, and 13.32% total capital to risk-weighted assets; it stated that it and the Bank met applicable requirements.
- Credit quality: Allowance for loan losses was $16.1 million, or 1.17% of loans, versus $13.2 million, or 0.93%, at year-end. Nonperforming loans were $2.7 million (0.20% of loans); nonperforming assets were $4.6 million (0.22% of assets). Net charge-offs for nine months were $0.8 million.
- Cash flow, nine months: Operating activities provided $23.0 million; investing activities used $100.1 million; financing activities provided $185.3 million. Cash and cash equivalents increased $108.2 million to $219.9 million.
Material changes, outlook and risks
- Q3 net interest income benefited from securities purchases, PPP fee recognition and lower funding costs. Q3 fully taxable-equivalent net interest margin fell to 3.61% from 3.73% year over year, while the nine-month margin increased to 3.54% from 3.51%.
- The allowance included $2.1 million of COVID-related qualitative factors. The Q3 provision declined as certain pandemic-related qualitative factors were reduced. Management considered the allowance adequate but cautioned that future losses could exceed it.
- All loans previously granted COVID-related forbearance had returned to full payment status by September 30, 2021. The company had approved more than 1,200 PPP applications totaling $274.3 million since the program began; it disclosed potential litigation and SBA-guarantee risks related to PPP administration.
- Unrealized losses on available-for-sale securities were attributed by management to interest-rate changes and considered temporary. Nine-month other comprehensive loss was $3.7 million, reducing accumulated other comprehensive income.
- Management reported that modeled net interest income exposure to a plus or minus 200-basis-point rate shift was within policy limits. It also cited risks including credit losses, regional economic conditions, commercial real estate exposure, interest rates, liquidity, cybersecurity and regulatory costs.
- The filing provides no specific earnings or financial guidance. Management noted that interim results are not necessarily indicative of full-year results. Legal proceedings were reported as not applicable; management said disclosure controls were effective and there were no material quarterly changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether deposit growth tied to stimulus and other factors persists, and how excess liquidity is deployed or affects margins.
- PPP forgiveness pace, remaining PPP balances and fees, and any SBA reimbursement or litigation developments.
- Loan portfolio performance, including commercial real estate concentrations, nonperforming assets, COVID-related reserve assumptions and adequacy of the allowance.
- Interest-rate and securities valuation sensitivity, including potential effects on net interest income and accumulated other comprehensive income.
- Comparability of earnings and expenses after the UpState acquisition, including ongoing integration costs and acquired-loan performance.
- Share repurchases and dividends: the company repurchased 30,000 shares in Q3 at an average $25.50 per share and declared dividends of $0.78 per share for the first nine months.