Norwood Financial Corp. — Q1 2019 Form 10-Q
Business context and period: Norwood Financial Corp., parent of Wayne Bank, reported unaudited consolidated results for the three months ended March 31, 2019. The bank serves northeastern Pennsylvania and Delaware and Sullivan counties in New York. Unless stated otherwise, dollar amounts below are in millions.
Key financial results
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Interest income | $11.43 | $10.03 |
| Net interest income | $9.27 | $8.81 |
| Provision for loan losses | $0.45 | $0.55 |
| Other income | $1.56 | $1.69 |
| Other expenses | $6.65 | $6.25 |
| Income before taxes | $3.73 | $3.70 |
| Net income | $3.19 | $3.13 |
| Basic and diluted EPS | $0.51 | $0.50 |
| Net interest margin, tax-equivalent | 3.43% | 3.46% |
| Return on average assets / equity | 1.09% / 10.37% | 1.13% / 11.00% |
Management attributed the increase in net income primarily to $0.464 million higher net interest income. Tax-equivalent net interest income rose $0.453 million; loan growth lifted interest income, while higher funding costs weighed on margin. Time-deposit average cost increased to 1.74% from 1.10%. Salaries and benefits and data-processing costs were higher. The effective tax rate was 14.6%, versus 15.5%, reflecting increased tax-exempt income.
Financial position, cash flow and credit
- Assets and lending: Total assets were $1,203.6 million at quarter-end, up from $1,184.6 million at December 31, 2018. Loans were $864.2 million, up $14.0 million; deposits were $974.4 million, up $27.6 million. Management cited seasonal municipal-account activity, including an $18.1 million increase in time deposits.
- Liquidity and borrowings: Cash and cash equivalents were $19.9 million. Cash plus available-for-sale securities totaled $260.5 million, or 21.6% of assets, compared with $261.6 million, or 22.1%, at year-end. Short-term borrowings fell to $37.8 million from $53.0 million; other borrowings declined to $48.0 million from $52.3 million. The filing says liquidity was adequate and within policy guidelines.
- Cash flows: Operating activities provided $4.3 million; investing activities used $9.1 million, primarily reflecting $15.4 million of net loan growth; financing activities provided $6.3 million. Cash and cash equivalents increased $1.5 million to $19.9 million.
- Credit quality: The allowance for loan losses was $8.35 million, or 0.97% of loans, versus $8.45 million, or 0.99%, at year-end. Net charge-offs were $0.553 million, versus $0.085 million in Q1 2018, including a $0.451 million write-down on one commercial credit later transferred to foreclosed real estate. Nonperforming loans were $1.10 million (0.13% of loans); nonperforming assets were $2.89 million (0.24% of assets), up from $2.26 million (0.19%) at year-end. Foreclosed real estate rose to $1.79 million.
- Capital and distributions: Stockholders’ equity was $126.8 million, up from $122.3 million at year-end, including $2.9 million of after-tax securities valuation gains. Regulatory capital ratios included Tier 1 leverage of 9.81%, common equity Tier 1 of 12.92%, and total capital of 13.85%; the company and bank reported compliance with applicable requirements. The quarterly dividend declared was $0.24 per share, versus $0.22 in Q1 2018.
Changes, outlook and risks
- Q1 2019 loan growth and higher loan yields increased interest income, but funding costs rose faster in several categories; net interest margin narrowed 3 basis points year over year. Other income declined, in part because Q1 2018 included securities-sale gains.
- Available-for-sale securities were $240.6 million, down from $243.3 million at year-end. Unrealized losses were $4.1 million before tax; management attributed them to interest-rate changes, considered them temporary, and reported no other-than-temporary impairment charge.
- Management reported that modeled net interest income exposure under a plus or minus 200-basis-point rate shift remained within policy limits. The 90-day interest-sensitivity gap shifted from negative $18.7 million at year-end to positive $19.8 million.
- The filing provides no earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results and identified risks including loan losses, commercial lending and collateral values, regional economic conditions, interest-rate and liquidity risks, competition, regulation, cybersecurity, and capital availability.
- Adoption of the new lease standard on January 1, 2019 added $5.3 million each in right-of-use assets and lease liabilities. The company expected the forthcoming credit-loss standard to require a one-time allowance adjustment, but could not estimate its amount or overall impact.
- During the quarter, the company recorded a $0.451 million loss on a loan previously identified as a troubled debt restructuring and transferred the loan to foreclosed real estate. Three properties were acquired through deed-in-lieu transactions and one commercial property was foreclosed.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing reported no material changes to previously disclosed risk factors and no applicable legal proceedings.
Important facts for investors to verify
- Whether loan growth and net interest income can continue to offset deposit and borrowing cost increases.
- Performance and collateral recovery for the commercial credit written down, and the increase in foreclosed real estate and nonperforming assets.
- Whether the allowance remains adequate as loan balances and credit conditions change, including the eventual impact of the expected-credit-loss standard.
- Deposit mix and persistence of municipal seasonal balances, available borrowing capacity, and liquidity under stressed conditions.
- How interest-rate movements affect net interest margin, securities values, and accumulated other comprehensive loss.