Norwood Financial Corp. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Norwood is a Pennsylvania bank holding company operating through Wayne Bank. Amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $9.867 | $9.612 | $19.532 | $18.882 |
| Provision for loan losses | $1.300 | $0.300 | $2.000 | $0.750 |
| Net income | $1.488 | $3.522 | $4.567 | $6.712 |
| Diluted earnings per share | $0.24 | $0.56 | $0.73 | $1.06 |
- Q2 net income fell 58% year over year; the six-month decline was 32%. Management attributed the decreases primarily to higher loan-loss provisions and $1.597 million of merger-related expense in 2020.
- Tax-equivalent net interest margin was 3.25% in Q2 and 3.36% for the first half, versus 3.49% and 3.46%, respectively, in 2019. Management cited low-yield PPP loans and increased deposits held at banks as factors weighing on margin.
- Q2 return on average assets and equity was 0.45% and 4.17%, respectively, compared with 1.16% and 10.93% a year earlier. First-half returns were 0.72% and 6.46%, versus 1.12% and 10.66%.
Financial position, cash flow and liquidity
- At June 30, total assets were $1.355 billion, up from $1.231 billion at December 31, 2019. Loans were $988.7 million, up $64.1 million, including $67.3 million of PPP loans; securities available for sale were $196.7 million, down from $210.2 million.
- Deposits increased $128.7 million to $1.086 billion. Non-interest-bearing demand deposits rose $77.5 million. Short-term borrowings were $55.2 million and other borrowings were $50.8 million, compared with $62.3 million and $56.4 million at year-end.
- Cash and cash equivalents were $83.4 million, versus $15.4 million at year-end. Cash plus available-for-sale securities totaled $280.1 million, or 20.7% of assets, compared with $225.6 million, or 18.3%.
- For the first half, operating cash flow was $0.6 million, investing cash outflow was $45.4 million, and financing cash inflow was $112.8 million. Cash increased $68.0 million. The filing does not provide a clear explanation for the $6.2 million negative “other, net” operating-cash-flow adjustment.
- Stockholders’ equity was $142.7 million, versus $137.4 million at year-end. Regulatory capital ratios included Tier 1 leverage of 9.61%, Common Equity Tier 1 of 13.20%, and total risk-based capital of 14.29%; the company reported compliance with applicable requirements.
Credit, material developments and outlook
- The allowance for loan losses was $10.3 million, or 1.04% of loans, versus $8.5 million, or 0.92%, at year-end. Management said COVID-19-related qualitative factors increased the required allowance, including $1.0 million of pandemic-related factors; the economic-conditions factor added $1.7 million. Net charge-offs were $0.197 million for the first half, down from $0.974 million.
- Nonperforming loans rose to $3.0 million, or 0.30% of loans, from $0.8 million, or 0.09%, at year-end. Nonperforming assets were $3.9 million, or 0.29% of assets, versus $2.4 million, or 0.19%.
- As of June 30, the bank had received forbearance requests for 918 loans totaling $192.9 million; 863 loans totaling $182.3 million remained in forbearance. Management said these short-term COVID-19 modifications generally were not treated as troubled debt restructurings where applicable guidance criteria were met. It expected additional residential borrowers to seek relief in Q3.
- The bank originated 746 PPP loans totaling $67.3 million and received approximately $2.4 million in processing fees, deferred and to be recognized over the loan terms. PPP loans are SBA-guaranteed, but the filing warns that the guarantee could be challenged if origination, funding or servicing requirements were deficient. It also identifies potential PPP-related litigation and associated financial, legal-cost and reputational risks.
- Norwood completed its acquisition of UpState New York Bancorp on July 7, 2020, after quarter-end. UpState reported March 31 assets of $443.8 million, deposits of $393.9 million and equity of $46.5 million. Consideration included approximately $8.8 million cash and 1,865,738 Norwood shares. Integration, realized results and acquisition impacts are not reflected in the June 30 balance sheet.
- Management estimated 2020 loan growth of approximately 3%, excluding PPP loans, as part of its allowance analysis; this is not formal earnings guidance. Interest-rate simulations for a plus or minus 200-basis-point shift were within policy limits. Management considered liquidity adequate.
Important facts for investors to verify
- Subsequent-quarter credit performance, especially loans emerging from deferral, commercial real estate and hospitality/lodging exposures.
- PPP forgiveness, fee recognition, SBA guarantee compliance and any PPP-related litigation or claims.
- UpState acquisition accounting, integration costs, realized synergies and post-merger capital, asset quality and earnings.
- The adequacy of the loan-loss allowance as pandemic conditions and borrower relief programs evolve.
- Whether deposit growth and elevated cash balances can be deployed profitably without further pressure on net interest margin.