Business context and reporting period
Norwood Financial Corp, the parent of Wayne Bank, reported unaudited results for the quarter and nine months ended September 30, 2020. It completed its acquisition of UpState New York Bancorp on July 7, 2020; results include UpState only from that date. The acquisition materially expanded the company’s balance sheet and share count.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $15.33 million | $9.89 million | $34.86 million | $28.77 million |
| Provision for loan losses | $1.85 million | $0.30 million | $3.85 million | $1.05 million |
| Net income | $5.00 million | $3.91 million | $9.57 million | $10.62 million |
| Diluted EPS | $0.62 | $0.62 | $1.39 | $1.68 |
| Net interest margin, tax-equivalent | 3.73% | 3.60% | 3.51% | 3.51% |
At September 30, 2020, total assets were $1.842 billion, loans were $1.415 billion, deposits were $1.516 billion, and stockholders’ equity was $190.5 million. Cash and cash equivalents were $124.4 million; available-for-sale securities were $197.4 million. Short-term borrowings were $69.3 million and other borrowings were $46.4 million. The allowance for loan losses was $11.7 million, or 0.83% of loans.
For the nine months, operating cash flow was $9.0 million; investing activities used $36.1 million, while financing activities provided $136.1 million. Cash and cash equivalents increased $109.0 million to $124.4 million, with financing inflows reflecting deposit growth and acquisition-related activity. The company reported $321.9 million of cash and available-for-sale securities liquidity, equal to 17.5% of assets.
Regulatory capital ratios at September 30 were 8.80% Tier 1 capital to average assets, 11.52% Tier 1 and Common Equity Tier 1 to risk-weighted assets, and 12.40% total capital to risk-weighted assets. Management said the company and bank met applicable capital requirements, including the conservation buffer.
Material changes versus prior periods
- Assets rose from $1.231 billion at year-end 2019, primarily due to the UpState acquisition, which added about $456 million of assets. The merger consideration was $54.2 million, including 1,865,738 Norwood shares and cash. Goodwill recorded was $18.9 million.
- Loans increased from $924.6 million at year-end, including $402.2 million acquired and $95.0 million of PPP loans. Deposits increased from $957.5 million, including $414.1 million acquired.
- Q3 net income rose 28% year over year, mainly as higher net interest income from the acquisition more than offset higher credit-loss provision and merger costs. Diluted EPS was unchanged at $0.62 as the share count increased.
- Nine-month net income fell about 10%, with the benefit of higher net interest income offset by a $2.8 million year-over-year increase in provision and $1.983 million of merger expenses.
- Q3 net interest margin improved to 3.73% from 3.60%; the nine-month margin was unchanged at 3.51%. Lower funding costs helped, while the company cited lower securities income and reduced loan yields.
- Available-for-sale securities declined to $197.4 million from $210.2 million as sales, maturities and principal repayments helped fund loan growth. Other comprehensive income increased equity by $3.5 million, net of tax, over the nine-month period.
Outlook, commentary, risks and unusual items
- No specific earnings or financial guidance was provided. Management said results for the interim periods are not necessarily indicative of full-year or future results.
- Management increased qualitative credit-loss factors for pandemic-related economic conditions, higher-risk industries and loans with payment deferrals. It said COVID-related factors added $1.5 million to the allowance; a higher economic-conditions factor added $2.2 million, partly offset by a reduction in the loan-growth factor.
- During the nine months, 1,191 loans totaling $273.4 million received forbearance; 314 loans totaling $126.3 million remained in forbearance at quarter-end. These modifications generally were not treated as troubled debt restructurings under applicable guidance.
- The company had $95.0 million of PPP loans outstanding, generally guaranteed by the SBA, and received about $2.5 million of processing fees. It warned of potential PPP-related litigation and the risk that SBA guarantees could be reduced or denied if origination, funding or servicing deficiencies are found.
- Credit and pandemic risks include potential loan losses exceeding the allowance, regional economic weakness, commercial real estate exposure, and borrower performance after deferrals end. Management also cited interest-rate, liquidity, goodwill-impairment and cybersecurity risks. It reported no material impact to operations to date but said worsening or prolonged pandemic effects could materially harm results.
- The company recorded $1.983 million of merger-related expense for the nine months. It reported no securities impairment charges and considered unrealized securities losses temporary. COVID-related loan deferrals and PPP participation are significant monitoring items.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the filing’s asset-quality disclosures: MD&A narrative cites nonperforming loans of $12.6 million and nonperforming assets of $13.6 million, while its detailed table reports $4.044 million of nonperforming loans and $5.009 million of nonperforming assets, with $8.586 million of purchased credit-impaired loans shown separately. Confirm the definitions and ratios used.
- Track the performance and credit quality of acquired UpState loans, including purchased credit-impaired loans and the acquisition-date fair-value adjustments.
- Monitor the $126.3 million of loans still in forbearance at quarter-end, subsequent payment performance and any change in risk ratings or allowance requirements.
- Assess the impact of the $95.0 million PPP portfolio, including forgiveness, fee recognition and any SBA guarantee or litigation developments.
- Evaluate whether acquisition-related expense, integration costs and the enlarged share base affect future earnings and per-share results.
- Review liquidity and funding trends, loan growth, capital ratios, and sensitivity to changes in interest rates as pandemic conditions evolve.