Norwood Financial Corp. (NWFL) Earnings Call Transcript & Summary

Hello, and welcome to the Annual Meeting of Stockholders of Norwood Financial Corp. Please note that today's meeting is being recorded. During the meeting, we'll have a question-and-answer session. You can submit questions or comments at any time by clicking on the message icon. It is now my pleasure to turn today's meeting over to Mr. William W. Davis Jr., Chairman of the Board of Norwood Financial Corp. Mr. Davis, the floor is yours.

Good morning. I'll call the meeting to order. The 2020 annual meeting of Stockholders will please come to order. I am William W. Davis Jr., Chairman of the Board, and I'll act as Chairman for the annual meeting. I would also like to welcome you to our 149th Annual Meeting to do the first virtual annual meeting of stockholders of Norwood Financial Corp. This meeting is being held by means of remote communications as a result of the COVID-19 pandemic and to comply with the current guidelines in effect in Pennsylvania. William S. Lance, Executive Vice President and secretary of the company, will act as secretary of the annual meeting. I would like to also introduce your Board of Directors that are present today and who are participating in the meeting by remote communications. They are: Dr. Andrew Forte, Attorney Ralph Matergia, Kevin Lamont, Susan Campfield; Dr. Ken Phillips, Joseph Adams, Meg Hungerford and Lew Critelli, who is also our President and CEO. We posted the meeting procedures and rules for conduct of the annual meeting on our meeting web page for your review. In order to conduct an orderly meeting, we ask that you please follow these rules. I will now turn over the annual meeting to Lewis J. Critelli, President and Chief Executive Officer, who will conduct the formal business of the meeting. Lew?

Thank you, Bill. Good morning, everyone. I would also like to welcome and thank you for participating in our 149th annual meeting, and it's our first annual meeting in a virtual format. We believe this is the prudent approach this year due to the public health impact of the COVID-19 pandemic. We wanted to support the health and well-being of you, our stockholders, our employees and the communities we serve, and I really appreciate the effort it took for you to participate in today's meeting. Later in the meeting, the company's Executive Vice President and Chief Financial Officer, Bill Lance, will discuss our 2019 operating results. I will then give an update of our first quarter results, the company's actions during the pandemic and the upcoming acquisition and integration of UpState New York Bancorp. At this point, we will begin the formal matters which must be completed at the annual meeting. The only persons entitled to vote at this annual meeting are stockholders of record as of the close of business on April 15, 2020, the voting record date. In accordance with the bylaws, the company has prepared a complete alphabetical list of stockholders entitled to vote at the annual meeting with their addresses and number of shares held on the record date. We have previously received an affidavit that notice of the annual meeting was mailed on or about April 21, 2020, to each stockholder of record as of the close of business on the voting record date. Accordingly, this annual meeting has been duly called. This affidavit will be attached as an exhibit to the minutes of the annual meeting. The Board of Directors has previously appointed Philip Meyer, representing Computershare Trust company NA, to act as inspector of election at this annual meeting. The inspector has taken an oath to fairly and impartially perform his duties, which oath will be filed as an exhibit to the minutes of the annual meeting. We have previously delivered to the inspector a certified list of stockholders as of voting record date and all proxies which have been received. Also, the company has delivered the signed master ballot for the voted proxies voted by the Board of Directors, as indicated by such proxies. Our records show that there were outstanding on the record date and entitled to notice of and to vote at this annual meeting, 6,330,561 shares of common stock. Our records further show that more than a majority of such shares are present at this annual meeting in person or by proxy. The inspector is making an exact count and will submit a formal report on the number of shares present or represented during the course of the annual meeting. Based on our preliminary count, a quorum is declared present, subject to the confirmation of that fact by the inspector in his report. In order to save time at this annual meeting, we proposed to arrange the proceedings so that the vote will not be taken until all items have been moved and seconded. And if you voted by proxy, you do not need to vote at this annual meeting. As stated in the notice of the annual meeting, the first item of business to be acted upon by stockholders is the election of 3 directors. In accordance with the bylaws, Joseph W. Adams, Kevin M. Lamont; and Dr. Kenneth A. Phillips have been nominated by the Board of Directors for election to a 3-year term until their respective successors have been elected and qualified. I, therefore, declare the Board's slate to be a nomination. No timely notice of any other nominations have been received, and I declare the nominations to be closed. The second item of business on the agenda is the approval of the agreement and plan of merger, dated January 8, 2020, by and among Norwood Financial Corp., Wayne Bank, UpState New York Bancorp, Inc. and USNY Bank, under which UpState New York Bancorp, Inc. will merge with and into Norwood Financial Corp., with Norwood Financial Corp. being the surviving corporation. And USNY Bank will merge with and into Wayne Bank, with Wayne Bank being the surviving bank. The merger agreement and the merger are described in detail in our joint proxy statement prospectus. This proposal must be approved by a majority of the votes cast at the annual meeting. The Chairman will entertain a motion that the merger agreement and merger be approved.

This is Kevin Lamont and I so move

I second the motion.

Thank you, Joe. The third item of business on the agenda is the ratification of the appointment of S.R. Snodgrass, P.C. as independent auditors for the fiscal year ended December 31, 2020. Mr. Michael Korhnak from S.R. Snodgrass, P.C. is available to respond to questions from our stockholders. The chair will entertain a motion that S.R. Snodgrass, P.C. be ratified as the company's independent auditors for the 2020 fiscal year.

This is Andy Forte. I so move.

This is Ralph Matergia. I second the motion.

Thank you. The final item of business from the agenda is the approval of a nonbinding advisory resolution on executive compensation. The chair will entertain a motion for approval of this proposal.

This is Ralph Matergia. I so move.

This is Joseph Adams. I second the motion.

Thank you. It is now 11:08. The vote will now be taken on Proposals 1, 2, 3 and 5. And remember, if you have voted by proxy in advance of the meeting, you do not need to vote at this meeting. In order to vote today, please press the Cast Your Vote button on our meeting web page and follow the directions. [Voting]

Everyone has had an opportunity to complete their voting, and I now declare the polls closed. While the inspector is counting the votes, William S. Lance, Executive Vice President and Chief Financial Officer, will report to you on the company's financial results for 2019. Bill?

Thank you, Lew. Good morning, and welcome to our 2020 annual meeting. We appreciate your attendance at our first virtual meeting. We certainly hope that we can get together in person for next year's meeting. As Lew mentioned, I will review our results from 2019, and then he will bring you up-to-date with our first quarter financial results and many of the issues that we've addressed since the outbreak of the pandemic. Before I start, here's our legal disclaimer on any forward-looking statements that Lew or I may make today. And what this basically says is that when we talk about future events, there's no guarantee that everything will occur exactly as we say here today, and that we have no obligation to report if anything does change. So now let's talk about 2019. As we sit here today on May 26, 2019 seems like a long time ago. Our economy was strong, our earnings reached record levels and we were able to go out with friends and family without restrictions. So much has changed since then. Let me give you a quick summary of what we accomplished last year, which will show that we were well positioned prior to the outbreak of COVID-19. For the year ended December 31, 2019, our net income totaled $14.2 million, which was $564,000, higher than the $13.7 million we earned last year. And the primary reason for the improvement was a $1.8 million increase in net interest income. As a result of the improvement in earnings, fully diluted earnings per share were $2.25 in 2019, and that compares to $2.17, 2018. our return on asset for the year was 1.18% and our return on equity was 10.83%. And both of these key measurements looked good when we compare them to our national and our Pennsylvania peer banks. Cash dividends per share were $0.97 in 2019, and that compares to $0.90 in 2018. And when we increased the dividend in December, the fourth quarter's dividend was 4% higher than the same period of 2018, which was our way of sharing the success we experienced in 2019 with our stockholders. In 2019, we returned 43% of our net income to our shareholders through cash dividends, and that compares to 40% for our national peer banks and 37% for all Pennsylvania banks. When we look at the balance sheet, our total assets grew $46 million in 2019 and ended the year at $1.2 billion. Total loans grew $74 million or 9% in 2019, and our equity increased by $15 million to $137 million. Our strong credit quality continued into 2019, including our ratio of nonperforming assets to total assets, which was 0.19% on December 31, 2019, and that compares to 0.50% for our national peer banks. Another important metric for banks is the ratio of the allowance for loan losses to total nonperforming loans. At year-end 2019, our reserve for loan losses totaled $8.5 million and was 1,070% of nonperforming loans. And what that means is we had over $10 reserved for every dollar problem loans. This is more than 3x the 328% coverage ratio that our national peer banks have. So we felt good about the credit quality of our loan portfolio as we entered 2020. But I do think it's safe to say that no one was expecting a global pandemic as we began the new year. During 2019, interest rates impacted us on both sides of the balance sheet. Our yield on interest-earning assets increased by 24 basis points to 4.30%, and that was due primarily to growth in loans. On the funding side, rising interest rates also had a significant impact on our costs related to certificates of deposit. And our cost of total interest-bearing liabilities increased 32 basis points to 1.02%. So as a result, we recorded a net interest margin of 3.53% in 2019, and that was the same as the margin that we recorded in 2018. By comparison, our margin was lower than the 3.72% recorded by our national peer group but better than the state average of 3.46% for the year. Also in 2019, service charges and fees collected on loans and deposits increased by $155,000 or 4%, while gains from the sale of loans and securities increased $225,000. As we continue to grow, so do our overhead costs. Our other expenses increased over $1 million last year, reflecting a higher level of salaries and employee benefit costs and costs related to data processing due to the many technological improvements that we've made in recent years. Our efficiency ratio was 58.9% 2019, and that compares to 57.8% reported in 2018. And what the efficiency ratio does is measure the cost of generating $1 of revenue, so it cost us approximately $0.59 in 2019. By comparison, our peer banks nationally spent $0.62 in 2019 to generate that same dollar of revenue, while the average for all Pennsylvania banks was $0.68. So you can see that as we continue to grow, we have also continued to operate very efficiently and continued to outperform our peers in this area. This next graph shows our regulatory capital at the end of each year and the amount of capital that would have been required to be considered well capitalized. And as I said before, it's been the strategy of this company to maintain high levels of capital, which ensure the safety of the company, and ultimately, your investment. We will continue to do our best to ensure that these strategies are followed for many years to come. So to recap our accomplishments from 2019. We recorded record earnings with a return on assets of 1.18% and a return on equity of 10.83%. We grew our loans by over 9%. We maintained our strong credit quality metrics. We increased the cash dividend by 4% in the fourth quarter. And we've prepared to close on our acquisition of UpState New York Bancorp, and Lew is going to talk more about that in a few minutes. So once again, that is a very impressive list, and we're proud to report on each and every one of these accomplishments. But the major point that I'd like to emphasize here today is the strength of our company coming out of 2019. Unforeseen circumstances and a new normal will impact 2020 and beyond in many ways. But we accept the challenges that the future holds and look forward to the opportunities. So thanks again for joining today to listen to our story. And now, Lew will update you with our first quarter results and provide insight to other current developments.

Thank you, Bill. We recently announced that our earnings totaled $3,079,000 for the 3 months ended March 31, 2020, compared to $3,190,000 recorded during the same 3-month period of last year. This decrease in earnings was due to an increased provision for loan losses related to the current period of economic uncertainty caused by the COVID-19 pandemic. Our earnings per share on a fully diluted basis were $0.49 per share in the first quarter this year compared to $0.51 in 2019. We had an annualized return on average assets of 1.01% and an annualized return on average equity of 8.79% in 2020 compared to 1.09% and 10.37%, respectively, in the first quarter of 2019. Total assets were $1.242 billion as of March 31 this year, an increase of $38.7 million compared to March 31 of last year. Total loans grew by $64.4 million, deposits were up $15.7 million and stockholders' equity increased $15.4 million when all compared to March 31, 2019. In addition, our tangible book value per share increased to $20.70 as of March 31 this year, up from $18.31 last year. Nonperforming assets totaled $3.8 million or 0.31% of total assets at March 31, 2020. And that was comprised of $2.7 million of nonperforming loans and $1.1 million of foreclosed real estate, as compared to nonperforming assets of $2.9 million or 0.24% of total assets as of March 31, 2019. And our allowance for loan losses totaled $9,088,000 as of March 31 this year, increasing from $8,349,000 on March 31, 2019. Net interest income on a fully taxable equivalent or FTE basis was $9,903,000 during the first quarter this year, which is $367,000 higher than the comparable 3-month period of last year. A $69.7 million increase in average loans outstandings contributed to the increased interest income. The fully taxable equivalent yield on interest-earning assets improved 4 basis points compared to the 3-month period of March 31, 2019, while our cost of funds increased only 1 basis point. As a result, the annualized net interest margin improved to 3.48% from 3.43% in the quarter ended March 31, 2020, compared to the prior year. However, even though we saw an increase in the first quarter this year in our net interest margin, we expect to see pressure on that margin in the remainder of 2020 due to the rapid and significant decrease of interest rates over the last 60 to 90 days. Other income totaled $1,654,000 in the first quarter this year compared to $1,560,000 during the same period of last year. The increase is due primarily to a $32,000 increase in service charges and a $38,000 increase in net gains on sales of securities. And all other categories of fee income were up $24,000. Our operating expenses totaled $7,059,000 in the first quarter of this year, up $411,000 higher than we recorded in the same period of last year. Salaries and benefit costs rose $128,000, while all other operating expenses increased $283,000 with the bulk of that increase related to investments in technology. Our first quarter results were on track for a solid start to the year prior to the impact from the COVID-19 pandemic and the resulting stay-at-home orders and the closure of businesses throughout our market area. We've since focused our efforts on providing the products and services that will assist our customers through the crisis. In addition, we're supplying resources to our employees to give them the ability to perform their functions in a safe work environment. We've been successful on both fronts and remain committed to providing the financial resources that will help our customers emerge from the current situation financially sound. As a result of the COVID-19 pandemic, we've taken many steps to protect the health and safety of our employees and customers, to support our local small business customers, and assist those individuals in need in all of our communities. From an operational standpoint, we've deployed close to 100 workstations for remote access. We can operate all our critical time-sensitive functions remotely. This allows us to limit the staff in the building while we continue performing all the required functions to run a bank on a daily basis. We also made the decision to limit lobby access to appointment only. During this period, we encouraged use of our electronic banking platforms. We saw a significant increase of 30% in Internet banking usage. We had double-digit growth in our mobile capture product and significant growth in our bill pay system. All of these services allowed our customers to do their banking from the safety and convenience of their home. We expect to see those trends continue as we go throughout 2020. Now the bank is making plans to follow state and CDC guidance to once again open the lobbies to our customers. To date, we've reopened our lobbies in Delaware County, New York and Wayne County, Pennsylvania. There are a number of significant pieces of new legislation at the federal level, various state-related executive orders and guidelines, and a number of regulatory interagency policy statements and guidance related to the impact of COVID-19 on our businesses and communities. On the federal level, the Families First Coronavirus Response Act was effective April 2. The act requires employers to provide paid sick leave and expanded family and medical leave for specified reasons related to COVID-19. This includes circumstances where an employee to report to work due to lack of child care or school closure. The bank has implemented all these requirements and has a number of employees benefiting from the provisions of the act. The Coronavirus Aid Relief and Economic Security Act, or the CARES Act, was signed into law on March 27, 2020, and provides over $2 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized a Small Business Administration, the SBA, to clearly guarantee loans under a new loan program called the Paycheck Protection Program, or PPP. As a qualified small business administration lender, we were automatically authorized to originate such loans. An eligible business can apply for a PPP loan up to 2.5x its average monthly payroll cost. And the Paycheck Protection Program loans will have an interest rate of 1%, a 2-year loan term to maturity and principal and interest payments deferred for 6 months from the disbursement date. The SBA will guarantee 100% of these loans made to eligible borrowers, and the entire principal amount of the borrowers' PPP loan is eligible to be reduced by a loan forgiveness component under the PPP based on the level of payroll and other qualifying expenses incurred by the business. This program or group of loans was initially funded with $349 billion, which was immediately dispersed in a very short time. Congress then authorized an additional $310 billion in mid-April. As we process these loans, the bank will be eligible to receive a onetime fee of 3% to 5% based on the size of the loan. And as of May 20, we've approved over 700 applications or over $70 million of loans to our local small businesses. The bank is also participating in a federal reserve bank liquidity program to help us provide funding for these loans. To assist our customers during this time, we've also implemented a residential mortgage and consumer loan forbearance agreements to qualified borrowers, as defined under the CARES Act. As of April 30, we processed 150 [ run ] residential mortgage deferrals of $10.4 million. And due to the widespread impact of the state of Pennsylvania and the state of New York stay-at-home orders, we expect that additional residential loan borrowers will seek loan forbearance or loan modification agreements as we go throughout the second quarter of this year. And both states are also encouraging banks to work with customers impacted by COVID-19 by waiving certain late fees, overdraft charges and other fees. Section 4013 of the CARES Act also provides that banks may elect not to categorize a loan modification as a troubled debt restructuring if the loan modification is related to COVID-19. In addition, according to the interagency statement on loan modifications and reported for financial institutions working with customers affected by the coronavirus issued by the federal banking regulatory agencies in April, short-term loan modifications not otherwise eligible under the CARES Act, but that are made on a good faith basis in response to COVID-19 to borrowers who are current prior to any relief, are also not considered troubled debt restructurings. These include short-term modifications such as payment deferrals, fee waivers, extensions and repayment terms or other delays in payments that are considered insignificant. The bank has granted modifications for businesses and consumers totaling $165 million, all to assist these businesses affected by COVID-19. These modifications provided much needed short-term cash flow support to our local small business customers. The CARES Act also provided stimulus payments for the U.S. Treasury to many individuals. The bank processed almost 8,000 direct deposits totaling $14 million for our customers. We're also focused on our upcoming merger and integration with UpState New York Bancorp and USNY Bank. In January, shortly after the announcement of the merger, we formed an integration conversion committee. This committee, consisting of key staff from both banks, is planning and coordinating all aspects of the integration including our operating systems, our financial systems, electronic banking, branding, deposit and lending products, training, information technology and human resources. This group is working diligently to provide a smooth transition for the USNY customers to our Wayne Bank products and services. And as of December 31, 2019, UpState had total assets of $439.6 million, total net loans of $380.7 million, deposits of $387.9 million and stockholders' equity of $46.4 million. So when combined, new North Financial Corp. will have over $1.7 billion in assets, $1.3 billion in loans and deposits of $1.4 billion. We will have 31 offices covering an expanded market area, including the Finger Lakes region in New York. And as detailed in our investor presentation in January, the transaction will be accretive to Norwood's earnings in 2021. It is also minimally dilutive to our pro forma tangible book value per share with an earn-back period of less than 2 years. Through all of this, Norwood will emerge and continue to be a well-capitalized institution. We're pleased to be able to partner with UpState and USNY Bank. Both of our companies have earned a great reputation in the market and have a common community banking culture. The merger will offer expanded products and services to the USNY Bank customer base, including wealth management services which are not currently available. And we look forward to welcoming the USNY stockholders, customers and employees to Norwood and Wayne Bank. This is clearly a challenging time for everyone. However, we also view this as an opportunity, an opportunity to evaluate our operating procedures and look for new efficiencies, to strengthen our relationships by assisting our existing customers, and to develop new relationships for those businesses we help with federal programs and to support our communities in times of need. We believe the expansion in Norwood by way of the UpState acquisition positions us for growth and enhances long-term profitability and shareholder value. So through all of this, we continue to thank you for your support and appreciate the confidence that you've shown in Norwood Financial Corp. We'll now be available to answer questions.

Lew, we have one question that came in today. And the question is, when do you expect to close the acquisition of UpState New York Bancorp?

We expect to close on the acquisition in the third quarter, hopefully, in the beginning of the third quarter, and then work through all the operational conversions, which will happen after the acquisition closes.

There are no additional questions on the forum.

Thank you. The inspector has completed his count and provided me with the report, subject to final audit. The report of the inspector confirms that a quorum is and has been in attendance at this annual meeting for all purposes. It also shows that Joseph W. Adams, Kevin M. Lamont and Dr. Kenneth A. Phillips have each been duly elected as directors for 3-year terms. The report further shows that more than a majority of the votes cast have been voted in favor of the merger agreement, the ratification of the appointment of S.R. Snodgrass as the company's independent auditors for the 2020 fiscal year and the nonbinding advisory resolution on executive compensation. The report of the inspector is hereby accepted and approved and will be attached to the minutes of this annual meeting. There being no further business, the motion to adjourn is in order.

Joseph Adams, I move that the annual meeting be adjourned.

Kevin Lamont. I second the motion.

Thank you. Well, again, I want to thank everyone for participating. Bill Davis and I have been doing these meetings, I think, since 1997. And at the end of every single meeting, we were able to say, I hope you can join us for lunch and a little fellowship and to talk informally with the directors and the other officers and amongst fellow shareholders. Unfortunately, unfortunately, due to these circumstances, we just can't do that today. And I find it a little bit sad when I was coming in this morning that we're not able to accommodate you here this year. But we really hope we can do it next year, and we really hope to see everybody, that we can get together and be able to have some fellowship and meet each other face-to-face. So until that time, I really thank you for your attention today. Thank you for taking the time to participate, and I wish you all to be well and have an enjoyable summer.

Thank you.

This concludes the meeting. You may now disconnect.