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

Hello, and welcome to the Annual Meeting of Shareholders of Norwood Financial Corporation. Please note that today's meeting is being recorded. [Operator Instructions] It is now my pleasure to turn today's meeting over to William W. Davis Jr., Chairman of the Board of Norwood. Mr. Davis, the floor is yours.

Good morning. The 2021 Annual Meeting of Stockholders will please come to order. I am Bill Davis, Chairman of the Board, and I will act as Chairman of the meeting. I would like to welcome you, and thank you for participating in our 150th annual meeting and to the second virtual Annual Meeting of Stockholders of Norwood Financial Corp. and our wholly owned subsidiary, Wayne Bank. The meeting is being held by means of remote communications as a result of the COVID-19 pandemic to comply with the current guidelines in effect in Pennsylvania. Bill Lance, our Executive Vice President and Chief Financial Officer, will act as Secretary of the Annual Meeting. I would now like to introduce the members of your Board of Directors who are present today or who are participating by remote Communications, Dr. Andrew Fort; Attorney Ralph Matergia; Kevin Lamont; Susan Campfield; Dr. Ken Phillips; Joseph Adams; Meg Hungerford; Jeffrey Gilford; Alexandria Nolan; and Lew Critelli, who is also our President and CEO. We posted the meeting procedures and rules for conduct of the annual meeting on the web page for your review in order to conduct the meeting properly, we ask that you 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 annual meeting. Lew?

Thank you, Bill. Good morning, everyone. I would also like to welcome and thank you for participating in our 150th annual meeting. It's our second annual meeting in a virtual format. We believe this was once again the prudent approach due to the ongoing public health impact of the COVID-19 pandemic, and we truly 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 2020 operating results. I will then give you an update on our first quarter results, the company's actions during the pandemic and a recap of our merger with UpState New York Bancorp. At this point, we will begin the formal matters, which must be completed at this annual meeting. The only persons entitled to vote at this annual meeting are stockholders of record as of the close of business on March 11, 2021, 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 March 26, 2021, 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 as 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 the 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 record showed that there was outstanding on the record date and entitled to notice of and to vote at this annual meeting, 8,229,818 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 this 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 annual meeting, the first item of business to be acted upon by stockholders is the election of 3 directors. In accordance with the bylaws, Lewis J. Critelli, William W. Davis Jr. and Meg L. Hungerford have each been nominated by the Board of Directors for election to a 3-year term and until the respective successors have been elected and qualified. I, therefore, declare the Board's slate to be in 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 ratification of the appointment of S.R. Snodgrass, P.C. as independent auditors for the fiscal year ended December 31, 2021. Mr. Brendan Whalen from S.R. Snodgrass is available to respond to questions, if any, from stockholders attending the webcast. The chair will entertain a motion that S.R. Snodgrass, P.C. be ratified, as the company's independent auditors for the 2021 fiscal year.

I so move.

I second the motion.

Thank you. The vote will now be taken on proposals 1 and 2. And remember, if you voted by proxy in advance of today's 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. Everyone has now had an opportunity to complete their voting, and I now declare the polls closed. While the inspector is counting the votes, Williams S. Lance, Executive Vice President, and Chief Financial Officer, will report to you on the company's financial results for 2020. Bill?

Thank you, Lew. Good morning, and welcome to our 2021 Annual Meeting. We appreciate your attendance at this virtual meeting and certainly hope that we can get together in person or next year's meeting. As Lew mentioned, I will review our results from 2020, 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 we last met. Before I start, here's our legal disclaimer and 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 2020. Since we last met, we've been continuing to operate under the guidance and restrictions that have been ever-changing. In July of 2020, we closed on our acquisition of UpState New York Bancorp, and our financial results since the closing have reflected the benefits that were derived from the acquisition. These 2 items, the pandemic and our acquisition had a significant impact on our results for the year of 2020, as you'll see from my following remarks. So for the year ended December 31, 2020, net income totaled $15.1 million, which was $865,000 higher than the $14.2 million we earned last year. And the primary reason for the improvement was an $11.9 million increase in net interest income, which resulted from the acquisition of UpState. Our fully diluted earnings per share were $2.09 in 2020, and that compares to $2.25 in 2019. Our return on assets for the year was 0.97%, and our return on equity was 9.06%. And each of these key measurements were also impacted by the acquisition and the effects of the pandemic. Cash dividends per share were $1.01 in 2020 compared to $0.97 in 2019. And so when we increased the dividend in December, the fourth quarter dividend was 4% higher than the same period of 2019, and represented a dividend yield of 3.97%, and that's based on the closing price of our stock on December 31, 2020. And this was our way of sharing the success we experienced in 2020 with our stockholders. In 2020, we returned 48% of our net income to our shareholders through cash dividends, and that compares to 38% for our national peer banks and 38% for all Pennsylvania banks as well. When we look at the balance sheet, our total assets grew $621 million in 2020 and ended the year at $1.9 billion. Assets acquired from UpState totaled $439 million. While much of the remaining growth can be attributed to economic stimulus, which had a significant impact on our overall balance sheet. Total loans grew $486 million in 2020, that includes $413 million of loans acquired and $68 million of Paycheck Protection Program, or PPP loans, that were originated in 2020. Total deposits increased $578 million. This includes the $411 million of deposits acquired from UpState. Now that leaves $167 million of organic deposit growth, much of which is the result of economic stimulus. Now that much deposit growth is certainly extraordinary and to put that in perspective, our total deposit growth over the 3 years prior to 2020 was $32 million. Another key topic related to the acquisition is credit quality. One of the more important and complicated aspects of a bank acquisition is an evaluation of the targeted bank's loan portfolio, including any credit quality concerns. Factors such as risk rating, payment history and collateral are analyzed to identify loans which are categorized as purchased credit impaired loans, which are then subjected to specific accounting treatment and excluded from a historical comparison of credit quality metrics, in order to give the reader of the financial statements a better comparison. So after we exclude the $9.3 million of purchased impaired loans acquired, our strong credit quality metrics continued in 2020, including our ratio of nonperforming assets to total assets, which was 0.24% on December 31, 2020 compared to 0.47% for our national peer banks. Another important measurement for banks is the ratio of the allowance for loan losses to total nonperforming loans. At year-end 2020, our reserve for loan losses totaled $13.2 million and was 388% of our nonperforming loans, which means we had almost $4 reserved for every dollar of problem loan. This level of reserve is in line with our Pennsylvania and national peer banks, which had reserves of 350% and 442%, respectively, at year-end 2020. During 2020, we added $5.5 million to our allowance for loan losses, which included additional reserves for potential losses resulting from the pandemic. But so far, those losses have been minimal and most economists now project that defaults resulting from the pandemic will be much lower than original estimates. Now to switch gears a little. Changes in interest rates could also have a significant effect on bank earnings. In March 2020, the Federal Reserve reduced interest rates 1.5% in response to the pandemic. This decrease in rates effected the pricing on our loans and deposits, which in turn affects our net interest income. Our yield on interest-earning assets decreased 20 basis points to 4.10%, while our cost of total interest-bearing liabilities decreased 28 basis points to 0.74%. As a result, we recorded a net interest margin of 3.55% in 2020, which was slightly higher than the 3.53% we recorded in 2019. While our peer banks saw their margin decreased 26 basis points during the year. By comparison, our margin was slightly higher than the 3.46% recorded by our national peer group and significantly higher than the state average of 3.24% for the year. So while our ability to reprice deposits quickly helped us to improve our net interest margin, we also benefited from the $292 million increase in average loans outstanding, which is due primarily to the acquisition. Our noninterest income improved $1 million in 2020, and that was due primarily to loan-related fees resulting from the acquisition. We also have to keep in mind that as we continue to grow, so do our overhead costs. Operating expenses increased over $7 million in 2020, which includes the cost of the operations acquired from UpState as well as over $2 million of onetime merger-related expenses. That said, our efficiency ratio was 58.2% in 2020, which was better than the 58.9% we reported in 2019. Now what the efficiency ratio does is measure the cost of generating $1 of revenue. So it cost us approximately $0.58 in 2020. By comparison, our peer banks nationally spent $0.60 in 2020 to generate that same dollar of revenue, while the average for all Pennsylvania banks was $0.66. So you can see that although our expenses have increased due to our growth, we have continued to operate very efficiently and continue to outperform our peers in this area. And finally, I also want to address the strength of our capital. What this next graph shows, our regulatory capital at the end of each year and the amount of capital that would be required to be considered well capitalized. As I've said many times before, there has been a strategy of this company to maintain high levels of capital, which ensures the safety of the company and ultimately, your investment. So to recap our accomplishments from 2020, we recorded record earnings with a return on assets of 0.97% and a return on equity of 9.06%. We acquired and fully integrated the employees and operations of UpState and USNY Bank. We increased our allowance for loan losses. We participated in the SBA PPP program, providing over $95 million to businesses in need. We increased the cash dividend by 4% in the fourth quarter, and we accomplished all of this during a global health pandemic, while providing our employees the ability to perform their functions in a safe work environment. Once again, this is a very impressive list, and we're proud to report on each and every one of these accomplishments. We look forward to an end to the restrictions placed on us and on our customers during the past year. We remain optimistic to face the challenges that the future holds and look forward to the opportunities. 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 record earnings of $5.542 million for the 3 months ended March 31, 2021, increasing 80% from the $3.79 million recorded during the first quarter of 2020. The increase reflects the benefits derived from the company's merger with UpState New York Bancorp, which closed in July 7, 2020, and also the impact of various economic stimulus programs. Earnings per share on a fully diluted basis were $0.67 in the first quarter of 2021, and that's up 37% from the $0.49 earned in the first quarter of last year. The annualized return on average assets was 1.18% first quarter of 2021, and we had an annualized return on tangible equity of 13.42%. Both numbers increasing from 1.01% and 9.57%, respectively, in the first quarter of 2020. Our total assets were over $2 billion for the first time in our history as of March 31, 2021, and that's an increase of $767.5 million when compared to March 31, 2020. And as of March 31, 2021, total loans increased $493 million, total deposits grew $695 million, and stockholders' equity increased $52.9 million, all as compared to March 31 last year. The increases reflect the balances acquired from UpState and the impact from economic stimulus, including loans originated through the Paycheck Protection Program, or PPP. During the 3 months ended March 31, 2021, we originated 633 new PPP loans totaling $54.3 million and had $30 million of loans forgiven that were originated in previous periods. And as of March 31 this year, the total of all PPP loans outstanding was $119.3 million. Net interest income on a fully taxable equivalent basis was $15.981 million during the 3 months ended March 31 of this year, which is $6.78 million higher than the comparable 3-month period of 2020. A $491.3 million increase in average loans outstanding over the corresponding period of 2020 contributed to this increase. During the 3 months ended March 31 this year, fully taxable equivalent yield on interest-earning assets decreased 32 basis points when compared to last year. However, our cost of funds decreased 55 basis points from the prior year. As a result of this decline in funding costs, the annualized net interest spread improved to 3.46% in the current period from 3.23% in the corresponding 3-month period in 2020. Other income totaled $1.989 million for the 3 months ended March 31 this year compared to $1.654 million during the corresponding period of last year. The increase is due primarily to a $184,000 increase in service charges, principally due to our increase in loans and deposits related to our merger with UpState. Earnings and proceeds on bank-owned life insurance policies also increased $166,000 over the first quarter last year. Operating expenses totaled $9.452 million for the 3 months ended March 31, 2021, and were $2.393 million, higher than the $7.59 million recorded in the same period of last year. The increase reflects the cost of operations acquired from UpState, including 4 new community offices. However, our revenue growth is outpacing the increase in expenses so our efficiency ratio actually improved to 52.2% first quarter of this year compared to 55.1% in the first quarter of 2020. Our first quarter results are on track for a productive year, and we are eagerly anticipating the lifting of all restrictions and the increase in vaccination rates, which should have a positive effect on our local businesses and economies. We're also encouraged that our first quarter financial results reflect the accretion to earnings of the UpState merger. As we had during the past year, we remain strong, resilient and responsive to the needs of our customers and communities. We are well aware that the impact of the COVID-19 pandemic has had on our economy. Federal legislation enacted over the past year, beginning with the CARES Act in March of 2020, has helped the U.S. economy withstand the worst effects of the coronavirus and has kept millions of workers and businesses afloat. The CARES ACT created and funded the small business administration's Paycheck Protection Program, PPP, which provides qualifying small businesses with cash flow assistance through forgivable loans. With later expansions and extensions, the PPP has been funded with a total of approximately $900 billion and eligible businesses can apply for these loans through May 31, 2021. We're extremely proud to have assisted over 1,700 local businesses in obtaining PPP loans with over $150 million in funds dispersed. As an official small business administration lender, Wayne Bank was able to provide emergency relief to our existing business customers as well as other businesses across our markets. And our dedicated commercial lending team worked tirelessly to process these loans and help support small businesses. We're now assisting these businesses to obtain the loan forgiveness from the SBA. The CARES Act, the Consolidated Appropriations Act of 2021 and the American Rescue Plan Act have provided 3 rounds of economic payments to millions of Americans and have provided additional unemployment benefits to many who have lost their jobs as a result of the pandemic. Our front-line and back office teams have processed over $50 million in CARES ACT stimulus payments for thousands of individuals, in addition to providing daily essential financial services during these challenging times. The CARES Act and the subsequent legislation permitted financial institutions to suspend the requirement to categorize certain loan modifications related to the COVID-19 pandemic as troubled debt restructurings through January 2, 2022. We assisted almost 1,200 borrowers, representing $273.4 million of loans with payment modifications. With the improving economic conditions as of today, close to 90% of these borrowers have now returned to full payment status, which is very encouraging as we see our economy improve. To comply with changing restrictions and keep our customers safe, we actively promoted our digital banking platforms, encouraging customers to take advantage of these services that allow for secure banking from the comfort of home. As a result, we saw a 30% increase in the usage of all of our online and mobile banking products. We currently have over 35,000 registered devices for our mobile platform. 14,000 downloaded Wayne Bank apps and mobile deposit capture is used by over 6,000 customers. For our business customers, we process over $38 million a month through remote deposit capture and another $21 million via the automated clearinghouse or ACH process. To maintain pandemic guidelines and ensure the continued safety of our employees, we also established over 100 remote workstations that allowed our employees to service our customers efficiently, effectively and securely from home. We're also implementing additional Microsoft Teams technology to enhance our communications infrastructure. And the company plans to continue its technology investments to expand products and services to our customers and improve efficiencies. Supporting our communities and economies has been Wayne Bank's mission since our founding, but it's more important now than ever before. We continue to contribute to hundreds of local schools, food banks, first responders and community organizations throughout Pennsylvania and New York. We also launched a special initiative to show support and gratitude to health care workers and first responders. Coordinated by our 30 community offices, lunch was provided to frontline workers as a way to show appreciation, while also helping to support the restaurant industry that was hit particularly hard by the pandemic. Very pleased to say your company continued to grow and expand even in this very challenging environment. Our most exciting accomplishment in 2020 was our additional expansion to New York, with our merger with UpState New York Bancorp and its wholly owned subsidiary, USNY Bank. The merger was completed in July of last year, with USNY's operations, employees and customers successfully integrated into Wayne Bank operating systems in August. From a balance sheet perspective, the merger accounted for a growth of $413 million in loans and $411 million in deposits. We also added an additional $45 million in capital support continued growth. It helped diversify our loan portfolio with new markets in Ostigo, Ontario and Yates County. We also added an expertise in agricultural lending as USNY has a strong legacy of supporting local farmers. Our current financial results reflect the growth in net income and the accretion to earnings per share as expected from the merger. In addition to thousands of new customers, the acquisition also added 2 new brands as units of Wayne Bank. Bank of the Finger Lakes with 2 community offices in Geneva and Penn Yan, New York; and Bank of Cooperstown, with 2 more locations in Cooperstown in Oneonta, New York. Wayne Bank now has 30 community offices throughout 10 counties and is well positioned to serve the residents, businesses and organizations within our enhanced market area. We feel very positive about the opportunities this expansion has and will continue to bring, including the potential for growth, long-term profitability and enhancement of shareholder value. Norwood has been included in the Russell 2000 Index for a number of years. Now the Russell 1000 consists of the 1,000 largest companies based on market cap and the Russell 2000 consists of companies ranked 1,001 to 3,000 based on market capitalization. Each year, in early May, Russell takes a snapshot of the U.S. equity markets to determine these largest 3,000 publicly traded companies as measured by market cap. It then uses these measurements to perform a reconstitution, which is additions and deletions of the component companies of the various Russell indices. The additions and deletions are announced in early June with the actual reconstitution performed on the last Friday of June or 25th this year. With the market capitalization breakpoint for the Russell 2000 anticipated to more than double from $94.8 million in 2020 to somewhere in the range of $260 million in 2021, as many as 85 community banks, including Norwood, which has a market cap at around $210 million, face the prospect of deletion from the index in late June. Historically, both the speculation about which companies will be added or deleted as well as the actual reconstitution can influence the trading volume and stock prices for companies near the threshold. We could expect to see increased volume and possibly short-term stock price volatility during this period. To take advantage of any opportunities provided by this volatility, we announced the initiation of a stock repurchase program, under which the company may repurchase up to 5% of our outstanding shares of common stock or approximately 400,000 shares in the open market in accordance with all applicable security laws and regulations. The extent to which the company repurchases shares and the timing of these repurchases will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations. We believe at appropriate levels, the repurchase of shares of our common stock is a proper and effective use of our capital. A repurchase program could potentially enhance shareholder value in the company by increasing our return on equity and also increasing our net income per share. On November 4 this year, Wayne Bank will celebrate our 150-year anniversary. This is a remarkable milestone for our organization since our founding in 1871. We're proud of the fact that Wayne Bank remains committed to the very same mission and core values that were instituted by our original founders. These include the 4 pillars of success that we still follow 150 years later. To loan money to the local businesses and residents within our communities, knowing that we are only as strong as the communities we serve. To fund those loans with local deposits gathered through our community offices, which we -- which was where we build our relationships. To operate efficiently and effectively as we can. And to utilize our capital to earn a return for our stockholders, our customers and our communities. Throughout the years, Wayne Bank has thrived and remain relevant, and we will continue to do so with whatever the future may bring. We want to thank you for your continued support of our mission. We appreciate your investment in Norwood Financial Corp., and we do appreciate the effort it took for you to join us today. So now if there are any questions, Bill answer -- I will be happy to answer them. Thank you.

There's 1 question came in here, Lew, regarding our new markets in Upstate New York. The question is, do you have any plans to add offices in the area between the Finger Lakes and Cooperstown?

Thank you, Bill. Yes. Thank you for the question. I mean, when you saw that map on 1 of the slides, you could certainly see that there was an area between Geneva and Cooperstown that was graded out with no current locations. So that certainly is an opportunity for us. Of course, there are 3 different ways we can do that -- fill in. One is through de novo offices. If we feel there are any opportunities in any of those communities. The other is to look for any larger banks that may be closing offices and willing to sell those off, which is a good way to get an existing location. And also if there are any other whole bank acquisitions. So we're actually pursuing and looking at opportunities in all 3 of those avenues to fill in that location for us.

And then the next question that's here. I guess it's fitting. So much of our results were impacted by the pandemic and the acquisition. So we had 1 question regarding acquisition, and this 1 really related to the pandemic. So the question is, I've read that several banks are beginning to release some of the allowance for loan losses that they reserve during a pandemic. Have you evaluated this? And what are your plans?

Yes. Thank you for that question. We did make some aggressive provisions and increases to the allowance in 2020, which we thought were extremely appropriate and prudent. And took the allowance now up to a little over $14 million. I mean, we continue to evaluate the adequacy of the allowance on a quarterly basis. I mean, right now, given our market areas, we do feel there is still some stress in our -- some of our businesses, especially related to hospitality. However, we do see those improving. One of the real healthy signs of that improvement is the rapid decrease in the loans that we had to make payment modifications on. We see that come down quite dramatically and that continues to come down on a monthly basis. So as that continues to decrease as vaccination rates increase and other restrictions are lifted, and we start to see a summer in our hospitality industry that is strong, we'll continue to evaluate that on a quarterly basis.

Okay, very good. That's all the questions we have today.

Thank you. I'm told 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 Lewis J. Critelli, William W. Davis Jr. and Meg Hungerford have each been duly elected as directors for 3-year terms. The report further shows the ratification of the appointment of S.R. Snodgrass, P.C. as the company's independent auditors for the year 2021. 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.

I move that the annual meeting be adjourned.

I second the motion.

In favor, all say, aye.

Aye.

Aye.

The motion is carried and this annual meeting is adjourned. Again, thank you all for attending. I do appreciate the effort to attend us at this virtual setting. And we do really look forward to the opportunity where we can once again gather face-to-face. Hopefully, at next year's annual meeting and discuss these topics in person. Enjoy some fellowship and have a lunch together. So -- but until then, thank you, and we do appreciate your investment in Norwood.

This concludes the meeting. You may now disconnect.