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

Hello, and welcome to the Annual Meeting of Shareholders of Norwood Financial Corp. Please note that today's meeting is being recorded. [Operator Instructions] It is now my pleasure to turn the meeting over to Lewis J. Critelli. Lew, the floor is yours.

Thank you. Good morning, everyone. The 2023 Annual Meeting of Shareholders will please come to order. I am Lewis J. Critelli, Chairman of the Board, and I will act as Chairman of the Annual Meeting. I would like to welcome you to our 152nd Annual Meeting into the fourth Virtual Annual Meeting of Shareholders of Norwood Financial. William S. Lance, Executive Vice President and Secretary of the company, will act as secretary of the annual meeting. I would like to introduce members of your Board of Directors present today who are also participating in the meeting by remote communications. Dr. Andrew Forte, Vice Chairman of the Board; Ralph Matergia, Kevin Lamont, Susan Campfield; Dr. Ken Phillips, Joseph Adams, Meg Hungerford, Jeffrey Gilford, Alexandria Nolan; and James Donnelly, our President and CEO. Also joining us today is our former CEO and Chairman and current Director Emeritus, William W. Davis Jr. We posted the meeting procedures and rules of conduct of the annual meeting on the meeting web page for your review. In order to conduct an orderly meeting, we ask you to please follow these rules. I will now turn the annual meeting over to James O. Donnelly, President and Chief Executive Officer, who will conduct the formal business of the annual meeting. Jim?

Thank you, Lew. Good morning, everyone. I would also like to welcome and thank you for participating in our 152nd Annual Meeting. It's our fourth annual meeting in a virtual format. We believe a virtual format makes it possible for more shareholders to access the meeting and to receive information from any location. I appreciate the effort you took to participate in today's meeting, and thank you for joining us. Later in the meeting, the company's Executive Vice President and Chief Financial Officer, Bill Lance will discuss our 2022 operating results. I will then give an update on our first quarter results and our plans for the remainder of this year. At this point, we will begin the formal matters which we must complete 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 9, 2023, the voting record date. In accordance with the bylaws, the company has prepared a complete alphabetical list of shareholders 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 24, 2023, to each shareholder of record as of the close of business on the voting record date. Accordingly, this annual meeting has been duly called. The 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 the Election at this annual meeting. The inspector has taken the 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 the inspector a certificate -- 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 were an outstanding -- that they were outstanding on the record date and entitled to notice of and to vote at this annual meeting. 8,181,001 shares of stock -- common stock. Our records further show that more than a majority of such shares are present at the annual meeting in person or by proxy. The inspector is making an exact count and will submit a formal report of 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 propose to arrange the proceedings so that the vote will not be taken until all items have been moved and seconded. If you have 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 4 directors. In accordance with the bylaws, Joseph W. Adams, Kevin M. Lamont; Dr. Kenneth A. Phillips and Jeffrey S. Gilford have each been nominated by the Board of Directors for election to a 3-year term and until their 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; I declare 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 ending December 31, 2023. The chair will entertain a motion that S.R. Snodgrass, P.C. be ratified as the company's independent auditors for 2023 fiscal year.

I so move.

I second the motion.

The third item of business on the agenda is the approval of a nonbinding advisory resolution on executive compensation. The chair will entertain a motion that the nonbinding advisory resolution be approved.

I so move.

I second the motion.

The fourth and final item of business on the agenda is an advisory vote on whether the advisory vote on executive compensation should occur every 1, 2 or 3 years. The chair will entertain a motion that a vote be taken approving the frequency of advisory votes on executive compensation.

I so move.

I second the motion.

The vote will now be taken on proposals 1, 2, 3 and 4. Remember that if you've already voted by proxy in advance of the meeting, you do not need to vote at this meeting. In order to vote today, please click the voting tab on your meeting web page and follow the directions. [Voting]

Everyone has had an opportunity to complete their voting, I now declare the polls booked. 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 2022.

Thank you, Jim. Good morning and welcome to our 2023 Annual Meeting. We appreciate your attendance at this virtual meeting. As Jim mentioned, I will review our results from 2022, and then he will bring you up to date with our first quarter financial results and other recent developments. Before I start, here's our legal disclaimer and any forward-looking statements that Jim 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 2022. For the banking industry as a whole, 2022 was a very successful year, and our results reflect the positive effect of rising interest rates as well as several onetime positive events. From a balance sheet perspective, stimulus funds to enter the banking system as deposits during the pandemic began to run off which resulted in a decrease in total deposits and total assets. Additionally, over $15 million of PPP loans were paid off in 2022, which also reduced our asset size. For the year, we grew our loan portfolio by $119 million, utilizing much of the remaining excess liquidity that was generated in the previous years. This redeployment of low-earning overnight liquidity into higher-earning loans, combined with the positive effect of rising interest rates contributed largely to our success in 2022. For the year ended December 31, 2022, net income totaled a record $29.2 million, which was $4.3 million higher than the previous record of $24.9 million we earned last year. The improved earnings were due primarily to a $3.1 million increase in net interest income, combined with a $3.3 million reduction in the provision for loan losses. Another area of improvement was other income, which increased $1.6 million over the prior year, and that was due to income recognized on previously acquired purchased impaired loans that were carried at a discount as well as a $427,000 gain on the sale of a property that we carried in foreclosed real estate owned. So you can see that a combination of things fell into place during 2022, which resulted in a record year for the company. Our fully diluted earnings per share were $3.58 in 2022, and that compares to $3.05 in 2021. Our return on assets for the year was 1.43%, and our return on equity was 16.11%, and each of these key measurements increased significantly over the 2021 levels. Cash dividends per share were $1.13 in 2022 compared to $1.06 in 2021. And so when we increased the dividend in December, the fourth quarter dividend was 3.6% higher than the same period of 2021 and represented a dividend yield of 3.47% based on the closing price of our stock on December 31, 2022. And this was our way of sharing the success we experienced in 2022 with our shareholders. In 2022, we returned 31% of our net income to shareholders through cash dividends, and that compares to 26% for our national peer banks and 33% for all Pennsylvania banks. When we look at the balance sheet, total assets decreased $21 million in 2022 and ended the year at $2.0 billion. And as I said earlier, much of the runoff can be attributed to economic stimulus funds that have worked their way through the system. Our total loans increased $119 million in 2022, including a $90 million increase in retail loans and a $29 million increase in commercial loans. Total deposits decreased $29 million, which, as I said, includes a significant portion related to economic stimulus. Another area that we maintained focus on last year was our credit quality metrics. And after excluding the $6.3 million of purchased impaired loans, our strong credit quality metrics continued into 2022, including our ratio of nonperforming assets to total assets, which was 0.07% on December 31, 2022, and that's compared to 0.12% at the end of 2021. This credit quality metric also compares favorably to our peer banks. We reported a 0.20% nonperforming ratio. Another important measurement for banks is the ratio of the allowance for loan losses to total nonperforming loans. At year-end 2022, our reserve for loan losses totaled $17 million and was 1,527% of our nonperforming loans, which means we had over $15 reserved for every dollar of a problem loan. During 2022, we added $900,000 to our allowance for loan losses from earnings or our net charge-offs were limited to $343,000. Also, we were able to reduce our loan loss provision for the year as additional reserves for potential losses related to the pandemic were reversed in 2022, since the actual losses were much less than original estimates. During 2022, changes in interest rates and the level of assets and liabilities that we're repricing had a significant impact on our net interest income. Our yield on interest earning assets increased 9 basis points to 3.90%, while our cost of total interest-bearing liabilities increased 10 basis points to 0.52%. As a result, we recorded a net interest margin of 3.53% in 2022, which was slightly better than the 3.50% we recorded in 2021. Our net interest margin of 3.53% was higher than the 3.46% recorded by our national peer group and significantly higher than the state average of 3.27% for the year. Our ability to reprice assets proportionate to rising funding costs helped us to improve our net interest margin and contributed to the $3.1 million increase in net interest income. We also have to keep in mind that as we continue to grow, so do overhead costs. Operating expenses increased by $2.4 million last year or 6.3%, and that was due primarily to rising salaries and employee benefit costs. That said, our efficiency ratio was 51.9% in 2022, which was similar to the 51.8% reported in 2021. And what the efficiency ratio does is measure the cost of generating $1 of revenue, so it cost us approximately $0.52 in 2022. By comparison, our peer banks nationally spent $0.59 in 2022 to generate that same $1 of revenue. So you can see that although our expenses have increased due to our growth we've continued to operate very efficiently and continue to outperform our peers in this area. Next, I'd like to address the strength of our capital. 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. And as I've said many times before, has been the strategy of this company to maintain high levels of capital, which ensure the safety of the company and ultimately your investment. And capital levels took on added attention in 2022. That's a sudden and significant increase in interest rates had a negative impact on the value of securities portfolios. And while we certainly shared in the pain of this temporary event, our tangible capital was $167 million at year-end 2022 and regulatory ratios were unaffected by the unrealized losses. Additionally, during 2021, we had announced a share repurchase program to buy back up to 5% of the company's outstanding shares. As a result, over 94,000 shares of stock were repurchased in 2022. So to recap our accomplishments from 2022, we reported record earnings with a return on assets of 1.43% and a return on equity of 16.11%. We grew our loans by 8.8%. We increased the cash dividend by 3.6% in the fourth quarter. We maintained our strong credit quality metrics, and we accomplished all of this while managing through the most significant increase in interest rates by the Federal Reserve in over 40 years. That is a very impressive list of accomplishments, and we're proud to report on each and every 1 of them. We remain optimistic to face the challenges that the future holds and look forward to the opportunities. Thanks for joining today to listen to our story. And now Jim will update you with our first quarter results and provide insight to other current developments.

Thank you, Bill. Thank you to all the employees who worked so hard to make that record year occur. We recently announced earnings of $5,782,000 for the 3 months ended March 31, 2023. Earnings per share on a fully diluted basis were $0.71 for the 3-month period ended March 31, 2023 compared to the $0.87 in the 3-month period ended March 31, 2022. The annualized return on average assets was 1.13% in the first quarter of 2023, and the annualized return on average equity was 13.61%, this compares to 1.39% and 14.22% respectively, in the first quarter of 2022. Total assets were $2.104 billion as of March 31, 2023. First quarter loans totaled $1.536 billion with deposits of $1.756 billion and stockholders' equity of $176.4 million. Net interest income on a fully taxable equivalent basis totaled $16.1 million during the 3 months ended March 31, 2023. During the first quarter, the annualized net interest spread FTE decreased to 2.83% in 2023 compared to 3.22% in the quarter ended March 31, 2022. Other income totaled [ $1.9 million ] for the 3 months ended March 31, 2023. Operating expenses totaled $10,400,000 in the 3 months ended March 31, 2023. During the first quarter, total loans increased 16.7% annually compared to 7.7% during the same period in 2022. Our total deposits increased 6.6% during the quarter compared to 5.7% during the same period last year. Our core operating expenses remain well controlled and our capital base remains well capitalized -- above well-capitalized targets. Additionally, our credit quality metrics continued to improve during the first quarter, which we believe should benefit future results. 2022 was a year of positive change and progress for Wayne Bank, especially within our leadership team. During the second quarter, Lew Critelli retired from his position of President and CEO of Wayne Bank and was appointed Chairman of our Board. Concurrently, I was hired as the new President and CEO. I came to Wayne Bank with over 30 years of banking experience, most recently with Bangor Savings Bank in the State of Maine. At Bangor, I served as Executive Vice President and Chief Commercial Officer, and have extensive experience and leadership skills in many banking areas. It was my honor and privilege to be asked to lead Wayne Bank and to join this team has been one of the best moves in my career. Our employees, our directors, our shareholders and our community members have made me feel welcome from the start, and I'm so thankful to have this opportunity to work with such an incredible group of people. One of last year's most exciting achievements was the relocation of our Penn Yan Community office in November. We designed and constructed this new building from the ground up to offer our customers and employees a modern and inviting space. It has off-street parking, drive-up banking and ATM facilities, a bike parking rack and even a hitching post for our Amish and Menonite customers. We held a ribbon-cutting in December with the [indiscernible] County Chamber of Commerce to celebrate the beautiful new space and our commitment to the community. I am also happy to share that we ranked as 1 of the top 100 performing banks in the country by Bank Director Magazine in 2022. Ranking 71, Wayne Bank was evaluated on its profitability, capital adequacy, asset quality and total shareholder return. We have prostate been included in this prestigious list of financial institutions. Technology continues to be a major focus for Wayne Bank, and our goal is to make it easy for our customers to do their banking at any time of day from nearly any location in the world. Part of the change in efficiency ratio is due to our investment in technology this year. We hope this will pay off for us in the long term with more efficient operations. We are implementing systems that make it easier to bank with Wayne Bank by removing friction for our customers, whether they are opening deposit accounts or applying for small business loans online. We are implementing management software that will help us more efficiently and effectively manage our business. We are giving more controls to our customers through their mobile devices. We offer a full suite of convenient digital banking services for our customers and have launched a new service in the second quarter called Card Hub. Card Hub allows mobile banking users to easily access their debit cards at any time from the convenience of their mobile device. Its features include instant alerts when the card is being used the ability to turn it off as it is lost or stolen and the option to create travel plan notifications. We now have over 5,000 customers enjoying the benefit of the convenient service that puts the controls in the palm of your hand. Usage of our digital banking devices continues to grow as a whole and we are now -- have over 46,000 mobile banking users and over 7,500 consumers and businesses utilizing the convenience of mobile deposit capture. These numbers show that our customers are quickly adopting the solutions that they crave. We believe that by implementing all of these convenience services, we will be able to offer our customers high touch, and high-tech solutions with an exceptional customer experience. Along with promoting the benefits of technology, we feel that it is our responsibility to help protect our customers from fraud and educate them about its red flags. We take this mission very seriously and last year, joined the American Bankers Association along with 1,000 banks from across the country to promote the industry-wide campaign called banks never asked that. Its goal is to educate consumers on the persistent threat of phishing scams scans using engaging video and social media content. We look forward to continuing our participation during this year's campaign. We achieved a record number of loan originations in 2022. Our commercial lending department produced over $188 million in loans in 2022, with $54 million produced to date in 2023. These loans have helped our local businesses expand and thrive. We provide funding to municipalities and help our businesses create jobs throughout our 10 County market area. We were also very effective in our community office network, generating 1,237 mortgages, home equity and personal loans totaling just under $100 million. All of these loans helped our customers build and purchase new homes, make home improvements, fund education, purchase cars and boats. As we look to the second half of 2023, we are inspired by many of the positive business developments throughout our market. For the third consecutive year, Northeastern Pennsylvania was recognized as one of the best locations in the Northeastern United States for economic development projects according to the Governor's Cup Awards by Site Selection Magazine. Here in Wayne County, home sales, Kitty Hawk Technologies was recently awarded a $25 million contract by the Navy to provide mission engineering and analysis support. Earlier this month, CVS Health announced that they will create and retain 912 jobs as part of the planned expansion of the company's handover township facility. Also in Luzerne County, SCHOTT glass developed products that were used by the National Ignition Facility of the U.S. Department of Energy to create the world's first controlled fusion ignition, marking a breakthrough for clean energy, which Time Magazine called a huge milestone. In Lackawanna County, Geisinger, purchased the former Ice Box complex with plans to expand their comprehensive outpatient services in Lackawanna County. In Monroe County, the Northeastern Pennsylvania Industrial Resource Center celebrated the opening of its Monroe County office in Effort. The new office will support the manufacturing industry in Monroe County, which provides reliable and steady employment to nearly 10% of the region's workforce. In Delaware County, the Inn at Kirk side in Roxbury, will be a welcoming destination hotel, restaurant, school and hospitality incubator providing key support for the tourism industry in the region. Drawing students from nearby colleges, the Inn will provide postgraduate experience for paid fellows in addition to encouraging new businesses and boosting the economy. In Sullivan County, the destination golf course on Tennanah Lake will be purchased and numerous updates are planned for the motel, restaurants, rentals and more. In Ontario County, the Geneva downtown and Lakefront property continued to receive enhancements resulting from the New York State downtown revitalization initiatives. Wayne Banks, Bank of the Finger Lakes brand will once again be present -- the presenting sponsor at the Glorious Garlic Festival located on the Geneva Lake Front. The festival had a record attendance of over 10,000 people in 2022. And on a side note, our employees had a lot of fun volunteering and helping out that day. These develops and many others throughout our market forecast growth for our local economies and represent a healthy commercial loan pipeline for Wayne Bank. I believe that these market forecasts, combined with our strong credit metrics, along with implementing all of the convenience services differentiate us from our competition. We will deliver a high-tech and high-touch exceptional customer experience to every customer. I will continue to partner with our team to build lasting relationships with our customers, help our local businesses grow and thrive, reinvest in the communities we serve and expand into new markets and reward our shareholders. Thank you for your support. Bill and I will be happy to answer any questions you may have.

One question that came in here addresses our growth. The question is what plans or prospects does the bank have to grow?

So first, we plan to continue to grow in the markets we already serve, and we are continuously looking at the other markets that might about our markets to see if it's a good place for us to be and we're always open to the opportunities that might come with acquisitions.

That's well said, and hopefully, that addresses the question. Another question here, it's fairly timely. Should we have any concerns about Wayne Bank after the recent bank failures? Do you have any of the same problems that caused issues at those banks?

Yes. The 2 banks that failed were unique in the banking space and had unique business models that don't reflect most of the banks. Wayne Bank has been around for over 150 years. And our investments, unlike those 2 banks have failed are in our neighbors. We invest in small businesses in town. We invest in people's homes. And we're not participating with the crypto business or with the venture capital businesses that were unique to those 2 banks. And when we look at -- you've reported, Bill and I've also commented on, we are well above well capitalized. And so I'd say we're a strong bank and we're well on our way to our next 150 years of successfully serving our communities.

Very good. That's all the questions we have here this morning, Jim. So we can move on with our script.

Thank you, Bill, and thank you for the questions, and appreciate everybody joining us today. The inspector has completed his count and provided me with a report subject to final audit. The report of the inspector confirms that a quorum is and has been in attendance at the Annual Meeting for all purposes. It also shows that Joseph W. Adams, Kevin M. Lamont, Dr. Kenneth A. Phillips and Jeffrey S. Gilford 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 2023 fiscal year and the nonbinding advisory resolution on executive compensation. The report lastly shows that a plurality votes cast regarding Proposal 4 and were voted in favor of holding advisory votes on executive compensation every 3 years. The report of the inspector is hereby accepted and approved and will be attached to the minutes of the annual meeting. There being no further business, a motion to adjourn is in order.

I move that the annual meeting be adjourned.

I second the motion.

Those in favor signify by saying, A or texting A. [Voting]

A.

A.

Those oppose, say or text No. [Voting]

The motion is carried and the Annual Meeting is adjourned. Thank you all for attending our Annual Meeting.

This concludes the meeting. You may now disconnect.