Norwood Financial Corp Q3 FY2025 Earnings Call

Good day, and thank you for standing by. Welcome to the Norwood Financial's Third Quarter 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Kristen Lancia, Vice President and Marketing Manager. Please go ahead.

Thank you, Tanya. Good morning, everyone. Welcome to our Q3 2025 earnings conference call. With me today are Jim Donnelly, CEO; and John McCaffery, CFO. The press release we issued earlier this morning together with the presentation material that accompanies our remarks, are available on the Investor Relations section of our web page. Comments made by any participant on today's call may include forward-looking statements. These statements are subject to various risks and uncertainties and other factors that are difficult to predict. Actual results may differ materially from those expressed or implied, and we assume no obligation to update any forward-looking information. Please refer to our most recent Form 10-K and other subsequent reports filed with the SEC for more information about risks related to forward-looking statements. During our discussion, we may refer to certain non-GAAP financial measures. These measures are useful for analysts, investors and management to evaluate ongoing performance. A reconciliation of these measures to GAAP financial results is provided in our presentation materials. I will now turn the call over to Jim.

Thank you, Kristen. Good morning, everyone. Our teams delivered strong results in the third quarter, growing assets by around $100 million year-to-date, while expanding our margins. This is the result of good growth in loans and strong growth in deposits. Our credit metrics remained strong while delivering this growth. Our yield also continues to benefit from the bond portfolio repositioning we did in the fourth quarter of 2024. Our fee income has also grown year-over-year as we focused on our wealth management, trust, and other fee income businesses. It was a good quarter for us, and we entered the fourth quarter on solid footing and with good momentum. I am proud of the performance of the entire Norwood team as they remain focused on delivering the products and services that help our customers achieve their goals, truly living out our tagline, 'every day better.' This embodiment of our mission within a high-performing culture distinguishes us and gives me belief that we are on our way to creating a bright future for our customers and shareholders. Looking at our year-to-date performance, it is clear that our results in the third quarter and throughout 2025 have benefited from our repositioning of our bond portfolio that was completed in December of 2024. Recall that we successfully completed a capital raise through the issuance of common stock to support our growth, improve our financial position through the repositioning of our available-for-sale securities portfolio, and increase our earnings potential. I am pleased to say that we achieved all of these objectives. The increased earnings potential is evident in the improved yields we have generated in 2025. With a stronger financial position, we have been able to better serve our customers across our footprint with loans that enable them to purchase homes or cars and start or expand their businesses. We have filed all regulatory applications necessary for approval of our merger with Presence Bank that was announced on July 7. The applications are pending. Please refer to the Investor Relations section of our website for more information. During the third quarter, we completed the leadership transition in our Board of Directors, and added two new directors, strengthening the Board by bringing on new talent as we embark on the next phase of our growth. This was a bittersweet transition for me and many of the employees of Wayne Bank as we said goodbye to our long-term colleague and friend, Lew Critelli. Lew is my predecessor and served as Chairman of the Board since 2022. He had a tremendous impact on the bank and me personally, as well as many employees over his 30 years of dedication to the company. It would be hard to overstate the impact that he has had on making us the company that we are today. His legacy will carry on, and he will be missed. On behalf of the rest of the Board and the entire company, we wish Lew all the best in his retirement. We now move forward with Dr. Andrew Ford leading the Board as Chairman and Kevin Lamont replacing him as Vice Chairman. These two long-serving directors ensure that the Board is in great hands under their leadership. We also welcomed two new directors to the Board, Marissa Nacinovich and James Shook, both outstanding leaders within their respective fields and shining examples of individuals committed to serving their community. I'm excited about the changes to our Board and have every confidence that they will be valuable advisers as we move forward. While we have built a strong financial position and delivered strong financial results, it is our employees that truly make us unique. They continue to embody our tradition of community involvement, donating time and money to causes that make the places we live and call home better. I am proud of all they do for our communities and thankful for their dedication and commitment. In conclusion, we delivered good results as we also executed on strategic initiatives that have lifted our team and our brand. We rolled out our new brand this year; the eye-catching marketing materials are just a small piece of what we have delivered with this rollout. We have worked over the past two years to improve our culture with our 'every day better' focus. We have united our three brands into one. Our customers are rating their experiences with an average of 4.7 stars. Our employees have a new lift in their step as we recognize them for delivering on everyday better service. This is the secret sauce behind these good results. I am proud of our team and their commitment to our customers, our communities, and each other, and in returning good results for our investors. I will now turn the call over to our CFO, John McCaffery, to walk us through the results.

Thank you, Jim. Good morning, everyone. The third quarter results continued an improving trend that began with our balance sheet repositioning in December 2024. Our net interest margin increased by 20 basis points on a linked-quarter basis and resulted in a $1.4 million increase in net interest income versus the second quarter. This was due to asset yield increasing while at the same time, liability costs decreasing. Our quarterly results included $568,000 in merger charges, and we have included adjusted return metrics in both the press release and the presentation to show our performance ratios and the impact of these expenses. Additionally, our CECL model calculated a release of the allowance for credit losses this quarter, so we included pre-provisioned net revenue numbers as well. The ACL release of $502,000 was mostly driven by several loans moving out of nonaccrual status. Our unadjusted pre-provision net revenue increased by 15% on a linked-quarter basis and 19% adjusting for nonrecurring merger charges. Noninterest income for the nine months ended September 30 increased 9% over the same period last year, with growth coming from our wealth and trust activities, as well as increased gains on loan sales. Quarterly expenses were up 7.5% over the third quarter of 2024. Excluding merger charges, the increase was only 2.8%. Credit metrics continued to improve year-over-year as nonperforming loans as a percent of total loans decreased, and our reserves to nonperforming assets also increased. The overall themes of the quarter were improving net interest margins and benign credit, combined with measured expense control. These themes have aligned to deliver a solid quarter and leave our company well positioned for the future. Jim and I will now be happy to answer any questions you may have. Operator, please provide instructions for asking questions.

And our first question will come from Tyler Cacciatori of Stephens.

This is Tyler on for Matt Breese. Can you just talk about the ability to further reduce deposit costs from here with another two rate cuts expected and maybe some sense for the full cycle beta versus the hiking cycle?

Sure. One thing we have is about $400 million plus in municipal deposits. A lot of those are tied to market rates, so they will come down with market rates on a step-by-step basis. We are very aggressive in moving other specialized rates down with the move in Fed rates. I would say that the beta on the way down is going to be somewhere in the neighborhood of 50%. We still have room, and we have been showing, if you look at the presentation, we've seen even before the Fed cut that we have seen our deposit costs coming down over time.

And then can you remind us how much is in munis and what's roughly the high watermark versus the low?

We're probably right now at the high watermark, which goes from between $450 million down to $400 million. We have New York and Pennsylvania municipal deposits, so they will offset each other as far as the timing goes on when tax receipts come in. Even after tax receipts come in, some of the other municipalities that receive the tax money will see money come in gradually.

Yes. We also have some school districts that work on a slightly different cycle as well that are in that mix. So the highs and lows are a little less dramatic than they might otherwise be.

Great. And then along those same lines, can you discuss your NIM outlook and where you think you start seeing some stability here?

That's a tough one, Tyler. Thanks. Our NIM outlook is still positive. Our loan book is still pricing up. Although that has been leveling off a little bit. I think I had it at 3.63% for this quarter, and I hope we can start reaching towards 4%, but I'm not sure where we go from there over the next few quarters.

Great. And if I could just squeeze one more in. The window here for M&A certainly feels a bit more open. Can you maybe just talk about where you stand from here? And when the update on the deal close is expected?

We are opportunistic on M&A, and we'll look for strategic opportunities to continue to evaluate what's out there and how it would be a strategic alignment. Regarding our current Presence Bank transaction, we're waiting for regulatory approval and don't really have a date that we know will come through. But looking at the overall environment and how other deals have proceeded, we feel confident that things will go smoothly.

Yes. If you look at the calendar, we don't see it would be very difficult for us to get it done in Q4. There are other operational and accounting issues with closing in December. At this point, they haven't mailed their proxy out yet. We think that will be happening soon. And when that happens, we can start the calendar accounting. On a parallel path, the regulators have been asking questions but haven't given us any flags, yellow or red, at this point.

Our next question will be coming from Ross Haberman of Rlh Investments.

I just have a quick question. Assuming we get another 0.25 drop in rates in the next month or so, could you tell us how accretive that will be to your margin or your spread?

I mean we have a lot going on underneath in the portfolio. Just by itself, without any comment on the change in the shape of the yield curve out past a year, it would be accretive to us in terms of reducing our cost of deposits. However, I hesitate to specify a dollar amount or a basis point amount at this time, depending on timing and where in the quarter it happens. Then we'll get into the first quarter when hopefully we will be closing on a transaction, and there will be a lot of noise then as well.

And just one follow-up question, if I may. Could you tell us where you're seeing the best loan growth and demand today? Which category, and do you see that continuing into the fourth quarter, or is the situation in D.C. and the expectation of lower rates mitigating loan growth?

Yes, Ross, good question. Our loan growth this year has been broad across different categories. We haven't tipped into one category or another as the major growth factor. The only area where we may have seen a slight shrinkage is in our agriculture percent of our portfolio, which may have gone from about 9% to about 8%. Our commercial real estate breakout remains well within regulatory guidelines and has lots of room. So there is no one category driving it. Our consumer lending has been good and strong and is performing well across our portfolio for the various types of commercial, including commercial and industrial loans.

And I'm showing no further questions at this time. I would now like to turn the call back to Jim for closing remarks.

Thank you, and thank you all for joining us today. We're really pleased to be discussing and delivering the kinds of results that we have today. It's the employees working hard every day to take great care of our customers that make these numbers possible. So thank you for calling in today, and we appreciate it. We look forward to talking to you soon on our next quarterly release.

And this concludes today's conference call. Thank you for participating. You may now disconnect.