I have written a few articles on Norwood Financial (NASDAQ: NWFLlisten)) the holding company of Wayne Bank, a bank operating in New York and Pennsylvania. In my most recent article, I started considering Norwood Financial for its dividend yield as the bank was earning around 4% with a payout ratio of less than 40%. The quarterly dividend now represents a yield above 4.5% as the share price has fallen, so I wanted to check if now would be a good time to add Norwood to my portfolio.
The first quarter of the year was very satisfactory
The bank performed well in the first quarter. It was able to keep its interest income stable at around $17.3M and, as interest expense decreased by a few hundred thousand dollars to $1.25M, net interest income went from just under $15.8m to $16.1m. That’s up 2% and probably as good as it gets for the bank. Rising interest rates should help improve its net interest income profile going forward.
The bank also reported total non-interest income of $3.3 million and total non-interest expenses of just under $10.2 million, for a net total of non-interest expenses interest of approximately $6.8 million. That’s a better achievement than the $7.5 million in the first quarter of last year, although that was caused by some one-time items, so we shouldn’t read too much into it.
In any case, it gave a nice boost to pre-tax income which jumped to nearly $9 million, also helped by lower provisions for loan losses, with the amount of provisions falling by about 80 % to just $300,000 in the first quarter. Net earnings were approximately $7.1 million or $0.87 per share.
This means that the quarterly dividend of $0.28 per share is largely covered and the payout ratio is just over 30%. That being said, keep in mind that some one-time items contributed to a strong quarterly result, so normalized earnings will likely be a bit lower going forward. But in any case, a good quarter for Norwood Financial.
There is no need to worry about the low provision for loan losses, as the vast majority of loans are outstanding. Looking at the breakdown below, less than $9 million of the $1.37 billion loan portfolio is classified as past due or impaired. With over $16 million in loan loss provisions and knowing that the bank will still be able to recover some of the $9 million in acid loans, I still think the situation is healthy and Norwood is not too optimistic at this point.
Despite the strong earnings result, book value per share declined quite dramatically
You would think that if a bank reports EPS of $0.87 and pays $0.28 per share in dividends, it would see its book value increase by $0.59/share. Since Norwood has 8.2 million shares outstanding, you would expect to see the book value increase by nearly $5 million.
But as you can see below, on the liability side of the balance sheet, that didn’t happen. Not only did the book value not increase, but it actually fell almost 10% to just under $187 million.
Due to the rise in interest rates, the bank’s investment securities lost part of their value. In the first quarter of 2022, the bank saw its unrealized losses on the securities portfolio increase by more than $27 million, while unrealized gains decreased by $2.6 million. The combination of the two weighed on the bank’s book value.
So, despite strong first quarter earnings, Norwood saw its book value per share decline from about $25 to about $22.8. And if you remove goodwill and other intangibles from the equation, the tangible book value per share has dropped to just over $19.
That would be good in itself. But with more pain expected in the second quarter (interest rates continued to rise and equity values continued to fall), I think things will get worse before they get better.
And that’s the main reason I’m on the sidelines when it comes to Norwood Financial. I think the bank’s earnings are excellent and if it weren’t for the fluctuations in the bank’s book value, I would consider this a great opportunity to go long. But I’m waiting to see how book value evolves in the second quarter and how that will potentially affect capital ratios going forward.