Norwood Financial Corp. (NWFL) Q3 2026 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Northwood Financial Corp. Third Quarter 26 Earnings Conference Call. At this time, all participants are in listen only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star-11 on your telephone. Will then hear an automated message advising your hand is raised. To withdraw your question, please press star-11 again. Please be advised that today's conference is being recorded. I would like to hand the conference over to your first speaker today, Mackenzie Jackson, corporate secretary. Please go ahead.

Thank you, Marvin. Good morning, everyone, and welcome to our third quarter 26 earnings conference call. With me today are Jim Donnelly, our President and CEO and John Martin McCaffery Jr., our CFO. The press release we issued earlier this morning, together with the presentation with material that accompanies our remarks, are available on the Investor Relations section of our webpage. 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 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 risk relating 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. I will now turn the call over to Jim.

Thank you, Mackenzie. Good morning, everyone. We delivered another strong quarter. With record net income, and net interest income. A 4.01% net interest margin and continued improvement in operating leverage. These results demonstrate the earnings power of our expanded franchise following the Presence acquisition and, importantly, the underlying trends in the business remain strong. The third quarter strong results are delivered by the entire Norwood team who continue to perform with discipline and excellence. These strong results are delivered while we take great care of our customers, support our communities, and make a superior workplace for our employees. Net interest income improved 3.04 thousand% over last year to $28 million driven by strong performance plus the impact of Presence Bancshares acquisition. Net interest margin was 4.01%, up 38 basis points. Importantly, our improved earnings are translating into strong net returns with an ROA of 1.6% and a return on average tangible equity of 18%. I am pleased with our results and proud of the continued performance of our team as they focus on taking care of our customers. Delivering great experiences, and helping them achieve their financial goals. I would like to provide an update on a customer bankruptcy we discussed during our second quarter call. Recall that we recorded the charge off in the second quarter with that credit. In the third quarter, 1 of the businesses held by this borrower were purchased by a new entity. As a result, we received past due interest and related fees that we did not expect to collect. Improving our results this quarter. John will share some of the details in a few minutes. In addition, the loan purchase resolves a significant amount of our exposure to the borrower, derisking our balance sheet. This is a positive outcome for us and for our shareholders. I am grateful for the work done by those involved to reach this point. We continue to actively manage the remaining exposure with a focus on minimizing risk and maximizing recovery. Next, I would like to review our 2 2026 strategic priorities. With the completion of the Presence Bancshares integration, we continue to explore ways to work smarter across all locations and functions. As we do, we are identifying best in class practices and policies that will enable us to better serve our communities. Our second strategic priority is to increase operating efficiency and elevate the customer experience using AI. Moving beyond experimentation with AI and embedding it into specific workflows. We are now expanding the 3-year AI road map across additional departments. Our third objective is to strengthen our talent pool and deepen our leadership bench. As we continue to grow both organically and through M&A, it is important that we retain the culture that has contributed to our success. This ensures that our commitment to community involvement and customer service is durable. I would like to highlight a few appointments and promotions from the quarter. Stephanie Abram has joined as Senior Vice President and Commercial Team Leader. Responsible for leading and expanding our commercial lending team. She will be taking over in the Luzerne and Lackawanna markets as Vinny Obel retires late in October. This key activity has deepened our presence in the communities we serve. Also, we are our commercial lending team, I want to congratulate Tyler Cacciatori and John F. Carmody on their promotion to commercial team leaders. Where they are focused on serving business and commercial customers in their regions. Lastly, we have expanded the role of Joe Mahon, Executive Vice President and Market Executive to include the Greater Scranton Market in addition to the New York territories he currently oversees. In this role, Joe will continue leading commercial lending and deposit growth initiatives while working closely with customers, businesses, and community organizations through his expanded market area. I am excited about all of these appointments and look forward to their continued contribution to our success. Our fourth and final priority is to ensure that everything we do is to increase shareholder value. We are executing with discipline our clear growth strategy. This is built on organic growth, strategic M&A and strong execution. All are evident in our results this quarter. We have grown organically, expanding our presence in established markets and serving our communities. Our fee income strategy embedded in there. 1 example of this growth has been achieved in our brokerage business. Earlier this year, we transitioned our brokerage and investment platform platforms to Cetera Wealth Services. This enabled us to enhance our wealth management offerings, improve our service capabilities for our customers, and keep trusted relationships. As a result, our brokerage business improved 41% year-over-year last year. Driving growth in our non interest income. We also have grown through M&A through the successful integration of our most recent acquisition, Presence Bancshares. On top of this growth, we are executing well with a diversified portfolio to minimize risk. Disciplined underwriting culture to sustain high credit quality, and financial discipline to manage the balance sheet exposures. This strong execution we demonstrated in our ability to navigate the borrower bankruptcy discussed earlier, All combined, we believe the strategy will enable us to create sustainable value. We have now surpassed $3 billion in assets but size alone is not our objective. Our goal is to build a high performing franchise that compounds earnings and tangible book value per share while generating attractive returns on shareholder capital. I will now turn the call over to John to walk us through our third quarter results.

Thank you, Jim. Good morning, everyone. Building on Jim's comments, I will focus on the financial results and some key performance metrics for the quarter. The third quarter demonstrated the earnings power of our expanded franchise following the Presence Bancshares acquisition. And the completion of our core system conversion. We delivered record earnings while continuing to execute on our strategic priorities. Net income for the quarter was $11.8 million or $1.08 per diluted share, On an adjusted basis, this compares with net income of $8.9 million or $0.94 per diluted share in the third quarter of 2025. Return on average assets was 1.60%, and return on average tangible equity was 18.5%. Net interest margin expanded to 4.01%%, up 38 basis points from a year ago, 11 basis points from the second quarter. The quarter did include a 1-time benefit to interest income related to the resolution of the borrower bankruptcy discussed by Jim. Including the collection of past due interest and fees. Even that benefit the underlying margin trend remained positive, supported by disciplined balance sheet management and lower funding costs. At quarter end, tangible book value per share was $22.35 down slightly from the second quarter due to a decline in other comprehensive income as rising interest rates depressed the market value of our available for sale portfolio. From an operating performance perspective, pre provision net revenue reached $15.4 million up 53% from $10 million in the prior year quarter. And 13% from $13.6 million in the second quarter. The improvement reflects the benefit of a larger balance sheet stronger net interest income generation and continued operating leverage across the franchise. Turning to credit quality. The resolution Jim described reduced our exposure to the borrower and contributed to a significant improvement in nonperforming loans during the quarter. Provision for credit losses was $100 thousand in the third quarter compared with $1.9 million in the second quarter. Which included the impact of the borrower bankruptcy. Our allowance for credit losses totaled $25.1 million at quarter end, or 1.1% of total loans. On the balance sheet, total assets were approximately $3 billion at quarter end. Loans increased to $2.29 billion and deposits totaled $2.51 billion. Below the margin line, merger related expenses is now essentially behind us. We recorded no merger related expenses in the third quarter, compared with $53 thousand in the second quarter and approximately $4.9 million in the first quarter. This cleaner expense base gives us a better view of the earnings capacity of the combined franchise. There were some unusual items during the quarter, including the favorable resolution of a portion of the borrower exposure, but the broader story is strength of the underlying franchise, record earnings, continued margin expansion, strong operating leverage and tangible book value of $22.35 per share. We believe these trends position us well to continue building shareholder value. Jim and I will now be happy to answer any questions you may have. Operator, please provide instructions for asking questions.

Thank you. At this time, we will conduct a question and answer session. As a reminder to ask a question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Please standby while we compile the Q&A roster. And our first question comes from the line of Matthew Breese of Stephens. Your line is now open.

Hey, good morning.

Hey, Matthew.

Good morning, Matthew.

Good morning. John, Jim, how much is the $28 million in net income and the 11 basis points of NIM increase came from the bankruptcy settlement? And I am curious how you guys feel about the 4Q 2026 NIM and beyond now that we are in a kind of a different kinda great hiking cycle.

Sure. There was about $400 thousand in the NIM related to that. I mean, there was did some debt financing. There were some fees associated with that. And it also crossed over the quarter. So and things were facing. But that is where we are kind of putting a pin in $400 thousand in that number for the quarter. Our new loan volumes are going on at higher than the portfolio rates. We have seen some of the fourth quarter. Sorry, some of the third quarter was some mix of some public funds coming in at a little bit lower rate, but also our retail CDs dropped throughout the quarter as well. And so that is you know, showing some there is a little bit of room on the liability side, the funding side there. So I think we are in a good spot for the margin. I would not, again, expect a lot of expansion as we continue into this rate hike cycle. But the asset side seems to be holding up pretty well for us so far.

Understood. Okay. And then know, the remaining $7 million tied to this borrower, what is the status on those? Are they performing, nonperforming? Underlying collateral, do you do you feel like, you know, if there is much, if any, kind of lost content tied to those?

Well, we put them on nonaccrual as soon as the bankruptcy was announced. They are still in nonaccrual, and they are still in our numbers in nonaccrual numbers. Wanna see what they are. Yeah. I. They are they are both real estate secured and we. The loan-to-values on them are okay. We think the workout will take a little bit longer because of that going through the process, the bankruptcy on the real estate side of that borrower is going to take a little longer than the operating businesses that I think they have already worked all the way through. So we will we will probably wind up carrying these a little bit longer. But do not foresee a large loss. 1 of the loans we are a participant on, so, really, it is the lead bank who is kind of taking the point on that.

The other 1, we are the sole Yeah. Lender on.

Got it. Okay. Last 1, I will hop back into the queue. You know, fee income was positive on a few different fronts this quarter. Service charges took a big step up. Wealth management was positive. Just curious how sustainable this level of fee income is as you look out.

it is been a-- I think I think we have talked about it in the past, Matthew. it is been a strategy of ours for years to increase our fee income as a percent of income. And couple years ago, 1 of our board members left the board to take over the brokerage side, I talked about his the results he is been able to drive in his department. And the other areas, including our debit revenue is up, We were underperforming. We were below the peer. We are working our way toward the peer. So from what I can see in the fee income, I think it is sustainable and hopefully able. Thank you.

1 moment for our next question. Our next question comes from the line of Daniel Cardenas of Brean Capital. Your line is now open.

Good morning, guys.

Hey, Daniel.

Congrats on a good quarter. Just wanna I wanna get some thoughts here on the loan growth we saw this quarter. You know, maybe we can get a little bit of color as to what impact of any paydowns and payoffs had, and then if you could talk a little bit about how the pipeline looks coming into Q4.

We did have more paydowns and payoffs than expected. And so that softened the loan growth. Number, but it was loan growth on its own was good. And our pipeline going into Q4 is strong. Also in the quarter, I guess, as we see loans come up for repricing, most of them are repricing upwards. You know, if we look at a week-to-week sheet, you know, 5 or 6 loans that are repricing in the week, you know, All but 1 of them are repricing up Some of them, people are just coming in for, you know, asking for rate relief on certain things. But so for the most part, the underlying trajectory on the loan book is up. You know? Sometimes, you know, the payoffs come with prepayment fees sometimes. So there is a little bit of that in there. But you know, we do not see that being sustainable as rates continue to rise.

Okay. And then maybe some color on competitive factors. What are they looking like? I am assuming they are they still remain intense. But would you would you say competition still remains rational, or are you beginning to see a little irrational activity going, you know, beginning to pick up?

I think we see on competition is rational on both deposit and loan pricing. On the larger deals, it may be more aggressive. But I would say overall, we are we are able to be disciplined about our pricing and still grow.

Okay. And then last question for me, I will step back. it is just on M&A. What are your. With the transaction, it seems like pretty well digested now. You know, what are your thoughts on M&A, and what is the environment looking like at the moment?

Yeah. The transaction went really well. I think the leadership team that joined our leadership team really kind of made it. We culturally aligned. And so I think the merger from the personnel side is been good. And if you take care of your people, they take care of your customers and community. So it. You know, there is probably nits and nats that we are still working on, but I would say overall, it is pretty well digested then. And future M&A, you know, I am an active visitor and talking with lots of banks, and the environment we are in is good for banking. I think people are feeling pretty good about where they are at right now. Stock prices are up. Earnings are up, credit quality is good, and the regulators are fair. So I do not see anybody rushing to sell. But we are out having conversations If there are any that align like Presence Bank, we will be talking. To them.

Okay. And then maybe the last question. Just how should we be thinking about your tax rate here on a go forward basis?

So the tax rate has been. You know, it is been a little bit higher because of some of the nondeductible items in the first in the merger charges going forward. But I think in that 21.5% to 22.0% is probably a good place for us to be on tax rate.

Okay. I will step back for now. Thank you, guys.

Thanks, Daniel.

Thank you. I am showing no further questions at this time. I might turn it back to Jim Donnelly for closing remarks.

Thank you, Marvin. Thank you for joining us today. The third quarter demonstrated the increasing earnings power of our franchise. We delivered record earnings expanded our margin, improved operating leverage and significantly reduced the risk associated with the borrower exposure we discussed last quarter. With the Presence Bancshares integration behind us, our focus is now firmly on execution, generating disciplined, organic growth, improving efficiency, deploying technology, maintaining strong credit quality, and producing attractive returns on shareholder capital. We believe we have a significant opportunity ahead of us and our objective is clear. Continue increasing earnings and tangible book value per share. And creating sustainable long term value for our shareholders. We look forward to updating you next quarter. Thank you for joining us.

Thank you for participation in today's conference. This concludes the program. You may now disconnect.