It has been about 16 months since I last consulted Norwood Financial (NASDAQ: NWFL) but although I was charmed by the bank’s performance in January 2021, the bank’s share price barely budged despite posting strong results in 2021 and the strengthening of the balance sheet. This may be an opportunity, but I wanted to take a closer look at the bank’s assets first. Norwood Financial is the name of the holding company of Wayne Bank.
Strong result in 2021 thanks to low loan loss provisions
Norwood Financial is active in both Pennsylvania and New York, and in my previous article I noticed that the loan portfolio was quite heavy in real estate, so one could consider a long position in this bank as a bet on the real estate situation in these two states. The value of real estate does not have to increase, as long as borrowers are able to make their payments, the performance of Norwood’s loan portfolio should be good.
In 2021, the bank enjoyed higher interest income combined with lower interest expense and the combination of the two drove net interest income up by around 30% to over $65 million. dollars.
This is a good result, as higher net interest income will help mitigate the impact of higher net non-interest expenses during the year, which rose from less than 27 million to over $30 million. Provision for losses before loans and income before taxes were approximately $35 million. Unlike other banks that have been able to recover a substantial portion of the loan loss provisions they have recorded, Norwood has kept its loan loss provisions fairly high at $4.2 million, which is a bit more 20% lower than the level recorded in 2020. This level of provision for loan losses rather high is why I wanted to take a closer look at the loan book and the status of loans and I will discuss it in a separate section of This article.
After taking into account the provision for loan losses, net income was approximately $24.9 million, resulting in EPS of $3.05, indicating that the bank’s shares are currently trading at less than 10 times the profits, knowing that these profits have not been inflated by taking over part of the historical provisions.
Norwood recently increased its dividend to $0.28 per quarter and the annualized dividend of $1.12 represents a dividend yield of approximately 4%. The payout ratio is just under 40%, so the dividend is well covered.
The loan portfolio is still very heavy in real estate
As loan loss provisions remained rather high, I wanted to take a closer look at Norwood’s loan portfolio. There may be no cause for alarm as the provisions in 2020 were relatively low and it would make sense for Norwood to try to soften the blow by spreading the provisions over several years, but I still wanted to dig a little deeper that.
The balance sheet contains a total of $2.07 billion in assets and as you can see in the image below, approximately $207 million is held in cash and cash equivalents with an additional $407 million in securities the majority of which should be as good as cash. .
The total size of the loan portfolio was $1.34 billion, which is actually a decrease of about 4% from the previous year. And that’s an interesting first thing: the size of the balance sheet has grown by over $200 million, but the size of the loan book has shrunk, as Norwood has increased its cash equivalent balance and nearly doubled its investment in debt securities.
As explained in my article from last year, Norwood Financial’s loan portfolio is heavily weighted towards real estate, accounting for approximately 72% of the total loan portfolio. The majority is related to commercial real estate, but there is also a good part of residential real estate.
The image above already explains why loan loss provisions have remained relatively high: even after adding the additional provisions, the total loan loss provision is only around 1.2% of the loan portfolio. loans, compared to less than 1% about a year ago.
The next logical step is to check what percentage of loans are currently in arrears. And this situation seems quite OK. The total amount of delinquent loans not accumulating was $1.2 million and with a total of $8.3 million in impaired loans purchased, it looks like Norwood Financial should be fine. Notably because impaired and unaccrued loans are mostly backed by real estate and losses should therefore remain relatively limited.
I don’t currently have a long position in Norwood Financial, but I’m a bit surprised that the bank’s share price has barely budged since my previous post in January last year. The stock is currently trading at less than 10x 2021 earnings (which were not inflated by the addition of previously recorded loan loss provisions) and as the stock is trading at a P/TBV of around 1.35, stocks aren’t too expensive either. The dividend yield is acceptable (4%), but by keeping the payout ratio low, Norwood Financial is actually increasing its tangible book value by more than $1.5/share per year, so the current premium on the tangible book value decreases.
I don’t think I will initiate a long position any time soon as I need to keep an eye on my cash position, but Norwood Financial is still on my watch list for sure.