Norwood Financial Corp 2026 Q3 Earnings Call

Please go ahead. Thank you, Marvin.

Good morning, everyone. Welcome to our third quarter 2026 earnings conference call. With me today are Jim Donnelly, our President and CEO, and John McCaffery, our 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 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 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 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 as we take great care of our customers, support our communities, and make a superior workplace for our employees. Net interest income improved 37% over last year to $28 million, driven by strong performance plus the impact of Presence Bank acquisition. Net interest margin was 4.01, up 38 basis points.

Importantly, our improved earnings are translating into strong net returns, with an ROAA of 1.6% and a return on average tangible equity of approximately 18.5%. 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, one 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, de-risking 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 2026 strategic priorities. With the completion of the Presence Bank 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. We are moving beyond experimentation with AI and embedding it into specific workflows. We are now expanding the three-year AI roadmap 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 Abraham 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 Vinnie Obele retires late in October. This key activity has deepened our presence in the communities we serve. Also, our commercial lending team, I want to congratulate Kyle Liner and John Veleber 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.

One example of this growth has been achieved in our brokerage business. Earlier this year, we transitioned our brokerage and investment 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% over 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 Bank. 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. The 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 PB Bankshares, Inc. 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 and 11 basis points from the second quarter.

The quarter did include a one-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 non-performing loans during the quarter. Provision for credit losses was $100,000 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 approximately 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 total $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 $53,000 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.