Norwood Financial - Earnings Call - Q3 2025

Executive Summary

• Q3 results were strong: diluted EPS $0.89 (+85% YoY) and ROA 1.40%; NIM expanded to 3.63% (+64 bps YoY, +20 bps QoQ) on higher asset yields and lower liability costs.
• Results beat Wall Street: EPS $0.89 vs $0.705 consensus; revenue $23.47M vs $22.10M consensus; margin trajectory and benign credit are the quarter’s key positive catalysts. Bold beat: EPS and revenue above estimates*.
• Efficiency ratio improved to 56.3% (vs 58.7% in Q2, 66.0% in Q3’24); non-interest income up 9.2% YTD; credit quality improved (NPLs/loans 0.36%).
• Outlook: CFO “hopes” NIM can “start reaching towards 4%”; deposit cost beta ~50% as rates decline; Presence Bank merger regulatory approvals pending; closing unlikely in Q4 and more likely around early 2026, creating a potential deal-update catalyst.

What Went Well and What Went Wrong

• What Went Well

  • Margin and NII expansion: NIM rose 20 bps QoQ to 3.63%; net interest income up $1.4M QoQ; “asset yield increasing while liability costs decreasing”.
  • Earnings/returns: EPS $0.89 (+85% YoY); ROA 1.40%; adjusted EPS $0.94 and adjusted ROA 1.47% excluding merger costs.
  • Credit quality: ACL release of $0.502M driven by loans leaving non-accrual; NPLs/loans down to 0.36% and NPAs/assets 0.31%.
  • Quote: “Our quarterly results continue to demonstrate the strength of our community banking franchise… improving profitability and efficiency.” — CEO Jim Donnelly.
  • Quote: “I hope we can start reaching towards 4% [NIM].” — CFO John McCaffrey.

• What Went Wrong

  • Expense pressure: total quarterly expenses +7.5% YoY; ex-merger charges, +2.8% YoY; while manageable, cost discipline remains a focus.
  • Loan repricing pace moderating: Management noted loan pricing up but “begun to level off a little bit” as the long end of the curve fell.
  • Merger timing: Presence Bank closing “very difficult” in Q4; proxy not yet mailed; regulatory review ongoing; likely shifts into early 2026, delaying synergy realization.

Transcript

Speaker 1

Good day, and thank you for standing by. Welcome to the Norwood Financial Corp.'s third quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one-one on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star one-one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Kristen Lencia, Vice President and Marketing Manager. Please go ahead.

Speaker 4

Thank you, Tanya. Good morning, everyone. Welcome to our Q3 2025 earnings conference call. With me today are James F. Donnelly, CEO, and John McCaffrey, CFO. The press release we issued earlier this morning, together with the presentation material that accompanies our remarks, is 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 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 James.

Speaker 2

Thank you, Kristen. Good morning, everyone. Our team delivered strong results in the third quarter and growing assets over around $100 million year to date while expanding our margins. This is the result of delivering good growth in loans and strong growth in deposits. Our credit metrics remain 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." It is this embodiment of our mission within the high-performing culture that distinguishes us, that gives me the belief that we are on our way to creating a bright future for us, our customers, and our shareholders. Stepping back and 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 help 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, and with the 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 to start or expand their businesses. Turning to another item, we have filed all regulatory applications necessary for approval of our merger with Presence Bank that was announced on July 7th. The applications of our filings are pending. I refer you 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 we added two new directors, strengthening the board by bringing on board 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, Lewis Critelli, who was my predecessor and has served as Chairman of the Board since 2022. Lewis 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 Lewis all the best in his retirement. We now move forward with Dr. Andrew Forte leaving the Board as Chairman and Kevin Lamont replacing him as Vice Chairman.

These are two long-serving directors, and the Board is in great hands under their leadership. We also welcomed two new directors to the Board, Marissa Nassimovich and James Shook, both outstanding leaders within their respective fields and, even more importantly, shining examples of individuals with strong commitment to serving their community. I'm excited about the changes to our Board and have every confidence that they will be valuable advisors as we move forward. While we have built a strong financial position and operated well to deliver strong financial results, it is our employees that truly make us unique. They continue to live according to our tradition of community involvement, donating time and money to causes that make the places we live and call home better places to live and work. 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 delivered on strategic initiatives that have given our team and our brand a lift. We rolled out our new brand this year. The eye-catching marketing materials are a small piece of what we have delivered with this rollout. We have worked over the last 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 Wayne Bank experiences with an average of 4.7 stars. Our employees have a new lift in their step as we recognize them for delivering on Every Day 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 McCaffrey, to walk us through the results.

Speaker 0

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. Below the margin line, our quarterly results included $568,000 in merger-related charges, and we have included adjusted return metrics in both the press release and the presentation to show our performance ratios without the impact of these expenses. Additionally, our CECL model calculated a release of the allowance for credit losses this quarter, so we included pre-provision net revenue numbers as well. The allowance for credit losses release of $502,000 was mostly driven by several loans moving out of non-accrual status.

Our unadjusted pre-provision net revenue increased by 15% on a linked quarter basis and 19% adjusting for non-recurring merger-related charges. Non-interest income for the nine months ended September 30, increased 9% over the same period last year, with growth coming from our wealth management and trust services activities as well as increased gains on loan sales. Quarterly expenses were up 7.5% over the third quarter of 2024. Excluding merger-related charges, the increase was only 2.8%. Credit metrics continued to improve year over year as non-performing loans as a percent of total loans decreased, and our reserves to non-performing assets also increased. The overall themes of the quarter were improving net interest margins and benign credit, combined 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.

Speaker 1

Certainly. As a reminder, to ask a question, please press star one-one on your touchtone telephone and wait for your name to be announced. To remove yourself from the queue, please press star one-one again. Our first question will come from Tyler Cacciatore of Stephens. Your line is open, Tyler.

Good morning. This is Tyler on for Matt Briess.

Speaker 0

Hey, Tyler. How are you doing?

Good morning. 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 we have, as you know, 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%. I think we still have room, and we have been showing, if you look in the presentation, we've seen even before the Fed cut, we have seen our deposit costs coming down over time.

Can you remind us how much is in municipal deposits and what's roughly the high watermark versus the low?

We're probably right now at the high watermark. It goes from between, I think, $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 of when tax receipts come in. Even as the tax receipts come in, some of the other municipalities that receive the tax money get them, so it kind of trickles out slowly.

Yeah. 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 it might otherwise be. Great, thank you. Along those same lines, can you discuss your NIM outlook and where you think you start seeing some stability here? You know.

That's a tough one, Tyler, but thanks. Our NIM outlook, I think, is still positive. We're still getting, you know, our loan book is still pricing up. Although that has been, as the longer part of the curve has come down, that's begun to level off a little bit. I think at 3.63% for this quarter, I hope we can start reaching towards 4%, but I'm not sure where we go from there over the next few quarters.

Great. Thank you. 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/or post-deal close and update us on when the updating deal close is expected to happen?

Speaker 2

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

Speaker 0

Yeah. If you look at the calendar, Tyler, you know, we don't see it. It would be very difficult for us to get it done in Q4. There are other obviously operational and accounting issues with closing in December. At this point, you know, they haven't mailed their proxy out yet. We think that'll be happening soon. When that happens, then we can start, like we can start the calendar counting. On a parallel path is obviously the regulators who have been, you know, they've been asking questions, but they haven't given us any flags of yellow or red kind at this point.

That's helpful. That'll be it for me. I appreciate you taking my questions.

Speaker 2

Thank you, Tyler.

Speaker 1

Thank you. As a reminder, to ask a question, please press star one-one on your touchtone telephone. Our next question will be coming from Ross Haverman of RLH Investments. Your line is open.

Good morning, gentlemen. Thank you for taking my call. I just have a quick question. Assuming we get another quarter point drop in the, I don't know, in the next month or so, could you tell us how accretive that will be to your margin or your spread? Thank you.

Speaker 0

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 as far as dropping our cost of deposits. I'd hesitate to put a dollar amount on it now or a basis point amount on it now, especially depending on timing and where in the quarter it happens. We will get into the first quarter when hopefully we'll be closing on a transaction, and then there'll be a lot of noise then as well.

Just one follow-up question, if I may. Could you tell us where you're seeing the best loan growth and demand today? What category? Do you see that continuing into the fourth quarter? With everything happening in D.C. and the expectation of lower rates, is that sort of mitigating loan growth?

Speaker 2

Yeah, Ross, good question. Our loan growth this year has pretty much been across the board in the different categories. It hasn't tipped us into one category or another as being the major growth factor. The only area I'd say that we may have shrunk a little bit in was our ag % of our portfolio may have gone from about 9% to about 8% of our portfolio. Our CRE breakout remains well under, we're well within the regulatory guidelines and have lots of room there. There is no one category driving it. Our consumer lending has been good and strong and is performing well, as is across our portfolio for the various types of commercial, including CNI.

Okay, thank you for your help. Have a good week.

You too. Thank you, Ross.

Speaker 1

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

Speaker 2

Thank you. Thank you all for joining us today. We're really pleased to be talking about 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 are able to put these numbers up. Thank you for calling in today, we appreciate it. We look forward to talking to you really soon on our next quarterly release.

Speaker 1

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