Norwood Financial Corp. (NWFL)
- A $1.23 billion total asset-sized community bank, earning 1.18% on average assets.
- Increased their dividend 28 consecutive years and is on target to make 2020 their 29th.
- Closing on a $400+ million total asset-sized community bank acquisition in the 3rd quarter of 2020.
It’s time to jump into another dividend stock analysis in the community banking sector. Being from the midwest, I tend to focus on the financial institutions in my area and see if there are any dividend investment opportunities out there.
Norwood Financial Corp. (NWFL) is a community bank, based in Honesdale, PA and they have branches spread throughout northern PA, as well as in New York. I’ve seen them grow from $712 million total assets in 2014 to over $1.23 billion total assets to end 2019. That’s an average growth rate of 15%, folks. Also attributing to their growth was a $370 million dollar bank acquisition in 2016 of Delaware Bancshares, Inc.. Therefore, they aren’t shy to go and acquire an institution, that’s for sure.
Speaking of acquisitions, Norwood also recently announced in January, their plans to acquire UpState New York Bancorp, Inc.; which is set to close in Q3 of 2020. This will add $440 million to the total asset base of Norwood, propelling them closer to cross the $1.7 billion mark. Management also stated the acquisition is to be accretive to earnings, to the tune of 18% in the first 12 months after the close.
Very exciting times for Norwood shareholders. Given the forward looking news and growth plans from the merger announcement, it’s time to review how they performed for their shareholders in 2019.
Norwood Financial Performance – 2019 Review
Onto the fun part, financial performance. Norwood released their 2019 results during January and appears strong across the board.
Norwood’s interest income was higher by $5.5 million from 2018 to 2019, finishing at $41.9 million or a growth of 15.1%. Deposit or interest expense also increased from $4.6 million to $7.1 million. Net interest income, before provision, was higher by $1.8 million or a growth of 4.79%. Playing a factor in the growth being lower, was due to $700k less in security interest income and $400k more in other borrowing interest expense.
Non-interest income was slightly down by $300k from last year, primarily due to death benefit of bank owned life insurance that occurred in 2018. Non-interest expense had to mostly flat to slight increases across the board. In total, non-interest expense increased $1.3 million or 5.14%. From reviewing the non-interest expense, there wasn’t anything unusual that stood out or any large/significant spikes in expense.
Therefore, net income in 2019 vs. 2018 showed a growth of $564k. This represented a growth of 4.13% over last year. The impact to earnings per share was virtually the same at 4%. Two items stood out tome. First, it appears they let their security portfolio mature and they used those proceeds to invest into new loans, as opposed to their deposit base due to their total deposit base decreasing throughout the year. Second, the increase in other borrowing expense truly impacted their net interest income and ultimately, their net income.
Segwaying into their balance sheet, there were quite a few items I see that impacted their results above. First, loans grew from $850.2 million to $924.6 million from 2018 to 2019, a solid 8.8% growth rate. Their security portfolio declined from $243 million down to $210 million, a 14% decline. Total deposits grew modestly, from $947 million in 2018 to $957.5 million in 2019, an increase of 1.1%. Total borrowings increased by $13.3 million or 12.68% since the end of 2018, causing the expense to go up, as discussed. Overall, however, they carry nothing unusual or anything that gives rise to an increase of risk on their balance sheet.
Norwood has the acquisition closing in the 3rd quarter of 2020, which they stated an 18% addition to earnings in the following 12 months, post-close. This should propel them to growth in earnings for 2020, which they will also have merger-related expenditures during the year. Given they have increased their dividend for 28 straight years, does management continue the trend in 2020? You know what time it is. It is time to run NWFL through the Dividend Diplomat Stock Screener.
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|Stock Price*||Dividend||Forward EPS**||Dividend Yield||Payout Ratio||3-Year Growth Rate||5-Year Growth Rate||P/E Ratio|
*Based on 02/14/2020 close price
**Based on annualizing 4th Quarter 2019 + 4.5% growth in Q4 of 2020 due to merger.
Similar to other analyses, I would want to see a payout ratio below 60, a price-to-earnings (P/E) ratio below 13 (lower due to historically lower P/E ratios in the industry), a yield above 4.00% (i.e., higher than the market and most community-based bank yields) and a dividend growth rate of 6.00% (given strength in desired yield).
1.) Payout Ratio – The payout ratio is what helps determine the safety of the dividend, as well as demonstrates if there is room for continued growth. NWFL showcases a moderate 43% payout ratio, which is right in the middle of 40 and 60%. NWFL receives the green check mark in this dividend category.
2.) Dividend Growth – Per management’s release in the 4th quarter, NWFL is on 28 consecutive years of dividend increases. This is most definitely not a small feat and can even be considered a dividend aristocrat. Their most recent increase was 4.17%, from $0.24 per share, per quarter to $0.25. Not the strongest but definitely not the weakest.
3.) Price-to-Earnings (P/E) – The P/E ratio is an identifier if the dividend stock is undervalued, or not. In NWFL’s case, they are approaching 15. Now, I based results off of the 4th quarter 2019 and extrapolating that into 2020. This is definitely a higher P/E ratio that I traditionally see in the community banking space, not like Heritage Commerce (HTBK), where they are significantly lower!
In addition, I have shown their last 52 weeks below via the chart. There has been fluctuation from Q1 2019 through Q1 2020, thus far. They’ve been in the upper $20’s/lower $30’s often and currently are holding in the $34 range, down from their high in the upper $30’s/low $40’s. Seems like there could be room to go, especially once the merger closes in Q3 2020.
4.) Dividend Yield – Wait, can we hit a home run here on the 4 dividend metrics? HTBK comes in at almost 4.50% yield and DING DING DING, they do! They achieved my requirement of 4.00%, as stated above, and all 4 metrics seem to have the green light. The yield that HTBK correlates with the additional risk taken on acquisitions and growth that they’ve had.
Norwood is an interesting dividend play. First, their earnings and balance sheet did not grow by a significant amount, year over year. Second, it appears their core funding base – deposits, have been tough to come by, which I am sure that is why they are undergoing an acquisition – to take those deposits, to fuel their lending. Norwood’s ability to grow organically appears to operate at a slower pace than normal, which sometimes can be an OK thing – as they’ve weathered through quite a few financial storms in their ~150 years of banking.
In order to compete and stay relevant, the merger was a must. Management will be tested to ensure they meet the 18% accretion to earnings once the deal closes. I believe shareholders will be anxiously waiting those results. Why? Those results will impact the growth of the dividend going forward.
Norwood currently paying a $0.25 per share, per quarter dividend has come quite a ways. However, if management cannot grow earnings, shareholders may be a little underwhelmed by the $0.005 to $0.01 increases for the short-term, which doesn’t go a long way by way of % increases (i.e. 2-4%). That is why management needs to execute the deal and grow their earnings.
Given their p/e ratio is on the higher end, with the dividend yield and growth rate on the lower ends, I am going to have to wait on Norwood. If Norwood’s stock price declines to the $30 range, that is where I would look to acquire shares of Norwood, as the yield would be in the low to mid 3% and a p/e ratio below 13.
Please share your thoughts and feedback on the analysis and conclusion above. I would love to hear from everyone and look forward to the comments. As always, good luck and happy investing!
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