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Norwood Financial Corp. reported a strong start to 2026, significantly bolstered by the successful first-quarter integration of the Presence Bank acquisition. The company achieved record net interest income of $24.6 million, with net interest margin expanding to 3.68%. Adjusted earnings per share rose 14% year-over-year. Management emphasized that the integration is progressing ahead of schedule, with core systems converted and key leadership from Presence Bank retained. A primary strategic focus is the deployment of AI-driven systems, particularly a new commercial credit platform launching in July to enhance underwriting speed and quality. Financially, the bank saw healthy loan growth of 8.4% and deposit growth of 11.6% since the merger's close. During the Q&A, executives clarified that operating expenses are currently elevated due to technology investments but are expected to stabilize near $15 million per quarter. While non-performing assets saw a slight increase to $11 million, management attributed this to the legacy commercial portfolio rather than the acquired assets. Despite competitive pressures in the Northeast, the bank anticipates further margin expansion of 3 to 5 basis points as loan yields continue to reprice upward. Overall, Norwood remains optimistic about realizing faster-than-projected accretion.

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Full Earnings Call Transcript — Q1 • 2026-04-27

Operator: Good day, and thank you for standing by. Welcome to Norwood Financial Corp. First Quarter 2026 Earnings Call. At this time, all participants are in a 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. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Be advised that today’s conference is being recorded. I would now like to hand the conference over to Mackenzie Jackson, Corporate Secretary. Please go ahead.
Mackenzie Jackson: Thank you, Liz. Good morning, everyone, and welcome to our first quarter 2026 earnings conference call. With me today are James Donnelly, our President and CEO, and John McCaffery, our CFO. The press release we issued earlier this morning, together with 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, 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-Ks 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 Donnelly.
James Donnelly: Good morning, everyone. We began 2026 with strong performance, extending the momentum we began to build last year. This was the first quarter that included results from the Presence Bank acquisition, increasing our assets, loan portfolio, geographic presence, and earnings power. I am proud of our team’s ability to focus on our mission to make every day better by serving our customers and communities while making significant progress on our integration activities. Net interest income was a record 24.6 million, an increase of 38% compared with 2025. Net interest margin expanded by 38 basis points to 3.68%. It was a great quarter for the bank as we benefited from our repositioned bond portfolio and favorable interest rate movement. Net income and earnings per share increased 35% and 14%, respectively, on an adjusted basis, with higher adjusted returns on average assets and tangible equity. I am pleased with our first quarter performance and remain optimistic that 2026 will be a great year for the bank. During our fourth quarter earnings call, I introduced our 2026 strategic priorities. I would like to provide you with an update on these. The first priority is to successfully complete the Presence Bank integration. I am pleased to report that we are on plan with these activities. Our plans include driving uniform systems and operating practices across the new combined entity, uniting the acquired businesses and branches under our new brand, and engaging in open conversations across our locations and functions to identify and adopt best-in-class policies that will enable us to better serve our communities while improving our results. Among our early accomplishments is the completion of our core integration and unifying our IT and HR systems. We have also begun the work of unifying all acquired locations under our brand, including signage, logos, and other branded materials to drive consistency and unity across our organization. The integration requires a lot of planning, organization, and execution across sites and functions to complete. While we have been actively integrating the systems, we have not taken our eye off serving our customers and communities, which has resulted in impressive loan and deposit growth during the same period. I am proud of our team for going above and beyond to ensure our integration plans are being accomplished and for taking great care of our customers while doing so. Our second strategic priority is to increase operating efficiency and elevate the customer experience through AI. This is an area where we are implementing best practices from Presence Bank and deploying their developed systems and processes across the combined organization. One item I am really excited about is the commercial credit system, which we will integrate in July. This uses embedded AI and machine learning to enhance the productivity of our talented credit officers by bringing automation, speed, and quality to the process. For example, automatic spreading will allow our credit analysts to save time, better reporting will provide our credit officers with helpful insights to make informed decisions, and the ability to draft credit memos will improve the speed and quality of the documentation process. These benefits will enable our employees to perform higher-value functions as well as underwrite deals more quickly to improve deal flow. Our third objective is to strengthen the talent pool and deepen our leadership bench. As I have met with our employees across the sites, including the newly added sites in Chester, Lancaster, and Dauphin Counties, I am continually reminded of the great team we have, and I firmly believe our key to success is our people. They are dedicated to serving the communities and working hard to find ways to make every day better. The team became bigger and stronger during the quarter as we welcomed the former Presence Bank employees to our organization, including additions to our executive leadership team. I am confident that together, we can continue to deliver financial solutions that improve the lives of our customers, allowing them to achieve their financial goals. Our fourth and final priority is to ensure everything we do increases shareholder value. The results we reported today demonstrate how we have accomplished this during the quarter, a culmination of our performance in Q1 and actions taken in previous periods, including the portfolio rebalancing we completed in 2024. The first three priorities I have reviewed position us to create even more value in future periods. One shining example of how we are creating value for shareholders is through our recent acquisition. Not only did the transaction bring immediate and meaningful growth to our bank, but we are also realizing the strategic and financial benefits of our acquisition more quickly than planned. One demonstration of this is that we now expect accretion to shareholder value ahead of our original projections. As a result of the quality of the Presence Bank team and assets, plus interest rates that have moved in our favor, we anticipate the tangible book value payback to occur more quickly than planned. After only one quarter since we closed the acquisition, it is obvious that we acquired a solid business with high-quality credit metrics and an excellent team, including several talented executives that have joined the Wayne Bank team, demonstrating their confidence in our joint future. The strong strategic fit and cultural alignment is contributing to our early success. I am encouraged by our initial progress and even more optimistic about our future and ability to generate meaningful and lasting shareholder value. I will now turn the call over to John to walk us through the results.
John McCaffery: Thank you, Jim. Good morning, everyone. In the first quarter, we delivered improved financial results on an adjusted basis, continuing to benefit from our repositioned balance sheet and the outstanding performance of the entire Norwood Financial Corp. team. It was a great start to the year, continuing the momentum from 2025. We achieved record net interest income, increasing 3 million on a linked quarter basis due to higher interest-earning assets. Margin improved 8 basis points due to a slight decline in deposit costs coupled with a 7 basis point increase in interest-earning asset yields. Below the margin line, our quarterly results continue to include merger charges. We had about 5 million in merger charges in the quarter. We provided adjusted returns in the press release to show you performance ratios excluding these expenses. We are also providing pre-provision net revenue across the entire span of the press release. Provision was higher in Q1 versus 2025. Part of the increase was the result of annual updating of historical factors in the model as well as the integration of the Presence Bank portfolio. Our coverage ratio stands at 1.09%, compared to 1.07% at year-end. I will also note that we elected to adopt early ASU 2025-8 and therefore did not experience a CECL double count on the acquired non-PCD loans. Adjusted pre-provision net revenue was up about 11% on a linked quarter basis, mostly due to the improved margin on a larger balance sheet, offset by higher expenses. Noninterest income increased compared to the same period last year due to higher service charges and debit card income. Quarterly expenses were up as a percent of average assets compared to Q4 2025. Most of this increase is technology-related, as we are investing in new systems that will ultimately drive efficiency in the future. On that note, I would like to give a shout-out to the finance team that implemented a new accounting system while executing a merger and a core conversion. The first quarter was a transition period as we integrated the acquisition, with GAAP results impacted by related expenses. On an adjusted basis, we achieved strong growth in net interest income, partially offset by higher expenses. To expand on Jim’s point earlier, growth since January 5: loans grew approximately 46 million, or 8.4% annualized, and deposits grew about 70 million, or 11.6 million on an annualized basis. Overall, we are pleased with our performance and believe that our sound balance sheet management and credit metrics position us well for the future. Jim and I will now be happy to answer any questions you may have. Operator, please provide instructions for asking questions.
Operator: If you would like to ask a question at this time, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our first question comes from Daniel Cardenas with Brean Capital.
Analyst: Good morning, guys. Couple of questions. On the operating expense number that came in this quarter, you said part of that was tech-related. How much was that? And then are all of the tech-related investments made? I am just trying to get a sense for what is a good run rate on operating expenses going forward.
John McCaffery: The increase in tech expenses was mostly due to, well, again, we are increasing investments, as Jim mentioned, in the ABRICO system and our new accounting system. So there are ongoing expenses. We tried to exclude all of the conversion and other charges that were one-timers in Q1. So I think for OpEx going forward, the level that we are at is probably a pretty good run rate.
Analyst: Okay. On the 16.1 million per quarter, is that where you think things will kind of shake out here?
John McCaffery: I would like to see them come down a little bit. Again, we are trying to pull apart how much actually was related to activity during the quarter because of the merger, but I do think we will get efficiencies. I would not drop it below 15.08 million, I think, for the quarter.
Analyst: Alright. Thank you. And then on the margin, the 3.68% margin, I probably missed it in the press release, but what was the contribution from yield accretion in the quarter?
John McCaffery: The total pretax impact of purchase accounting was 435,000. That is substantially margin-related. There is some for the leases, but that is a minimal amount. So probably about 6 basis points this quarter.
Analyst: And on a go-forward basis, what do you think yield accretion will contribute?
John McCaffery: On a go-forward basis for the full year of 2026, we are scheduled at about 2.2 million, dropping to about 2 million for 2027, in total margin accretion.
Analyst: Got it. And then one more question. The nonperforming number for the quarter, roughly 11 million if I am calculating that correctly. Was that all attributable to the acquisition, or were there other issues in the portfolio?
John McCaffery: I do not think there were any nonperforming loans contributed from Presence. So that was mostly us. I am not aware of any large nonperformers that came in.
Analyst: Pretty granular increase. Is that mostly on the commercial side? Maybe a little color as to what made up the linked-quarter increase?
John McCaffery: Largely commercial. The indirect and consumer portfolios are about the same as the quarter before. We had a little dip in the last quarter on the commercial side, and we came back up to about where we were the previous quarter. I think we leveled off at that amount.
Analyst: Okay. I will step back for now. Thank you.
Operator: Our next question comes from Matthew Breese with Stephens.
Analyst: Hey, good morning. I was hoping maybe to touch on the components of the margin. First, more broadly, I would love some color on competitive conditions around deposits in the Northeast. We have started to hear inklings of maybe some high 3% and low 4% promotional rates. Are you dealing with that? And what are your thoughts around the deposit cost outlook now that it does not seem like we are getting much, if any, rate cuts?
John McCaffery: Even into Q1, we were continuing to lower deposit costs based upon the December rate cut. We are not talking about raising any of our specials on CDs at all. In the new markets, I think they are a little more competitive than we are used to up here in Northeast Pennsylvania, but we are not seeing competitive pressure in our markets on deposit pricing yet.
James Donnelly: Yes, Matt. We see some spotty stuff. If you dig into why they are doing it, they are people with very high loan-to-deposit ratios or just interesting business strategies sometimes. But we see that we are competitive with our current rates, and we are not seeing a lot of upward pressure. I am still seeing some competitors bringing their rates down.
Analyst: Got it. How much more room do you think there is to squeeze deposit costs lower? I look at your CD cost this quarter knocking on 3.6%. Is the blended rate of maturities still in the 3.30% range with some downside?
John McCaffery: Most of that is just really churning our specials we have had out there. And there is a push to get our CDs down below 40% of total deposits. We hope that will give us some more levers to push on going forward. We had just a couple basis points drop in some of the deposit categories—just 1 basis point overall. I want to get a better feel for the full portfolio now that we have the deposits in one system. We completed the core conversion on April 5, so getting that kind of data is underway. We are not seeing downward pressure on the lending rates to the level that might be seen elsewhere in the Northeast. I think our ability to squeeze out of the deposits will be smaller than it has been. It is there, but it will be a smaller amount.
Analyst: And then on the lending side, same question around competitive conditions. What are new origination yields on the pipeline right now, and how does the pipeline look?
John McCaffery: The pipeline is very healthy and has been. Looking ahead 30, 60, 90 days, we are ahead of our general pipeline. Quality is very good. Pricing is in line with our expectations. The closings that we just had averaged 7.05% for the last 18 we booked. Most of the rates coming across are still higher than the portfolio yield, so we think there is still room for some expansion.
Analyst: So it sounds like deposit costs are flat to down a little bit, and there is still upward repricing on the loan side. How do you feel like the margin will shake out as we progress through the year?
John McCaffery: I think we still have room to expand somewhat. I would not put it at what we experienced in the first quarter, given the different financial ins and outs with the acquisition. If we can get another, let us say, 3 to 5 basis points on loans going forward, I think we can do better. We had some drag on cash in Q1 as well, which we will be able to deploy more easily going forward, given the systems issues. So I think the margin can increase throughout the year. I would not put it at 8 basis points on a linked-quarter basis, but maybe 3 to 5 basis points.
Analyst: Great. I appreciate all that. I will stop there. Thank you.
Unknown Speaker: Thanks, Matt.
Operator: We have a question from Daniel Cardenas with Brean Capital.
Analyst: Thanks, guys. Just a couple of quick questions. The margin discussion you just had, John—are you talking 3 to 5 basis points for the remainder of the year, or perhaps over the next couple of quarters?
John McCaffery: Over the next couple of quarters.
Analyst: Good. And then on the fee income side, nice improvement quarter over quarter. What are some of the drivers that could potentially push that number higher as we look at 2Q and beyond?
James Donnelly: Part of it, Dan, is we were an underperformer on debit revenue. We put a strategy in place a couple of years ago and changed the way we were looking at that and promoting it. Part of it is getting more debit cards in more people’s hands and promoting utilization. We have been working on growing our fee income businesses for the last few years, and it is starting to pay dividends. There is lots of room for us to grow there. It is just a matter of making sure that we are able to staff up appropriately to grow our brokerage, trust, and mortgage businesses.
Analyst: Okay.
James Donnelly: Treasury management is geared up for the second half of the year to do a nice job as well.
Analyst: I was just going to ask you about that. Okay. Perfect. Alright. I will step back. Thank you.
Unknown Speaker: Thanks, Dan.
Operator: That concludes today’s question-and-answer session. I would like to turn the call over to James Donnelly for closing remarks.
James Donnelly: Thank you once again for joining us this morning. We made a great start to 2026, continuing the momentum built in 2025 as we live out our mission to help our customers and communities build strong financial futures so that every day, every year, every generation is better than the last. As we continue to integrate the Presence Bank acquisition and benefit from the shared best practices, we will be better positioned to deliver that better future, united to serve our communities. As we move forward, our disciplined approach, high-quality credit metrics, and careful execution enable us to deliver improved financial results and lasting value for our shareholders. I look forward to updating you on our progress. Have a great day.
Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.