Norwood's Margin Widens to 3.90% as Credit Costs Emerge
Norwood Financial (NWFL) posted a record $26.8 million in net interest income in the second quarter as its margin expanded to 3.90%, even as nonperforming loans jumped to 1.23% of loans on a single bankruptcy-linked charge-off.
Norwood Financial (NWFL), the Pennsylvania-based community bank that completed its acquisition of Presence Bancshares in January, reported net interest income of $26.8 million in the second quarter, a record for the company and up $2.3 million from $24.6 million in the first quarter. The gain extended a margin expansion that has now run five straight quarters, with net interest margin on a fully taxable-equivalent basis rising 22 bps QoQ to 3.90% from 3.68%, and 47 bps YoY from 3.43%. The move traced back to a widening spread between earning-asset yields, which rose to 5.87% from 5.73% QoQ, and interest-bearing liability costs, which actually fell to 2.60% from 2.69%.
The margin trajectory — 3.30% in the first quarter of 2024, climbing to 3.43%, 3.60%, 3.68% and now 3.90% — reflects a roughly 60-bp cumulative improvement over five quarters, a period spanning the Presence Bancshares integration. That deal, which closed January 5, drove the balance-sheet scale behind the NII gain: loans receivable stood at $2.263 billion in the second quarter, up 26.4% YoY, though the QoQ pace slowed sharply to just 1.1% growth, or about $24 million, as the acquisition-driven jump from a year earlier faded. Deposits told the same story, essentially flat QoQ at $2.514 billion versus $2.507 billion, with the 25.8% YoY increase entirely attributable to the merger-driven step-up rather than organic gathering.
Credit quality was the offsetting signal. Nonperforming loans rose to 1.23% of total loans in the second quarter from 0.34% at year-end 2024 and 0.45% a year earlier, while the reserve coverage ratio against nonperforming assets collapsed to 90% from 280% at year-end. The deterioration centered on a single borrower's Chapter 11 filing, secured by roughly $22 million of commercial real estate exposure, which produced a $729 thousand charge-off and pushed net charge-offs to 0.24% of loans for the quarter, up from a full-year 2024 pace of just 0.03%. Total net charge-offs for the period were about $1.4 million, with the bankruptcy exposure accounting for roughly half.
The allowance for credit losses ticked down to 1.13% of total loans from 1.17% a year earlier, even as the absolute reserve balance grew to $25.6 million, a gain largely explained by purchase accounting on the Presence Bancshares loan book rather than fresh provisioning against the emerging credit issue. The juxtaposition — coverage ratios falling on a percentage basis while dollar reserves rise on acquisition accounting — leaves the bank with less cushion against a repeat of the CRE-linked stress than the year-end 2024 numbers suggested.
Profitability rebounded sharply now that merger costs have cleared the income statement. Net income reached a record $9.3 million in the second quarter, up $5.6 million from $3.7 million in the first quarter, when integration and restructuring charges tied to the Presence Bank core-system conversion and brand convergence weighed on results. Return on assets climbed 75 bps QoQ to 1.28% from 0.53%. Adjusted pre-provision net revenue, a cleaner read on underlying earnings power, rose to $13.6 million from $11.4 million QoQ and was up 53% from $8.9 million a year earlier, evidence that the margin and scale gains are translating into core earnings beyond the one-time deal costs.
Deposit costs, the variable that determines whether the margin expansion holds, appear to have plateaued. The cost of deposits ran at 2.21% in the second quarter of 2024, eased to 2.11% by year-end, ticked up to 2.14% in the first quarter of 2025, and came back down to 2.12% in the second quarter, even as time deposits grew to 42% of the $2.5 billion deposit base. A rising time-deposit mix normally pressures funding costs higher, so the flat-to-lower trend suggests repricing pressure from the deposit book has largely worked through the system.
Tangible book value per share provided a final capital-markets tell: it rose to $22.96 in the second quarter, up $0.54 from $22.43 in the first quarter and above the pre-acquisition year-end 2024 level of $22.90. That reverses the dilution and unrealized-securities-loss drag that had pulled tangible book value below its pre-deal level in the first quarter, indicating the Presence Bancshares transaction has moved from a near-term book-value headwind to a net accretive position for shareholders.
With the merger integration largely behind it, Norwood's results now hinge on whether the CRE-linked credit episode proves isolated. The bank's margin and earnings trends argue the acquisition is delivering as underwritten; the sudden reserve-coverage drop argues for close tracking of asset quality in the coming quarters.