In this piece, I have evaluated two regional bank stocks, Norwood Financial Corp. (NWFL) and The Community Financial Corporation (TCFC), to determine which has better return potential. Based on a fundamental comparison of these stocks, I find TCFC a better pick for the reasons explained throughout this article.

The Federal Reserve’s aggressive interest rate hikes since last year to control inflation put immense pressure on the U.S. banking system and was one of the primary reasons for the failure of three large regional banks this year. These bank failures were the biggest since the global financial crisis of 2008. According to the Federal Deposit Insurance Corporation (FDIC), U.S. banks lost $472 billion in deposits during the first quarter.

Despite the measures taken by the financial regulators to restore stability to the banking system, investors and depositors are still concerned about the strength of the financial system. However, Deutsche Bank analysts said in a client note, “Our baseline does not anticipate a further intensification of banking stresses.”

NWFL’s President and CEO James O. Donnelly said, “Our first quarter income decreased from the 2022 level due to one-time gains recognized in 2022 and the rising cost of deposits and borrowed funds. Loan growth was 16.7% annually during the quarter, while total deposits increased 6.6% annually during the first quarter of 2023.”

“Our core operating expenses remain well-controlled, and our capital base remains above “Well-Capitalized” targets. Additionally, our credit quality metrics remained strong during the first quarter, which we believe should benefit future performance,” he added.

TCFC’s President and CEO James M. Burke said, “The first quarter was a strong start to the year, despite the well-publicized challenges to the industry. While increasing deposit costs compressed margins, profitability remained very strong, thanks in part to our continued focus on non-interest expenses.”

“We continue to operate with ample liquidity, solid capital, excellent credit, and a stable deposit base that is well-diversified among consumer and commercial clients,” he added.

On December 14, 2022, TCFC entered into a definitive agreement to undertake a merger of equals, to which the company and bank will merge into Shore Bancshares, Inc. (SHBI) in an all-stock transaction. On March 7, 2023, SHBI and TCFC announced receiving the required regulatory approvals from the Office of the Comptroller of the Currency and the Maryland Office of the Commissioner of Financial Regulation.

The merger is likely to close on or about July 1, 2023. The combined company will have total assets of approximately $6 billion on a pro forma basis.

TCFC’s President and CEO James M. Burke said, “Our merger of equals with Shore Bancshares continues on schedule and is expected to close around the first week of July. The combined bank, with its greater scale, diversification, and resources, will be better positioned to manage risks and provide existing and new customers with new products and services.”

When it comes to price performance, NWFL is the clear winner. NWFL’s stock has gained 10.5% in price over the past nine months compared to TCFC’s 16.2% decline. In addition, NWFL’s stock has gained 21.6% over the past year, compared to TCFC’s 23.4% decline.

However, here are the reasons I think TCFC could perform better in the near term:

Recent Financial Results

NWFL’s total interest income for the first quarter ended rose 25.2% year-over-year to $21.71 million. Its net interest income declined marginally year-over-year to $16.09 million. The company’s net interest income after provision for credit losses declined marginally over the prior-year quarter to $15.79 million.

Its net income declined 18.9% year-over-year to $5.78 million. In addition, its EPS declined 18.4% year-over-year to $0.71. Also, its return on average assets came in at 1.13%, compared to 1.39% in the year-ago quarter. Moreover, its return on average equity came in at 13.61%, compared to 14.22% in the prior-year quarter.

For the fiscal first quarter ended March 31, 2023, TCFC’s non-GAAP operating net income rose 19.1% year-over-year to $7.59 million. Its non-GAAP operating EPS came in at $1.34, representing an increase of 19.6% year-over-year. The company’s non-GAAP operating ROAA came in at 1.25%, compared to 1.10% in the year-ago period.

In addition, its net interest income (NII) increased 15.8% year-over-year to $19.07 million. Also, its net interest income after provision for credit losses rose 14.7% over the prior-year quarter to $18.42 million.

Profitability

TCFC’s trailing-12-month revenue is 1.05 times what NWFL generates. NWFL is more profitable, with a Return on Equity and Return on Assets of 15.36% and 1.83%, compared to TCFC’s 14.98% and 1.65%, respectively. On the other hand, TCFC’s 36.83% net income margin compares to NWFL’s 36.70%.

Valuation

In terms of trailing-12-month Price/Book, TCFC is currently trading at 0.79x, 42.3% lower than NWFL’s 1.37x. TCFC’s trailing-12-month Price/Sales ratio of 1.97x is 37.9% lower than NWFL’s 3.17x.

Thus, TCFC is relatively more affordable.

POWR Ratings

NWFL has an overall rating of D, which equates to a Sell in our proprietary POWR Ratings system. On the other hand, TCFC has an overall rating of B, translating to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. NWFL has a D grade for Value, consistent with its stretched valuation. On the other hand, TCFC has a B grade for Value, in sync with its discounted valuation.

Of the 39 stocks in the Mid-Atlantic Regional Banks industry, NWFL is ranked #23, while TCFC is ranked #4 in the same industry.

Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Stability, Sentiment, and Quality. Click here to view NWFL’s ratings. Get all the ratings of TCFC here.

The Winner

Although the U.S. banking industry has faced several challenges over the past few months, there are signs of the stabilization of the industry as deposit outflows are slowing down.

NWFL disappointed investors after reporting a decline in net interest income and earnings during the first quarter. However, the bank said it remains well capitalized, and its credit quality metrics would drive future performance. On the other hand, TCFC’s merger with SHBI is in the process of getting completed soon. The merger will benefit the shareholders, and the combined entity will have $6 billion in assets.

Considering TCFC’s strong fundamentals and discounted valuation, TCFC could be a better choice than NWFL.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Mid-Atlantic Regional Banks industry here.

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NWFL shares were trading at $29.39 per share on Wednesday morning, down $0.23 (-0.78%). Year-to-date, NWFL has declined -10.43%, versus a 14.84% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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