Penns Woods: Operational Success, High-Yield

Our coverage of the regional bank earnings season for the first quarter continues with Penns Woods Bancorp, Inc. (NASDAQ:PWOD). This is a bank holding company headquartered in Williamsport, Pennsylvania, that operates through Jersey Shore State Bank. This is a true community oriented bank operating 16 branches. While this is not a household name, the stock has been stable up until this recent regional bank contagion that has dominated the headlines. It is not often we find a 5.5% yielding stock that can pay you to wait but this may indeed be a solid choice. Now, make no mistake, Penns Woods Bancorp is a very small player, and so a run on deposits could have crippled it. We have been investigating regional bank reports to look for evidence of a run on banks. You see, the entire landscape for regional banks has changed dramatically in the last few months as banks began to collapse. The flight of deposits from banks at large and the pressure on net interest margins due to the need to offer higher rates to attract customers has raised significant concerns. Banks are facing tough competition for deposits, not only from each other but also from bonds and money market funds. In addition, there is a possibility of banks increasing their lending standards, which could further add to the challenges they are facing. With that said, Penns Woods had operational success in Q1 and the stock is looking attractive. Let us discuss.

Penns Woods Bancorp's earnings power and margins

Recently, the stock has experienced a significant pullback, which has resulted in a more attractive valuation. However, the operational metrics of the stock have been mixed. Despite this, the stock is currently offering an attractive dividend yield of 5.5%. Nevertheless, the stock is once again experiencing a decline in value today, which follows the recent earnings report.

What was a standout here is that there was both loan growth and an increase in deposits. The reported revenue of $16.6 million fell short of estimates by a significant $7 million. Nevertheless, this indicates that not all regional banks are experiencing deposit outflows, and it is noteworthy that the bank was able to achieve deposit growth despite intense competition in the market. As previously forecasted, the net interest margins for the sector have reached their peak, due to the need to offer higher rates to attract customer deposits.

During Q1 2023, Penns Woods reported a net income of $4.7 million, which is up from Q1 2022's $3.5 million. The earnings per share for the same period were $0.64, compared to $0.69 in Q1 2022. This is impressive growth, as many banks are seeing lower performance.

Although there has been a decline in net interest margin from Q4, it has not significantly impacted the loan quality or loan loss provisions. However, there has been some impact. That said, it is expected that margins will remain strong, but a slight decline has been observed, with net interest margin falling to 3.10, down by 32 basis points from the previous quarter.

Loans and deposits grew in Q1

As we mentioned, Penns Woods Bancorp, Inc. saw an increase in loans and deposits. So clearly there has not been any sort of a run on deposits here. Deposits rose to $1.64 billion versus $1.56 billion to start the quarter. Considering the climate, this is notable.

Loan growth in this environment is impressive. Net loans increased $296.3 million to $1.7 billion compared to Q1, 2022. The bank also saw loans increase from the sequential quarter's $1.6 billion. The bank stated: "An emphasis was placed on commercial loan growth coupled with a significant increase in indirect auto lending." Now, there is some concern with commercial loans ahead of tighter credit and deteriorating commercial real estate conditions, particularly as we head into a likely recession. But for now, asset quality has been strong.

Asset quality improves from the sequential quarter

While we saw growth in Penns Woods Bancorp's loans and deposits, we have to keep in mind asset quality metrics. Provision for credit losses were up slightly from Q4 to $0.7 million. The allowance for loan losses to total loans improved heavily from Q4 to our surprise. To start the quarter these were 0.95%, but improved to 0.64%. The non-performing loan to total asset percentage also improved to 0.23% from 0.24%. Finally the non-performing loans to total loans improved to 0.28% from 0.30%. The return metrics are also strong. The return on average assets was 0.92% while the return on equity was 11.12%. These were flat from, and a 20 basis point improvement from the same metrics in the sequential quarter, respectively.

Final thoughts on Penns Woods Bancorp

Penns Woods Bancorp, Inc. pays a great dividend while the valuation is relatively fair, but we think this market is heading lower, and if PWOD shares dip under $22, they would be a great buy. Here they are a moderate buy, especially with deposits growth and loan growth. This report is another regional bank that did not experience any sort of run on deposits. Net interest margins have peaked as the cost of deposits has increased heavily and this may put a cap on return metrics in the near-term. However, we believe a 5.5% yield here is sufficient to own shares while we wait for a turn around.

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