Monthly Archives: October 2015

Penns Woods offers an attractive yield plus growth

What constitutes a good bank investment?  Is a good investment one that’s purchased as part of a merger, or one that’s cheap and appreciates to fair value?  Either of these could work, but there’s a third route, a slightly undervalued bank with an attractive dividend yield that’s growing.

In the current environment banks are divided into two groups, those banks that are growing and those that are complaining about the lack of growth.  The growing banks are purchasing the complaining banks.  Shareholders can benefit from both sides of the aisle.  If a shareholder purchases shares of a complaining bank at enough of a discount they realize a gain when it’s sold.  But shareholders can realize a gain on a growing bank by purchasing shares then sitting back and doing nothing else.

Penns Woods Bancorp is a bank holding company that has two banking subsidiaries, The Jersey Shore State Bank, and Luzerne Bank.  The subsidiaries are shown below:

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Jersey Shore State Bank is the larger of the two subsidiaries with almost $1b in assets, $700m in loans and sizable earnings.

Jersey Shore State Bank has 14 branches spread across Lycoming, Clinton, Montour, and Centre counties.  Luzerne Bank has eight branches in Luzerne county.  Contrary to the name, Jersey Shore State Bank doesn’t have any branches in New Jersey, or near the Jersey Shore.  Rather the bank’s geographic footprint is centered around the tiny town of Jersey Shore, PA, located near Wilkes-Barre.

The area where the bank operates isn’t a high growth area, it’s a rural area with ties to the coal mining industry.

The following is an overview of the bank’s performance since Q2 2013:

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There are a few items of note.  The first is that the bank hasn’t grown much over the past few years.  The bank has grown over the past 10 years, Jersey Shore Bank grew their assets from $593m in 2003 to $893m at the end of 2014.  Luzerne Bank grew their assets from $182m in 2003 to $344m at the end of 2014.

The majority of the bank’s loans are residential with a small amount of commercial and even smaller amount of construction lending.  The bank’s lending is supported by a stable deposit base of mostly retail deposits held in money market or savings accounts.  In a higher rate environment savings account deposits are not ideal, but when the bank is paying .4% for their all-in funding costs it’s not bad.

The bank isn’t dealing with any troubled assets, and never really experienced any asset issues from the crisis either.  Non-current loans to loans hasn’t risen above 2% since 2003.

Penn Woods Bancorp is a well run bank, and this shows in a few of their operating metrics.  They have a return on assets above 1% as well as a return on equity above 10%.  Their efficiency ratio is 66% as of the last quarter, which is slightly below average for a bank their size.

Simply put this is a well run community bank doing what it does best, taking community deposits and re-lending them back into the community.

For investors the question is “what’s the bank worth?”  The follow picture shows the bank’s valuation model from the Bloomberg version of CompleteBankData (APPS BANKS <GO>).

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Based on the average of the three models the bank is slightly undervalued.  They could be worth $45 and they trade at $41.  That doesn’t leave much room for appreciation.  But I feel that misses out on some of the value the stock has.  The bank pays a generous dividend and currently yields 4.48%.  Investors receive an immediate 4.48% return plus the ~6% growth from the bank reinvesting their earnings (minus their dividend) back into the business.  Add in a small gap between the current price and value, and together these things could add up to a 10%+ return for investors willing to buy and hold the bank.