Penns Woods Bancorp(PWOD) - 2022 Q1 - Quarterly Report

Part I Financial Information Financial Statements The unaudited consolidated financial statements for the quarter ended March 31, 2022, show a slight decrease in total assets to $1.917 billion from $1.941 billion at year-end 2021, with net income remaining stable at $3.4 million, but a comprehensive loss of $2.0 million due to increased unrealized losses on available-for-sale securities Notes to Consolidated Financial Statements The notes detail financial statement presentation, recent accounting pronouncements, and provide in-depth information on key financial components, including a significant increase in investment securities unrealized losses, growth in the loan portfolio, and increased off-balance sheet commitments - The company expects to adopt ASU 2016-13 (CECL model) for fiscal years beginning after December 15, 2022, and anticipates a one-time cumulative-effect adjustment to the allowance for loan losses upon adoption[26] Investment Securities Unrealized Losses (March 31, 2022) | (In Thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | | :--- | :--- | :--- | :--- | :--- | | Total debt securities | $179,565 | $967 | $(4,858) | $175,674 | - As of March 31, 2022, the company had 172 securities in a continuous unrealized loss position for less than twelve months and 25 for twelve months or greater, with management determining these declines to be temporary, resulting from interest rate changes, and does not intend to sell these securities before recovery[44][45] Loan Portfolio Composition (March 31, 2022) | (In Thousands) | Amount | % of Total | | :--- | :--- | :--- | | Commercial, financial, and agricultural | $162,273 | 11.5% | | Real estate mortgage - Residential | $613,161 | 43.6% | | Real estate mortgage - Commercial | $443,415 | 31.5% | | Consumer automobile loans | $135,568 | 9.6% | | Other | $51,289 | 3.8% | | Total Loans | $1,405,706 | 100.0% | - Total impaired loans stood at $13.3 million as of March 31, 2022, with a related allowance of $954 thousand, a decrease from $14.0 million in impaired loans at year-end 2021[58] - As of March 31, 2022, only one loan with an outstanding balance of $158 thousand remained in the COVID-19 related payment deferral program, down significantly from 70 loans with a balance of $12.3 million a year prior[63] Off-Balance Sheet Risk (Commitments) | (In Thousands) | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Commitments to extend credit | $231,011 | $184,364 | | Standby letters of credit | $8,644 | $7,027 | | Total | $249,985 | $201,639 | Consolidated Balance Sheet Highlights (Unaudited) | (In Thousands) | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Assets | $1,916,809 | $1,940,809 | | Loans, net | $1,391,943 | $1,377,971 | | Total Deposits | $1,612,395 | $1,621,315 | | Total Liabilities | $1,748,382 | $1,768,535 | | Total Shareholders' Equity | $168,427 | $172,274 | Consolidated Statement of Income Highlights (Unaudited) | (In Thousands, Except Per Share Data) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net Interest Income | $12,853 | $12,070 | | Provision for Loan Losses | $150 | $515 | | Non-Interest Income | $2,412 | $2,614 | | Non-Interest Expense | $11,007 | $9,951 | | Net Income | $3,432 | $3,441 | | Earnings Per Share - Diluted | $0.49 | $0.49 | - The company reported a comprehensive loss of $2.0 million for Q1 2022, a significant shift from a comprehensive income of $1.86 million in Q1 2021, primarily due to a $5.4 million after-tax other comprehensive loss, driven by unrealized losses on available-for-sale securities[14] Consolidated Statement of Cash Flows Highlights (Unaudited) | (In Thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $7,090 | $9,390 | | Net cash (used for) provided by investing activities | $(28,911) | $814 | | Net cash (used for) provided by financing activities | $(23,238) | $54,126 | | Net (Decrease) Increase in Cash | $(45,059) | $64,330 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management reported stable net income of $3.4 million for Q1 2022, with EPS of $0.49, unchanged from Q1 2021, driven by improved net interest margin and reduced loan loss provision, despite higher non-interest expenses and a one-time branch closure charge, while maintaining a strong capital position Earnings Summary Net income for Q1 2022 was $3.43 million, nearly flat compared to $3.44 million in Q1 2021, with unchanged basic and diluted EPS of $0.49, impacted by after-tax securities losses and a one-time branch closure loss, while non-GAAP core earnings increased to $3.48 million GAAP to Non-GAAP Reconciliation | (In Thousands, Except Per Share Data) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | GAAP net income | $3,432 | $3,441 | | Less: net securities (losses) gains, net of tax | $(48) | $94 | | Non-GAAP core earnings | $3,480 | $3,347 | | Non-GAAP core operating EPS | $0.50 | $0.47 | - Return on average assets (ROA) was 0.72% and return on average equity (ROE) was 8.17% for Q1 2022, compared to 0.75% and 8.59% for the same period in 2021[114] Net Interest Income and Margin Net interest income for Q1 2022 increased to $12.85 million from $12.07 million in Q1 2021, with the net interest margin expanding by 5 basis points to 2.93% year-over-year, primarily driven by a significant decrease in total interest expense due to lower rates paid on deposits, partially offset by a decline in loan portfolio yield - Total interest income decreased slightly by 2.2% YoY to $14.28 million, while total interest expense fell sharply by 43.7% YoY to $1.42 million[121][123] - The net interest margin increased to 2.93% in Q1 2022 from 2.88% in Q1 2021, primarily driven by a 35 bps decline in the rate paid on interest-bearing deposits, led by a 94 bps drop in the rate paid on time deposits[124] Provision for Loan Losses and Asset Quality The provision for loan losses was significantly reduced to $150 thousand for Q1 2022, reflecting improved economic conditions and reduced COVID-related loan deferrals, while asset quality improved with nonperforming loans decreasing to $5.3 million (0.38% of total loans) and the allowance for loan losses providing strong coverage of 265.5% of nonperforming loans - The provision for loan losses decreased to $150 thousand in Q1 2022 from $515 thousand in Q1 2021, attributed to economic improvement and reduced uncertainty from the COVID-19 pandemic[134] Nonperforming Loan Trend | (In Thousands) | March 31, 2022 | December 31, 2021 | March 31, 2021 | | :--- | :--- | :--- | :--- | | Total Nonperforming Loans | $5,281 | $6,250 | $9,272 | - The ratio of nonperforming loans to total loans improved to 0.38% at March 31, 2022, from 0.45% at December 31, 2021[135] - The allowance for loan losses to nonperforming loans ratio increased to 265.54% at March 31, 2022, up from 226.82% at the end of 2021, indicating stronger coverage[135] Non-interest Income and Expense Total non-interest income decreased by $202 thousand YoY to $2.4 million, primarily due to a $563 thousand reduction in gain on sale of loans, partially offset by a $360 thousand increase in loan broker commissions, while total non-interest expense rose by $1.06 million YoY to $11.0 million, driven by higher salaries and a one-time branch closure write-down - A decrease in 'Gain on sale of loans' by $563 thousand was largely offset by an increase in 'Loan broker commissions' of $360 thousand, reflecting a shift in business mix[139][141] - Salaries and employee benefits, the largest expense component, increased by 11.9% YoY to $6.3 million due to the current employment environment and retention efforts[142][143] - Other non-interest expense increased by $354 thousand, primarily due to a $254 thousand write-down related to a branch closure[142] Financial Condition Analysis Total assets decreased slightly to $1.92 billion, while gross loans grew by $13.8 million to $1.41 billion, led by residential and construction real estate, and the investment portfolio's fair value increased despite unrealized losses, with total deposits decreasing due to a strategic shift from higher-cost time deposits to core deposits, and borrowed funds reduced, maintaining a strong capital position - Gross loans increased by 0.99% during the quarter to $1.406 billion, driven by growth in residential and construction real estate mortgages[148][149] - Total deposits decreased by $8.9 million, reflecting a $31.8 million reduction in time deposits, partially offset by a $22.8 million increase in core deposits (demand, NOW, money market, and savings accounts)[155][156] - Total borrowed funds decreased by 9.23% to $119.6 million, mainly due to the maturity of $13.0 million in long-term FHLB borrowings[157][158] Company Capital Ratios (March 31, 2022) | Ratio | Actual | Minimum to be Well Capitalized | | :--- | :--- | :--- | | Common Equity Tier I Capital | 10.730% | 6.500% | | Tier I Capital | 10.730% | 8.000% | | Total Capital | 11.690% | 10.000% | | Tier I Leverage | 8.330% | 5.000% | - The company's interest rate sensitivity analysis shows it is asset sensitive, with a 100 basis point parallel upward shift in rates projected to increase net interest income by 6.17% over the next twelve months[173][177] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate risk and liquidity risk, which are monitored through various measures, with no substantial changes in the market risk profile since the 2021 year-end report, indicating the company is well-positioned to respond to market interest rate changes - The company's main market risks are identified as interest rate risk and liquidity risk[180] - No substantial changes in market risk exposure were reported compared to the information provided in the Annual Report on Form 10-K for the year ended December 31, 2021[180] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2022, with no material changes occurring during the quarter that affected internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by this report[182] - There were no material changes to the company's internal control over financial reporting during the first quarter of 2022[183] Part II Other Information Legal Proceedings The company reported no legal proceedings during the period - There are no legal proceedings to report[185] Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any common stock during the quarter ended March 31, 2022, but subsequently, on April 12, 2022, the Board of Directors authorized a new share repurchase program for up to 354,000 shares, or approximately 5% of outstanding shares, effective through April 30, 2023 - No shares of common stock were repurchased during the three months ended March 31, 2022[188] - A new stock repurchase plan was authorized on April 12, 2022, allowing for the repurchase of up to 354,000 shares through April 30, 2023[188] Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO as required by the Sarbanes-Oxley Act, and the interactive data files (XBRL) - Exhibits filed include CEO and CFO certifications under Rule 13a-14(a) and Section 1350, as well as XBRL interactive data files[194]