Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. Economic growth impacts the stability of salaries and interest rate level which in turn affects borrowers’ demand for, and ability to repay, their loans. As a small-cap bank with a market capitalisation of US$196m, Penns Woods Bancorp, Inc.’s (NASDAQ:PWOD) profit and value are directly affected by economic activity. Risk associate with repayment is measured by the level of bad debt which is an expense written off Penns Woods Bancorp’s bottom line. Today we will analyse Penns Woods Bancorp’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
How Good Is Penns Woods Bancorp At Forecasting Its Risks?
Penns Woods Bancorp’s understanding of its risk level can be estimated by its ability to forecast and provision for its bad loans. If it writes off more than 100% of the bad debt it provisioned for, then it may have underestimated the risks that may have led to a higher bad loan level which begs the question – does Penns Woods Bancorp understand its own risk? Penns Woods Bancorp’s low non-performing loan allowance to non-performing loan ratio of 83.5% means the bank has under-provisioned by -16.5%, indicating either an unexpected one-off occurrence with defaults or poor bad debt provisioning. We do note though, that many banks don't require 100% coverage of their non-performing loans, as banks often can seize collateral to cover their losses on bad loans.
How Much Risk Is Too Much?
Penns Woods Bancorp’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. Ideally, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes out directly from Penns Woods Bancorp’s profit. A ratio of 1.2% may indicate the bank faces relatively low chance of default and exhibits strong bad debt management - or it could indicate risks in the portfolio have not fully matured.
Is There Enough Safe Form Of Borrowing?
Penns Woods Bancorp makes money by lending out its various forms of borrowings. Deposits from customers tend to bear the lowest risk given the relatively stable amount available and interest rate. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Since Penns Woods Bancorp’s total deposit to total liabilities is within the sensible margin at 79% compared to other banks' level of 50%, it shows a prudent level of the bank's safer form of borrowing and an appropriate level of risk.
How will PWOD’s recent acquisition impact the business going forward? Should you be concerned about the future of PWOD and the sustainability of its financial health? I’ve bookmarked PWOD’s company page on Simply Wall St to stay informed with changes in outlook and valuation. This is also the source of data for this article. The three main sections I’d recommend you check out are:
- Future Outlook: What are well-informed industry analysts predicting for PWOD’s future growth? Take a look at our free research report of analyst consensus for PWOD’s outlook.
- Valuation: What is PWOD worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether PWOD is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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