Penns Woods Bancorp, Inc. continued its strong earnings and growth during the recently completed first quarter of 2013. Earnings of $3,684,000 were achieved for the three month period ending March 31, 2013 resulting in basic and dilutive earnings per share of $0.96. The driving force behind the strong net income was growth in loans and core deposits as both categories increased in excess of 10% over the past twelve months.
Highlights
- Net income from core operations ("operating earnings"), which is a non-GAAP measure of net income excluding net securities gains and bank owned life insurance gains on death benefits, decreased slightly to $3,033,000 for the three months ended March 31, 2013 compared to $3,191,000 for the same period of 2012.
- Operating earnings per share for the three months ended March 31, 2013 were $0.79 basic and dilutive compared to $0.83 basic and dilutive for the same period of 2012.
- Return on average assets was 1.72% for the three months ended March 31, 2013 compared to 1.91% for the corresponding period of 2012.
- Return on average equity was 15.48% for the three months ended March 31, 2013 compared to 17.39% for the corresponding period of 2012.
- The results for the three months ended March 31, 2013 were negatively impacted by $88,000 in expenses related to the announced acquisition of Luzerne National Bank Corporation.
"During the current prolonged period of low rates, we have taken the strategic path of growing our balance sheet by acquiring high quality earning assets funded by core deposit growth. The loan growth is being driven by home equity and mortgage products, while NOW and savings accounts drive the core deposit growth. As part of our strategic plan, we continue to invest in revenue streams for the future. These revenue streams include the successful 2012 opening of our Danville branch, approved branch locations in Lewisburg and Loyalsock, expansion of our residential secondary market footprint and commercial services department, and the announced acquisition of Luzerne National Bank Corporation. While the investment in these areas limits our ability to increase current earnings, these areas will further diversify our revenue streams and should positively impact net income in future periods, while reducing the reliance on net interest income as the driver of earnings," said Richard A. Grafmyre, CFP®, President and CEO.
A reconciliation of the non-GAAP financial measures of operating earnings, operating return on assets, operating return on equity, and operating earnings per share, described in the highlights, to the comparable GAAP financial measures is included at the end of this press release.
Net Income
Net income, as reported under GAAP, for the three months ended March 31, 2013 was $3,684,000 compared to $3,689,000 for the same period of 2012. Results for the three months ended March 31, 2013 compared to 2012 were impacted by an increase in after-tax securities gains of $262,000 (from a gain of $389,000 to a gain of $651,000). In addition, a gain of $109,000 on death benefit related to bank owned life insurance was recorded during the first quarter of 2012. Impacting the results for the three months ended March 31, 2013 was the recognition of $88,000 in expenses related to the announced acquisition of Luzerne National Bank Corporation, a write down of $330,000 of other real estate owned, and the payoff of a nonaccrual loan resulting in the recognition of $528,000 in interest income and a recovery of a previous loan charge-off of $850,000. Basic and dilutive earnings per share for the three months ended March 31, 2013 and the corresponding period of 2012 were $0.96. Return on average assets and return on average equity were 1.72% and 15.48% for the three months ended March 31, 2013 compared to 1.91% and 17.39% for the corresponding period of 2012.
Net Interest Margin
The net interest margin for the three months ended March 31, 2013 was 4.46% compared to 4.72% for the corresponding periods of 2012. While the net interest margin has decreased year over year, net interest income on a fully taxable equivalent basis has increased $445,000 to $8,943,000 for the three months ended March 31, 2013 compared to the corresponding period of 2012. Driving this increase is the growth in the loan portfolio of 15.52% primarily due to growth in home equity products, recognition of $528,000 in loan interest from the payoff of a nonaccrual loan, and the continued emphasis on core deposit growth. The primary funding for the loan growth was an increase in core deposits of 10.63%. These deposits represent a lower cost funding source than time deposits and comprise 74.55% of total deposits at March 31, 2013 compared to 71.48% at March 31, 2012. The continued growth in core deposits has led to the total cost of deposits decreasing to 49 bp from 66 bp for the three month periods ended March 31, 2013 and 2012, respectively. FHLB long-term borrowings have been increased by $10,000,000 since March 31, 2012 to supplement the deposit funding of a combination of loan growth and FHLB debt that matured. Long-term borrowings of $5,000,000 matured during the three months ended March 31, 2013 carrying an average rate of 3.74%. The changes in the composition of the deposit and borrowing portfolios has led to the total cost of funds decreasing to 72 bp from 97 bp for the three months ended March 31, 2013 and 2012, respectively.
"Despite the uptick in the net interest margin, the margin has and will continue to encounter challenges as we move forward in the current low rate environment. Our strategic direction is to continue to add quality earning assets, even though these new earning assets are being added are at a lower rate than the legacy earning assets that are maturing or are repricing lower at their rate reset dates. In addition, our investment portfolio strategy continues to focus on shortening the portfolio duration in order to reduce interest rate and market risk in the future. The earning asset acquisition strategies do limit current earnings, but they play a key role in our long-term asset liability management strategy. On the funding side of the balance sheet there is limited opportunity to reduce costs. During the second half of 2012, new borrowings from the FHLB totaled $30 million at a blended rate of less than one percent. These borrowings replaced $15 million in higher cost FHLB borrowings that were maturing and provided additional funding for the growth in the loan and investment portfolios," commented President Grafmyre.
Assets
Total assets increased $59,883,000 to $852,997,000 at March 31, 2013 compared to March 31, 2012. Net loans increased 15.55% to $503,592,000 at March 31, 2013 compared to March 31, 2012 due in large part to campaigns related to increasing home equity product market share during 2012 and carrying over into 2013. The investment portfolio increased $3,744,000 from March 31, 2012 to March 31, 2013 due to the purchase of primarily short maturity bonds that have been utilized to reduce the portfolio duration and to provide current cash flow. In addition, we continue to follow our strategy to reduce the investment portfolio duration through the selective selling of bonds as opportunities develop.
Non-performing Loans
Our non-performing loans to total loans ratio has decreased to 1.77% at March 31, 2013 from 2.55% at March 31, 2012. The decrease in non-performing loans is primarily the result of several partial charge-offs and the payoff of a large construction loan that was on nonaccrual. The majority of non-performing loans are centered on several loans that are either in a secured position and have sureties with a strong underlying financial position or have a specific allocation for any impairment recorded within the allowance for loan losses. Net loan recoveries of $713,000 for the three months ended March 31, 2013 augmented the allowance for loan losses which was 1.72% of total loans at March 31, 2013.
Deposits
Deposits have grown 6.08%, or $37,762,000, to $659,304,000 at March 31, 2013 compared to March 31, 2012, with core deposits (total deposits excluding time deposits) increasing $47,242,000, while higher cost time deposits decreased $9,480,000. Noninterest-bearing deposits have increased 3.61% to $120,471,000 at March 31, 2013 compared to March 31, 2012. Also playing a significant role in increasing core deposits were NOW and savings accounts with growth rates of 29.13% and 12.04%, respectively. Driving this growth is our commitment to easy-to-use products, community involvement, and emphasis on customer service. We have also successfully implemented a targeted marketing campaign aimed at further strengthening our customer relationships, while also expanding our market penetration.
Shareholders' Equity
Shareholders' equity increased $8,695,000 to $93,974,000 at March 31, 2013 compared to March 31, 2012. The accumulated other comprehensive gain of $3,709,000 at March 31, 2013 is a result of an increase in unrealized gains on available for sale securities from an unrealized gain of $5,832,000 at March 31, 2012 to an unrealized gain of $8,516,000 at March 31, 2013. However, the amount of accumulated other comprehensive gain at March 31, 2013 was also impacted by the change in net excess of the projected benefit obligation over the market value of the plan assets of the defined benefit pension plan resulting in an increase in the net loss of $674,000 to $4,807,000 at March 31, 2013. The current level of shareholders' equity equates to a book value per share of $24.48 at March 31, 2013 compared to $22.22 at March 31, 2012 and an equity to asset ratio of 11.02% at March 31, 2013 compared to 10.75% at March 31, 2012. Excluding accumulated other comprehensive gain/loss, book value per share was $23.51 at March 31, 2013 compared to $21.78 at March 31, 2012. Dividends per share declared to shareholders were $0.72 for the three months ended March 31, 2013, which includes a special cash dividend of $0.25 per share, compared to $0.47 for the three months ended March 31, 2012.
Penns Woods Bancorp, Inc. is the parent company of Jersey Shore State Bank, which operates thirteen branch offices providing financial services in Lycoming, Clinton, Centre, and Montour Counties. Investment and insurance products are offered through the bank's subsidiary, The M Group, Inc. D/B/A The Comprehensive Financial Group.
NOTE: This press release contains financial information determined by methods other than in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"). Management uses the non-GAAP measure of net income from core operations in its analysis of the company's performance. This measure, as used by the Company, adjusts net income determined in accordance with GAAP to exclude the effects of special items, including significant gains or losses that are unusual in nature such as net securities gains and losses. Because certain of these items and their impact on the Company's performance are difficult to predict, management believes presentation of financial measures excluding the impact of such items provides useful supplemental information in evaluating the operating results of the Company's core businesses. These disclosures should not be viewed as a substitute for net income determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.
This press release may contain certain "forward-looking statements" including statements concerning plans, objectives, future events or performance and assumptions and other statements, which are statements other than statements of historical fact. The Company cautions readers that the following important factors, among others, may have affected and could in the future affect actual results and could cause actual results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company herein: (i) the effect of changes in laws and regulations, including federal and state banking laws and regulations, and the associated costs of compliance with such laws and regulations either currently or in the future as applicable; (ii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or of changes in the Company's organization, compensation and benefit plans; (iii) the effect on the Company's competitive position within its market area of the increasing consolidation within the banking and financial services industries, including the increased competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services; (iv) the effect of changes in interest rates; and (v) the effect of changes in the business cycle and downturns in the local, regional or national economies. For a list of other factors which could affect the Company's results, see the Company's filings with the Securities and Exchange Commission, including "Item 1A. Risk Factors," set forth in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
You should not place undue reliance on any forward-looking statements. These statements speak only as of the date of this press release, even if subsequently made available by the Company on its website or otherwise. The Company undertakes no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this press release.
Previous press releases and additional information can be obtained from the Company's website at www.jssb.com.
Contact: Richard A. Grafmyre, President and Chief Executive Officer
300 Market Street
Williamsport, PA 17701
570-322-1111 e-mail: jssb@jssb.com
THIS INFORMATION IS SUBJECT TO YEAR-END AUDIT ADJUSTMENT