January 26, 2015

Penns Woods Bancorp, Inc. Reports Fourth Quarter 2014 Operating Earnings

Williamsport, PA - January 26, 2015

Penns Woods Bancorp, Inc. continued its solid earnings and growth achieving net income of $14,608,000 for the twelve months ended December 31, 2014 resulting in basic and dilutive earnings per share of $3.03.

Highlights

  • Year over year comparisons are impacted by the acquisition of Luzerne National Bank Corporation ("Luzerne") that was effective June1, 2013 and resulted in increases in net loans of $254,057,000; investments of $21,140,000; deposits of $279,867,000; and assets of $329,209,000 at the time of acquisition.
  • 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 to $2,560,000 for the three months ended December31, 2014 compared to $3,389,000 for the same period of 2013. Net income from core operations decreased to $12,114,000 for the twelve months ended December 31, 2014 compared to $12,489,000 for the same period of 2013. Impacting the three and twelve month periods was an increase in the provision for loan losses of $1,005,000 and $575,000, respectively due to the level of charge-offs and the downgrading of several commercial loans.
  • Operating earnings per share for the three months ended December 31, 2014 were $0.53 basic and dilutive compared to $0.70 basic and dilutive for the same period of 2013. Operating earnings per share for the twelve months ended December 31, 2014 were $2.52 basic and dilutive compared to $2.83 basic and dilutive for the same period 2013.
  • Return on average assets was 0.93% for the three months ended December31, 2014 compared to 1.16% for the corresponding period of 2013. Return on average assets was 1.19% for the twelve months ended December 31, 2014 compared to 1.32% for the corresponding period of 2013.
  • Return on average equity was 8.33% for the three months ended December31, 2014 compared to 10.99% for the corresponding period of 2013. Return on average equity was 10.79% for the twelve months ended December 31, 2014 compared to 12.36% for the corresponding period of 2013.

"The twelve months ended December 31, 2014 have been an exciting and challenging time for the Penns Woods family.  We have experienced a record level of net income, while undertaking several projects that will prepare us for the future; upgrading software systems, opening a branch in Loyalsock, and beginning the process of building a branch in Lewisburg.   While these projects were progressing, we were also in the midst of shifting the earning asset portfolio from investments to loans.  This strategic action  was taken as we focused on shortening the earning asset portfolio per our strategy to reduce interest rate and market price risk, but this action did negatively impact net interest income and the net interest margin.  We also have been working through several impaired credits in the loan portfolio which resulted in $2,415,000 in charge-offs and an increase in the provision for loan losses during 2014," 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 and twelve months ended December 31, 2014 was $2,883,000 and $14,608,000 compared to $3,495,000 and $14,084,000 for the same periods of 2013.  Results for the three and twelve months ended December 31, 2014 compared to 2013 were impacted by an increase in after-tax securities gains of $217,000 (from a gain of $106,000 to a gain of $323,000) for the three month periods and an increase of $725,000 (from a gain of $1,595,000 to a gain of $2,320,000) for the twelve month periods.  In addition, a gain of $174,000 on death benefits related to bank owned life insurance was recorded during the first quarter of 2014.  Basic and dilutive earnings per share for the three and twelve months ended December 31, 2014 were $0.60 and $3.03 compared to $0.73 and $3.19 for the corresponding periods of 2013.  Return on average assets and return on average equity were 0.93% and 8.33% for the three months ended December 31, 2014 compared to 1.16% and 10.99% for the corresponding period of 2013. Return on average assets and return on average equity were 1.19%  and 10.79% for the twelve months ended December 31, 2014 compared to 1.32% and 12.36% for the corresponding period of 2013.

Net Interest Margin

The net interest margin for the three and twelve months ended December 31, 2014 was 3.73% and 3.81% compared to 3.98% and 4.13% for the corresponding periods of 2013.  The net interest margin has decreased for the comparable three and twelve months ended, while net interest income on a fully taxable equivalent basis has decreased $347,000 for the three months ended December 31, 2014 and increased $2,098,000 for the twelve months ended December 31, 2014 compared to the corresponding periods of 2013.  Driving this increase is the growth in the loan and deposit portfolios for the twelve months ended December 31, 2014 compared to the corresponding period for 2013, primarily due to growth in home equity products and the continued emphasis on core deposit growth.  The primary funding for the loan growth was an increase in core deposits.  These deposits represent a lower cost funding source than time deposits and comprise 77.96% of total deposits at December 31, 2014 compared to 75.83% at December 31, 2013.  The continued growth in core deposits has led to the total cost of deposits decreasing to 40 basis points ("bp") for the twelve months ended December 31, 2014 from 48 bp for the corresponding period of 2013. The rate paid on borrowings decreased slightly due to the impact of maturities and the entering into a capital lease agreement.  The changes in the composition of the deposit and borrowing portfolios has led to the total cost of interest bearing funding decreasing to 58 bp for the twelve months ended December 31, 2014 from 69 bp for the corresponding period of 2013.

"Consistent with industry trends and a reflection of our balance sheet management the net interest margin continues to decrease each quarter by several basis points resulting in the net interest margin for the year ended December 2014 being 3.81% versus 4.13% for the previous year.  The continued low interest rate environment has resulted in declining asset yields due to legacy assets being replaced at lower yields.  To offset the negative impact of declining yields on net interest income, we have focused on increasing the earning asset portfolio by adding quality short and intermediate term loans such as home equity loans, even though these new earning assets are at lower yields than legacy assets.  The investment portfolio is being actively managed in order to reduce interest rate and market risk. The principal action being undertaken is the sale of long-term municipal bonds that have a maturity date of 2025 or later and securities with a call date within the next five years.  Proceeds generated from the strategic selling of bonds are being deployed primarily into loans with limited reinvestment into intermediate term corporate bonds and short and intermediate term municipal bonds.  These actions do negatively impact current earnings, but the actions play a key role in our long-term asset liability management strategy as the balance sheet is shortened to better prepare for a rising rate environment.  The funding side of the balance sheet remains focused on increasing lower cost core deposits as there is limited opportunity to reduce funding costs," commented President Grafmyre.

Assets

Total assets increased $33,016,000 to $1,245,011,000 at December 31, 2014 compared to December 31, 2013.  Net loans increased $96,800,000 to $905,000,000 at December 31, 2014 compared to December 31, 2013 primarily due to campaigns related to increasing home equity product market share during 2013 and 2014 and growth in the commercial portfolio.  The investment portfolio decreased $56,399,000 from December 31, 2013 to December 31, 2014 due to our strategy to reduce the investment portfolio duration through the selective selling of bonds as opportunities develop.  The combination of loan portfolio growth and a decrease in the size of the investment portfolio has resulted in a shortening of the overall earning asset portfolio duration consistent with a strategy to reduce the interest rate and market risk exposure to a rising rate environment.

Non-performing Loans

The non-performing loans to total loans ratio increased to 1.34% at December 31, 2014 from 1.18% at December 31, 2013.   The increase in non-performing loans to $12,248,000 at December 31, 2014 from $9,678,000 at December 31, 2013 is primarily the result of certain commercial loans becoming non-performing.  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 charge-offs of $2,415,000 for the twelve months ended December 31, 2014 negatively impacted the allowance for loan losses which was 1.16% of total loans at December 31, 2014.  The majority of the loans charged-off had a specific allowance within the allowance for loan losses.

Deposits

Deposits increased $8,417,000 to $981,419,000 at December 31, 2014 compared to December 31, 2013.  Core deposits (total deposits excluding time deposits) increased $27,381,000, while higher cost time deposits decreased $18,964,000 due to our commitment to building complete banking relationships with our customers.  Noninterest-bearing deposits increased $26,001,000 to $243,378,000 at December 31, 2014 compared to December 31, 2013.  Driving this growth is our commitment to easy-to-use products, community involvement, and emphasis on customer service. 

Shareholders' Equity

Shareholders' equity increased $8,152,000 to $135,967,000 at December 31, 2014 compared to December 31, 2013.  The decrease in accumulated other comprehensive loss of $3,227,000 to $1,667,000 at December 31, 2014 from $4,894,000 at December 31, 2013 is primarily a result of an increase in unrealized gains on available for sale securities from an unrealized loss of $2,169,000 at December 31, 2013 to an unrealized gain of $2,930,000 at December 31, 2014.  The amount of accumulated other comprehensive loss at December 31, 2014 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 $1,872,000 to $4,597,000 at December 31, 2014.  The current level of shareholders' equity equates to a book value per share of $28.30 at December 31, 2014 compared to $26.52 at December 31, 2013 and an equity to asset ratio of 10.92% at December 31, 2014 compared to 10.55% at December 31, 2013.  Excluding goodwill and intangibles, book value per share was $24.44 at December 31, 2014 compared to $22.60 at December 31, 2013.  Dividends declared for the three and twelve months ended December 31, 2014 were $0.47 and $1.88 per share compared to $0.47 and $2.13 for the three and twelve months ended December 31, 2013.

Penns Woods Bancorp, Inc. is the parent company of Jersey Shore State Bank, which operates fourteen branch offices providing financial services in Lycoming, Clinton, Centre, and Montour Counties, and Luzerne Bank, which operates eight branch offices providing financial services in Luzerne County.  Investment and insurance products are offered through Jersey Shore State 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, 2013.

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

THIS INFORMATION IS SUBJECT TO YEAR-END AUDIT ADJUSTMENT


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