October 21, 2015

Penns Woods Bancorp, Inc. Reports Third Quarter 2015 Operating Earnings

Williamsport, PA October 21, 2015

Penns Woods Bancorp, Inc. continued its solid earnings, supported by strong asset and deposit growth, achieving net income of $10,152,000 for the nine months ended September 30, 2015 resulting in basic and dilutive earnings per share of $2.12.

Highlights

•     Net income from core operations (“operating earnings”), which is a non-generally accepted accounting principles (GAAP) measure of net income excluding net securities gains and bank owned life insurance gains on death benefits, decreased to $3,039,000 for the three months ended September 30, 2015 compared to $3,377,000 for the same period of 2014.  Net income from core operations decreased to $9,046,000 for the nine months ended September 30, 2015 compared to $9,554,000 for the same period of 2014.  Impacting the three and nine months ended September 30, 2015 compared to 2014 were an increase in the provision for loan losses of $60,000 and $575,000 due to the level of charge-offs and significant loan portfolio growth.  In addition, the investment portfolio has declined $30,978,000 from September 30, 2014 to September 30, 2015 as part of our strategy to position the balance sheet for a rising rate environment.

•     Operating earnings per share for the three months ended September 30, 2015 and 2014 were $0.64 and $0.70 for both basic and dilutive.  Operating earnings per share for the nine months ended September 30, 2015 were $1.89 basic and dilutive compared to $1.98 basic and dilutive for the same period of 2014.

•     Return on average assets was 1.04% for the three months ended September 30, 2015 compared to 1.56% for the corresponding period of 2014.  Return on average assets was 1.06% for the nine months ended September 30, 2015 compared to 1.28% for the corresponding period of 2014.

•     Return on average equity was 9.89% for the three months ended September 30, 2015 compared to 13.95% for the corresponding period of 2014.  Return on average equity was 9.90% for the nine months ended September 30, 2015 compared to 11.63% for the corresponding period of 2014.

“The first nine months of 2015 have seen the Penns Woods Family continue on its proven path of success, while also preparing for the future.  Continued strong customer service and professionalism by our employees has led to double digit loan growth, deposit growth, and relationship building with our customers.  The future will entail the opening of a branch in Lewisburg during the fourth quarter of 2015 and the continued addition of technology driven products and services,” 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 nine months ended September 30, 2015 was $3,364,000 and $10,152,000 compared to $4,793,000 and $11,725,000 for the same periods of 2014.  Results for the three and nine months ended September 30, 2015 compared to 2014 were impacted by a decrease in after-tax securities gains of $1,091,000 (from a gain of $1,416,000 to a gain of $325,000) for the three month periods and a decrease in the after-tax securities gains of $891,000 (from a gain of $1,997,000 to a gain of $1,106,000) for the nine 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 nine months ended September 30, 2015 were $0.71 and $2.12 compared to $0.99 and $2.43 for the corresponding periods of 2014.  Return on average assets and return on average equity were 1.04% and 9.89% for the three months ended September 30, 2015 compared to 1.56% and 13.95% for the corresponding period of 2014.  Return on average assets and return on average equity were 1.06% and 9.90% for the nine months ended September 30, 2015 compared to 1.28% and 11.63% for the corresponding period of 2014.

Net Interest Margin

The net interest margin for the three and nine months ended September 30, 2015 was 3.55% and 3.63% compared to 3.78% and 3.84% for the corresponding periods of 2014.  The decline in the net interest margin was driven by a decreasing yield on the loan and investment portfolios due to the continued low rate environment.  The impact of the declining earning asset yield and decreasing investment portfolio balance was partially offset by a 12.45% growth in gross loans from September 30, 2014 to September 30, 2015 resulting in net interest income remaining flat compared to the comparable three and nine month periods of 2014. The loan growth was funded by an increase in core deposits, decrease in the investment portfolio, and an increase in borrowings.  Core deposits represent a lower cost funding source than time deposits and comprise 78.02% of total deposits at September 30, 2015 and 77.90% at September 30, 2014.  

“We, as with the financial industry, continue to experience a declining net interest margin due to the low rate environment which has resulted in a decrease in the yield of the earning asset portfolio.  We have maintained our focus on adding quality earning assets such as short and intermediate term loans which has led to growth in the home equity segment of the loan portfolio.  Despite the growth in earning assets, net interest income has remained flat as higher yielding legacy assets continue to mature or reprice to lower yields and new earning assets are added at lower yields than the existing portfolio.  Selective selling of bonds within the investment portfolio continues to occur as interest and market risk within the investment portfolio continues to be reduced.  This active management has resulted in a reduction of long-term municipal bonds within the portfolio and has provided funding for the growth of the loan portfolio.  The reduction in size of the investment portfolio does negatively impact current earnings, but the actions play a key role in our long-term asset liability management strategy,” commented President Grafmyre.

Assets

Total assets increased $72,170,000 to $1,299,292,000 at September 30, 2015 compared to September 30, 2014.  Net loans increased $108,687,000 to $990,164,000 at September 30, 2015 compared to September 30, 2014 primarily due to campaigns related to increasing home equity product market share during 2014 and 2015 and growth in the commercial loan portfolio.  The investment portfolio decreased $30,978,000 from September 30, 2014 to September 30, 2015 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 decreased to 0.86% at September 30, 2015 from 1.38% at September 30, 2014.  The ratio decreased due to a decrease in non-performing loans and an increase in total loans from September 30, 2014 to September 30, 2015.  The decrease in non-performing loans to $8,608,000 at September 30, 2015 from $12,294,000 at September 30, 2014 is primarily the result of a large commercial real estate loan that was removed from non-accrual status due to improved company performance and a solid payment history.  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 $910,000 for the nine months ended September 30, 2015 negatively impacted the allowance for loan losses which was 1.15% of total loans at September 30, 2015.  The majority of the loans charged-off had a specific allowance within the allowance for loan losses.

Deposits

Deposits increased $15,673,000 to $1,004,801,000 at September 30, 2015 compared to September 30, 2014.  Core deposits (total deposits excluding time deposits) increased $13,452,000 due to our commitment to building complete banking relationships with our customers.  Noninterest-bearing deposits increased $15,260,000 to $247,848,000 at September 30, 2015 compared to September 30, 2014.  Driving this growth is our commitment to easy-to-use products, community involvement, and emphasis on customer service.  While deposit gathering efforts have centered on core deposits, the lengthening of the time deposit portfolio is in process as part of the strategy to build balance sheet protection in a rising rate environment.

Shareholders’ Equity

Shareholders’ equity decreased $1,427,000 to $135,577,000 at September 30, 2015 compared to September 30, 2014.  Since September 30, 2014 treasury stock purchases of $2,687,000 for 61,804 shares were completed as part of the stock repurchase plan.  The change in accumulated other comprehensive loss from $211,000 at September 30, 2014 to $3,100,000 at September 30, 2015 is a result of a decrease in unrealized gains on available for sale securities from an unrealized gain of $2,514,000 at September 30, 2014 to an unrealized gain of $1,418,000 at September 30, 2015.  The amount of accumulated other comprehensive loss at September 30, 2015 was also impacted by the change in net excess of the projected benefit obligation over the fair value of the plan assets of the defined benefit pension plan resulting in an increase in the net loss of $1,793,000 to $4,518,000 at September 30, 2015.  The current level of shareholders’ equity equates to a book value per share of $28.54 at September 30, 2015 compared to $28.49 at September 30, 2014 and an equity to asset ratio of 10.43% at September 30, 2015 compared to 11.16% at September 30, 2014.  Excluding goodwill and intangibles, book value per share was $24.66 at September 30, 2015 compared to $24.61 at September 30, 2014.  Dividends declared for each of the three and nine months ended September 30, 2015 and 2014 were $0.47 and $1.41 per share.

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, 2014.

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.pwod.com.

Contact:    Richard A. Grafmyre, President and Chief Executive Officer
    300 Market Street
    Williamsport, PA 17701
    570-322-1111    e-mail: pwod@pwod.com

THIS INFORMATION IS SUBJECT TO YEAR-END AUDIT ADJUSTMENT