**FORM10-K/A**

 

**AmendmentNo. 2**

 

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, DC 20549**

 
| **ý**                                                                                                                                                                                                                                                                                                                                               | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**                       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                     |
| **For the fiscal year ended December 31,  2004**                                                                                                                                                                                                                                                                                                    |
|                                                                                                                                                                                                                                                                                                                                                     |
| **OR**                                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                                                     |
| **o**                                                                                                                                                                                                                                                                                                                                                    | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934 (NO FEE REQUIRED)** |
|                                                                                                                                                                                                                                                                                                                                                     |
| **For the transition period from                                  to                   ** |

 

**Commission file number 0-17077**

 

**PENNS WOODS BANCORP, INC.**

(exact name of registrant asspecified in its charter)

 
| **Pennsylvania**                                                            | ** ** | **23-2226454**                         |
|-----------------------------------------------------------------------------|------------|----------------------------------------|
| (State or  other jurisdiction  of incorporation or organization)            |       | (I.R.S.  Employer  Identification No.) |
|                                                                        |       |                                   |
| **300 Market Street, P.O. Box 967  Williamsport, Pennsylvania 17703-0967**  |
| (Address of principal executive offices)                                    |
|                                                                        |       |                                   |
| Registrant’s telephone number, including  area code (**570) 322-1111** |

 

Securities registered pursuant to Section 12(b) of the Act:

 
| **Title of each class** | ** ** | **Name of each exchange  which registered** |
|-------------------------|------------|---------------------------------------------|
| **None**                |       | **None**                                    |

 

**Securities to be registered pursuant to Section 12(g)of the Act:**

 

**CommonStock, par value $10 per share**(Title of Class)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days.    Yes ý   No o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.                                  ý

 

Indicate by check mark whether the registrant is an accelerated fileras of defined in Rule 12b-2 of the Act.    Yes ý  No o

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).  Yes o  No ý

 

State the aggregate market value of the voting stock held bynon-affiliates of the registrant **$135,611,421 at June 30,2004.**

 

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date.

 
| **Class**                       | ** ** | **Outstanding at March 7,  2005** |
|---------------------------------|------------|----------------------------------------|
| **Common Stock, $10 Par Value** | ** ** | **3,321,637  Shares**                  |

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Portions of the registrant’s definitive proxy statement prepared inconnection with its annual meeting of shareholders to be held on April 27,2005 are incorporated by reference in Part III hereof.

 

 

----

 

EXPLANATORY NOTE

 

Penns WoodsBancorp, Inc. (the “Company”) is filing this Amendment No. 2 on Form 10-K/Ato amend the Company’s Annual Report on Form 10-K for the fiscal yearended December 31, 2004, which was filed on March 15, 2005, asamended by Amendment No. 1 on Form 10-K/A, which was filed on May 10,2005.  The original Annual Report on Form 10-Kinadvertently omitted the conformed signature of the Company’s independentregistered public accounting firm from its report, dated February 11,2005, included in Part II, Item 8, Financial Statements andSupplementary Data.  Pursuant to SEC Rule 12b-15,the Company is filing a revised Item 8, in its entirety.  The only change to Item 8 as revised bythis Amendment No. 2 on Form 10-K/A from Item 8 included in theoriginal Annual Report on Form 10-K filed on March 15, 2005 is theaddition of the conformed signature of the Company’s independent registeredpublic accounting firm to its audit report, dated February 11, 2005.

 

This amendedAnnual Report on Form 10-K/A has not been updated except as required toreflect the effects of the foregoing correction.  In order to preserve the nature and characterof the disclosures set forth in such items as originally filed, no attempt hasbeen made in this amendment to modify or update the disclosures in the originalAnnul Report on Form 10-K, except for the foregoing correction.  As a result, this amended Annual Report on Form 10-K/Ahas not been updated for events subsequent to the date of the original filing,and all information contained in this amended Annual Report on Form 10-K/Aand the original Annual Report on Form 10-K is subject to updating andsupplementing as provided in the periodic reports that the Company has filedand/or will file with the SEC after the original filing date of the AnnualReport on Form 10-K.

 

Pursuant toSEC Rule 12b-15, in connection with this Amendment No. 2 on Form 10-K/A,the Company is filing updated Exhibits 31(v), 31(vi), 32(iii) and32(iv).

 

**PART II**

 

**ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARYDATA**

 

1

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

Boardof Directors and Shareholders

PennsWoods Bancorp, Inc.

 

Wehave audited the consolidated balance sheet of Penns Woods Bancorp, Inc. andsubsidiaries as of December 31, 2004 and 2003, and the relatedconsolidated statements of income, changes in stockholders’ equity, and cashflows for each of the three years in the period ended December 31, 2004.These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements basedon our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Penns WoodsBancorp, Inc. and subsidiaries as of December 31, 2004 and 2003, and theconsolidated results of their operations and cash flows for each of the threeyears in the period ended December 31, 2004, in conformity with U.S.generally accepted accounting principles.

 
| /s/ S.R. Snodgrass, A.C. |   |
|--------------------------|--------|
| Wexford, Pennsylvania    |
| February 11, 2005   |

 

2

----

 

**Penns Woods Bancorp, Inc.**

**Consolidated Balance Sheet**

 
| ** **                                                                                        | ** ** | **DECEMBER 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **(In Thousands, Except Per Share  Data)**                                                        | ** ** | **2004**              | ** ** | **2003** | ** ** |
|                                                                                              |       |                  |       |   |   |
| **ASSETS:**                                                                                       |       |                  |       |   |   |
| Noninterest-bearing  balances in other financial institutions                                     |       | $                     | 12,602     |   | $ | 10,196 |   |
| Interest-bearing  deposits in other financial institutions                                        |       | 24                    |       | 34 |   |
| Total cash  and cash equivalents                                                                  |       | 12,626                |       | 10,230 |   |
|                                                                                              |       |                  |       |   |   |
| Investment  securities, available for sale, at fair value                                         |       | 177,957               |       | 210,611 |   |
| Investment  securities held to maturity (fair value of $561 and $701)                             |       | 558                   |       | 686 |   |
| Loans held  for sale                                                                              |       | 4,624                 |       | 4,803 |   |
| Loans, net  of unearned discount of $1,096 and $940                                               |       | 324,505               |       | 275,828 |   |
| Less:Allowance  for loan losses                                                                   |       | 3,338                 |       | 3,069 |   |
| Loans, net                                                                                        |       | 321,167               |       | 272,759 |   |
| Premises and  equipment, net                                                                      |       | 4,882                 |       | 4,625 |   |
| Accrued  interest receivable                                                                      |       | 2,246                 |       | 2,242 |   |
| Bank-owned  life insurance                                                                        |       | 10,976                |       | 8,908 |   |
| Goodwill                                                                                          |       | 3,032                 |       | 3,032 |   |
| Other assets                                                                                      |       | 8,635                 |       | 9,485 |   |
| **TOTAL  ASSETS**                                                                                 |       | $                     | 546,703    |   | $ | 527,381 |   |
| **LIABILITIES:**                                                                                  |       |                  |       |   |   |
| Interest-bearing  deposits                                                                        |       | $                     | 282,786    |   | $ | 269,443 |   |
| Noninterest-bearing  deposits                                                                     |       | 74,050                |       | 64,875 |   |
| TOTAL  DEPOSITS                                                                                   |       | 356,836               |       | 334,318 |   |
| Short-term  borrowings                                                                            |       | 36,475                |       | 47,265 |   |
| Long-term  borrowings, Federal Home Loan Bank                                                     |       | 75,878                |       | 70,878 |   |
| Accrued  interest payable                                                                         |       | 850                   |       | 836 |   |
| Other  liabilities                                                                                |       | 3,499                 |       | 4,315 |   |
| TOTAL  LIABILITIES                                                                                |       | 473,538               |       | 457,612 |   |
| **SHAREHOLDERS’EQUITY:**                                                                     |       |                  |       |   |   |
| Common  stock, par value $10; 10,000,000 shares authorized 3,331,837 and 3,326,560  shares issued |       | 33,318                |       | 33,265 |   |
| Additional  paid-in capital                                                                       |       | 17,700                |       | 17,559 |   |
| Retained  earnings                                                                                |       | 18,262                |       | 13,022 |   |
| Accumulated  other comprehensive income                                                           |       | 4,331                 |       | 6,132 |   |
| Treasury  stock, at cost (10,310 and 5,000 shares)                                                |       | (446                  | )          | (209 | ) |
| TOTAL  SHAREHOLDERS’EQUITY                                                                   |       | 73,165                |       | 69,769 |   |
| **TOTAL**                                                                                         |       | $                     | 546,703    |   | $ | 527,381 |   |

 

SeeAccompanying Notes to the Consolidated Financial Statements.

 

3

----

 

**Penns WoodsBancorp, Inc.**

**ConsolidatedStatement of Income**

 
| ** **                                               | ** ** | **YEAR ENDED DECEMBER 31,** |
|----------------------------------------------------------|------------|----------------------------------|
| **(In Thousands, Except Per Share  Data)**               | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                     |       |                             |   |   |   |   |   |
| **INTEREST  AND DIVIDEND INCOME:**                       |       |                             |   |   |   |   |   |
| Loans  including fees                                    |       | $                                | 21,363 |   | $ | 19,963 |   | $ | 20,911 |   |
| Investment  Securities:                                  |       |                             |   |   |   |   |   |
| Taxable                                                  |       | 7,769                            |   | 6,550 |   | 4,999 |   |
| Tax-exempt                                               |       | 1,707                            |   | 2,608 |   | 3,252 |   |
| Other  dividend and interest income                      |       | 108                              |   | 111 |   | 140 |   |
| TOTAL  INTEREST AND DIVIDEND INCOME                      |       | 30,947                           |   | 29,232 |   | 29,302 |   |
| **INTEREST  EXPENSE:**                                   |       |                             |   |   |   |   |   |
| Deposits                                                 |       | 4,775                            |   | 5,656 |   | 7,857 |   |
| Short-term  borrowings                                   |       | 539                              |   | 428 |   | 501 |   |
| Long-term  borrowings                                    |       | 3,454                            |   | 3,181 |   | 2,488 |   |
| TOTAL  INTEREST EXPENSE                                  |       | 8,768                            |   | 9,265 |   | 10,846 |   |
| **NET  INTEREST INCOME**                                 |       | 22,179                           |   | 19,967 |   | 18,456 |   |
| **PROVISION  FOR LOAN LOSSES**                           |       | 465                              |   | 255 |   | 365 |   |
|                                                     |       |                             |   |   |   |   |   |
| **NET  INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES** |       | 21,714                           |   | 19,712 |   | 18,091 |   |
| **NON-INTEREST  INCOME:**                                |       |                             |   |   |   |   |   |
| Service  charges                                         |       | 1,983                            |   | 1,917 |   | 1,833 |   |
| Securities  gains, net                                   |       | 2,176                            |   | 3,479 |   | 35 |   |
| Bank-owned  life insurance                               |       | 294                              |   | 404 |   | 416 |   |
| Insurance  commissions                                   |       | 2,282                            |   | 1,598 |   | 1,807 |   |
| Other income                                             |       | 1,214                            |   | 1,056 |   | 1,164 |   |
| TOTAL  NON-INTEREST INCOME                               |       | 7,949                            |   | 8,454 |   | 5,255 |   |
| **NON-INTEREST  EXPENSES:**                              |       |                             |   |   |   |   |   |
| Salaries and  employee benefits                          |       | 7,937                            |   | 7,262 |   | 6,944 |   |
| Occupancy  expense, net                                  |       | 959                              |   | 877 |   | 831 |   |
| Furniture  and equipment expense                         |       | 1,016                            |   | 999 |   | 837 |   |
| Advertising  expense                                     |       | 344                              |   | 388 |   | 372 |   |
| Pennsylvania  shares tax expense                         |       | 508                              |   | 455 |   | 411 |   |
| Other  expenses                                          |       | 3,553                            |   | 3,308 |   | 2,818 |   |
| TOTAL  NON-INTEREST EXPENSES                             |       | 14,317                           |   | 13,289 |   | 12,213 |   |
|                                                     |       |                             |   |   |   |   |   |
| **INCOME  BEFORE INCOME TAX PROVISION**                  |       | 15,346                           |   | 14,877 |   | 11,133 |   |
| **INCOME  TAX PROVISION**                                |       | 4,263                            |   | 3,703 |   | 2,247 |   |
| **NET  INCOME**                                          |       | $                                | 11,083 |   | $ | 11,174 |   | $ | 8,886 |   |
| **EARNINGS  PER SHARE – BASIC**                     |       | $                                | 3.33 |   | $ | 3.35 |   | $ | 2.66 |   |
| **EARNINGS  PER SHARE – DILUTED**                   |       | $                                | 3.33 |   | $ | 3.35 |   | $ | 2.66 |   |
| **WEIGHTED  AVERAGE SHARES OUTSTANDING-BASIC**           |       | $                                | 3,325,007 |   | $ | 3,330,585 |   | $ | 3,336,312 |   |
| **WEIGHTED  AVERAGE SHARES OUTSTANDING-DILUTED**         |       | $                                | 3,328,627 |   | $ | 3,333,798 |   | $ | 3,339,249 |   |

 

See Accompanying Notes tothe Consolidated Financial Statements.

 

4

----

 

**Penns WoodsBancorp, Inc.**

**Consolidated Statement of Changes In Shareholders’Equity**

 
| **(In Thousands, Except Per Share  Data)**                                                               | ** ** | **COMMON STOCK  SHARES** | ** ** | **AMOUNT** | ** ** | **ADDITIONAL  PAID-IN  CAPITAL** | ** ** | **RETAINED  EARNINGS** | ** ** | **ACCUMULATED  OTHER  COMPREHENSIVE  INCOME  (LOSS)** | ** ** | **TREASURY  STOCK** | ** ** | **TOTAL  SHAREHOLDERS’  EQUITY** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|------------|------------|----------------------------------|------------|------------------------|------------|-------------------------------------------------------|------------|---------------------|------------|---------------------------------------|------------|
|                                                                                                     |       |                     |       |       |       |                             |       |                   |       |                                                  |       |                |       |                                  |       |
| Balance, December 31,  2001                                                                         |       | 3,131,644                |       | $          | 31,316     |                             | $          | 18,230                 |       | $                                                     | 6,987      |                | $          | 1,729                                 |       | $ | (3,010 | ) | $ | 55,252 |   |
|                                                                                                     |       |                     |       |       |       |                             |       |                   |       |                                                  |       |                |       |                                  |       |
| Comprehensive Income:                                                                                    |       |                     |       |       |       |                             |       |                   |       |                                                  |       |                |       |                                  |       |
| Net income                                                                                               |       |                     |       |       |       |                             |       | 8,886                  |       |                                                  |       |                |       | 8,886                                 |       |
| Unrealized gain on available  for sale securities, net of reclassification adjustments and tax of $1,760 |       |                     |       |       |       |                             |       |                   |       | 3,416                                                 |       |                |       | 3,416                                 |       |
| Total comprehensive income                                                                               |       |                     |       |       |       |                             |       |                   |       |                                                  |       |                |       | 12,302                                |       |
| Dividends declared, ($1.24  per share)                                                                   |       |                     |       |       |       |                             |       | (4,124                 | )          |                                                  |       |                |       | (4,124                                | )          |
| Stock options exercised                                                                                  |       | 5,188                    |       | 52         |       | 61                               |       |                   |       |                                                  |       |                |       | 113                                   |       |
| Purchase of treasury stock  (13,449 shares)                                                              |       |                     |       |       |       |                             |       |                   |       |                                                  |       | (401                | )          | (401                                  | )          |
| Balance, December 31,  2002                                                                         |       | 3,136,832                |       | 31,368     |       | 18,291                           |       | 11,749                 |       | 5,145                                                 |       | (3,411              | )          | 63,142                                |       |
| Stock split effected in the  form of a 10% dividend                                                      |       | 187,143                  |       | 1,871      |       | (793                             | )          | (4,900                 | )          |                                                  |       | 3,822               |       |                                  |       |
| Comprehensive Income:                                                                                    |       |                     |       |       |       |                             |       |                   |       |                                                  |       |                |       |                                  |       |
| Net income                                                                                               |       |                     |       |       |       |                             |       | 11,174                 |       |                                                  |       |                |       | 11,174                                |       |
| Unrealized gain on available  for sale securities, net of reclassification adjustments and tax of $508   |       |                     |       |       |       |                             |       |                   |       | 987                                                   |       |                |       | 987                                   |       |
| Total comprehensive income                                                                               |       |                     |       |       |       |                             |       |                   |       |                                                  |       |                |       | 12,161                                |       |
| Dividends declared, ($1.49  per share)                                                                   |       |                     |       |       |       |                             |       | (5,001                 | )          |                                                  |       |                |       | (5,001                                | )          |
| Stock options exercised                                                                                  |       | 2,585                    |       | 26         |       | 61                               |       |                   |       |                                                  |       |                |       | 87                                    |       |
| Purchase of treasury stock  (14,787 shares)                                                              |       |                     |       |       |       |                             |       |                   |       |                                                  |       | (620                | )          | (620                                  | )          |
| Balance, December 31,  2003                                                                         |       | 3,326,560                |       | 33,265     |       | 17,559                           |       | 13,022                 |       | 6,132                                                 |       | (209                | )          | 69,769                                |       |
| Comprehensive Income:                                                                                    |       |                     |       |       |       |                             |       |                   |       |                                                  |       |                |       |                                  |       |
| Net income                                                                                               |       |                     |       |       |       |                             |       | 11,083                 |       |                                                  |       |                |       | 11,083                                |       |
| Unrealized gain on available  for sale securities, net of reclassification adjustments and tax of $926   |       |                     |       |       |       |                             |       |                   |       | (1,801                                                | )          |                |       | (1,801                                | )          |
| Total comprehensive income                                                                               |       |                     |       |       |       |                             |       |                   |       |                                                  |       |                |       | 9,282                                 |       |
| Dividends declared, ($1.76  per share)                                                                   |       |                     |       |       |       |                             |       | (5,843                 | )          |                                                  |       |                |       | (5,843                                | )          |
| Stock options exercised                                                                                  |       | 5,277                    |       | 53         |       | 141                              |       |                   |       |                                                  |       |                |       | 194                                   |       |
| Purchase of treasury stock  (5,310 shares)                                                               |       |                     |       |       |       |                             |       |                   |       |                                                  |       | (237                | )          | (237                                  | )          |
| Balance, December 31,  2004                                                                         |       | 3,331,837                |       | $          | 33,318     |                             | $          | 17,700                 |       | $                                                     | 18,262     |                | $          | 4,331                                 |       | $ | (446 | ) | $ | 73,165 |   |
|                                                                                                     |       |                     |       |       |       |                             |       |                   |       |                                                  |       |                |       |                                  |       |
| **Components of comprehensive income (loss):**                                                           |       |                     |       | **2004**   | ** ** | **2003**                         | ** ** | **2002**               |       |                                                  |       |                |       |                                  |       |
| Change in net unrealized  gain (loss) on investment securities available for sale                        |       |                     |       | $          | (365       | )                                | $          | 3,283                  |       | $                                                     | 3,439      |                |       |                                  |       |   |   |   |
| Realized gains included in  net income, net of taxes of $740, $1,183 and $12                             |       |                     |       | (1,436     | )          | (2,296                           | )          | (23                    | )          |                                                  |       |                |       |                                  |       |
| Total                                                                                                    |       |                     |       | $          | (1,801     | )                                | $          | 987                    |       | $                                                     | 3,416      |                |       |                                  |       |   |   |   |

 

See Accompanying Notes tothe Consolidated Financial Statements

 

5

----

 

**Penns WoodsBancorp, Inc.**

**Consolidated Statement of Cash Flows**

 
| ** **                                                                         | ** ** | **YEAR ENDED DECEMBER 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **(In Thousands)**                                                                 | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                               |       |                             |       |   |   |   |   |
| **OPERATING  ACTIVITIES:**                                                         |       |                             |       |   |   |   |   |
| Net income                                                                         |       | $                                | 11,083     |   | $ | 11,174 |   | $ | 8,886 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                             |       |   |   |   |   |
| Depreciation                                                                       |       | 585                              |       | 631 |   | 526 |   |
| Provision  for loan losses                                                         |       | 465                              |       | 255 |   | 365 |   |
| Accretion  and amortization of investment security discounts and premiums          |       | (132                             | )          | (194 | ) | (906 | ) |
| Securities  gains, net                                                             |       | (2,176                           | )          | (3,479 | ) | (35 | ) |
| Originations  of loans held for sale                                               |       | (34,398                          | )          | (15,983 | ) | (16,597 | ) |
| Proceeds of  loans held for sale                                                   |       | 34,577                           |       | 13,831 |   | 17,939 |   |
| Earnings on  bank-owned life insurance                                             |       | (294                             | )          | (404 | ) | (416 | ) |
| Other, net                                                                         |       | 482                              |       | 606 |   | (1,190 | ) |
| Net cash  provided by operating activities                                         |       | 10,192                           |       | 6,437 |   | 8,572 |   |
| **INVESTING  ACTIVITIES:**                                                         |       |                             |       |   |   |   |   |
| Investment  securities available for sale:                                         |       |                             |       |   |   |   |   |
| Proceeds  from sales                                                               |       | 162,796                          |       | 82,489 |   | 79,022 |   |
| Proceeds  from calls and maturities                                                |       | 28,732                           |       | 48,046 |   | 13,047 |   |
| Purchases                                                                          |       | (159,295                         | )          | (159,363 | ) | (130,328 | ) |
| Investment  securities held to maturity:                                           |       |                             |       |   |   |   |   |
| Proceeds  from calls and maturities                                                |       | 142                              |       | 520 |   | 137 |   |
| Purchases                                                                          |       | (14                              | )          | (24 | ) | (41 | ) |
| Net increase  in loans                                                             |       | (49,002                          | )          | (18,390 | ) | (6,800 | ) |
| Acquisition  of bank premises and equipment                                        |       | (842                             | )          | (400 | ) | (992 | ) |
| Proceeds  from the sale of foreclosed assets                                       |       | 237                              |       | 341 |   | 344 |   |
| Purchase of  bank-owned life insurance                                             |       | (1,774                           | )          | — |   | — |   |
| Proceeds  from redemption of regulatory stock                                      |       | 3,322                            |       | 1,507 |   | 1,262 |   |
| Purchases of  regulatory stock                                                     |       | (2,940                           | )          | (4,402 | ) | (2,080 | ) |
|                                                                               |       |                             |       |   |   |   |   |
| Net cash  used for investing activities                                            |       | (18,638                          | )          | (49,676 | ) | (46,429 | ) |
| **FINANCING  ACTIVITIES:**                                                         |       |                             |       |   |   |   |   |
| Net increase  (decrease) in interest-bearing deposits                              |       | 13,343                           |       | (3,344 | ) | 22,914 |   |
| Net increase  (decrease) in noninterest-bearing deposits                           |       | 9,175                            |       | (2,186 | ) | 11,784 |   |
| Net  (decrease) increase in short-term borrowings                                  |       | (10,790                          | )          | 33,702 |   | (5,542 | ) |
| Proceeds  from other borrowings                                                    |       | 5,000                            |       | 20,000 |   | 10,000 |   |
| Repayment of  other borrowings                                                     |       | —                           |       | (900 | ) | — |   |
| Dividends  paid                                                                    |       | (5,843                           | )          | (5,001 | ) | (4,124 | ) |
| Stock  options exercised                                                           |       | 194                              |       | 87 |   | 113 |   |
| Purchase of  treasury stock                                                        |       | (237                             | )          | (620 | ) | (401 | ) |
| Net cash  provided by financing activities                                         |       | 10,842                           |       | 41,738 |   | 34,744 |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                              |       | 2,396                            |       | (1,501 | ) | (3,113 | ) |
| CASH AND  CASH EQUIVALENTS, BEGINNING                                              |       | 10,230                           |       | 11,731 |   | 14,844 |   |
| CASH AND  CASH EQUIVALENTS, ENDING                                                 |       | $                                | 12,626     |   | $ | 10,230 |   | $ | 11,731 |   |
|                                                                               |       |                             |       |   |   |   |   |
| **SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION:**                            |       |                             |       |   |   |   |   |
|                                                                               |       |                             |       |   |   |   |   |
| Interest  paid                                                                     |       | $                                | 8,754      |   | $ | 9,521 |   | $ | 10.944 |   |
| Income taxes  paid                                                                 |       | $                                | 4,350      |   | $ | 3,500 |   | $ | 3,394 |   |
| Transfer of  loans to foreclosed real estate                                       |       | $                                | 129        |   | $ | 173 |   | $ | 254 |   |

 

SeeAccompanying Notes to the Consolidated Financial Statements

 

6

----

 

**PENNS WOODS BANCORP, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 — OPERATIONS AND SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

**Principles of Consolidation**

 

The accompanying consolidated financial statements include the accountsof Penns Woods Bancorp, Inc. and its wholly owned subsidiaries, Jersey ShoreState Bank (the “Bank”), Woods Real Estate Development Co., Inc., WoodsInvestment Company, Inc. and The M Group Inc. D/B/A The Comprehensive FinancialGroup (“The M Group”), a wholly owned subsidiary of the Bank (collectively, the“Company”). All significant intercompany balances and transactions have beeneliminated.

 

**Nature of Business**

 

The Bank engages in a full-service commercial banking business, makingavailable to the community a wide range of financial services including, butnot limited to, installment loans, credit cards, mortgage and home equityloans, lines of credit, construction financing, farm loans, communitydevelopment loans, loans to non-profit entities and local government loans andvarious types of time and demand deposits including, but not limited to,checking accounts, savings accounts, clubs, money market deposit accounts,certificates of deposit and IRAs. Deposits are insured by the Federal DepositInsurance Corporation (“FDIC”) to the extent provided by law.

 

The financial services are provided by the bank to individuals,partnerships, non-profit organizations and corporations through its elevenoffices located in Clinton, Lycoming, and Centre Counties, Pennsylvania and aFinancial Center located in State College, Pennsylvania.

 

Woods Real Estate Development Co., Inc. engages in real estatetransactions on behalf of Penns Woods Bancorp, Inc. and the Bank.

 

Woods Investment Company,Inc., a Delaware holding company, is engaged in investing activities.

 

The M Group engages insecurities brokerage and insurance activities.

 

Operations are managed andfinancial performance is evaluated on a corporate-wide basis. Accordingly, allfinancial services operations are considered by management to be aggregated inone reportable operating segment.

 

**Use of Estimates**

 

Thepreparation of financial statements in conformity with U.S. generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the consolidated financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results may differ from those estimates.

 

Material estimates that are particularly susceptible to significantchange relate to the determination of the allowance for loan losses, deferredtax assets and liabilities, and the valuation of real estate acquired through,or in lieu of, foreclosure on settlement of debt.

 

**Cash and Cash Equivalents**

 

Cash equivalents include cash on hand and inbanks, interest-earning deposits and federal funds sold. Interest-earningdeposits mature within one year and are carried at cost. Net cash flows arereported for loan and deposit transactions.

 

**Investment Securities**

 

Investment securities are classified as available for sale or held tomaturity.

 

Securities held to maturity include bonds, notes, and debentures forwhich the Company has the positive intent and ability to hold to maturity andare reported at amortized cost.

 

Available for sale securities consist of bonds, notes, debentures, andcertain equity securities not classified as trading securities nor as held tomaturity securities. Unrealized holding gains and losses, net of tax, onavailable for sale securities are reported as a net amount as a separatecomponent of shareholders’ equity until realized.

 

Gains and losses on the sale of equity securities are determined usingthe average cost method, while all other investment securities use the specificcost method.

 

All investment securities, regardless of classification, are monitoredand tested for impairment. An investment security is considered to be impairedwhen the unrealized loss is considered to be other than temporary. When thisoccurs, the investment is written down to the current fair market value withthe write-downs being reflected as a realized loss.

 

Premiums and discounts on all securities are recognized in interestincome using the interest method over the period to maturity.

 

Investment securities fair values are based on observed market prices.Certain investment securities do not have observed bid prices and their fairvalue is based on instruments with similar risk elements.

 

**Loans**

 

Loans are stated at the principal amountoutstanding, net of unearned discount, unamortized loan fees and costs, and theallowance for loan losses. Interest on loans is recognized as income whenearned on the accrual method. The Company’s general policy has been to stopaccruing interest on loans when it is determined a reasonable doubt exists asto the collectibility of additional interest. Income is subsequently recognizedonly to the extent that cash payments are received provided the loan is notdelinquent in payment and, in management’s judgment, the borrower has theability and intent to make future principal payments.

 

7

----

 

Loan origination and commitment fees as well as certain direct loanorigination costs are being deferred and the net amount amortized as anadjustment to the related loan’s yield. These amounts are being amortized overthe contractual lives of the related loans.

 

**Allowance for Loan Losses**

 

The allowance for loan losses represents theamount which management estimates is adequate to provide for probable lossesinherent in its loan portfolio, as of the balance sheet date. The allowancemethod is used in providing for loan losses. Accordingly, all loan losses arecharged to the allowance and all recoveries are credited to it. The allowancefor loan losses is established through a provision for loan losses charged tooperations. The provision for loan losses is based upon management’s quarterly reviewof the loan portfolio. The purpose of the review is to assess loan quality,identify impairedloans, analyze delinquencies, ascertain loan growth, evaluate potentialcharge-offs and recoveries, and assess general economic conditions in themarkets served. An external independent loan review is also performed annuallyfor the Bank. Management remains committed to an aggressive program of problemloan identification and resolution.

 

The allowance is calculated by applying loss factors to outstanding loansby type, excluding loans for which a specific allowance has been determined.Loss factors are based on management’s consideration of the nature of theportfolio segments, changes in mix and volume of the loan portfolio, andhistorical loan loss experience. In addition, management considers industrystandards and trends with respect to nonperforming loans and its knowledge andexperience with specific lending segments.

 

Although management believes that it uses the best information availableto make such determinations and that the allowance for loan losses is adequateat December 31, 2004, future adjustments could be necessary ifcircumstances or economic conditions differ substantially from the assumptionsused in making the initial determinations. A downturn in the local economy,employment and delays in receiving financial information from borrowers couldresult in increased levels of nonperforming assets and charge-offs, increasedloan loss provisions and reductions in income. Additionally, as an integralpart of the examination process, bank regulatory agencies periodically reviewthe Bank’s loan loss allowance. The banking agencies could require therecognition of additions to the loan loss allowance based on their judgment ofinformation available to them at the time of their examination.

 

Impaired loans are commercial and commercial real estate loans for whichit is probable the Company will not be able to collect all amounts dueaccording to the contractual terms of the loan agreement. The Company individuallyevaluates such loans for impairment and does not aggregate loans by major riskclassifications. The definition of “impaired loans” is not the same as thedefinition of “nonaccrual loans,” although the two categories overlap. TheCompany may choose to place a loan on nonaccrual status due to paymentdelinquency or uncertain collectibility, while not classifying the loan asimpaired if the loan is not a commercial or commercial real estate loan.Factors considered by management in determining impairment include paymentstatus and collateral value. The amount of impairment for these types ofimpaired loans is determined by the difference between the present value of theexpected cash flows related to the loan, using the original interest rate, and itsrecorded value, or as a practical expedient in the case of collateralizedloans, the difference between the fair value of the collateral and the recordedamount of the loans. When foreclosure is probable, impairment is measured basedon the fair value of the collateral.

 

Mortgage loans on one-to-four family properties and all consumer loansare large groups of smaller-balance homogeneous loans and are measured forimpairment collectively. Loans that experience insignificant payment delays,which are defined as 90 days or less, generally are not classified as impaired.Management determines the significance of payment delays on a case-by-casebasis taking into consideration all circumstances surrounding the loan and theborrower including the length of the delay, the borrower’s prior paymentrecord, and the amount of shortfall in relation to the principal and interest owed.

 

**Loans Held for Sale**

 

In general, fixed rate residential mortgage loans originated by the Bankare held for sale and are carried at the aggregate lower of cost or market.Such loans sold are not serviced by the Bank.

 

**Foreclosed Assets Held for Sale**

 

Foreclosed assets held for sale are carried at the lower of cost or fairvalue less estimated costs to sell. Prior to foreclosure, the value of theunderlying loan is written down to the fair value of the real estate to beacquired by a charge to the allowance for loan losses, if necessary. Anysubsequent writedowns are charged against operating expenses. Operatingexpenses of such properties, net of related income, and gains and losses ontheir disposition are included in other expenses.

 

Foreclosed assets held for sale totaled $40,000 and $132,000 at December 2004and 2003, respectively.

 

**Bank Premises and Equipment**

 

Premises and equipment are stated at costless accumulated depreciation. Depreciation is computed using straight-line andaccelerated methods over the estimated useful lives of the related assets,which range from five to seven years for furniture, fixtures and equipment andthirty-one and a half years for buildings and improvements. Costs incurred forroutine maintenance and repairs are charged to operations as incurred. Costs ofmajor additions and improvements are capitalized.

 

**Bank-Owned Life Insurance**

 

The Company has purchased life insurance policies on certain officersand directors, and is the sole beneficiary on those policies. Bank-owned lifeinsurance is recorded at its cash surrender value, or the amount that can berealized. Increases in the cash surrender value are recognized as non-interestincome.

 

**Goodwill**

 

The company accounts for goodwill inaccordance with Statement of Financial Accounting Standards (“FAS”) No. 142,Goodwill and Other Intangible Assets. This statement, among other things,requires a two-step process for testing the impairment of goodwill on at leastan annual basis. This approach could cause more volatility in the Company’sreported net income because impairment losses, if any, could occur irregularlyand in varying amounts. The Company performs an annual

 

8

----

 

impairment analysis of goodwill. Based on the fair value of thereporting unit, estimated using the expected present value of future cashflows, no impairment of goodwill was recognized in 2004 and 2003.

 

**Advertising Costs**

 

Advertising costs are generally expensed as incurred.

 

**Income Taxes**

 

Deferred tax assets and liabilities result from temporary differences infinancial and income tax methods of accounting, and are reflected at currentlyenacted income tax rates applicable to the period in which the deferred taxassets or liabilities are expected to be realized or settled. As changes in taxlaws or rates are enacted, deferred tax assets and liabilities are adjustedthrough the provision for income taxes.

 

**Earnings Per Share**

 

The Company provides dual presentation ofbasic and diluted earnings per share. Basic earnings per share is calculatedutilizing net income as reported in the numerator and weighted average sharesoutstanding in the denominator. The computation of diluted earnings per sharediffers in that the dilutive effects of any stock options are adjusted in thedenominator.

 

**Employee Benefits**

 

Pension and employee benefits includecontributions, determined actuarially, to a defined benefit retirement plancovering the eligible employees of the Bank. The plan is funded on a currentbasis to the extent that it is deductible under existing federal taxregulations. Pension and other employee benefits also include contributions toa defined contribution Section 401(k) plan covering eligible employees.Contributions matching those made by eligible employees and an electivecontribution are made annually at the discretion of the Board of Directors.

 

**Stock Options**

 

The Company maintains a stock option plan forthe directors, officers and employees. When the exercise price of the Company’sstock options is greater than or equal to the market price of the underlyingstock on the date of the grant, no compensation expense is recognized in theCompany’s financial statements. Pro forma net income and earnings per share arepresented to reflect the impact of the stock option plan assuming compensationexpense had been recognized based on the fair value of the stock optionsgranted under the plan.

 

The Company applies Accounting PrinciplesBoard Opinion No. 25 and related interpretations in accounting for theseoptions. Accordingly, compensation expense is recognized on the grant date, inthe amount equivalent to the intrinsic value of the options (stock price lessexercise price, at measurement date).

 

Had compensation costs for these options beendetermined based on the fair values at the grant dates for awards consistentwith the method of FAS No. 123, there would be no effect on the Company’s netincome and earnings per share for 2004, 2003, and 2002.

 

**Comprehensive Income**

 

The Company is required to presentcomprehensive income in a full set of general-purpose financial statements forall periods presented. Other comprehensive income is comprised exclusively ofunrealized holding gains (losses) on the available for sale securitiesportfolio.

 

**Reclassification of Comparative Amounts**

 

Certain items previously reported have been reclassified to conform tothe current year’s reporting format. Such reclassifications did not affect netincome or shareholders’ equity.

 

**Recent Accounting Pronouncements**

 

In December 2004, the FinancialAccounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards (“FAS”) No. 123 (Revised 2004), Share-Based Payment. The Statementrequires that compensation cost relating to share-based payment transactions berecognized in financial statements and that this cost be measured based on thefair value of the equity or liability instruments issued. FAS No. 123 (Revised2004) covers a wide range of share-based compensation arrangements includingshare options, restricted share plans, performance-based awards, shareappreciation rights, and employee share purchase plans. The Company will adoptFAS No. 123 (Revised 2004) on July 1, 2005 and is currently evaluating theimpact the adoption of the standard will have on the Company’s results ofoperations.

 

In October 2003, the American Instituteof Certified Public Accountants issued SOP 03-3, “Accounting for Loans orCertain Debt Securities Acquired in a Transfer.” SOP 03-3 applies to a loanthat is acquired where it is probable, at acquisition, that a transferee willbe unable to collect all contractually required payments receivable. SOP 03-3requires the recognition, as accretable yield, the excess of all cash flowsexpected at acquisition over the investor’s initial investment in the loan asinterest income on a level-yield basis over the life of the loan. The amount bywhich the loan’s contractually required payments exceed the amount of itsexpected cash flows at acquisition may not be recognized as an adjustment toyield, a loss accrual or a valuation allowance for credit risk. SOP 03-3 iseffective for loans acquired in fiscal years beginning after December 31,2004. Early adoption is permitted. The adoption of SOP 03-3 is not expected tohave a material impact on the consolidated financial statements.

 

**NOTE 2 - PER SHARE DATA**

 

There are no convertible securities, whichwould affect the numerator in calculating basic and dilutive earnings pershare, therefore, net income as presented on the consolidated statement ofincome will be used as the numerator. The following table sets forth thecomposition of the weighted average common shares (denominator) used in thebasic and dilutive per share computation.

 

9

----

 
| ** **                                                                                                 | ** ** | **2004**  | ** ** | **2003**  | ** ** | **2002**  | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
|                                                                                                       |       |      |       |      |       |      |       |
| Weighted  average common shares outstanding                                                                |       | 3,327,780 |       | 3,430,302 |       | 3,445,477 |       |
|                                                                                                       |       |      |       |      |       |      |       |
| Weighted  average treasury stock shares                                                                    |       | (2,773    | )          | (99,717   | )          | (109,165  | )          |
|                                                                                                       |       |      |       |      |       |      |       |
| Weighted  average common shares and common stock equivalents used to calculate basic  earnings per share   |       | 3,325,007 |       | 3,330,585 |       | 3,336,312 |       |
|                                                                                                       |       |      |       |      |       |      |       |
| Additional  common stock equivalents (stock options) used to calculate diluted earnings  per share         |       | 3,620     |       | 3,213     |       | 2,937     |       |
|                                                                                                       |       |      |       |      |       |      |       |
| Weighted  average common shares and common stock equivalents used to calculate diluted  earnings per share |       | 3,328,627 |       | 3,333,798 |       | 3,339,249 |       |

 

Options to purchase 8,713 shares of common stock at a price of $48.35were outstanding during 2004, 10,890 shares of common stock at a price of$48.35 were outstanding during 2003 and 22,385 shares of common stock at pricesfrom $38.18 to $48.35 were outstanding during 2002, but were not included inthe computation of diluted earnings per share as they were anti-dilutive due tothe strike price being greater than the market price as of the end of thefiscal year.

 

10

----

 

 

**NOTE 3 – INVESTMENT SECURITIES**

Theamortized cost of investment securities and their approximate fair values areas follows:

 
| ** **                             | ** ** | **2004**            | ** ** |
|----------------------------------------|------------|---------------------|------------|
| **(In Thousands)**                     | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|                                   |       |                |       |   |   |   |   |   |   |
| Available  for Sale (AFS)              |       |                |       |   |   |   |   |   |   |
| U.S.  Government and agency securities |       | $                   | 104,248    |   | $ | 207 |   | $ | (430 | ) | $ | 104,025 |   |
| State and  political securities        |       | 46,829              |       | 766 |   | (527 | ) | 47,068 |   |
| Other debt  securities                 |       | 1,302               |       | 47 |   | (7 | ) | 1,342 |   |
| Total debt  securities                 |       | 152,379             |       | 1,020 |   | (964 | ) | 152,435 |   |
| Equity  securities                     |       | 19,015              |       | 6,579 |   | (72 | ) | 25,522 |   |
| Total  Investment Securities AFS       |       | $                   | 171,394    |   | $ | 7,599 |   | $ | (1,036 | ) | $ | 177,957 |   |
|                                   |       |                |       |   |   |   |   |   |   |
| Held to  Maturity (HTM)                |       |                |       |   |   |   |   |   |   |
| U.S.  Government and agency securities |       | $                   | 32         |   | $ | — |   | $ | — |   | $ | 32 |   |
| State and  political securities        |       | 248                 |       | 3 |   | — |   | 251 |   |
| Other debt  securities                 |       | 278                 |       | — |   | — |   | 278 |   |
| Total  Investment Securities HTM       |       | $                   | 558        |   | $ | 3 |   | $ | — |   | $ | 561 |   |
|                                   |       |                |       |   |   |   |   |   |   |
| ** **                             | ** ** | **2003**            | ** ** |
| ** **                             | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|                                   |       |                |       |   |   |   |   |   |   |
| Available  for Sale (AFS)              |       |                |       |   |   |   |   |   |   |
| U.S.  Government and agency securities |       | $                   | 150,218    |   | $ | 626 |   | $ | (1,015 | ) | $ | 149,829 |   |
| State and  political securities        |       | 31,364              |       | 2,510 |   | (22 | ) | 33,852 |   |
| Other debt  securities                 |       | 1,581               |       | 75 |   | (4 | ) | 1,652 |   |
| Total debt  securities                 |       | 183,163             |       | 3,211 |   | (1,041 | ) | 185,333 |   |
| Equity  securities                     |       | 18,158              |       | 7,146 |   | (26 | ) | 25,278 |   |
| Total  Investment Securities AFS       |       | $                   | 201,321    |   | $ | 10,357 |   | $ | (1,067 | ) | $ | 210,611 |   |
|                                   |       |                |       |   |   |   |   |   |   |
| Held to  Maturity (HTM)                |       |                |       |   |   |   |   |   |   |
| U.S.  Government and agency securities |       | $                   | 75         |   | $ | — |   | $ | (1 | ) | $ | 74 |   |
| State and  political securities        |       | 347                 |       | 16 |   | — |   | 363 |   |
| Other debt  securities                 |       | 264                 |       | — |   | — |   | 264 |   |
| Total  Investment Securities HTM       |       | $                   | 686        |   | $ | 16 |   | $ | (1 | ) | $ | 701 |   |

 

11

----

 

The following table shows the Company’s gross unrealized losses and fairvalue, aggregated by investment category and length of time, that theindividual securities have been in a continuous unrealized loss position, atDecember 31, 2004.

 
| ** **                            | ** ** | **Less than Twelve Months** | ** ** | **Twelve Months or Greater**  | ** ** | **Total**       | ** ** |
|---------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|-----------------|------------|
| **(In Thousands)**                    | ** ** | **Fair  Value**             | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** |
|                                  |       |                        |       |                          |       |            |       |   |   |   |   |   |   |
| U.S. Government and agency Securities |       | $                           | 51,636     |                          | $          | 226             |       | $ | 28,598 |   | $ | 204 |   | $ | 80,234 |   | $ | 430 |   |
| State and political securities        |       | 17,339                      |       | 527                           |       | —          |       | — |   | 17,339 |   | 527 |   |
| Other debt securities                 |       | 142                         |       | 3                             |       | 146             |       | 4 |   | 288 |   | 7 |   |
| Total debt securities                 |       | 69,117                      |       | 756                           |       | 28,744          |       | 208 |   | 97,861 |   | 964 |   |
| Equity securities                     |       | 1,187                       |       | 64                            |       | 298             |       | 8 |   | 1,485 |   | 72 |   |
| Total                                 |       | $                           | 70,304     |                          | $          | 820             |       | $ | 29,042 |   | $ | 216 |   | $ | 99,346 |   | $ | 1,036 |   |

 

The policy of the Company isto recognize other than temporary impairment of equity securities where thefair value has been significantly below cost for one year. For fixed maturityinvestments with unrealized losses due to interest rates where the Company hasthe positive intent and ability to hold the investment for a period of timesufficient to allow a market recovery, declines in value below cost are notassumed to be other than temporary.  TheCompany reviews its position quarterly and has asserted that at December 31,2004, the declines outlined in the above table represent temporary declines andthe Company does have the intent and ability to hold those securities either tomaturity or to allow a market recovery.

 

The Company has concludedthat any impairment of its investment securities portfolio is not other thantemporary but is the result of interest rate changes, sector credit rating changes,or company-specific rating changes that are not expected to result in thenon-collection of principal and interest during the period.

 

The amortized cost and fairvalue of debt securities at December 31, 2004, by contractual maturity, areshown below. Expected maturities will differ from contractual maturitiesbecause borrowers may have the right to call or prepay obligations with orwithout call or prepayment penalties.

 
| ** **                        | ** ** | **HELD TO MATURITY** | ** ** | **AVAILABLE FOR SALE** | ** ** |
|-----------------------------------|------------|----------------------|------------|------------------------|------------|
| **(In Thousands)**                | ** ** | **AMORTIZED  COST**  | ** ** | **FAIR  VALUE**        | ** ** | **AMORTIZED  COST** | ** ** | **FAIR  VALUE** | ** ** |
| Due in one year or less           |       | $                    | 75         |                   | $          | 75 |   | $ | 1,019 |   | $ | 1,024 |   |
| Due after one year to five years  |       | 75                   |       | 75                     |       | 3,420 |   | 3,473 |   |
| Due after five years to ten years |       | 376                  |       | 379                    |       | 15 |   | 16 |   |
| Due after ten years               |       | 32                   |       | 32                     |       | 147,925 |   | 147,922 |   |
|                              |       |                 |       |                   |       |   |   |   |   |
|                              |       | $                    | 558        |                   | $          | 561 |   | $ | 152,379 |   | $ | 152,435 |   |

 

Total gross proceeds fromsales of securities available for sale were $162,796,000, $82,489,000, and$79,022,000 for 2004, 2003, and 2002, respectively. The following tablerepresents gross realized gains and gross realized losses on thosetransactions:

 

12

----

 
| **(In Thousands)**                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Gross realized gains:                 |       |     |       |     |       |     |       |
| U.S. Government and agency securities |       | $        | 459        |     | $          | 254      |       | $ | 204 |   |
| State and political securities        |       | 1,191    |       | 3,345    |       | 2,234    |       |
| Other debt securities                 |       | 1        |       | 27       |       | 6        |       |
| Equity securities                     |       | 2,192    |       | 1,015    |       | 1,605    |       |
|                                  |       | $        | 3,843      |     | $          | 4,641    |       | $ | 4,049 |   |
|                                  |       |     |       |     |       |     |       |
| Gross realized losses:                |       |     |       |     |       |     |       |
| U.S. Government and agency securities |       | $        | 1,623      |     | $          | 742      |       | $ | 125 |   |
| State and political securities        |       | 23       |       | 50       |       | 67       |       |
| Other debt securities                 |       | —   |       | 2        |       | —   |       |
| Equity securities                     |       | 21       |       | 368      |       | 3,822    |       |
|                                  |       | $        | 1,667      |     | $          | 1,162    |       | $ | 4,014 |   |

 

In 2003, the Companyrecorded an investment security gain of $24,000 resulting from a businesscombination where the Company received the common stock of the acquirer in anon-monetary exchange. This gain is included in the above table. There were nogains of this nature in 2004.

 

A charge of $292,000 wasrecorded in 2003 and $2,083,000 was recorded in 2002 to recognize other thantemporary declines in the value of marketable equity securities. These lossesare included in the above table.

 

Investment securities with acarrying value of approximately $71,730,000 and $34,059,000 at December 31,2004 and 2003, respectively, were pledged to secure certain deposits, securityrepurchase agreements, and for other purposes as required by law.

 

There is no concentration ofinvestments that exceed ten percent of shareholders’ equity for any individualissuer, excluding those guaranteed by the U.S. Government.

 

**NOTE4 - LOANS**

 

Major loan classificationsare summarized as follows:

 

13

----

 
| ** **                            | ** ** | **2004**    | ** ** |
|---------------------------------------|------------|-------------|------------|
| **(In Thousands)**                    | ** ** | **CURRENT** | ** ** | **PAST DUE  30 TO 90  DAYS** | ** ** | **PAST DUE  90 DAYS  OR MORE  & STILL  ACCRUING** | ** ** | **NON-  ACCRUAL** | ** ** | **TOTAL** | ** ** |
| Commercial and agricultural           |       | $           | 29,467     |   | $ | 389 |   | $ | 82 |   | $ | 165 |   | $ | 30,103 |   |
| Real estate mortgage:                 |       |        |       |   |   |   |   |   |   |   |   |
| Residential                           |       | 143,028     |       | 3,530 |   | 254 |   | 649 |   | 147,461 |   |
| Commercial                            |       | 121,951     |       | 1,257 |   | — |   | 549 |   | 123,757 |   |
| Construction                          |       | 8,359       |       | — |   | — |   | 6 |   | 8,365 |   |
| Installment loans to individuals      |       | 15,495      |       | 399 |   | 9 |   | 12 |   | 15,915 |   |
|                                  |       | 318,300     |       | $ | 5,575 |   | $ | 345 |   | $ | 1,381 |   | 325,601 |   |
| Less: Net deferred loan fees          |       | 1,096       |       |   |   |   |   |   |   | 1,096 |   |
|   Allowance for loan losses |       | 3,338       |       |   |   |   |   |   |   | 3,338 |   |
| Loans, net                            |       | $           | 313,866    |   |   |   |   |   |   |   | $ | 321,167 |   |

 
| ** **                       | ** ** | **2003**    | ** ** |
|----------------------------------|------------|-------------|------------|
| ** **                       | ** ** | **CURRENT** | ** ** | **PAST DUE  30 TO 90  DAYS** | ** ** | **PAST DUE  90 DAYS  OR MORE  & STILL  ACCRUING** | ** ** | **NON-  ACCRUAL** | ** ** | **TOTAL** | ** ** |
| Commercial and agricultural      |       | $           | 23,105     |   | $ | 215 |   | $ | 21 |   | $ | 182 |   | $ | 23,523 |   |
| Real estate mortgage:            |       |        |       |   |   |   |   |   |   |   |   |
| Residential                      |       | 144,102     |       | 2,625 |   | 383 |   | 587 |   | 147,697 |   |
| Commercial                       |       | 82,156      |       | 667 |   | 15 |   | 58 |   | 82,896 |   |
| Construction                     |       | 7,637       |       | 15 |   | — |   | — |   | 7,652 |   |
| Installment loans to individuals |       | 14,738      |       | 252 |   | 10 |   | — |   | 15,000 |   |
|                             |       | 271,738     |       | $ | 3,774 |   | $ | 429 |   | $ | 827 |   | 276,768 |   |
| Less: Net deferred loan fees     |       | 940         |       |   |   |   |   |   |   | 940 |   |
| Allowance for loan losses        |       | 3,069       |       |   |   |   |   |   |   | 3,069 |   |
| Loans, net                       |       | $           | 267,729    |   |   |   |   |   |   |   | $ | 272,759 |   |

 

Loans on which the accrualof interest has been discontinued or reduced amounted to approximately$1,381,000 and $827,000 at December 31, 2004 and 2003, respectively. Ifinterest had been recorded at the original rate on those loans, such incomewould have approximated $64,000, $55,000, and $24,000 for the years endedDecember 31, 2004, 2003 and 2002, respectively. Interest income on such loans,which is recorded as received, amounted to approximately $10,000, $7,000, and$17,000, for the years ended December 31, 2004, 2003 and 2002, respectively.

 

Charges in theallowance for loan losses for the years ended December 31, are as follows:

 
| **(In Thousands)**              | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|---------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance, beginning of year      |       | $          | 3,069      |       | $          | 2,953      |       | $ | 2,927 |   |
| Provision charged to operations |       | 465        |       | 255        |       | 365        |       |
| Loans charged off               |       | (283       | )          | (216       | )          | (402       | )          |
| Recoveries                      |       | 87         |       | 77         |       | 63         |       |
| Balance, end of year            |       | $          | 3,338      |       | $          | 3,069      |       | $ | 2,953 |   |

 

14

----

 

The Company had noconcentration of loans to borrowers engaged in similar businesses or activitieswhich exceed five percent of total assets at December 31, 2004 or December 31,2003.

 

The Company grantscommercial, industrial, residential, and installment loans to customersthroughout north-central Pennsylvania. Although the Company has a diversifiedloan portfolio at December 31, 2004 and 2003, a substantial portion of its debtors’ability to honor their contracts is dependent on the economic conditions withinthis region.

 

**NOTE5 - PREMISES AND EQUIPMENT**

 

Major classifications ofpremises and equipment are summarized as follows at December 31:

 
| **(In Thousands)**            | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
|                          |       |     |       |     |       |
| Land                          |       | $        | 566        |     | $          | 566 |   |
| Premises                      |       | 5,290    |       | 4,883    |       |
| Furniture and equipment       |       | 6,756    |       | 6,348    |       |
| Leasehold improvements        |       | 894      |       | 867      |       |
| Total                         |       | 13,506   |       | 12,664   |       |
| Less accumulated depreciation |       | 8,624    |       | 8,039    |       |
| Net                           |       | $        | 4,882      |     | $          | 4,625 |   |

 

Depreciation charges tooperations for the years ended 2004, 2003, and 2002 were $585,000, $631,000,and $526,000, respectively.

 

The Bank has committed to$1,000,000 for the premises and equipment of a new branch in State College, PA.

 

**NOTE6 - GOODWILL**

 

As of December 31, 2004,2003, and 2002 goodwill had a gross carrying value of $3,308,000 andaccumulated amortization of $276,000 resulting in a net carrying amount of$3,032,000.

 

The gross carrying amount ofgoodwill is tested for impairment in the third quarter of each fiscal year.Based on fair value of the reporting unit, estimated using the expected presentvalue of future cash flows, no goodwill impairment loss was recognized in the currentyear.

 

**NOTE7 - DEPOSITS**

 

Time deposits of $100,000 ormore totaled approximately $30,212,000 on December 31, 2004 and $27,386,000 onDecember 31, 2003. Interest expense related to such deposits was approximately$818,000, $829,000, and $1,098,000, for the years ended December 31, 2004, 2003and 2002, respectively.

 

Maturities on time depositsof $100,000 or more are as follows:

 
| **(In Thousands)**          | ** ** | **2004** | ** ** |
|-----------------------------|------------|----------|------------|
|                        |       |     |       |
| Three months or less        |       | $        | 6,869      |   |
| Three months to six months  |       | 5,316    |       |
| Six months to twelve months |       | 8,807    |       |
| Over twelve months          |       | 9,220    |       |
|                        |       |     |       |
| Total                       |       | $        | 30,212     |   |

 

15

----

 

Total time deposits atDecember 31, 2004 mature as follows:

 
| **(In Thousands)** | ** ** | **2004** | ** ** |
|--------------------|------------|----------|------------|
|               |       |     |       |
| 2005               |       | $        | 81,340     |   |
| 2006               |       | 22,237   |       |
| 2007               |       | 13,998   |       |
| 2008               |       | 5,811    |       |
| 2009               |       | 652      |       |
| Thereafter         |       | 1,353    |       |
|               |       |     |       |
| Total              |       | $        | 125,391    |   |

 

Total deposits at December31 are as follows:

 
| **(In Thousands)**               | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
|                             |       |     |       |     |       |
| Demand deposits                  |       | $        | 74,050     |     | $          | 64,875 |   |
| Interest-bearing demand deposits |       | 87,588   |       | 77,245   |       |
| Saviings deposits                |       | 69,807   |       | 67,298   |       |
| Time deposits                    |       | 125,391  |       | 124,900  |       |
|                             |       |     |       |     |       |
| Total deposits                   |       | $        | 356,836    |     | $          | 334,318 |   |

 

**NOTE8 - SHORT-TERM BORROWINGS**

 

Short-term borrowingsconsist of securities sold under agreements to repurchase and FHLB advanceswhich generally represent overnight or less than 30-day borrowings. Theoutstanding balances and related information for short-term borrowings aresummarized as follows:

 
| **(In Thousands)**                          | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|
| **Repurchase  Agreements:**                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at year end                         |       | $          | 13,845     |       | $          | 10,225 |   |
| Maximum amount outstanding at any month end |       | 15,301     |       | 15,665     |       |
| Average balance outstanding during the year |       | 13,317     |       | 13,214     |       |
| Weighted-average interest rate:             |       |       |       |       |       |
| At year end                                 |       | 1.82       | %          | 1.91       | %          |
| Paid during the year                        |       | 1.77       | %          | 2.07       | %          |
| **Open Repo Plus:**                         |       |       |       |       |       |
| Balance at year end                         |       | $          | 22,630     |       | $          | 36,140 |   |
| Maximum amount outstanding at any month end |       | 32,480     |       | 36,140     |       |
| Average balance outstanding during the year |       | 18,336     |       | 11,537     |       |
| Weighted-average interest rate:             |       |       |       |       |       |
| At year end                                 |       | 2.24       | %          | 1.06       | %          |
| Paid during the year                        |       | 1.64       | %          | 1.16       | %          |
| **Short Term FHLB:**                        |       |       |       |       |       |
| Balance at year end                         |       | $          | —     |       | $          | 900 |   |
| Maximum amount outstanding at any month end |       | 900        |       | 900        |       |
| Average balance outstanding during the year |       | 204        |       | 695        |       |
| Weighted-average interest rate:             |       |       |       |       |       |
| At year end                                 |       | —     |       | 1.40       | %          |
| Paid during the year                        |       | 1.42       | %          | 1.42       | %          |

 

16

----

 

**NOTE9 - OTHER BORROWINGS**

 

The following representsoutstanding long-term borrowings by contractual maturities at December 31, 2004and 2003:

 
| **(In Thousands)**                                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|
| Variable rate of 4.49%, maturing in 2007                  |       | $        | 5,000      |     | $          | 5,000 |   |
| Variable rates between 3.14% and 5.56%,  maturing in 2008 |       | 29,600   |       | 29,600   |       |
| Variable rate of 5.06%, maturing in 2009                  |       | 5,000    |       | 5,000    |       |
| Variable rate of 6.65%, maturing in 2010                  |       | 5,000    |       | 5,000    |       |
| Variable rates of 4.25% and 4.72%, maturing  in 2011      |       | 10,000   |       | 10,000   |       |
| Variable rate of 3.68%, maturing in 2012                  |       | 5,000    |       | 5,000    |       |
| Variable rate of 3.74%, maturing in 2013                  |       | 5,000    |       | 5,000    |       |
| Fixed rate of 2.02%, maturing in 2005                     |       | 1,400    |       | 1,400    |       |
| Fixed rate of 2.58%, maturing in 2006                     |       | 1,600    |       | 1,600    |       |
| Fixed rates between 2.67% and 3.13%,  maturing in 2007    |       | 6,500    |       | 1,500    |       |
| Fixed rate of 6.95%, maturing in 2011                     |       | 500      |       | 500      |       |
| Fixed rate of 5.87%, maturing in 2013                     |       | 528      |       | 528      |       |
| Fixed rate of 6.92%, maturing in 2015                     |       | 750      |       | 750      |       |
| Total                                                     |       | $        | 75,878     |     | $          | 70,878 |   |

 

The terms of the convertibleborrowings allow the Federal Home Loan Bank (“FHLB”) to convert the interestrate to an adjustable rate based on the three month London Interbank OfferedRate (“LIBOR”) at a predetermined anniversary date of the borrowing’sorigination, ranging from three months to five years.

 

The Bank maintains a creditarrangement, which includes a revolving line of credit with the FHLB. Underthis credit arrangement, the Bank has a remaining borrowing capacity ofapproximately $145 million at December 31, 2004, is subject to annual renewal,and typically incurs no service charges. Under terms of a blanket agreement,collateral for the FHLB borrowings must be secured by certain qualifying assetsof the Bank which consist principally of first mortgage loans.

 

**NOTE10 - INCOME TAXES**

 

The following temporarydifferences gave rise to the net deferred tax liability at December 31, 2004and 2003:

 
| **(In Thousands)**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  asset:                               |       |     |       |     |       |
| Allowance for loan losses                          |       | $        | 841        |     | $          | 716 |   |
| Deferred compensation                              |       | 353      |       | 346      |       |
| Contingencies                                      |       | 24       |       | 22       |       |
| Pension                                            |       | 515      |       | 429      |       |
| Loan fees and costs                                |       | 368      |       | 320      |       |
| Investment securities allowance                    |       | 98       |       | 119      |       |
| Other                                              |       | 15       |       | —   |       |
| Total                                              |       | 2,214    |       | 1,952    |       |
|                                               |       |     |       |     |       |
| Deferred tax liability:                            |       |     |       |     |       |
| Bond accretion                                     |       | 21       |       | 28       |       |
| Depreciation                                       |       | 205      |       | 260      |       |
| Amortization                                       |       | 225      |       | 150      |       |
| Unrealized gains on available for sale  securities |       | 2,231    |       | 3,159    |       |
| Total                                              |       | 2,682    |       | 3,597    |       |
|                                               |       |     |       |     |       |
| Deferred tax liability, net                        |       | $        | (468       | )        | $          | (1,645 | ) |

 

17

----

 

No valuation allowance wasestablished at December 31, 2004 and 2003, in the view of the Company’s abilityto carry back taxes paid in previous years and certain tax strategies, coupledwith the anticipated future taxable income as evidenced by the Company’searning potential.

 

The provision for incometaxes is comprised of the following for the years ended December 31:

 
| **(In Thousands)**        | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
|                      |       |     |       |     |       |     |       |
| Currently payable         |       | $        | 4,512      |     | $          | 3,666    |       | $ | 2,363 |   |
| Deferred (benfit) expense |       | (249     | )          | 37       |       | (116     | )          |
|                      |       |     |       |     |       |     |       |
| Total provision           |       | $        | 4,263      |     | $          | 3,703    |       | $ | 2,247 |   |

 

The effective federal incometax rate for the years ended December 31, 2004, 2003, and 2002 was 27.8%, 24.9%and 20.2%, respectively.  Areconciliation between the expected income tax and the effective income taxrate on income before income tax provision follows:

 
| ** **                      | ** ** | **2004**   | ** ** | **2003** | ** ** | **2002**   | ** ** |
|---------------------------------|------------|------------|------------|----------|------------|------------|------------|
| ** **                      | ** ** | **AMOUNT** | ** ** | **%**    | ** ** | **AMOUNT** | ** ** | **%** | ** ** | **AMOUNT** | ** ** | **%** | ** ** |
|                            |       |       |       |     |       |       |       |   |   |   |   |   |   |
| Provision at expected rate      |       | $          | 5,218      |     | 34.0       | %          | $          | 5,058 |   | 34.0 | % | $ | 3,785 |   | 34.0 | % |
| Decrease in tax resulting from: |       |       |       |     |       |       |       |   |   |   |   |   |   |
| Tax-exempt income               |       | (632       | )          | (4.1     | )          | (964       | )          | (6.4 | ) | (1,367 | ) | (12.3 | ) |
| Other, net                      |       | (323       | )          | (2.1     | )          | (391       | )          | (2.7 | ) | (171 | ) | (1.5 | ) |
|                            |       |       |       |     |       |       |       |   |   |   |   |   |   |
| Effective income tax and rates  |       | $          | 4,263      |     | 27.8       | %          | $          | 3,703 |   | 24.9 | % | $ | 2,247 |   | 20.2 | % |

 

**NOTE11 - EMPLOYEE BENEFIT PLANS**

 

**DEFINEDBENEFIT PENSION PLAN**

 

The Company has anoncontributory defined benefit pension plan (the “Plan”) for all employees hiredprior to January 1, 2004, meeting certain age and length of servicerequirements. Benefits are based primarily on years of service and the averageannual compensation during the highest five consecutive years within the finalten years of employment.

 

The following tables showthe funded status and components of net periodic benefit cost from this definedbenefit plan:

 

18

----

 
| ** **                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| **Change in benefit obligation**                |       |     |       |     |       |
| Benefit obligation at beginning of year         |       | $        | 7,145      |     | $          | 6,473 |   |
| Service cost                                    |       | 447      |       | 443      |       |
| Interest cost                                   |       | 398      |       | 384      |       |
| Actuarial (gain) loss                           |       | (225     | )          | 43       |       |
| Benefits paid                                   |       | (216     | )          | (198     | )          |
| Benefit obligation at end of year               |       | $        | 7,549      |     | $          | 7,145 |   |
|                                            |       |     |       |     |       |
| **Change in plan assets**                       |       |     |       |     |       |
| Fair value of plan assets at beginning of  year |       | $        | 4,042      |     | $          | 3,131 |   |
| Actual return on plan assets                    |       | 394      |       | 620      |       |
| Employer contribution                           |       | 347      |       | 506      |       |
| Benefits paid                                   |       | (216     | )          | (198     | )          |
| Expenses paid                                   |       | (18      | )          | (17      | )          |
| Fair value of plan assets at end of year        |       | 4,549    |       | 4,042    |       |
| Funded status                                   |       | (3,000   | )          | (3,103   | )          |
| Unrecognized net actuarial loss                 |       | 1,275    |       | 1,609    |       |
| Unrecognized prior service cost                 |       | 229      |       | 255      |       |
| Unrecognized tranisition asset                  |       | (19      | )          | (22      | )          |
| Net Accrued Benefit Cost Recognized             |       | $        | (1,515     | )        | $          | (1,261 | ) |

 

The accumulated benefit obligation for thedefined benefit pension plan was $5,606,000, and $4,913,000 at December 31,2004 and 2003, respectively. Amounts recognized in the Statement of Incomeconsist of:

 
| **(In Thousands)**                 | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                       |       | $          | 447        |       | $          | 443        |       | $ | 381 |   |
| Interest cost                      |       | 398        |       | 384        |       | 342        |       |
| Expected return on plan assets     |       | (376       | )          | (256       | )          | (246       | )          |
| Amortization of transition asset   |       | (3         | )          | (3         | )          | (3         | )          |
| Amortization of prior service cost |       | 26         |       | 26         |       | 26         |       |
| Recognized net actuarial gain      |       | 109        |       | 83         |       | 19         |       |
| Net periodic benefit cost          |       | $          | 601        |       | $          | 677        |       | $ | 519 |   |

 

The plan was amended,effective January 1, 2004, to cease eligibility for employees with a hire dateof January 1, 2004 or later. Employees with a hire date of January 1, 2004 orlater are eligible to receive, after meeting certain age and length of servicerequirements, an annual discretionary pension contribution from the Bank equalto a percentage of an employee’s base compensation. The dollars will be placedin a separate account within the 401(k) plan with a vesting requirement.

 

The following information relates to the Plan’sprojected obligation, accumulated benefit obligation, and plan assets atDecember 31:

 
| **(In Thousands)**              | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Projected  benefit obligation   |       | $        | 7,549      |     | $          | 7,145 |   |
| Accumulative benefit obligation |       | 5,606    |       | 4,913    |       |
| Fair value of plan assets       |       | 4,549    |       | 4,042    |       |
|                                 |            |          |            |          |            |  |  |

 

19

----

 

**Assumptions**

 

Weighted-average assumptionsused to determine benefit obligations at December 31:

 
| ** **                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discount rate                 |       | 5.75     | %          | 6.00     | %          | 6.00     | %          |
| Rate of compensation increase |       | 4.75     | %          | 5.00     | %          | 5.00     | %          |

 

Weighted-averageassumptions used to determine net periodic cost for years ended December 31:

 
| ** **                               | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discount rate                            |       | 6.00     | %          | 6.00     | %          | 6.50     | %          |
| Expected long-term return on plan assets |       | 8.00     | %          | 8.00     | %          | 8.00     | %          |
| Rate of compensation increase            |       | 5.00     | %          | 5.00     | %          | 5.00     | %          |

 

The expected long-term rate of return was estimated using marketbenchmarks by which the plan assets would outperform the market value in thefuture, based on historical experience adjusted for changes in asset allocationand expectations for overall lower future returns on similar investmentscompared to past periods.

 

**Plan Assets**

 

The Company’s pension planweighted-average asset allocations at December 31 by asset category are asfollows:

 
| **Asset Category**      | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------|------------|------------|------------|------------|------------|
| ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash                    |       | 0.3        | %          | 0.6        | %          |
| Fixed Income securities |       | 37.9       | %          | 38.7       | %          |
| Equity                  |       | 61.8       | %          | 60.7       | %          |
| Total                   |       | 100.0      | %          | 100.0      | %          |

 

The investment objective forthe defined pension plan is to maximize total return with tolerance forslightly above average risk, meaning the fund is able to tolerate short-termvolatility to achieve above-average returns over the long term. The portfolio’starget exposure to equities is 60%, primarily invested in mid and large capitalizationdomestic equities. Exposure to small capitalization and international stocksmay be allowed.

 

Asset allocation favorsequities, with target allocation of approximately 60% equity securities, 37.5%fixed income securities and 2.5% cash. Due to volatility in the market, thetarget allocation is not always desirable and asset allocations will fluctuatebetween the acceptable ranges.

 

It is management’s intent togive the investment managers flexibility within the overall guidelines withrespect to investment decisions and their timing. However, certain investmentsrequire specific review and approval by management. Management is also informedof anticipated, significant modifications of any previously approvedinvestment, or anticipated use of derivatives to execute investment strategies.

 

The following benefitpayments, which reflect expected future cost, are expected to be paid duringthe years ended December 31:

 

20

----

 

**Estimatedfuture benefit payments:**

 
| **(In Thousands)** | ** ** | ** ** | ** ** |
|--------------------|------------|------------|------------|
| 2005               |       | $          | 181        |   |
| 2006               |       | 192        |       |
| 2007               |       | 235        |       |
| 2008               |       | 272        |       |
| 2009               |       | 277        |       |
| 20010 - 2014       |       | 2,242      |       |
|               |       |       |       |
|               |       | $          | 3,399      |   |

 

The company expects tocontribute $575,000 to its Pension Plan in 2005.

 

**401(k)SAVINGS PLAN**

 

The Company also offers a 401(k)savings plan in which eligible participating employees may elect to contributeup to a maximum percentage allowable not to exceed the limits of Code Sections401(k), 404, and 415. The Company may make matching contributions equal to adiscretionary percentage to be determined by the Company. Participants are atall times fully vested in their contributions and vest over a period of fiveyears in the employer contribution. Contribution expense was approximately$83,000, $75,000, and $80,000 for the years ended December 31, 2004, 2003, and2002, respectively.

 

**DEFERREDCOMPENSATION PLAN**

 

Certain directors haveentered into deferred compensation agreements with the Corporation pursuant towhich all or a specified portion of their directors’ fees are deferred untiltheir retirement or termination of service. Interest on amounts credited to theaccount balance for each director accrues at an amount equal to one half of theCorporation’s return on equity for the prior year. To fund benefits under thedeferred compensation plan, the Company has acquired corporate-owned lifeinsurance policies on the lives of the participating directors for whichinsurance benefits are payable to the Company. The total expense charged toother expenses was $73,000, $104,000, and $98,000 for the years ended December31, 2004, 2003 and 2002, respectively. Benefits paid under the plan wereapproximately $127,000 in 2004, $132,000 in 2003 and $51,000 in 2002.

 

**NOTE12 - STOCK OPTIONS**

 

Prior to 1998, the Companygranted a select group of its officers options to purchase shares of its commonstock. These options, which are immediately exercisable, expire within three toten years after having been granted. Also, in 1998, the Company adopted the “1998Stock Option Plan” for key employees and directors. Incentive stock options andnonqualified stock options may be granted to eligible employees of the Bank andnonqualified options may be granted to directors of the Company. In addition,non-employee directors are eligible to receive grants of nonqualified stockoptions. Incentive nonqualified stock options granted under the 1998 Plan maybe exercised not later than ten years after the date of grant. Each optiongranted under the 1998 Plan shall be exercisable only after the expiration of sixmonths following the date of grant of such options.

 

A summary of the status ofthe Company’s common stock option plans are presented below:

 

21

----

 

 
| ** **                      | ** ** | **2004**   | ** ** | **2003**                               | ** ** |
|---------------------------------|------------|------------|------------|----------------------------------------|------------|
| ** **                      | ** ** | **SHARES** | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** | **SHARES** | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** |
|                            |       |       |       |                                   |       |   |   |   |   |
| Outstanding, beginning of year  |       | 30,607     |       | $                                      | 39.39      |   | 33,385 |   | $ | 38.69 |   |
| Granted                         |       | —     |       | —                                 |       | — |   | — |   |
| Exercised                       |       | (5,277     | )          | 36.73                                  |       | (2,778 | ) | 30.93 |   |
| Forfeited                       |       | (9,365     | )          | 38.63                                  |       | — |   | — |   |
|                            |       |       |       |                                   |       |   |   |   |   |
| Outstanding, end of year        |       | 15,965     |       | 40.24                                  |       | 30,607 |   | 39.39 |   |
|                            |       |       |       |                                   |       |   |   |   |   |
| Options exercisable at year-end |       | 15,965     |       | $                                      | 40.24      |   | 30,607 |   | $ | 39.39 |   |

 

The following table summarizes information about nonqualified andincentive stock options outstanding at December 31, 2004:

 
| ** **         | ** ** | **OUTSTANDING** | ** ** | **EXERCISABLE**   | ** ** |
|--------------------|------------|-----------------|------------|-------------------|------------|
| **EXERCISE PRICE** | ** ** | **SHARES**      | ** ** | **AVERAGE  LIFE** | ** ** | **AVERAGE  EXERCISE  PRICE** | ** ** | **SHARES** | ** ** | **AVERAGE  EXERCISE  PRICE** | ** ** |
| $                  | 48.35      |            | 8,410      |              | 4          |   | $ | 48.35 |   | 8,410 |   | $ | 48.35 |   |
| $                  | 38.18      |            | 1,375      |              | 5          |   | $ | 38.18 |   | 1,375 |   | $ | 38.18 |   |
| $                  | 29.66      |            | 6,180      |              | 2          |   | $ | 29.66 |   | 6,180 |   | $ | 29.66 |   |

 

**NOTE 13 -RELATED PARTY TRANSACTIONS**

 

Certain directors andexecutive officers of the Company and the Bank, including their immediatefamilies and companies in which they are principal owners (more than tenpercent), are indebted to the Company. Such indebtedness was incurred in theordinary course of business on the same terms and at those rates prevailing atthe time for comparable transactions with others.

 

A summary of loan activitywith executive officers, directors, principal shareholders, and associates ofsuch persons is listed below for the years ended December 31:

 
| ** **         | ** ** | **BEGINNING** | ** ** | ** **    | ** ** | ** **   | ** ** | **ENDING**   | ** ** |
|--------------------|------------|---------------|------------|---------------|------------|--------------|------------|--------------|------------|
| **(In Thousands)** | ** ** | **BALANCE**   | ** ** | **ADDITIONS** | ** ** | **PAYMENTS** | ** ** | **RESIGNED** | ** ** | **BALANCE** | ** ** |
|               |       |          |       |          |       |         |       |         |       |   |   |
| 2004               |       | $             | 7,227      |          | $          | 5,720        |       | $            | 1,273      |   | $ | — |   | $ | 11,674 |   |
| 2003               |       | $             | 6,785      |          | $          | 2,374        |       | $            | 1,791      |   | $ | 141 |   | $ | 7,227 |   |

 

**NOTE 14 -COMMITMENTS AND CONTINGENT LIABILITIES**

 

The following schedule offuture minimum rental payments under operating leases with noncancellable termsin excess of one year as of December 31, 2004:

 

22

----

 
| **Year Ending December 31,  (In Thousands)** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
|                                         |       |       |       |
| 2005                                         |       | $          | 348        |   |
| 2006                                         |       | 326        |       |
| 2007                                         |       | 293        |       |
| 2008                                         |       | 194        |       |
| 2009                                         |       | 105        |       |
| Thereafter                                   |       | 1,837      |       |
| Total                                        |       | $          | 3,103      |   |

 

Total rental expense for alloperating leases for the years ended December 31, 2004, 2003 and 2002 were$320,000, $269,000, and $258,000 respectively.

 

The Company is subject tolawsuits and claims arising out of its business. In the opinion of management,after review and consultation with counsel, any proceedings that may beassessed will not have a material adverse effect on the consolidated financialposition of the Company.

 

**NOTE 15 -OFF-BALANCE SHEET RISK**

 

The Company is a party tofinancial instruments with off-balance sheet risk in the normal course ofbusiness to meet the financing needs of its customers. These financialinstruments include commitments to extend credit and standby letters of credit.These instruments involve, to varying degrees, elements of credit, interestrate or liquidity risk in excess of the amount recognized in the consolidatedbalance sheet. The contract amounts of these instruments express the extent ofinvolvement the Company has in particular classes of financial instruments.

 

The Company’s exposure tocredit loss from nonperformance by the other party to the financial instrumentsfor commitments to extend credit and standby letters of credit is representedby the contractual amount of these instruments. The Company uses the samecredit policies in making commitments and conditional obligations as it doesfor on-balance sheet instruments.

 

The Company may requirecollateral or other security to support financial instruments with off-balancesheet credit risk.

 

Financial instruments whosecontract amounts represent credit risk are as follows at December 31:

 
| **(In Thousands)**           | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
| Commitments to extend credit |       | $        | 42,537     |     | $          | 47,454 |   |
| Standby letters of credit    |       | $        | 1,321      |     | $          | 258 |   |

 

Commitments to extend creditare legally binding agreements to lend to customers. Commitments generally havefixed expiration dates or other termination clauses and may require payment offees. Since many of the commitments are expected to expire without being drawnupon, the total commitment amounts do not necessarily represent futureliquidity requirements. The Company evaluates each customer’s credit worthinesson a case-by-case basis. The amount of collateral obtained, if deemed necessaryby the Company, on extension of credit is based on management’s creditassessment of the counterparty.

 

Standby letters of creditrepresent conditional commitments issued by the Company to guarantee theperformance of a customer to a third party. These instruments are issuedprimarily to support bid or performance related contracts. The coverage periodfor these instruments is typically a one year period with an annual renewaloption subject to prior approval by management. Fees earned from the issuanceof these letters are recognized upon expiration of the coverage period. Forsecured letters of credit, the collateral is typically Bank deposit instrumentsor customer business assets.

 

**NOTE 16 -CAPITAL REQUIREMENTS**

 

Federal regulations requirethe Company and the Bank to maintain minimum amounts of capital. Specifically,each is required to maintain certain minimum dollar amounts and ratios of Totaland Tier 1 capital to risk-weighted assets and of Tier 1 capital to averagetotal assets.

 

In addition to the capitalrequirements, the Federal Deposit Insurance Corporation Improvement Act(“FDICIA”) established five capital categories ranging from “well capitalized”to “critically

 

23

----

 

undercapitalized.” Shouldany institution fail to meet the requirements to be considered “adequatelycapitalized,” it would become subject to a series of increasingly restrictiveregulatory actions. As of December 31, 2004 and 2003, the FDIC categorized theBank as well capitalized under the regulatory framework for prompt correctiveaction. To be classified as a well capitalized financial institution, Totalrisk-based, Tier 1 risk-based and Tier 1 leverage capital ratios must be atleast 10%, 6%, and 5%, respectively.

 

The Company’s and the Bank’sactual capital ratios are presented in the following tables, which shows that bothmet all regulatory capital requirements.

 

The Company’s actual capitalamounts and ratios are presented in the following table:

 
| ** **                    | ** ** | **2004**   | ** ** | **2003**  | ** ** |
|-------------------------------|------------|------------|------------|-----------|------------|
| **(In Thousands)**            | ** ** | **AMOUNT** | ** ** | **RATIO** | ** ** | **AMOUNT** | ** ** | **RATIO** | ** ** |
| **Total Capital**             |       |       |       |      |       |   |   |   |   |
| **(to Risk-weighted Assets)** |       |       |       |      |       |   |   |   |   |
| Actual                        |       | $          | 72,042     |      | 21.8       | % | $ | 66,820 |   | 23.0 | % |
| For Capital Adequacy Purposes |       | 26,475     |       | 8.0       |       | 23,225 |   | 8.0 |   |
| To Be Well Capitalized        |       | 33,094     |       | 10.0      |       | 29,031 |   | 10.0 |   |
| **Tier 1 Capital**            |       |       |       |      |       |   |   |   |   |
| **(to Risk-weighted Assets)** |       |       |       |      |       |   |   |   |   |
| Actual                        |       | $          | 65,776     |      | 19.9       | % | $ | 60,547 |   | 20.9 | % |
| For Capital Adequacy Purposes |       | 13,238     |       | 4.0       |       | 11,613 |   | 4.0 |   |
| To Be Well Capitalized        |       | 19,856     |       | 6.0       |       | 17,419 |   | 6.0 |   |
| **Tier 1 Capital**            |       |       |       |      |       |   |   |   |   |
| **(to Average Assets)**       |       |       |       |      |       |   |   |   |   |
| Actual                        |       | $          | 65,776     |      | 12.1       | % | $ | 60,547 |   | 11.6 | % |
| For Capital Adequacy Purposes |       | 21,750     |       | 4.0       |       | 20,922 |   | 4.0 |   |
| To Be Well Capitalized        |       | 27,187     |       | 5.0       |       | 26,153 |   | 5.0 |   |
|                               |            |            |            |           |            |  |  |  |  |  |  |  |  |  |  |

 

The Bank’s actual capital amounts and ratiosare presented in the following table:

 
| ** **                    | ** ** | **2004**   | ** ** | **2003**  | ** ** |
|-------------------------------|------------|------------|------------|-----------|------------|
| **(In Thousands)**            | ** ** | **AMOUNT** | ** ** | **RATIO** | ** ** | **AMOUNT** | ** ** | **RATIO** | ** ** |
| **Total Capital**             |       |       |       |      |       |   |   |   |   |
| **(to Risk-weighted Assets)** |       |       |       |      |       |   |   |   |   |
| Actual                        |       | $          | 55,717     |      | 17.6       | % | $ | 52,161 |   | 18.8 | % |
| For Capital Adequacy Purposes |       | 25,311     |       | 8.0       |       | 22,155 |   | 8.0 |   |
| To Be Well Capitalized        |       | 31,639     |       | 10.0      |       | 27,693 |   | 10.0 |   |
| **Tier 1 Capital**            |       |       |       |      |       |   |   |   |   |
| **(to Risk-weighted Assets)** |       |       |       |      |       |   |   |   |   |
| Actual                        |       | $          | 51,213     |      | 16.2       | % | $ | 47,770 |   | 17.3 | % |
| For Capital Adequacy Purposes |       | 12,656     |       | 4.0       |       | 11,077 |   | 4.0 |   |
| To Be Well Capitalized        |       | 18,983     |       | 6.0       |       | 16,616 |   | 6.0 |   |
| **Tier 1 Capital**            |       |       |       |      |       |   |   |   |   |
| **(to Average Assets)**       |       |       |       |      |       |   |   |   |   |
| Actual                        |       | $          | 51,213     |      | 9.7        | % | $ | 47,770 |   | 9.6 | % |
| For Capital Adequacy Purposes |       | 21,039     |       | 4.0       |       | 19,982 |   | 4.0 |   |
| To Be Well Capitalized        |       | 26,299     |       | 5.0       |       | 24,978 |   | 5.0 |   |

 

**NOTE 17 -REGULATORY RESTRICTIONS**

 

The Pennsylvania BankingCode restricts the availability of capital funds for payment of dividend by allstate-chartered banks to the additional paid in capital of the Bank.Accordingly, at December 31, 2004, the balance in the additional paid incapital account totaling approximately $11,700,000 is unavailable fordividends.

 

The Bank is subject toregulatory restrictions, which limit its ability to loan funds to Penns WoodsBancorp, Inc. At

 

24

----

 

December 31, 2004, theregulatory lending limit amounted to approximately $5,502,000.

 

**Cash andDue from Banks**

 

Included in cash and duefrom banks are reserves required by the district Federal Reserve Bank of$1,197,000 and $1,151,000 at December 31, 2004 and 2003. The required reservesare computed by applying prescribed ratios to the classes of average depositbalances. These are held in the form of cash on hand and a balance maintaineddirectly with the Federal Reserve Bank.

 

**NOTE 18 -ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

The Company is required todisclose estimated fair values for its financial instruments. Fair valueestimates are made at a specific point in time, based on relevant marketinformation and information about the financial instrument. These estimates donot reflect any premium or discount that could result from offering for sale atone time the Company’s entire holdings of a particular financial instrument.Also, it is the Company’s general practice and intention to hold most of itsfinancial instruments to maturity and not to engage in trading or salesactivities. Because no market exists for a significant portion of the Company’sfinancial instruments, fair value estimates are based on judgments regardingfuture expected loss experience, current economic conditions, riskcharacteristics of various financial instruments and other factors. Theseestimates are subjective in nature and involve uncertainties and matters ofsignificant judgment and therefore cannot be determined with precision. Changesin assumptions can significantly affect the estimates.

 

Estimated fair values havebeen determined by the Company using historical data and an estimationmethodology suitable for each category of financial instruments. The estimatedfair value of the Company’s investment securities is described in Note 1.

 

The Company’s fair valueestimates, methods, and assumptions are set forth below for the Company’s otherfinancial instruments.

 

As certain assets andliabilities, such as deferred tax assets, premises and equipment, and many otheroperational elements of the Company, are not considered financial instrumentsbut have value, this estimated fair value of financial instruments would notrepresent the full market value of the Company.

 

The estimated fair values ofthe Company’s financial instruments are as follows at December 31,:

 
| ** **                    | ** ** | **2004**            | ** ** | **2003**        | ** ** |
|-------------------------------|------------|---------------------|------------|-----------------|------------|
| **(In Thousands)**            | ** ** | **CARRYING  VALUE** | ** ** | **FAIR  VALUE** | ** ** | **CARRYING  VALUE** | ** ** | **FAIR  VALUE** | ** ** |
|                          |       |                |       |            |       |   |   |   |   |
| Financial assets:             |       |                |       |            |       |   |   |   |   |
| Cash and due from equivalents |       | $                   | 12,626     |            | $          | 12,626 |   | $ | 10,230 |   | $ | 10,230 |   |
| Investment securities:        |       |                |       |            |       |   |   |   |   |
| Available for sale            |       | 177,957             |       | 177,957         |       | 210,611 |   | 210,611 |   |
| Held to maturity              |       | 558                 |       | 561             |       | 686 |   | 701 |   |
| Loans held for sale           |       | 4,624               |       | 4,624           |       | 4,803 |   | 4,803 |   |
| Loans, net                    |       | 321,167             |       | 331,350         |       | 272,759 |   | 287,310 |   |
| Bank-owned life insurance     |       | 10,976              |       | 10,976          |       | 8,908 |   | 8,908 |   |
| Regulatory stock              |       | 6,206               |       | 6,206           |       | 6,588 |   | 6,588 |   |
| Accrued interest receivable   |       | 2,246               |       | 2,246           |       | 2,242 |   | 2,242 |   |
|                          |       |                |       |            |       |   |   |   |   |
| Financial liabilities:        |       |                |       |            |       |   |   |   |   |
| Interest-bearing deposits     |       | $                   | 282,786    |            | $          | 263,509 |   | $ | 269,443 |   | $ | 271,200 |   |
| Noninterest-bearing deposits  |       | 74,050              |       | 74,050          |       | 64,875 |   | 64,875 |   |
| Short-term borrowings         |       | 36,475              |       | 36,475          |       | 47,265 |   | 47,265 |   |
| Long-term borrowings, FHLB    |       | 75,878              |       | 77,858          |       | 70,878 |   | 73,107 |   |
| Accrued interest payable      |       | 850                 |       | 850             |       | 836 |   | 836 |   |

 

25

----

 

**Cash and Cash Equivalents, Loans Held for Sale,Regulatory Stock, Accrued Interest Receivable, Short-term Borrowings, andAccrued Interest Payable:**

 

The fair value is equal to thecarrying value.

 

**Investmentsecurities****:**

 

The fair value of investmentsecurities available for sale and held to maturity is equal to the availablequoted market price. If no quoted market price is available, fair value isestimated using the quoted market price for similar securities.

 

**Loans:**

 

Fair values are estimatedfor portfolios of loans with similar financial characteristics. Loans aresegregated by type such as commercial, commercial real estate, residential realestate, construction real estate, and other consumer. Each loan category isfurther segmented into fixed and adjustable rate interest terms and byperforming and nonperforming categories.

 

The fair value of performingloans is calculated by discounting scheduled cash flows through the estimatedmaturity using estimated market discount rates that reflect the credit andinterest rate risk inherent in the loan. The estimate of maturity is based onthe Company’s historical experience with repayments for each loanclassification, modified, as required, by an estimate of the effect of currenteconomic and lending conditions.

 

Fair value for significantnonperforming loans is based on recent external appraisals. If appraisals arenot available, estimated cash flows are discounted using a rate commensuratewith the risk associated with the estimated cash flows. Assumptions regardingcredit risk, cash flows, and discounted rates are judgmentally determined usingavailable market information and specific borrower information.

 

**Bank-ownedlife insurance:**

 

The fair value is equal tothe Cash Surrender Value of life insurance policies.

 

**Deposits:**

 

The fair value of depositswith no stated maturity, such as noninterest-bearing demand deposits, savingsand NOW accounts, and money market and checking accounts, is equal to theamount payable on demand as of December 31, 2004 and 2003. The fair value ofcertificates of deposit is based on the discounted value of contractual cashflows.

 

The fair value estimatesabove do not include the benefit that results from the low-cost fundingprovided by the deposit liabilities compared to the cost of borrowing funds inthe market, commonly referred to as the core deposit intangible.

 

**Otherborrowings****:**

 

The fair value of otherborrowings is based on the discounted value of contractual cash flows.

 

**Commitmentsto extend credit, standby letters of credit, and financial guarantees written:**

 

There is no materialdifference between the notional amount and the estimated fair value ofoff-balance sheet items at December 31, 2004 and 2003, respectively. Thecontractual amounts of unfunded commitments and letters of credit are presentedin Note 15.

 

**NOTE 19 -PARENT COMPANY ONLY FINANCIAL STATEMENTS**

 

Condensed financialinformation for Penns Woods Bancorp, Inc. follows:

 

26

----

 

**CONDENSED BALANCE SHEET, DECEMBER 31,**

 
| **(In Thousands)**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
|                                          |       |     |       |     |       |
| ASSETS                                        |       |     |       |     |       |
| Cash                                          |       | $        | 453        |     | $          | 369 |   |
| Investment in subsidiaries:                   |       |     |       |     |       |
| Bank                                          |       | 56,743   |       | 54,133   |       |
| Nonbank                                       |       | 15,980   |       | 15,307   |       |
| Other assets                                  |       | 104      |       | 91       |       |
|                                          |       |     |       |     |       |
| Total Assets                                  |       | $        | 73,280     |     | $          | 69,900 |   |
|                                          |       |     |       |     |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY     |       |     |       |     |       |
| Other liabilities                             |       | $        | 115        |     | $          | 131 |   |
| Shareholders’ equity                     |       | 73,165   |       | 69,769   |       |
|                                          |       |     |       |     |       |
| Total liability and shareholders’ equity |       | $        | 73,280     |     | $          | 69,900 |   |

 

27

----

 

**CONDENSED STATEMENT OF INCOME**

**FOR THE YEARS ENDED DECEMBER 31,**

 
| **(In Thousands)**                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                |       |     |       |     |       |     |       |
| Operating income:                                   |       |     |       |     |       |     |       |
| Dividends from subsidiaries                         |       | $        | 6,440      |     | $          | 6,651    |       | $ | 4,878 |   |
| Equity in undistributed net income of  subsidiaries |       | 4,833    |       | 4,649    |       | 4,121    |       |
|                                                |       |     |       |     |       |     |       |
| Operating expenses:                                 |       | (190     | )          | (126     | )          | (113     | )          |
|                                                |       |     |       |     |       |     |       |
| Net income                                          |       | $        | 11,083     |     | $          | 11,174   |       | $ | 8,886 |   |

 

**CONDENSED STATEMENT OF CASH FLOWS**

**FOR THE YEARS ENDED DECEMBER 31,**

 
| **(In Thousands)**                                                                      | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                    |       |     |       |     |       |     |       |
| OPERATING ACTIVITIES                                                                    |       |     |       |     |       |     |       |
| Net income                                                                              |       | $        | 11,083     |     | $          | 11,174   |       | $ | 8,886 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |     |       |     |       |     |       |
| Equity in undistributed net income of  subsidiaries                                |       | (4,833   | )          | (4,649   | )          | (4,121   | )          |
| Other, net                                                                              |       | (9       | )          | (64      | )          | (23      | )          |
| Net cash provided by operating activities                                               |       | 6,241    |       | 6,461    |       | 4,742    |       |
|                                                                                    |       |     |       |     |       |     |       |
| INVESTING ACTIVITIES                                                                    |       |     |       |     |       |     |       |
| Additional investment in subsidiaries                                                   |       | (271     | )          | (1,039   | )          | —   |       |
|                                                                                    |       |     |       |     |       |     |       |
| FINANCING ACTIVITIES                                                                    |       |     |       |     |       |     |       |
| Dividends paid                                                                          |       | (5,843   | )          | (5,001   | )          | (4,124   | )          |
| Proceeds from exercise of stock options                                                 |       | 194      |       | 87       |       | 113      |       |
| Purchase/retirement of treasury stock                                                   |       | (237     | )          | (620     | )          | (401     | )          |
| Net cash used for financing activities                                                  |       | (5,886   | )          | (5,534   | )          | (4,412   | )          |
|                                                                                    |       |     |       |     |       |     |       |
| NET INCREASE (DECREASE) IN CASH                                                         |       | 84       |       | (112     | )          | 330      |       |
| CASH, BEGINNING OF YEAR                                                                 |       | 369      |       | 481      |       | 151      |       |
| CASH, END OF YEAR                                                                       |       | $        | 453        |     | $          | 369      |       | $ | 481 |   |

 

28

----

 

**NOTE 20 -CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)**

 

(In Thousands, Except PerShare Data)

 
| ** **                         | ** ** | **FOR THE THREE MONTHS ENDED** | ** ** |
|------------------------------------|------------|--------------------------------|------------|
| **2004**                           | ** ** | **March 31,**                  | ** ** | **June 30,** | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** |
|                               |       |                           |       |   |   |   |   |   |   |
| Interest income                    |       | $                              | 7,327      |   | $ | 7,532 |   | $ | 7,924 |   | $ | 8,164 |   |
| Interest expense                   |       | 2,124                          |       | 2,142 |   | 2,229 |   | 2,273 |   |
|                               |       |                           |       |   |   |   |   |   |   |
| Net interest income                |       | 5,203                          |       | 5,390 |   | 5,695 |   | 5,891 |   |
|                               |       |                           |       |   |   |   |   |   |   |
| Provision for loan losses          |       | 75                             |       | 75 |   | 165 |   | 150 |   |
| Non-interest income                |       | 1,492                          |       | 1,467 |   | 1,548 |   | 1,266 |   |
| Securities gains, net              |       | 545                            |       | 583 |   | 407 |   | 641 |   |
| Non-interest expenses              |       | 3,473                          |       | 3,453 |   | 3,509 |   | 3,882 |   |
|                               |       |                           |       |   |   |   |   |   |   |
| Income before income tax provision |       | 3,692                          |       | 3,912 |   | 3,976 |   | 3,766 |   |
| Income tax provision               |       | 1,019                          |       | 1,108 |   | 1,150 |   | 986 |   |
|                               |       |                           |       |   |   |   |   |   |   |
| Net income                         |       | $                              | 2,673      |   | $ | 2,804 |   | $ | 2,826 |   | $ | 2,780 |   |
|                               |       |                           |       |   |   |   |   |   |   |
| Earnings per share - basic         |       | $                              | 0.80       |   | $ | 0.85 |   | $ | 0.85 |   | $ | 0.83 |   |
|                               |       |                           |       |   |   |   |   |   |   |
| Earnings per share - diluted       |       | $                              | 0.80       |   | $ | 0.85 |   | $ | 0.85 |   | $ | 0.83 |   |

 

(In Thousands, Except Per Share Data)

 
| ** **                         | ** ** | **FOR THE THREE MONTHS ENDED** | ** ** |
|------------------------------------|------------|--------------------------------|------------|
| **2003**                           | ** ** | **March 31,**                  | ** ** | **June 30,** | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** |
|                               |       |                           |       |   |   |   |   |   |   |
| Interest income                    |       | $                              | 7,092      |   | $ | 7,251 |   | $ | 7,281 |   | $ | 7,608 |   |
| Interest expense                   |       | 2,386                          |       | 2,395 |   | 2,327 |   | 2,157 |   |
|                               |       |                           |       |   |   |   |   |   |   |
| Net interest income                |       | 4,706                          |       | 4,856 |   | 4,954 |   | 5,451 |   |
|                               |       |                           |       |   |   |   |   |   |   |
| Provision for loan losses          |       | 90                             |       | 45 |   | 90 |   | 30 |   |
| Non-interest income                |       | 1,182                          |       | 1,195 |   | 1,325 |   | 1,273 |   |
| Securities gains, net              |       | 101                            |       | 1,750 |   | 1,247 |   | 381 |   |
| Non-interest expenses              |       | 3,139                          |       | 3,186 |   | 3,290 |   | 3,674 |   |
|                               |       |                           |       |   |   |   |   |   |   |
| Income before income tax provision |       | 2,760                          |       | 4,570 |   | 4,146 |   | 3,401 |   |
| Income tax provision               |       | 573                            |       | 1,233 |   | 1,135 |   | 762 |   |
|                               |       |                           |       |   |   |   |   |   |   |
| Net income                         |       | $                              | 2,187      |   | $ | 3,337 |   | $ | 3,011 |   | $ | 2,639 |   |
|                               |       |                           |       |   |   |   |   |   |   |
| Earnings per share - basic         |       | $                              | 0.72       |   | $ | 1.10 |   | $ | 1.00 |   | $ | 0.53 |   |
|                               |       |                           |       |   |   |   |   |   |   |
| Earnings per share - diluted       |       | $                              | 0.72       |   | $ | 1.10 |   | $ | 0.99 |   | $ | 0.54 |   |

 

29

----

 

**PART IV**

 

**ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

 

(a) Financial Statements

 

1. The followingconsolidated financial statements and reports are set forth in Item 8:
| Report of Independent  Auditors                                 |
|-----------------------------------------------------------------|
| Consolidated Balance Sheet                                      |
| Consolidated Statement of  Income                               |
| Consolidated Statement of  Changes in Shareholders’ Equity |
| Consolidated Statement of  Cash Flows                           |
| Notes to the Consolidated  Financial Statements                 |

 

2. The following schedulesis submitted herewith:

I. Indebtedness of RelatedParties

 

The schedules not includedare omitted because the required matter or conditions are not present, the datais insignificant or the required information is submitted as part of theconsolidated financial statements and notes thereto.

 

(b) Exhibits:

 

(23)(iii) Consent of Independent Registered Public Accounting Firm.

(31)(v) Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer

(31)(vi) Rule 13a-14(a)/Rule 15d-14(a) Certification of Principal AccountingOfficer

(32)(iii) Section 1350 Certification of Chief Executive Officer

(32)(iv) Section 1350 Certification of Principal Accounting Officer

 

30

----

 

**SIGNATURES**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| Dated:  August 25,  2005 | PENNS WOODS BANCORP, INC.                                |
|------------------------------------|----------------------------------------------------------|
|                               |                                                     |
|                               | /s/ Ronald A. Walko                                      |
|                               | RONALD A. WALKO  President & Chief Executive Officer |

 

31

----