**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

**FORM10-Q**

 

**ý****    ****Quarterly Report pursuant toSection 13 or 15 (d) of the Securities Exchange Act of 1934 for the QuarterlyPeriod Ended March 31, 2005,**

 

**o****    ****Transition report pursuant toSection 13 or 15 (d) of the Exchange Act for the Transition Period from                                         to                                        .**

 

**No.0-17077**

(Commission File Number)

 

**PENNS WOODS BANCORP, INC.**

(Exact name of Registrantas specified in its charter)

 
| **PENNSYLVANIA**                                                 | ** ** | **23-2226454**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                             |       |                                  |
| **300 Market Street,  Williamsport, Pennsylvania**               | ** ** | **17701**                             |
| (Address of  principal executive offices)                        |       | (Zip Code)                            |
|                                                             |       |                                  |
| **(570)  322-1111**                                              |
| Registrant’s  telephone number, including area code         |

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that Registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.

 

YES  ý          NO  o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12 b-2 of the Exchange Act)

 

YES  ý          NO  o

 

On April 25, 2005 therewere 3,321,869 of the Registrant’s common stock outstanding.

 

 

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**PENNS WOODS BANCORP, INC.**

**INDEX TO QUARTERLY REPORT ON FORM10-Q**

 
| **Part  I Financial Information**                                                                       | ** **                                                                                                                      |
|---------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                              | ** **                                                                                                                      |
| **Item  I Financial Information**                                                                       | ** **                                                                                                                      |
| ** **                                                                                              | ** **                                                                                                                      |
|                                                                                                    | Consolidated Balance Sheet  (unaudited) as of March 31, 2005 and December 31, 2004                                              |   |
|                                                                                                    |                                                                                                                            |   |
|                                                                                                    | Consolidated Statement  of Income (unaudited) for the Three Months ended March 31, 2005 and 2004                                |   |
|                                                                                                    |                                                                                                                            |   |
|                                                                                                    | Consolidated  Statement of Comprehensive Income (unaudited) For the Three Months  ended March 31, 2005 and 2004                 |   |
|                                                                                                    |                                                                                                                            |   |
|                                                                                                    | Consolidated  Statement of Changes in Shareholders’ Equity (unaudited) for the Three Months  ended March 31, 2005 and 2004 |   |
|                                                                                                    |                                                                                                                            |   |
|                                                                                                    | Consolidated  Statement of Cash Flows (unaudited) for the Three Months ended  March 31, 2005 and 2004                           |   |
|                                                                                                    |                                                                                                                            |   |
|                                                                                                    | Notes to  Consolidated Financial Statements (unaudited)                                                                         |   |
|                                                                                                    |                                                                                                                            |
| **Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations** | ** **                                                                                                                      |
| ** **                                                                                              | ** **                                                                                                                      |
| **Item 3. Quantitative and  Qualitative Disclosures About Market Risk**                                 | ** **                                                                                                                      |
| ** **                                                                                              | ** **                                                                                                                      |
| **Item 4. Controls and  Procedures**                                                                    | ** **                                                                                                                      |
| ** **                                                                                              | ** **                                                                                                                      |
| **Part II Other Information**                                                                           | ** **                                                                                                                      |
| ** **                                                                                              | ** **                                                                                                                      |
| **Item 1. Legal Proceedings**                                                                           |                                                                                                                            |
| **Item 2. Unregistered Sales  of Equity Securities and Use of Proceeds**                                |                                                                                                                            |
| **Item 3. Defaults Upon  Senior Securities**                                                            |                                                                                                                            |
| **Item 4. Submission of  Matters to a Vote of Security Holders**                                        |                                                                                                                            |
| **Item 5. Other Information**                                                                           |                                                                                                                            |
| **Item 6. Exhibits**                                                                                    |                                                                                                                            |
| **Signatures**                                                                                          |                                                                                                                            |
| **Exhibit Index  and Exhibits**                                                                         |                                                                                                                            |

 

2

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PENNSWOODS BANCORP, INC.

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 
| **(In Thousands, Except Share Data)**                                                                | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
|                                                                                                 |       |                |       |                   |       |
| ASSETS:                                                                                              |       |                |       |                   |       |
| Cash and  noninterest-bearing balances in other financial institutions                               |       | $                   | 17,314     |                   | $          | 12,602 |   |
| Interest-bearing  deposits in other financial institutions                                           |       | 30                  |       | 24                     |       |
| Total cash and  cash equivalents                                                                     |       | 17,344              |       | 12,626                 |       |
|                                                                                                 |       |                |       |                   |       |
| Investment  securities, available for sale, at fair value                                            |       | 178,071             |       | 184,163                |       |
| Investment  securities held to maturity (fair value of $307 and $561)                                |       | 309                 |       | 558                    |       |
| Loans held for  sale                                                                                 |       | 2,575               |       | 4,624                  |       |
| Loans, net of  unearned discount of $1,060 and $1,096                                                |       | 323,140             |       | 324,505                |       |
| Allowance for  loan and lease losses                                                                 |       | (3,399              | )          | (3,338                 | )          |
| Loans, net                                                                                           |       | 319,741             |       | 321,167                |       |
|                                                                                                 |       |                |       |                   |       |
| Premises and  equipment, net                                                                         |       | 5,588               |       | 4,882                  |       |
| Accrued interest  receivable                                                                         |       | 2,208               |       | 2,246                  |       |
| Bank-owned life  insurance                                                                           |       | 11,070              |       | 10,976                 |       |
| Goodwill                                                                                             |       | 3,032               |       | 3,032                  |       |
| Other assets                                                                                         |       | 4,055               |       | 2,429                  |       |
| TOTAL ASSETS                                                                                         |       | $                   | 543,993    |                   | $          | 546,703 |   |
|                                                                                                 |       |                |       |                   |       |
| LIABILITIES:                                                                                         |       |                |       |                   |       |
| Interest-bearing  deposits                                                                           |       | $                   | 281,593    |                   | $          | 282,786 |   |
| Noninterest-bearing  deposits                                                                        |       | 72,708              |       | 74,050                 |       |
| Total deposits                                                                                       |       | 354,301             |       | 356,836                |       |
|                                                                                                 |       |                |       |                   |       |
| Short-term  borrowings                                                                               |       | 37,262              |       | 36,475                 |       |
| Long-term  borrowings, Federal Home Loan Bank                                                        |       | 74,478              |       | 75,878                 |       |
| Accrued interest  payable                                                                            |       | 862                 |       | 850                    |       |
| Other  liabilities                                                                                   |       | 5,179               |       | 3,499                  |       |
| TOTAL  LIABILITIES                                                                                   |       | 472,082             |       | 473,538                |       |
|                                                                                                 |       |                |       |                   |       |
| SHAREHOLDERS’  EQUITY:                                                                          |       |                |       |                   |       |
| Common stock par  value $10.00, 10,000,000 shares authorized; 3,332,179 and 3,331,837 shares  issued |       | 33,322              |       | 33,318                 |       |
| Additional  paid-in capital                                                                          |       | 17,707              |       | 17,700                 |       |
| Retained  earnings                                                                                   |       | 19,481              |       | 18,262                 |       |
| Accumulated  other comprehensive gain                                                                |       | 1,847               |       | 4,331                  |       |
| Less: Treasury  stock at cost, 10,310 shares                                                         |       | (446                | )          | (446                   | )          |
| TOTAL  SHAREHOLDERS’ EQUITY                                                                     |       | 71,911              |       | 73,165                 |       |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                                     |       | $                   | 543,993    |                   | $          | 546,703 |   |

 

Seeaccompanying notes to the unaudited consolidated financial statements.

 

3

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PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OFINCOME

(UNAUDITED)

 
| ** **                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------|------------|
| **(In Thousands, Except Per Share  Data)**           | ** ** | **2005**                          | ** ** | **2004** | ** ** |
|                                                 |       |                              |       |   |   |
| INTEREST AND  DIVIDEND INCOME:                       |       |                              |       |   |   |
| Loans including  fees                                |       | $                                 | 5,500      |   | $ | 4,891 |   |
| Investment  securities:                              |       |                              |       |   |   |
| Taxable                                              |       | 1,264                             |       | 1,803 |   |
| Tax-exempt                                           |       | 589                               |       | 391 |   |
| Dividend                                             |       | 298                               |       | 242 |   |
| TOTAL INTEREST  AND DIVIDEND INCOME                  |       | 7,651                             |       | 7,327 |   |
|                                                 |       |                              |       |   |   |
| INTEREST  EXPENSE:                                   |       |                              |       |   |   |
| Deposits                                             |       | 1,194                             |       | 1,135 |   |
| Short-term  borrowings                               |       | 202                               |       | 137 |   |
| Long-term  borrowings                                |       | 853                               |       | 852 |   |
| TOTAL INTEREST  EXPENSE                              |       | 2,249                             |       | 2,124 |   |
|                                                 |       |                              |       |   |   |
| NET INTEREST  INCOME                                 |       | 5,402                             |       | 5,203 |   |
|                                                 |       |                              |       |   |   |
| PROVISION FOR  LOAN LOSSES                           |       | 180                               |       | 75 |   |
|                                                 |       |                              |       |   |   |
| NET INTEREST  INCOME AFTER PROVISION FOR LOAN LOSSES |       | 5,222                             |       | 5,128 |   |
|                                                 |       |                              |       |   |   |
| NON-INTEREST  INCOME:                                |       |                              |       |   |   |
| Service charges                                      |       | 455                               |       | 476 |   |
| Securities  gains, net                               |       | 611                               |       | 545 |   |
| Bank-owned life  insurance                           |       | 94                                |       | 90 |   |
| Insurance  commissions                               |       | 643                               |       | 614 |   |
| Other income                                         |       | 314                               |       | 312 |   |
| TOTAL  NON-INTEREST INCOME                           |       | 2,117                             |       | 2,037 |   |
|                                                 |       |                              |       |   |   |
| NON-INTEREST  EXPENSES:                              |       |                              |       |   |   |
| Salaries and  employee benefits                      |       | 2,020                             |       | 1,979 |   |
| Occupancy  expense, net                              |       | 291                               |       | 243 |   |
| Furniture and  equipment expense                     |       | 221                               |       | 265 |   |
| Advertising  expense                                 |       | 94                                |       | 94 |   |
| Pennsylvania  shares tax expense                     |       | 139                               |       | 116 |   |
| Other operating  expenses                            |       | 856                               |       | 776 |   |
| TOTAL  NON-INTEREST EXPENSES                         |       | 3,621                             |       | 3,473 |   |
|                                                 |       |                              |       |   |   |
| INCOME BEFORE  INCOME TAX PROVISION                  |       | 3,718                             |       | 3,692 |   |
| INCOME TAX  PROVISION                                |       | 1,003                             |       | 1,019 |   |
| NET INCOME                                           |       | $                                 | 2,715      |   | $ | 2,673 |   |
|                                                 |       |                              |       |   |   |
| EARNINGS PER  SHARE - BASIC                          |       | $                                 | 0.82       |   | $ | 0.80 |   |
| EARNINGS PER  SHARE - DILUTED                        |       | $                                 | 0.82       |   | $ | 0.80 |   |
| DIVIDENDS PER  SHARE                                 |       | $                                 | 0.45       |   | $ | 0.35 |   |
|                                                 |       |                              |       |   |   |
| WEIGHTED AVERAGE  SHARES OUTSTANDING-BASIC           |       | 3,311,272                         |       | 3,321,853 |   |
| WEIGHTED AVERAGE  SHARES OUTSTANDING-DILUTED         |       | 3,313,422                         |       | 3,325,395 |   |

 

Seeaccompanying notes to the unaudited consolidated financial statements.

 

4

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PENNSWOODS BANCORP, INC.

CONSOLIDATEDSTATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

 

** **
| **(In Thousands Except Per Share  Data)**                                                      | ** ** | **COMMON  STOCK** | ** ** | **ADDITIONAL  PAID-IN  CAPITAL** | ** ** | **RETAINED  EARNINGS** | ** ** | **ACCUMULATED  OTHER  COMPREHENSIVE  INCOME** | ** ** | **TREASURY  STOCK** | ** ** | **TOTAL  SHAREHOLDERS’  EQUITY** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|-----------------------------------------------|------------|---------------------|------------|---------------------------------------|------------|
| **SHARES**                                                                                     | ** ** | **AMOUNT**        |
| Balance, December  31, 2004                                                                    |       | 3,331,837         |       | $                                | 33,318     |                   | $          | 17,700                                        |       | $                   | 18,262     |                                  | $          | 4,331 |   | $ | (446 | ) | $ | 73,165 |   |
|                                                                                           |       |              |       |                             |       |                   |       |                                          |       |                |       |                                  |       |   |   |
| Net income                                                                                     |       |              |       |                             |       |                   |       | 2,715                                         |       |                |       |                                  |       | 2,715 |   |
| Dividends  declared, $0.45                                                                     |       |              |       |                             |       |                   |       | (1,496                                        | )          |                |       |                                  |       | (1,496 | ) |
| Net change in unrealized  gain on investments available for sale, net of tax benefit of $1,280 |       |              |       |                             |       |                   |       |                                          |       | (2,484              | )          |                                  |       | (2,484 | ) |
| Stock options  exercised                                                                       |       | 342               |       | 4                                |       | 7                      |       |                                          |       |                |       |                                  |       | 11 |   |
| Balance, March  31, 2005                                                                       |       | 3,332,179         |       | $                                | 33,322     |                   | $          | 17,707                                        |       | $                   | 19,481     |                                  | $          | 1,847 |   | $ | (446 | ) | $ | 71,911 |   |

 

5

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PENNSWOODS BANCORP, INC.

CONSOLIDATEDSTATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

 
| ** **                                                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------|------------|
| **(In Thousands)**                                                         | ** ** | **2005**                         | ** ** | **2004** | ** ** |
|                                                                       |       |                             |       |   |   |
| Net Income                                                                 |       | $                                | 2,715      |   | $ | 2,673 |   |
| Other  comprehensive income:                                               |       |                             |       |   |   |
| Unrealized gains  (losses) on available for sale securities                |       | (3,155                           | )          | 737 |   |
| Less:  Reclassification adjustment for gain included in net income         |       | 611                              |       | 545 |   |
| Other  comprehensive income (loss) before tax                              |       | (3,766                           | )          | 192 |   |
| Income tax  expense (benefit) related to other comprehensive income (loss) |       | (1,280                           | )          | 65 |   |
| Other  comprehensive income (loss), net of tax                             |       | (2,486                           | )          | 127 |   |
| Comprehensive  income                                                      |       | $                                | 229        |   | $ | 2,800 |   |

 

See accompanying notes to the unauditedconsolidated financial statements.

 

6

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PENNSWOODS BANCORP, INC.

CONSOLIDATEDSTATEMENT OF CASH FLOWS

(UNAUDITED)

 
| ** **                                                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **(In Thousands)**                                                                 | ** ** | **2005**                          | ** ** | **2004** | ** ** |
|                                                                               |       |                              |       |   |   |
| OPERATING  ACTIVITIES:                                                             |       |                              |       |   |   |
| Net Income                                                                         |       | $                                 | 2,715      |   | $ | 2,673 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                              |       |   |   |
| Depreciation                                                                       |       | 143                               |       | 158 |   |
| Provision for  loan losses                                                         |       | 180                               |       | 75 |   |
| Accretion and  amortization of investment security discounts and premiums          |       | (105                              | )          | 3 |   |
| Securities  gains, net                                                             |       | (611                              | )          | (545 | ) |
| Originations of  loans held for sale                                               |       | (4,838                            | )          | (2,056 | ) |
| Proceeds of  loans held for sale                                                   |       | 6,887                             |       | 3,165 |   |
| Earnings on  bank-owned life insurance                                             |       | (94                               | )          | (90 | ) |
| Other, net                                                                         |       | 1,010                             |       | 1,572 |   |
| Net cash  provided by operating activities                                         |       | 5,287                             |       | 4,955 |   |
| INVESTING  ACTIVITIES:                                                             |       |                              |       |   |   |
| Investment  securities available for sale:                                         |       |                              |       |   |   |
| Proceeds from  sales                                                               |       | 63,594                            |       | 35,792 |   |
| Proceeds from  calls and maturities                                                |       | 3,517                             |       | 5,364 |   |
| Purchases                                                                          |       | (64,153                           | )          | (36,890 | ) |
| Investment  securities held to maturity:                                           |       |                              |       |   |   |
| Proceeds from  calls and maturities                                                |       | 249                               |       | 1 |   |
| Purchases                                                                          |       | —                            |       | (14 | ) |
| Net decrease  (increase) in loans                                                  |       | 1,169                             |       | (2,804 | ) |
| Acquisition of  bank premises and equipment                                        |       | (849                              | )          | (108 | ) |
| Proceeds from  the sale of foreclosed assets                                       |       | 28                                |       | 134 |   |
| Proceeds from  redemption of regulatory stock                                      |       | 1,286                             |       | 1,718 |   |
| Purchases of  regulatory stock                                                     |       | (777                              | )          | (1,252 | ) |
| Net cash  provided by investing activities                                         |       | 4,064                             |       | 1,941 |   |
| FINANCING  ACTIVITIES:                                                             |       |                              |       |   |   |
| Net (decrease)  increase in interest-bearing deposits                              |       | (1,193                            | )          | 9,073 |   |
| Net decrease in  noninterest-bearing deposits                                      |       | (1,342                            | )          | (1,154 | ) |
| Proceeds of  long-term borrowings                                                  |       | —                            |       | 5,000 |   |
| Repayment of  long-term borrowings                                                 |       | (1,400                            | )          | — |   |
| Net increase  (decrease) in short-term borrowings                                  |       | 787                               |       | (16,671 | ) |
| Dividends paid                                                                     |       | (1,496                            | )          | (1,163 | ) |
| Stock options  exercised                                                           |       | 11                                |       | 31 |   |
| Purchase of  treasury stock                                                        |       | —                            |       | (130 | ) |
| Net cash  provided used in financing activities                                    |       | (4,633                            | )          | (5,014 | ) |
| NET INCREASE IN  CASH AND CASH EQUIVALENTS                                         |       | 4,718                             |       | 1,882 |   |
| CASH AND CASH  EQUIVALENTS, BEGINNING                                              |       | 12,626                            |       | 10,230 |   |
| CASH AND CASH  EQUIVALENTS, ENDING                                                 |       | $                                 | 17,344     |   | $ | 12,112 |   |
|                                                                               |       |                              |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION:                                |       |                              |       |   |   |
|                                                                               |       |                              |       |   |   |
| Interest paid                                                                      |       | $                                 | 2,237      |   | $ | 2,131 |   |
| Transfer of  loans to foreclosed assets                                            |       | $                                 | 77         |   | $ | 39 |   |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

7

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# **PENNS WOODS BANCORP, INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

# **NOTE1.  Basis of Presentation**

# ** **

# **The consolidated financialstatements include the accounts of Penns Woods Bancorp, Inc. (the “Company”)and its wholly-owned subsidiaries Woods Investment Company, Inc., Woods RealEstate Development Company, Inc., and Jersey Shore State Bank (the “Bank”) andits wholly-owned subsidiary The M Group, Inc. D/B/A The Comprehensive FinancialGroup (“The M Group”).  All significantinter-company balances and transactions have been eliminated in theconsolidation.**

# ** **

The interim financialstatements are unaudited but, in the opinion of management, reflect alladjustments necessary for the fair presentation of results for suchperiods.  All of those adjustments are ofa normal, recurring nature.  The resultsof operations for any interim period are not necessarily indicative of resultsfor the full year.  These financialstatements should be read in conjunction with financial statements and notesthereto contained in the Company’s annual report for the year ended December31, 2004.

 

**Recent Accounting Pronouncements**

** **

In April, the Securities and Exchange Commissionadopted a new rule that amends the compliance dates for Financial AccountingStandards Board’s (“FASB”) Statement of Financial Accounting Standards No. 123(revised 2004), Share-Based Payment (FAS No. 123R).  The Statement requires that compensation costrelating to share-based payment transactions be recognized in financialstatements and that this cost be measured based on the fair value of the equityor liability instruments issued.  FAS No.123 (Revised 2004) covers a wide range of share-based compensation arrangementsincluding share options, restricted share plans, performance-based awards,share appreciation rights, and employee share purchase plans. The Company willadopt FAS No. 123 (Revised 2004) on January 1, 2006 and is currently evaluatingthe impact the adoption of the standard will have on the Company’s results ofoperations.

 

In December 2004, FASBissued FAS No. 153, “Exchanges of Nonmonetary Assets - An Amendment of APBOpinion No. 29”. The guidance in APB Opinion No. 29, “Accounting forNonmonetary Transactions”, is based on the principle that exchanges ofnonmonetary assets should be measured based on the fair value of the assetsexchanged. The guidance in that Opinion, however, included certain exceptionsto that principle. FAS No. 153 amends Opinion No. 29 to eliminate the exceptionfor nonmonetary exchanges of similar productive assets and replaces it with ageneral exception for exchanges of nonmonetary assets that do not have commercialsubstance. A nonmonetary exchange has commercial substance if the future cashflows of the entity are expected to change significantly as a result of theexchange. The provisions of FAS No. 153 are effective for nonmonetary assetexchanges occurring in fiscal periods beginning after June 15, 2005. Earlyapplication is permitted and companies must apply

 

8

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the standardprospectively. The adoption of this standard is not expected to have a materialeffect on the Company’s results of operations or financial position.

 

**NOTE 2. Per Share Data**

 

The following table sets forth the composition of theweighted average common shares (denominator) used in the basic and dilutive pershare computation.  There are no convertiblesecurities which would affect the numerator in calculating basic and dilutedearnings per share, therefore, net income as presented on the consolidatedstatement of income will be used as the numerator.

 
| ** **                                                                                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                 | ** ** | **2005**                         | ** ** | **2004** | ** ** |
|                                                                                                       |       |                             |       |   |   |
| Weighted average  common shares outstanding                                                                |       | 3,321,582                        |       | 3,327,315 |   |
|                                                                                                       |       |                             |       |   |   |
| Average treasury  stock shares                                                                             |       | (10,310                          | )          | (5,462 | ) |
|                                                                                                       |       |                             |       |   |   |
| Weighted average  common shares and common stock equivalents used to calculate basic earnings  per share   |       | 3,311,272                        |       | 3,321,853 |   |
|                                                                                                       |       |                             |       |   |   |
| Additional  common stock equivalents (stock options) used to calculate diluted earnings  per share         |       | 2,150                            |       | 3,542 |   |
|                                                                                                       |       |                             |       |   |   |
| Weighted average  common shares and common stock equivalents used to calculate diluted earnings  per share |       | 3,313,422                        |       | 3,325,395 |   |

 

Options to purchase 8,410 shares of common stock at theprice of $48.35 were outstanding during the three months ended March 31, 2005and 10,890 shares of common stock at the price of $48.35 were outstanding forthe three months ended March 31, 2004, but were not included in the computationof diluted earnings per share as they were anti-dilutive due to the strikeprice being greater than the market price as of the end of the quarter.

 

**Note 3.****  NetPeriodic Benefit Cost-Defined Benefit Plans**

 

For a detailed disclosure on the Company’s pension andemployee benefits plans, please refer to Note 11 of the Company’s ConsolidatedFinancial Statements included in the 2004 Annual Report on Form 10-K.

 

9

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The following sets forth the components of netperiodic benefit cost of the domestic non-contributory defined benefit plansfor the three months ended March 31, 2005 and 2004,  respectively.

 
| ** **                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
|                                   |       |     |       |     |       |
| Service cost                           |       | $        | 127        |     | $          | 113 |   |
| Interest cost                          |       | 112      |       | 106      |       |
| Expected return  on plan assets        |       | (95      | )          | (84      | )          |
| Amortization of  transition obligation |       | (1       | )          | (1       | )          |
| Amortization of  prior service cost    |       | 6        |       | 6        |       |
| Amortization of  net (gain) loss       |       | 16       |       | 14       |       |
| Net periodic  cost                     |       | $        | 165        |     | $          | 154 |   |

 

**Employer Contributions**

** **

The Company previously disclosed in its consolidatedfinancial statements included in the 2004 Annual Report on Form 10-K that itexpected to contribute $575,000 to its defined benefit plan in 2005.  Asof March 31, 2005, contributions of $206,000 have been made.  The Company presently anticipatescontributing an additional $369,000 to fund its pension plan in 2005 for atotal of $575,000.

 

**Note4.  Off Balance Sheet Risk**

 

The Company is a party to financial instruments withoff-balance sheet risk in the normal course of business to meet the financingneeds of its customers.  These financialinstruments include commitments to extend credit and standby letters of credit.  These instruments involve, to varyingdegrees, elements of credit, interest rate or liquidity risk in excess of theamount recognized in the consolidated balance sheet.  The contract amounts of these instrumentsexpress the extent of involvement the Company has in particular classes offinancial instruments.

 

The Company’s exposure to credit loss fromnonperformance by the other party to the financial instruments for commitmentsto extend credit and standby letters of credit is represented by thecontractual amount of these instruments. The Company uses the same credit policies in making commitments andconditional obligations as it does for on-balance sheet instruments.

 

The Company may require collateral or other security tosupport financial instruments with off-balance sheet credit risk.

 

10

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Financial instruments whose contract amounts representcredit risk are as follows:

 

|                          |   | **March 31,** |       |
|-------------------------------|--------|---------------|------------|
|                          |   | **2005**      | ** ** | **2004** |   |
| Commitments to  extend credit |   | $             | 41,361     |   | $ | 48,822 |   |
| Standby letters  of credit    |   | 1,705         |       | 816 |   |
|                               |        |               |            |  |  |  |  |

 

# **Note5.  Reclassification of ComparativeAmounts**

 

Certain comparativeamounts for the prior periods have been reclassified to conform to currentperiod presentations. Such reclassifications had no effect on net income orshareholders’ equity.

 

**CAUTIONARY STATEMENT FOR PURPOSESOF THE PRIVATE**

**SECURITIES LITIGATION REFORM ACTOF 1995**

 

This Report containscertain “forward-looking statements” including statements concerning plans,objectives, future events or performance and assumptions and other statementswhich are other than statements of historical fact.  The Company wishes to caution readers thatthe following important factors, among others, may have affected and could inthe future affect the Company’s actual results and could cause the Company’sactual results for subsequent periods to differ materially from those expressedin any forward-looking statement made by or on behalf of the Companyherein:  (i) the effect of changes inlaws and regulations, including federal and state banking laws and regulations,which the Company must comply, and the associated costs of compliance with suchlaws and regulations either currently or in the future as applicable; (ii) theeffect of changes in accounting policies and practices, as may be adopted bythe regulatory agencies as well as by the Financial Accounting Standards Board,or of changes in the Company’s organization, compensation and benefit plans;(iii) the effect on the Company’s competitive position within its market areaof the increasing consolidation within the banking and financial servicesindustries, including the increased competition from larger regional andout-of-state banking organizations as well as non-bank providers of variousfinancial services; (iv) the effect of changes in interest rates; and (v) theeffect of changes in the business cycle and downturns in the local, regional ornational economies.

 

11

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**ITEM 2****.   Management’s Discussion and Analysis ofFinancial Condition and Results of Operation**

 

# **EARNINGSSUMMARY**

# ** **

**Comparisonof the Three Months Ended March 31, 2005 and 2004**

 

**SummaryResults**

 

Net income for the threemonths ended March 31, 2005 was $2,715,000 compared to $2,673,000 for the sameperiod of 2004.  Basic and dilutedearnings per share for the three months ended March 31, 2005 were $0.82 ascompared to $0.80 for the three months ended March 31, 2004.  Return on average assets and return onaverage equity were 2.01% and 14.56% for the three months ended March 31, 2005 ascompared to 2.04% and 14.99% for the corresponding period of 2004.  Net income from core operations for the threemonths ended March 31, 2005, excluding after-tax securities gains of $403,000,remained stable at $2,312,000. (Management uses the non-GAAP measure of netincome from core operations in its analysis of the Company’s performance.  This measure, as used by the Company, adjustsnet income significant gains or losses that are unusual in nature.  Because certain of these items and theirimpact on the Company’s performance are difficult to predict, managementbelieves the presentation of financial measures excluding the impact of suchitems provides useful supplemental information in evaluating the operatingresults of the Company’s core businesses. These disclosures should not be viewed as a substitute for net incomedetermined in accordance with GAAP, nor are they necessarily comparable tonon-GAAP performance measures that may be presented by other companies.)

 

**InterestIncome**

 

Duringthe first quarter of 2005, interest and dividend income was $7,651,000, anincrease of $324,000 over the same quarter in 2004.  The increase in total interest income wasprimarily the result of a change in the mix of earning assets from March 31,2004 to March 31,2005.  Over this timeframe cash flows from the investment portfolio have been reinvested into thehigher yielding loan portfolio, principally commercial products.  The shift in earning assets increased loaninterest and fee income by $609,000 while decreasing interest and dividendincome on investment securities by $285,000. The decrease in taxable investment security interest income was also theeffect of a portfolio reallocation from the taxable investment portfolio totax-free municipal bonds.  This shiftwithin the investment securities portfolio was undertaken to ladder cash flows,maintain the interest margin, and to invest at the community level.  The increase in dividends received is theresult of an increase in the level of dividends from the Federal Home Loan Bankof Pittsburgh coupled with an emphasis on purchasing stocks consistently havingan above average dividend yield.

 

Interestincome composition for the three months ended March 31, 2005 and 2004 is asfollows:

 

12

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| ** **              | ** ** | **For The Three Months Ended** | ** ** |
|-------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **March 31, 2005**             | ** ** | **March 31, 2004** | ** ** | **Change** | ** ** |
| **(In Thousands)**      | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** |
| Loans including  fees   |       | $                              | 5,500      |   | 71.9 | % | $ | 4,891 |   | 66.8 | % | $ | 609 |   | 12.5 | % |
| Investment  securities: |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                 |       | 1,264                          |       | 16.5 |   | 1,803 |   | 24.6 |   | (539 | ) | (29.9 | ) |
| Tax-exempt              |       | 589                            |       | 7.7 |   | 391 |   | 5.3 |   | 198 |   | 50.6 |   |
| Dividend                |       | 298                            |       | 3.9 |   | 242 |   | 3.3 |   | 56 |   | 23.1 |   |
| Total interest  income  |       | $                              | 7,651      |   | 100.0 | % | $ | 7,327 |   | 100.0 | % | $ | 324 |   | 4.4 | % |

 

**InterestExpense**

 

Interestexpense during the first quarter of 2005 increased $125,000 to $2,249,000 from$2,124,000 for the first quarter of 2004. The increased expense associated with deposits is the result of bothrate and volume increases from the first quarter of 2004 to the correspondingperiod of 2005.  During this time framean emphasis was placed on building and retaining strong customer relationshipsby providing needed deposit products at a competitive rate.  This emphasis along with the current risingrate environment led to both the rate and volume increases that occurred fromperiod to period.  Short-term borrowingcosts also increased do to the 175 basis point increase in the Fed Funds rateover the past year.  This increaseaffected the rate paid on FHLB overnight borrowings, FHLB short-termborrowings, and the rate paid to cash management customers.  Long-term FHLB borrowing expense remainedconstant as there were no new long-term borrowings and a maturity of $1,400,000at a rate of 2.02% at the end of the quarter.

 

Interestexpense composition for the three months ended March 31, 2005 and 2004 is asfollows:

 
| ** **              | ** ** | **For The Three Months Ended** | ** ** |
|-------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **March 31, 2005**             | ** ** | **March 31, 2004** | ** ** | **Change** | ** ** |
| **(In Thousands)**      | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** |
| Deposits                |       | $                              | 1,194      |   | 53.1 | % | $ | 1,135 |   | 53.4 | % | $ | 59 |   | 5.2 | % |
| Short-term  borrowings  |       | 202                            |       | 9.0 |   | 137 |   | 6.5 |   | 65 |   | 47.4 |   |
| Long-term  borrowings   |       | 853                            |       | 37.9 |   | 852 |   | 40.1 |   | 1 |   | 0.1 |   |
| Total interest  expense |       | $                              | 2,249      |   | 100.0 | % | $ | 2,124 |   | 100.0 | % | $ | 125 |   | 5.9 | % |

 

**Net Interest Margin**

 

Thenet interest margin (NIM) for the three months ended March 31, 2005 was 4.58%as compared to 4.48% for the corresponding period of 2004.  The increase in the NIM was the result of theyield on earning assets increasing 14 basis points (bp) to 6.39% for the threemonths ended March 31, 2005 as compared to 2004 offset by a 9 bp increase ininterest bearing liabilities over the same period.  The increase in the yield on earning assetsis attributable to a change in the mix of earning assets.  Over the time periods being compared, totalaverage loans increased $47,759,000, while the lower yielding investmentsecurities portfolio average balance decreased $31,228,000.  In addition, within the investment portfolio,average tax-exempt investment securities accounted for 27.3% of the portfoliofor the three months ended March 31, 2005 as compared to 14.9% during thecomparable period of 2004.  The NIMimpact of the earning asset mix improvements and volume increase in total loanswere reduced by rate increases on interest bearing liabilities.  The rates paid on deposit accounts remained relativelyconstant at 1.72% as

 

13

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comparedto 1.68% for the 2004 period.  Short-termborrowings, the majority of which is Federal Home Loan Bank (FHLB) advances,incurred a rate increase of 83 bp to 2.25% for the three months ended March 31,2005.  The increase in the FHLB rate canbe associated with the increase in prime rate from 4.00% during the threemonths ended March 31, 2004 to 5.75% at March 31, 2005.

 

Followingis a schedule of average balances and associated yields for the three monthperiods ended March 31, 2005 and 2004:

 

AVERAGE BALANCES AND INTEREST RATES

 
| ** **                          | ** ** | **3/31/2005** | ** ** | **3/31/2004** | ** ** |
|-------------------------------------|------------|---------------|------------|---------------|------------|
|                                |       |          |       |          |       |   |   |   |   |   |   |   |   |
| Tax-exempt  loans(4)                |       | $             | 1,421      |          | $          | 21 |   | 6.05 | % | $ | 1,446 |   | $ | 21 |   | 5.95 | % |
| All other loans                     |       | 325,426       |       | 5,486         |       | 6.84 | % | 277,642 |   | 4,877 |   | 7.12 | % |
| Total  loans(1),(3)                 |       | 326,847       |       | 5,507         |       | 6.83 | % | 279,088 |   | 4,898 |   | 7.12 | % |
|                                |       |          |       |          |       |   |   |   |   |   |   |   |   |
| US Treasury                         |       | 101,738       |       | 1,235         |       | 4.86 | % | 150,007 |   | 1,768 |   | 4.71 | % |
| State &  Political(4)           |       | 48,279        |       | 892           |       | 7.39 | % | 30,910 |   | 592 |   | 7.67 | % |
| Other                               |       | 26,546        |       | 326           |       | 4.91 | % | 26,874 |   | 276 |   | 4.11 | % |
| Total securities                    |       | 176,563       |       | 2,453         |       | 5.56 | % | 207,791 |   | 2,636 |   | 5.08 | % |
|                                |       |          |       |          |       |   |   |   |   |   |   |   |   |
| Total  interest-earning assets      |       | 503,410       |       | 7,961         |       | 6.39 | % | 486,879 |   | 7,535 |   | 6.25 | % |
|                                |       |          |       |          |       |   |   |   |   |   |   |   |   |
| Other assets                        |       | 37,715        |       |          |       |   |   | 37,540 |   |   |   |   |   |
|                                |       |          |       |          |       |   |   |   |   |   |   |   |   |
| Total assets                        |       | $             | 541,125    |          |       |   |   |   | $ | 524,419 |   |   |   |   |   |
|                                |       |          |       |          |       |   |   |   |   |   |   |   |   |
| Savings                             |       | $             | 66,930     |          | 131        |   | 0.79 | % | $ | 68,108 |   | 140 |   | 0.83 | % |
| Super Now  deposits                 |       | 53,505        |       | 107           |       | 0.81 | % | 42,867 |   | 54 |   | 0.51 | % |
| Money market  deposits              |       | 32,560        |       | 91            |       | 1.13 | % | 35,439 |   | 97 |   | 1.11 | % |
| Time deposits                       |       | 128,968       |       | 865           |       | 2.72 | % | 127,957 |   | 844 |   | 2.68 | % |
| Total Deposits                      |       | 281,963       |       | 1,194         |       | 1.72 | % | 274,371 |   | 1,135 |   | 1.68 | % |
|                                |       |          |       |          |       |   |   |   |   |   |   |   |   |
| Short-term  borrowings              |       | 36,398        |       | 202           |       | 2.25 | % | 39,050 |   | 137 |   | 1.42 | % |
| Other borrowings                    |       | 75,754        |       | 853           |       | 4.57 | % | 74,449 |   | 852 |   | 4.64 | % |
| Total interest  bearing liabilities |       | 394,115       |       | $             | 2,249      |   | 2.31 | % | 387,870 |   | $ | 2,124 |   | 2.22 | % |
|                                |       |          |       |          |       |   |   |   |   |   |   |   |   |
| Demand deposits                     |       | 68,205        |       |          |       |   |   | 60,165 |   |   |   |   |   |
| Other  liabilities                  |       | 4,200         |       |          |       |   |   | 5,050 |   |   |   |   |   |
| Shareholders’  equity          |       | 74,605        |       |          |       |   |   | 71,334 |   |   |   |   |   |
|                                |       |          |       |          |       |   |   |   |   |   |   |   |   |
|                                |       | $             | 541,125    |          |       |   |   |   | $ | 524,419 |   |   |   |   |   |
| Interest rate  spread               |       |          |       |          |       | 4.07 | % |   |   |   |   | 4.03 | % |
| Net interest  income/margin         |       |          |       | $             | 5,712      |   | 4.57 | % |   |   | $ | 5,411 |   | 4.48 | % |

 

----

**(1).**** **Informationon this table has been calculated using average daily balance sheets to obtainaverage balances.

**(2).**** **Nonaccrualloans have been included with loans for the purpose of analyzing net interestearnings.

**(3).**** **Incomeand rates on a fully taxable equivalent basis include an adjustment for thedifference between annual income from tax-exempt obligations and the taxableequivalent of such income at the standard 34% tax rate.

 

The following tablepresents the adjustment to convert net interest income to net interest incomeon a fully taxable equivalent basis for the periods ended March 31, 2005 and2004.

 

14

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| ** **                                      | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
|                                            |       |                                      |       |   |   |
| Total interest  income                          |       | $                                         | 7,651      |   | $ | 7,327 |   |
| Total interest  expense                         |       | 2,249                                     |       | 2,124 |   |
|                                            |       |                                      |       |   |   |
| Net interest  income                            |       | $                                         | 5,402      |   | $ | 5,203 |   |
| Tax equivalent  adjustment                      |       | 310                                       |       | 208 |   |
|                                            |       |                                      |       |   |   |
| Net interest  income (fully taxable equivalent) |       | $                                         | 5,712      |   | $ | 5,411 |   |

 

# **The following table sets forththe respective impact that both volume and rate changes have had on netinterest income and the net interest margin for the three month periods endedMarch 31, 2005 and 2004:**

 
| ** **                          | ** ** | **For the Three Months Ended March 31,**      | ** ** |
|-------------------------------------|------------|-----------------------------------------------|------------|
| ** **                          | ** ** | **2005 vs 2004  Increase (Decrease)  Due to** | ** ** |
| **(In Thousands)**                  | ** ** | **Volume**                                    | ** ** | **Rate** | ** ** | **Net** | ** ** |
| **Interest  income:**               |       |                                          |       |   |   |   |   |
| Loans                               |       | $                                             | 810        |   | $ | (201 | ) | $ | 609 |   |
| Taxable  investment securities      |       | (588                                          | )          | 105 |   | (483 | ) |
| Tax-exempt  investment securities   |       | 322                                           |       | (22 | ) | 300 |   |
| Total  interest-earning assets      |       | 544                                           |       | (118 | ) | 426 |   |
|                                |       |                                          |       |   |   |   |   |
| **Interest  expenses:**             |       |                                          |       |   |   |   |   |
| Savings deposits                    |       | (2                                            | )          | (7 | ) | (9 | ) |
| Super Now  deposits                 |       | 8                                             |       | 45 |   | 53 |   |
| Money Market  deposits              |       | (8                                            | )          | 2 |   | (6 | ) |
| Time deposits                       |       | 7                                             |       | 14 |   | 21 |   |
| Short-term  borrowings              |       | (10                                           | )          | 75 |   | 65 |   |
| Long-term  borrowings               |       | 15                                            |       | (14 | ) | 1 |   |
| Total  interest-bearing liabilities |       | 10                                            |       | 115 |   | 125 |   |
|                                |       |                                          |       |   |   |   |   |
| Change in net  interest income      |       | $                                             | 534        |   | $ | (233 | ) | $ | 301 |   |

 

# **Provisionfor Loan Losses**

# ** **

Theprovision for loan losses is based upon management’s quarterly review of theloan portfolio.  The purpose of thereview is to assess loan quality, identify impaired loans, analyzedelinquencies, ascertain loan growth, evaluate potential charge-offs andrecoveries, and assess general economic conditions in the markets served.  An external independent loan review is also

 

15

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performed annually for the Bank. Management remains committed to an aggressive program of problem loan identificationand resolution.

 

The allowance iscalculated by applying loss factors to outstanding loans by type, excludingloans for which a specific allowance has been determined.  Loss factors are based on management’sconsideration of the nature of the portfolio segments, changes in mix andvolume of the loan portfolio, and historical loan loss experience.  In addition, management considers industrystandards and trends with respect to nonperforming loans and its knowledge andexperience with specific lending segments.

 

Although managementbelieves it uses the best information available to make such determinations andthat the allowance for loan losses is adequate at March 31, 2005, futureadjustments could be necessary if circumstances or economic conditions differsubstantially from the assumptions used in making the initialdeterminations.  A downturn in the localeconomy, employment and delays in receiving financial information fromborrowers could result in increased levels of nonperforming assets andcharge-offs, increased loan loss provisions and reductions in income.  Additionally, as an integral part of theexamination process, bank regulatory agencies periodically review the Bank’sloan loss allowance.  The bankingagencies could require the recognition of additions to the loan loss allowancebased on their judgment of information available to them at the time of theirexamination.

 

While determining theappropriate allowance level management has attributed the allowance for loanlosses to various portfolio segments; however, the allowance is available forthe entire portfolio as needed.

 

The allowance for loanlosses increased from $3,338,000 at December 31, 2004 to $3,399,000 at March31, 2005.  At March 31, 2005, theallowance for loan losses was 1.04% of total loans compared to 1.01% of totalloans at December 31, 2004.  Management’sconclusion is that the allowance for loan losses is adequate to provide for probable losses inherent inits loan portfolio as of the balance sheet date.

 

The provision for loanlosses totaled $180,000 for the three months ended March 31, 2005 as comparedto $75,000 the same period in 2004.  Theincrease of $105,000 was the result of gross loan growth of $45,711,000,primarily in the commercial category, from March 2004 to March 2005.

 

An overall decrease of$382,000 was experienced in non-performing loans from December 31, 2004 to$1,343,000 on March 31, 2005 as a result of a 41% decrease of non-performingloans secured by 1-4 family residential properties.

 

Based upon this analysis,as well as the others noted above, senior management has concluded that theallowance for loan losses remains at a level adequate to provide for probablelosses inherent in its loan portfolio.

 

16

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**Non-interestIncome**

 

Totalnon-interest income for the quarter ended March 31, 2005 compared to the sameperiod in 2004 increased $80,000. Excluding net security gains, the increase from period to period was$14,000.  Insurance commissions increasedas the Comprehensive Financial Group (d/b/a M Group) continued to gather newand build upon current relationships.  Inaddition, The M Group continues to add sales representatives to better coverand expand their foot print.  Thedecrease in service charge on deposit accounts is primarily the result of adecrease in insufficient fund charges.

 

Non-interestincome composition for the three months ended March 31, 2005 and 2004 is asfollows:

 
| ** **                          | ** ** | **For The Three Months Ended** | ** ** |
|-------------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **March 31, 2005**             | ** ** | **March 31, 2004** | ** ** | **Change** | ** ** |
| **(In Thousands)**                  | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** |
| Service charge  on deposit accounts |       | $                              | 455        |   | 21.5 | % | $ | 476 |   | 23.4 | % | $ | (21 | ) | (4.4 | )% |
| Net security  gains                 |       | 611                            |       | 28.9 |   | 545 |   | 26.8 |   | 66 |   | 12.1 |   |
| Bank owned life  insurance          |       | 94                             |       | 4.4 |   | 90 |   | 4.4 |   | 4 |   | 4.4 |   |
| Insurance  commissions              |       | 643                            |       | 30.4 |   | 614 |   | 30.1 |   | 29 |   | 4.7 |   |
| Other income                        |       | 314                            |       | 14.8 |   | 312 |   | 15.3 |   | 2 |   | 0.6 |   |
| Total  non-interest income          |       | $                              | 2,117      |   | 100.0 | % | $ | 2,037 |   | 100.0 | % | $ | 80 |   | 3.9 | % |

 

**Non-interestExpenses**

 

Totalnon-interest expenses increased $148,000 from the quarter ended March 31, 2004as compared to the same period of 2005. The increase in salaries and employee benefits was attributable tostandard cost of living salary increases for employees.  Occupancy expenses increased do to increasedutility costs, property taxes, and depreciation.  Other expenses increased primarily do tonormal increases in business expenses and nonrecurring consultant fees relatedto employee recruitment. The decrease in furniture and equipment expenses wasthe result of decreased depreciation.

 

Non-interestexpense composition for the three months ended March 31, 2005 and 2004 is asfollows:

 
| ** **                        | ** ** | **For The Three Months Ended** | ** ** |
|-----------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **March 31, 2005**             | ** ** | **March 31, 2004** | ** ** | **Change** | ** ** |
| **(In Thousands)**                | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** |
| Salaries and employee benefits    |       | $                              | 2,020      |   | 55.9 | % | $ | 1,979 |   | 57.1 | % | $ | 41 |   | 2.1 | % |
| Occupancy  expense, net           |       | 291                            |       | 8.0 |   | 243 |   | 7.0 |   | 48 |   | 19.8 |   |
| Furniture and  equipment expenses |       | 221                            |       | 6.1 |   | 265 |   | 7.6 |   | (44 | ) | (16.6 | ) |
| Advertising  expense              |       | 94                             |       | 2.6 |   | 94 |   | 2.7 |   | — |   | — |   |
| Pennsylvania  shares tax          |       | 139                            |       | 3.8 |   | 116 |   | 3.3 |   | 23 |   | 19.8 |   |
| Other expense                     |       | 856                            |       | 23.6 |   | 776 |   | 22.3 |   | 80 |   | 10.3 |   |
| Total  non-interest expense       |       | $                              | 3,621      |   | 100.0 | % | $ | 3,473 |   | 100.0 | % | $ | 148 |   | 4.3 | % |

 

**Provisionfor Income Taxes**

 

Incometaxes decreased $16,000 for the quarter ended March 31, 2005 compared to thesame period of 2004.  The effective taxrates for the quarter ended March 31, 2005 and 2004 were

 

17

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27.0% and 27.6%, respectively. This decreasing effective tax rate is consistent with management’srepositioning of the investment portfolio from taxable investment securities totax-exempt investment securities.

 

# **ASSET/LIABILITYMANAGEMENT**

# ** **

# **Cash**

# ** **

Cash and due from otherfinancial institutions increased $4,718,000 from $12,626,000 at December 31,2004.  The increase was the result of anincrease in the cash letter (items in process of clearing between the bank andother financial institutions).

 

**Loans**

 

## Total gross loansdecreased $1,365,000 to $323,140,000 at March 31, 2005 from December 31,2004.  The decrease is the result ofresidential and commercial real estate mortgages each declining approximately$2,000,000 and an increase of real estate construction loans of $2,522,000.

##  

The allocation of the loan portfolio, by category,as of March 31, 2005 and December 31, 2004 are presented below:

 
| **(In Thousands)**                | ** ** | **March 31  2005** | ** ** | **December 31  2004** | ** ** |
|-----------------------------------|------------|--------------------|------------|-----------------------|------------|
| Commercial and  agricultural      |       | $                  | 30,154     |                  | $          | 30,103 |   |
| Real estate  mortgage:            |       |               |       |                  |       |
| Residential                       |       | 145,479            |       | 147,461               |       |
| Commercial                        |       | 121,721            |       | 123,757               |       |
| Construction                      |       | 10,887             |       | 8,365                 |       |
| Installment  loans to individuals |       | 15,959             |       | 15,915                |       |
| Subtotal                          |       | 324,200            |       | 325,601               |       |
| Less: Net  deferred loan fees     |       | 1,060              |       | 1,096                 |       |
| Gross loans                       |       | $                  | 323,140    |                  | $          | 324,505 |   |

 

**Investments**

 

Totalinvestment securities decreased $6,341,000 as the principal cash flows from theportfolio at the end of March 2005 were not immediately reinvested asinvestment alternatives for the current rising rate environment were discussed.  Since December 31, 2004, tax-exempt bondholdings have increased as the portfolio is managed to maintain tax equivalentyield and liquidity, reduce

 

18

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theoverall corporate effective tax rate, and to invest in communities across theCommonwealth of Pennsylvania and the country.

 

Duringthe three months ended March 31, 2005, $611,000 in net security gains wererecognized from the $6,563,000 in net unrealized gains at December 31, 2004 forthe entire investment portfolio.  Thebond portfolio incurred a net realized loss of $7,000 as the portfolio wasshifted slightly in light of the current rising rate environment.  The equity portfolio had recognized gains of$618,000 during the three months ended March 31, 2005.  The gains were the result of management’sintention to diversify, increase dividend yield, or to reduce ownership incompanies that management felt had reached their full potential.

 

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

 

19

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| ** **                             | ** ** | **March 31, 2005**  | ** ** |
|----------------------------------------|------------|---------------------|------------|
| **(In Thousands)**                     | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
| Available for  Sale (AFS)              |       |                |       |   |   |   |   |   |   |
| U.S. Government  and agency securities |       | $                   | 96,971     |   | $ | 85 |   | $ | (2,036 | ) | $ | 95,020 |   |
| State and  political securities        |       | 52,452              |       | 1,163 |   | (347 | ) | 53,268 |   |
| Other debt  securities                 |       | 1,302               |       | 22 |   | (52 | ) | 1,272 |   |
| Total debt  securities                 |       | 150,725             |       | 1,270 |   | (2,435 | ) | 149,560 |   |
| Equity securities                      |       | 24,547              |       | 4,244 |   | (280 | ) | 28,511 |   |
| Total Investment  Securities AFS       |       | $                   | 175,272    |   | $ | 5,514 |   | $ | (2,715 | ) | $ | 178,071 |   |
|                                   |       |                |       |   |   |   |   |   |   |
| Held to Maturity  (HTM)                |       |                |       |   |   |   |   |   |   |
| U.S. Government  and agency securities |       | $                   | 31         |   | $ | — |   | $ | — |   | $ | 31 |   |
| Other debt  securities                 |       | 278                 |       | — |   | (2 | ) | 276 |   |
| Total Investment  Securities HTM       |       | $                   | 309        |   | $ | — |   | $ | (2 | ) | $ | 307 |   |

 
| ** **                             | ** ** | **December 31, 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                      |       | 25,221                |       | 6,579 |   | (72 | ) | 31,728 |   |
| Total Investment  Securities AFS       |       | $                     | 177,600    |   | $ | 7,599 |   | $ | (1,036 | ) | $ | 184,163 |   |
|                                   |       |                  |       |   |   |   |   |   |   |
| 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 |   |

 

# **Deposits**

 

AtMarch 31, 2005, total deposits were $354,301,000, a decrease of $2,535,000 fromDecember 31, 2004.  Non time depositsdecreased $6,499,000 from December 31, 2004 with half of the decrease occurringin the NOW account category.  Theincrease in time deposits of $3,964,000 is the result of an emphasis to obtainfixed rate customer funding, with a maturity of two to four years, ahead offuture rate increases.

 

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# **Deposit balances and their changesfor the periods being discussed follow:**

 
| ** **         | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** | **Change** | ** ** |
|--------------------|------------|--------------------|------------|-----------------------|------------|------------|------------|
| **(In Thousands)** | ** ** | **Amount**         | ** ** | **% Total**           | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** |
| Demand deposits    |       | $                  | 72,708     |                  | 20.5       | %          | $          | 74,050 |   | 20.8 | % | $ | (1,342 | ) | (1.8 | )% |
| NOW Accounts       |       | 51,831             |       | 14.6                  |       | 55,211     |       | 15.5 |   | (3,380 | ) | (6.1 | ) |
| Insured MMDA       |       | 31,310             |       | 8.8                   |       | 32,377     |       | 9.1 |   | (1,067 | ) | (3.3 | ) |
| Savings deposits   |       | 69,097             |       | 19.5                  |       | 69,807     |       | 19.6 |   | (710 | ) | (1.0 | ) |
| Time deposits      |       | 129,355            |       | 36.6                  |       | 125,391    |       | 35.0 |   | 3,964 |   | 3.2 |   |
| Total deposits     |       | $                  | 354,301    |                  | 100.0      | %          | $          | 356,836 |   | 100.0 | % | $ | (2,535 | ) | (0.7 | )% |

 

# **BorrowedFunds**

 

Total borrowed fundsdecreased slightly to $111,740,000 at March 31, 2005 as compared to December31, 2004.  The decrease of $613,000 wasthe result of long term borrowings decreasing $1,400,000, due to maturity,offset by an increase in short-term FHLB borrowings.   Short-term borrowings are being utilized tosupplement deposits in the day to day funding of the loan portfolio and normaloperations.

 
| **(In Thousands)**                             | ** ** | **March 31  2005** | ** ** | **December 31  2004** | ** ** |
|------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | ** **         | ** ** | ** **            | ** ** |
| Short-term  borrowings:                        |       |               |       |                  |       |
| FHLB repurchase  agreements                    |       | $                  | 23,740     |                  | $          | 22,630 |   |
| Securities sold  under agreement to repurchase |       | 13,522             |       | 13,845                |       |
| Total short-term  borrowings                   |       | 37,262             |       | 36,475                |       |
|                                           |       |               |       |                  |       |
| Long-term  borrowings, FHLB                    |       | 74,478             |       | 75,878                |       |
| Total borrowed  funds                          |       | $                  | 111,740    |                  | $          | 112,353 |   |

 

# **Capital**

# ** **

## The adequacy of theCompany’s capital is reviewed on an ongoing basis with reference to the size,composition and quality of the Company’s resources and regulatoryguidelines.  Management seeks to maintaina level of capital sufficient to support existing assets and anticipated assetgrowth, maintain favorable access to capital markets and preserve high qualitycredit ratings.

##  

## Bank holding companiesare required to comply with the Federal Reserve Board’s risk-based capitalguidelines.  The risk-based capital rulesare designed to make regulatory capital requirements more sensitive todifferences in risk profiles among banks and bank holding companies and tominimize disincentives for holding liquid assets.  Specifically, each is required to maintaincertain minimum dollar amounts and ratios of Total risk-based, Tier Irisk-based and Tier I leverage capital requirements. In addition to the capitalrequirements, the Federal Deposit Insurance Corporation Improvements Act(FDICIA) established five capital categories ranging from “well capitalized” to“critically undercapitalized.” To be classified as “well capitalized”,

 

21

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Total risk-based, Tier I risked-based and Tier I leverage capitalratios must be at least 10%, 6%, and 5%, respectively.

##  

Capitalratios as of March 31, 2005 and 2004 were as follows:

 
| ** **                     | ** ** | **2005**   | ** ** | **2004**  | ** ** |
|--------------------------------|------------|------------|------------|-----------|------------|
| **(In Thousands)**             | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| Total Capital                  |       |       |       |      |       |   |   |   |   |
| (to  Risk-weighted Assets)     |       |       |       |      |       |   |   |   |   |
|                           |       |       |       |      |       |   |   |   |   |
| Actual                         |       | $          | 72,991     |      | 22.0       | % | $ | 68,069 |   | 23.3 | % |
| For Capital  Adequacy Purposes |       | 26,523     |       | 8.0       |       | 23,385 |   | 8.0 |   |
| To Be Well  Capitalized        |       | 33,154     |       | 10.0      |       | 29,232 |   | 10.0 |   |
|                           |       |       |       |      |       |   |   |   |   |
| Tier I Capital                 |       |       |       |      |       |   |   |   |   |
| (to  Risk-weighted Assets)     |       |       |       |      |       |   |   |   |   |
|                           |       |       |       |      |       |   |   |   |   |
| Actual                         |       | $          | 67,809     |      | 20.5       | % | $ | 61,981 |   | 21.2 | % |
| For Capital Adequacy  Purposes |       | 13,261     |       | 4.0       |       | 11,693 |   | 4.0 |   |
| To Be Well  Capitalized        |       | 19,892     |       | 6.0       |       | 17,539 |   | 6.0 |   |
|                           |       |       |       |      |       |   |   |   |   |
| Tier I Capital                 |       |       |       |      |       |   |   |   |   |
| (to Average  Assets)           |       |       |       |      |       |   |   |   |   |
|                           |       |       |       |      |       |   |   |   |   |
| Actual                         |       | $          | 67,809     |      | 12.8       | % | $ | 61,981 |   | 12.1 | % |
| For Capital Adequacy  Purposes |       | 21,231     |       | 4.0       |       | 20,482 |   | 4.0 |   |
| To Be Well  Capitalized        |       | 26,538     |       | 5.0       |       | 27,153 |   | 5.0 |   |

 

# **Liquidityand Interest Rate Sensitivity**

# ** **

## The asset/liabilitycommittee addresses the liquidity needs of the Bank to see that sufficientfunds are available to meet credit demands and deposit withdrawals as well asto the placement of available funds in the investment portfolio.  In assessing liquidity requirements, equalconsideration is given to the current position as well as the future outlook.

##  

The following liquiditymeasures are monitored and kept within the limits cited.

 

1.  Net Loans to Total Assets,  70% maximum

 

2.  Net Loans to Total Deposits, 92.5% maximum

 

3.  Net Loans to Core Deposits, 100% maximum

 

4.  Investments to Total Assets, 40% maximum

 

5.  Investments to Total Deposits, 50% maximum

 

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6.  Total Liquid Assets to Total Assets, 25%minimum

 

7.  Total Liquid Assets to Total Liabilities, 25%minimum

 

8.     NetCore Funding Dependence, 35% maximum

 

Fundamentalobjectives of the Company’s asset/liability management process are to maintainadequate liquidity while minimizing interest rate risk.  The maintenance of adequate liquidityprovides the Company with the ability to meet its financial obligations todepositors, loan customers and shareholders. Additionally, it provides funds for normal operating expenditures andbusiness opportunities as they arise. The objective of interest rate sensitivity management is to increase netinterest income by managing interest sensitive assets and liabilities in such away that they can be repriced in response to changes in market interest rates.

 

TheBank, like other financial institutions, must have sufficient funds availableto meet its liquidity needs for deposit withdrawals, loan commitments, andexpenses.   In order to control cashflow, the Bank estimates future flows of cash from deposits, loan payments, andinvestment security payments.  Theprimary sources of funds are deposits, principal and interest payments on loansand investment securities, as well as Federal Home Loan Bank borrowings.  Funds generated are used principally to fundloans and purchase investment securities. Management believes the Company has adequate resources to meet itsnormal funding requirements.

 

Managementmonitors the Company’s liquidity on both a long and short-term basis, therebyproviding management necessary information to react to current balance sheettrends.  Cash flow needs are assessed andsources of funds are determined.  Fundingstrategies consider both customer needs and economical cost.  Both short and long-term funding needs areaddressed by maturities and sales of available for sale investment securities,loan repayments and maturities, and liquidating money market investments suchas federal funds sold.  The use of theseresources, in conjunction with access to credit provides core ingredients tosatisfy depositor, borrower, and creditor needs.

 

Managementmonitors and determines the desirable level of liquidity.  Consideration is given to loan demand,investment opportunities, deposit pricing and growth potential as well as thecurrent cost of borrowing funds.  TheCompany has a current borrowing capacity at the Federal Home Loan Bank of $237,657,000.  Inaddition to this credit arrangement, the Company has additional lines of creditwith correspondent banks of $10,500,000. Management believes that it hassufficient liquidity to satisfy estimated short-term and long-term fundingneeds.  Federal Home Loan Bank advancestotaled $98,218,000 as of March 31, 2005.

 

Interestrate sensitivity, which is closely related to liquidity management, is afunction of the repricing characteristics of the Company’s portfolio of assetsand liabilities.  Asset/liabilitymanagement strives to match maturities and rates between loan and investmentsecurity assets with the deposit liabilities and borrowings that fundthem.  Successful asset/liabilitymanagement results in a balance sheet structure which can cope effectively withmarket rate fluctuations. The matching process is affected by segmenting bothassets and liabilities into future time periods

 

23

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(usually12 months, or less) based upon when repricing can be effected.  Repriceable assets are subtracted fromrepriceable liabilities, for a specific time period to determine the “gap”, ordifference. Once known, the gap is managed based on predictions about futuremarket interest rates.  Intentionalmismatching, or gapping, can enhance net interest income if market rates moveas predicted.  However, if market ratesbehave in a manner contrary to predictions, net interest income willsuffer.  Gaps, therefore, contain anelement of risk and must be prudently managed. In addition to gap management, the Company has an asset/liabilitymanagement policy which incorporates a market value at risk calculation whichis used to determine the effects of interest rate movements on shareholders’equity and a simulation analysis to monitor the effects of interest ratechanges on the Company’s balance sheets.

 

Therehave been no substantial changes in the Company’s GAP analyses or simulationanalyses compared to the information provided in the Company’s Form 10-K forthe period ended December 31, 2004.

 

Generally,management believes the Company is well positioned to respond expeditiouslywhen the market interest rate outlook changes.

 

# **Inflation**

# ** **

The asset and liabilitystructure of a financial institution is primarily monetary in nature.  Therefore, interest rates rather thaninflation have a more significant impact on the Company’s performance.  Interest rates are not always affected in thesame direction or magnitude as prices of other goods and services, but arereflective of fiscal policy initiatives or economic factors which are notmeasured by a price index.

 

In reference to theattached financial statements, all adjustments are of a normal recurring naturepursuant to Rule 10-01 (b) (8) of Regulation S-X.

 

**Item 3****. Quantitative and Qualitative Disclosure About Market Risk**

 

Marketrisk for the Company is comprised primarily from interest rate risk exposureand liquidity risk.  Interest rate riskand liquidity risk management is performed at the Bank level as well as theCompany level.  The Company’s interestrate sensitivity is monitored by management through selected interest rate riskmeasures produced by an independent third party.  There have been no substantial changes in theCompany’s GAP analyses or simulation analyses compared to the informationprovided in the Company’s SEC 10-K for the period ended December 31, 2004.  Additional information and details areprovided in the Liquidity and Interest Rate Sensitivity section of Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations.

 

Generally,management believes the Company is well positioned to respond in a timelymanner when the market interest rate outlook changes.

 

24

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**Item 4****. Controls and Procedures**

 

An analysis was performed under the supervision and with theparticipation of the Company’s management, including the Chief ExecutiveOfficer and the Principal Accounting Officer, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures. Basedon that evaluation, the Company’s Chief Executive Officer and PrincipalAccounting Officer concluded that the Company’s disclosure controls andprocedures were effective as of March 31, 2005. There has been no change in theCompany’s internal control over financial reporting that occurred during thequarter ended March 31, 2005, that has materially affected, or is reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

### **Part II.  OTHER INFORMATION**

### ** **

**Item 1****.  Legal Proceedings**

 

None.

 

**Item 2****.  Unregistered Sales of Equity Securities andUse of Proceeds**

 

The Company announced arepurchase program on August 10, 2000 which was approved by the Board ofDirectors on August 8, 2000 for the repurchase of 171,600 shares which willexpire on August 8, 2005.  There were norepurchases of the Company’s common stock during the quarter ended March 31,2005.

 

**Item 3****.  Defaults Upon Senior Securities**

 

None

 

**Item 4****.  Submission of Matters to a Vote of SecurityHolders**

 

None

 

### **Item 5**. Other Information

### ** **

None

 

**Item 6****.  Exhibits**

 
| (3)  (i)   |   | Articles  of Incorporation of the Registrant, as presently in effect (incorporated by  reference to Exhibit 3.1 of the Registrant’s Registration Statement on Form  S-4, No. 333-65821). |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3)  (ii)  |   | Bylaws  of the Registrant as presently in effect (incorporated by reference to  Exhibit 3.2 of the Registrant’s Registration Statement on Form S-4, No.  333-65821).                     |
| (31)  (i)  |   | Rule  13a-14(a) Certification of Chief Executive Officer                                                                                                                                      |
| (31)  (ii) |   | Rule  13a-14(a) Certification of Principal Accounting Officer                                                                                                                                 |
| (32)  (i)  |   | Certification  of Chief Executive Officer Section 1350                                                                                                                                        |
| (32)  (ii) |   | Certification  of Principal Accounting Officer Section 1350                                                                                                                                   |

 

25

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## **SIGNATURES**

##  

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
| PENNS WOODS  BANCORP, INC. |
|----------------------------|
| (Registrant)               |
|                       |   |
|                       |   |
| Date: May 10, 2005         | /s/ Ronald A. Walko |   |
|                       | Ronald A. Walko,  President and Chief Executive Officer |
|                       |   |
|                       |   |
| Date: May 10, 2005         | /s/ Brian L. Knepp |   |
|                       | Brian L. Knepp, Vice  President of Finance |
|                            |  |  |  |

 

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**EXHIBIT INDEX**

 
| Exhibit  31(i)  |   | Rule  13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer      |
|-----------------|--------|------------------------------------------------------------------------------|
| Exhibit  31(ii) |   | Rule  13a-14(a)/Rule 15d-14(a) Certification of Principal Accounting Officer |
| Exhibit  32(i)  |   | Section  1350 Certification of Chief Executive Officer                       |
| Exhibit  32(ii) |   | Section  1350 Certification of Principal Accounting Officer                  |

 

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