**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**x****     ****QuarterlyReport pursuant to Section 13 or 15 (d) of the Securities Exchange Actof 1934 for the Quarterly Period Ended June 30, 2006,**

 

**o****        ****Transition report pursuant to Section 13or 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 Registrant as specified in its charter)

 

| **PENNSYLVANIA**                                   |   | **23-2226454**      |
|----------------------------------------------------|--------|---------------------|
| (State or other jurisdiction of                    |   | (I.R.S. Employer    |
| incorporation or organization)                     |   | Identification No.) |
|                                               |   |                |
| **300  Market Street, Williamsport, Pennsylvania** |   | **17701-0967**      |
| (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 by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that Registrant was required to file suchreports), and (2) has been subject to such filing requirements for thepast 90 days.

|   | YES x |   | NO o |
|--------|-------|--------|------|

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):

| Large accelerated filer o |   | Accelerated filer x |   | Non-accelerated filer o |
|---------------------------|--------|---------------------|--------|-------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

|   | YES o |   | NO x |
|--------|-------|--------|------|

 

On August 1, 2006there were 3,931,787 of the Registrant’s common stock outstanding.

 

 

----

 

**PENNS WOODS BANCORP, INC.**

**INDEX TO QUARTERLY REPORT ON FORM 10-Q**

 
| **Part I**                                                                                                                   | **Financial  Information**                                                                      | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                        | ** **                                                                                      | ** ** |
| **Item 1.**                                                                                                                       | **Financial  Statements**                                                                       | ** ** |
| ** **                                                                                                                        | ** **                                                                                      | ** ** |
| Consolidated Balance Sheet  (unaudited) as of June 30, 2006 and December 31, 2005                                       |                                                                                            |
|                                                                                                                              |                                                                                            |       |
| Consolidated Statement of Income  (unaudited) for the Three and Six Months ended June 30, 2006 and 2005                      |                                                                                            |
|                                                                                                                              |                                                                                            |       |
| Consolidated Statement of  Changes in Shareholders’ Equity (unaudited) for the Six Months ended June 30,  2006 and 2005 |                                                                                            |
|                                                                                                                              |                                                                                            |       |
| Consolidated Statement of  Comprehensive Income (unaudited) for the Three and Six Months ended June 30,  2006 and 2005       |                                                                                            |
|                                                                                                                              |                                                                                            |       |
| Consolidated Statement of  Cash Flows (unaudited) for the Six Months ended June 30, 2006 and 2005                            |                                                                                            |
|                                                                                                                              |                                                                                            |       |
| 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 1A.**                                                                                                                      | **Risk Factors**                                                                                |       |
| **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

----

 

**Part I. FINANCIALINFORMATION**

 

**Item 1. FinancialStatements**

 

PENNS WOODS BANCORP, INC.

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 
| ** **                                                                            | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(In Thousands, Except Share  Data)**                                                | ** ** | **2006**          | ** ** | **2005**              | ** ** |
|                                                                                  |       |              |       |                  |       |
| ASSETS                                                                                |       |              |       |                  |       |
| Noninterest-bearing balances                                                          |       | $                 | 14,181     |                  | $          | 14,065 |   |
| Interest-bearing deposits in other financial  institutions                            |       | 27                |       | 25                    |       |
| Total cash and cash equivalents                                                       |       | 14,208            |       | 14,090                |       |
|                                                                                  |       |              |       |                  |       |
| Investment securities, available for sale, at fair  value                             |       | 180,553           |       | 187,018               |       |
| Investment securities held to maturity (fair value  of $284 and $238)                 |       | 281               |       | 265                   |       |
| Loans held for sale                                                                   |       | 5,777             |       | 3,545                 |       |
| Loans                                                                                 |       | 346,569           |       | 338,438               |       |
| Less: Allowance for loan losses                                                       |       | 3,995             |       | 3,679                 |       |
| Loans, net                                                                            |       | 342,574           |       | 334,759               |       |
| Premises and equipment, net                                                           |       | 6,605             |       | 6,409                 |       |
| Accrued interest receivable                                                           |       | 2,649             |       | 2,828                 |       |
| Bank-owned life insurance                                                             |       | 10,896            |       | 10,718                |       |
| Investment in limited partnerships                                                    |       | 4,988             |       | 3,549                 |       |
| Goodwill                                                                              |       | 3,032             |       | 3,032                 |       |
| Other assets                                                                          |       | 4,742             |       | 2,455                 |       |
| TOTAL ASSETS                                                                          |       | $                 | 576,305    |                  | $          | 568,668 |   |
|                                                                                  |       |              |       |                  |       |
| LIABILITIES                                                                           |       |              |       |                  |       |
| Interest-bearing deposits                                                             |       | $                 | 302,634    |                  | $          | 281,150 |   |
| Noninterest-bearing deposits                                                          |       | 74,310            |       | 71,379                |       |
| Total deposits                                                                        |       | 376,944           |       | 352,529               |       |
|                                                                                  |       |              |       |                  |       |
| Short-term borrowings                                                                 |       | 40,925            |       | 54,003                |       |
| Long-term borrowings, Federal Home Loan Bank (FHLB)                                   |       | 82,878            |       | 84,478                |       |
| Accrued interest payable                                                              |       | 1,171             |       | 1,108                 |       |
| Other liabilities                                                                     |       | 2,755             |       | 2,631                 |       |
| TOTAL LIABILITIES                                                                     |       | 504,673           |       | 494,749               |       |
|                                                                                  |       |              |       |                  |       |
| SHAREHOLDERS’ EQUITY                                                             |       |              |       |                  |       |
| Common stock, par value $8.33, 10,000,000 shares  authorized; 4,002,159 shares issued |       | 33,351            |       | 33,351                |       |
| Additional paid-in capital                                                            |       | 17,772            |       | 17,772                |       |
| Retained earnings                                                                     |       | 24,471            |       | 22,938                |       |
| Accumulated other comprehensive income (loss)                                         |       | (1,273            | )          | 850                   |       |
| Less: Treasury stock at cost, 70,372 and 26,372  shares                               |       | (2,689            | )          | (992                  | )          |
| TOTAL SHAREHOLDERS’ EQUITY                                                       |       | 71,632            |       | 73,919                |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                       |       | $                 | 576,305    |                  | $          | 568,668 |   |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

3

----

 

PENNSWOODS BANCORP, INC.

CONSOLIDATEDSTATEMENT OF INCOME

(UNAUDITED)

 
| ** **                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                          | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **(In Thousands, Except Per Share  Data)**          | ** ** | **2006**               | ** ** | **2005**             | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                |       |                   |       |                 |       |   |   |   |   |
| INTEREST AND DIVIDEND INCOME                        |       |                   |       |                 |       |   |   |   |   |
| Loans including fees                                |       | $                      | 6,086      |                 | $          | 5,455 |   | $ | 11,895 |   | $ | 10,739 |   |
| Investment Securities:                              |       |                   |       |                 |       |   |   |   |   |
| Taxable                                             |       | 896                    |       | 1,214                |       | 1,819 |   | 2,478 |   |
| Tax-exempt                                          |       | 1,000                  |       | 688                  |       | 1,989 |   | 1,277 |   |
| Dividend                                            |       | 365                    |       | 297                  |       | 666 |   | 595 |   |
| TOTAL INTEREST AND DIVIDEND INCOME                  |       | 8,347                  |       | 7,654                |       | 16,369 |   | 15,089 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| INTEREST EXPENSE                                    |       |                   |       |                 |       |   |   |   |   |
| Deposits                                            |       | 1,968                  |       | 1,420                |       | 3,805 |   | 2,614 |   |
| Short-term borrowings                               |       | 509                    |       | 144                  |       | 915 |   | 346 |   |
| Long-term borrowings, FHLB                          |       | 944                    |       | 893                  |       | 1,890 |   | 1,746 |   |
| TOTAL INTEREST EXPENSE                              |       | 3,421                  |       | 2,457                |       | 6,610 |   | 4,706 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| NET INTEREST INCOME                                 |       | 4,926                  |       | 5,197                |       | 9,759 |   | 10,383 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| PROVISION FOR LOAN LOSSES                           |       | 198                    |       | 180                  |       | 396 |   | 360 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |       | 4,728                  |       | 5,017                |       | 9,363 |   | 10,023 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| NON-INTEREST INCOME                                 |       |                   |       |                 |       |   |   |   |   |
| Deposit service charges                             |       | 587                    |       | 536                  |       | 1,177 |   | 991 |   |
| Securities gains, net                               |       | 265                    |       | 687                  |       | 824 |   | 1,298 |   |
| Bank-owned life insurance                           |       | 90                     |       | 93                   |       | 178 |   | 187 |   |
| Gain on sale of loans                               |       | 210                    |       | 178                  |       | 360 |   | 368 |   |
| Insurance commissions                               |       | 670                    |       | 652                  |       | 1,230 |   | 1,295 |   |
| Other                                               |       | 394                    |       | 329                  |       | 784 |   | 643 |   |
| TOTAL NON-INTEREST INCOME                           |       | 2,216                  |       | 2,475                |       | 4,553 |   | 4,782 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| NON-INTEREST EXPENSE                                |       |                   |       |                 |       |   |   |   |   |
| Salaries and employee benefits                      |       | 2,214                  |       | 2,135                |       | 4,446 |   | 4,129 |   |
| Occupancy, net                                      |       | 275                    |       | 286                  |       | 518 |   | 577 |   |
| Furniture and equipment                             |       | 288                    |       | 234                  |       | 585 |   | 455 |   |
| Pennsylvania shares tax                             |       | 151                    |       | 140                  |       | 296 |   | 279 |   |
| Other                                               |       | 1,150                  |       | 1,054                |       | 2,184 |   | 2,004 |   |
| TOTAL NON-INTEREST EXPENSE                          |       | 4,078                  |       | 3,849                |       | 8,029 |   | 7,444 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| INCOME BEFORE INCOME TAX PROVISION                  |       | 2,866                  |       | 3,643                |       | 5,887 |   | 7,361 |   |
| INCOME TAX PROVISION                                |       | 432                    |       | 883                  |       | 998 |   | 1,886 |   |
| NET INCOME                                          |       | $                      | 2,434      |                 | $          | 2,760 |   | $ | 4,889 |   | $ | 5,475 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| EARNINGS PER SHARE - BASIC                          |       | $                      | 0.63       |                 | $          | 0.70 |   | $ | 1.25 |   | $ | 1.38 |   |
| EARNINGS PER SHARE - DILUTED                        |       | $                      | 0.63       |                 | $          | 0.70 |   | $ | 1.25 |   | $ | 1.38 |   |
| WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC         |       | 3,879,052              |       | 3,973,988            |       | 3,923,923 |   | 3,973,756 |   |
| WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED       |       | 3,879,539              |       | 3,976,255            |       | 3,924,409 |   | 3,976,179 |   |
| DIVIDENDS PER SHARE                                 |       | $                      | 0.43       |                 | $          | 0.38 |   | $ | 0.85 |   | $ | 0.76 |   |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

4

----

 

PENNSWOODS BANCORP, INC.

CONSOLIDATEDSTATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

 
| ** **                                                                                            | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **        | ** ** | **ACCUMULATED**   | ** ** | ** **             | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|-------------------|------------|-------------------|------------|------------------------|------------|------------|------------|
| ** **                                                                                            | ** ** | **COMMON** | ** ** | **ADDITIONAL** | ** ** | ** **   | ** ** | **OTHER**         | ** ** | ** **        | ** ** | **TOTAL**              | ** ** |
| ** **                                                                                            | ** ** | **STOCK**  | ** ** | **PAID-IN**    | ** ** | **RETAINED** | ** ** | **COMPREHENSIVE** | ** ** | **TREASURY**      | ** ** | **SHAREHOLDERS’** | ** ** |
| **(In Thousands Except Per Share Data)**                                                              | ** ** | **SHARES** | ** ** | **AMOUNT**     | ** ** | **CAPITAL**  | ** ** | **EARNINGS**      | ** ** | **INCOME (LOSS)** | ** ** | **STOCK**              | ** ** | **EQUITY** | ** ** |
| Balance, December 31, 2005                                                                       |       | 4,002,159  |       | $              | 33,351     |         | $          | 17,772            |       | $                 | 22,938     |                   | $          | 850        |       | $ | (992 | ) | $ | 73,919 |   |
|                                                                                                  |       |       |       |           |       |         |       |              |       |              |       |                   |       |       |       |
| Comprehensive Income:                                                                                 |       |       |       |           |       |         |       |              |       |              |       |                   |       |       |       |
| Net income                                                                                            |       |       |       |           |       |         |       | 4,889             |       |              |       |                   |       | 4,889      |       |
| Net change in unrealized gain (loss) on investments  available for sale, net of tax benefit of $1,094 |       |       |       |           |       |         |       |              |       | (2,123            | )          |                   |       | (2,123     | )          |
| Total comprehensive income                                                                            |       |       |       |           |       |         |       |              |       |              |       |                   |       | 2,766      |       |
| Dividends declared, ($0.85 per share)                                                                 |       |       |       |           |       |         |       | (3,356            | )          |              |       |                   |       | (3,356     | )          |
| Purchase of treasury stock (44,000 shares)                                                            |       |       |       |           |       |         |       |              |       |              |       | (1,697                 | )          | (1,697     | )          |
| Balance, June 30, 2006                                                                           |       | 4,002,159  |       | $              | 33,351     |         | $          | 17,772            |       | $                 | 24,471     |                   | $          | (1,273     | )          | $ | (2,689 | ) | $ | 71,632 |   |

 
| ** **                                                                          | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **        | ** ** | **ACCUMULATED** | ** ** | ** **             | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|-------------------|------------|-----------------|------------|------------------------|------------|------------|------------|
| ** **                                                                          | ** ** | **COMMON** | ** ** | **ADDITIONAL** | ** ** | ** **   | ** ** | **OTHER**         | ** ** | ** **      | ** ** | **TOTAL**              | ** ** |
| ** **                                                                          | ** ** | **STOCK**  | ** ** | **PAID-IN**    | ** ** | **RETAINED** | ** ** | **COMPREHENSIVE** | ** ** | **TREASURY**    | ** ** | **SHAREHOLDERS’** | ** ** |
| ** **                                                                          | ** ** | **SHARES** | ** ** | **AMOUNT**     | ** ** | **CAPITAL**  | ** ** | **EARNINGS**      | ** ** | **INCOME**      | ** ** | **STOCK**              | ** ** | **EQUITY** | ** ** |
| Balance, December 31, 2004                                                     |       | 3,998,204  |       | $              | 33,318     |         | $          | 17,700            |       | $               | 18,262     |                   | $          | 4,331      |       | $ | (446 | ) | $ | 73,165 |   |
|                                                                                |       |       |       |           |       |         |       |              |       |            |       |                   |       |       |       |
| Comprehensive Income:                                                               |       |       |       |           |       |         |       |              |       |            |       |                   |       |       |       |
| Net income                                                                          |       |       |       |           |       |         |       | 5,475             |       |            |       |                   |       | 5,475      |       |
| Net change in unrealized gain on investments  available for sale, net of tax of $83 |       |       |       |           |       |         |       |              |       | 161             |       |                   |       | 161        |       |
| Total comprehensive income                                                          |       |       |       |           |       |         |       |              |       |            |       |                   |       | 5,636      |       |
| Dividends declared, ($0.76 per share)                                               |       |       |       |           |       |         |       | (3,023            | )          |            |       |                   |       | (3,023     | )          |
| Stock options exercised                                                             |       | 674        |       | 6              |       | 11           |       |              |       |            |       |                   |       | 17         |       |
| Balance, June 30, 2005                                                         |       | 3,998,878  |       | $              | 33,324     |         | $          | 17,711            |       | $               | 20,714     |                   | $          | 4,492      |       | $ | (446 | ) | $ | 75,795 |   |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

PENNS WOODSBANCORP, INC.

CONSOLIDATEDSTATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

 
| ** **                                                                 | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **(In Thousands)**                                                         | ** ** | **2006**                             | ** ** | **2005**                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                       |       |                                 |       |                               |       |   |   |   |   |
| Net Income                                                                 |       | $                                    | 2,434      |                               | $          | 2,760 |   | $ | 4,889 |   | $ | 5,475 |   |
| Other comprehensive income (loss):                                         |       |                                 |       |                               |       |   |   |   |   |
| Net unrealized gains (losses) on available for sale  securities            |       | (3,581                               | )          | 4,695                              |       | (2,393 | ) | 1,542 |   |
| Less: Reclassification adjustment for net gains  included in net income    |       | 265                                  |       | 687                                |       | 824 |   | 1,298 |   |
| Other comprehensive income (loss) before tax                               |       | (3,846                               | )          | 4,008                              |       | (3,217 | ) | 244 |   |
| Income tax expense (benefit) related to other  comprehensive income (loss) |       | (1,308                               | )          | 1,363                              |       | (1,094 | ) | 83 |   |
| Other comprehensive income (loss), net of tax                              |       | (2,538                               | )          | 2,645                              |       | (2,123 | ) | 161 |   |
| Comprehensive income (loss)                                                |       | $                                    | (104       | )                                  | $          | 5,405 |   | $ | 2,766 |   | $ | 5,636 |   |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

5

----

 

PENNS WOODS BANCORP, INC.

CONSOLIDATEDSTATEMENT OF CASH FLOWS

(UNAUDITED)

 
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                         | ** ** | **June 30,**    | ** ** |
| **(In Thousands)**                                                                 | ** ** | **2006**             | ** ** | **2005** | ** ** |
|                                                                               |       |                 |       |   |   |
| OPERATING ACTIVITIES                                                               |       |                 |       |   |   |
| Net Income                                                                         |       | $                    | 4,889      |   | $ | 5,475 |   |
| Adjustments to reconcile net income to net cash provided  by operating activities: |       |                 |       |   |   |
| Depreciation                                                                       |       | 176                  |       | 271 |   |
| Provision for loan losses                                                          |       | 396                  |       | 360 |   |
| Accretion and amortization of investment security  discounts and premiums          |       | (381                 | )          | (202 | ) |
| Securities gains, net                                                              |       | (824                 | )          | (1,298 | ) |
| Originations of loans held for sale                                                |       | (17,466              | )          | (14,395 | ) |
| Proceeds of loans held for sale                                                    |       | 15,594               |       | 15,314 |   |
| Gain on sale of loans                                                              |       | (360                 | )          | (368 | ) |
| Increases in bank-owned life insurance                                             |       | (178                 | )          | (187 | ) |
| Other, net                                                                         |       | (641                 | )          | 546 |   |
| Net cash provided by operating activities                                          |       | 1,205                |       | 5,516 |   |
| INVESTING ACTIVITIES                                                               |       |                 |       |   |   |
| Investment securities available for sale:                                          |       |                 |       |   |   |
| Proceeds from sales                                                                |       | 19,680               |       | 88,475 |   |
| Proceeds from calls and maturities                                                 |       | 3,702                |       | 9,824 |   |
| Purchases                                                                          |       | (19,045              | )          | (110,693 | ) |
| Investment securities held to maturity:                                            |       |                 |       |   |   |
| Proceeds from calls and maturities                                                 |       | —               |       | 325 |   |
| Purchases                                                                          |       | —               |       | (35 | ) |
| Net increase in loans                                                              |       | (8,262               | )          | (3,697 | ) |
| Acquisition of bank premises and equipment                                         |       | (372                 | )          | (1,240 | ) |
| Proceeds from the sale of foreclosed assets                                        |       | 61                   |       | 67 |   |
| Investment in limited partnership                                                  |       | (1,535               | )          | — |   |
| Net cash used for investing activities                                             |       | (5,771               | )          | (16,974 | ) |
| FINANCING ACTIVITIES                                                               |       |                 |       |   |   |
| Net increase in interest-bearing deposits                                          |       | 21,484               |       | 27,401 |   |
| Net increase (decrease) in noninterest-bearing  deposits                           |       | 2,931                |       | (1,963 | ) |
| Proceeds of long-term borrowings                                                   |       | —               |       | 10,000 |   |
| Repayment of long-term borrowings                                                  |       | (1,600               | )          | (1,400 | ) |
| Net decrease in short-term borrowings                                              |       | (13,078              | )          | (15,230 | ) |
| Dividends paid                                                                     |       | (3,356               | )          | (3,023 | ) |
| Stock options exercised                                                            |       | —               |       | 17 |   |
| Purchase of treasury stock                                                         |       | (1,697               | )          | — |   |
| Net cash provided by financing activities                                          |       | 4,684                |       | 15,802 |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                          |       | 118                  |       | 4,344 |   |
| CASH AND CASH EQUIVALENTS, BEGINNING                                               |       | 14,090               |       | 12,626 |   |
| CASH AND CASH EQUIVALENTS, ENDING                                                  |       | $                    | 14,208     |   | $ | 16,970 |   |
|                                                                               |       |                 |       |   |   |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                                  |       |                 |       |   |   |
|                                                                               |       |                 |       |   |   |
| Interest paid                                                                      |       | $                    | 6,547      |   | $ | 4,506 |   |
| Income taxes paid                                                                  |       | 2,000                |       | 2,050 |   |
| Transfer of loans to foreclosed assets                                             |       | 51                   |       | 126 |   |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

6

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

**NOTES TO**

**CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

# **Note 1. Basis of Presentation**

# ** **

# **Theconsolidated financial statements include the accounts of Penns Woods Bancorp, Inc.(the “Company”) and its wholly-owned subsidiaries: Woods Investment Company, Inc.,Woods Real Estate Development Company, Inc., and Jersey Shore State Bank(the “Bank”) and its wholly-owned subsidiary The M Group, Inc. D/B/A TheComprehensive Financial Group (“The M Group”). All significant inter-companybalances and transactions have been eliminated in the consolidation.**

# ** **

The interim financialstatements are unaudited but, in the opinion of management, reflect alladjustments necessary for the fair presentation of results for such periods. Allof those adjustments are of a normal, recurring nature. The results ofoperations for any interim period are not necessarily indicative of results forthe full year. These financial statements should be read in conjunction withfinancial statements and notes thereto contained in the Company’s annual reportfor the year ended December 31, 2005.

 

Theaccounting policies followed in the presentation of interim financial resultsare the same as those followed on an annual basis. These policies are presentedon pages 38 thru 43 of the Annual Report on Form 10-K for the yearended December 31, 2005.

 

**Note 2. Recent Accounting Pronouncements**

** **

InJune 2006, the FASB issued staff position FIN 48 “Accounting forUncertainty in Income Taxes – an Interpretation of FASB Statement No. 109”.The interpretation prescribes a recognition threshold and measurement attributefor the financial statement recognition and measurement of a tax position takenor expected to be taken in a tax return. This interpretation is effective forfiscal years beginning after December 15, 2006. The adoption of thisstandard is not expected to have a material effect on the Company’s results ofoperations or financial position.

 

InApril 2006, the FASB issued Staff Position FIN 46(R)-6, “Determining theVariability to Be Considered in Applying FASB Interpretation No. 46(R)”(StaffPosition FIN 46(R)-6). This staff position addresses how an entity shoulddetermine the variability to be considered in applying FASB Interpretation No. FIN46(R) (FIN 46). The variability that is to be considered in applying FIN 46affects the determination of (a) whether the entity is a variable interestentity (VIE), (b) which interests are “variable interests” in the entityand (c) which party, if any is the primary beneficiary of the VIE. Therequirements prescribed by this staff position are to be applied prospectivelyfor all new arrangements at the commencement of the first reporting period thatbegins after June 15, 2006, or July 1, 2006 for the Company. The newrequirements need not be applied to entities that have previously been analyzedunder FIN 46 unless a

 

7

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

 

**Note 3. 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 convertible securities which would affect thenumerator in calculating basic and diluted earnings per share, therefore, netincome as presented on the consolidated statement of income will be used as thenumerator.

 
| ** **                                                                                                | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                | ** ** | **2006**                             | ** ** | **2005**                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                                      |       |                                 |       |                               |       |   |   |   |   |
| Weighted average common shares outstanding                                                                |       | 3,941,787                            |       | 3,986,360                          |       | 3,975,787 |   | 3,986,128 |   |
|                                                                                                      |       |                                 |       |                               |       |   |   |   |   |
| Average treasury stock shares                                                                             |       | (62,735                              | )          | (12,372                            | )          | (51,864 | ) | (12,372 | ) |
|                                                                                                      |       |                                 |       |                               |       |   |   |   |   |
| Weighted average common shares and common stock equivalents  used to calculate basic earnings per share   |       | 3,879,052                            |       | 3,973,988                          |       | 3,923,923 |   | 3,973,756 |   |
|                                                                                                      |       |                                 |       |                               |       |   |   |   |   |
| Additional common stock equivalents (stock options)  used to calculate diluted earnings per share         |       | 487                                  |       | 2,267                              |       | 486 |   | 2,423 |   |
|                                                                                                      |       |                                 |       |                               |       |   |   |   |   |
| Weighted average common shares and common stock  equivalents used to calculate diluted earnings per share |       | 3,879,539                            |       | 3,976,255                          |       | 3,924,409 |   | 3,976,179 |   |

 

Options to purchase 8,999 shares and 9,728 shares ofcommon stock at the price of $40.29 were outstanding during the three and six monthsended June 30, 2006 and 2005, respectively, but were not included in thecomputation of diluted earnings per share as they were anti-dilutive due to thestrike price being greater than the market price as of June 30, 2006 and2005, respectively.

 

**Note 4.****Net Periodic Benefit Cost-Defined BenefitPlans**

 

For a detailed disclosure onthe Company’s pension and employee benefits plans, please refer to Note 11 ofthe Company’s Consolidated Financial Statements included in the 2005 AnnualReport on Form 10-K.

 

The following sets forth thecomponents of the net periodic benefit cost of the domestic non-contributorydefined benefit plan for the three and six months ended June 30, 2006 and2005, respectively.

 

8

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| ** **                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                          | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **(In Thousands)**                  | ** ** | **2006**               | ** ** | **2005**             | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                        |       | $                      | 117        |                 | $          | 127 |   | $ | 232 |   | $ | 252 |   |
| Interest cost                       |       | 108                    |       | 112                  |       | 217 |   | 223 |   |
| Expected return  on plan assets     |       | (121                   | )          | (101                 | )          | (242 | ) | (201 | ) |
| Amortization of  transition         |       | —                 |       | —               |       | (1 | ) | (1 | ) |
| Amortization of  prior service cost |       | 6                      |       | 6                    |       | 13 |   | 13 |   |
| Amortization of  net loss           |       | 6                      |       | 16                   |       | 11 |   | 33 |   |
| Net periodic  cost                  |       | $                      | 116        |                 | $          | 160 |   | $ | 230 |   | $ | 319 |   |

 

**Employer Contributions**

** **

The Company previouslydisclosed in its consolidated financial statements, included in the 2005 AnnualReport on Form 10-K, that it expected to contribute $500,000 to itsdefined benefit plan in 2006. As of June 30, 2006, there were no contributionsmade for the 2006 plan year. This is the result of the contributions madeduring 2005 being above the required minimum in order to benefit from a currenttax and future financial perspective and an increase in the market value ofplan assets. In effect, the excess 2005 contributions eliminated the requirementfor minimum funding during 2006. The Company, however, is evaluating theamount, if any, of funds to contribute during the remainder of 2006.

 

**Note 5. 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 financial instruments are primarily comprised of commitmentsto extend credit and standby letters of credit. These instruments involve, tovarying degrees, elements of credit, interest rate, or liquidity risk in excessof the amount recognized in the consolidated balance sheet. The contractamounts of these instruments express the extent of involvement the Company hasin particular classes of financial 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 creditpolicies in making commitments and conditional obligations as it does foron-balance sheet instruments. The Company may require collateral or othersecurity to support financial instruments with off-balance sheet credit risk.

 

Outstanding financial instruments with off balance sheetrisk are as follows:

 
| ** **                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(In Thousands)**            | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Commitments to  extend credit |       | $                 | 78,480     |                  | $          | 72,583 |   |
| Standby letters  of credit    |       | 1,377             |       | 2,193                 |       |
|                               |            |                   |            |                       |            |  |  |

 

9

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# **Note 6. Reclassification of Comparative Amounts**

# ** **

Certaincomparative amounts for the prior periods have been reclassified to conform tocurrent period presentations. Such reclassifications had no effect on netincome or shareholders’ equity.

 

# **Note 7. Stock Split**

# ** **

Duringthe fourth quarter of 2005 the Company initiated a 6 for 5 stock split. Previouslyreported share and per share amounts have been adjusted to reflect the split.

 

**CAUTIONARYSTATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF1995**

 

This Reportcontains certain “forward-looking statements” including statements concerningplans, objectives, future events or performance and assumptions and otherstatements which are other than statements of historical fact. The Companywishes to caution readers that the following important factors, among others, may haveaffected and could in the future affect the Company’s actual results and couldcause the Company’s actual results for subsequent periods to differ materiallyfrom those expressed in any forward-looking statement made by or on behalf ofthe Company herein:  (i) the effectof changes in laws and regulations, including federal and state banking lawsand regulations, which the Company must comply, and the associated costs ofcompliance with such laws and regulations either currently or in the future asapplicable; (ii) the effect of changes in accounting policies andpractices, as may be adopted by the regulatory agencies as well as by theFinancial Accounting Standards Board, or of changes in the Company’sorganization, compensation and benefit plans; (iii) the effect on theCompany’s competitive position within its market area of the increasingconsolidation within the banking and financial services industries, includingthe increased competition from larger regional and out-of-state bankingorganizations as well as non-bank providers of various financial services; (iv) theeffect of changes in interest rates; and (v) the effect of changes in thebusiness cycle and downturns in the local, regional or national economies.

 

10

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**Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operation**

 

# **EARNINGS SUMMARY**

# ** **

**Comparison of the Three and Six Months Ended June 30, 2006 and2005**

 

**Summary Results**

 

Net income for the threemonths ended June 30, 2006 was $2,434,000 compared to $2,760,000 for thesame period of 2005. Basic and diluted earnings per share for the three monthsended June 30, 2006 were $0.63 as compared to $0.70 for the three monthsended June 30, 2005. Return on average assets and return on average equitywere 1.70% and 13.34% for the three months ended June 30, 2006 as comparedto 2.02% and 14.81% for the corresponding periods of 2005. Net income from coreoperations for the three months ended June 30, 2006 and 2005, excludingafter-tax net securities gains of $175,000 and $453,000, respectively, were $2,259,000and $2,307,000.

 

The six months ended June 30,2006 generated net income of $4,889,000 compared to $5,475,000 for the sameperiod of 2005. Earnings per share, basic and diluted, for the six months endedJune 30, 2006 were $1.25 as compared to $1.38 for the comparable periodsof 2005. Return on average assets and return on average equity were 1.71% and 13.12%for the six months ended June 30, 2006 as compared to 2.02% and 14.68% forthe corresponding period of 2005. Net income from core operations for the sixmonths ended June 30, 2006, excluding after-tax securities gains of $544,000,declined to $4,345,000 from $4,618,000 for the six months ended June 30,2005. (Management uses the non-GAAP measure of net income from core operationsin its analysis of the Company’s performance. This measure, as used by theCompany, adjusts net income by significant gains or losses that are unusual innature. Because certain of these items and their impact on the Company’sperformance are difficult to predict, management believes the presentation offinancial measures excluding the impact of such items provides usefulsupplemental information in evaluating the operating results of the Company’score businesses. These disclosures should not be viewed as a substitute for netincome determined in accordance with GAAP, nor are they necessarily comparableto non-GAAP performance measures that may be presented by othercompanies.)

 

**Interest Income**

 

Interestincome for the three months ended June 30, 2006 increased $693,000 to $8,347,000as compared to $7,654,000 for the same period of 2005. The increase in totalinterest income was primarily the result of growth in average loans of $24,839,000for the three months ended June 30, 2006 as compared to 2005. The averageloan growth and a 27 basis point increase in loan portfolio yields accountedfor $631,000 of the total interest income growth. Over this time frame theaverage balance of investment securities increased $3,173,000. The averageinvestment portfolio growth coupled with a shift to tax-exempt municipal bondsresulted in interest income from the investment portfolio increasing $62,000. Ona taxable equivalent basis the interest income from the investment portfolioincreased by $223,000. The shift within the investment

 

11

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securitiesportfolio was strategically designed to ladder cash flows and to enhancemanagement’s ability to manage the net interest margin. The increase individends received is the result of an increase in the level of dividends fromthe Federal Home Loan Bank of Pittsburgh coupled with an emphasis on purchasingstocks consistently having an above average dividend yield.

 

Duringthe six months ended June 30, 2006, interest and dividend income was$16,369,000, an increase of $1,280,000 over the same period in 2005. Thereasons for the 8.5% growth in interest income for this six month period areidentical to those for the three month period ending June 30, 2006 discussedabove. The growth in average loans of $20,593,000 coupled with a 31 basis pointincrease in the loan portfolio yield resulted in an increase of $1,156,000 inloan interest and fee income. Average investment securities increased to $186,719,000resulting in interest income on the investment portfolio increasing $124,000 whencompared to June 30, 2005, which resulted in taxable equivalent interestincome increasing $491,000.

 

Interestincome composition for the three and six months ended June 30, 2006 and2005 were as follows:

 
| ** **                         | ** ** | **For The Three Months Ended** | ** ** |
|------------------------------------|------------|--------------------------------|------------|
| ** **                         | ** ** | **June 30, 2006**         | ** ** | **June 30, 2005** | ** ** | **Change** | ** ** |
| **(In Thousands)**                 | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Loans including  fees              |       | $                              | 6,086      |   | 72.9 | % | $ | 5,455 |   | 71.2 | % | $ | 631 |   | 11.6 | % |
| Investment  securities:            |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                            |       | 896                            |       | 10.7 |   | 1,214 |   | 15.9 |   | (318 | ) | (26.2 | ) |
| Tax-exempt                         |       | 1,000                          |       | 12.0 |   | 688 |   | 9.0 |   | 312 |   | 45.3 |   |
| Dividend                           |       | 365                            |       | 4.4 |   | 297 |   | 3.9 |   | 68 |   | 22.9 |   |
| Total interest and dividend income |       | $                              | 8,347      |   | 100.0 | % | $ | 7,654 |   | 100.0 | % | $ | 693 |   | 9.1 | % |

 
| ** **                         | ** ** | **For The Six Months Ended** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| ** **                         | ** ** | **June 30, 2006**                      | ** ** | **June 30, 2005** | ** ** | **Change** | ** ** |
| **(In Thousands)**            | ** ** | **Amount**                                       | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Loans including  fees              |       | $                                                | 11,895     |   | 72.7 | % | $ | 10,739 |   | 71.2 | % | $ | 1,156 |   | 10.8 | % |
| Investment  securities:            |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                            |       | 1,819                                            |       | 11.1 |   | 2,478 |   | 16.4 |   | (659 | ) | (26.6 | ) |
| Tax-exempt                         |       | 1,989                                            |       | 12.1 |   | 1,277 |   | 8.5 |   | 712 |   | 55.8 |   |
| Dividend                           |       | 666                                              |       | 4.1 |   | 595 |   | 3.9 |   | 71 |   | 11.9 |   |
| Total interest and dividend income |       | $                                                | 16,369     |   | 100.0 | % | $ | 15,089 |   | 100.0 | % | $ | 1,280 |   | 8.5 | % |

 

**Interest Expense**

 

Interestexpense for the three months ended June 30, 2006 increased $964,000 to$3,421,000 as compared to $2,457,000 for the same period of 2005. The increasedexpense associated with deposits is primarily the result of rate increases fortime deposits, which are comprised of various certificates of deposit (“CD”)accounts, from the three months ended June 30, 2005 to the correspondingperiod of 2006. Factors that led to the rate increases include, but are notlimited to, several period prime rate increases, competitive market pricingpressure, and attracting new deposit customers while retaining existingaccounts. The increase in CD interest rates has

 

12

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exceededthe increase for other deposit accounts. This has led to a shift of a portionof the money market and savings deposit portfolios into higher yielding CDs.

 

Short-termborrowing costs increased as a direct result of the prime rate increases overthe past year and an increase in the average balance of $23,227,000. Thisincrease in short-term borrowings was utilized to fund earning asset growth forthe three months ended June 30, 2006 as compared to the same period of2005. Long-term FHLB borrowing expense increased due to $10,000,000 that wasborrowed from the FHLB during the latter portion of the second quarter of 2005.The advance was at a fixed rate of 3.97% for 5 years with a final maturity of10 years and is responsible for the increase in long-term interest expense.

 

Interestexpense for the six months ended June 30, 2006 increased $1,904,000 to$6,610,000 from $4,706,000 for the comparable period of 2005. Interest ondeposits accounted for $1,191,000 of the increase due to the reasons noted inthe above three month analysis. Borrowing costs increased due to the rateincreases over the past year and increased average borrowings that were used tofund the growth in average earning assets.

 

Interestexpense composition for the three and six months ended June 30, 2006 and2005 were as follows:

 
| ** **             | ** ** | **For The Three Months Ended** | ** ** |
|------------------------|------------|--------------------------------|------------|
| ** **             | ** ** | **June 30, 2006**         | ** ** | **June 30, 2005** | ** ** | **Change** | ** ** |
| **(In Thousands)**     | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Deposits               |       | $                              | 1,968      |   | 57.5 | % | $ | 1,420 |   | 57.8 | % | $ | 548 |   | 38.6 | % |
| Short-term  borrowings |       | 509                            |       | 14.9 |   | 144 |   | 5.9 |   | 365 |   | 253.5 |   |
| Long-term  borrowings  |       | 944                            |       | 27.6 |   | 893 |   | 36.3 |   | 51 |   | 5.7 |   |
| Total interest expense |       | $                              | 3,421      |   | 100.0 | % | $ | 2,457 |   | 100.0 | % | $ | 964 |   | 39.2 | % |

 
| ** **              | ** ** | **For The Six Months Ended** | ** ** |
|-------------------------|------------|--------------------------------------------------|------------|
| ** **              | ** ** | **June 30, 2006**                      | ** ** | **June 30, 2005** | ** ** | **Change** | ** ** |
| **(In Thousands)** | ** ** | **Amount**                                       | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Deposits                |       | $                                                | 3,805      |   | 57.6 | % | $ | 2,614 |   | 55.5 | % | $ | 1,191 |   | 45.6 | % |
| Short-term  borrowings  |       | 915                                              |       | 13.8 |   | 346 |   | 7.4 |   | 569 |   | 164.5 |   |
| Long-term  borrowings   |       | 1,890                                            |       | 28.6 |   | 1,746 |   | 37.1 |   | 144 |   | 8.2 |   |
| Total interest expense  |       | $                                                | 6,610      |   | 100.0 | % | $ | 4,706 |   | 100.0 | % | $ | 1,904 |   | 40.5 | % |

 

**Net Interest Margin**

** **

Thenet interest margin (“NIM”) for the three months ended June 30, 2006 was 4.12%as compared to 4.41% for the corresponding period of 2005. The decrease in theNIM was the result of the yield on earning assets increasing 33 basis points (“bp”)to 6.69% for the three months ended June 30, 2006, as compared to 2005, however,interest bearing liabilities increased 72 bp over the same period. The increasein the yield on earning assets is attributable to a change in the mix ofearning assets as previously discussed in the Interest Income section ofthis Earnings Summary. The average tax-exempt investment securities portfoliogrew by $29,124,000, the direct result of a shift in investment strategy whichalso resulted in a decline in

 

13

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taxableinvestment securities of $25,951,000. The average loan growth of $24,839,000was predominately comprised of commercial real estate loans. The yield on totalloans increased to 7.04% from 6.77% due to the impact of the Federal OpenMarket Committee rate increases enacted over the past year. The investmentportfolio yield increased to 6.01% from 5.63% primarily from the previouslynoted shift in the portfolio to tax-exempt investments. The average interestrates paid on deposit accounts increased to 2.66% as compared to 1.93% for the2005 period. This increase was driven by growth in average time deposits of$16,386,000 and an increase in the rate paid on time deposits of 87 bp. Aportion of the increase in deposit volume and the average interest yield paidis due to several CD promotions during the past year to attract new customerswhile retaining existing customers. The promotions were designed to gatherdeposits that would have maturities of two years or less. In addition, thepromotions served as a catalyst to cross sell other deposit products and toimplement management’s strategy regarding the CD portfolio allocation amongvarious maturities and therefore, reducing the concentration of time depositmaturities within any single month.

 

Short-termborrowings realized an increase of 188 bp in interest rates charged for thethree months ended June 30, 2006. The prime rate increased to 8.25% at June 30,2006 from 6.25% at June 30, 2005, as further evidence of the correlationbetween the Company’s primary source of borrowed funds, the FHLB, and theprimary lending rate indicator used on a national basis.

 

TheNIM for the six months ended June 30, 2006 was 4.10% as compared to 4.39%for the corresponding period of 2005. The decrease in the NIM was the result ofthe before mentioned growth and change in mix of the earnings assets offset byincreased rates paid on interest bearing liabilities and growth in totalborrowings of $20,360,000.

 

Followingis a schedule of average balances and associated yields for the three andsix month periods ended June 30, 2006 and 2005:

 

14

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| ** **                                      | ** ** | **AVERAGE BALANCES AND INTEREST RATES** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                      | ** ** | **Three Months Ended**                  | ** ** | **Three Months Ended** | ** ** |
| ** **                                      | ** ** | **June 30, 2006**                  | ** ** | **June 30, 2005** | ** ** |
| **(In Thousands)**                              | ** ** | **Average Balance**                     | ** ** | **Interest** | ** ** | **Average Rate** | ** ** | **Average Balance** | ** ** | **Interest** | ** ** | **Average Rate** | ** ** |
|                                            |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Tax-exempt loans                                |       | $                                       | 7,887      |   | $ | 123 |   | 6.26 | % | $ | 4,119 |   | $ | 35 |   | 3.41 | % |
| All other loans                                 |       | 341,091                                 |       | 6,005 |   | 7.06 | % | 320,020 |   | 5,432 |   | 6.81 | % |
| Total loans                                     |       | 348,978                                 |       | 6,128 |   | 7.04 | % | 324,139 |   | 5,467 |   | 6.77 | % |
|                                            |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Taxable investment securities                   |       | 94,134                                  |       | 1,261 |   | 5.36 | % | 120,085 |   | 1,511 |   | 5.03 | % |
| Tax-exempt investment securities                |       | 90,530                                  |       | 1,515 |   | 6.69 | % | 61,406 |   | 1,042 |   | 6.79 | % |
| Total securities                                |       | 184,664                                 |       | 2,776 |   | 6.01 | % | 181,491 |   | 2,553 |   | 5.63 | % |
|                                            |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning assets                   |       | 533,642                                 |       | 8,904 |   | 6.69 | % | 505,630 |   | 8,020 |   | 6.36 | % |
|                                            |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Other assets                                    |       | 39,175                                  |       |   |   |   |   | 38,166 |   |   |   |   |   |
|                                            |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Total assets                                    |       | $                                       | 572,817    |   |   |   |   |   | $ | 543,796 |   |   |   |   |   |
|                                            |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Savings                                         |       | $                                       | 60,161     |   | 125 |   | 0.83 | % | $ | 65,912 |   | 126 |   | 0.77 | % |
| Super Now deposits                              |       | 48,282                                  |       | 169 |   | 1.40 | % | 51,571 |   | 111 |   | 0.86 | % |
| Money market deposits                           |       | 24,165                                  |       | 121 |   | 2.01 | % | 30,252 |   | 106 |   | 1.41 | % |
| Time deposits                                   |       | 164,464                                 |       | 1,553 |   | 3.79 | % | 148,078 |   | 1,077 |   | 2.92 | % |
| Total deposits                                  |       | 297,072                                 |       | 1,968 |   | 2.66 | % | 295,813 |   | 1,420 |   | 1.93 | % |
|                                            |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Short-term borrowings                           |       | 44,793                                  |       | 509 |   | 4.56 | % | 21,566 |   | 144 |   | 2.68 | % |
| Long-term borrowings                            |       | 82,878                                  |       | 944 |   | 4.57 | % | 75,754 |   | 893 |   | 4.73 | % |
| Total borrowings                                |       | 127,671                                 |       | 1,453 |   | 4.56 | % | 97,320 |   | 1,037 |   | 4.27 | % |
|                                            |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing liabilities              |       | 424,743                                 |       | 3,421 |   | 3.23 | % | 393,133 |   | 2,457 |   | 2.51 | % |
|                                            |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                 |       | 70,961                                  |       |   |   |   |   | 68,784 |   |   |   |   |   |
| Other liabilities                               |       | 4,129                                   |       |   |   |   |   | 7,344 |   |   |   |   |   |
| Shareholders’ equity                       |       | 72,984                                  |       |   |   |   |   | 74,535 |   |   |   |   |   |
| Total liabilities and shareholders’ equity |       | $                                       | 572,817    |   |   |   |   |   | $ | 543,796 |   |   |   |   |   |
|                                            |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Interest rate spread                            |       |                                    |       |   |   | 3.46 | % |   |   |   |   | 3.85 | % |
| Net interest income/margin                      |       |                                    |       | $ | 5,483 |   | 4.12 | % |   |   | $ | 5,563 |   | 4.41 | % |

 

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.

 

15

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| ** **                          | ** ** | **AVERAGE BALANCES AND INTEREST RATES** | ** ** |
|-------------------------------------|------------|-----------------------------------------|------------|
| ** **                          | ** ** | **Six Months Ended**                    | ** ** | **Six Months Ended** | ** ** |
| ** **                          | ** ** | **6/30/2006**                           | ** ** | **6/30/2005** | ** ** |
| ** **                          | ** ** | **Average Balance**                     | ** ** | **Interest** | ** ** | **Average Rate** | ** ** | **Average Balance** | ** ** | **Interest** | ** ** | **Average Rate** | ** ** |
|                                |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Tax-exempt loans                    |       | $                                       | 8,038      |   | $ | 248 |   | 6.22 | % | $ | 1,869 |   | $ | 57 |   | 6.15 | % |
| All other loans                     |       | 338,041                                 |       | 11,731 |   | 7.00 | % | 323,617 |   | 10,701 |   | 6.67 | % |
| Total loans                         |       | 346,079                                 |       | 11,979 |   | 6.98 | % | 325,486 |   | 10,758 |   | 6.67 | % |
|                                |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Taxable  securities                 |       | 95,880                                  |       | 2,485 |   | 5.18 | % | 125,153 |   | 3,073 |   | 4.91 | % |
| Tax-exempt  securities              |       | 90,839                                  |       | 3,014 |   | 6.64 | % | 55,370 |   | 1,935 |   | 6.99 | % |
| Total securities                    |       | 186,719                                 |       | 5,499 |   | 5.89 | % | 180,523 |   | 5,008 |   | 5.55 | % |
|                                |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets      |       | 532,798                                 |       | 17,478 |   | 6.60 | % | 506,009 |   | 15,766 |   | 6.27 | % |
|                                |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Other assets                        |       | 38,691                                  |       |   |   |   |   | 36,419 |   |   |   |   |   |
|                                |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Total assets                        |       | $                                       | 571,489    |   |   |   |   |   | $ | 542,428 |   |   |   |   |   |
|                                |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Savings                             |       | $                                       | 60,360     |   | 238 |   | 0.80 | % | $ | 66,418 |   | 257 |   | 0.78 | % |
| Super Now  deposits                 |       | 48,223                                  |       | 318 |   | 1.33 | % | 52,533 |   | 218 |   | 0.84 | % |
| Money market  deposits              |       | 24,642                                  |       | 237 |   | 1.94 | % | 31,400 |   | 197 |   | 1.27 | % |
| Time deposits                       |       | 163,312                                 |       | 3,012 |   | 3.72 | % | 138,576 |   | 1,942 |   | 2.83 | % |
| Total Deposits                      |       | 296,537                                 |       | 3,805 |   | 2.59 | % | 288,927 |   | 2,614 |   | 1.82 | % |
|                                |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Short-term  borrowings              |       | 43,100                                  |       | 915 |   | 4.28 | % | 29,242 |   | 346 |   | 2.39 | % |
| Other borrowings                    |       | 83,603                                  |       | 1,890 |   | 4.56 | % | 77,101 |   | 1,746 |   | 4.57 | % |
| Total borrowings                    |       | 126,703                                 |       | 2,805 |   | 4.46 | % | 106,343 |   | 2,092 |   | 3.97 | % |
|                                |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities |       | 423,240                                 |       | $ | 6,610 |   | 3.15 | % | 395,270 |   | $ | 4,706 |   | 2.40 | % |
|                                |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                     |       | 69,381                                  |       |   |   |   |   | 68,571 |   |   |   |   |   |
| Other liabilities                   |       | 4,324                                   |       |   |   |   |   | 4,017 |   |   |   |   |   |
| Shareholders’  equity          |       | 74,544                                  |       |   |   |   |   | 74,570 |   |   |   |   |   |
|                                |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
|                                |       | $                                       | 571,489    |   |   |   |   |   | $ | 542,428 |   |   |   |   |   |
| Interest rate  spread               |       |                                    |       |   |   | 3.45 | % |   |   |   |   | 3.87 | % |
| Net interest  income/margin         |       |                                    |       | $ | 10,868 |   | 4.10 | % |   |   | $ | 11,060 |   | 4.39 | % |

 

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.

 

16

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The following tablepresents the adjustment to convert net interest income to net interest incomeon a fully taxable equivalent basis for the three and six month periods ended June 30,2006 and 2005.

 
| ** **                                      | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **June 30,**              | ** ** | **June 30,**            | ** ** |
| **(In Thousands)**                              | ** ** | **2006**                       | ** ** | **2005**                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                            |       |                           |       |                         |       |   |   |   |   |
| Total interest  income                          |       | $                              | 8,347      |                         | $          | 7,654 |   | $ | 16,369 |   | $ | 15,089 |   |
| Total interest  expense                         |       | 3,421                          |       | 2,457                        |       | 6,610 |   | 4,706 |   |
|                                            |       |                           |       |                         |       |   |   |   |   |
| Net interest  income                            |       | 4,926                          |       | 5,197                        |       | 9,759 |   | 10,383 |   |
| Tax equivalent  adjustment                      |       | 557                            |       | 366                          |       | 1,109 |   | 677 |   |
|                                            |       |                           |       |                         |       |   |   |   |   |
| Net interest  income (fully taxable equivalent) |       | $                              | 5,483      |                         | $          | 5,563 |   | $ | 10,868 |   | $ | 11,060 |   |

 

# **Thefollowing table sets forth the respective impact that both volume and ratechanges have had on net interest income on a fully taxable equivalent basis andthe net interest margin for the three and six month periods ended June 30,2006 and 2005:**

 
| ** **                         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                         | ** ** | **2006 vs 2005**                     | ** ** | **2006 vs 2005**                   | ** ** |
| ** **                         | ** ** | **Increase (Decrease)**              | ** ** | **Increase (Decrease)**            | ** ** |
| ** **                         | ** ** | **Due to**                           | ** ** | **Due to**                         | ** ** |
| **(In Thousands)**                 | ** ** | **Volume**                           | ** ** | **Rate**                           | ** ** | **Net** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Net** | ** ** |
| Interest income:                   |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |
| Loans,  tax-exempt                 |       | $                                    | 42         |                               | $          | 46 |   | $ | 88 |   | $ | 190 |   | $ | 1 |   | $ | 191 |   |
| Loans                              |       | 366                                  |       | 207                                |       | 573 |   | 488 |   | 542 |   | 1,030 |   |
| Taxable  investment securities     |       | (355                                 | )          | 105                                |       | (250 | ) | (768 | ) | 180 |   | (588 | ) |
| Tax-exempt  investment securities  |       | 487                                  |       | (14                                | )          | 473 |   | 1,168 |   | (89 | ) | 1,079 |   |
| Total interest-earning assets      |       | 540                                  |       | 344                                |       | 884 |   | 1,078 |   | 634 |   | 1,712 |   |
|                               |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |
| Interest  expenses:                |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |
| Savings deposits                   |       | (22                                  | )          | 21                                 |       | (1 | ) | (24 | ) | 4 |   | (19 | ) |
| Super Now  deposits                |       | (6                                   | )          | 64                                 |       | 58 |   | (16 | ) | 117 |   | 100 |   |
| Money market  deposits             |       | (8                                   | )          | 23                                 |       | 15 |   | (19 | ) | 59 |   | 40 |   |
| Time deposits                      |       | 128                                  |       | 348                                |       | 476 |   | 383 |   | 687 |   | 1,070 |   |
| Short-term  borrowings             |       | 201                                  |       | 164                                |       | 365 |   | 202 |   | 367 |   | 569 |   |
| Long-term  borrowings              |       | 79                                   |       | (28                                | )          | 51 |   | 147 |   | (3 | ) | 144 |   |
| Total interest-bearing liabilities |       | 372                                  |       | 592                                |       | 964 |   | 673 |   | 1,231 |   | 1,904 |   |
| Change in net  interest income     |       | $                                    | 168        |                               | $          | (248 | ) | $ | (80 | ) | $ | 405 |   | $ | (597 | ) | $ | (192 | ) |

 

# **Provision for Loan Losses**

# ** **

The provision for loan losses is based upon management’squarterly review of the loan portfolio. The purpose of the review is to assessloan quality, identify impaired loans, analyze delinquencies, ascertain loangrowth, evaluate potential charge-offs and recoveries, and assess generaleconomic conditions in the markets served. An external independent loan reviewis also performed annually for the Bank. Management remains committed to anaggressive program of problem loan identification and resolution.

 

17

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The allowance iscalculated by applying loss factors to outstanding loans by type, excludingloans for which a specific allowance has been determined. Loss factors arebased on management’s consideration of the nature of the portfolio segments,changes in mix and volume of the loan portfolio, and historical loan lossexperience. In addition, management considers industry standards and trendswith respect to non-performing loans and its knowledge and experience withspecific lending segments.

 

Although managementbelieves it uses the best information available to make such determinations andthat the allowance for loan losses is adequate at June 30, 2006, futureadjustments could be necessary if circumstances or economic conditions differsubstantially from the assumptions used in making the initial determinations. Adownturn in the local economy, employment, and delays in receiving financialinformation from borrowers could result in increased levels of nonperformingassets and charge-offs, increased loan loss provisions, and reductions inincome. Additionally, as an integral part of the examination process, bankregulatory agencies periodically review the Bank’s loan loss allowance. Thebanking agencies could require the recognition of additions to the loan lossallowance based on their judgment of information available to them at the timeof their examination.

 

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 $3,679,000 at December 31, 2005 to $3,995,000 at June 30,2006. At June 30, 2006, the allowance for loan losses was 1.15% of totalloans compared to 1.09% of total loans at December 31, 2005. Management’sconclusion is that the allowance for loan losses is adequate to provide for possible losses inherent inthe loan portfolio as of the balance sheet date.

 

The provision for loanlosses totaled $198,000 and $396,000 for the three and six months ended June 30,2006, respectively, as compared to $180,000 and $360,000 for the same periodsin 2005. The increase was the result of loan growth of $18,699,000.

 

An overall increase of$381,000 was experienced in non-performing loans (non-accrual and 90 days pastdue) from December 31, 2005 to $983,000 at June 30, 2006.

 

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.

 

**Non-interest Income**

 

Totalnon-interest income for the quarter ended June 30, 2006 compared to thesame period in 2005 decreased $259,000 to $2,216,000. Excluding net securitygains, an increase of $163,000 was realized in non-interest income. Deposit servicecharges increased due to the

 

18

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implementationof Bounce Protection during May 2005. This product provides overdraftprotection up to a predetermined amount to non-commercial customers for a perevent fee which resulted in an approximate $68,000 increase in service incomeover the 2005 period. Gain on the sale of loans from secondary marketoriginations increased due to an increase in volume.

 

Insurancecommissions increased slightly due to increased volume offset by a reduction inthe overall commission earned from the underwriter that The M Group receives oneach insurance contract written. The management of The M Group continued togather new and build upon current relationships. The sales cycle for insuranceand investment products can take typically from six months to one year or moreto complete. The sales call program continues to expand to other financialinstitutions, and results in shared revenue with The M Group.

 

Otherincome increased due primarily to revenue generated from increased debit cardtransactions, title insurance fees, and the income recognized related to theorigination of secondary market residential loans.

 

Totalnon-interest income for the six months ended June 30, 2006 compared to thesame period in 2005 decreased $229,000. Excluding net security gains, the increasefrom period to period was $245,000. The implementation of Bounce Protectionduring May 2005 as noted above, resulted in an increase of $209,000 in servicefees. The increase in other income is the result of the items noted above for thethree month period discussion.

 

Non-interestincome composition for the three and six months ended June 30, 2006 and2005 were as follows:

 
| ** **                 | ** ** | **For The Three Months Ended** | ** ** |
|----------------------------|------------|--------------------------------|------------|
| ** **                 | ** ** | **June 30, 2006**         | ** ** | **June 30, 2005** | ** ** | **Change** | ** ** |
| **(In Thousands)**         | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Deposit service  charges   |       | $                              | 587        |   | 26.5 | % | $ | 536 |   | 21.7 | % | $ | 51 |   | 9.5 | % |
| Security gains,  net       |       | 265                            |       | 12.0 |   | 687 |   | 27.7 |   | (422 | ) | (61.4 | ) |
| Bank-owned life  insurance |       | 90                             |       | 4.1 |   | 93 |   | 3.8 |   | (3 | ) | (3.2 | ) |
| Gain on sale of  loans     |       | 210                            |       | 9.5 |   | 178 |   | 7.2 |   | 32 |   | 18.0 |   |
| Insurance  commissions     |       | 670                            |       | 30.1 |   | 652 |   | 26.3 |   | 18 |   | 2.8 |   |
| Other                      |       | 394                            |       | 17.8 |   | 329 |   | 13.3 |   | 65 |   | 19.8 |   |
| Total non-interest income  |       | $                              | 2,216      |   | 100.0 | % | $ | 2,475 |   | 100.0 | % | $ | (259 | ) | (10.5 | )% |

 
| ** **                 | ** ** | **For The Six Months Ended** | ** ** |
|----------------------------|------------|------------------------------|------------|
| ** **                 | ** ** | **June 30, 2006**       | ** ** | **June 30, 2005** | ** ** | **Change** | ** ** |
| **(In Thousands)**         | ** ** | **Amount**                   | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Deposit service  charges   |       | $                            | 1,177      |   | 25.9 | % | $ | 991 |   | 20.7 | % | $ | 186 |   | 18.8 | % |
| Security gains,  net       |       | 824                          |       | 18.1 |   | 1,298 |   | 27.2 |   | (474 | ) | (36.5 | ) |
| Bank-owned life  insurance |       | 178                          |       | 3.9 |   | 187 |   | 3.9 |   | (9 | ) | (4.8 | ) |
| Gain on sale of  loans     |       | 360                          |       | 7.9 |   | 368 |   | 7.7 |   | (8 | ) | (2.2 | ) |
| Insurance  commissions     |       | 1,230                        |       | 27.0 |   | 1,295 |   | 27.1 |   | (65 | ) | (5.0 | ) |
| Other                      |       | 784                          |       | 17.2 |   | 643 |   | 13.4 |   | 141 |   | 21.9 |   |
| Total non-interest income  |       | $                            | 4,553      |   | 100.0 | % | $ | 4,782 |   | 100.0 | % | $ | (229 | ) | (4.8 | )% |

 

19

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**Non-interest Expenses**

 

Totalnon-interest expenses increased $229,000 from the three months ended June 30,2005 as compared to the same period of 2006. The increase in salaries andemployee benefits was attributable to several items including: standard cost ofliving wage adjustments for employees, new additions to our staff and increasedhealth insurance cost. Furniture and equipment expense increased due to the newbranch in State College and increased cost of maintenance. The decrease inoccupancy expenses was attributable to a reduction in leasehold improvementsamortization and facilities maintenance amounts. Other expenses increasedprimarily due to normal anticipated inflationary adjustments to ongoingbusiness operating costs and the Company’s share of operating results incurredthrough a limited partnership arrangement which was initiated during the fourthquarter of 2005 for the purposes of funding the construction of affordablehousing in the Company’s primary market area.

 

Totalnon-interest expenses increased $585,000 from the six months ended June 30,2005 as compared to the same period of 2006. As noted in the three monthdiscussion, the new State College branch and normal increases in generalbusiness expenses impacted the level of non-interest expenses. Decreasedamortization of leasehold improvements resulted in occupancy expense decliningfor the six month period ended June 30, 2006 as compared to 2005. Furnitureand equipment expenses increased due in part to the new State Collegebranch.

 

Non-interestexpense composition for the three and six months ended June 30, 2006 and2005 were as follows:

 
| ** **                      | ** ** | **For The Three Months Ended** | ** ** |
|---------------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | **June 30, 2006**         | ** ** | **June 30, 2005** | ** ** | **Change** | ** ** |
| **(In Thousands)**              | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Salaries and  employee benefits |       | $                              | 2,214      |   | 54.3 | % | $ | 2,135 |   | 55.5 | % | $ | 79 |   | 3.7 | % |
| Occupancy, net                  |       | 275                            |       | 6.7 |   | 286 |   | 7.4 |   | (11 | ) | (3.8 | ) |
| Furniture and  equipment        |       | 288                            |       | 7.1 |   | 234 |   | 6.1 |   | 54 |   | 23.1 |   |
| Pennsylvania  shares tax        |       | 151                            |       | 3.7 |   | 140 |   | 3.6 |   | 11 |   | 7.9 |   |
| Other                           |       | 1,150                          |       | 28.2 |   | 1,054 |   | 27.4 |   | 96 |   | 9.1 |   |
| Total non-interest expense      |       | $                              | 4,078      |   | 100.0 | % | $ | 3,849 |   | 100.0 | % | $ | 229 |   | 5.9 | % |

 
| ** **                      | ** ** | **For The Six Months Ended** | ** ** |
|---------------------------------|------------|------------------------------|------------|
| ** **                      | ** ** | **June 30, 2006**       | ** ** | **June 30, 2005** | ** ** | **Change** | ** ** |
| **(In Thousands)**              | ** ** | **Amount**                   | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Salaries and  employee benefits |       | $                            | 4,446      |   | 55.3 | % | $ | 4,129 |   | 55.5 | % | $ | 317 |   | 7.7 | % |
| Occupancy, net                  |       | 518                          |       | 6.5 |   | 577 |   | 7.8 |   | (59 | ) | (10.2 | ) |
| Furniture and  equipment        |       | 585                          |       | 7.3 |   | 455 |   | 6.1 |   | 130 |   | 28.6 |   |
| Pennsylvania  shares tax        |       | 296                          |       | 3.7 |   | 279 |   | 3.7 |   | 17 |   | 6.1 |   |
| Other                           |       | 2,184                        |       | 27.2 |   | 2,004 |   | 26.9 |   | 180 |   | 9.0 |   |
| Total non-interest expense      |       | $                            | 8,029      |   | 100.0 | % | $ | 7,444 |   | 100.0 | % | $ | 585 |   | 7.9 | % |

 

20

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**Provision for Income Taxes**

 

Incometaxes decreased $451,000 and $888,000 for the three and six month periods endedJune 30, 2006 compared to the same periods of 2005. The effective tax ratefor the three months ended June 30, 2006 and 2005 were 15.1% and 24.2%,respectively. The six months ended June 30, 2006 had an effective tax rateof 17.0% as compared to 25.6% for the comparable period of 2005. The decline inthe effective tax rate is consistent with management’s repositioning of theinvestment portfolio from taxable investment securities to tax-exemptinvestment securities and tax credits related to investments in low incomehousing projects.

 

# **ASSET/LIABILITY MANAGEMENT**

# ** **

Cash and cashequivalents increased $118,000 from $14,090,000 at December 31, 2005, andare the results of the following activities which have occurred during the six monthsended June 30, 2006:

 

# **Operating Activities**

# ** **

The significantcomponents of operating activities are net income and the origination andproceeds of loans held for sale. Cash provided by net income, as adjusted forloans held for sale activity, amounted to $3,077,000. Activity regarding loansheld for sale resulted in sale proceeds, less $360,000 in realized gains,exceeding loan origination disbursements by $2,232,000 for the period.

 

**Loans**

 

Gross loansincreased $8,131,000 since December 31, 2005 as residential real estatemortgages increased 3.5% or $5,282,000 in part due to the active marketingof a new home equity line of credit product during 2006. Residential realestate loans increased due to promotion of home equity loans and lines. Thegrowth in commercial real estate mortgages is part of the Company’sstrategy to originate high quality, well secured commercial loans.

 

The allocation of the loan portfolio, bycategory, as of June 30, 2006 and December 31, 2005 is presentedbelow:

 
| ** **                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **Change** | ** ** |
|-----------------------------------|------------|-------------------|------------|-----------------------|------------|------------|------------|
| **(In Thousands)**                | ** ** | **2006**          | ** ** | **2005**              | ** ** | **Amount** | ** ** | **%** | ** ** |
| Commercial and  agricultural      |       | $                 | 33,838     |                  | $          | 34,407     |       | $ | (569 | ) | (1.7 | )% |
| Real estate  mortgage:            |       |              |       |                  |       |       |       |   |   |
| Residential                       |       | 155,282           |       | 150,000               |       | 5,282      |       | 3.5 |   |
| Commercial                        |       | 128,986           |       | 127,131               |       | 1,855      |       | 1.5 |   |
| Construction                      |       | 11,996            |       | 10,681                |       | 1,315      |       | 12.3 |   |
| Installment  loans to individuals |       | 17,517            |       | 17,281                |       | 236        |       | 1.4 |   |
| Less: Net  deferred loan fees     |       | 1,050             |       | 1,062                 |       | (12        | )          | (1.1 | ) |
| Gross loans                       |       | $                 | 346,569    |                  | $          | 338,438    |       | $ | 8,131 |   | 2.4 | % |

 

21

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The recorded investment in loans for whichimpairment has been recognized in accordance with Statement of FinancialAccounting Standards No. 114, *Accounting by Creditorsfor Impairment of a Loan*, amounted to $572,000 at June 30,2006, as compared to no impaired loans at December 31, 2005. The valuationallowance related to impaired loans amounted to $60,000 at June 30, 2006.

 

A loan is considered impaired, based oncurrent information and events, if it is probable that the Bank will be unableto collect the scheduled payments of principal or interest when due accordingto the contractual terms of the loan agreement. The measurement of impairedloans is generally based on the present value of expected future cash flowsdiscounted at the historical effective interest rate, except that allcollateral-dependent loans are measured for impairment based on the fair valueof the collateral.

 

**Investments**

 

Theamortized cost and fair market value of the investment securities portfolio intotal has declined modestly since December 31, 2005. Over the first sixmonths of 2006, the amortized cost of state and political securities hasincreased $1,955,000, while U.S. Government and agency securities decreased$4,228,000. This shift is the result of a repositioning of the security portfoliothat began during 2005. The shift from taxable to tax exempt bonds has beenundertaken as a strategy to build call protection, maintain the taxableequivalent yield, reduce the effective federal income tax rate, and to investin communities across the Commonwealth of Pennsylvania and the country.

 

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

 

22

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| ** **                             | ** ** | **June 30, 2006** | ** ** |
|----------------------------------------|------------|------------------------|------------|
| ** **                             | ** ** | ** **             | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Amortized**          | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| **(In Thousands)**                     | ** ** | **Cost**               | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| Available for  Sale (AFS)              |       |                   |       |   |   |   |   |   |   |
| U.S. Government  and agency securities |       | $                      | 61,268     |   | $ | — |   | $ | (3,201 | ) | $ | 58,067 |   |
| State and  political securities        |       | 95,724                 |       | 950 |   | (1,924 | ) | 94,750 |   |
| Other debt  securities                 |       | 1,924                  |       | 4 |   | (103 | ) | 1,825 |   |
| Total debt securities                  |       | 158,916                |       | 954 |   | (5,228 | ) | 154,642 |   |
| Equity  securities                     |       | 23,575                 |       | 2,718 |   | (382 | ) | 25,911 |   |
| Total Investment  Securities AFS       |       | $                      | 182,491    |   | $ | 3,672 |   | $ | (5,610 | ) | $ | 180,553 |   |
|                                   |       |                   |       |   |   |   |   |   |   |
| Held to Maturity  (HTM)                |       |                   |       |   |   |   |   |   |   |
| U.S. Government  and agency securities |       | $                      | 27         |   | $ | 2 |   | $ | — |   | $ | 29 |   |
| Other debt  securities                 |       | 254                    |       | 1 |   | — |   | 255 |   |
| Total Investment  Securities HTM       |       | $                      | 281        |   | $ | 3 |   | $ | — |   | $ | 284 |   |

 
| ** **                             | ** ** | **December 31, 2005** | ** ** |
|----------------------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | ** **                 | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Amortized**              | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| **(In Thousands)**                     | ** ** | **Cost**                   | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| Available for  Sale (AFS)              |       |                       |       |   |   |   |   |   |   |
| U.S. Government  and agency securities |       | $                          | 65,496     |   | $ | 30 |   | $ | (1,573 | ) | $ | 63,953 |   |
| State and  political securities        |       | 93,769                     |       | 1,390 |   | (1,068 | ) | 94,091 |   |
| Other debt  securities                 |       | 1,750                      |       | 12 |   | (43 | ) | 1,719 |   |
| Total debt securities                  |       | 161,015                    |       | 1,432 |   | (2,684 | ) | 159,763 |   |
| Equity  securities                     |       | 24,715                     |       | 2,951 |   | (411 | ) | 27,255 |   |
| Total Investment  Securities AFS       |       | $                          | 185,730    |   | $ | 4,383 |   | $ | (3,095 | ) | $ | 187,018 |   |
|                                   |       |                       |       |   |   |   |   |   |   |
| Held to Maturity  (HTM)                |       |                       |       |   |   |   |   |   |   |
| U.S. Government  and agency securities |       | $                          | 28         |   | $ | 2 |   | $ | — |   | $ | 30 |   |
| Other debt  securities                 |       | 237                        |       | — |   | (29 | ) | 208 |   |
| Total Investment  Securities HTM       |       | $                          | 265        |   | $ | 2 |   | $ | (29 | ) | $ | 238 |   |

 

23

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# **Financing Activities**

# ** **

# **Deposits**

# ** **

Totaldeposits increased 6.9% or $24,415,000 from December 31, 2005 as bothinterest and noninterest bearing deposit categories increased from December 31,2005 to June 30, 2006. The mix of deposits has remained constant from December 31,2005 to June 30, 2006 with demand deposits holding steady at 19.7% oftotal deposits. During the second half of 2005 the Bank began utilizingbrokered deposits (time deposits) to supplement the funding of loanoriginations and investment purchases. These time deposits are generally for aterm of either four or thirteen weeks with interest rates presently at or belowthe cost of alternative funding sources, such as short term borrowinginstruments from the FHLB. The amount of brokered deposits is continuouslymonitored and is used to supplement deposits, not as a primary source ofdeposits.

 

# **Depositbalances and their changes for the periods being discussed follow:**

# ** **

| ** **                | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** | **Change** | ** ** |
|---------------------------|------------|------------------------|------------|----------------------------|------------|------------|------------|
| **(In Thousands)**        | ** ** | **Amount**             | ** ** | **% Total**                | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Demand deposits           |       | $                      | 74,310     |                       | 19.7       | %          | $          | 71,379 |   | 20.2 | % | $ | 2,931 |   | 4.1 | % |
| NOW Accounts              |       | 48,739                 |       | 12.9                       |       | 48,678     |       | 13.8 |   | 61 |   | 0.1 |   |
| Money market  deposits    |       | 23,712                 |       | 6.3                        |       | 24,446     |       | 6.9 |   | (734 | ) | (3.0 | ) |
| Savings deposits          |       | 59,619                 |       | 15.8                       |       | 61,906     |       | 17.6 |   | (2,287 | ) | (3.7 | ) |
| Time deposits             |       | 160,643                |       | 42.7                       |       | 137,373    |       | 39.0 |   | 23,270 |   | 16.9 |   |
| Time deposits -  brokered |       | 9,921                  |       | 2.6                        |       | 8,747      |       | 2.5 |   | 1,174 |   | 13.4 |   |
| Total deposits            |       | $                      | 376,944    |                       | 100.0      | %          | $          | 352,529 |   | 100.0 | % | $ | 24,415 |   | 6.9 | % |

# ** **

# **Borrowed Funds**

# ** **

Total borrowed fundsdecreased 10.6% to $123,803,000 at June 30, 2006 as compared to December 31,2005. The decrease in borrowed funds is the result of deposit growth thatoccurred primarily in time deposits since December 31, 2005. FHLBshort-term borrowings were utilized during the first six months of 2006;however, there were no such borrowings outstanding at June 30, 2006. Long-termborrowings declined due to a maturity of $1,600,000 that carried a fixed rateof 2.67%.

 
| ** **                                     | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(In Thousands)**                             | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Short-term  borrowings:                        |       |              |       |                  |       |
| FHLB repurchase  agreements                    |       | $                 | 25,085     |                  | $          | 1,740 |   |
| Short-term  borrowings, FHLB                   |       | —            |       | 37,000                |       |
| Securities sold  under agreement to repurchase |       | 15,840            |       | 15,263                |       |
| Total short-term  borrowings                   |       | 40,925            |       | 54,003                |       |
| Long-term  borrowings, FHLB                    |       | 82,878            |       | 84,478                |       |
| Total borrowed  funds                          |       | $                 | 123,803    |                  | $          | 138,481 |   |

 

24

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# **Capital**

# ** **

## The adequacy ofthe Company’s capital is reviewed on an ongoing basis with reference to thesize, composition, and quality of the Company’s resources and regulatoryguidelines. Management seeks to maintain a level of capital sufficient tosupport existing assets and anticipated asset growth, maintain favorable accessto capital markets, and preserve high quality credit ratings.

##  

## Bank holdingcompanies are required to comply with the Federal Reserve Board’s risk-basedcapital guidelines. The risk-based capital rules are designed to makeregulatory capital requirements more sensitive to differences in risk profilesamong banks and bank holding companies and to minimize disincentives forholding liquid assets. Specifically, each is required to maintain certainminimum dollar amounts and ratios of Total risk-based, Tier I risk-based, andTier I leverage capital requirements. In addition to the capital requirements,the Federal Deposit Insurance Corporation Improvements Act (FDICIA) establishedfive capital categories ranging from “well capitalized” to “criticallyundercapitalized.” To be classified as “well capitalized”, Total risk-based,Tier I risked-based, and Tier I leverage capital ratios must be at least 10%, 6%,and 5%, respectively.

##  

 

25

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Capitalratios as of June 30, 2006 and December 31, 2005 were as follows:

 
| ** **                             | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------------------------|------------|------------------------|------------|----------------------------|------------|
| **(In Thousands)**                     | ** ** | **Amount**             | ** ** | **Ratio**                  | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| Total Capital                          |       |                   |       |                       |       |   |   |   |   |
|   (to  Risk-weighted Assets) |       |                   |       |                       |       |   |   |   |   |
|                                   |       |                   |       |                       |       |   |   |   |   |
| Actual                                 |       | $                      | 72,212     |                       | 20.2       | % | $ | 73,210 |   | 21.0 | % |
| For Capital  Adequacy Purposes         |       | 28,552                 |       | 8.0                        |       | 27,937 |   | 8.0 |   |
| To Be Well  Capitalized                |       | 35,691                 |       | 10.0                       |       | 34,921 |   | 10.0 |   |
|                                   |       |                   |       |                       |       |   |   |   |   |
| Tier I Capital                         |       |                   |       |                       |       |   |   |   |   |
|   (to  Risk-weighted Assets) |       |                   |       |                       |       |   |   |   |   |
|                                   |       |                   |       |                       |       |   |   |   |   |
| Actual                                 |       | $                      | 67,162     |                       | 18.8       | % | $ | 68,388 |   | 19.6 | % |
| For Capital  Adequacy Purposes         |       | 14,276                 |       | 4.0                        |       | 13,968 |   | 4.0 |   |
| To Be Well  Capitalized                |       | 21,414                 |       | 6.0                        |       | 20,952 |   | 6.0 |   |
|                                   |       |                   |       |                       |       |   |   |   |   |
| Tier I Capital                         |       |                   |       |                       |       |   |   |   |   |
|   (to  Average Assets)       |       |                   |       |                       |       |   |   |   |   |
|                                   |       |                   |       |                       |       |   |   |   |   |
| Actual                                 |       | $                      | 67,162     |                       | 11.9       | % | $ | 68,388 |   | 12.2 | % |
| For Capital  Adequacy Purposes         |       | 22,603                 |       | 4.0                        |       | 22,495 |   | 4.0 |   |
| To Be Well  Capitalized                |       | 28,254                 |       | 5.0                        |       | 28,119 |   | 5.0 |   |

 

# **Liquidity and Interest Rate Sensitivity**

# ** **

## Theasset/liability committee addresses the liquidity needs of the Company to seethat sufficient funds are available to meet credit demands and depositwithdrawals as well as to the placement of available funds in the investment portfolio.In assessing liquidity requirements, equal consideration is given to thecurrent position as well as the future outlook.

##  

The following liquiditymeasures are monitored for compliance within the limits cited:

 

1. Net Loans to TotalAssets, 100% maximum

2. Net Loans to TotalDeposits, 100% maximum

3. Cumulative 90 dayMaturity GAP %, +/- 20% maximum

4. Cumulative 1 YearMaturity GAP %, +/- 20%, maximum

 

Fundamentalobjectives of the Company’s asset/liability management process are to maintainadequate liquidity while minimizing interest rate risk. The maintenance ofadequate liquidity provides the Company with the ability to meet its financialobligations to depositors, loan customers, and shareholders. Additionally, itprovides funds for normal operating expenditures

 

26

----

 

andbusiness opportunities as they arise. The objective of interest ratesensitivity management is to increase net interest income by managing interestsensitive assets and liabilities in such a way that they can be repriced inresponse 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 andoriginations, and expenses. In order to control cash flow, the Bank estimatesfuture flows of cash from deposits, loan payments, and investment securitypayments. The primary sources of funds are deposits, principal and interestpayments on loans and investment securities, as well as Federal Home Loan Bankborrowings. Management believes the Bank 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 and sources of funds are determined. Fundingstrategies consider both customer needs and economical cost. Both short andlong-term funding needs are addressed by maturities and sales of available forsale investment securities, loan repayments and maturities, and liquidatingmoney market investments such as federal funds sold. The use of theseresources, in conjunction with access to credit provides core ingredients tosatisfy depositor, borrower, and creditor needs.

 

Management monitors and determines the desirable level of liquidity. Considerationis given to loan demand, investment opportunities, deposit pricing and growthpotential, as well as the current cost of borrowing funds. The Company has acurrent borrowing capacity at the Federal Home Loan Bank of $217,357,000. Inaddition to this credit arrangement, the Company has additional lines of creditwith correspondent banks of $25,500,000. Management believes it has sufficientliquidity to satisfy estimated short-term and long-term funding needs. FederalHome Loan Bank borrowings totaled $107,963,000 as of June 30, 2006.

 

Interestrate sensitivity, which is closely related to liquidity management, is a functionof the repricing characteristics of the Company’s portfolio of assets andliabilities. Asset/liability management strives to match maturities and ratesbetween loan and investment security assets with the deposit liabilities andborrowings that fund them. Successful asset/liability management results in abalance sheet structure which can cope effectively with market ratefluctuations. The matching process is affected by segmenting both assets andliabilities into future time periods (usually 12 months, or less) based uponwhen 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. Intentional mismatching, or gapping, can enhance netinterest income if market rates move as predicted. However, if market ratesbehave in a manner contrary to predictions, net interest income will suffer. Gaps,therefore, contain an element of risk and must be prudently managed. Inaddition to gap management, the Company has an asset/liability managementpolicy which incorporates a market value at risk calculation which is used todetermine the effects of interest rate movements on shareholders’ equity and asimulation analysis to monitor the effects of interest rate changes on theCompany’s balance sheet.

 

27

----

 

Therehave been no substantial changes in the Company’s GAP analyses or simulationanalyses compared to the information provided in the Company’s Form 10-Kfor the period ended December 31, 2005.

 

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

 

# **Inflation**

# ** **

The asset and liabilitystructure of a financial institution is primarily monetary in nature. Therefore,interest rates rather than inflation have a more significant impact on theCompany’s performance. Interest rates are not always affected in the samedirection 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 risk and liquidity risk management isperformed at the Bank level as well as the Company level. The Company’sinterest rate sensitivity is monitored by management through selected interestrate risk measures produced by an independent third party. There have been nosubstantial changes in the Company’s GAP analyses or simulation analysescompared to the information provided in the Annual Report on Form 10-K forthe period ended December 31, 2005. 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.

 

**Item 4. Controls andProcedures**

 

An analysis was performed under thesupervision and with the participation of the Company’s management, includingthe Chief Executive Officer and the Principal Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures. Based on that evaluation, the Company’s Chief Executive Officerand Principal Financial Officer concluded that the Company’s disclosurecontrols and procedures were effective as of June 30, 2006. There were nochanges in the Company’s internal control over financial reporting thatoccurred during the quarter ended June 30, 2006, that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

28

----

 

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

### ** **

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

 

None.

 

**Item 1A.Risk Factors**

 

There are no materialchanges to the risk factors set forth in Part I, Item 1A, “Risk Factors,”of the Company’s Annual Report on Form 10-K for the year ended December 31,2005. Please refer to that section for disclosures regarding the risks anduncertainties related to the Company’s business.

 

**Item 2.****           Unregistered Sales ofEquity Securities and Use of Proceeds**

 

On April 25, 2006the Board of Directors authorized the repurchase of approximately 5% of theoutstanding shares of the Registrant. The repurchase plan is for a one yearperiod and allows for the repurchase of 197,000 shares of the 3,941,787 sharesoutstanding.

 

During the three monthsended June 30, 2006 there were 10,000 shares of the Company’s common stockrepurchased as part of a previously announced repurchase program.

 
| ** **                                 | ** ** | **Total**      | ** ** | **Average**    | ** ** | **Total Number of**           | ** ** | **Maximum Number (or**          | ** ** |
|--------------------------------------------|------------|----------------|------------|----------------|------------|-------------------------------|------------|---------------------------------|------------|
| ** **                                 | ** ** | **Number of**  | ** ** | **Price Paid** | ** ** | **Shares (or Units)**         | ** ** | **Approximate Dollar Value)**   | ** ** |
| ** **                                 | ** ** | **Shares (or** | ** ** | **per Share**  | ** ** | **Purchased as Part of** | ** ** | **of Shares (or Units) that**   | ** ** |
| ** **                                 | ** ** | **Units)**     | ** ** | **(or Units)** | ** ** | **Publicly Announced**        | ** ** | **May Yet Be Purchased**   | ** ** |
| **Period**                                 | ** ** | **Purchased**  | ** ** | **Purchased**  | ** ** | **Plans or Programs**         | ** ** | **Under the Plans or Programs** | ** ** |
|                                       |       |           |       |           |       |                          |       |                            |       |
| Month#1(April 1-April 30,  2006) |       | —         |       | —         |       | —                        |       | —                          |       |
|                                       |       |           |       |           |       |                          |       |                            |       |
| Month#2 (May 1-May 31,  2006)    |       | 5,000          |       | $              | 38.40      |                          | 5,000      |                            | 192,000    |   |
|                                       |       |           |       |           |       |                          |       |                            |       |   |
| Month#3 (June 1,-June 30,  2006) |       | 5,000          |       | 39.15          |       | 5,000                         |       | 187,000                         |       |

 

**Item 3.****           Defaults Upon SeniorSecurities**

 

None

 

**Item 4.****           Submission of Mattersto a Vote of Security Holders**

 

Penns Woods Bancorp, Inc.’sannual meeting of the shareholders was held on April 26, 2006. The resultsof the items voted on are listed below:

 

29

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| **Issue** | ** ** | **Description**                              |   | **For**   |   | **Withhold** |   |
|-----------|------------|----------------------------------------------|--------|-----------|--------|--------------|--------|
| 1.        |       | Election of  Directors for a Three Year Term |   |      |   |         |   |
|      |       |                                         |   |      |   |         |   |
|      |       | James M. Furey, II                      |   | 3,252,674 |   | 66,623       |   |
|      |       | Leroy H. Keiler, III                    |   | 3,288,226 |   | 31,071       |   |
|      |       | James E. Plummer                             |   | 3,255,468 |   | 63,829       |   |
|      |       | Hubert A.  Valencik                          |   | 3,136,949 |   | 182,348      |   |

 
| **Issue** | ** ** | **Description**                                                                           | ** ** | **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Vote** | ** ** |
|-----------|------------|-------------------------------------------------------------------------------------------|------------|-----------|------------|-------------|------------|-------------|------------|--------------|------------|
| 2.        |       | Proposal to Approve the Penns Woods Bancorp, Inc.  2006 Employee Stock Purchase Plan |       | 2,129,270 |       | 400,088     |       | 18,333      |       | 771,606      |       |

 
| **Issue** |   | **Description**                                                                            |   | **For**   | ** ** | **Against** | ** ** | **Abstain** |   |
|-----------|--------|--------------------------------------------------------------------------------------------|--------|-----------|------------|-------------|------------|-------------|--------|
| 3.        |   | Ratification of S.R. Snodgrass A.C., Certified  Public Accountants as independent auditors |   | 3,285,068 |       | 13,513      |       | 20,716      |   |

 

### **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(i) of the Registrant’s  Annual Report on Form 10-K for the year ended December 31, 2005).                                                              |
|----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3)  (ii) |   | Bylaws of the Registrant as presently in effect (incorporated by  reference to Exhibit 3 (ii) of the Registrant’s Current Report on Form 8-K  filed June 17, 2005).                                                                                                 |
| (10) (i)  |   | Form of First Amendment to the Jersey Shore State Bank Amendment  and Restatement of the Director Fee Agreement, dated as of October 1,  2004 (incorporated by reference to Exhibit 10.7 of the Registrant’s  Current Report on Form 8-K filed June 29, 2006). |
| (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.                                                                                                                                                                                                                             |

 

30

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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:  August 8,  2006 | /s/ Ronald A.  Walko                                                      |   |
|                                  | Ronald A. Walko,  President and Chief Executive Officer                   |
|                                  |                                                                      |
|                                  |                                                                      |
| Date:  August 8,  2006 | /s/ Brian L.  Knepp                                                       |   |
|                                  | Brian L. Knepp,  Vice President of Finance (Principal  Financial Officer) |
|                                       |                                                                           |        |  |

 

31

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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                             |

 

32

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