**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 
| **ý** | ** ** | **Quarterly  Report pursuant to Section 13 or 15 (d) of the Securities Exchange  Act of 1934 for the Quarterly Period Ended June 30, 2005,**                                                                                                                                                                                                                    |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                     |
| **o**      | ** ** | **Transition  report pursuant to Section 13 or 15 (d) of the Exchange Act for the  Transition Period from                 to                        .** |

 

**No. 0-17077**

(Commission File Number)

 

**PENNS WOODS BANCORP, INC.**

(Exact name of 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**           |
| (Address of principal executive offices)           |       | (Zip Code)          |

 

**(570) 322-1111**

Registrant’s telephonenumber, 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 ý                                                           NO o

 

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

YES ý                                                           NO o

 

On July 20, 2005there were 3,322,089 shares of the Registrant’s common stock outstanding.

 

 

----

 

**PENNS WOODS BANCORP, INC.**

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

 
| ** **                                                                                                                                  | **Page  Number** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------------|
| ** **                                                                                                                                  | ** **       |
| **Part I Financial Information**                                                                                                       | ** **       |
| ** **                                                                                                                                  | ** **       |
| **Item 1. Financial Statements**                                                                                                            | ** **       |
| ** **                                                                                                                                  | ** **       |
| Consolidated  Balance Sheet (unaudited) as of June 30, 2005 and December 31, 2004                                                 | 3                |
|                                                                                                                                        |             |
| Consolidated Statement of Income  (unaudited) for the Three and Six Months ended June 30, 2005 and 2004                                | 4                |
|                                                                                                                                        |             |
| Consolidated Statement of  Comprehensive Income (unaudited) For the Three and Six Months ended June 30,  2005 and 2004                 | 6                |
|                                                                                                                                        |             |
| Consolidated Statement of  Changes in Shareholders’ Equity (unaudited) for the Three and Six Months  ended June 30, 2005 and 2004 | 5                |
|                                                                                                                                        |             |
| Consolidated Statement of  Cash Flows (unaudited) for the Three and Six Months ended June 30, 2005  and 2004                           | 7                |
|                                                                                                                                        |             |
| Notes to Consolidated Financial Statements (unaudited)                                                                                      | 8-12             |
|                                                                                                                                        |             |
| **Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                                     | **13-28**        |
|                                                                                                                                        |             |
| **Item 3.  Quantitative and Qualitative Disclosures About Market Risk**                                                                     | **28**           |
| ** **                                                                                                                                  | ** **       |
| **Item 4. Controls  and Procedures**                                                                                                        | **28**           |
| ** **                                                                                                                                  | ** **       |
| **Part II Other  Information**                                                                                                         | **29**           |
| ** **                                                                                                                                  | ** **       |
| **Item 1. Legal  Proceedings**                                                                                                              | 29               |
| **Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds**                                                                    | 29               |
| **Item 3.  Defaults Upon Senior Securities**                                                                                                | 29               |
| **Item 4.  Submission of Matters to a Vote of Security Holders**                                                                            | 29               |
| **Item 5. Other  Information**                                                                                                              | 29               |
| **Item  6. Exhibits**                                                                                                                       | 29               |
| **Signatures**                                                                                                                              | 31               |
| **Exhibit Index  and Exhibits**                                                                                                        | 32               |

 

2

----

 

PENNS WOODS BANCORP, INC.

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 
| ** **                                                                                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(In Thousands, Except Share  Data)**                                                               | ** ** | **2005**          | ** ** | **2004**              | ** ** |
|                                                                                                 |       |              |       |                  |       |
| ASSETS:                                                                                              |       |              |       |                  |       |
| Noninterest-bearing balances                                                                         |       | $                 | 16,945     |                  | $          | 12,602 |   |
| Interest-bearing deposits in other financial  institutions                                           |       | 25                |       | 24                    |       |
| Total cash and cash equivalents                                                                      |       | 16,970            |       | 12,626                |       |
|                                                                                                 |       |              |       |                  |       |
| Investment securities, available for sale, at fair  value                                            |       | 203,400           |       | 184,163               |       |
| Investment securities held to maturity (fair value  of $286 and $561)                                |       | 268               |       | 558                   |       |
| Loans held for sale                                                                                  |       | 4,073             |       | 4,624                 |       |
| Loans, net of unearned discount of $1,055 and $1,096                                                 |       | 327,870           |       | 324,505               |       |
| Less: Allowance for loan and lease losses                                                            |       | 3,492             |       | 3,338                 |       |
| Loans, net                                                                                           |       | 331,362           |       | 327,843               |       |
|                                                                                                 |       |              |       |                  |       |
| Premises and equipment, net                                                                          |       | 5,851             |       | 4,882                 |       |
| Accrued interest receivable                                                                          |       | 2,342             |       | 2,246                 |       |
| Bank-owned life insurance                                                                            |       | 11,163            |       | 10,976                |       |
| Goodwill                                                                                             |       | 3,032             |       | 3,032                 |       |
| Other assets                                                                                         |       | 2,116             |       | 2,429                 |       |
| TOTAL ASSETS                                                                                         |       | $                 | 580,577    |                  | $          | 553,379 |   |
|                                                                                                 |       |              |       |                  |       |
| LIABILITIES:                                                                                         |       |              |       |                  |       |
| Interest-bearing deposits                                                                            |       | $                 | 310,187    |                  | $          | 282,786 |   |
| Noninterest-bearing deposits                                                                         |       | 72,087            |       | 74,050                |       |
| Total deposits                                                                                       |       | 382,274           |       | 356,836               |       |
|                                                                                                 |       |              |       |                  |       |
| Short-term borrowings                                                                                |       | 21,245            |       | 36,475                |       |
| Long-term borrowings, Federal Home Loan Bank(FHLB)                                                   |       | 84,478            |       | 75,878                |       |
| Accrued interest payable                                                                             |       | 1,050             |       | 850                   |       |
| Other liabilities                                                                                    |       | 8,751             |       | 3,499                 |       |
| TOTAL LIABILITIES                                                                                    |       | 497,798           |       | 473,538               |       |
|                                                                                                 |       |              |       |                  |       |
| SHAREHOLDERS’ EQUITY:                                                                           |       |              |       |                  |       |
| Common stock, par value $10.00, 10,000,000 shares  authorized; 3,332,399 and 3,331,837 shares issued |       | 33,324            |       | 33,318                |       |
| Additional paid-in capital                                                                           |       | 17,711            |       | 17,700                |       |
| Retained earnings                                                                                    |       | 20,714            |       | 18,262                |       |
| Accumulated other comprehensive gain                                                                 |       | 4,492             |       | 4,331                 |       |
| Less: Treasury stock at cost, 10,310 shares                                                          |       | (446              | )          | (446                  | )          |
| TOTAL SHAREHOLDERS’ EQUITY                                                                      |       | 75,795            |       | 73,165                |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                      |       | $                 | 573,593    |                  | $          | 546,703 |   |

 

See accompanying notes to the unaudited consolidatedfinancial statements.

 

3

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PENNSWOODS BANCORP, INC.

CONSOLIDATEDSTATEMENT OF INCOME

(UNAUDITED)

 
| ** **                                               | ** ** | **Three  Months Ended  June 30,** | ** ** | **Six Months  Ended  June 30,** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| **(In Thousands, Except Per Share  Data)**               | ** ** | **2005**                               | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                     |       |                                   |       |                                 |       |   |   |   |   |
| **INTEREST AND DIVIDEND INCOME:**                        |       |                                   |       |                                 |       |   |   |   |   |
| Loans including fees                                     |       | $                                      | 5,671      |                                 | $          | 5,137 |   | $ | 11,171 |   | $ | 10,028 |   |
| Investment Securities:                                   |       |                                   |       |                                 |       |   |   |   |   |
| Taxable                                                  |       | 1,214                                  |       | 1,782                                |       | 2,478 |   | 3,580 |   |
| Tax-exempt                                               |       | 688                                    |       | 320                                  |       | 1,277 |   | 711 |   |
| Dividend                                                 |       | 297                                    |       | 293                                  |       | 595 |   | 540 |   |
| **TOTAL INTEREST AND DIVIDEND INCOME**                   |       | 7,870                                  |       | 7,532                                |       | 15,521 |   | 14,859 |   |
|                                                     |       |                                   |       |                                 |       |   |   |   |   |
| **INTEREST EXPENSE:**                                    |       |                                   |       |                                 |       |   |   |   |   |
| Deposits                                                 |       | 1,420                                  |       | 1,182                                |       | 2,614 |   | 2,317 |   |
| Short-term borrowings                                    |       | 144                                    |       | 99                                   |       | 346 |   | 236 |   |
| Long-term borrowings                                     |       | 893                                    |       | 861                                  |       | 1,746 |   | 1,713 |   |
| **TOTAL INTEREST EXPENSE**                               |       | 2,457                                  |       | 2,142                                |       | 4,706 |   | 4,266 |   |
|                                                     |       |                                   |       |                                 |       |   |   |   |   |
| **NET INTEREST INCOME**                                  |       | 5,413                                  |       | 5,390                                |       | 10,815 |   | 10,593 |   |
|                                                     |       |                                   |       |                                 |       |   |   |   |   |
| **PROVISION FOR LOAN LOSSES**                            |       | 180                                    |       | 75                                   |       | 360 |   | 150 |   |
|                                                     |       |                                   |       |                                 |       |   |   |   |   |
| **NET INTEREST INCOME AFTER PROVISION  FOR LOAN LOSSES** |       | 5,233                                  |       | 5,315                                |       | 10,455 |   | 10,443 |   |
|                                                     |       |                                   |       |                                 |       |   |   |   |   |
| **NON-INTEREST INCOME:**                                 |       |                                   |       |                                 |       |   |   |   |   |
| Service charges                                          |       | 536                                    |       | 522                                  |       | 991 |   | 998 |   |
| Securities gains, net                                    |       | 687                                    |       | 583                                  |       | 1,298 |   | 1,128 |   |
| Bank-owned life insurance                                |       | 93                                     |       | 90                                   |       | 187 |   | 180 |   |
| Insurance commissions                                    |       | 652                                    |       | 545                                  |       | 1,295 |   | 1,159 |   |
| Other operating income                                   |       | 329                                    |       | 310                                  |       | 643 |   | 622 |   |
| **TOTAL NON-INTEREST INCOME**                            |       | 2,297                                  |       | 2,050                                |       | 4,414 |   | 4,087 |   |
|                                                     |       |                                   |       |                                 |       |   |   |   |   |
| **NON-INTEREST EXPENSES:**                               |       |                                   |       |                                 |       |   |   |   |   |
| Salaries and employee benefits                           |       | 2,173                                  |       | 1,886                                |       | 4,193 |   | 3,865 |   |
| Occupancy expense, net                                   |       | 286                                    |       | 230                                  |       | 577 |   | 473 |   |
| Furniture and equipment expense                          |       | 234                                    |       | 230                                  |       | 455 |   | 495 |   |
| Pennsylvania shares tax expense                          |       | 140                                    |       | 130                                  |       | 279 |   | 246 |   |
| Other operating expenses                                 |       | 1,054                                  |       | 977                                  |       | 2,004 |   | 1,847 |   |
| **TOTAL NON-INTEREST EXPENSES**                          |       | 3,887                                  |       | 3,453                                |       | 7,508 |   | 6,926 |   |
|                                                     |       |                                   |       |                                 |       |   |   |   |   |
| **INCOME BEFORE INCOME TAX PROVISION**                   |       | 3,643                                  |       | 3,912                                |       | 7,361 |   | 7,604 |   |
| **INCOME TAX PROVISION**                                 |       | 883                                    |       | 1,108                                |       | 1,886 |   | 2,127 |   |
| **NET INCOME**                                           |       | $                                      | 2,760      |                                 | $          | 2,804 |   | $ | 5,475 |   | $ | 5,477 |   |
|                                                     |       |                                   |       |                                 |       |   |   |   |   |
| **EARNINGS PER SHARE - BASIC**                           |       | $                                      | 0.83       |                                 | $          | 0.85 |   | $ | 1.65 |   | $ | 1.65 |   |
|                                                     |       |                                   |       |                                 |       |   |   |   |   |
| **EARNINGS PER SHARE - DILUTED**                         |       | $                                      | 0.83       |                                 | $          | 0.85 |   | $ | 1.65 |   | $ | 1.65 |   |
|                                                     |       |                                   |       |                                 |       |   |   |   |   |
| **WEIGHTED AVERAGE SHARES  OUTSTANDING-BASIC**           |       | 3,311,657                              |       | 3,319,445                            |       | 3,311,464 |   | 3,320,649 |   |
|                                                     |       |                                   |       |                                 |       |   |   |   |   |
| **WEIGHTED AVERAGE SHARES  OUTSTANDING-DILUTED**         |       | 3,313,546                              |       | 3,322,730                            |       | 3,313,483 |   | 3,324,063 |   |
|                                                     |       |                                   |       |                                 |       |   |   |   |   |
| **DIVIDNEDS PER SHARE**                                  |       | $                                      | 0.46       |                                 | $          | 0.35 |   | $ | 0.91 |   | $ | 0.70 |   |

 

**Seeaccompanying notes to the unaudited consolidated financial statements.**

 

4

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PENNSWOODS BANCORP, INC.

CONSOLIDATEDSTATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

 
| ** **                                                                                            | ** ** | **COMMON  STOCK** | ** ** | **ADDITIONAL  PAID-IN** | ** ** | **RETAINED** | ** ** | **ACCUMULATED  OTHER  COMPREHENSIVE** | ** ** | **TREASURY** | ** ** | **TOTAL  SHAREHOLDERS’** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------------|------------|--------------|------------|---------------------------------------|------------|--------------|------------|-------------------------------|------------|
| **(In Thousands Except Per Share Data)**                                                              | ** ** | **SHARES**        | ** ** | **AMOUNT**              | ** ** | **CAPITAL**  | ** ** | **EARNINGS**                          | ** ** | **INCOME**   | ** ** | **STOCK**                     | ** ** | **EQUITY** | ** ** |
| Balance, December 31, 2004                                                                       |       | 3,331,837         |       | $                       | 33,318     |         | $          | 17,700                                |       | $            | 18,262     |                          | $          | 4,331 |   | $ | (446 | ) | $ | 73,165 |   |
|                                                                                                  |       |              |       |                    |       |         |       |                                  |       |         |       |                          |       |   |   |
| Net income                                                                                            |       |              |       |                    |       |         |       | 5,475                                 |       |         |       |                          |       | 5,475 |   |
| Dividends declared, $0.91                                                                             |       |              |       |                    |       |         |       | (3,023                                | )          |         |       |                          |       | (3,023 | ) |
| Unrealized gain on available for sale securities, net  of reclassification adjustments and tax of $83 |       |              |       |                    |       |         |       |                                  |       | 161          |       |                          |       | 161 |   |
| Stock options exercised                                                                               |       | 562               |       | 6                       |       | 11           |       |                                  |       |         |       |                          |       | 17 |   |
| Balance, June 30, 2005                                                                           |       | 3,332,399         |       | $                       | 33,324     |         | $          | 17,711                                |       | $            | 20,714     |                          | $          | 4,492 |   | $ | (446 | ) | $ | 75,795 |   |

 

See accompanying notes to the unauditedconsolidated financial statements.

 
| ** **                                                                                     | ** ** | **COMMON  STOCK** | ** ** | **ADDITIONAL  PAID-IN** | ** ** | **RETAINED** | ** ** | **ACCUMULATED  OTHER  COMPREHENSIVE** | ** ** | **TREASURY** | ** ** | **TOTAL  SHAREHOLDERS’** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------------|------------|--------------|------------|---------------------------------------|------------|--------------|------------|-------------------------------|------------|
| ** **                                                                                     | ** ** | **SHARES**        | ** ** | **AMOUNT**              | ** ** | **CAPITAL**  | ** ** | **EARNINGS**                          | ** ** | **INCOME**   | ** ** | **STOCK**                     | ** ** | **EQUITY** | ** ** |
| Balance, December 31, 2003                                                                |       | 3,326,560         |       | $                       | 33,265     |         | $          | 17,559                                |       | $            | 13,022     |                          | $          | 6,132 |   | $ | (209 | ) | $ | 69,769 |   |
|                                                                                           |       |              |       |                    |       |         |       |                                  |       |         |       |                          |       |   |   |
| Net income for the six months ended June 30,  2004                                        |       |              |       |                    |       |         |       | 5,477                                 |       |         |       |                          |       | 5,477 |   |
| Dividends declared, $0.70                                                                      |       |              |       |                    |       |         |       | (2,324                                | )          |         |       |                          |       | (2,324 | ) |
| Treasury Stock acquired (3,000 shares)                                                         |       |              |       |                    |       |         |       |                                  |       |         |       | (130                          | )          | (130 | ) |
| Net change in unrealized gain on investments  available for sale, net of tax benefit of $2,362 |       |              |       |                    |       |         |       |                                  |       | (4,586       | )          |                          |       | (4,586 | ) |
| Stock options exercised                                                                        |       | 897               |       | 9                       |       | 22           |       |                                  |       |         |       |                          |       | 31 |   |
| Balance, June 30, 2004                                                                    |       | 3,327,457         |       | $                       | 33,274     |         | $          | 17,581                                |       | $            | 16,175     |                          | $          | 1,546 |   | $ | (339 | ) | $ | 68,237 |   |

 

See accompanying notes to theunaudited consolidated financial statements.

 

5

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PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

 
| ** **                                                                 | ** ** | **Three Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------|------------|
| **(In Thousands)**                                                         | ** ** | **2005**                             | ** ** | **2004** | ** ** |
|                                                                       |       |                                 |       |   |   |
| Net Income                                                                 |       | $                                    | 2,760      |   | $ | 2,804 |   |
| Other comprehensive income:                                                |       |                                 |       |   |   |
| Net unrealized gains (losses) on available for sale  securities            |       | 4,695                                |       | (6,558 | ) |
| Less: Reclassification adjustment for gain included  in net income         |       | 687                                  |       | 583 |   |
| Other comprehensive income (loss) before tax                               |       | 4,008                                |       | (7,141 | ) |
| Income tax expense (benefit) related to other  comprehensive income (loss) |       | 1,363                                |       | (2,428 | ) |
| Other comprehensive income (loss), net of tax                              |       | 2,645                                |       | (4,713 | ) |
| Comprehensive income (loss)                                                |       | $                                    | 5,405      |   | $ | (1,909 | ) |

 
| ** **                                                                 | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------|------------|
| **(In Thousands)**                                                         | ** ** | **2005**                           | ** ** | **2004** | ** ** |
|                                                                       |       |                               |       |   |   |
| Net Income                                                                 |       | $                                  | 5,475      |   | $ | 5,477 |   |
| Other comprehensive income:                                                |       |                               |       |   |   |
| Net unrealized gains (losses) on available for sale  securities            |       | 1,542                              |       | (5,820 | ) |
| Less: Reclassification adjustment for gain included  in net income         |       | 1,298                              |       | 1,128 |   |
| Other comprehensive income (loss) before tax                               |       | 244                                |       | (6,948 | ) |
| Income tax expense (benefit) related to other  comprehensive income (loss) |       | 83                                 |       | (2,362 | ) |
| Other comprehensive income (loss), net of tax                              |       | 161                                |       | (4,586 | ) |
| Comprehensive income                                                       |       | $                                  | 5,636      |   | $ | 891 |   |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

6

----

 

PENNS WOODS BANCORP, INC.

CONSOLIDATEDSTATEMENT OF CASH FLOWS

(UNAUDITED)

 
| ** **                                                                         | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| **(In Thousands)**                                                                 | ** ** | **2005**                            | ** ** | **2004** | ** ** |
|                                                                               |       |                                |       |   |   |
| OPERATING ACTIVITIES:                                                              |       |                                |       |   |   |
| Net Income                                                                         |       | $                                   | 5,475      |   | $ | 5,477 |   |
| Adjustments to reconcile net income to net cash provided  by operating activities: |       |                                |       |   |   |
| Depreciation                                                                       |       | 271                                 |       | 291 |   |
| Provision for loan losses                                                          |       | 360                                 |       | 150 |   |
| Accretion and amortization of investment security  discounts and premiums          |       | (202                                | )          | 15 |   |
| Securities gains, net                                                              |       | (1,298                              | )          | (1,128 | ) |
| Originations of loans held for sale                                                |       | (4,942                              | )          | (15,624 | ) |
| Proceeds of loans held for sale                                                    |       | 5,493                               |       | 15,269 |   |
| Earnings on bank-owned life insurance                                              |       | (187                                | )          | (180 | ) |
| Pension                                                                            |       | 307                                 |       | 327 |   |
| Other, net                                                                         |       | 239                                 |       | 333 |   |
| Net cash provided by operating activities                                          |       | 5,516                               |       | 4,930 |   |
| INVESTING ACTIVITIES:                                                              |       |                                |       |   |   |
| Investment securities available for sale:                                          |       |                                |       |   |   |
| Proceeds from sales                                                                |       | 88,475                              |       | 83,273 |   |
| Proceeds from calls and maturities                                                 |       | 7,132                               |       | 15,826 |   |
| Purchases                                                                          |       | (109,007                            | )          | (94,407 | ) |
| Investment securities held to maturity:                                            |       |                                |       |   |   |
| Proceeds from calls and maturities                                                 |       | 325                                 |       | 42 |   |
| Purchases                                                                          |       | (35                                 | )          | (14 | ) |
| Net increase in loans                                                              |       | (3,697                              | )          | (25,042 | ) |
| Acquisition of bank premises and equipment                                         |       | (1,240                              | )          | (359 | ) |
| Proceeds from the sale of foreclosed assets                                        |       | 67                                  |       | 144 |   |
| Proceeds from redemption of regulatory stock                                       |       | 2,692                               |       | 2,100 |   |
| Purchases of regulatory stock                                                      |       | (1,686                              | )          | (1,690 | ) |
| Net cash used in investing activities                                              |       | (16,974                             | )          | (20,127 | ) |
| FINANCING ACTIVITIES:                                                              |       |                                |       |   |   |
| Net increase in interest-bearing deposits                                          |       | 27,401                              |       | 33,037 |   |
| Net (decrease) increase in noninterest-bearing  deposits                           |       | (1,963                              | )          | 1,395 |   |
| Proceeds of long-term borrowings                                                   |       | 10,000                              |       | 5,000 |   |
| Repayment of long-term borrowings                                                  |       | (1,400                              | )          | — |   |
| Net decrease in short-term borrowings                                              |       | (15,230                             | )          | (20,781 | ) |
| Dividends paid                                                                     |       | (3,023                              | )          | (2,324 | ) |
| Stock options exercised                                                            |       | 17                                  |       | 31 |   |
| Purchase of treasury stock                                                         |       | —                              |       | (130 | ) |
| Net cash provided used in financing activities                                     |       | 15,802                              |       | 16,228 |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                          |       | 4,344                               |       | 1,031 |   |
| CASH AND CASH EQUIVALENTS, BEGINNING                                               |       | 12,626                              |       | 10,230 |   |
| CASH AND CASH EQUIVALENTS, ENDING                                                  |       | $                                   | 16,970     |   | $ | 11,261 |   |
|                                                                               |       |                                |       |   |   |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                 |       |                                |       |   |   |
|                                                                               |       |                                |       |   |   |
| Interest paid                                                                      |       | $                                   | 4,506      |   | $ | 4,243 |   |
| Income taxes paid                                                                  |       | $                                   | 2,050      |   | $ | 2,050 |   |
| Transfer of loans to foreclosed assets                                             |       | $                                   | 126        |   | $ | 90 |   |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

7

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

**NOTES TO**

**CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

# **NOTE 1.  Basisof 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-company balances and transactions have been eliminatedin the consolidation.**

# ** **

The interim financialstatements are unaudited but, in the opinion of management, reflect alladjustments necessary for the fair presentation of results for suchperiods.  All of those adjustments are ofa normal, recurring nature.  The resultsof operations for any interim period are not necessarily indicative of resultsfor the full year.  These financialstatements should be read in conjunction with financial statements and notesthereto contained in the Company’s annual report for the year ended December 31,2004.

 

**Recent Accounting Pronouncements**

 

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004), *Share-Based Payment*(FAS No. 123R). FAS No. 123R revised FAS No. 123, *Accounting for Stock-Based Compensation*, and supersedes APB Opinion No. 25, *Accounting for Stock Issued to Employees*, and its related implementation guidance.  FAS No. 123R will require compensation costs related to share-based payment transactions to be recognized in the financial statements (with limited exceptions).  The amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued.  FAS No. 123R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Compensation cost will be recognized over the period that an employee provides service in exchange for the award.  In April 2005, the Securities and Exchange Commission adopted a new rule that amends the compliance dates for FAS No. 123R.  The Company will adopt FAS No. 123R on January 1, 2006 and is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations.

 

InMarch 2005, the Securities and Exchange Commission (“SEC”) issued StaffAccounting Bulletin No. 107 (“SAB No. 107”), *Share-Based Payment*, providing guidance on option valuationmethods, the accounting for income tax effects of share-based paymentarrangements upon adoption of FAS No. 123R, and the disclosures inMD&A subsequent to the adoption. The Company will provide SAB No. 107required disclosures upon adoption of FAS No. 123R on January 1,2006 and is currently evaluating the impact the adoption of the standard willhave on the Company’s financial condition, results of operations, and cashflows.

 

8

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InDecember 2004, FASB issued FAS No. 153, *Exchanges ofNonmonetary**Assets - An Amendment ofAPB Opinion No. 29*. The guidance in APB Opinion No. 29, *Accounting for Nonmonetary Transactions*, is based on theprinciple that exchanges of nonmonetary assets should be measured based on thefair value of the assets exchanged. The guidance in that Opinion, however,included certain exceptions to that principle. FAS No. 153 amends Opinion No. 29to eliminate the exception for nonmonetary exchanges of similar productiveassets and replaces it with a general exception for exchanges of nonmonetaryassets that do not have commercial substance. A nonmonetary exchange hascommercial substance if the future cash flows of the entity are expected tochange significantly as a result of the exchange. The provisions of FAS No. 153are effective for nonmonetary asset exchanges occurring in fiscal periodsbeginning after June 15, 2005. Early application is permitted andcompanies must apply the standard prospectively. The adoption of this standardis not expected to have a material effect on the Company’s results ofoperations or financial condition.

 

In June 2005, the FASBissued FAS No. 154, *Accounting Changes andErrors Corrections, a replacement of APB Opinion No. 20 and FAS No. 3*.  The Statement applies to all voluntarychanges in accounting principle, and changes the requirements for accountingfor and reporting of a change in accounting principle. FAS No. 154requires retrospective application to prior periods’ financial statements of avoluntary change in accounting principle unless it is impractical.  APB Opinion No. 20 previously requiredthat most voluntary changes in accounting principle be recognized by includingin net income of the period of the change the cumulative effect of changing tothe new accounting principle.  FAS No.154is intended to improve  financialreporting because its requirements enhance the consistency of financialreporting between periods.

 

**NOTE 2. Per Share Data**

 

The following table sets forth the composition of theweighted average common shares (denominator) used in the basic and dilutive pershare computation.  There are noconvertible securities which would affect the numerator in calculating basicand diluted earnings per share, therefore, net income as presented on theconsolidated statement of income will be used as the numerator.  

 

9

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| ** **                                                                                                     | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                     | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                           |       |                                 |       |                               |       |   |   |   |   |
| Weighted average common shares outstanding                                                                     |       | 3,321,967                            |       | 3,327,445                          |       | 3,321,774 |   | 3,327,380 |   |
|                                                                                                           |       |                                 |       |                               |       |   |   |   |   |
| Average treasury stock shares                                                                                  |       | (10,310                              | )          | (8,000                             | )          | (10,310 | ) | (6,731 | ) |
|                                                                                                           |       |                                 |       |                               |       |   |   |   |   |
| Weighted average common shares and common stock  equivalents used to calculate basic earnings per share   |       | 3,311,657                            |       | 3,319,445                          |       | 3,311,464 |   | 3,320,649 |   |
|                                                                                                           |       |                                 |       |                               |       |   |   |   |   |
| Additional common stock equivalents (stock options)  used to calculate diluted earnings per share         |       | 1,889                                |       | 3,285                              |       | 2,019 |   | 3,414 |   |
|                                                                                                           |       |                                 |       |                               |       |   |   |   |   |
| Weighted average common shares and common stock  equivalents used to calculate diluted earnings per share |       | 3,313,546                            |       | 3,322,730                          |       | 3,313,483 |   | 3,324,063 |   |

 

Options to purchase 8,107 shares of common stock at theprice of $48.35 were outstanding during the three and six months ended June 30,2005 and 8,713 shares of common stock at the price of $48.35 were outstandingfor the three and six months ended June 30, 2004, but were not included inthe computation of diluted earnings per share as they were anti-dilutive due tothe strike price being greater than the market price as of the end of thequarter.

 

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

 

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 2004 AnnualReport on Form 10-K.

 

The following sets forth thecomponents of net periodic benefit cost of the domestic non-contributorydefined benefit plan for the three and six months ended June 30, 2005 and2004,  respectively.

 
| ** **                             | ** ** | **Three  Months Ended** | ** ** | **Six Months  Ended** | ** ** |
|----------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **June 30,**       | ** ** | **June 30,**     | ** ** |
| ** **                             | ** ** | **2005**                | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                   |       |                    |       |                  |       |   |   |   |   |
| Service cost                           |       | $                       | 127        |                  | $          | 120 |   | $ | 254 |   | $ | 233 |   |
| Interest cost                          |       | 113                     |       | 93                    |       | 225 |   | 199 |   |
| Expected return on plan  assets        |       | (95                     | )          | (80                   | )          | (190 | ) | (164 | ) |
| Amortization of transition  obligation |       | —                  |       | —                |       | (1 | ) | (1 | ) |
| Amortization of prior  service cost    |       | 7                       |       | 7                     |       | 13 |   | 13 |   |
| Amortization of net (gain)  loss       |       | 17                      |       | 7                     |       | 33 |   | 21 |   |
| Net periodic cost                      |       | $                       | 169        |                  | $          | 147 |   | $ | 334 |   | $ | 301 |   |

 

10

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**Employer Contributions**

 

The Company previouslydisclosed in its consolidated financial statements included in the 2004 AnnualReport on Form 10-K that it expected to contribute $575,000 to its definedbenefit plan in 2005.  As of June 30, 2005, contributions of $206,000have been made.  The Company presentlyanticipates contributing an additional $369,000 to fund its pension plan in2005 for a total of $575,000.

 

**Note 4.  Off Balance Sheet Risk**

 

The Company is a party to financial instruments withoff-balance sheet risk in the normal course of business to meet the financingneeds of its customers.  These financialinstruments include commitments to extend credit and standby letters of credit.  These instruments involve, to varying degrees,elements of credit, interest rate or liquidity risk in excess of the amountrecognized in the consolidated balance sheet. The contract amounts of these instruments express the extent ofinvolvement the Company has in 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 credit policies in making commitments andconditional obligations as it does for on-balance sheet instruments.

 

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

 

Financial instruments whose contract amounts representcredit risk are as follows:

 
| ** **                   | ** ** | **June 30,**  | ** ** |
|------------------------------|------------|--------------------|------------|
| ** **                   | ** ** | **(in thousands)** | ** ** |
| ** **                   | ** ** | **2005**           | ** ** | **2004** | ** ** |
| Commitments to extend credit |       | $                  | 56,177     |   | $ | 49,524 |   |
| Standby letters of credit    |       | 1,520              |       | 786 |   |
|                              |            |                    |            |  |  |  |  |

 

# **Note 5. 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.

 

**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 Company wishes to caution readers thatthe following important factors, among others, may have affected and could inthe future affect the Company’s actual results and could cause the Company’sactual results for subsequent periods to differ materially from those expressedin any forward-looking statement made by or on behalf of the Companyherein:  (i) the effect of changesin laws and regulations, including federal and state

 

11

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banking laws andregulations, 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  increasing consolidation within the bankingand financial services industries, including the increased competition fromlarger regional and out-of-state banking organizations as well as non-bankproviders of various financial services; (iv) the effect of changes ininterest rates; and (v) the effect of changes in the business cycle anddownturns in the local, regional or national economies.

 

12

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

 

# **EARNINGSSUMMARY**

##  

**Comparisonof the Three and Six Months Ended June 30, 2005 and 2004**

 

**SummaryResults**

 

Net income for the threemonths ended June 30, 2005 was $2,760,000 compared to $2,804,000 for the sameperiod of 2004.  Basic and dilutedearnings per share for the three months ended June 30, 2005 were $0.83 ascompared to $0.85 for the three months ended June 30, 2004.  Return on average assets and return onaverage equity were 2.02% and 14.81% for the three months ended June 30, 2005as compared to 2.10% and 15.99% for the corresponding period of 2004.  Net income from core operations for the threemonths ended June 30, 2005, excluding after-tax net securities gains of$453,000, decreased to $2,307,000 from $2,419,000 for the three months endedJune 30, 2004.

 

The six months ended June30, 2005 generated net income of $5,475,000 compared to $5,477,000 for the sameperiod of 2004.  Earnings per share,basic and diluted, for the six months ended June 30, 2005 and 2004 were$1.65.  Return on average assets andreturn on average equity were 2.02% and 14.68% for the six months ended June30, 2005 as compared to 2.07% and 15.44% for the corresponding period of 2004.  Net income from core operations for the sixmonths ended June 30, 2005, excluding after-tax securities gains of $857,000,declined to $4,618,000 from $4,733,000 for the six months ended June 30, 2004.  (Management uses the non-GAAP measure of netincome from core operations in its analysis of the Company’s performance.  This measure, as used by the Company, adjustsnet income for significant gains or losses, for any investments, loans, orother assets sales.  The impact of these itemsthat result in significant gains or losses on the Company’s performance aredifficult to predict, as such management believes the additional presentationof financial measures excluding the impact of such items provides usefulsupplemental information in evaluating the operating results of the Company’score businesses.  These disclosuresshould not be viewed as a substitute for financial performance measures basedon net income in accordance with GAAP, nor are they necessarily comparable tonon-GAAP performance measures that may be presented by other companies.)

 

**InterestIncome**

 

Duringthe second quarter of 2005, total interest and dividend income was $7,870,000,an increase of $338,000 over the same quarter in 2004.  The increase in total interest and dividendincome was primarily the result of a change in the mix of earning assets overthe periods being compared.  Over thistime frame the average balance of investment securities declined $29,265,000while average loans increased $29,974,000. In addition, the investment portfolio continued to shift from taxablemortgage-backed securities to tax-exempt municipal bonds. The shift in earningassets increased loan interest and fee income by $534,000 while decreasinginterest and dividend income on investment securities by $196,000.  However, on a taxable equivalent basis, theshift in the investment portfolio resulted in a slight decrease of $7,000,comparing the second quarter of 2005 to the second quarter of 2004,

 

13

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despitea decline in average balance in excess of $29 million.  This shift within the investment securitiesportfolio was undertaken to better manage cash flows, maintain the interestmargin, and to invest at the community level. The increase in dividends received is the result of an increase in thelevel of dividends from the Federal Home Loan Bank of Pittsburgh coupled withan emphasis on purchasing stocks consistently having an above average dividendyield.

 

Duringthe six months ended June 30, 2005, total interest and dividend income was$15,521,000, an increase of $662,000 over the same period in 2004.  The increase in total interest income wasprimarily the result of a change in the mix of earning assets over the periodsbeing compared.  The average balance ofinvestment securities declined $33,434,000 while average loans increased$38,859,000 when comparing the six month periods of 2005 and 2004.  In addition, the investment portfoliocontinued to shift from taxable mortgage-backed securities to tax-exempt municipalbonds. The shift in earning assets increased loan interest and fee income by$1,143,000 while decreasing interest and dividend income on investmentsecurities by $481,000.  On a taxableequivalent basis, the shift in the investment portfolio resulted in a decreaseof $190,000 and an average balance decrease in excess of $33 million from thefirst half of 2004 to the first half of 2005.

 

Interestincome composition for the three and six months ended June 30, 2005 and 2004 isas follows:

 
| ** **              | ** ** | **For The Three Months Ended** | ** ** |
|-------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **June 30, 2005**              | ** ** | **June 30, 2004** | ** ** | **Change** | ** ** |
| **(In Thousands)**      | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** |
| Loans including  fees   |       | $                              | 5,671      |   | 72.1 | % | $ | 5,137 |   | 68.2 | % | $ | 534 |   | 10.4 | % |
| Investment  securities: |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                 |       | 1,214                          |       | 15.4 |   | 1,782 |   | 23.7 |   | (568 | ) | (31.9 | ) |
| Tax-exempt              |       | 688                            |       | 8.7 |   | 320 |   | 4.2 |   | 368 |   | 115.0 |   |
| Dividend                |       | 297                            |       | 3.8 |   | 293 |   | 3.9 |   | 4 |   | 1.4 |   |
| Total interest  income  |       | $                              | 7,870      |   | 100.0 | % | $ | 7,532 |   | 100.0 | % | $ | 338 |   | 4.5 | % |

 

 
| ** **              | ** ** | **For The Six Months Ended** | ** ** |
|-------------------------|------------|------------------------------|------------|
| ** **              | ** ** | **June 30, 2005**            | ** ** | **June 30, 2004** | ** ** | **Change** | ** ** |
| **(In Thousands)**      | ** ** | **Amount**                   | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** |
| Loans including  fees   |       | $                            | 11,171     |   | 72.0 | % | $ | 10,028 |   | 67.5 | % | $ | 1,143 |   | 11.4 | % |
| Investment  securities: |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                 |       | 2,478                        |       | 16.0 |   | 3,580 |   | 24.1 |   | (1,102 | ) | (30.8 | ) |
| Tax-exempt              |       | 1,277                        |       | 8.2 |   | 711 |   | 4.8 |   | 566 |   | 79.6 |   |
| Dividend                |       | 595                          |       | 3.8 |   | 540 |   | 3.6 |   | 55 |   | 10.2 |   |
| Total interest  income  |       | $                            | 15,521     |   | 100.0 | % | $ | 14,859 |   | 100.0 | % | $ | 662 |   | 4.5 | % |

 

**InterestExpense**

 

Interestexpense during the second quarter of 2005 increased $315,000 to $2,457,000 from$2,142,000 for the second quarter of 2004. The increased expense associated with deposits is primarily the resultof rate increases for money market and time deposit accounts from the secondquarter of 2004 to the corresponding period of 2005.  Factors that led to the rate increasesinclude, but are not limited to, prime rate increases, competitive pressure,attracting municipal deposits, and a time deposit campaign run in conjunctionwith the opening of the North Atherton

 

14

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Street,State College branch discussed in more detail under “Net Interest Margin”below.  Short-term borrowing costsincreased due to a 225 basis point increase in the federal funds rate over thepast year.  This increase affected therate paid on FHLB overnight borrowings, FHLB short-term borrowings, and therate paid to customers utilizing repurchase agreements.  Long-term FHLB borrowing expense increasedslightly due to a $10 million increase in borrowing from the FHLB at a fixedrate of 3.97% for 5 years with a final maturity of 10 years.  This borrowing replaced long-term debt thatmatured at the end of the first quarter of 2005, and was used to pay off aportion of the short-term borrowings with FHLB.

 

Interestexpense for the six months ended June 30, 2005 increased $440,000 to $4,706,000from $4,266,000 for the comparable period of 2004.  The majority of the increase, $315,000,occurred during the second quarter as discussed above.  These rate increases also impact the ratepaid on all borrowings as illustrated by the $143,000 increase in interest paidon borrowings, despite average borrowings decreasing $1,207,000 for therespective six month periods ending June 30, 2005 and 2004.

 

Interestexpense composition for the three and six months ended June 30, 2005 and 2004is as follows:

 
| ** **              | ** ** | **For The Three Months Ended** | ** ** |
|-------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **June 30, 2005**              | ** ** | **June 30, 2004** | ** ** | **Change** | ** ** |
| **(In Thousands)**      | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** |
| Deposits                |       | $                              | 1,420      |   | 57.8 | % | $ | 1,182 |   | 55.2 | % | $ | 238 |   | 20.1 | % |
| Short-term  borrowings  |       | 144                            |       | 5.9 |   | 99 |   | 4.6 |   | 45 |   | 45.5 |   |
| Long-term  borrowings   |       | 893                            |       | 36.3 |   | 861 |   | 40.2 |   | 32 |   | 3.7 |   |
| Total interest  expense |       | $                              | 2,457      |   | 100.0 | % | $ | 2,142 |   | 100.0 | % | $ | 315 |   | 14.7 | % |

 
| ** **              | ** ** | **For The Six Months Ended** | ** ** |
|-------------------------|------------|------------------------------|------------|
| ** **              | ** ** | **June 30, 2005**            | ** ** | **June 30, 2004** | ** ** | **Change** | ** ** |
| **(In Thousands)**      | ** ** | **Amount**                   | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** |
| Deposits                |       | $                            | 2,614      |   | 55.5 | % | $ | 2,317 |   | 54.3 | % | $ | 297 |   | 12.8 | % |
| Short-term  borrowings  |       | 346                          |       | 7.4 |   | 236 |   | 5.5 |   | 110 |   | 46.6 |   |
| Long-term  borrowings   |       | 1,746                        |       | 37.1 |   | 1,713 |   | 40.2 |   | 33 |   | 1.9 |   |
| Total interest  expense |       | $                            | 4,706      |   | 100.0 | % | $ | 4,266 |   | 100.0 | % | $ | 440 |   | 10.3 | % |

 

**Net Interest Margin**

 

Thenet interest margin (NIM) for the three months ended June 30, 2005 was 4.58% ascompared to 4.41% for the corresponding period of 2004.  The increase in the NIM was the result of theyield on earning assets increasing 41 basis points (bp) to 6.53% for the threemonths ended June 30, 2005 as compared to 2004 offset by a 33 bp increase ininterest bearing liabilities over the same period.  The increase in the yield on earning assetsis attributable to a change in the mix of earning assets from taxableinvestment securities to loans and tax-exempt investment securities. Over thetime periods being compared, total average loans, yielding 7.03%, increased$29,974,000, while the investment securities portfolio, yielding 5.63%, averagebalance declined $29,265,000.   The NIMimpact of the earning asset mix improvement and volume increase in total loanswere partially offset by rate increases on interest bearing liabilities.  The rates paid on deposit accounts increasedto 1.93% as compared to 1.62% for the 2004 period.  This increase

 

15

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wasdriven by growth in time deposits of $16,749,000 and an increase in the ratepaid on time deposits to 2.92% from 2.58% for the three months ended June 30,2004.  A portion of the increase involume and rate is due to a time deposit campaign that was run in conjunctionwith the opening of the North Atherton Street, State College branch.  The campaign was centered on 13 and 17 monthterm time deposits with rates slightly above market.  Short-term borrowings incurred a rateincrease of 114 bp to 2.68% for the three months ended June 30, 2005 as theprime rate increased to 6.25% at June 30, 2005.

 

Followingis a schedule of average balances and associated yields for the three monthperiods ended June 30, 2005 and 2004:

 
| ** **                          | ** ** | **AVERAGE  BALANCES AND INTEREST RATES** | ** ** |
|-------------------------------------|------------|------------------------------------------|------------|
| ** **                          | ** ** | **Three  Months Ended  6/30/2005**       | ** ** | **Three  Months Ended  6/30/2004** | ** ** |
| ** **                          | ** ** | **Average  Balance**                     | ** ** | **Interest** | ** ** | **Average  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Rate** | ** ** |
|                                |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Tax-exempt loans                    |       | $                                        | 4,119      |   | $ | 35 |   | 3.41 | % | $ | 1,388 |   | $ | 22 |   | 6.29 | % |
| All other loans                     |       | 320,020                                  |       | 5,648 |   | 7.08 | % | 292,777 |   | 5,123 |   | 7.02 | % |
| Total loans                         |       | 324,139                                  |       | 5,683 |   | 7.03 | % | 294,165 |   | 5,145 |   | 7.02 | % |
|                                |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| US Treasury                         |       | 93,539                                   |       | 1,164 |   | 4.98 | % | 150,444 |   | 1,748 |   | 4.65 | % |
| State &  Political              |       | 61,406                                   |       | 1,042 |   | 6.79 | % | 27,119 |   | 485 |   | 7.15 | % |
| Other                               |       | 26,546                                   |       | 347 |   | 5.23 | % | 33,193 |   | 327 |   | 3.94 | % |
| Total securities                    |       | 181,491                                  |       | 2,553 |   | 5.63 | % | 210,756 |   | 2,560 |   | 4.86 | % |
|                                |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets      |       | 505,630                                  |       | 8,236 |   | 6.53 | % | 504,921 |   | 7,705 |   | 6.12 | % |
|                                |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Other assets                        |       | 38,166                                   |       |   |   |   |   | 29,573 |   |   |   |   |   |
|                                |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Total assets                        |       | $                                        | 543,796    |   |   |   |   |   | $ | 534,494 |   |   |   |   |   |
|                                |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Savings                             |       | $                                        | 65,912     |   | 126 |   | 0.77 | % | $ | 70,127 |   | 144 |   | 0.82 | % |
| Super Now  deposits                 |       | 51,571                                   |       | 111 |   | 0.86 | % | 55,618 |   | 96 |   | 0.69 | % |
| Money market  deposits              |       | 30,252                                   |       | 106 |   | 1.41 | % | 35,325 |   | 97 |   | 1.10 | % |
| Time deposits                       |       | 148,078                                  |       | 1,077 |   | 2.92 | % | 131,329 |   | 845 |   | 2.58 | % |
| Total Deposits                      |       | 295,813                                  |       | 1,420 |   | 1.93 | % | 292,399 |   | 1,182 |   | 1.62 | % |
|                                |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Short-term  borrowings              |       | 21,566                                   |       | 144 |   | 2.68 | % | 25,786 |   | 99 |   | 1.54 | % |
| Other borrowings                    |       | 75,754                                   |       | 893 |   | 4.73 | % | 75,878 |   | 861 |   | 4.55 | % |
| Total interest  bearing liabilities |       | 393,133                                  |       | $ | 2,457 |   | 2.51 | % | 394,063 |   | $ | 2,142 |   | 2.18 | % |
|                                |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                     |       | 68,784                                   |       |   |   |   |   | 66,103 |   |   |   |   |   |
| Other liabilities                   |       | 7,344                                    |       |   |   |   |   | 4,205 |   |   |   |   |   |
| Shareholders’  equity          |       | 74,535                                   |       |   |   |   |   | 70,123 |   |   |   |   |   |
|                                |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
|                                |       | $                                        | 543,796    |   |   |   |   |   | $ | 534,494 |   |   |   |   |   |
| Interest rate  spread               |       |                                     |       |   |   | 4.02 | % |   |   |   |   | 3.93 | % |
| Net interest  income/margin         |       |                                     |       | $ | 5,779 |   | 4.58 | % |   |   | $ | 5,563 |   | 4.41 | % |

 

•                  Informationon this table has been calculated using average daily balance sheets to obtainaverage balances.

•                  Nonaccrualloans have been included with loans for the purpose of analyzing net interestearnings.

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

 

The NIM for the six months ended June 30,2005 was 4.56% as compared to 4.40% for the corresponding period of 2004.  The increase in the NIM was the result of theyield on earning assets increasing 33 bp to 6.44% for the six months ended June30, 2005 as compared to 2004 offset by a 21 bp increase in interest bearingliabilities over the same period.  Theincrease in the yield on earning assets is attributable to a change in the mixof earning assets.  Over the time

 

16

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periods being compared, total average loansincreased $38,859,000, while the lower yielding investment securities portfolioaverage balance decreased $33,434,000. In addition, within the investment portfolio, average tax-exemptinvestment securities accounted for 30.7% of the portfolio for the six monthsended June 30, 2005 as compared to 14.0% during the comparable period of2004.  The NIM impact of the earningasset mix improvement and volume increase in total loans was reduced by rateincreases on interest bearing liabilities. The rates paid on deposit accounts increased by 18 bp to 1.82% ascompared to 1.64% for the 2004 period as the average balance in time depositsincreased $8,932,000 while the rate paid increased to 2.83% from 2.62% for thesix months ended June 30, 2005. Short-term borrowings increased 92 bp to 2.40% for the six months endedJune 30, 2005 as the prime rate has increased to 6.25% from 4.00% over the timeperiods being compared.

 

Followingis a schedule of average balances and associated yields for the six monthperiods ended June 30, 2005 and 2004:

 
| ** **                          | ** ** | **AVERAGE  BALANCES AND INTEREST RATES** | ** ** |
|-------------------------------------|------------|------------------------------------------|------------|
| ** **                          | ** ** | **Six  Months Ended  6/30/2005**         | ** ** | **Six  Months Ended  6/30/2004** | ** ** |
| ** **                          | ** ** | **Average  Balance**                     | ** ** | **Interest** | ** ** | **Average  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Rate** | ** ** |
|                                |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Tax-exempt loans                    |       | $                                        | 1,869      |   | $ | 57 |   | 6.15 | % | $ | 1,417 |   | $ | 43 |   | 6.10 | % |
| All other loans                     |       | 323,617                                  |       | 11,133 |   | 6.94 | % | 285,210 |   | 10,000 |   | 7.05 | % |
| Total Loans                         |       | 325,486                                  |       | 11,190 |   | 6.93 | % | 286,627 |   | 10,043 |   | 7.05 | % |
|                                |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| US Treasury                         |       | 97,508                                   |       | 2,399 |   | 4.92 | % | 150,219 |   | 3,516 |   | 4.68 | % |
| State &  Political              |       | 55,370                                   |       | 1,933 |   | 6.98 | % | 30,049 |   | 1,078 |   | 7.17 | % |
| Other                               |       | 27,645                                   |       | 675 |   | 4.88 | % | 33,689 |   | 603 |   | 3.58 | % |
| Total securities                    |       | 180,523                                  |       | 5,007 |   | 5.55 | % | 213,957 |   | 5,197 |   | 4.86 | % |
|                                |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets      |       | 506,009                                  |       | 16,197 |   | 6.44 | % | 500,584 |   | 15,240 |   | 6.11 | % |
|                                |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Other assets                        |       | 36,419                                   |       |   |   |   |   | 28,867 |   |   |   |   |   |
|                                |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Total assets                        |       | $                                        | 542,428    |   |   |   |   |   | $ | 529,451 |   |   |   |   |   |
|                                |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Savings                             |       | $                                        | 66,418     |   | 257 |   | 0.78 | % | $ | 69,117 |   | 284 |   | 0.83 | % |
| Super Now  deposits                 |       | 52,533                                   |       | 218 |   | 0.84 | % | 49,243 |   | 150 |   | 0.61 | % |
| Money market deposits               |       | 31,400                                   |       | 197 |   | 1.27 | % | 35,382 |   | 194 |   | 1.10 | % |
| Time deposits                       |       | 138,576                                  |       | 1,942 |   | 2.83 | % | 129,644 |   | 1,689 |   | 2.62 | % |
| Total Deposits                      |       | 288,927                                  |       | 2,614 |   | 1.82 | % | 283,386 |   | 2,317 |   | 1.64 | % |
|                                |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Short-term  borrowings              |       | 29,242                                   |       | 346 |   | 2.39 | % | 32,387 |   | 236 |   | 1.47 | % |
| Other borrowings                    |       | 77,101                                   |       | 1,746 |   | 4.57 | % | 75,163 |   | 1,713 |   | 4.58 | % |
| Total interest  bearing liabilities |       | 395,270                                  |       | $ | 4,706 |   | 2.40 | % | 390,936 |   | $ | 4,266 |   | 2.19 | % |
|                                |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                     |       | 68,571                                   |       |   |   |   |   | 62,899 |   |   |   |   |   |
| Other liabilities                   |       | 4,017                                    |       |   |   |   |   | 4,685 |   |   |   |   |   |
| Shareholders’  equity          |       | 74,570                                   |       |   |   |   |   | 70,931 |   |   |   |   |   |
|                                |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
|                                |       | $                                        | 542,428    |   |   |   |   |   | $ | 529,451 |   |   |   |   |   |
| Interest rate  spread               |       |                                     |       |   |   | 4.04 | % |   |   |   |   | 3.92 | % |
| Net interest  income/margin         |       |                                     |       | $ | 11,491 |   | 4.56 | % |   |   | $ | 10,974 |   | 4.40 | % |

 

•                  Informationon this table has been calculated using average daily balance sheets to obtainaverage balances.

•                  Nonaccrualloans have been included with loans for the purpose of analyzing net interestearnings.

•                  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.

 

17

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The followingtable presents the adjustment to convert net interest income to net interestincome on a fully taxable equivalent basis for the three and six month periodsended June 30, 2005 and 2004.

 

| ** **                                      | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|
| ** **                                      | ** ** | **2005**                                 | ** ** | **2004**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                            |       |                                     |       |                                   |       |   |   |   |   |
| Total interest  income                          |       | $                                        | 7,870      |                                   | $          | 7,532 |   | $ | 15,521 |   | $ | 14,859 |   |
| Total interest  expense                         |       | 2,457                                    |       | 2,142                                  |       | 4,706 |   | 4,266 |   |
|                                            |       |                                     |       |                                   |       |   |   |   |   |
| Net interest  income                            |       | $                                        | 5,413      |                                   | $          | 5,390 |   | $ | 10,815 |   | $ | 10,593 |   |
| Tax equivalent  adjustment                      |       | 366                                      |       | 173                                    |       | 676 |   | 381 |   |
|                                            |       |                                     |       |                                   |       |   |   |   |   |
| Net interest  income (fully taxable equivalent) |       | $                                        | 5,779      |                                   | $          | 5,563 |   | $ | 11,491 |   | $ | 10,974 |   |

 

# **The following table sets forththe respective impact that both volume and rate changes have had on netinterest income and the net interest margin for the three and six month periodsended June 30, 2005 and 2004:**

 
| ** **                          | ** ** | **For the Three Months Ended June 30,**       | ** ** | **For the Six Months Ended June 30,**         | ** ** |
|-------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                          | ** ** | **2005 vs 2004  Increase (Decrease)  Due to** | ** ** | **2005 vs 2004  Increase (Decrease)  Due to** | ** ** |
| **(In Thousands)**                  | ** ** | **Volume**                                    | ** ** | **Rate**                                      | ** ** | **Net** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Net** | ** ** |
| **Interest  income:**               |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |
| Loans                               |       | $                                             | 508        |                                          | $          | 30 |   | $ | 538 |   | $ | 1,338 |   | $ | (191 | ) | $ | 1,147 |   |
| Taxable  investment securities      |       | (773                                          | )          | 209                                           |       | (564 | ) | (1,410 | ) | 365 |   | (1,045 | ) |
| Tax-exempt  investment securities   |       | 583                                           |       | (27                                           | )          | 556 |   | 885 |   | (31 | ) | 854 |   |
| Total  interest-earning assets      |       | 318                                           |       | 212                                           |       | 530 |   | 813 |   | 143 |   | 956 |   |
|                                |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |
| **Interest  expenses:**             |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |
| Savings deposits                    |       | (14                                           | )          | (4                                            | )          | (18 | ) | (12 | ) | (15 | ) | (27 | ) |
| Super Now  deposits                 |       | (7                                            | )          | 22                                            |       | 15 |   | 9 |   | 59 |   | 68 |   |
| Money Market deposits               |       | (15                                           | )          | 24                                            |       | 9 |   | (23 | ) | 26 |   | 3 |   |
| Time deposits                       |       | (651                                          | )          | 883                                           |       | 232 |   | 54 |   | 199 |   | 253 |   |
| Short-term  borrowings              |       | (15                                           | )          | 60                                            |       | 45 |   | (25 | ) | 135 |   | 110 |   |
| Long-term  borrowings               |       | (1                                            | )          | 33                                            |       | 32 |   | 42 |   | (9 | ) | 33 |   |
| Total  interest-bearing liabilities |       | (703                                          | )          | 1,018                                         |       | 315 |   | 45 |   | 395 |   | 440 |   |
|                                |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |
| Change in net  interest income      |       | $                                             | 1,021      |                                          | $          | (806 | ) | $ | 215 |   | $ | 768 |   | $ | (252 | ) | $ | 516 |   |

 

# **Provisionand Allowance for Loan Losses**

 

Theprovision for loan losses is based upon management’s quarterly review of theloan portfolio.  The purpose of thereview is to assess loan quality, identify impaired loans, analyzedelinquencies, ascertain loan growth, evaluate potential charge-offs andrecoveries, and assess general economic conditions in the markets served.  An external independent loan review is alsoperformed annually for the Bank. Management remains committed to an aggressive program of problem loanidentification and resolution.

 

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

 

18

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Although managementbelieves it uses the best information available to make such determinations andthat the allowance for loan losses is adequate at June 30, 2005, futureadjustments could be necessary if circumstances or economic conditions differsubstantially from the assumptions used in making the initialdeterminations.  A downturn in the localeconomy, increased unemployment, and delays in receiving financial informationfrom borrowers could result in increased levels of nonperforming assets andcharge-offs, increased loan loss provisions, and reductions in income.  Additionally, as an integral part of theexamination process, bank regulatory agencies periodically review the Bank’sloan loss allowance.  The bankingagencies could require the recognition of additions to the loan loss allowancebased on their judgment of information available to them at the time of theirexamination.

 

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

 

The allowance for loanlosses increased from $3,338,000 at December 31, 2004 to $3,492,000 at June 30,2005.  At June 30, 2005, the allowancefor loan losses was 1.05% of total loans compared to 1.01% of total loans atDecember 31, 2004.  Management’sconclusion is that the allowance for loan losses is adequate to provide for probable losses inherent inthe loan portfolio as of the balance sheet date.

 

The provision for loanlosses totaled $180,000 and $360,000 for the three and six months ended June30, 2005 compared to $75,000 and $150,000 the same periods in 2004.  The increases were the result of gross loangrowth of $26,817,000, primarily in the commercial category, from June 2004 toJune 2005.

 

As of June 30, 2005, nonaccrual loans totaled $816,000, an overall decrease of $564,000 from December31, 2004.  This decrease was due to aforeclosure in the commercial category. This decrease was due to the foreclosure in the commercial category.

 

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

 

**Non-interestIncome**

 

Totalnon-interest income for the quarter ended June 30, 2005 compared to the sameperiod in 2004 increased $247,000. Excluding net securities gains, the increase from period to period was$143,000.  Insurance commissionsincreased as The M Group continued to gather new and build upon existing relationships.  The M Group’s growth of business is a directresult of business referrals and a calling program geared toward the communityfinancial institution.  In conjunctiontherewith, The M Group continues to strategically add service representativesfor each geographic market that the Company has expanded into.   Service charges on deposit accountsincreased due to the implementation of a Bounce Protection product during May2005.  This product provides overdraftprotection up to a

 

19

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predeterminedamount to non-commercial customers.  Feesare charged when such customer transactions occur.

 

Non-interestincome composition for the three months ended June 30, 2005 and 2004 is asfollows:

 
| ** **                          | ** ** | **For The Three Months Ended** | ** ** |
|-------------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **June 30, 2005**              | ** ** | **June 20, 2004** | ** ** | **Change** | ** ** |
| **(In Thousands)**                  | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** |
| Service charge  on deposit accounts |       | $                              | 536        |   | 23.3 | % | $ | 522 |   | 25.5 | % | $ | 14 |   | 2.7 | % |
| Net security  gains                 |       | 687                            |       | 30.0 |   | 583 |   | 28.4 |   | 104 |   | 17.8 |   |
| Bank owned life  insurance          |       | 93                             |       | 4.0 |   | 90 |   | 4.4 |   | 3 |   | 3.3 |   |
| Insurance  commissions              |       | 652                            |       | 28.4 |   | 545 |   | 26.6 |   | 107 |   | 19.6 |   |
| Other income                        |       | 329                            |       | 14.3 |   | 310 |   | 15.1 |   | 19 |   | 6.1 |   |
| Total  non-interest income          |       | $                              | 2,297      |   | 100.0 | % | $ | 2,050 |   | 100.0 | % | $ | 247 |   | 12.0 | % |

 

Totalnon-interest income for the six months ended June 30, 2005 compared to the sameperiod in 2004 increased $327,000. Excluding net securities gains, the increase from period to period was$157,000.  Insurance commissionsrepresented the majority of the increase as The M Group continued to expand interms of customer base and geographic area

 

Non-interestincome composition for the six months ended June 30, 2005 and 2004 is asfollows:

 
| ** **                          | ** ** | **For The Six Months Ended** | ** ** |
|-------------------------------------|------------|------------------------------|------------|
| ** **                          | ** ** | **June 30, 2005**            | ** ** | **June 20, 2004** | ** ** | **Change** | ** ** |
| **(In Thousands)**                  | ** ** | **Amount**                   | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** |
| Service charge  on deposit accounts |       | $                            | 991        |   | 22.5 | % | $ | 998 |   | 24.4 | % | $ | (7 | ) | (0.7 | )% |
| Net security  gains                 |       | 1,298                        |       | 29.4 |   | 1,128 |   | 27.6 |   | 170 |   | 15.1 |   |
| Bank owned life  insurance          |       | 187                          |       | 4.2 |   | 180 |   | 4.4 |   | 7 |   | 3.9 |   |
| Insurance  commissions              |       | 1,295                        |       | 29.3 |   | 1,159 |   | 28.4 |   | 136 |   | 11.7 |   |
| Other income                        |       | 643                          |       | 14.6 |   | 622 |   | 15.2 |   | 21 |   | 3.4 |   |
| Total  non-interest income          |       | $                            | 4,414      |   | 100.0 | % | $ | 4,087 |   | 100.0 | % | $ | 327 |   | 8.0 | % |

 

**Non-interestExpenses**

 

Totalnon-interest expenses increased $434,000 from the three months ended June 30,2004 as compared to the same period of 2005. The increase in salaries and employee benefits was attributable toseveral items, including: standard cost of living salary increases foremployees, staffing for the new State College branch, and increased accrualsrelated to incentive payments.  Occupancyexpenses increased due to the new branch and due to general increases inutility costs, property taxes, and depreciation.  Advertising costs increased 30% from June 30,2005 due to opening of a new branch in State College.  Other expenses increased primarily due tonormal increases in business expenses and expenses surrounding the opening ofthe new branch.

 

20

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Non-interestexpense composition for the three months ended June 30, 2005 and 2004 is asfollows:

 
| ** **                        | ** ** | **For The Three Months Ended** | ** ** |
|-----------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **June 30, 2005**              | ** ** | **June 20, 2004** | ** ** | **Change** | ** ** |
| **(In Thousands)**                | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** |
| Salaries and  employee benefits   |       | $                              | 2,173      |   | 55.8 | % | $ | 1,886 |   | 54.6 | % | $ | 287 |   | 15.2 | % |
| Occupancy  expense, net           |       | 286                            |       | 7.4 |   | 230 |   | 6.7 |   | 56 |   | 24.3 |   |
| Furniture and  equipment expenses |       | 234                            |       | 6.0 |   | 230 |   | 6.7 |   | 4 |   | 1.7 |   |
| Advertising  expense              |       | 115                            |       | 3.0 |   | 88 |   | 2.5 |   | 27 |   | 30.7 |   |
| Pennsylvania  shares tax          |       | 140                            |       | 3.6 |   | 130 |   | 3.8 |   | 10 |   | 7.7 |   |
| Other expense                     |       | 939                            |       | 24.2 |   | 889 |   | 25.7 |   | 50 |   | 5.6 |   |
| Total  non-interest expense       |       | $                              | 3,887      |   | 100.0 | % | $ | 3,453 |   | 100.0 | % | $ | 434 |   | 12.6 | % |

 

Totalnon-interest expenses increased $582,000 from the six months ended June 30,2004 as compared to the same period of 2005. As noted in the three month discussion, the new State College branchimpacted the level of non-interest expenses. In addition, normal increases in business expenses aided the increase inoccupancy and other expenses.  Furnitureand equipment expenses declined as amortization of software, depreciation ofequipment, and maintenance on equipment declined as compared to the 2004 period.

 

Non-interestexpense composition for the six months ended June 30, 2005 and 2004 is asfollows:

 
| ** **                        | ** ** | **For The Six Months Ended** | ** ** |
|-----------------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **June 30, 2005**            | ** ** | **June 20, 2004** | ** ** | **Change** | ** ** |
| **(In Thousands)**                | ** ** | **Amount**                   | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** |
| Salaries and  employee benefits   |       | $                            | 4,193      |   | 55.8 | % | $ | 3,865 |   | 55.8 | % | $ | 328 |   | 8.5 | % |
| Occupancy  expense, net           |       | 577                          |       | 7.7 |   | 473 |   | 6.8 |   | 104 |   | 22.0 |   |
| Furniture and  equipment expenses |       | 455                          |       | 6.1 |   | 495 |   | 7.1 |   | (40 | ) | (8.1 | ) |
| Advertising  expense              |       | 209                          |       | 2.8 |   | 173 |   | 2.5 |   | 36 |   | 20.8 |   |
| Pennsylvania  shares tax          |       | 279                          |       | 3.7 |   | 246 |   | 3.6 |   | 33 |   | 13.4 |   |
| Other expense                     |       | 1,795                        |       | 23.9 |   | 1,674 |   | 24.2 |   | 121 |   | 7.2 |   |
| Total  non-interest expense       |       | $                            | 7,508      |   | 100.0 | % | $ | 6,926 |   | 100.0 | % | $ | 582 |   | 8.4 | % |

 

**Provisionfor Income Taxes**

 

Incometaxes decreased $225,000 and $241,000 for the three and six month periods endedJune 30, 2005 compared to the same periods of 2004.  The effective tax rates for the three monthsended June 30, 2005 and 2004 were 24.2% and 28.3%, respectively.  The six months ended June 30, 2005 had aneffective tax rate of 25.6% as compared to 28.0% for the comparable period of2004.  The decreasing effective tax rateis consistent with management’s repositioning of the investment portfolio fromtaxable investment securities to tax-exempt investment securities.

 

21

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# **ASSET/LIABILITYMANAGEMENT**

 

# **Cash**

 

Cash and cash equivalentsincreased $4,344,000 from $12,626,000 at December 31, 2004.  The increase was the result of an increase inthe cash letter (items in process of clearing between the bank and otherfinancial institutions).

 

**Loans**

 

## Total gross loansincreased $3,366,000 to $327,870,000 at June 30, 2005 from December 31,2004.  The increase is the result ofincreases in the commercial and agriculture, commercial real estate, realestate construction, and installment loans to individuals partially offset by adecrease in residential real estate mortgages. The shift is caused by non warehousing of most residential mortgages andthe desire to grow the commercial portfolio.

 

The allocation of the loan portfolio, by category,as of June 30, 2005 and December 31, 2004 is presented below:

 
| **(In Thousands)**                | ** ** | **June 30  2005** | ** ** | **December 31  2004** | ** ** |
|-----------------------------------|------------|-------------------|------------|-----------------------|------------|
| Commercial and  agricultural      |       | $                 | 33,371     |                  | $          | 30,103 |   |
| Real estate  mortgage:            |       |              |       |                  |       |
| Residential                       |       | 142,362           |       | 147,461               |       |
| Commercial                        |       | 125,825           |       | 123,757               |       |
| Construction                      |       | 10,420            |       | 8,364                 |       |
| Installment  loans to individuals |       | 16,947            |       | 15,915                |       |
| Less: Net  deferred loan fees     |       | 1,055             |       | 1,096                 |       |
| Gross loans                       |       | $                 | 327,870    |                  | $          | 324,504 |   |

 

**Investments**

 

Totalinvestment securities increased $18,947,000 as deposit growth in excess of loangrowth funded the purchase of tax-exempt investment securities.  Since December 31, 2004, tax-exempt bondholdings have increased $43,540,000 as the cash flows from mortgage-backedinvestment

 

22

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securitiescoupled with deposit growth funded the increase. The growth in tax-exemptinvestment securities was strategically driven by the overall tax equivalentyields available for these instruments versus those yields available fortaxable alternatives.

 

Duringthe six months ended June 30, 2005, $1,298,000 in net securities gains wererecognized from the $6,563,000 in net unrealized gains at December 31, 2004 forthe entire investment portfolio.  Thebond portfolio incurred a net realized gain of $53,000 as a result of therealignment of the portfolio in light of the current rising rate environmentand the desire to increase the use of investment securities as a vehicle tomanage the overall earning asset tax equivalent yield and to reduce theeffective corporate tax rate.  The equityportfolio had recognized gains of $1,245,000 during the six months ended June30, 2005.  The recognized gains were theresult of management’s strategy to diversify, based in part on an entity’sdividend and operational performance potential.

 

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

 
| ** **                             | ** ** | **June 30, 2005**   | ** ** |
|----------------------------------------|------------|---------------------|------------|
| **(In Thousands)**                     | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
| Available for  Sale (AFS)              |       |                |       |   |   |   |   |   |   |
| U.S. Government  and agency securities |       | $                   | 82,959     |   | $ | 506 |   | $ | (19 | ) | $ | 83,446 |   |
| State and  political securities        |       | 87,891              |       | 2,799 |   | (82 | ) | 90,608 |   |
| Other debt  securities                 |       | 1,426               |       | 27 |   | (40 | ) | 1,413 |   |
| Total debt  securities                 |       | 172,276             |       | 3,332 |   | (141 | ) | 175,467 |   |
| Equity  securities                     |       | 24,317              |       | 3,849 |   | (233 | ) | 27,933 |   |
| Total Investment  Securities AFS       |       | $                   | 196,593    |   | $ | 7,181 |   | $ | (374 | ) | $ | 203,400 |   |
|                                   |       |                |       |   |   |   |   |   |   |
| Held to Maturity  (HTM)                |       |                |       |   |   |   |   |   |   |
| U.S. Government  and agency securities |       | $                   | 31         |   | $ | 3 |   | $ | — |   | $ | 34 |   |
| Other debt  securities                 |       | 237                 |       | 15 |   | — |   | 252 |   |
| Total Investment  Securities HTM       |       | $                   | 268        |   | $ | 18 |   | $ | — |   | $ | 286 |   |

 
| ** **                             | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| **(In Thousands)**                     | ** ** | **Amortized  Cost**   | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
| Available for  Sale (AFS)              |       |                  |       |   |   |   |   |   |   |
| U.S. Government  and agency securities |       | $                     | 104,248    |   | $ | 207 |   | $ | (430 | ) | $ | 104,025 |   |
| State and  political securities        |       | 46,829                |       | 766 |   | (527 | ) | 47,068 |   |
| Other debt  securities                 |       | 1,302                 |       | 47 |   | (7 | ) | 1,342 |   |
| Total debt securities                  |       | 152,379               |       | 1,020 |   | (964 | ) | 152,435 |   |
| Equity  securities                     |       | 25,221                |       | 6,579 |   | (72 | ) | 31,728 |   |
| Total Investment  Securities AFS       |       | $                     | 177,600    |   | $ | 7,599 |   | $ | (1,036 | ) | $ | 184,163 |   |
|                                   |       |                  |       |   |   |   |   |   |   |
| Held to Maturity  (HTM)                |       |                  |       |   |   |   |   |   |   |
| U.S. Government  and agency securities |       | $                     | 32         |   | $ | — |   | $ | — |   | $ | 32 |   |
| State and  political securities        |       | 248                   |       | 3 |   | — |   | 251 |   |
| Other debt  securities                 |       | 278                   |       | — |   | — |   | 278 |   |
| Total Investment  Securities HTM       |       | $                     | 558        |   | $ | 3 |   | $ | — |   | $ | 561 |   |

 

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| ** **                             | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| **(In Thousands)**                     | ** ** | **Amortized  Cost**   | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
| Available for  Sale (AFS)              |       |                  |       |   |   |   |   |   |   |
| U.S. Government  and agency securities |       | $                     | 104,248    |   | $ | 207 |   | $ | (430 | ) | $ | 104,025 |   |
| State and  political securities        |       | 46,829                |       | 766 |   | (527 | ) | 47,068 |   |
| Other debt  securities                 |       | 1,302                 |       | 47 |   | (7 | ) | 1,342 |   |
| Total debt  securities                 |       | 152,379               |       | 1,020 |   | (964 | ) | 152,435 |   |
| Equity  securities                     |       | 25,221                |       | 6,579 |   | (72 | ) | 31,728 |   |
| Total Investment  Securities AFS       |       | $                     | 177,600    |   | $ | 7,599 |   | $ | (1,036 | ) | $ | 184,163 |   |
|                                   |       |                  |       |   |   |   |   |   |   |
| Held to Maturity  (HTM)                |       |                  |       |   |   |   |   |   |   |
| U.S. Government  and agency securities |       | $                     | 32         |   | $ | — |   | $ | — |   | $ | 32 |   |
| State and  political securities        |       | 248                   |       | 3 |   | — |   | 251 |   |
| Other debt  securities                 |       | 278                   |       | — |   | — |   | 278 |   |
| Total Investment  Securities HTM       |       | $                     | 558        |   | $ | 3 |   | $ | — |   | $ | 561 |   |

 

# **Deposits**

 

AtJune 30, 2005, total deposits were $382,274,000, an increase of $25,438,000from December 31, 2004.  Time depositsincreased by approximately $30 million as a result of efforts made to succeedin obtaining short term municipal funds as well as a certificate of depositpromotion conducted in conjunction with the opening of a new office in StateCollege, Pennsylvania.

# ** **

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

 
| ** **         | ** ** | **June 30, 2005** | ** ** | **December 31, 2004** | ** ** | **Change** | ** ** |
|--------------------|------------|-------------------|------------|-----------------------|------------|------------|------------|
| **(In Thousands)** | ** ** | **Amount**        | ** ** | **% Total**           | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** |
| Demand deposits    |       | $                 | 72,087     |                  | 18.9       | %          | $          | 74,050 |   | 20.8 | % | $ | (1,963 | ) | (2.7 | )% |
| NOW Accounts       |       | 54,977            |       | 14.4                  |       | 55,211     |       | 15.5 |   | (234 | ) | (0.4 | ) |
| Insured MMDA       |       | 29,745            |       | 7.8                   |       | 32,377     |       | 9.1 |   | (2,632 | ) | (8.1 | ) |
| Savings deposits   |       | 70,073            |       | 18.3                  |       | 69,807     |       | 19.6 |   | 266 |   | 0.4 |   |
| Time deposits      |       | 155,392           |       | 40.6                  |       | 125,391    |       | 35.0 |   | 30,001 |   | 23.9 |   |
| Total deposits     |       | $                 | 382,274    |                  | 100.0      | %          | $          | 356,836 |   | 100.0 | % | $ | 25,438 |   | 7.1 | % |

 

**Borrowed Funds**

 

Total borrowed fundsdecreased to $105,873,000 at June 30, 2005 as compared to December 31,2004.  The decrease of $6,630,000 was theresult of decreased reliance on short-term overnight funding due to depositgrowth coupled with a maturity of a long-term borrowing of $1,400,000.  Short-term borrowings are being utilized asan alternative source of funds to deposits, and are

 

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used for short terminvesting and lending purposes. Long-term borrowings have increased in order tolock in future borrowing costs in light of the current rising rate environment.

 
| **(In Thousands)**                             | ** ** | **June 30  2005** | ** ** | **December 31  2004** | ** ** |
|------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| Short-term  borrowings:                        |       |              |       |                  |       |
| FHLB repurchase  agreements                    |       | $                 | 4,965      |                  | $          | 22,630 |   |
| Securities sold  under agreement to repurchase |       | 16,280            |       | 13,845                |       |
| Total short-term  borrowings                   |       | 21,245            |       | 36,475                |       |
|                                           |       |              |       |                  |       |
| Long-term  borrowings, FHLB                    |       | 84,478            |       | 75,878                |       |
| Total borrowed  funds                          |       | $                 | 105,723    |                  | $          | 112,353 |   |

 

# **Capital**

 

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

 

## Bank holding companiesare required to comply with the Federal Reserve Board’s risk-based capitalguidelines.  The risk-based capital rulesare designed to make regulatory capital requirements more sensitive todifferences in risk profiles among banks and bank holding companies and tominimize disincentives for holding liquid assets.  Specifically, each is required to maintaincertain minimum dollar amounts and ratios of Total risk-based, Tier Irisk-based, and Tier I leverage capital requirements. In addition to thecapital requirements, the Federal Deposit Insurance Corporation ImprovementsAct (FDICIA) established five capital categories ranging from “well capitalized”to “critically undercapitalized.” To be classified as “well capitalized”, Totalrisk-based, Tier I risked-based and Tier I leverage capital ratios must be atleast 10%, 6%, and 5%, respectively.  As of June 30, 2005 and 2004, Penns WoodsBancorp, Inc. was well capitalized.

 

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Capitalratios as of June 30, 2005 and 2004 were as follows:

 
| ** **                                | ** ** | **2005**   | ** ** | **2004**  | ** ** |
|-------------------------------------------|------------|------------|------------|-----------|------------|
| **(In Thousands)**                        | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| Total Capital  (to Risk-weighted Assets)  |       |       |       |      |       |   |   |   |   |
|                                      |       |       |       |      |       |   |   |   |   |
| Actual                                    |       | $          | 73,376     |      | 21.5       | % | $ | 68,360 |   | 22.1 | % |
| For Capital  Adequacy Purposes            |       | 27,301     |       | 8.0       |       | 24,749 |   | 8.0 |   |
| To Be Well  Capitalized                   |       | 34,126     |       | 10.0      |       | 30,937 |   | 10.0 |   |
|                                      |       |       |       |      |       |   |   |   |   |
| Tier I Capital  (to Risk-weighted Assets) |       |       |       |      |       |   |   |   |   |
|                                      |       |       |       |      |       |   |   |   |   |
| Actual                                    |       | $          | 68,257     |      | 20.0       | % | $ | 62,792 |   | 20.3 | % |
| For Capital  Adequacy Purposes            |       | 13,650     |       | 4.0       |       | 12,375 |   | 4.0 |   |
| To Be Well  Capitalized                   |       | 21,075     |       | 6.0       |       | 18,562 |   | 6.0 |   |
|                                      |       |       |       |      |       |   |   |   |   |
| Tier I Capital  (to Average Assets)       |       |       |       |      |       |   |   |   |   |
|                                      |       |       |       |      |       |   |   |   |   |
| Actual                                    |       | $          | 68,257     |      | 12.8       | % | $ | 62,792 |   | 11.9 | % |
| For Capital  Adequacy Purposes            |       | 21,547     |       | 4.0       |       | 21,179 |   | 4.0 |   |
| To Be Well  Capitalized                   |       | 26,934     |       | 5.0       |       | 26,474 |   | 5.0 |   |

 

# **Liquidityand Interest Rate Sensitivity**

 

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

 

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

 

1.  Net Loans to Total Assets,  70% maximum

 

2.  Net Loans to Total Deposits, 92.5% maximum

 

3.  Net Loans to Core Deposits, 100% maximum

 

4.  Investments to Total Assets, 40% maximum

 

5.  Investments to Total Deposits, 50% maximum

 

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

 

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

 

8.  Net CoreFunding Dependence, 35% maximum

 

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

 

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

 

Managementmonitors the Company’s liquidity on both a long and short-term basis, therebyproviding management necessary information to react to current balance sheettrends.  Cash flow needs are assessed andsources of funds are determined.  Fundingstrategies consider both customer needs and cost.  Both short-term and long-term funding needsare addressed by maturities and sales of available for sale investmentsecurities, loan repayments and maturities, and liquidating money marketinvestments such as federal funds sold. The use of these resources, in conjunction with access to creditprovides core ingredients to satisfy depositor, borrower, and creditor needs.

 

Federal Home Loan Bankadvances totaled $89,443,000 as of June 30, 2005.  The Company has a current borrowing capacity at the Federal Home LoanBank of $246,755,000.  In addition to this credit arrangement, theCompany has additional lines of credit with correspondent banks of $10,500,000.Management believes that it has sufficient liquidity to satisfy estimatedshort-term and long-term funding needs.

 

Interestrate sensitivity, which is closely related to liquidity management, is afunction of the repricing characteristics of the Company’s portfolio of assetsand liabilities.  Asset/liabilitymanagement strives to match maturities and rates between loan and investmentsecurity assets with the deposit liabilities and borrowings that fund them.  Successful asset/liability management resultsin a balance 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.  Repriceableassets are subtracted from repriceable liabilities, for a specific time periodto determine the “gap”, or difference. Once known, the gap is managed based onpredictions about future market interest rates. Intentional mismatching, or gapping, can enhance net interest income ifmarket rates move as predicted.  However,if market rates behave in a manner contrary to predictions, net interest

 

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incomewill suffer.  Gaps, therefore, contain anelement of risk and must be prudently managed. In addition to gap management, the Company has an asset/liabilitymanagement policy which incorporates a market value at risk calculation whichis used to determine the effects of interest rate movements on shareholders’equity and a simulation analysis to monitor the effects of interest ratechanges on the Company’s balance sheets.

 

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

 

Generally,management believes the Company is well positioned to respond 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 thaninflation have a more significant impact on the Company’s performance.  Interest rates are not always affected in thesame direction or magnitude as prices of other goods and services, but arereflective of fiscal policy initiatives or economic factors which are notmeasured by a price index.

 

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

 

**Item3.  Quantitative and QualitativeDisclosure About Market Risk**

 

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

 

Generally,management believes the Company is positioned to respond in a timely manner ifthe market interest rate environment changes.

 

**Item 4.  Controls and Procedures**

 

An analysis was performed under the supervision and with theparticipation of the Company’s management, including the Chief ExecutiveOfficer and the Principal Accounting Officer, of the effectiveness of the designand operation of the Company’s disclosure controls and procedures. Based onthat evaluation, the Company’s Chief Executive Officer and Principal AccountingOfficer concluded that the Company’s disclosure controls and procedures wereeffective as of

 

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June 30, 2005. There has been no change in the Company’s internalcontrol over financial reporting that occurred during the quarter ended June30, 2005, that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

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

 

**Item 1. Legal Proceedings**

 

None.

 

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

 

The Company announced arepurchase program on August 10, 2000 which was approved by the Board ofDirectors on August 8, 2000 for the repurchase of 171,600 shares which was setto expire on August 8, 2005.  However, onJuly 27, 2005, the Company announced that the Board of Directors had elected toextend the terms of the repurchase program by one year with a new expirationdate of August 8, 2006.  There were norepurchases of the Company’s common stock during the quarter ended June 30,2005.

 

**Item 3.  Defaults Upon Senior Securities**

 

None

 

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

 

Penns Woods Bancorp, Inc.’sannual meeting of the shareholders was held on April 27, 2005.  The results of the items voted on are listedbelow:

 

 
| **Issue** | ** ** | **Description**                                                                            | ** ** | **For**   | ** ** | **Withhold** | ** ** | ** **  | ** ** |
|-----------|------------|--------------------------------------------------------------------------------------------|------------|-----------|------------|--------------|------------|-------------|------------|
| 1.        |       | Election of Directors for a Three Year Term                                                |       |      |       |         |       |        |       |
|      |       |                                                                                       |       |      |       |         |       |        |       |
|      |       | Lynn S. Bowes                                                                              |       | 2,683,711 |       | 3,268        |       |        |       |
|      |       | H. Thomas Davis,  Jr.                                                                      |       | 2,678,544 |       | 8,435        |       |        |       |
|      |       | Jay H. McCormick                                                                           |       | 2,681,349 |       | 5,630        |       |        |       |
|      |       |                                                                                       |       |      |       |         |       |        |       |
| **Issue** | ** ** | **Description**                                                                            | ** ** | **For**   | ** ** | **Against**  | ** ** | **Abstain** | ** ** |
| 2.        |       | Ratification of  S.R. Snodgrass A.C., Certified Public Accountants as independent auditors |       | 2,672,286 |       | 12,499       |       | 2,194       |       |

 

### **Item5.  Other Information**

 

None

 

**Item 6. Exhibits**

 
| (3) | (i) |   | Articles  of Incorporation of the Registrant, as presently in effect (incorporated by  reference to Exhibit 3.1 of the Registrant’s Registration Statement on Form  S-4, No. 333-65821). |
|-----|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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

 

30

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## **SIGNATURES**

 

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

 
| PENNS WOODS  BANCORP, INC. |
|----------------------------|
| (Registrant)               |
|                       |   |   |
|                       |   |   |
| Date:                      | August 9, 2005 | /s/ Ronald A. Walko |   |
|                       |   | Ronald A. Walko,  President and Chief Executive Officer |
|                       |   |   |
|                       |   |   |
| Date:                      | August 9, 2005 | /s/ Brian L. Knepp |   |
|                       |   | Brian L. Knepp, Vice  President of Finance |
|                            |  |  |  |  |

 

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**EXHIBIT INDEX**

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

 

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