**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**ý****        ****Quarterly Report pursuant to Section 13or 15 (d) of the Securities Exchange Act of 1934 for the Quarterly PeriodEnded September 30, 2005,**

 

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

 

**No. 0-17077**

(Commission File Number)

 

**PENNS WOODS BANCORP, INC.**

(Exact name of Registrant as specified in its charter)

 
| **PENNSYLVANIA**                                   | ** ** | **23-2226454**      |
|----------------------------------------------------|------------|---------------------|
| (State or other jurisdiction of                    |       | (I.R.S. Employer    |
| incorporation or organization)                     |       | Identification No.) |
|                                               |       |                |
| **300  Market Street, Williamsport, Pennsylvania** | ** ** | **17701-0967**      |
| (Address of principal executive offices)           |       | (Zip Code)          |

 

**(570) 322-1111**

Registrant’s telephone number, including area code

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that Registrant was required to file suchreports), and (2) has been subject to such filing requirements for thepast 90 days.

YES ý      NO o

 

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

 

YES ý      NO o

 

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

 

YES o      NO ý

 

On October 27, 2005there were 3,320,414 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 September 30, 2005 and December 31, 2004                                        |       | 3          |
|                                                                                                                                    |       |       |
| Consolidated Statement of Income  (unaudited) for the Three and Nine Months ended September 30, 2005 and  2004                     |       | 4          |
|                                                                                                                                    |       |       |
| Consolidated  Statement of Changes in Shareholders’ Equity (unaudited) For the Nine Months  ended September 30, 2005 and 2004 |       | 5          |
|                                                                                                                                    |       |       |
| Consolidated  Statement of Comprehensive Income (unaudited) for the Three and Nine Months  ended September 30, 2005 and 2004       |       | 6          |
|                                                                                                                                    |       |       |
| Consolidated Statement of  Cash Flows (unaudited) for the Nine Months ended September 30, 2005 and  2004                           |       | 7          |
|                                                                                                                                    |       |       |
| Notes to Consolidated  Financial Statements(unaudited)                                                                                  |       | 8          |
|                                                                                                                                    |       |       |
| **Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations**                                | ** ** | **13**     |
| ** **                                                                                                                              | ** ** | ** ** |
| **Item 3. Quantitative  and Qualitative Disclosures About Market Risk**                                                                 | ** ** | **29**     |
| ** **                                                                                                                              | ** ** | ** ** |
| **Item 4. Controls  and Procedures**                                                                                                    | ** ** | **29**     |
| ** **                                                                                                                              | ** ** | ** ** |
| **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**                                                                                            |       | 30         |
| **Item 4.  Submission of Matters to a Vote of Security Holders**                                                                        |       | 30         |
| **Item 5. Other  Information**                                                                                                          |       | 30         |
| **Item  6. Exhibits**                                                                                                                   |       | 30         |
| **Signatures**                                                                                                                          |       | 31         |
| **Exhibit Index  and Exhibits**                                                                                                    |       | 32         |

 

2

----

 

PENNS WOODS BANCORP, INC.CONSOLIDATED BALANCE SHEET(UNAUDITED)

 
| ** **                                                                                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(In Thousands, Except Share Data)**                                                                | ** ** | **2005**               | ** ** | **2004**              | ** ** |
|                                                                                                 |       |                   |       |                  |       |
| ASSETS:                                                                                              |       |                   |       |                  |       |
| Noninterest-bearing  balances                                                                        |       | $                      | 13,113     |                  | $          | 12,602 |   |
| Interest-bearing  deposits in other financial institutions                                           |       | 27                     |       | 24                    |       |
| Total cash and cash equivalents                                                                      |       | 13,140                 |       | 12,626                |       |
|                                                                                                 |       |                   |       |                  |       |
| Investment  securities, available for sale, at fair value                                            |       | 192,039                |       | 184,163               |       |
| Investment  securities held to maturity (fair value of $241 and $561)                                |       | 266                    |       | 558                   |       |
| Loans held for sale                                                                                  |       | 3,908                  |       | 4,624                 |       |
| Loans, net of  unearned discount of $1,025 and $1,096                                                |       | 330,651                |       | 324,505               |       |
| Less: Allowance  for loan and lease losses                                                           |       | 3,492                  |       | 3,338                 |       |
| Loans, net                                                                                           |       | 327,159                |       | 321,167               |       |
|                                                                                                 |       |                   |       |                  |       |
| Premises and  equipment, net                                                                         |       | 6,141                  |       | 4,882                 |       |
| Accrued interest  receivable                                                                         |       | 2,520                  |       | 2,246                 |       |
| Bank-owned life  insurance                                                                           |       | 10,627                 |       | 10,976                |       |
| Goodwill                                                                                             |       | 3,032                  |       | 3,032                 |       |
| Other assets                                                                                         |       | 11,587                 |       | 2,429                 |       |
| TOTAL ASSETS                                                                                         |       | $                      | 570,419    |                  | $          | 546,703 |   |
|                                                                                                 |       |                   |       |                  |       |
| LIABILITIES:                                                                                         |       |                   |       |                  |       |
| Interest-bearing  deposits                                                                           |       | $                      | 291,137    |                  | $          | 282,786 |   |
| Noninterest-bearing  deposits                                                                        |       | 72,053                 |       | 74,050                |       |
| Total deposits                                                                                       |       | 363,190                |       | 356,836               |       |
|                                                                                                 |       |                   |       |                  |       |
| Short-term  borrowings                                                                               |       | 40,410                 |       | 36,475                |       |
| Long-term  borrowings, Federal Home Loan Bank(FHLB)                                                  |       | 84,478                 |       | 75,878                |       |
| Accrued interest  payable                                                                            |       | 1,118                  |       | 850                   |       |
| Other  liabilities                                                                                   |       | 6,733                  |       | 3,499                 |       |
| TOTAL LIABILITIES                                                                                    |       | 495,929                |       | 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                                                                                   |       | 22,102                 |       | 18,262                |       |
| Accumulated  other comprehensive gain                                                                |       | 1,914                  |       | 4,331                 |       |
| Less: Treasury  stock at cost, 12,810 and 10,310 shares                                              |       | (561                   | )          | (446                  | )          |
| TOTAL SHAREHOLDERS’ EQUITY                                                                      |       | 74,490                 |       | 73,165                |       |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                                     |       | $                      | 570,419    |                  | $          | 546,703 |   |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

3

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PENNS WOODS BANCORP, INC.CONSOLIDATED STATEMENT OFINCOME(UNAUDITED)

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                               | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **(In Thousands, Except Per Share Data)**                | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                     |       |                   |       |                   |       |   |   |   |   |
| **INTEREST  AND DIVIDEND INCOME:**                       |       |                   |       |                   |       |   |   |   |   |
| Loans including  fees                                    |       | $                      | 5,899      |                   | $          | 5,550 |   | $ | 17,070 |   | $ | 15,578 |   |
| Investment  Securities:                                  |       |                   |       |                   |       |   |   |   |   |
| Taxable                                                  |       | 967                    |       | 1,698                  |       | 3,445 |   | 5,278 |   |
| Tax-exempt                                               |       | 969                    |       | 422                    |       | 2,246 |   | 1,133 |   |
| Dividend                                                 |       | 278                    |       | 254                    |       | 873 |   | 794 |   |
| **TOTAL INTEREST AND DIVIDEND INCOME**                   |       | 8,113                  |       | 7,924                  |       | 23,634 |   | 22,783 |   |
|                                                     |       |                   |       |                   |       |   |   |   |   |
| **INTEREST  EXPENSE:**                                   |       |                   |       |                   |       |   |   |   |   |
| Deposits                                                 |       | 1,537                  |       | 1,227                  |       | 4,151 |   | 3,544 |   |
| Short-term  borrowings                                   |       | 199                    |       | 131                    |       | 545 |   | 367 |   |
| Long-term  borrowings                                    |       | 965                    |       | 871                    |       | 2,711 |   | 2,584 |   |
| **TOTAL  INTEREST EXPENSE**                              |       | 2,701                  |       | 2,229                  |       | 7,407 |   | 6,495 |   |
|                                                     |       |                   |       |                   |       |   |   |   |   |
| **NET  INTEREST INCOME**                                 |       | 5,412                  |       | 5,695                  |       | 16,227 |   | 16,288 |   |
|                                                     |       |                   |       |                   |       |   |   |   |   |
| **PROVISION  FOR LOAN LOSSES**                           |       | 180                    |       | 165                    |       | 540 |   | 315 |   |
|                                                     |       |                   |       |                   |       |   |   |   |   |
| **NET  INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES** |       | 5,232                  |       | 5,530                  |       | 15,687 |   | 15,973 |   |
|                                                     |       |                   |       |                   |       |   |   |   |   |
| **NON-INTEREST  INCOME:**                                |       |                   |       |                   |       |   |   |   |   |
| Service charges                                          |       | 612                    |       | 499                    |       | 1,603 |   | 1,497 |   |
| Securities  gains, net                                   |       | 556                    |       | 407                    |       | 1,854 |   | 1,535 |   |
| Bank-owned life  insurance                               |       | 288                    |       | 90                     |       | 475 |   | 270 |   |
| Insurance  commissions                                   |       | 507                    |       | 637                    |       | 1,802 |   | 1,796 |   |
| Other operating  income                                  |       | 321                    |       | 322                    |       | 964 |   | 944 |   |
| **TOTAL  NON-INTEREST INCOME**                           |       | 2,284                  |       | 1,955                  |       | 6,698 |   | 6,042 |   |
|                                                     |       |                   |       |                   |       |   |   |   |   |
| **NON-INTEREST  EXPENSES:**                              |       |                   |       |                   |       |   |   |   |   |
| Salaries and  employee benefits                          |       | 2,130                  |       | 1,948                  |       | 6,323 |   | 5,813 |   |
| Occupancy  expense, net                                  |       | 261                    |       | 231                    |       | 838 |   | 704 |   |
| Furniture and  equipment expense                         |       | 262                    |       | 226                    |       | 717 |   | 721 |   |
| Pennsylvania  shares tax expense                         |       | 138                    |       | 131                    |       | 417 |   | 377 |   |
| Other operating  expenses                                |       | 1,031                  |       | 973                    |       | 3,035 |   | 2,820 |   |
| **TOTAL  NON-INTEREST EXPENSES**                         |       | 3,822                  |       | 3,509                  |       | 11,330 |   | 10,435 |   |
|                                                     |       |                   |       |                   |       |   |   |   |   |
| **INCOME  BEFORE INCOME TAX PROVISION**                  |       | 3,694                  |       | 3,976                  |       | 11,055 |   | 11,580 |   |
| **INCOME  TAX PROVISION**                                |       | 746                    |       | 1,150                  |       | 2,632 |   | 3,277 |   |
| **NET  INCOME**                                          |       | $                      | 2,948      |                   | $          | 2,826 |   | $ | 8,423 |   | $ | 8,303 |   |
|                                                     |       |                   |       |                   |       |   |   |   |   |
| **EARNINGS  PER SHARE - BASIC**                          |       | $                      | 0.89       |                   | $          | 0.85 |   | $ | 2.54 |   | $ | 2.50 |   |
|                                                     |       |                   |       |                   |       |   |   |   |   |
| **EARNINGS  PER SHARE - DILUTED**                        |       | $                      | 0.89       |                   | $          | 0.85 |   | $ | 2.54 |   | $ | 2.50 |   |
|                                                     |       |                   |       |                   |       |   |   |   |   |
| **WEIGHTED  AVERAGE SHARES OUTSTANDING-BASIC**           |       | 3,310,719              |       | 3,319,457              |       | 3,311,213 |   | 3,320,249 |   |
|                                                     |       |                   |       |                   |       |   |   |   |   |
| **WEIGHTED  AVERAGE SHARES OUTSTANDING-DILUTED**         |       | 3,312,464              |       | 3,323,608              |       | 3,313,141 |   | 3,323,908 |   |
|                                                     |       |                   |       |                   |       |   |   |   |   |
| **DIVIDNEDS  PER SHARE**                                 |       | $                      | 0.47       |                   | $          | 0.35 |   | $ | 1.38 |   | $ | 1.05 |   |

 

**See accompanying notes to theunaudited consolidated financial statements.**

 

4

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PENNS WOODS BANCORP, INC.CONSOLIDATED STATEMENTOF CHANGES IN SHAREHOLDERS’ EQUITY(UNAUDITED)

 
| ** **                                                                                                                                 | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **        | ** ** | **ACCUMULATED** | ** ** | ** **             | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|-------------------|------------|-----------------|------------|------------------------|------------|------------|------------|
| ** **                                                                                                                                 | ** ** | **COMMON** | ** ** | **ADDITIONAL** | ** ** | ** **   | ** ** | **OTHER**         | ** ** | ** **      | ** ** | **TOTAL**              | ** ** |
| ** **                                                                                                                                 | ** ** | **STOCK**  | ** ** | **PAID-IN**    | ** ** | **RETAINED** | ** ** | **COMPREHENSIVE** | ** ** | **TREASURY**    | ** ** | **SHAREHOLDERS’** | ** ** |
| **(In  Thousands Except Per Share Data)**                                                                                                  | ** ** | **SHARES** | ** ** | **AMOUNT**     | ** ** | **CAPITAL**  | ** ** | **EARNINGS**      | ** ** | **INCOME**      | ** ** | **STOCK**              | ** ** | **EQUITY** | ** ** |
| Balance, December 31,  2004                                                                                                           |       | 3,331,837  |       | $              | 33,318     |         | $          | 17,700            |       | $               | 18,262     |                   | $          | 4,331      |       | $ | (446 | ) | $ | 73,165 |   |
|                                                                                                                                       |       |       |       |           |       |         |       |              |       |            |       |                   |       |       |       |
| Net income                                                                                                                                 |       |       |       |           |       |         |       | 8,423             |       |            |       |                   |       | 8,423      |       |
| Dividends  declared, $1.38                                                                                                                 |       |       |       |           |       |         |       | (4,583            | )          |            |       |                   |       | (4,583     | )          |
| Treasury Stock  acquired (2,500 shares)                                                                                                    |       |       |       |           |       |         |       |              |       |            |       | (115                   | )          | (115       | )          |
| Net change in unrealized gain on investments  available for sale, net of reclassification adjustment, net of income tax  benefit of $1,245 |       |       |       |           |       |         |       |              |       | (2,417          | )          |                   |       | (2,417     | )          |
| Stock options  exercised                                                                                                                   |       | 562        |       | 6              |       | 11           |       |              |       |            |       |                   |       | 17         |       |
| Balance, September 30,  2005                                                                                                          |       | 3,332,399  |       | $              | 33,324     |         | $          | 17,711            |       | $               | 22,102     |                   | $          | 1,914      |       | $ | (561 | ) | $ | 74,490 |   |

 
| ** **                                                                                     | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **        | ** ** | **ACCUMULATED** | ** ** | ** **             | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|-------------------|------------|-----------------|------------|------------------------|------------|------------|------------|
| ** **                                                                                     | ** ** | **COMMON** | ** ** | **ADDITIONAL** | ** ** | ** **   | ** ** | **OTHER**         | ** ** | ** **      | ** ** | **TOTAL**              | ** ** |
| ** **                                                                                     | ** ** | **STOCK**  | ** ** | **PAID-IN**    | ** ** | **RETAINED** | ** ** | **COMPREHENSIVE** | ** ** | **TREASURY**    | ** ** | **SHAREHOLDERS’** | ** ** |
| **(In  Thousands Except Per Share Data)**                                                      | ** ** | **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                                                                                     |       |       |       |           |       |         |       | 8,303             |       |            |       |                   |       | 8,303      |       |
| Dividends  declared, $1.05                                                                     |       |       |       |           |       |         |       | (3,486            | )          |            |       |                   |       | (3,486     | )          |
| Treasury Stock  acquired (3,000 shares)                                                        |       |       |       |           |       |         |       |              |       |            |       | (130                   | )          | (130       | )          |
| Net change in unrealized gain on investments  available for sale, net of tax benefit of $1,084 |       |       |       |           |       |         |       |              |       | (2,105          | )          |                   |       | (2,105     | )          |
| Stock options  exercised                                                                       |       | 897        |       | 9              |       | 22           |       |              |       |            |       |                   |       | 31         |       |
| Balance, September 30,  2004                                                              |       | 3,327,457  |       | $              | 33,274     |         | $          | 17,581            |       | $               | 17,839     |                   | $          | 4,027      |       | $ | (339 | ) | $ | 72,382 |   |

 

See accompanying notes to the unaudited consolidated financial statements.

 

5

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PENNS WOODS BANCORP, INC.CONSOLIDATED STATEMENTOF COMPREHENSIVE INCOME(UNAUDITED)

 
| ** **                                                                 | ** ** | **Three Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **(In Thousands)**                                                         | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
|                                                                       |       |                                      |       |   |   |
| Net Income                                                                 |       | $                                         | 2,948      |   | $ | 2,826 |   |
| Other  comprehensive income:                                               |       |                                      |       |   |   |
| Net unrealized (losses) gains on available for sale  securities            |       | (3,350                                    | )          | 4,165 |   |
| Less: Reclassification adjustment for gain included  in net income         |       | 556                                       |       | 407 |   |
| Other  comprehensive (loss) income before tax                              |       | (3,906                                    | )          | 3,758 |   |
| Income tax  (benefit) expense related to other comprehensive (loss) income |       | (1,328                                    | )          | 1,278 |   |
| Other  comprehensive (loss) income, net of tax                             |       | (2,578                                    | )          | 2,480 |   |
| Comprehensive  income                                                      |       | $                                         | 370        |   | $ | 5,306 |   |

 
| ** **                                                         | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------|------------|
| **(In Thousands)**                                                 | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
|                                                               |       |                                     |       |   |   |
| Net Income                                                         |       | $                                        | 8,423      |   | $ | 8,303 |   |
| Other  comprehensive income:                                       |       |                                     |       |   |   |
| Net unrealized losses on available for sale  securities            |       | (1,808                                   | )          | (1,654 | ) |
| Less: Reclassification adjustment for gain included  in net income |       | 1,854                                    |       | 1,535 |   |
| Other comprehensive  loss before tax                               |       | (3,662                                   | )          | (3,189 | ) |
| Income tax  benefit related to other comprehensive (loss)          |       | (1,245                                   | )          | (1,084 | ) |
| Other  comprehensive loss, net of tax                              |       | (2,417                                   | )          | (2,105 | ) |
| Comprehensive  income                                              |       | $                                        | 6,006      |   | $ | 6,198 |   |

 

See accompanying notes to the unaudited consolidated financialstatements.

 

6

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PENNS WOODS BANCORP, INC.CONSOLIDATED STATEMENT OFCASH FLOWS(UNAUDITED)

 
| ** **                                                                         | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **September 30,** | ** ** |
| **(In Thousands)**                                                                 | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                                                               |       |                   |       |   |   |
| OPERATING  ACTIVITIES:                                                             |       |                   |       |   |   |
| Net Income                                                                         |       | $                      | 8,423      |   | $ | 8,303 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                   |       |   |   |
| Depreciation                                                                       |       | 377                    |       | 407 |   |
| Provision for loan losses                                                          |       | 540                    |       | 315 |   |
| Accretion and amortization of investment security  discounts and premiums          |       | (319                   | )          | (28 | ) |
| Securities gains, net                                                              |       | (1,854                 | )          | (1,535 | ) |
| Originations of loans held for sale                                                |       | (21,562                | )          | (27,785 | ) |
| Proceeds of loans held for sale                                                    |       | 22,278                 |       | 25,913 |   |
| Earnings on bank-owned life insurance                                              |       | (475                   | )          | (270 | ) |
| Other, net                                                                         |       | 200                    |       | 718 |   |
| Net cash provided by operating activities                                          |       | 7,608                  |       | 6,038 |   |
| INVESTING  ACTIVITIES:                                                             |       |                   |       |   |   |
| Investment  securities available for sale:                                         |       |                   |       |   |   |
| Proceeds from sales                                                                |       | 109,889                |       | 131,196 |   |
| Proceeds from calls and maturities                                                 |       | 10,697                 |       | 22,104 |   |
| Purchases                                                                          |       | (130,575               | )          | (138,020 | ) |
| Investment  securities held to maturity:                                           |       |                   |       |   |   |
| Proceeds from calls and maturities                                                 |       | 327                    |       | 42 |   |
| Purchases                                                                          |       | (35                    | )          | (14 | ) |
| Net increase in  loans                                                             |       | (6,918                 | )          | (41,145 | ) |
| Acquisition of  bank premises and equipment                                        |       | (1,636                 | )          | (474 | ) |
| Proceeds from  the sale of foreclosed assets                                       |       | 67                     |       | 177 |   |
| Proceeds from  redemption of regulatory stock                                      |       | 3,118                  |       | 2,100 |   |
| Purchases of  regulatory stock                                                     |       | (3,112                 | )          | (1,895 | ) |
| Investment in  limited partnership                                                 |       | (3,124                 | )          | — |   |
| Net cash used in investing activities                                              |       | (21,302                | )          | (25,929 | ) |
| FINANCING  ACTIVITIES:                                                             |       |                   |       |   |   |
| Net increase in interest-bearing deposits                                          |       | 8,351                  |       | 33,598 |   |
| Net (decrease) increase in noninterest-bearing  deposits                           |       | (1,997                 | )          | 5,171 |   |
| Proceeds of long-term borrowings                                                   |       | 10,000                 |       | 5,000 |   |
| Repayment of long-term borrowings                                                  |       | (1,400                 | )          | — |   |
| Net increase (decrease) in short-term borrowings                                   |       | 3,935                  |       | (13,596 | ) |
| Dividends paid                                                                     |       | (4,583                 | )          | (3,486 | ) |
| Stock options exercised                                                            |       | 17                     |       | 31 |   |
| Purchase of treasury stock                                                         |       | (115                   | )          | (130 | ) |
| Net cash provided by financing activities                                          |       | 14,208                 |       | 26,588 |   |
| NET INCREASE IN  CASH AND CASH EQUIVALENTS                                         |       | 514                    |       | 6,697 |   |
| CASH AND CASH  EQUIVALENTS, BEGINNING                                              |       | 12,626                 |       | 10,230 |   |
| CASH AND CASH  EQUIVALENTS, ENDING                                                 |       | $                      | 13,140     |   | $ | 16,927 |   |
|                                                                               |       |                   |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION:                                |       |                   |       |   |   |
|                                                                               |       |                   |       |   |   |
| Interest paid                                                                      |       | $                      | 7,139      |   | $ | 6,452 |   |
| Income taxes  paid                                                                 |       | $                      | 2,475      |   | $ | 3,250 |   |
| Transfer of  loans to foreclosed assets                                            |       | $                      | 386        |   | $ | 106 |   |

 

See accompanying notes to the unaudited consolidated financialstatements.

 

7

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**PENNS WOODS BANCORP, INC. AND SUBSIDIARIESNOTES TOCONSOLIDATED 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 beeneliminated in 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.

 

Theaccounting policies followed in the presentation of interim financial resultsare the same as those followed on an annual basis.  These policies arepresented on pages 9 thru 11 of the 2004 Annual Report and Form 10Kwith additional policies listed below in Note 2, Significant AccountingPolicies.

 

# **NOTE 2. Significant Accounting Policies**

# ** **

**The M Group (d/b/a Comprehensive Financial Group) Products and IncomeRecognition**

 

TheM Group product line is comprised primarily of annuities, life insurance, andmutual funds.  The revenues generatedfrom life insurance sales are commission only as The M Group does notunderwrite the policies.  Life insurancesales include permanent and term policies with the majority of the policieswritten being permanent.  Term lifeinsurance policies are written for 10, 15, 20, and 30 year terms with themajority of the policies being written for 20 years.  None of these products are offered as anintegral part of lending activities.

 

Commissionsfrom the sale of annuities is recognized at the time notice is received fromthe broker/dealer or an insurance company that the transaction is final, whichis also the time a commission check is received.  Until this notice is received, the completionof the sale is on hold as the broker/dealer or an insurance company may chooseto not accept the application.

 

Lifeinsurance commissions are recognized at varying points based on the paymentoption chosen by the consumer. Commissions from monthly and annual payment plans are recognized at thestart of each annual period for the life insurance, while quarterly andsemi-annual premium payments are recognized quarterly and semi-annually whenthe earnings process is complete.  Forexample, semi-annual payments on the first of January and July wouldresult in commission recognition on the first of January and July, whilepayments on the first of January, April, July,

 

8

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andOctober would result in commission recognition on those dates.  The potential for chargebacks only exists forthose policies on a monthly payment plan due to the income being recognized atthe beginning of the annual period versus at the time of each monthlypayment.  No liability is maintained forchargebacks as any chargeback is removed from income at the time of thechargeback.

 

**NOTE 3. 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 statement (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.   Compensation cost will be recognized over the period that an employee provides service in exchange for the award.

 

In April, the Securities andExchange Commission adopted a new rule that amends the compliance datesfor FAS No. 123R.  The Statementrequires that compensation cost relating to share-based payment transactions berecognized in financial statements and that this cost be measured based on thefair value of the equity or liability instruments issued.  FAS No. 123R covers a wide range ofshare-based compensation arrangements including share options, restricted shareplans, performance-based awards, share appreciation rights, and employee sharepurchase plans. The Company will adopt FAS No. 123R on January 1,2006 and is currently evaluating the impact the adoption of the standard willhave 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.

 

InDecember 2004, FASB issued FAS No. 153, *Exchanges ofNonmonetary Assets - An Amendment of APB Opinion No. 29*. Theguidance in APB Opinion No. 29, *Accounting for NonmonetaryTransactions*, is based on the principle that exchanges ofnonmonetary assets should be measured based on the fair value of the assetsexchanged. The guidance in that Opinion, however, included certain exceptionsto that principle. FAS No. 153 amends Opinion No. 29 to eliminate theexception for nonmonetary exchanges of similar productive assets and replacesit with a general exception for exchanges of nonmonetary assets that do nothave commercial substance. A nonmonetary exchange has commercial substance ifthe future cash flows of the entity are expected to change significantly as aresult of the exchange. The provisions of FAS No. 153 are effective fornonmonetary asset exchanges occurring in fiscal periods beginning after June 15,2005. Early application is permitted and companies must apply

 

9

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thestandard prospectively. The adoption of this standard is not expected to have amaterial effect on the Company’s results of operations or financial position.

 

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.154improves the financial reporting because its requirements enhance theconsistency of financial reporting between periods.  The provisions of FAS No. 154 areeffective for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005.

 

**NOTE 4. Per Share Data**

 

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

 

 
| ** **                                                                                                | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                      |       |                                      |       |                                     |       |   |   |   |   |
| Weighted average  common shares outstanding                                                               |       | 3,322,089                                 |       | 3,327,457                                |       | 3,321,880 |   | 3,327,406 |   |
|                                                                                                      |       |                                      |       |                                     |       |   |   |   |   |
| Average treasury  stock shares                                                                            |       | (11,370                                   | )          | (8,000                                   | )          | (10,667 | ) | (7,157 | ) |
|                                                                                                      |       |                                      |       |                                     |       |   |   |   |   |
| Weighted average common shares and common stock  equivalents used to calculate basic earnings per share   |       | 3,310,719                                 |       | 3,319,457                                |       | 3,311,213 |   | 3,320,249 |   |
|                                                                                                      |       |                                      |       |                                     |       |   |   |   |   |
| Additional common stock equivalents (stock options)  used to calculate diluted earnings per share         |       | 1,745                                     |       | 4,151                                    |       | 1,928 |   | 3,659 |   |
|                                                                                                      |       |                                      |       |                                     |       |   |   |   |   |
| Weighted average common shares and common stock  equivalents used to calculate diluted earnings per share |       | 3,312,464                                 |       | 3,323,608                                |       | 3,313,141 |   | 3,323,908 |   |

 

Options to purchase 8,107 shares of common stock at theprice of $48.35 were outstanding during the three and nine months ended September 30,2005 and 8,713 shares of common stock at the price of $48.35 were outstandingfor the three and nine months ended September 30, 2004, but were notincluded in the computation of diluted earnings per share as they wereanti-dilutive due to the strike price being greater than the market price as ofthe end of the quarter.

 

10

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**Note 5.****  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 plans for the three and nine months ended September 30,2005 and 2004,  respectively.

 
| ** **                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                             | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **(In Thousands)**                     | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                   |       |                   |       |                   |       |   |   |   |   |
| Service cost                           |       | $                      | 125        |                   | $          | 116 |   | $ | 379 |   | $ | 349 |   |
| Interest cost                          |       | 110                    |       | 100                    |       | 335 |   | 299 |   |
| Expected return  on plan assets        |       | (112                   | )          | (81                    | )          | (302 | ) | (245 | ) |
| Amortization of  transition obligation |       | (1                     | )          | (1                     | )          | (2 | ) | (2 | ) |
| Amortization of  prior service cost    |       | 6                      |       | 6                      |       | 19 |   | 19 |   |
| Amortization of  net (gain) loss       |       | 16                     |       | 10                     |       | 49 |   | 31 |   |
| Net periodic  cost                     |       | $                      | 144        |                   | $          | 150 |   | $ | 478 |   | $ | 451 |   |

 

**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.  However, as of September 30, 2005,contributions of $1,420,000 have been made as the Company determined thatcontributing an amount above the minimum required was beneficial from a currenttax and future financial perspective.  Ofthe contribution $1,100,000 was related to the 2004 pension period. The Companyis evaluating the amount, if any, of additional funds to contribute in thefinal quarter of 2005.

 

**Note 6.  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 ofcredit.  These instruments involve, tovarying degrees, elements of credit, interest rate or liquidity risk in excessof the amount recognized in the consolidated balance sheet.  The contract amounts of these instrumentsexpress the extent of involvement the Company has in particular classes of financialinstruments.

 

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.

 

11

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Financial instruments whose contract amounts representcredit risk are as follows:

 
| ** **                    | ** ** | **September 30,** | ** ** |
|-------------------------------|------------|------------------------|------------|
| **(In Thousands)**            | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Commitments to  extend credit |       | $                      | 74,483     |   | $ | 54,313 |   |
| Standby letters  of credit    |       | 1,537                  |       | 760 |   |
|                               |            |                        |            |  |  |  |  |

 

# **Note 7.  Reclassificationof 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 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 increasingconsolidation within the banking and financial services industries, includingthe increased competition from larger regional and out-of-state bankingorganizations as well as non-bank providers of various financial services; (iv) theeffect of changes in interest rates; and (v) the effect of changes in thebusiness cycle and downturns in the local, regional or national economies.

 

12

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**ITEM 2.  Management’s Discussionand Analysis of Financial Condition and Results of Operation**

 

# **EARNINGS SUMMARY**

 

**Comparison of the Three and Nine Months Ended September 30, 2005and 2004**

 

**Summary Results**

 

Net income for the threemonths ended September 30, 2005 was $2,948,000 compared to $2,826,000 forthe same period of 2004.  Basic anddiluted earnings per share for the three months ended September 30, 2005were $0.89 as compared to $0.85 for the three months ended September 30,2004.  Return on average assets andreturn on average equity were 2.12% and 16.54% for the three months ended September 30,2005 as compared to 2.06% and 16.07% for the corresponding period of 2004.  Net income from core operations for the threemonths ended September 30, 2005, excluding after-tax securities gains of$367,000, increased to $2,581,000 from $2,557,000 for the three months ended September 30,2004.

 

The nine months ended September 30,2005 generated net income of $8,423,000 compared to $8,303,000 for the sameperiod of 2004.  Earnings per share,basic and diluted, for the nine months ended September 30, 2005 were $2.54as compared to $2.50 for the comparable period of 2004.  Return on average assets and return onaverage equity were 2.05% and 14.94% for the nine months ended September 30,2005 as compared to 2.07% and 15.62% for the corresponding period of 2004.  Net income from core operations for the ninemonths ended September 30, 2005, excluding after-tax securities gains of$1,224,000, declined to $7,199,000 from $7,290,000 for the nine months ended September 30,2004.  (Management uses the non-GAAPmeasure of net income from core operations in its analysis of the Company’sperformance.  This measure, as used bythe Company, adjusts net income by significant gains or losses that are unusualin nature.  Because certain of theseitems and their impact on the Company’s performance are difficult to predict,management believes the presentation of financial measures excluding the impactof such items provides useful supplemental information in evaluating theoperating results of the Company’s core businesses.  These disclosures should not be viewed as asubstitute for net income determined in accordance with GAAP, nor are theynecessarily comparable to non-GAAP performance measures that may be presentedby other companies.)

 

**Interest Income**

 

Duringthe third quarter of 2005, interest and dividend income was $8,113,000, anincrease of $189,000 over the same quarter of 2004.  The increase in total interest income wasprimarily the result of growth in average loans of $18,671,000 for the third quarterof 2005 as compared to 2004.  Over thistime frame the average balance of investment securities declined $10,503,000,while the investment portfolio continued to shift from taxable mortgage-backedsecurities to tax-exempt municipal bonds. The shift in earning assets increasedloan interest and fee income by $349,000 while decreasing interest and dividendincome on investment securities by $160,000. On a taxable equivalent basis, the shift in the investment portfolioresulted in an increase of $122,000 in interest and dividend income despite adecline in average balance of $10,503,000.

 

13

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Thisshift within the investment securities portfolio was undertaken to ladder cashflows, maintain the interest margin, and to invest at the community level.  The increase in dividends received is theresult of an increase in the level of dividends from the Federal Home Loan Bankof Pittsburgh coupled with an emphasis on purchasing stocks consistently havingan above average dividend yield.

 

Duringthe nine months ended September 30, 2005, interest and dividend income was$23,634,000, an increase of $851,000 over the same period in 2004.  The reasons for the 3.7% growth in interestincome for the nine month period are identical to those for the three month perioddiscussed above.  The growth in averageloans of $32,089,000 offset a 7 basis point (bp) decline in the loan yieldresulting in an increase of $1,492,000 in loan interest and fee income.   Average investment securities declined$21,682,000 causing total investment security interest and dividend income todecline $641,000.  The change in the mixof investment securities offset the effect on interest income of the averagebalance decrease as taxable equivalent interest remained flat at $7,721,000 forthe nine month period ended September 30, 2005.

 

Interestincome composition for the three and nine months ended September 30, 2005and 2004 were as follows:

 
| ** **              | ** ** | **For The Three Months Ended** | ** ** |
|-------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **September 30, 2005**    | ** ** | **September 30, 2004** | ** ** | **Change** | ** ** |
| **(In Thousands)**      | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** |
| Loans including  fees   |       | $                              | 5,899      |   | 72.8 | % | $ | 5,550 |   | 70.1 | % | $ | 349 |   | 6.3 | % |
| Investment  securities: |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                 |       | 967                            |       | 11.9 |   | 1,698 |   | 21.4 |   | (731 | ) | (43.1 | ) |
| Tax-exempt              |       | 969                            |       | 11.9 |   | 422 |   | 5.3 |   | 547 |   | 129.6 |   |
| Dividend                |       | 278                            |       | 3.4 |   | 254 |   | 3.2 |   | 24 |   | 9.4 |   |
| Total interest income   |       | $                              | 8,113      |   | 100.0 | % | $ | 7,924 |   | 100.0 | % | $ | 189 |   | 2.4 | % |

 
| ** **              | ** ** | **For The Nine Months Ended** | ** ** |
|-------------------------|------------|-------------------------------|------------|
| ** **              | ** ** | **September 30, 2005**   | ** ** | **September 30, 2004** | ** ** | **Change** | ** ** |
| **(In Thousands)**      | ** ** | **Amount**                    | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** |
| Loans including  fees   |       | $                             | 17,070     |   | 72.2 | % | $ | 15,578 |   | 68.3 | % | $ | 1,492 |   | 9.6 | % |
| Investment  securities: |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                 |       | 3,445                         |       | 14.6 |   | 5,278 |   | 23.2 |   | (1,833 | ) | (34.7 | ) |
| Tax-exempt              |       | 2,246                         |       | 9.5 |   | 1,133 |   | 5.0 |   | 1,113 |   | 98.2 |   |
| Dividend                |       | 873                           |       | 3.7 |   | 794 |   | 3.5 |   | 79 |   | 9.9 |   |
| Total interest income   |       | $                             | 23,634     |   | 100.0 | % | $ | 22,783 |   | 100.0 | % | $ | 851 |   | 3.7 | % |

 

**Interest Expense**

 

Interestexpense during the third quarter of 2005 increased $472,000 to $2,701,000 from$2,229,000 for the third quarter of 2004. The increased expense associated with deposits is primarily the resultof rate increases for time deposit accounts from the third quarter of 2004 tothe corresponding period of 2005. Factors that led to the rate increases include, but are not limited to,prime rate increases, competitive pressure, attracting municipal deposits, anda CD campaign run in conjunction with the opening of the North Atherton Street,State College branch.  The increase in CDrates has been greater than the increase in rates related to non-

 

14

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maturitydeposits.  This has led to somenon-maturity accounts being transferred into higher rate CDs.  For example, the CD campaign related to theNorth Atherton Street branch opening witnessed approximately a third of thefunds being transferred from non-maturity deposit accounts held with theCompany. Short-term borrowing costs increased despite a decrease of $3,218,000in average balances due to the 200 basis point increase in the prime rate overthe past year.  This increase affectedthe rate paid on FHLB overnight borrowings, FHLB short-term borrowings, and therate paid to cash management customers. Long-term FHLB borrowing expense increased slightly as during the secondquarter of 2005 $10 million was borrowed from the FHLB at a fixed rate of 3.97%for 5 years with a final maturity of 10 years. This borrowing replaced the debt that matured at the end of the firstquarter of 2005 and was used to pay off a portion of the short-term borrowings.

 

Interestexpense for the nine months ended September 30, 2005 increased $912,000 to$7,407,000 from $6,495,000 for the comparable period of 2004.  The majority of the increase, $787,000,occurred during the second ($315,000 increase) and third quarters ($472,000increase) as discussed above.  Totaldeposits accounted for $607,000 of the increase due to the reasons noted in theabove three month analysis.  Borrowingcosts increased due to the rate increases over the past year as the borrowingaverage balance remained table for the 2005 and 2004 nine month periods.

 

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

 
| ** **             | ** ** | **For The Three Months Ended** | ** ** |
|------------------------|------------|--------------------------------|------------|
| ** **             | ** ** | **September 30, 2005**    | ** ** | **September 30, 2004** | ** ** | **Change** | ** ** |
| **(In Thousands)**     | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** |
| Deposits               |       | $                              | 1,537      |   | 56.9 | % | $ | 1,227 |   | 55.0 | % | $ | 310 |   | 25.3 | % |
| Short-term  borrowings |       | 199                            |       | 7.4 |   | 131 |   | 5.9 |   | 68 |   | 51.9 |   |
| Long-term  borrowings  |       | 965                            |       | 35.7 |   | 871 |   | 39.1 |   | 94 |   | 10.8 |   |
| Total interest expense |       | $                              | 2,701      |   | 100.0 | % | $ | 2,229 |   | 100.0 | % | $ | 472 |   | 21.2 | % |

 
| ** **             | ** ** | **For The Nine Months Ended** | ** ** |
|------------------------|------------|-------------------------------|------------|
| ** **             | ** ** | **September 30, 2005**   | ** ** | **September 30, 2004** | ** ** | **Change** | ** ** |
| **(In Thousands)**     | ** ** | **Amount**                    | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** |
| Deposits               |       | $                             | 4,151      |   | 56.0 | % | $ | 3,544 |   | 54.6 | % | $ | 607 |   | 17.1 | % |
| Short-term  borrowings |       | 545                           |       | 7.4 |   | 367 |   | 5.6 |   | 178 |   | 48.5 |   |
| Long-term  borrowings  |       | 2,711                         |       | 36.6 |   | 2,584 |   | 39.8 |   | 127 |   | 4.9 |   |
| Total interest expense |       | $                             | 7,407      |   | 100.0 | % | $ | 6,495 |   | 100.0 | % | $ | 912 |   | 14.0 | % |

 

**Net Interest Margin**

 

Thenet interest margin (NIM) for the three months ended September 30, 2005was 4.49% as compared to 4.54% for the corresponding period of 2004.  The decrease in the NIM was the result of theyield on earning assets increasing 28 basis points (bp) to 6.52% for the threemonths ended September 30, 2005 as compared to 2004 offset by a 44 bpincrease in interest 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

 

15

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7.10%,increased $18,671,000, while the lower yielding investment securitiesportfolio, yielding 5.54%, average balance declined $10,503,000.  In addition, within the investment portfolio,average tax-exempt investment securities accounted for 46.3% of the portfoliofor the three months ended September 30, 2005 as compared to 16.9% duringthe comparable period of 2004.  The NIMimpact of the earning asset mix improvement and volume increase in total loanswas reduced by rate increases on interest bearing liabilities.  The rates paid on deposit accounts increasedto 2.04% as compared to 1.62% for the 2004 period.  This increase was driven by growth in timedeposits of $23,565,000 and an increase in the rate paid on time deposits to3.06% from 2.58% for the three months ended September 30, 2004.  A portion of the increase in volume and rateis due to a CD campaign that was run in conjunction with the opening of theNorth Atherton Street, State College branch. The campaign was centered on 13 and 17 month term CD’s with ratesslightly above market.  Short-termborrowings incurred a rate increase of 120 bp to 2.92% for the three monthsended September 30, 2005 as the prime rate increased to 6.75% at September 30,2005.

 

TheNIM for the nine months ended September 30, 2005 was 4.52% as compared to4.47% for the corresponding period of 2004. The increase in the NIM was the result of the before mentioned growthand change in mix of the earnings assets along with the growth in demanddeposits.  The NIM increased for the timeperiods being compared despite the rate paid on interest bearing liabilitiesincreasing 29 bp, while the yield on earning assets increased 25 bp.  Offsetting the spread compression was anincrease in demand deposits that funded $5,658,000 of the $10,407,000 increasein earning assets.

 

Followingis a schedule of average balances and associated yields for the three andnine month periods ended September 30, 2005 and 2004:

 

16

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| ** **                          | ** ** | **AVERAGE BALANCES AND INTEREST RATES** |
|-------------------------------------|------------|-----------------------------------------|
| ** **                          | ** ** | **Three Months Ended**                  | ** ** | **Three Months Ended** | ** ** |
| ** **                          | ** ** | **9/30/2005**                           | ** ** | **9/30/2004** | ** ** |
| **(In Thousands)**                  | ** ** | **Average Balance**                     | ** ** | **Interest** | ** ** | **Average Rate** | ** ** | **Average Balance** | ** ** | **Interest** | ** ** | **Average Rate** | ** ** |
|                                |       |                                    |   |   |   |   |   |   |   |   |   |   |   |
| Tax-exempt  loans                   |       | $                                       | 7,959 |   | $ | 126 |   | 6.28 | % | $ | 1,446 |   | $ | 20 |   | 5.49 | % |
| All  other loans                    |       | 323,952                                 |   | 5,816 |   | 7.12 | % | 311,794 |   | 5,537 |   | 7.05 | % |
| Total  loans                        |       | 331,911                                 |   | 5,942 |   | 7.10 | % | 313,240 |   | 5,557 |   | 7.04 | % |
|                                |       |                                    |   |   |   |   |   |   |   |   |   |   |   |
| Taxable  securities                 |       | 105,186                                 |   | 1,245 |   | 4.73 | % | 171,440 |   | 1,952 |   | 4.55 | % |
| Tax-exempt  securities              |       | 90,551                                  |   | 1,468 |   | 6.48 | % | 34,800 |   | 639 |   | 7.34 | % |
| Total  securities                   |       | 195,737                                 |   | 2,713 |   | 5.54 | % | 206,240 |   | 2,591 |   | 5.03 | % |
|                                |       |                                    |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets      |       | 527,648                                 |   | 8,655 |   | 6.52 | % | 519,480 |   | 8,148 |   | 6.24 | % |
|                                |       |                                    |   |   |   |   |   |   |   |   |   |   |   |
| Other  assets                       |       | 28,941                                  |   |   |   |   |   | 27,588 |   |   |   |   |   |
|                                |       |                                    |   |   |   |   |   |   |   |   |   |   |   |
| Total  assets                       |       | $                                       | 556,589 |   |   |   |   |   | $ | 547,068 |   |   |   |   |   |
|                                |       |                                    |   |   |   |   |   |   |   |   |   |   |   |
| Savings                             |       | $                                       | 64,786 |   | 126 |   | 0.77 | % | $ | 71,081 |   | 148 |   | 0.83 | % |
| Super  Now deposits                 |       | 50,001                                  |   | 106 |   | 0.84 | % | 63,017 |   | 126 |   | 0.79 | % |
| Money  market deposits              |       | 28,427                                  |   | 109 |   | 1.52 | % | 35,031 |   | 98 |   | 1.11 | % |
| Time  deposits                      |       | 155,144                                 |   | 1,196 |   | 3.06 | % | 131,579 |   | 855 |   | 2.58 | % |
| Total  Deposits                     |       | 298,358                                 |   | 1,537 |   | 2.04 | % | 300,708 |   | 1,227 |   | 1.62 | % |
|                                |       |                                    |   |   |   |   |   |   |   |   |   |   |   |
| Short-term  borrowings              |       | 27,069                                  |   | 199 |   | 2.92 | % | 30,287 |   | 131 |   | 1.72 | % |
| Other  borrowings                   |       | 84,478                                  |   | 965 |   | 4.53 | % | 75,878 |   | 871 |   | 4.55 | % |
| Total  borrowings                   |       | 111,547                                 |   | 1,164 |   | 4.14 | % | 106,165 |   | 1,002 |   | 3.74 | % |
|                                |       |                                    |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest bearing liabilities |       | 409,905                                 |   | $ | 2,701 |   | 2.61 | % | 406,873 |   | $ | 2,229 |   | 2.17 | % |
|                                |       |                                    |   |   |   |   |   |   |   |   |   |   |   |
| Demand  deposits                    |       | 70,472                                  |   |   |   |   |   | 65,717 |   |   |   |   |   |
| Other  liabilities                  |       | 4,906                                   |   |   |   |   |   | 4,137 |   |   |   |   |   |
| Shareholders’  equity          |       | 71,306                                  |   |   |   |   |   | 70,341 |   |   |   |   |   |
|                                |       |                                    |   |   |   |   |   |   |   |   |   |   |   |
|                                |       | $                                       | 556,589 |   |   |   |   |   | $ | 547,068 |   |   |   |   |   |
| Interest  rate spread               |       |                                    |   |   |   | 3.91 | % |   |   |   |   | 4.07 | % |
| Net  interest income/margin         |       |                                    |   | $ | 5,954 |   | 4.49 | % |   |   | $ | 5,919 |   | 4.54 | % |

 

----

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

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

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

 

17

----

 

 
| ** **                          | ** ** | **AVERAGE BALANCES AND INTEREST RATES** | ** ** |
|-------------------------------------|------------|-----------------------------------------|------------|
| ** **                          | ** ** | **Nine Months Ended**                   | ** ** | **Nine Months Ended** | ** ** |
| ** **                          | ** ** | **9/30/2005**                           | ** ** | **9/30/2004** | ** ** |
| **(In  Thousands)**                 | ** ** | **Average Balance**                     | ** ** | **Interest** | ** ** | **Average Rate** | ** ** | **Average Balance** | ** ** | **Interest** | ** ** | **Average Rate** | ** ** |
|                                |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Tax-exempt  loans                   |       | $                                       | 4,500      |   | $ | 186 |   | 5.53 | % | $ | 1,385 |   | $ | 85 |   | 8.21 | % |
| All  other loans                    |       | 323,151                                 |       | 16,947 |   | 7.01 | % | 294,177 |   | 15,522 |   | 7.05 | % |
| Total  Loans                        |       | 327,651                                 |       | 17,133 |   | 6.99 | % | 295,562 |   | 15,607 |   | 7.06 | % |
|                                |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Taxable  securities                 |       | 120,425                                 |       | 4,318 |   | 4.78 | % | 177,572 |   | 6,072 |   | 4.56 | % |
| Tax-exempt  securitites             |       | 67,226                                  |       | 3,403 |   | 6.75 | % | 31,761 |   | 1,717 |   | 7.21 | % |
| Total  securities                   |       | 187,651                                 |       | 7,721 |   | 5.49 | % | 209,333 |   | 7,789 |   | 4.96 | % |
|                                |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets      |       | 515,302                                 |       | 24,854 |   | 6.44 | % | 504,895 |   | 23,396 |   | 6.19 | % |
|                                |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Other  assets                       |       | 33,361                                  |       |   |   |   |   | 29,393 |   |   |   |   |   |
|                                |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Total  assets                       |       | $                                       | 548,663    |   |   |   |   |   | $ | 534,288 |   |   |   |   |   |
|                                |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Savings                             |       | $                                       | 65,868     |   | 382 |   | 0.78 | % | $ | 69,776 |   | 432 |   | 0.83 | % |
| Super  Now deposits                 |       | 51,680                                  |       | 324 |   | 0.84 | % | 53,868 |   | 276 |   | 0.69 | % |
| Money  market deposits              |       | 30,398                                  |       | 306 |   | 1.35 | % | 35,264 |   | 292 |   | 1.11 | % |
| Time  deposits                      |       | 144,159                                 |       | 3,139 |   | 2.91 | % | 130,293 |   | 2,544 |   | 2.61 | % |
| Total  Deposits                     |       | 292,105                                 |       | 4,151 |   | 1.90 | % | 289,201 |   | 3,544 |   | 1.64 | % |
|                                |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Short-term  borrowings              |       | 28,268                                  |       | 545 |   | 2.58 | % | 31,683 |   | 367 |   | 1.55 | % |
| Long-term  borrowings               |       | 79,587                                  |       | 2,711 |   | 4.55 | % | 75,403 |   | 2,584 |   | 4.58 | % |
| Total  borrowings                   |       | 107,855                                 |       | 3,256 |   | 4.04 | % | 107,086 |   | 2,951 |   | 3.68 | % |
|                                |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Total  interest bearing liabilities |       | 399,960                                 |       | 7,407 |   | 2.48 | % | 396,287 |   | 6,495 |   | 2.19 | % |
|                                |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Demand  deposits                    |       | 68,547                                  |       |   |   |   |   | 62,889 |   |   |   |   |   |
| Other  liabilities                  |       | 4,988                                   |       |   |   |   |   | 4,252 |   |   |   |   |   |
| Shareholders’  equity          |       | 75,168                                  |       |   |   |   |   | 70,860 |   |   |   |   |   |
|                                |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
|                                |       | $                                       | 548,663    |   |   |   |   |   | $ | 534,288 |   |   |   |   |   |
| Interest  rate spread               |       |                                    |       |   |   | 3.97 | % |   |   |   |   | 4.00 | % |
| Net  interest income/margin         |       |                                    |       | $ | 17,447 |   | 4.52 | % |   |   | $ | 16,901 |   | 4.47 | % |

 

----

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

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

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

 

18

----

 

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

 
| ** **                                      | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                      | ** ** | **September 30,**              | ** ** | **September 30,**             | ** ** |
| **(In  Thousands)**                             | ** ** | **2005**                       | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                            |       |                           |       |                          |       |   |   |   |   |
| Total interest income                           |       | $                              | 8,113      |                          | $          | 7,924 |   | $ | 23,634 |   | $ | 22,783 |   |
| Total interest expense                          |       | 2,701                          |       | 2,229                         |       | 7,407 |   | 6,495 |   |
|                                            |       |                           |       |                          |       |   |   |   |   |
| Net interest income                             |       | $                              | 5,412      |                          | $          | 5,695 |   | $ | 16,227 |   | $ | 16,288 |   |
| Tax equivalent  adjustment                      |       | 542                            |       | 224                           |       | 1,220 |   | 613 |   |
|                                            |       |                           |       |                          |       |   |   |   |   |
| Net interest income  (fully taxable equivalent) |       | $                              | 5,954      |                          | $          | 5,919 |   | $ | 17,447 |   | $ | 16,901 |   |

 

# **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 nine monthperiods ended September 30, 2005 and 2004:**

 
| ** **                          | ** ** | **For the Three Months Ended September 30,** | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                          | ** ** | **2005 vs 2004**                                  | ** ** | **2005 vs 2004**                                 | ** ** |
| ** **                          | ** ** | **Increase (Decrease)**                           | ** ** | **Increase (Decrease)**                          | ** ** |
| ** **                          | ** ** | **Due to**                                        | ** ** | **Due to**                                       | ** ** |
| **(In  Thousands)**                 | ** ** | **Volume**                                        | ** ** | **Rate**                                         | ** ** | **Net** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Net** | ** ** |
| **Interest income:**                |       |                                              |       |                                             |       |   |   |   |   |   |   |   |   |
| Loans                               |       | $                                                 | 328        |                                             | $          | 57 |   | $ | 385 |   | $ | 1,651 |   | $ | (124 | ) | $ | 1,527 |   |
| Taxable investment  securities      |       | (781                                              | )          | 74                                               |       | (707 | ) | (2,037 | ) | 283 |   | (1,754 | ) |
| Tax-exempt investment  securities   |       | 913                                               |       | (83                                              | )          | 830 |   | 1,802 |   | (116 | ) | 1,686 |   |
| Total  interest-earning assets      |       | 460                                               |       | 48                                               |       | 508 |   | 1,416 |   | 43 |   | 1,459 |   |
|                                |       |                                              |       |                                             |       |   |   |   |   |   |   |   |   |
| **Interest expenses:**              |       |                                              |       |                                             |       |   |   |   |   |   |   |   |   |
| Savings deposits                    |       | (9                                                | )          | (13                                              | )          | (22 | ) | (36 | ) | (13 | ) | (49 | ) |
| Super Now deposits                  |       | (27                                               | )          | 8                                                |       | (19 | ) | (11 | ) | 60 |   | 49 |   |
| Money Market deposits               |       | (20                                               | )          | 31                                               |       | 11 |   | (43 | ) | 58 |   | 15 |   |
| Time deposits                       |       | (576                                              | )          | 915                                              |       | 339 |   | (113 | ) | 708 |   | 595 |   |
| Short-term borrowings               |       | (15                                               | )          | 84                                               |       | 69 |   | (44 | ) | 221 |   | 177 |   |
| Long-term borrowings                |       | 99                                                |       | (4                                               | )          | 95 |   | 142 |   | (16 | ) | 126 |   |
| Total  interest-bearing liabilities |       | (548                                              | )          | 1,021                                            |       | 473 |   | (105 | ) | 1,018 |   | 913 |   |
|                                |       |                                              |       |                                             |       |   |   |   |   |   |   |   |   |
| Change in net interest  income      |       | $                                                 | 1,008      |                                             | $          | (973 | ) | $ | 35 |   | $ | 1,521 |   | $ | (975 | ) | $ | 546 |   |

 

# **Provisionfor Loan Losses**

 

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

 

19

----

 

industry standards andtrends with respect to non-performing loans and its knowledge and experiencewith specific lending segments.

 

Although managementbelieves it uses the best information available to make such determinations andthat the allowance for loan losses is adequate at September 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, employment, and delays in receiving financial information fromborrowers could result in increased levels of nonperforming assets andcharge-offs, increased loan loss provisions, and reductions in income.  Additionally, as an integral part of theexamination process, bank regulatory agencies periodically review the Bank’sloan loss allowance.  The bankingagencies could require the recognition of additions to the loan loss allowancebased on their judgment of information available to them at the time of theirexamination.

 

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

 

The allowance for loanlosses increased from $3,338,000 at December 31, 2004 to $3,492,000 atSeptember 30, 2005.  At September 30,2005, the allowance for loan losses was 1.06% of total loans compared to 1.03%of total loans at December 31, 2004. Management’s conclusion is that the allowance for loan losses isadequate to provide forprobable losses inherent in its loan portfolio as of the balance sheet date.

 

The provision for loanlosses totaled $180,000 and $540,000 for the three and nine months endedSeptember 30, 2005 as compared to $165,000 and $315,000 the same periods in2004.  The increases were the result ofgross loan growth of $13,920,000, primarily in the commercial category, fromSeptember 2004 to September 2005.

 

An overall decrease of$669,000 was experienced in non-performing loans (non-accrual and 90 days pastdue) from December 31, 2004 to $1,056,000 at September 30, 2005.  The decrease is the result of severalcommercial loans being brought to current status due to collection effortsalong with other commercial loans being reclassified to other real estateowned, which is presented within other assets on the balance sheet.

 

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

 

**Non-interestIncome**

 

Totalnon-interest income for the quarter ended September 30, 2005 compared to thesame period in 2004 increased $329,000. Excluding net security gains, the increase from period to period was$180,000.  Bank-owned life insuranceincome increased $198,000 due to a gain on death benefit of $196,000.  The gain is the result of the differencebetween the cash value of the insurance policy and the actual benefit received.  Service charge on deposit accounts increased

 

20

----

 

dueto the implementation of Bounce Protection during May 2005.  This product provides overdraft protection upto a predetermined amount to non-commercial customers for a per event fee.  The approximate 50% increase in overdraftcharges over the 2004 period is attributable to the Bounce Protectionprogram.  Insurance commissions decreasedas The M Group enters the slower portion of its sales year.  The management of The M Group continued togather new and build upon current relationships during the third quarter of2005, however, the sales cycle for insurance products can take time tocomplete. The relationship gathering and building has been facilitated by The MGroup’s continued ability to align with other banks and credit unions to servethe needs of their customers.  Inaddition, The M Group has been able to hire additional sales representatives tobetter cover and expand the current geographic area.

 

Totalnon-interest income for the nine months ended September 30, 2005 compared tothe same period in 2004 increased $656,000. Excluding net security gains, the increase from period to period was$337,000.  Insurance commissionsrepresented the majority of the increase as The M Group continued to expand interms of customer base and geographic area. The increase in service charge on deposit accounts was driven by theimplementation of Bounce Protection during May 2005 as noted above.  The increase in bank-owned life insurance wasthe result of the previously noted gain on death benefit recognized during thethird quarter of 2005.

 

Non-interestincome composition for the three and nine months ended September 30, 2005 and2004 were as follows:

 
| ** **                          | ** ** | **For The Three Months Ended** | ** ** |
|-------------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **September 30, 2005**         | ** ** | **September 30, 2004** | ** ** | **Change** | ** ** |
| **(In  Thousands)**                 | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** |
| Service charge on  deposit accounts |       | $                              | 612        |   | 26.8 | % | $ | 499 |   | 25.5 | % | $ | 113 |   | 22.6 | % |
| Net security gains                  |       | 556                            |       | 24.3 |   | 407 |   | 20.8 |   | 149 |   | 36.6 |   |
| Bank owned life  insurance          |       | 288                            |       | 12.6 |   | 90 |   | 4.6 |   | 198 |   | 220.0 |   |
| Insurance commissions               |       | 507                            |       | 22.2 |   | 637 |   | 32.6 |   | (130 | ) | (20.4 | ) |
| Other income                        |       | 321                            |       | 14.1 |   | 322 |   | 16.5 |   | (1 | ) | (0.3 | ) |
| Total  non-interest income          |       | $                              | 2,284      |   | 100.0 | % | $ | 1,955 |   | 100.0 | % | $ | 329 |   | 16.8 | % |

 
| ** **                          | ** ** | **For The Nine Months Ended** |
|-------------------------------------|------------|-------------------------------|
| ** **                          | ** ** | **September 30, 2005**        | ** ** | **September 30, 2004** | ** ** | **Change** | ** ** |
| **(In  Thousands)**                 | ** ** | **Amount**                    | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** |
| Service charge on  deposit accounts |       | $                             | 1,603 |   | 23.9 | % | $ | 1,497 |   | 24.8 | % | $ | 106 |   | 7.1 | % |
| Net security gains                  |       | 1,854                         |   | 27.7 |   | 1,535 |   | 25.4 |   | 319 |   | 20.8 |   |
| Bank owned life  insurance          |       | 475                           |   | 7.1 |   | 270 |   | 4.5 |   | 205 |   | 75.9 |   |
| Insurance commissions               |       | 1,802                         |   | 26.9 |   | 1,796 |   | 29.7 |   | 6 |   | 0.3 |   |
| Other income                        |       | 964                           |   | 14.4 |   | 944 |   | 15.6 |   | 20 |   | 2.1 |   |
| Total  non-interest income          |       | $                             | 6,698 |   | 100.0 | % | $ | 6,042 |   | 100.0 | % | $ | 656 |   | 10.9 | % |

 

**Non-interestExpenses**

 

Totalnon-interest expenses increased $313,000 from the three months ended September30, 2004 as compared to the same period of 2005.  The increase in salaries and employeebenefits was attributable to several items including; standard cost of livingsalary increases for employees, staffing for the new State College branch, andincreased accruals related to incentive

 

21

----

 

andbonus payments.  Occupancy expensesincreased due to the new branch opened in May 2005 and due to general increasesin utility costs, property taxes, and depreciation.  Other expenses increased primarily due tonormal increases in business expenses and expenses surrounding the opening ofthe new branch.

 

Totalnon-interest expenses increased $895,000 from the nine months ended September30, 2004 as compared to the same period of 2005.  As noted in the three month discussion, thenew State College branch impacted the level of non-interest expenses.  In addition, normal increases in businessexpenses aided the increase in occupancy and other expenses.  Furniture and equipment expenses declined asamortization of software and maintenance on equipment declined as compared tothe 2004 period.

 

Non-interestexpense composition for the three and nine months ended September 30, 2005 and2004 was as follows:

 
| ** **                        | ** ** | **For The Three Months Ended** | ** ** |
|-----------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **September 30, 2005**    | ** ** | **September 30, 2004** | ** ** | **Change** | ** ** |
| **(In  Thousands)**               | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** |
| Salaries and employee  benefits   |       | $                              | 2,130      |   | 55.7 | % | $ | 1,948 |   | 55.5 | % | $ | 182 |   | 9.3 | % |
| Occupancy expense, net            |       | 261                            |       | 6.8 |   | 231 |   | 6.6 |   | 30 |   | 13.0 |   |
| Furniture and equipment  expenses |       | 262                            |       | 6.9 |   | 226 |   | 6.4 |   | 36 |   | 15.9 |   |
| Pennsylvania shares tax           |       | 138                            |       | 3.6 |   | 131 |   | 3.7 |   | 7 |   | 5.3 |   |
| Other expense                     |       | 1,031                          |       | 27.0 |   | 973 |   | 27.7 |   | 58 |   | 6.0 |   |
| Total  non-interest expense       |       | $                              | 3,822      |   | 100.0 | % | $ | 3,509 |   | 100 | % | $ | 313 |   | 8.9 | % |

 
| ** **                        | ** ** | **For The Nine Months Ended** | ** ** |
|-----------------------------------|------------|-------------------------------|------------|
| ** **                        | ** ** | **September 30, 2005**   | ** ** | **September 30, 2004** | ** ** | **Change** | ** ** |
| **(In  Thousands)**               | ** ** | **Amount**                    | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** |
| Salaries and employee  benefits   |       | $                             | 6,323      |   | 55.8 | % | $ | 5,813 |   | 55.8 | % | $ | 510 |   | 8.8 | % |
| Occupancy expense, net            |       | 838                           |       | 7.4 |   | 704 |   | 6.7 |   | 134 |   | 19.0 |   |
| Furniture and equipment  expenses |       | 717                           |       | 6.3 |   | 721 |   | 6.9 |   | (4 | ) | (0.6 | ) |
| Pennsylvania shares tax           |       | 417                           |       | 3.7 |   | 377 |   | 3.6 |   | 40 |   | 10.6 |   |
| Other expense                     |       | 3,035                         |       | 26.8 |   | 2,820 |   | 27.0 |   | 215 |   | 7.6 |   |
| Total  non-interest expense       |       | $                             | 11,330     |   | 100.0 | % | $ | 10,435 |   | 100.0 | % | $ | 895 |   | 8.6 | % |
|                                   |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Provisionfor Income Taxes**

 

Incometaxes decreased $404,000 and $645,000 for the three and nine month periodsended September 30, 2005 compared to the same periods of 2004.  The effective tax rate for the three monthsended September 30, 2005 and 2004 were 20.2% and 28.9%, respectively.  The nine months ended September 30, 2005 hadan effective tax rate of 23.8% as compared to 28.3% for the comparable periodof 2004.  The decreasing effective taxrate is consistent with management’s repositioning of the investment portfoliofrom taxable investment securities to tax-exempt investment securities.  In addition, increased bank-owned lifeinsurance related to a gain on death benefit aided in reducing the effectivetax rate for the three and nine month periods of 2005.

 

22

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# ** **

# **ASSET/LIABILITYMANAGEMENT**

 

# **Cash**

 

Cash and cash equivalentsincreased $514,000 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 $6,146,000 to $330,651,000 at September 30, 2005 from December 31,2004.  The increase is primarily a resultof continued emphasis in obtaining commercial loans as commercial and agriculturalloans increased $4,990,000 since December 31, 2004.

 

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

 
| ** **                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-------------------|------------|------------------|------------|
| **(In  Thousands)**               | ** ** | **2005**          | ** ** | **2004**         | ** ** |
| Commercial and  agricultural      |       | $                 | 35,093     |             | $          | 30,103 |   |
| Real estate mortgage:             |       |              |       |             |       |
| Residential                       |       | 149,150           |       | 147,461          |       |
| Commercial                        |       | 120,410           |       | 123,757          |       |
| Construction                      |       | 10,040            |       | 8,364            |       |
| Installment loans to  individuals |       | 16,983            |       | 15,915           |       |
| Less: Net deferred loan  fees     |       | 1,025             |       | 1,096            |       |
| Gross loans                       |       | $                 | 330,651    |             | $          | 324,504 |   |

 

**Investments**

 

Totalinvestment securities increased $7,584,000 as deposit growth in excess of loangrowth was invested in tax-exempt investment securities.  Since December 31, 2004, tax-exempt bondholdings have increased $44,394,000 as the cash flows from mortgage-backedinvestment securities funded the increase. The growth in tax-exempt investmentsecurities was undertaken to maintain tax equivalent yield, liquidity, providecall option protection, reduce the overall corporate effective tax rate, and toinvest in communities across the Commonwealth of Pennsylvania and the country.

 

Duringthe nine months ended September 30, 2005, $1,854,000 in net security gains wererecognized from the $6,563,000 in net unrealized gains at December 31, 2004 forthe available for sale investment portfolio. The bond portfolio incurred a net realized gain of $45,000 as theportfolio was shifted slightly in light of the current rising rate environmentand the desire to increase the use of the investment portfolio as a vehicle tomanage the corporate tax rate.  Theequity portfolio had recognized gains of $1,809,000 during the nine monthsended September 30,

 

23

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2005.  The gains were the result of management’sintention to diversify, increase dividend yield, or to reduce ownership incompanies that management felt had reached their full potential.

 

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

 
| ** **                             | ** ** | **September 30, 2005** | ** ** |
|----------------------------------------|------------|------------------------|------------|
| ** **                             | ** ** | ** **             | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Amortized**          | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| **(In  Thousands)**                    | ** ** | **Cost**               | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| Available for Sale  (AFS)              |       |                   |       |   |   |   |   |   |   |
| U.S. Government and  agency securities |       | $                      | 66,947     |   | $ | 24 |   | $ | (1,063 | ) | $ | 65,908 |   |
| State and political  securities        |       | 94,951                 |       | 1,929 |   | (490 | ) | 96,390 |   |
| Other debt securities                  |       | 1,381                  |       | 24 |   | (12 | ) | 1,393 |   |
| Total  debt securities                 |       | 163,279                |       | 1,977 |   | (1,565 | ) | 163,691 |   |
| Equity securities                      |       | 25,860                 |       | 3,070 |   | (582 | ) | 28,348 |   |
| Total Investment  Securities AFS       |       | $                      | 189,139    |   | $ | 5,047 |   | $ | (2,147 | ) | $ | 192,039 |   |
|                                   |       |                   |       |   |   |   |   |   |   |
| Held to Maturity (HTM)                 |       |                   |       |   |   |   |   |   |   |
| U.S. Government and  agency securities |       | $                      | 29         |   | $ | 2 |   | $ | — |   | $ | 31 |   |
| Other debt securities                  |       | 237                    |       | — |   | (27 | ) | 210 |   |
| Total Investment  Securities HTM       |       | $                      | 266        |   | $ | 2 |   | $ | (27 | ) | $ | 241 |   |

 
| ** **                             | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | ** **            | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Amortized**         | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| **(In  Thousands)**                    | ** ** | **Cost**              | ** ** | **Gains** | ** ** | **Losses** | ** ** | **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 |   |

 

24

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# **Other Assets**

 

Theincrease in other assets of $9,158,000 since December 31, 2004 is the result oftwo events.  During September 2004, aninvestment in a low income housing complex was undertaken as part of thecompany’s reinvestment into the community and for corporate tax planningpurposes.  The $3,124,000 investment willgenerate federal income tax credits for 10 years beginning when the complexreaches 95% occupancy.  The majority ofthe remaining increase is the result of a receivable in the amount $4,960,000related to investment portfolio trades that were initiated during September2005 but did not settle until October 2005.

# ** **

# **Deposits**

 

AtSeptember 30, 2005, total deposits were $363,190,000, an increase of $6,354,000from December 31, 2004.  Non-timedeposits decreased $20,895,000 from December 31, 2004 with the decreaseoccurring in all non-time deposit account categories.  The increase in time deposits of $27,249,000is the result of a combination of a CD gathering campaign run in conjunctionwith the Atherton Street, State College branch opening, transfer of funds fromnon-time to time deposit accounts, and the obtainment of municipal funds whichmature in under a year.

# ** **

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

 
| ** **          | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** | **Change** | ** ** |
|---------------------|------------|------------------------|------------|-----------------------|------------|------------|------------|
| **(In  Thousands)** | ** ** | **Amount**             | ** ** | **% Total**           | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** |
| Demand deposits     |       | $                      | 72,053     |                  | 19.8       | %          | $          | 74,050 |   | 20.8 | % | $ | (1,997 | ) | (2.7 | )% |
| NOW Accounts        |       | 49,064                 |       | 13.5                  |       | 55,211     |       | 15.5 |   | (6,147 | ) | (11.1 | ) |
| Insured MMDA        |       | 26,757                 |       | 7.4                   |       | 32,377     |       | 9.1 |   | (5,620 | ) | (17.4 | ) |
| Savings deposits    |       | 62,676                 |       | 17.3                  |       | 69,807     |       | 19.6 |   | (7,131 | ) | (10.2 | ) |
| Time deposits       |       | 152,640                |       | 42.0                  |       | 125,391    |       | 35.0 |   | 27,249 |   | 21.7 |   |
| Total  deposits     |       | $                      | 363,190    |                  | 100.0      | %          | $          | 356,836 |   | 100.0 | % | $ | 6,354 |   | 1.8 | % |

 

# **BorrowedFunds**

 

Total borrowed fundsincreased to $124,888,000 at September 30, 2005 as compared to December 31,2004.  The increase in short-termborrowings are being utilized to supplement deposits in the day to day fundingof the loan portfolio and normal operations. Long-term borrowings were utilized to replace maturing long-termadvances, while locking in a competitive rate in advance of projected rateincreases.

 
| ** **                                     | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|------------------------------------------------|------------|------------------|------------|-----------------|------------|
| **(In  Thousands)**                            | ** ** | **2005**         | ** ** | **2004**        | ** ** |
| Short-term borrowings:                         |       |             |       |            |       |
| FHLB repurchase  agreements                    |       | $                | 5,465      |            | $          | 22,630 |   |
| Short-term borrowings,  FHLB                   |       | 19,855           |       | —          |       |
| Securities sold under  agreement to repurchase |       | 15,090           |       | 13,845          |       |
| Total  short-term borrowings                   |       | 40,410           |       | 36,475          |       |
|                                           |       |             |       |            |       |
| Long-term borrowings,  FHLB                    |       | 84,478           |       | 75,878          |       |
| Total  borrowed funds                          |       | $                | 124,888    |            | $          | 112,353 |   |

 

25

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# ** **

# **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 I risk-based,and Tier I leverage capital requirements. In addition to the capitalrequirements, the Federal Deposit Insurance Corporation Improvements Act(FDICIA) established five capital categories ranging from “well capitalized” to“critically undercapitalized.” To be classified as “well capitalized”, Totalrisk-based, Tier I risked-based and Tier I leverage capital ratios must be atleast 10%, 6%, and 5%, respectively.

 

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

 
| ** **                                            | ** ** | **2005**   | ** ** | **2004**  | ** ** |
|-------------------------------------------------------|------------|------------|------------|-----------|------------|
| **(In  Thousands)**                                   | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| Total Capital    (to Risk-weighted Assets)  |       |       |       |      |       |   |   |   |   |
|                                                  |       |       |       |      |       |   |   |   |   |
| Actual                                                |       | $          | 73,683     |      | 21.0       | % | $ | 71,225 |   | 22.1 | % |
| For Capital Adequacy Purposes                         |       | 28,130     |       | 8.0       |       | 25,768 |   | 8.0 |   |
| To Be Well Capitalized                                |       | 35,162     |       | 10.0      |       | 32,210 |   | 10.0 |   |
|                                                  |       |       |       |      |       |   |   |   |   |
|                                                  |       |       |       |      |       |   |   |   |   |
| Tier I Capital    (to Risk-weighted Assets) |       |       |       |      |       |   |   |   |   |
|                                                  |       |       |       |      |       |   |   |   |   |
| Actual                                                |       | $          | 69,071     |      | 19.6       | % | $ | 65,286 |   | 20.3 | % |
| For Capital Adequacy  Purposes                        |       | 14,065     |       | 4.0       |       | 12,884 |   | 4.0 |   |
| To Be Well Capitalized                                |       | 21,097     |       | 6.0       |       | 19,326 |   | 6.0 |   |
|                                                  |       |       |       |      |       |   |   |   |   |
|                                                  |       |       |       |      |       |   |   |   |   |
| Tier I Capital    (to Average Assets)       |       |       |       |      |       |   |   |   |   |
|                                                  |       |       |       |      |       |   |   |   |   |
| Actual                                                |       | $          | 69,071     |      | 12.6       | % | $ | 65,286 |   | 12.1 | % |
| For Capital Adequacy  Purposes                        |       | 22,008     |       | 4.0       |       | 21,655 |   | 4.0 |   |
| To Be Well Capitalized                                |       | 27,510     |       | 5.0       |       | 27,068 |   | 5.0 |   |

 

26

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# **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

 

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

 

8.   Net Core Funding Dependence, 35% maximum

 

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

 

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

 

27

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customerneeds and economical cost.  Both shortand long-term funding needs are addressed by maturities and sales of availablefor sale investment securities, loan repayments and maturities, and liquidatingmoney market investments such as federal funds sold.  The use of these resources, in conjunctionwith access to credit provides core ingredients to satisfy depositor, borrower,and creditor needs.

 

Managementmonitors and determines the desirable level of liquidity.  Consideration is given to loan demand,investment opportunities, deposit pricing and growth potential, as well as thecurrent cost of borrowing funds.  TheCompany has a current borrowing capacity at the Federal Home Loan Bank of $206,685,000.  Inaddition to this credit arrangement, the Company has additional lines of creditwith correspondent banks of $25,500,000. Management believes that it hassufficient liquidity to satisfy estimated short-term and long-term fundingneeds.  Federal Home Loan Bankadvances totaled $109,798,000 as of September 30, 2005.

 

Interestrate sensitivity, which is closely related to liquidity management, is afunction of the repricing characteristics of the Company’s portfolio of assetsand liabilities.  Asset/liabilitymanagement strives to match maturities and rates between loan and investmentsecurity assets with the deposit liabilities and borrowings that 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. Repriceable assets are subtracted from repriceable liabilities, for aspecific time period to determine the “gap”, or difference. Once known, the gapis managed based on predictions about future market interest rates.  Intentional mismatching, or gapping, canenhance net interest income if market rates move as predicted.  However, if market rates behave in a mannercontrary to predictions, net interest income will suffer.  Gaps, therefore, contain an element of riskand must be prudently managed.  In additionto gap management, the Company has an asset/liability management policy whichincorporates a market value at risk calculation which is used to determine theeffects of interest rate movements on shareholders’ equity and a simulationanalysis to monitor the effects of interest rate changes on the Company’sbalance 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.

 

28

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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 SEC 10-K for the period ended December 31, 2004.  Additional information and details areprovided in the Liquidity and Interest Rate Sensitivity section of Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations.

 

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

 

**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 Financial 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 FinancialOfficer concluded that the Company’s disclosure controls and procedures wereeffective as of September 30, 2005. There has been no change in the Company’sinternal control over financial reporting that occurred during the quarterended September 30, 2005, that has materially affected, or is reasonably likelyto materially affect, 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. During the three months ended September 30, 2005 therewere 2,500 shares repurchased as part of the repurchase program.

 

29

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| ** **                               | ** ** | **Total**      | ** ** | **Average**    | ** ** | **Total Number of**      | ** ** | **Maximum Number (or**          | ** ** |
|------------------------------------------|------------|----------------|------------|----------------|------------|--------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **Number of**  | ** ** | **Price Paid** | ** ** | **Shares (or Units)**    | ** ** | **Approximate Dollar Value)**   | ** ** |
| ** **                               | ** ** | **Shares (or** | ** ** | **per Share**  | ** ** | **Purchased as Part of** | ** ** | **of Shares (or Units) that**   | ** ** |
| ** **                               | ** ** | **Units)**     | ** ** | **(or Units)** | ** ** | **Publicly Announced**   | ** ** | **May Yet Be Purchased**        | ** ** |
| **Period**                               | ** ** | **Purchased**  | ** ** | **Purchased**  | ** ** | **Plans or Programs**    | ** ** | **Under the Plans or Programs** | ** ** |
| July  1, 2005 to July 31, 2005           |       | —         |       | —         |       | —                   |       | 49,809                          |       |
|                                     |       |           |       |           |       |                     |       |                            |       |
| August  1, 2005 to August 31, 2005       |       | 2,500          |       | $              | 46.00      |                     | 2,500      |                            | 49,809     |   |
|                                     |       |           |       |           |       |                     |       |                            |       |
| September  1, 2005 to September 30, 2005 |       | —         |       | —         |       | —                   |       | 49,809                          |       |
|                                     |       |           |       |           |       |                     |       |                            |       |
| Total                                    |       | 2,500          |       | $              | 46.00      |                     | 2,500      |                            | 49,809     |   |

 

**Item 3.  Defaults Upon Senior Securities**

 

None

 

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

 

None

 

### **Item5.  Other Information**

 

On October 25, 2005 theBoard of Directors declared a 6 for 5 stock split.  The split will increase shares outstanding by 20% or approximately663,917 shares. Total outstanding shares after the split will totalapproximately 3,983,506.  The split ispayable November 18, 2005 to shareholders of record November 4, 2005.  Cash will be paid in lieu of fractionalshares.

 
| **Item 6. Exhibits** |   |                                                                                                                                                                                                                |
|----------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |   |                                                                                                                                                                                                                |
| (3)  (i)             |   | Articles  of Incorporation of the Registrant, as presently in effect (incorporated by  reference to Exhibit 3.1 of the Registrant’s Registration Statement on Form S-4,  No. 333-65821).                       |
| (3)  (ii)            |   | Bylaws  of the Registrant as presently in effect (incorporated by reference to  Exhibit 3 (ii) of the Registrant’s current report on Form 8-K filed June 17,  2005.                                            |
| (10)  (i)            |   | Consulting  Agreement, dated July 15, 2005, between Hubert A. Valencik and the Registrant  (incorporated by reference to Exhibit 10.1 of the Registrant’s current report  on Form 8-K filed on July 18, 2005). |
| (31)  (i)            |   | Rule  13a-14(a) Certification of Chief Executive Officer                                                                                                                                                            |
| (31)  (ii)           |   | Rule  13a-14(a) Certification of Principal Financial Officer                                                                                                                                                        |
| (32)  (i)            |   | Certification  of Chief Executive Officer Section 1350                                                                                                                                                              |
| (32)  (ii)           |   | Certification  of Principal Financial Officer Section 1350                                                                                                                                                          |

 

30

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## **SIGNATURES**

 

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

 
|   | PENNS WOODS BANCORP,  INC. |                                                                      |
|--------|----------------------------|---------------------------------------------------------------------------|
|   | (Registrant)               |                                                                      |
|   |                       |                                                                      |
|   |                       |                                                                      |
| Date:  | November 8, 2005           |                                                                      | /s/ Ronald A. Walko |   |
|   |                       | Ronald A. Walko,  President and Chief Executive Officer                   |
|   |                       |                                                                      |
|   |                       |                                                                      |
| Date:  | November 8, 2005           |                                                                      | /s/ Brian L. Knepp |   |
|   |                       | Brian L. Knepp, Vice  President of Finance (Principal  Financial Officer) |
|        |                            |                                                                           |  |  |  |  |

 

31

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**EXHIBIT INDEX**

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

 

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