** **

**UNITEDSTATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C.  20549**

 

**FORM 10-Q**

 
| **x**** ** | **Quarterly  Report pursuant to Section 13 or 15 (d) of the Securities Exchange  Act of 1934 for the Quarterly Period Ended March 31, 2008.**                                                                                                                                                                                                                                                                                                                                           |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **      | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **o**           | **Transition  report pursuant to Section 13 or 15 (d) of the Exchange Act for the  Transition Period from                                  to                                .** |

 

**No. 0-17077**

(Commission FileNumber)

 

**PENNS WOODS BANCORP, INC.**

(Exact name ofRegistrant 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’stelephone 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 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for thepast 90 days.

YESx                 NO o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definition of “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.  (Check one):

 
| Large accelerated filer o                   |   | Accelerated filer x            |
|---------------------------------------------|--------|--------------------------------|
|                                        |   |                           |
| Non-accelerated filero                      |   | Small reporting company  ̈ |
| Do not check if a smaller reporting company |   |                           |

 

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

YESo                 NO x

 

On May 1, 2008 therewere 3,867,722 shares of the Registrant’s common stock outstanding.

 

 

----

 

**PENNS WOODS BANCORP, INC.**

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

 
| ** **                                                                                                                           | ** **                                                                                     | **Page**   |
|--------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                           | ** **                                                                                     | **Number** |
|                                                                                                                                 |                                                                                           |       |
| **Part I**                                                                                                                      | **Financial Information**                                                                      | ** ** |
| ** **                                                                                                                           | ** **                                                                                     | ** ** |
| **Item 1.**                                                                                                                          | **Financial Statements**                                                                       | ** ** |
| ** **                                                                                                                           | ** **                                                                                     | ** ** |
| Consolidated Balance Sheet (unaudited) as of  March 31, 2008 and December 31, 2007                                         | 3                                                                                              |
|                                                                                                                                 |                                                                                           |       |
| Consolidated  Statement of Income (unaudited) for the Three   Months ended March 31, 2008 and 2007                    | 4                                                                                              |
|                                                                                                                                 |                                                                                           |       |
| Consolidated  Statement of Changes in Shareholders’ Equity (unaudited) for the Three Months  ended March 31, 2008 and 2007 | 5                                                                                              |
|                                                                                                                                 |                                                                                           |       |
| Consolidated Statement of Comprehensive Income (unaudited)  for the Three Months ended March 31, 2008 and 2007                  | 5                                                                                              |
|                                                                                                                                 |                                                                                           |       |
| Consolidated Statement of Cash Flows (unaudited) for  the Three Months ended March 31, 2008 and 2007                            | 6                                                                                              |
|                                                                                                                                 |                                                                                           |       |
| Notes to Consolidated Financial Statements (unaudited)                                                                               |                                                                                           | 7          |
|                                                                                                                                 |                                                                                           |       |
| **ITEM 2.**                                                                                                                          | **Management’s Discussion and Analysis of Financial  Conditionand Results of Operations** | **14**     |
| **ITEM 3.**                                                                                                                          | **Quantitative and Qualitative Disclosures About  Market Risk**                                | **28**     |
| **ITEM 4.**                                                                                                                          | **Controls and Procedures**                                                                    | **28**     |
| ** **                                                                                                                           | ** **                                                                                     | ** ** |
| **Part II**                                                                                                                     | **Other Information**                                                                          | ** ** |
| ** **                                                                                                                           | ** **                                                                                     | ** ** |
| **Item 1.**                                                                                                                          | **Legal Proceedings**                                                                          | 29         |
| **Item 1A.**                                                                                                                         | **Risk Factors**                                                                               | 29         |
| **Item 2.**                                                                                                                          | **Unregistered Sales of Equity Securities and Use of  Proceeds**                               | 29         |
| **Item 3.**                                                                                                                          | **Defaults Upon Senior Securities**                                                            | 29         |
| **Item 4.**                                                                                                                          | **Submission of Matters to a Vote of Security  Holders**                                       | 29         |
| **Item 5.**                                                                                                                          | **Other Information**                                                                          | 29         |
| **Item 6.**                                                                                                                          | **Exhibits**                                                                                   | 30         |
| **Signatures**                                                                                                                       |                                                                                           | 31         |
| **Exhibit Index and Exhibits**                                                                                                  |                                                                                           | 32         |
|                                                                                                                                      |                                                                                                |            |  |

 

2

----

 

**Part I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

PENNSWOODS BANCORP, INC.

CONSOLIDATEDBALANCE SHEET

(UNAUDITED)

 
| ** **                                                                                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(In Thousands, Except Share Data)**                                            | ** ** | **2008**           | ** ** | **2007**              | ** ** |
|                                                                                                 |       |               |       |                  |       |
| ASSETS                                                                                               |       |               |       |                  |       |
| Noninterest-bearing  balances                                                                        |       | $                  | 16,440     |                  | $          | 15,417 |   |
| Interest-bearing  deposits in other financial institutions                                           |       | 12                 |       | 16                    |       |
| Total cash and  cash equivalents                                                                     |       | 16,452             |       | 15,433                |       |
|                                                                                                 |       |               |       |                  |       |
| Investment  securities, available for sale, at fair value                                            |       | 207,777            |       | 214,455               |       |
| Investment  securities held to maturity (fair value of $281 and $279)                                |       | 279                |       | 277                   |       |
| Loans held for  sale                                                                                 |       | 3,254              |       | 4,214                 |       |
| Loans                                                                                                |       | 357,609            |       | 360,478               |       |
| Less: Allowance  for loan losses                                                                     |       | 4,154              |       | 4,130                 |       |
| Loans, net                                                                                           |       | 353,455            |       | 356,348               |       |
| Premises and  equipment, net                                                                         |       | 7,381              |       | 6,774                 |       |
| Accrued interest  receivable                                                                         |       | 3,122              |       | 3,343                 |       |
| Bank-owned life  insurance                                                                           |       | 13,209             |       | 12,375                |       |
| Investment in  limited partnerships                                                                  |       | 5,261              |       | 5,439                 |       |
| Goodwill                                                                                             |       | 3,032              |       | 3,032                 |       |
| Other assets                                                                                         |       | 17,794             |       | 6,448                 |       |
| TOTAL ASSETS                                                                                         |       | $                  | 631,016    |                  | $          | 628,138 |   |
|                                                                                                 |       |               |       |                  |       |
| LIABILITIES                                                                                          |       |               |       |                  |       |
| Interest-bearing  deposits                                                                           |       | $                  | 324,463    |                  | $          | 314,351 |   |
| Noninterest-bearing  deposits                                                                        |       | 71,662             |       | 74,671                |       |
| Total deposits                                                                                       |       | 396,125            |       | 389,022               |       |
|                                                                                                 |       |               |       |                  |       |
| Short-term  borrowings                                                                               |       | 61,766             |       | 55,315                |       |
| Long-term  borrowings, Federal Home Loan Bank (FHLB)                                                 |       | 96,778             |       | 106,378               |       |
| Accrued interest  payable                                                                            |       | 1,626              |       | 1,744                 |       |
| Other  liabilities                                                                                   |       | 5,567              |       | 5,120                 |       |
| TOTAL  LIABILITIES                                                                                   |       | 561,862            |       | 557,579               |       |
|                                                                                                 |       |               |       |                  |       |
| SHAREHOLDERS’  EQUITY                                                                           |       |               |       |                  |       |
| Common stock,  par value $8.33, 10,000,000 shares authorized; 4,007,652 and 4,006,934 shares  issued |       | 33,397             |       | 33,391                |       |
| Additional  paid-in capital                                                                          |       | 17,904             |       | 17,888                |       |
| Retained  earnings                                                                                   |       | 27,620             |       | 27,707                |       |
| Accumulated  other comprehensive loss:                                                               |       |               |       |                  |       |
| Net unrealized  loss on available for sale securities                                                |       | (3,366             | )          | (2,159                | )          |
| Defined benefit  plan                                                                                |       | (1,375             | )          | (1,375                | )          |
| Less: Treasury  stock at cost, 135,599 and 131,302 shares                                            |       | (5,026             | )          | (4,893                | )          |
| TOTAL  SHAREHOLDERS’ EQUITY                                                                     |       | 69,154             |       | 70,559                |       |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                                     |       | $                  | 631,016    |                  | $          | 628,138 |   |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

3

----

 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OFINCOME

(UNAUDITED)

 
| ** **                                                         | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **March 31,**               | ** ** |
| **(In Thousands, Except Per Share Data)** | ** ** | **2008**                         | ** ** | **2007** | ** ** |
|                                                               |       |                             |       |   |   |
| INTEREST AND  DIVIDEND INCOME                                      |       |                             |       |   |   |
| Loans including  fees                                              |       | $                                | 6,380      |   | $ | 6,423 |   |
| Investment  Securities:                                            |       |                             |       |   |   |
| Taxable                                                            |       | 1,190                            |       | 823 |   |
| Tax-exempt                                                         |       | 1,226                            |       | 1,111 |   |
| Dividend and  other interest income                                |       | 252                              |       | 322 |   |
| TOTAL INTEREST  AND DIVIDEND INCOME                                |       | 9,048                            |       | 8,679 |   |
|                                                               |       |                             |       |   |   |
| INTEREST EXPENSE                                                   |       |                             |       |   |   |
| Deposits                                                           |       | 2,541                            |       | 2,512 |   |
| Short-term  borrowings                                             |       | 429                              |       | 505 |   |
| Long-term  borrowings, FHLB                                        |       | 1,197                            |       | 922 |   |
| TOTAL INTEREST  EXPENSE                                            |       | 4,167                            |       | 3,939 |   |
|                                                               |       |                             |       |   |   |
| NET INTEREST  INCOME                                               |       | 4,881                            |       | 4,740 |   |
|                                                               |       |                             |       |   |   |
| PROVISION FOR  LOAN LOSSES                                         |       | 60                               |       | 40 |   |
|                                                               |       |                             |       |   |   |
| NET INTEREST  INCOME AFTER PROVISION FOR LOAN LOSSES               |       | 4,821                            |       | 4,700 |   |
|                                                               |       |                             |       |   |   |
| NON-INTEREST  INCOME                                               |       |                             |       |   |   |
| Deposit service  charges                                           |       | 570                              |       | 541 |   |
| Securities  gains, net                                             |       | 38                               |       | 326 |   |
| Bank-owned life  insurance                                         |       | 155                              |       | 115 |   |
| Gain on sale of  loans                                             |       | 152                              |       | 138 |   |
| Insurance  commissions                                             |       | 580                              |       | 438 |   |
| Other                                                              |       | 419                              |       | 416 |   |
| TOTAL  NON-INTEREST INCOME                                         |       | 1,914                            |       | 1,974 |   |
|                                                               |       |                             |       |   |   |
| NON-INTEREST  EXPENSE                                              |       |                             |       |   |   |
| Salaries and  employee benefits                                    |       | 2,451                            |       | 2,281 |   |
| Occupancy, net                                                     |       | 338                              |       | 331 |   |
| Furniture and  equipment                                           |       | 285                              |       | 286 |   |
| Pennsylvania  shares tax                                           |       | 105                              |       | 161 |   |
| Other                                                              |       | 1,266                            |       | 1,069 |   |
| TOTAL  NON-INTEREST EXPENSE                                        |       | 4,445                            |       | 4,128 |   |
|                                                               |       |                             |       |   |   |
| INCOME BEFORE  INCOME TAX PROVISION                                |       | 2,290                            |       | 2,546 |   |
| INCOME TAX  PROVISION                                              |       | 159                              |       | 265 |   |
| NET INCOME                                                         |       | $                                | 2,131      |   | $ | 2,281 |   |
|                                                               |       |                             |       |   |   |
| EARNINGS PER  SHARE - BASIC                                        |       | $                                | 0.55       |   | $ | 0.59 |   |
|                                                               |       |                             |       |   |   |
| EARNINGS PER  SHARE - DILUTED                                      |       | $                                | 0.55       |   | $ | 0.59 |   |
|                                                               |       |                             |       |   |   |
| WEIGHTED AVERAGE  SHARES OUTSTANDING - BASIC                       |       | 3,874,741                        |       | 3,897,480 |   |
|                                                               |       |                             |       |   |   |
| WEIGHTED AVERAGE  SHARES OUTSTANDING - DILUTED                     |       | 3,874,931                        |       | 3,897,818 |   |
|                                                               |       |                             |       |   |   |
| DIVIDENDS PER  SHARE                                               |       | $                                | 0.46       |   | $ | 0.44 |   |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

4

----

 

PENNSWOODS BANCORP, INC.

CONSOLIDATEDSTATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

(UNAUDITED)

 
| ** **                                                                                                                 | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **        | ** ** | **ACCUMULATED**        | ** ** | ** **        | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|-------------------|------------|------------------------|------------|-------------------|------------|------------|------------|
| ** **                                                                                                                 | ** ** | **COMMON** | ** ** | **ADDITIONAL** | ** ** | ** **   | ** ** | **OTHER**         | ** ** | ** **             | ** ** | **TOTAL**         | ** ** |
| ** **                                                                                                                 | ** ** | **STOCK**  | ** ** | **PAID-IN**    | ** ** | **RETAINED** | ** ** | **COMPREHENSIVE** | ** ** | **TREASURY**           | ** ** | **SHAREHOLDERS'** | ** ** |
| **(In Thousands Except Per Share Data)**                                                          | ** ** | **SHARES** | ** ** | **AMOUNT**     | ** ** | **CAPITAL**  | ** ** | **EARNINGS**      | ** ** | **INCOME (LOSS)** | ** ** | **STOCK**         | ** ** | **EQUITY** | ** ** |
| Balance, December  31, 2007                                                                                                |       | 4,006,934  |       | $              | 33,391     |         | $          | 17,888            |       | $                      | 27,707     |              | $          | (3,534     | )          | $ | (4,893 | ) | $ | 70,559 |   |
|                                                                                                                       |       |       |       |           |       |         |       |              |       |                   |       |              |       |       |       |
| Comprehensive  Income:                                                                                                     |       |       |       |           |       |         |       |              |       |                   |       |              |       |       |       |
| Net income                                                                                                                 |       |       |       |           |       |         |       | 2,131             |       |                   |       |              |       | 2,131      |       |
| Unrealized loss  on investments available for sale, net of reclassification adjustment, net of  income tax benefit of $622 |       |       |       |           |       |         |       |              |       | (1,207                 | )          |              |       | (1,207     | )          |
| Total  comprehensive income                                                                                                |       |       |       |           |       |         |       |              |       |                   |       |              |       | 924        |       |
| Dividends  declared, ($0.46 per share)                                                                                     |       |       |       |           |       |         |       | (1,781            | )          |                   |       |              |       | (1,781     | )          |
| Purchase of  treasury stock (4,297 shares)                                                                                 |       |       |       |           |       |         |       |              |       |                   |       | (133              | )          | (133       | )          |
| Cumulative effect  of change in accounting for postretirement benefits                                                     |       |       |       |           |       |         |       | (437              | )          |                   |       |              |       | (437       | )          |
| Common shares  issued for employee stock purchase plan                                                                     |       | 718        |       | 6              |       | 16           |       |              |       |                   |       |              |       | 22         |       |
| Balance, March  31, 2008                                                                                                   |       | 4,007,652  |       | $              | 33,397     |         | $          | 17,904            |       | $                      | 27,620     |              | $          | (4,741     | )          | $ | (5,026 | ) | $ | 69,154 |   |

 
| ** **                                                                                                                 | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **        | ** ** | **ACCUMULATED**        | ** ** | ** **        | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|-------------------|------------|------------------------|------------|-------------------|------------|------------|------------|
| ** **                                                                                                                 | ** ** | **COMMON** | ** ** | **ADDITIONAL** | ** ** | ** **   | ** ** | **OTHER**         | ** ** | ** **             | ** ** | **TOTAL**         | ** ** |
| ** **                                                                                                                 | ** ** | **STOCK**  | ** ** | **PAID-IN**    | ** ** | **RETAINED** | ** ** | **COMPREHENSIVE** | ** ** | **TREASURY**           | ** ** | **SHAREHOLDERS'** | ** ** |
| **(In Thousands Except Per Share Data)**                                                          | ** ** | **SHARES** | ** ** | **AMOUNT**     | ** ** | **CAPITAL**  | ** ** | **EARNINGS**      | ** ** | **INCOME (LOSS)** | ** ** | **STOCK**         | ** ** | **EQUITY** | ** ** |
| Balance, December  31, 2006                                                                                                |       | 4,003,514  |       | $              | 33,362     |         | $          | 17,810            |       | $                      | 25,783     |              | $          | 1,560      |       | $ | (3,921 | ) | $ | 74,594 |   |
|                                                                                                                       |       |       |       |           |       |         |       |              |       |                   |       |              |       |       |       |
| Comprehensive  Income:                                                                                                     |       |       |       |           |       |         |       |              |       |                   |       |              |       |       |       |
| Net income                                                                                                                 |       |       |       |           |       |         |       | 2,281             |       |                   |       |              |       | 2,281      |       |
| Unrealized loss  on investments available for sale, net of reclassification adjustment, net of  income tax benefit of $337 |       |       |       |           |       |         |       |              |       | (653                   | )          |              |       | (653       | )          |
| Total  comprehensive income                                                                                                |       |       |       |           |       |         |       |              |       |                   |       |              |       | 1,628      |       |
| Dividends  declared, ($0.44 per share)                                                                                     |       |       |       |           |       |         |       | (1,714            | )          |                   |       |              |       | (1,714     | )          |
| Purchase of  treasury stock (10,030 shares)                                                                                |       |       |       |           |       |         |       |              |       |                   |       | (357              | )          | (357       | )          |
| Stock options  exercised                                                                                                   |       | 330        |       | 3              |       | 5            |       |              |       |                   |       |              |       | 8          |       |
| Common shares  issued for employee stock purchase plan                                                                     |       | 672        |       | 6              |       | 17           |       |              |       |                   |       |              |       | 23         |       |
| Balance, March  31, 2007                                                                                                   |       | 4,004,516  |       | $              | 33,371     |         | $          | 17,832            |       | $                      | 26,350     |              | $          | 907        |       | $ | (4,278 | ) | $ | 74,182 |   |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

PENNSWOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

 
| ** **                                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(In Thousands)**                                                 | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
|                                                                    |       | ** **                                           | ** ** |   | ** ** |
| Net Income                                                              |       | $                                                    | 2,131      |   | $ | 2,281 |   |
| Other  comprehensive loss:                                              |       |                                                 |       |   |   |
| Change in net  unrealized losses on available for sale securities       |       | (1,791                                               | )          | (664 | ) |
| Less:  Reclassification adjustment for net gains included in net income |       | 38                                                   |       | 326 |   |
| Other  comprehensive loss before tax                                    |       | (1,829                                               | )          | (990 | ) |
| Income tax  benefit related to other comprehensive loss                 |       | (622                                                 | )          | (337 | )  |
| Other  comprehensive loss, net of tax                                   |       | (1,207                                               | )          | (653 | ) |
| Comprehensive  income                                                   |       | $                                                    | 924        |   | $ | 1,628 |   |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

5

----

 

PENNSWOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | **March 31,**               | ** ** |
| **(In Thousands)**                                                            | ** ** | **2008**                         | ** ** | **2007** | ** ** |
|                                                                               |       |                             |       |   |   |
| OPERATING  ACTIVITIES                                                              |       |                             |       |   |   |
| Net Income                                                                         |       | $                                | 2,131      |   | $ | 2,281 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                             |       |   |   |
| Depreciation and  amortization                                                     |       | 157                              |       | 179 |   |
| Provision for  loan losses                                                         |       | 60                               |       | 40 |   |
| Accretion and  amortization of investment security discounts and premiums          |       | (284                             | )          | (232 | ) |
| Securities  gains, net                                                             |       | (38                              | )          | (326 | ) |
| Originations of  loans held for sale                                               |       | (6,400                           | )          | (5,289 | ) |
| Proceeds of  loans held for sale                                                   |       | 7,512                            |       | 6,147 |   |
| Gain on sale of  loans                                                             |       | (152                             | )          | (138 | ) |
| Increases in  bank-owned life insurance                                            |       | (155                             | )          | (440 | ) |
| Other, net                                                                         |       | (702                             | )          | (64 | ) |
| Net cash  provided by operating activities                                         |       | 2,129                            |       | 2,158 |   |
| INVESTING  ACTIVITIES                                                              |       |                             |       |   |   |
| Investment  securities available for sale:                                         |       |                             |       |   |   |
| Proceeds from  sales                                                               |       | 17,737                           |       | 13,110 |   |
| Proceeds from  calls and maturities                                                |       | 1,887                            |       | 1,769 |   |
| Purchases                                                                          |       | (23,912                          | )          | (13,277 | ) |
| Net decrease in  loans                                                             |       | 2,833                            |       | 2,786 |   |
| Acquisition of  bank premises and equipment                                        |       | (764                             | )          | (184 | ) |
| Proceeds from  the sale of foreclosed assets                                       |       | 11                               |       | — |   |
| Purchase of  bank-owned life insurance                                             |       | (679                             | )          | (325 | ) |
| Proceeds from  redemption of regulatory stock                                      |       | 1,161                            |       | 132 |   |
| Purchases of  regulatory stock                                                     |       | (1,446                           | )          | (881 | ) |
| Net cash (used  for) provided by investing activities                              |       | (3,172                           | )          | 3,130 |   |
| FINANCING  ACTIVITIES                                                              |       |                             |       |   |   |
| Net increase  (decrease) in interest-bearing deposits                              |       | 10,112                           |       | (8,110 | ) |
| Net decrease in  noninterest-bearing deposits                                      |       | (3,009                           | )          | (2,232 | ) |
| Proceeds of  long-term borrowings, FHLB                                            |       | —                           |       | 10,000 |   |
| Repayment of  long-term borrowings, FHLB                                           |       | (9,600                           | )          | (11,500 | ) |
| Net increase in  short-term borrowings                                             |       | 6,451                            |       | 6,476 |   |
| Dividends paid                                                                     |       | (1,781                           | )          | (1,714 | ) |
| Issuance of  common stock                                                          |       | 22                               |       | 23 |   |
| Stock options  exercised                                                           |       | —                           |       | 8 |   |
| Purchase of treasury  stock                                                        |       | (133                             | )          | (357 | ) |
| Net cash  provided by (used for) financing activities                              |       | 2,062                            |       | (7,406 | ) |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                              |       | 1,019                            |       | (2,118 | ) |
| CASH AND CASH  EQUIVALENTS, BEGINNING                                              |       | 15,433                           |       | 15,373 |   |
| CASH AND CASH  EQUIVALENTS, ENDING                                                 |       | $                                | 16,452     |   | $ | 13,255 |   |
|                                                                               |       |                             |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION                                 |       |                             |       |   |   |
|                                                                               |       |                             |       |   |   |
| Interest paid                                                                      |       | $                                | 4,285      |   | $ | 4,099 |   |
| Income taxes  paid                                                                 |       | 150                              |       | 200 |   |
| Transfer of  loans to foreclosed real estate                                       |       | —                           |       | — |   |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

6

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# ** **

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

**NOTES TO**

**CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

# **Note 1.  Basis of Presentation**

# ** **

# **The consolidated financialstatements include the accounts of Penns Woods Bancorp, Inc. (the “Company”)and its wholly-owned subsidiaries: Woods Investment Company, Inc., WoodsReal Estate Development Company, Inc., and Jersey Shore State Bank (the “Bank”)and its wholly-owned subsidiary, The M Group, Inc. D/B/A The ComprehensiveFinancial Group (“The M Group”).  Allsignificant inter-company balances and transactions have been eliminated in theconsolidation.**

# ** **

The interim financialstatements are unaudited but, in the opinion of management, reflect alladjustments necessary for the fair presentation of results for such periods.  The results of operations for any interimperiod are not necessarily indicative of results for the full year.  These financial statements should be read inconjunction with financial statements and notes thereto contained in theCompany’s Annual Report on Form 10-K for the year ended December 31,2007.

 

Theaccounting policies followed in the presentation of interim financial resultsare the same as those followed on an annual basis.  These policies arepresented on pages 41 through 47 of the Annual Report on Form 10-Kfor the year ended December 31, 2007.

 

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

 

**Note 2. RecentAccounting Pronouncements**

** **

In December 2007, theFASB issued FAS No. 141 (revised 2007), Business Combinations (“FAS 141(R)”),which establishes principles and requirements for how an acquirer recognizesand measures in its financial statements the identifiable assets acquired, theliabilities assumed, and any noncontrolling interest in an acquiree, includingthe recognition and measurement of goodwill acquired in a businesscombination.  FAS 141(R) is effective for fiscal years beginning onor after December 15, 2008.  Earlier adoption is prohibited. The adoption of this standard is not expected to have a material effect on theCompany’s results of operations or financial position.

 

In September 2006, the FASB issued FAS No. 157,Fair Value Measurements (“FAS 157”), which provides enhanced guidance for usingfair value to measure assets and liabilities. The standard applies whenever other standards require or permit assetsor liabilities to be measured at fair value. The Standard does not expand the use of fair value in any newcircumstances.  FAS 157 is effectivefor financial statements issued for fiscal years beginning after November 15,2007 and interim periods within those fiscal years.  In February 2008, the FASB issued StaffPosition No. 157-1, Application of FASB Statement 157 to FASB Statement No. 13

 

7

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and Other Accounting Pronouncements That Address FairValue Measurements for Purposes of Lease Classification or Measurement underStatement 13, which removed leasing transactions accounted for under FAS No. 13and related guidance from the scope of FAS 157. Also in February 2008, the FASB issued Staff Position No.157-2,Partial Deferral of the Effective Date of Statement 157, which deferred theeffective date of FAS No. 157 for all nonfinancial assets and nonfinancialliabilities to fiscal years beginning after November 15, 2008.  On January 1, 2008, the Company adoptedFAS 157 which did not have a material effect on the Company’s results ofoperations or financial position, see Note 8.

 

In February 2007, theFASB issued FAS No. 159, The Fair Value Option for Financial Assets andFinancial Liabilities – Including an Amendment of FASB Statement No. 115(“FAS159”), which provides all entities with an option to report selected financialassets and liabilities at fair value. The objective of the FAS 159 is toimprove financial reporting by providing entities with the opportunity tomitigate volatility in earnings caused by measuring related assets andliabilities differently without having to apply the complex provisions of hedgeaccounting.  FAS 159 is effective as ofthe beginning of an entity’s first fiscal year beginning after November 15,2007.  Early adoption is permitted as ofthe beginning of a fiscal year that begins on or before November 15, 2007provided the entity also elects to apply the provisions of FAS 157.  On January 1, 2008, the Company adoptedFAS 159 which did not have a material effect on the Company’s results ofoperations or financial position.

 

In December 2007, theFASB issued FAS No. 160, Noncontrolling Interests in ConsolidatedFinancial Statements — an Amendment of ARB No. 51(“FAS 160”).  FAS 160 amends ARB No. 51 to establishaccounting and reporting standards for the noncontrolling interest in asubsidiary and for the deconsolidation of a subsidiary.  It clarifies thata noncontrolling interest in a subsidiary, which is sometimes referred to asminority interest, is an ownership interest in the consolidated entity thatshould be reported as equity in the consolidated financial statements. Among other requirements, this statement requires consolidated net income to bereported at amounts that include the amounts attributable to both the parentand the noncontrolling interest.  It also requires disclosure, on the faceof the consolidated income statement, of the amounts of consolidated net incomeattributable to the parent and to the noncontrolling interest.   FAS160 is effective for fiscal years beginning on or after December 15,2008.  Earlier adoption is prohibited. The adoption of this standard is not expected to have a material effect on theCompany’s results of operations or financial position.

 

In September 2006, theFASB reached consensus on the guidance provided by Emerging Issues Task ForceIssue 06-4 (“EITF 06-4”), Accounting for Deferred Compensation andPostretirement Benefit Aspects of Endorsement Split-Dollar Life InsuranceArrangements.  The guidance is applicableto endorsement split-dollar life insurance arrangements, whereby the employerowns and controls the insurance policy, that are associated with apostretirement benefit.  EITF 06-4requires that, for a split-dollar life insurance arrangement within the scopeof the Issue, an employer should recognize a liability for future benefits inaccordance with FAS No. 106 (if, in substance, a postretirement benefitplan exists) or Accounting Principles Board Opinion No. 12 (if thearrangement is, in substance, an individual deferred compensation contract)based on the substantive agreement with the employee.  EITF 06-4 is effective for fiscal yearsbeginning after December 15, 2007. On January 1, 2008, the Company adopted 

 

8

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EITF 06-04 which resulted inan adjustment to retained earnings and an associated liability in the amount of$437,000.

 

In March 2007, the FASBratified Emerging Issues Task Force Issue No. 06-10 (“EITF 06-10”),Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements.EITF 06-10 provides guidance for determining a liability for the postretirementbenefit obligation as well as recognition and measurement of the associatedasset on the basis of the terms of the collateral assignment agreement. EITF06-10 is effective for fiscal years beginning after December 15, 2007. On January 1,2008, the Company adopted EITF 06-10 which did not have a material effect onthe Company’s results of operations or financial position.

 

In June 2007, the FASBratified Emerging Issues Task Force Issue No. 06-11 (“EITF 06-11”),Accounting for Income Tax Benefits of Dividends on Share-Based PaymentAwards.  EITF 06-11 applies toshare-based payment arrangements with dividend protection features that entitleemployees to receive (a) dividends on equity-classified nonvested shares, (b) dividendequivalents on equity-classified nonvested share units, or (c) paymentsequal to the dividends paid on the underlying shares while an equity-classifiedshare option is outstanding, when those dividends or dividend equivalents arecharged to retained earnings under FAS No. 123R, Share-Based Payment, andresult in an income tax deduction for the employer. A consensus was reachedthat a realized income tax benefit from dividends or dividend equivalents thatare charged to retained earnings and are paid to employees forequity-classified nonvested equity shares, nonvested equity share units, andoutstanding equity share options should be recognized as an increase inadditional paid-in capital.  EITF 06-11is effective for fiscal years beginning after December 15, 2007, andinterim periods within those fiscal years. On January 1, 2008, the Company adopted EITF 06-11 which did nothave a material effect on the Company’s results of operations or financialposition.

 

In March 2008, the FASBissued FAS No. 161, Disclosures about Derivative Instruments and HedgingActivities (“FAS 161”), to require enhanced disclosures about derivativeinstruments and hedging activities. The new standard has revised financialreporting for derivative instruments and hedging activities by requiring moretransparency about how and why an entity uses derivative instruments, howderivative instruments and related hedged items are accounted for under FAS No. 133,Accounting for Derivative Instruments and Hedging Activities; and how derivativeinstruments and related hedged items affect an entity’s financial position,financial performance, and cash flows. FAS 161 requires disclosure of the fair values of derivative instrumentsand their gains and losses in a tabular format. It also requires entities toprovide more information about their liquidity by requiring disclosure ofderivative features that are credit risk-related. Further, it requirescross-referencing within footnotes to enable financial statement users tolocate important information about derivative instruments.  FAS 161 is effective for financial statementsissued for fiscal years and interim periods beginning after November 15,2008, with early application encouraged. The adoption of this standard is not expected to have a material effecton the Company’s results of operations or financial position.

 

**Note 3. Per Share Data**

 

The following table sets forth the composition of theweighted average common shares (denominator) used in the basic and dilutive pershare computation.  There are noconvertible 

 

9

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securities which would affect the numerator incalculating basic and diluted earnings per share; therefore, net income aspresented on the consolidated statement of income will be used as thenumerator.

 
|                                                                                                       |   | **Three  Months Ended March 31,** |       |
|------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                                                       |   | **2008**                          | ** ** | **2007** |   |
|                                                                                                       |   |                              |       |   |   |
| Weighted average  common shares outstanding                                                                |   | 4,007,176                         |       | 4,003,936 |   |
|                                                                                                       |   |                              |       |   |   |
| Average treasury  stock shares                                                                             |   | (132,435                          | )          | (106,456 | ) |
|                                                                                                       |   |                              |       |   |   |
| Weighted average  common shares and common stock equivalents used to calculate basic earnings  per share   |   | 3,874,741                         |       | 3,897,480 |   |
|                                                                                                       |   |                              |       |   |   |
| Additional  common stock equivalents (stock options) used to calculate diluted earnings  per share         |   | 190                               |       | 338 |   |
|                                                                                                       |   |                              |       |   |   |
| Weighted average  common shares and common stock equivalents used to calculate diluted earnings  per share |   | 3,874,931                         |       | 3,897,818 |   |

 

Options to purchase 8,273 shares of common stock at theprice of $40.29 were outstanding during the three months ended March 31,2008 and 2007, respectively, but were not included in the computation ofdiluted earnings per share as they were anti-dilutive due to the strike pricebeing greater than the market price as of March 31, 2008 and 2007,respectively.

 

**Note 4.****  NetPeriodic Benefit Cost-Defined Benefit Plans**

 

For a detailed disclosure on the Company’s pension andemployee benefits plans, please refer to Note 11 of the Company’s ConsolidatedFinancial Statements included in the Annual Report on Form 10-K for theyear ended December 31, 2007.

 

The following sets forth the components of the netperiodic benefit cost of the domestic non-contributory defined benefit plan forthe three months ended March 31, 2008 and 2007, respectively:

 

10

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| ** **                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|
| **(In Thousands)**             | ** ** | **2008**                                         | ** ** | **2007** |   |
|                                |       |                                             |       |   |   |
| Service cost                        |       | $                                                | 137        |   | $ | 117 |   |
| Interest cost                       |       | 152                                              |       | 121 |   |
| Expected return  on plan assets     |       | (157                                             | )          | (140 | ) |
| Amortization of  transition         |       | (1                                               | )          | (1 | ) |
| Amortization of  prior service cost |       | 6                                                |       | 6 |   |
| Amortization of  net loss           |       | 14                                               |       | — |   |
| Net periodic  cost                  |       | $                                                | 151        |   | $ | 103 |   |

 

**Employer Contributions**

** **

The Company previously disclosed in its consolidatedfinancial statements, included in the Annual Report on Form 10-K for theyear ended December 31, 2007, that it expected to contribute $450,000 toits defined benefit plan in 2008.  As of March 31, 2008, there wereno contributions made to the plan.

 

**Note5.  Off Balance Sheet Risk**

 

The Company is a party to financial instrumentswith off-balance sheet risk in the normal course of business to meet thefinancing needs of its customers.  Thesefinancial instruments are primarily comprised of commitments to extend creditand standby letters of credit.  These instrumentsinvolve, to varying degrees, elements of credit, interest rate, or liquidityrisk in excess of the amount recognized in the consolidated balance sheet.  The contract amounts of these instrumentsexpress the extent of involvement the Company has in particular classes offinancial instruments.

 

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

 

Outstanding financial instruments with off balancesheet risk are as follows:

 
| ** **                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(In Thousands)**       | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Commitments to  extend credit |       | $                  | 69,402     |                  | $          | 74,349 |   |
| Standby letters  of credit    |       | 975                |       | 974                   |       |
|                               |            |                    |            |                       |            |  |  |

 

11

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

 

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

 

# **Note 7.  Employee Stock Purchase Plan**

# ** **

TheCompany issues shares under the Penns Woods Bancorp, Inc. 2006 EmployeeStock Purchase Plan (“Plan”) which is intended to encourage employeeparticipation in the ownership and economic progress of the Company.  The Plan allows for up to 1,000,000 shares tobe purchased by employees.  The purchaseprice of the shares is 95% of market value with an employee eligible topurchase up to the lesser of 15% of base compensation or $12,000 in marketvalue annually.  During the three monthsended March 31, 2008 and 2007, there were 718 and 672 shares issued underthe plan, respectively.

 

# **Note 8.  Fair Value Measurements**

# ** **

EffectiveJanuary 1, 2008, the Company adopted FAS 157, which, among other things,requires enhanced disclosures about assets and liabilities carried at fairvalue. FAS 157 establishes a hierarchal disclosure framework associated withthe level of pricing observability utilized in measuring assets and liabilitiesat fair value. The three broad levels defined by FAS 157 hierarchy are as follows:

 
| Level I:   |   | Quoted prices are available in active markets for  identical assets or liabilities as of the reported date.                                                                                                                                                                                                                                                                                    |
|------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| Level II:  |   | Pricing inputs are other than quoted prices in  active markets, which are either directly or indirectly observable as of the  reported date. The nature of these assets and liabilities include items for  which quoted prices are available but traded less frequently, and items that  are fair valued using other financial instruments, the parameters of which  can be directly observed. |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| Level III: |   | Assets and liabilities that have little to no  pricing observability as of the reported date. These items do not have  two-way markets and are measured using management’s best estimate of fair  value, where the inputs into the determination of fair value require  significant management judgment or estimation.                                                                    |

 

Thefollowing table presents the assets and liabilities reported on theconsolidated statements of financial condition at their fair value as of March 31,2008 by level within the fair value hierarchy. As required by FAS 157,financial assets and liabilities are classified in their entirety based on thelowest level of input that is significant to the fair value measurement.

 
| ** **                                 | ** ** | **March 31, 2008** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|
| **(In Thousands)**                    | ** ** | **Level I**             | ** ** | **Level II** | ** ** | **Level III** | ** ** | **Total** | ** ** |
|                                       |       |                         |       |   |   |   |   |   |   |
| Assets:                                    |       |                         |       |   |   |   |   |   |   |
| Investment  Securities, available-for-sale |       | $                            | —     |   | $ | 207,777 |   | $ | — |   | $ | 207,777 |   |
|                                            |            |                              |            |  |  |  |  |  |  |  |  |  |  |

 

12

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**CAUTIONARYSTATEMENT FOR PURPOSES OF THE PRIVATE**

**SECURITIESLITIGATION REFORM ACT OF 1995**

 

This Report containscertain “forward-looking statements” including statements concerning plans,objectives, future events or performance and assumptions and other statementswhich are other than statements of historical fact.  The Company wishes to caution readers thatthe following important factors, among others, may have affected and could inthe future affect the Company’s actual results and could cause the Company’sactual results for subsequent periods to differ materially from those expressedin any forward-looking statement made by or on behalf of the Companyherein:  (i) the effect of changesin laws and regulations, including federal and state banking laws andregulations, with which the Company must comply, and the associated costs ofcompliance with such laws and regulations either currently or in the future asapplicable; (ii) the effect of changes in accounting policies andpractices, as may be adopted by the regulatory agencies as well as by theFinancial Accounting Standards Board, or of changes in the Company’sorganization, compensation and benefit plans; (iii) the effect on theCompany’s competitive position within its market area of the  increasing consolidation within the bankingand financial services industries, including the increased competition fromlarger regional and out-of-state banking organizations as well as non-bankproviders of various financial services; (iv) the effect of changes ininterest rates; and (v) the effect of changes in the business cycle anddownturns in the local, regional or national economies.

 

13

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**Item2.   Management’s Discussion and Analysisof Financial Condition and Results of Operation**

 

**EARNINGS SUMMARY**

# ** **

**Comparisonof the Three Months Ended March 31, 2008 and 2007**

 

**SummaryResults**

 

Netincome for the three months ended March 31, 2008 was $2,131,000 comparedto $2,281,000 for the same period of 2007. Basic and diluted earnings per share for the three months ended March 31,2008 were $0.55 as compared to $0.59 for the three months ended March 31,2007.  Return on average assets andreturn on average equity were 1.36% and 12.01% for the three months ended March 31,2008 as compared to 1.56% and 12.13% for the corresponding period of 2007.  Net income from core operations (“operatingearnings”), which excludes after-tax securities gains of $25,000 and $215,000for the three months ended March 31, 2008 and 2007, increased $40,000 to$2,106,000 for the three months ended March 31, 2008 as compared to$2,066,000 for the same period of 2007. Operating earnings per share for the three months ended March 31,2008 increased to $0.54 basic and dilutive as compared to $0.53 for the threemonths ended March 31, 2007.

 

(Management uses thenon-GAAP measure of net income from core operations in its analysis of theCompany’s performance.  This measure, asused by the Company, adjusts net income by significant gains or losses that areunusual in nature.  Because certain ofthese items and their impact on the Company’s performance are difficult topredict, management believes the presentation of financial measures excludingthe impact of such items provides useful supplemental information in evaluatingthe operating results of the Company’s core businesses.  For purposes of this Quarterly Report on Form 10-Q,net income from core operations means net income adjusted to exclude after-taxnet securities gains.  These disclosuresshould not be viewed as a substitute for net income determined in accordancewith GAAP, nor are they necessarily comparable to non-GAAP performance measuresthat may be presented by other companies.)

 

**InterestAnd Dividend Income**

 

Interestand dividend income for the three months ended March 31, 2008 increased$369,000 to $9,048,000 as compared to $8,679,000 for the same period of2007.  The increase in interest incomewas primarily the result of growth in average taxable investment securities of$18,158,000 coupled with a 19 basis point (“bp”) increase in the relatedsecurity yields for the three months ended March 31, 2008 over the sameperiod of 2007.  The combination oftaxable investment security growth and yield increases resulted in a $367,000increase in taxable interest income. Over the same time frame, the averagebalance of tax-exempt investment securities increased $11,804,000 with theportfolio yield decreasing 7 bp resulting in a $115,000 increase in tax-exemptinterest income.  On a taxable equivalentbasis, the interest income from the investment portfolio increased $472,000 dueto the investment portfolio being strategically 

 

14

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shiftedtoward tax-exempt instruments.  Thedecrease in dividends received is the result of a decrease in equityinvestments.

 

Interestand dividend income composition for the three months ended March 31, 2008and 2007 was as follows:

 
| ** **                         | ** ** | **For The Three Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------------------------|------------|
| ** **                         | ** ** | **March 31, 2008**                       | ** ** | **March 31, 2007** | ** ** | **Change** | ** ** |
| **(In Thousands)**            | ** ** | **Amount**                                         | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Loans including fees               |       | $                                                  | 6,380      |   | 70.5 | % | $ | 6,423 |   | 74.0 | % | $ | (43 | ) | (0.7 | )% |
| Investment securities:             |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                            |       | 1,190                                              |       | 13.2 |   | 823 |   | 9.5 |   | 367 |   | 44.6 |   |
| Tax-exempt                         |       | 1,226                                              |       | 13.5 |   | 1,111 |   | 12.8 |   | 115 |   | 10.4 |   |
| Dividend and other interest income |       | 252                                                |       | 2.8 |   | 322 |   | 3.7 |   | (70 | ) | (21.7 | ) |
| Total interest and dividend income |       | $                                                  | 9,048      |   | 100.0 | % | $ | 8,679 |   | 100.0 | % | $ | 369 |   | 4.3 | % |

 

**InterestExpense**

 

Interestexpense for the three months ended March 31, 2008 increased $228,000 to$4,167,000 as compared to $3,939,000 for the same period of 2007.  The increased expense associated withdeposits is primarily the result of growth in the average time depositportfolio of $5,166,000 for the three month period ended March 31, 2008 ascompared to 2007, offset by a reduction in rate paid of 14 basis points overthe same time period.  Factors that ledto the rate decreases include, but are not limited to, Federal Open MarketCommittee (“FOMC”) actions over the past year, campaigns conducted to attract 8to 12 month maturity CDs that have resulted in an increased repricingfrequency, and decreased average utilization of $9,305,000 in brokeredCDs.  Short-term borrowings interestexpense decreased $76,000 as the rate paid decreased 150 bp due to the FOMCrate actions over the past year. Long-term borrowings interest expense increased $275,000 as the averagebalance of such borrowings increased $24,812,000 for the three months ended March 31,2008 as compared to the same period of 2007, while the average rate decreased14 bp to 4.49% for the 2008 period.

 

Interestexpense composition for the three months ended March 31, 2008 and 2007 wasas follows:

 
| ** **                 | ** ** | **For The Three Months Ended** | ** ** |
|----------------------------|------------|----------------------------------------------------|------------|
| ** **                 | ** ** | **March 31, 2008**                       | ** ** | **March 31, 2007** | ** ** | **Change** | ** ** |
| **(In Thousands)**    | ** ** | **Amount**                                         | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Deposits                   |       | $                                                  | 2,541      |   | 61.0 | % | $ | 2,512 |   | 63.8 | % | $ | 29 |   | 1.2 | % |
| Short-term borrowings      |       | 429                                                |       | 10.3 |   | 505 |   | 12.8 |   | (76 | ) | (15.0 | ) |
| Long-term borrowings, FHLB |       | 1,197                                              |       | 28.7 |   | 922 |   | 23.4 |   | 275 |   | 29.8 |   |
| Total interest expense     |       | $                                                  | 4,167      |   | 100.0 | % | $ | 3,939 |   | 100.0 | % | $ | 228 |   | 5.8 | % |

 

**Net Interest Margin**

** **

Thenet interest margin (“NIM”) for the three months ended March 31, 2008 was3.87% as compared to 3.95% for the corresponding period of 2007.  The minimal decrease in the NIM was due tothe investment portfolio growth that occurred during the second half of2007.  Despite this 

 

15

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growthbeing accretive to earnings, return on average assets, and return on averageequity, it lowered the net interest margin due to the spread between the yieldon assets purchased and the associated funding cost being less than historicallevels resulting in a 12 bp decrease in the yield on earning assets.  The yield on total loans decreased to 7.12%from 7.27% due to the impact of the FOMC rate decreases over the pastyear.  The average investment securitiesportfolio increased by $29,962,000, as the tax-exempt segment increased to$114,590,000 at March 31, 2008 as compared to $102,786,000 at March 31,2007.  The growth in the investmentportfolio was driven by a strategic initiative in the second half of 2007 toincrease tax equivalent net interest income by purchasing fixed rateinstruments in anticipation of the decreasing rate environment that iscontinuing into 2008.  The decrease inthe cost of interest bearing liabilities to 3.50% from 3.66% was drivenprimarily by the FOMC rate actions over the past year that resulted in lowerborrowing costs and rates paid on time deposits.  In addition, the shortening of the timedeposit portfolio initiated in the early stages of 2007 has resulted in anincreasing repricing frequency during this period of decreasing rates.

 

Followingis a schedule of average balances and associated yields for the three monthperiods ended March 31, 2008 and 2007:

 
| ** **                                 | ** ** | **AVERAGE BALANCES AND INTEREST RATES** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Three Months Ended  March 31, 2008**  | ** ** | **Three Months Ended  March 31, 2007** | ** ** |
| **(In Thousands)**                    | ** ** | **Average Balance**                                    | ** ** | **Interest** | ** ** | **Average Rate** | ** ** | **Average Balance** | ** ** | **Interest** | ** ** | **Average Rate** | ** ** |
| Assets:                                    |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Tax-exempt loans                           |       | $                                                           | 8,013      |   | $ | 126 |   | 6.32 | % | $ | 8,266 |   | $ | 127 |   | 6.23 | % |
| All other loans                            |       | 354,715                                                     |       | 6,297 |   | 7.14 | % | 352,599 |   | 6,339 |   | 7.29 | % |
| Total loans                                |       | 362,728                                                     |       | 6,423 |   | 7.12 | % | 360,865 |   | 6,466 |   | 7.27 | % |
|                                       |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Taxable investment securities              |       | 100,730                                                     |       | 1,442 |   | 5.73 | % | 82,572 |   | 1,144 |   | 5.54 | % |
| Tax-exempt investment securities           |       | 114,590                                                     |       | 1,857 |   | 6.48 | % | 102,786 |   | 1,683 |   | 6.55 | % |
| Total securities                           |       | 215,320                                                     |       | 3,299 |   | 6.13 | % | 185,358 |   | 2,827 |   | 6.10 | % |
|                                       |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing deposits                  |       | 38                                                          |       | — |   | 0.00 | % | 21 |   | 1 |   | 19.31 | % |
|                                       |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning assets              |       | 578,086                                                     |       | 9,722 |   | 6.75 | % | 546,244 |   | 9,294 |   | 6.87 | % |
|                                       |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Other assets                               |       | 48,692                                                      |       |   |   |   |   | 39,842 |   |   |   |   |   |
|                                       |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Total assets                               |       | $                                                           | 626,778    |   |   |   |   |   | $ | 586,086 |   |   |   |   |   |
|                                       |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                               |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Savings                                    |       | $                                                           | 58,561     |   | 109 |   | 0.75 | % | $ | 58,997 |   | 105 |   | 0.72 | % |
| Super Now deposits                         |       | 46,367                                                      |       | 155 |   | 1.34 | % | 44,847 |   | 149 |   | 1.35 | % |
| Money market deposits                      |       | 23,324                                                      |       | 127 |   | 2.18 | % | 23,562 |   | 125 |   | 2.15 | % |
| Time deposits                              |       | 190,927                                                     |       | 2,150 |   | 4.52 | % | 185,761 |   | 2,133 |   | 4.66 | % |
| Total deposits                             |       | 319,179                                                     |       | 2,541 |   | 3.20 | % | 313,167 |   | 2,512 |   | 3.25 | % |
|                                       |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Short-term borrowings                      |       | 51,113                                                      |       | 429 |   | 3.34 | % | 42,283 |   | 505 |   | 4.84 | % |
| Long-term borrowings, FHLB                 |       | 105,534                                                     |       | 1,197 |   | 4.49 | % | 80,722 |   | 922 |   | 4.63 | % |
| Total borrowings                           |       | 156,647                                                     |       | 1,626 |   | 4.11 | % | 123,005 |   | 1,427 |   | 4.70 | % |
|                                       |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing liabilities         |       | 475,826                                                     |       | 4,167 |   | 3.50 | % | 436,172 |   | 3,939 |   | 3.66 | % |
|                                       |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                            |       | 70,243                                                      |       |   |   |   |   | 68,222 |   |   |   |   |   |
| Other liabilities                          |       | 9,726                                                       |       |   |   |   |   | 6,459 |   |   |   |   |   |
| Shareholders’ equity                  |       | 70,983                                                      |       |   |   |   |   | 75,233 |   |   |   |   |   |
| Total liabilities and shareholders' equity |       | $                                                           | 626,778    |   |   |   |   |   | $ | 586,086 |   |   |   |   |   |
|                                       |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Interest rate spread                       |       |                                                        |       |   |   | 3.25 | % |   |   |   |   | 3.21 | % |
| Net interest income/margin                 |       |                                                        |       | $ | 5,555 |   | 3.87 | % |   |   | $ | 5,355 |   | 3.95 | % |

 

----

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

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

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

 

16

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# **Thefollowing table presents the adjustment to convert net interest income to net interestincome on a fully taxable equivalent basis for the three month periods ended March 31,2008 and 2007.**

# ** **

| ** **                                     | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(In Thousands)**                        | ** ** | **2008**                                                           | ** ** | **2007** | ** ** |
|                                           |       |                                                               |       |   |   |
| Total interest income                          |       | $                                                                  | 9,048      |   | $ | 8,679 |   |
| Total interest expense                         |       | 4,167                                                              |       | 3,939 |   |
|                                           |       |                                                               |       |   |   |
| Net interest income                            |       | 4,881                                                              |       | 4,740 |   |
| Tax equivalent adjustment                      |       | 674                                                                |       | 615 |   |
|                                           |       |                                                               |       |   |   |
| Net interest income (fully taxable equivalent) |       | $                                                                  | 5,555      |   | $ | 5,355 |   |

 

# **Thefollowing table sets forth the respective impact that both volume and ratechanges have had on net interest income on a fully taxable equivalent basis forthe three month periods ended March 31, 2008 and 2007:**

# ** **

17

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# ** **

| ** **                         | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|
| ** **                         | ** ** | **2008 vs 2007**                           | ** ** |
| ** **                         | ** ** | **Increase (Decrease)  Due to**            | ** ** |
| **(In Thousands)**            | ** ** | **Volume**                                           | ** ** | **Rate** | ** ** | **Net** | ** ** |
| Interest income:                   |       |                                                 |       |   |   |   |   |
| Loans, tax-exempt                  |       | $                                                    | (4         | ) | $ | 3 |   | $ | (1 | ) |
| Loans                              |       | 17                                                   |       | (59 | ) | (42 | ) |
| Taxable investment securities      |       | 259                                                  |       | 39 |   | 298 |   |
| Tax-exempt investment securities   |       | 191                                                  |       | (17 | ) | 174 |   |
| Interest bearing deposits          |       | 1                                                    |       | (2 | ) | (1 | ) |
| Total interest-earning assets      |       | 464                                                  |       | (36 | ) | 428 |   |
|                               |       |                                                 |       |   |   |   |   |
| Interest expense:                  |       |                                                 |       |   |   |   |   |
| Savings deposits                   |       | (1                                                   | )          | 5 |   | 4 |   |
| Super Now deposits                 |       | 7                                                    |       | (1 | ) | 6 |   |
| Money market deposits              |       | (2                                                   | )          | 4 |   | 2 |   |
| Time deposits                      |       | 138                                                  |       | (121 | ) | 17 |   |
| Short-term borrowings              |       | 141                                                  |       | (217 | ) | (76 | ) |
| Long-term borrowings, FHLB         |       | 306                                                  |       | (31 | ) | 275 |   |
| Total interest-bearing liabilities |       | 589                                                  |       | (361 | ) | 228 |   |
| Change in net interest income      |       | $                                                    | (125       | ) | $ | 325 |   | $ | 200 |   |

 

# **Provision for Loan Losses**

# ** **

The provision for loan losses is based upon management’s quarterlyreview of the loan portfolio.  Thepurpose of the review is to assess loan quality, identify impaired loans,analyze delinquencies, ascertain loan growth, evaluate potential charge-offsand recoveries, and assess general economic conditions in the marketsserved.  An external independent loanreview is also performed annually for the Bank. Management remains committed to an aggressive program of problem loanidentification and resolution.

 

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

 

Although managementbelieves it uses the best information available to make such determinations andthat the allowance for loan losses is adequate at March 31, 2008, futureadjustments could be necessary if circumstances or economic conditions differsubstantially from the assumptions used in making the initialdeterminations.  A downturn in the localeconomy, 

 

18

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employment, and delays inreceiving financial information from borrowers could result in increased levelsof nonperforming assets, charge-offs, loan loss provisions, and reductions inincome.  Additionally, as an integralpart of the examination process, bank regulatory agencies periodically reviewthe Bank’s loan loss allowance.  Thebanking agencies could require the recognition of additions to the loan lossallowance based on their judgment of information available to them at the timeof their examination.

 

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

 

The allowance for loanlosses increased from $4,130,000 at December 31, 2007 to $4,154,000 at March 31,2008.  At March 31, 2008, theallowance for loan losses was 1.16% of total loans compared to 1.15% of totalloans at December 31, 2007. Management’s conclusion is that the allowance for loan losses isadequate to provide forpossible losses inherent in the loan portfolio as of the balance sheet date.

 

The provision for loanlosses totaled $60,000 for the three months ended March 31, 2008, ascompared to $40,000 for the same period in 2007.  The stability of the provision was the resultof several continuing positive factors, including but not limited to, a ratioof annualized net charge offs to average loans of 0.04%, a ratio ofnonperforming loans to total loans of 0.40%, and a ratio of the allowance forloan losses to nonperforming loans of 291.10% at March 31, 2008.  In addition, gross loans have declined$2,869,000 since December 31, 2007 due to a softening of the loan marketand the payoff of several commercial loans.

 

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

 

**Non-interestIncome**

 

Totalnon-interest income for the three months ended March 31, 2008 compared tothe same period in 2007 decreased $60,000 to $1,914,000 due to a $288,000decrease in net securities gains realized when comparing the three monthperiods ended March 31, 2008 and 2007. Excluding net securities gains, non-interest income for the firstquarter of 2008 would have increased $228,000 as compared to the 2007 period.  Deposit service charges increased $29,000 asthe Company implemented a new fee schedule effective for the first quarter of2008.  Earnings on bank owned lifeinsurance increased $40,000 as a result of increased holdings as of March 31,2008 as compared to the 2007 period.

 

Insurancecommissions for the three months ended March 31, 2008 increased $142,000as compared to the same period in 2007 due to a shift in product mix.  Management of The M Group continues to pursuenew and build upon current relationships. The sales call program continues to expand to other financialinstitutions, which results in additional revenue for The M Group.  However, the addition of another sales outletfor The M-Group can take up to a year or more to be completed.

 

19

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Non-interest incomecomposition for the three months ended March 31, 2008 and 2007 were asfollows:

 
| ** **                 | ** ** | **For The Three Months Ended** | ** ** |
|----------------------------|------------|----------------------------------------------------|------------|
| ** **                 | ** ** | **March 31, 2008**                       | ** ** | **March 31, 2007** | ** ** | **Change** | ** ** |
| **(In Thousands)**    | ** ** | **Amount**                                         | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Deposit  service charges   |       | $                                                  | 570        |   | 29.8 |  % | $ | 541 |   | 27.4 | % | $ | 29 |   | 5.4 | % |
| Securities  gains, net     |       | 38                                                 |       | 2.0 |   | 326 |   | 16.5 |   | (288 | ) | (88.3 | ) |
| Bank  owned life insurance |       | 155                                                |       | 8.1 |   | 115 |   | 5.8 |   | 40 |   | 34.8 |   |
| Gain  on sale of loans     |       | 152                                                |       | 7.9 |   | 138 |   | 7.0 |   | 14 |   | 10.1 |   |
| Insurance  commissions     |       | 580                                                |       | 30.3 |   | 438 |   | 22.2 |   | 142 |   | 32.4 |   |
| Other                      |       | 419                                                |       | 21.9 |   | 416 |   | 21.1 |   | 3 |   | 0.6 |   |
| Total  non-interest income |       | $                                                  | 1,914      |   | 100.0 | % | $ | 1,974 |   | 100.0 | % | $ | (60 | ) | (3.0 | )% |

 

**Non-interestExpense**

 

Totalnon-interest expense increased $317,000 for the three months ended March 31,2008 compared to the same period of 2007. The increase in salaries and employee benefits was attributable toseveral items including standard cost of living wage adjustments for employees,increased pension expense, and other benefit costs.  Occupancy expense increased due to increasedcost of utilities, maintenance and property taxes. Pennsylvania shares taxdecreased $56,000 due to the use of Pennsylvania Enterprise Zone tax creditsfrom a low income housing partnership committed to during 2007.  Other expenses increased primarily due tonormal anticipated inflationary adjustments to ongoing business operating costsand the amortization related to the before mentioned low income housing.

 

Non-interestexpense composition for the three months ended March 31, 2008 and 2007were as follows:

 
| ** **                      | ** ** | **For The Three Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------------------------|------------|
| ** **                      | ** ** | **March 31, 2008**                       | ** ** | **March 31, 2007** | ** ** | **Change** | ** ** |
| **(In Thousands)**         | ** ** | **Amount**                                         | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Salaries  and employee benefits |       | $                                                  | 2,451      |   | 55.1 |  % | $ | 2,281 |   | 55.3 | % | $ | 170 |   | 7.5 | % |
| Occupancy,  net                 |       | 338                                                |       | 7.6 |   | 331 |   | 8.0 |   | 7 |   | 2.1 |   |
| Furniture  and equipment        |       | 285                                                |       | 6.4 |   | 286 |   | 6.9 |   | (1 | ) | (0.3 | ) |
| Pennsylvania  shares tax        |       | 105                                                |       | 2.4 |   | 161 |   | 3.9 |   | (56 | ) | (34.8 | ) |
| Other                           |       | 1,226                                              |       | 28.5 |   | 1,069 |   | 25.9 |   | 197 |   | 18.4 |   |
| Total  non-interest expense     |       | $                                                  | 4,445      |   | 100.0 | % | $ | 4,128 |   | 100.0 | % | $ | 317 |   | 7.7 | % |

 

**Provisionfor Income Taxes**

 

Incometaxes decreased $106,000 for the three month period ended March 31, 2008compared to the same period of 2007.  Theeffective tax rate for the three months ended March 31, 2008 was 

 

20

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6.94%as compared to 10.41% for the same period of 2007.  The decline in the effective tax rate isconsistent with management’s repositioning of the investment portfolio from taxableinvestment securities to tax-exempt investment securities, and the eliminationof the allowance for loan loss recapture. The current effective tax rate has resulted in a deferred tax asset dueto the low income housing tax credits. Management has reviewed the deferred tax asset and has determined thatthe asset will be utilized within the appropriate carry forward period andtherefore does not require a valuation allowance.

 

# **ASSET/LIABILITYMANAGEMENT**

# ** **

# **Cashand Cash Equivalents**

# ** **

Cash and cash equivalentsincreased $1,019,000 from $15,433,000 at December 31, 2007 to $16,452,000at March 31, 2008 primarily as a result of the following activities duringthe three months ended March 31, 2008.

 

# **LoansHeld for Sale**

# ** **

Activity regarding loansheld for sale resulted in sale proceeds exceeding loan originations, less$152,000 in realized gains, by $960,000 for the three months ended March 31,2008.

 

**Loans**

 

Gross loans decreased$2,869,000 since December 31, 2007 due to the early payoff of severallarge commercial loans coupled with increased competition for commercial loansand a softening of the market.

 

The allocation of the loan portfolio, by category,as of March 31, 2008 and December 31, 2007 is presented below:

 
|                                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **Change** | ** ** |
|-----------------------------------------|------------|--------------------|------------|-----------------------|------------|------------|------------|
| **(In Thousands)**                 | ** ** | **2008**           | ** ** | **2007**              | ** ** | **Amount** | ** ** | **%** | ** ** |
| Commercial,  financial and agricultural |       | $                  | 35,557     |                  | $          | 35,739     |       | $ | (182 | ) | (0.5 | )% |
| Real  estate mortgage:                  |       |               |       |                  |       |       |       |   |   |
| Residential                             |       | 167,103            |       | 163,268               |       | 3,835      |       | 2.3 |   |
| Commercial                              |       | 126,154            |       | 132,943               |       | (6,789     | )          | (5.1 | ) |
| Construction                            |       | 16,770             |       | 16,152                |       | 618        |       | 3.8 |   |
| Installment  loans to individuals       |       | 12,959             |       | 13,317                |       | (358       | )          | (2.7 | ) |
| Less:  Net deferred loan fees           |       | 934                |       | 941                   |       | (7         | )          | (0.7 | ) |
| Gross  loans                            |       | $                  | 357,609    |                  | $          | 360,478    |       | $ | (2,869 | ) | (0.8 | )% |

 

The recorded investment in loans for which impairment has beenrecognized in accordance with Statement of Financial Accounting Standards No. 114,*Accounting by Creditors for Impairment of a Loan*,amounted to $1,671,000 at March 31, 2008, as compared to $1,477,000 at December 

 

21

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31, 2007.  The valuationallowance related to impaired loans amounted to $76,000 at March 31, 2008and $102,000 at December 31, 2007. The increase in impaired loans is from a few commercial relationships,while the decrease in valuation allowance is the result of the charge off of acommercial relationship that had a specific collateral weakness.

 

A loan is considered impaired, based on current information and events,if it is probable that the Bank will be unable to collect the scheduledpayments of principal or interest when due according to the contractual termsof the loan agreement. The measurement of impaired loans is generally based onthe present value of expected future cash flows discounted at the historicaleffective interest rate, except that all collateral-dependent loans aremeasured for impairment based on the fair value of the collateral.

 

**Investments**

 

Theestimated fair value of the investment securities portfolio in total hasdecreased $6,676,000 since December 31, 2007, while the amortized costdecreased $4,839,000.  The majority ofthe changes in value occurred within the agency securities and state andmunicipal segments of the portfolio.  Theamortized cost position in state and political securities increased $10,307,000as the Bank continued its strategy to build call protection, maintain taxableequivalent yields, reduce the effective federal income tax rate, and invest incommunities across the Commonwealth of Pennsylvania and the country.  Over the same time period, the above strategyresulted in the amortized cost position of U.S. Government and agencysecurities to decrease by $16,437,000. The increased level of unrealizedlosses, which offset the increase in amortized cost, was the result of changesin the yield curve, not credit quality, as the credit quality of the portfolioremains sound.

 

Theamortized cost of investment securities and their estimated fair values are asfollows:

 

22

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|                                                             | ** ** | **March 31, 2008** | ** ** |
|------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                       | ** ** | ** **                   | ** ** | **Gross** | ** ** | **Gross** | ** ** | **Estimated** | ** ** |
| ** **                                                       | ** ** | **Amortized**                | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| **(In Thousands)**                                          | ** ** | **Cost**                     | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| Available for sale  (AFS)  U.S. Government and agency securities |       | $                            | 45,945     |   | $ | 848 |   | $ | (1 | ) | $ | 46,792 |   |
| State  and political securities                                  |       | 129,958                      |       | 554 |   | (4,025 | ) | 126,487 |   |
| Other  debt securities                                           |       | 16,286                       |       | 130 |   | (444 | ) | 15,972 |   |
| Total  debt securities                                           |       | 192,189                      |       | 1,532 |   | (4,470 | ) | 189,251 |   |
| Equity  securities                                               |       | 20,689                       |       | 486 |   | (2,649 | ) | 18,526 |   |
| Total  investment securities AFS                                 |       | $                            | 212,878    |   | $ | 2,018 |   | $ | (7,119 | ) | $ | 207,777 |   |
|                                                             |       |                         |       |   |   |   |   |   |   |
| Held to maturity (HTM)                                           |       |                         |       |   |   |   |   |   |   |
| U.S. Government and  agency securities                           |       | $                            | 14         |   | $ | 1 |   | $ | — |   | $ | 15 |   |
| Other  debt securities                                           |       | 265                          |       | 1 |   | — |   | 266 |   |
| Total  investment securities HTM                                 |       | $                            | 279        |   | $ | 2 |   | $ | — |   | $ | 281 |   |

 
| ** **                                                       | ** ** | **December  31, 2007** |       |
|------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                       | ** ** | ** **             | ** ** | **Gross** | ** ** | **Gross** | ** ** | **Estimated** | ** ** |
| ** **                                                       | ** ** | **Amortized**          | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** |   |
| **(In Thousands)**                                               | ** ** | **Cost**               | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** |   |
| Available for sale  (AFS)  U.S. Government and agency securities |       | $                      | 62,382     |   | $ | 522 |   | $ | — |   | $ | 62,904 |   |
| State  and political securities                                  |       | 119,651                |       | 581 |   | (2,417 | ) | 117,815 |   |
| Other  debt securities                                           |       | 15,917                 |       | 290 |   | (440 | ) | 15,767 |   |
| Total  debt securities                                           |       | 197,950                |       | 1,393 |   | (2,857 | ) | 196,486 |   |
| Equity  securities                                               |       | 19,776                 |       | 496 |   | (2,303 | ) | 17,969 |   |
| Total  investment securities AFS                                 |       | $                      | 217,726    |   | $ | 1,889 |   | $ | (5,160 | ) | $ | 214,455 |   |
|                                                             |       |                   |       |   |   |   |   |   |   |
| Held  to maturity (HTM)                                          |       |                   |       |   |   |   |   |   |   |
| U.S.  Government and agency securities                           |       | $                      | 14         |   | $ | 1 |   | $ | — |   | $ | 15 |   |
| Other  debt securities                                           |       | 263                    |       | 1 |   | — |   | 264 |   |
| Total  investment securities HTM                                 |       | $                      | 277        |   | $ | 2 |   | $ | — |   | $ | 279 |   |

 

23

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# **Financing Activities**

# ** **

# **Deposits**

# ** **

Totaldeposits increased 1.8% or $7,103,000 from December 31, 2007 to March 31,2008.  The growth was led by a 19.4% or$4,081,000 increase in money market accounts coupled with growth in savingsdeposits of 5.7% or $3,228,000 from December 31, 2007 to March 31,2008.  In addition, time deposit growthof $6,205,000 offset a reduction of $2,712,000 in brokered time deposits.  The utilization of brokered deposits has beenlessened due to the ability to attract market area deposits at more favorableterms through the first three months of 2008.

 

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

# ** **

| ** **                | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** | **Change** | ** ** |
|---------------------------|------------|------------------------------|------------|---------------------------------|------------|------------|------------|
| **(In  Thousands)**       | ** ** | **Amount**                   | ** ** | **% Total**                | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Demand  deposits          |       | $                            | 71,662     |                            | 18.1       | %          | $          | 74,671 |   | 19.2 | % | $ | (3,009 | ) | (4.0 | )% |
| NOW  accounts             |       | 50,193                       |       | 12.7                            |       | 50,883     |       | 13.1 |   | (690 | ) | (1.4 | ) |
| Money  market deposits    |       | 25,110                       |       | 6.3                             |       | 21,029     |       | 5.4 |   | 4,081 |   | 19.4 |   |
| Savings  deposits         |       | 59,985                       |       | 15.1                            |       | 56,757     |       | 14.6 |   | 3,228 |   | 5.7 |   |
| Time  deposits            |       | 183,056                      |       | 46.3                            |       | 176,851    |       | 45.4 |   | 6,205 |   | 3.5 |   |
| Time  deposits - brokered |       | 6,119                        |       | 1.5                             |       | 8,831      |       | 2.3 |   | (2,712 | ) | (30.7 | ) |
| Total  deposits           |       | $                            | 396,125    |                            | 100.0      | %          | $          | 389,022 |   | 100.0 | % | $ | 7,103 |   | 1.8 | % |

# ** **

# **Borrowed Funds**

# ** **

Total borrowed fundsdecreased 1.9% to $158,544,000 at March 31, 2008 as compared to$161,693,000 at December 31, 2007. The decrease in borrowed funds is primarily the result of the previouslydiscussed time deposit gathering campaigns that were utilized to provide fundsto reduce the level of higher cost short-term borrowings and to assist inreplacing long-term borrowing maturities. Short-term borrowings increased and long-term borrowings decreased dueto the maturity of a borrowing totaling $9,600,000 that carried an average rateof 3.14% offset by a new $10,000,000 FHLB borrowing that matures in April 2008and carries a rate of 2.05%.

 
| ** **                                     | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** | **Change** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|------------|------------|
| **(In Thousands)**                        | ** ** | **Amount**                   | ** ** | **% Total**                | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Short-term  borrowings:                        |       |                         |       |                            |       |       |       |   |   |   |   |   |   |
| FHLB  repurchase agreements                    |       | $                            | 37,980     |                            | 24.0       | %          | $          | 38,160 |   | 23.6 | % | $ | (180 | ) | (0.5 | )% |
| Short-term  borrowings, FHLB                   |       | 10,000                       |       | 6.3                             |       | —     |       | — |   | 10,000 |   | — |   |
| Securities  sold under agreement to repurchase |       | 13,786                       |       | 8.7                             |       | 17,155     |       | 10.6 |   | (3,369 | ) | (19.6 | ) |
| Total  short-term borrowings                   |       | 61,766                       |       | 39.0                            | %          | 55,315     |       | 34.2 | % | 6,451 |   | 11.7 |   |
|                                           |       |                         |       |                            |       |       |       |   |   |   |   |   |   |
| Long-term  borrowings, FHLB                    |       | 96,778                       |       | 61.0                            |       | 106,378    |       | 65.8 |   | (9,600 | ) | (9.0 | ) |
| Total  borrowed funds                          |       | $                            | 158,544    |                            | 100.0      | %          | $          | 161,693 |   | 100.0 | % | $ | (3,149 | ) | (1.9 | )% |

 

24

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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 rules aredesigned to make regulatory capital requirements more sensitive to differencesin risk profiles among banks and bank holding companies and to minimizedisincentives for holding liquid assets. Specifically, each is required to maintain certain minimum dollaramounts and ratios of Total risk-based, Tier I risk-based, and Tier I leveragecapital requirements. In addition to the capital requirements, the FederalDeposit Insurance Corporation Improvements Act (FDICIA) established fivecapital categories ranging from “well capitalized” to “criticallyundercapitalized.” To be classified as “well capitalized”, Total risk-based,Tier I risked-based, and Tier I leverage capital ratios must be at least 10%,6%, and 5%, respectively.

##  

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Capitalratios as of March 31, 2008 and December 31, 2007 were as follows:

 
|                                      | ** ** | **2008**   | ** ** | **2007**  | ** ** |
|-------------------------------------------|------------|------------|------------|-----------|------------|
| **(In Thousands)**                   | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| Total  Capital (to Risk-weighted Assets)  |       |       |       |      |       |   |   |   |   |
|                                      |       |       |       |      |       |   |   |   |   |
| Actual                                    |       | $          | 70,290     |      | 17.7       | % | $ | 70,381 |   | 18.0 | % |
| For  Capital Adequacy Purposes            |       | 31,738     |       | 8.0       |       | 31,280 |   | 8.0 |   |
| To  Be Well Capitalized                   |       | 39,673     |       | 10.0      |       | 39,100 |   | 10.0 |   |
|                                      |       |       |       |      |       |   |   |   |   |
| Tier  I Capital (to Risk-weighted Assets) |       |       |       |      |       |   |   |   |   |
|                                      |       |       |       |      |       |   |   |   |   |
| Actual                                    |       | $          | 66,136     |      | 16.7       | % | $ | 66,251 |   | 16.9 | % |
| For  Capital Adequacy Purposes            |       | 15,869     |       | 4.0       |       | 15,640 |   | 4.0 |   |
| To  Be Well Capitalized                   |       | 23,804     |       | 6.0       |       | 23,460 |   | 6.0 |   |
|                                      |       |       |       |      |       |   |   |   |   |
| Tier  I Capital (to Average Assets)       |       |       |       |      |       |   |   |   |   |
|                                      |       |       |       |      |       |   |   |   |   |
| Actual                                    |       | $          | 66,136     |      | 10.6       | % | $ | 66,251 |   | 10.8 | % |
| For  Capital Adequacy Purposes            |       | 24,902     |       | 4.0       |       | 24,664 |   | 4.0 |   |
| To  Be Well Capitalized                   |       | 31,127     |       | 5.0       |       | 30,830 |   | 5.0 |   |

# ** **

# **Liquidityand Interest Rate Sensitivity**

# ** **

## The asset/liabilitycommittee addresses the liquidity needs of the Company to ensure thatsufficient funds are available to meet credit demands and deposit withdrawalsas well as to the placement of available funds in the investmentportfolio.  In assessing liquidityrequirements, equal consideration is given to the current position as well asthe future outlook.

##  

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

 

1.  Net Loans to Total Assets, 85% maximum

2.  Net Loans to Total Deposits, 100% maximum

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

4.  Cumulative 1 Year Maturity GAP %, +/- 25 maximum

 

Fundamentalobjectives of the Company’s asset/liability management process are to maintainadequate liquidity while minimizing interest rate risk.  The maintenance of adequate liquidity 

 

26

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providesthe Company with the ability to meet its financial obligations to depositors,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 andoriginations, and expenses.  In order tocontrol cash flow, the Bank estimates future flows of cash from deposits, loanpayments, and investment security payments. The primary sources of funds are deposits, principal and interestpayments on loans and investment securities, FHLB borrowings, and brokereddeposits.  Management believes the Bankhas adequate resources to meet its normal funding requirements.

 

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

 

Managementmonitors and determines the desirable level of liquidity.  Consideration is given to loan demand,investment opportunities, deposit pricing and growth potential, as well as thecurrent cost of borrowing funds.  TheCompany has a current borrowing capacity at the FHLB of $217,690,000.  In addition to this credit arrangement, theCompany has additional lines of credit with correspondent banks of $29,327,000.Management believes it has sufficient liquidity to satisfy estimated short-termand long-term funding needs.  FHLB borrowings totaled$144,758,000 as of March 31, 2008.

 

Interestrate sensitivity, which is closely related to liquidity management, is afunction of the repricing characteristics of the Company’s portfolio of assetsand liabilities.  Asset/liabilitymanagement strives to match maturities and rates between loan and investmentsecurity assets with the deposit liabilities and borrowings that fundthem.  Successful asset/liabilitymanagement results in a balance sheet structure which can cope effectively withmarket rate fluctuations. The matching process is affected by segmenting bothassets and liabilities into future time periods (usually 12 months, or less)based upon when 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.  Inaddition to gap management, the Company has an asset/liability managementpolicy which incorporates a market value at risk calculation which is used todetermine the effects of interest rate movements on shareholders’ equity and asimulation analysis to monitor the effects of interest rate changes on theCompany’s balance sheet.

 

27

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Therehave been no substantial changes in the Company’s gap analyses or simulationanalyses compared to the information provided in the Company’s Form 10-Kfor the year ended December 31, 2007.

 

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 not measuredby a price index.

 

**Item 3.  Quantitative andQualitative Disclosures About Market Risk**

 

Marketrisk for the Company is comprised primarily of interest rate risk exposure andliquidity risk.  Interest rate risk andliquidity risk management is performed at the Bank level as well as the Companylevel.  The Company’s interest ratesensitivity 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 Annual Report on Form 10-K for the period ended December 31,2007.  Additional information and detailsare provided in the “Liquidity and Interest Rate Sensitivity” section of “Item2. 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 March 31, 2008. There were no changes in the Company’s internal control over financialreporting that occurred during the quarter ended March 31, 2008, that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

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### ** **

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

### ** **

**Item 1.     LegalProceedings**

 

None.

 

**Item 1A.  Risk Factors**

 

There are no materialchanges to the risk factors set forth in Part I, Item 1A, “Risk Factors,”of the Company’s Annual Report on Form 10-K for the year ended December 31,2007.  Please refer to that section fordisclosures regarding the risks and uncertainties related to the Company’sbusiness.

 

**Item2.     Unregistered Sales of Equity Securities and Useof Proceeds**

 
| **Period**                               | ** ** | **Total****Number of  Shares (or  Units)  Purchased** | ** ** | **Average****Price Paid  per Share  (or Units)  Purchased** | ** ** | **Total Number of****Shares (or Units)  Purchased as Part of  Publicly Announced  Plans or Programs** | ** ** | **Maximum Number (or****Approximate Dollar Value)  of Shares (or Units) that  May Yet Be Purchased  Under the Plans or Programs** |    |
|------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------|---------|
|                                     |       |                                                  |       |                                                        |       |                                                                                                            |       |                                                                                                                                        |    |
| Month#1  (January 1- January 31, 2008)   |       | —                                                |       | —                                                      |       | —                                                                                                          |       | —                                                                                                                                      |    |
|                                     |
|                                     |       |                                                  |       |                                                        |       |                                                                                                            |       |                                                                                                                                        |    |
| Month#2  (February 1- February 29, 2008) |       | —                                                |       | —                                                      |       | —                                                                                                          |       | —                                                                                                                                      |    |
|                                     |       |                                                  |       |                                                        |       |                                                                                                            |       |                                                                                                                                        |    |
| Month#3  (March 1- March 31, 2008)       |       | 4,297                                                 |       | $                                                           | 30.97      |                                                                                                            | 4,297      |                                                                                                                                        | 121,773 |   |
|                                          |            |                                                       |            |                                                             |            |                                                                                                                 |            |                                                                                                                                             |         |  |

 

On April 22, 2008,the Board of Directors extended the authorization to repurchase up to 197,000shares, or approximately 5%, of the outstanding shares of the Company for anadditional year to April 30, 2009. The repurchase plan was originally for a one year period expiring on April 25,2007.  To date, there have been 75,227shares repurchased under this plan.

 

**Item 3.     DefaultsUpon Senior Securities**

 

None

 

**Item 4.     Submissionof Matters to a Vote of Security Holders**

 

None

 

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

### ** **

None

 

29

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**Item 6.          Exhibits**

 
| (3)   (i)  |   | Articles  of Incorporation of the Registrant, as presently in effect (incorporated by  reference to Exhibit 3(i) of the Registrant’s Annual Report on  Form 10-K for the year ended December 31, 2007). |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3)   (ii) |   | Bylaws  of the Registrant’s 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).                              |
| (31)  (i)       |   | Rule 13a-14(a)/Rule 15d-14(a) Certification  of Chief Executive Officer.                                                                                                                                          |
| (31)  (ii)      |   | Rule 13a-14(a)/Rule 15d-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.                                                                                                                                                                 |

 

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##  

## **SIGNATURES**

##  

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

 
|                               | PENNS WOODS BANCORP,  INC.                                                |
|------------------------------------|---------------------------------------------------------------------------|
|                               | (Registrant)                                                              |
|                               |                                                                      |
|                               |                                                                      |
| Date:  May 9,  2008 | /s/ Ronald A. Walko                                                       |
|                               | Ronald A. Walko,  President and Chief Executive Officer                   |
|                               |                                                                      |
|                               |                                                                      |
| Date:  May 9,  2008 | /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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