Penns Woods Bancorp (PWOD) 10-Q 2004 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

ýQuarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

for the Quarterly Period Ended September 30, 2004,

oTransition report pursuant to Section 13 or 15 (d) of the Exchange Act

for the Transition Period from                                to                               .

No. 0-17077

(Commission File Number)

PENNS WOODS BANCORP, INC.

(Exact name of Registrant as specified in its charter)

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

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

YES ý              NO o

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

YES ý              NO o

On October 22, 2004 there were 3,319,567 of the Registrant’s common stock outstanding.

PENNS WOODS BANCORP, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

Part I Financial Information

Item 1. Financial Statements

2

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PENNS WOODS BANCORP, INC.

CONSOLIDATED BALANCE SHEET (UNAUDITED)

	September 30, 2004			December 31, 2003
	(in thousands)
ASSETS:
Cash and due from banks	$	16,927		$	10,230
Investment securities available for sale	193,705			210,611
Investment securities held to maturity (market value of $664 and $701)	658			686
Loans held for sale	6,675			4,803
Loans, net of unearned discount of $1,079 and $940	316,731			275,828
Allowance for loan losses	(3,248		)	(3,069		)
Loans, net	313,483			272,759
Premises and equipment, net	4,692			4,625
Accrued interest receivable	2,168			2,242
Bank-owned life insurance	9,178			8,908
Goodwill	3,032			3,032
Other assets	8,751			9,485
TOTAL ASSETS	$	559,269		$	527,381
LIABILITIES:
Noninterest-bearing demand deposits	$	70,046		$	64,875
Interest-bearing demand deposits	94,057			77,245
Savings deposits	70,165			67,298
Time deposits	138,819			124,900
Total deposits	373,087			334,318
Short-term borrowings	33,669			47,265
Other borrowings	75,878			70,878
Accrued interest payable	879			836
Other liabilities	3,374			4,315
Total liabilities	486,887			457,612
SHAREHOLDERS’ EQUITY:
Common stock, par value $10; 10,000,000 shares authorized; 3,327,457 and 3,326,560 shares issued	33,274			33,265
Additional paid-in capital	17,581			17,559
Retained earnings	17,839			13,022
Accumulated other comprehensive income	4,027			6,132
Less: Treasury stock, at cost (8,000 and 5,000 shares)	(339		)	(209		)
Total shareholders’ equity	72,382			69,769
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	559,269		$	527,381

See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

	Nine Months Ended September 30,				Three Months Ended September 30,
	2004		2003		2004		2003
	(in thousands except per share data)
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans	$	15,578	$	14,919	$	5,550	$	5,017
Interest and dividends on investments:
Taxable	5,996		4,472		1,930		1,703
Tax-exempt	1,133		2,134		422		541
Other dividend and interest income	76		99		22		20
Total interest and dividend income	22,783		21,624		7,924		7,281
INTEREST EXPENSE:
Interest on deposits	3,544		4,486		1,227		1,364
Interest on short-term borrowings	367		278		131		106
Interest on other borrowings	2,584		2,344		871		857
Total interest expense	6,495		7,108		2,229		2,327
Net interest income	16,288		14,516		5,695		4,954
Provision for loan losses	315		225		165		90
Net interest income after provision for loan losses	15,973		14,291		5,530		4,864
OTHER INCOME:
Service charges	1,497		1,427		499		490
Securities gains, net	1,535		3,098		407		1,247
Earnings on bank-owned life insurance	270		304		90		97
Insurance commissions	1,796		1,175		637		425
Other operating income	944		796		322		313
Total other operating income	6,042		6,800		1,955		2,572
OTHER EXPENSES:
Salaries and employee benefits	5,813		5,058		1,948		1,738
Occupancy expense, net	704		684		231		219
Furniture and equipment expense	721		811		226		263
Pennsylvania shares tax expense	377		342		131		114
Other expenses	2,820		2,720		973		956
Total other operating expenses	10,435		9,615		3,509		3,290
INCOME BEFORE INCOME TAX PROVISION	11,580		11,476		3,976		4,146
APPLICABLE INCOME TAX PROVISION	3,277		2,941		1,150		1,135
NET INCOME	$	8,303	8,535		$	2,826	$	3,011
EARNINGS PER SHARE - BASIC	$	2.50	$	2.56	$	0.85	$	0.90
-DILUTED	$	2.50	$	2.55	$	0.85	$	0.89
DIVDENDS PER SHARE	$	1.05	$	0.82	$	0.35	$	0.28
WEIGHTED AVERAGE
SHARES OUTSTANDING-BASIC	3,320,249		3,332,717		3,319,457		3,331,555
-DILUTED	3,323,908		3,335,452		3,323,608		3,335,022

See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

	Three Months Ended September 30,
	2004				2003
	(in thousands)
Net Income			$	2,826				$	3,011
Other comprehensive income:
Unrealized gains (losses) on available for sale securities	$	4,165			$	(4,230	)
Less: Reclassification adjustment for gain included in net income	407				1,247
Other comprehensive income (loss) before tax			3,758					(5,477		)
Income tax expense (benefit) related to other comprehensive income (loss)			1,278					(1,862		)
Other comprehensive income (loss), net of tax			2,480					(3,615		)
Comprehensive income (loss)			$	5,306				$	(604	)

	Nine Months Ended September 30,
	2004						2003
	(in thousands)
Net Income				$	8,303				$	8,535
Other comprehensive income:
Unrealized gains(losses) on available for sale securities	$	(1,654	)				$	968
Less: Reclassification adjustment for gain included in net income	1,535						3,098
Other comprehensive loss before tax				(3,189		)			(2,130		)
Income tax benefit related to other comprehensive loss				(1,084		)			(724		)
Other comprehensive loss, net of tax				(2,105		)			(1,406		)
Comprehensive income				$	6,198				$	7,129

See accompanying notes to the unaudited consolidated financial statements.

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

(in thousands except per share data)

									ACCUMULATED
	COMMON			ADDITIONAL					OTHER						TOTAL
	STOCK			PAID-IN		RETAINED			COMPREHENSIVE			TREASURY			SHAREHOLDERS’
	SHARES	AMOUNT		CAPITAL		EARNINGS			INCOME			STOCK			EQUITY
Balance, December 31, 2003	3,326,560	$	33,265	$	17,559	$	13,022		$	6,132		$	(209	)	69,769
Net income for the nine months ended September 30, 2004						8,303									8,303
Dividends declared, $1.05						(3,486		)							(3,486	)
Treasury Stock acquired (3,000 shares)												(130		)	(130	)
Net change in unrealized gain on investments available for sale, net of tax benefit of $1,084									(2,105		)				(2,105	)
Stock options exercised	897	9		22											31
Balance, September 30, 2004	3,327,457	$	33,274	$	17,581	$	17,839		$	4,027		$	(339	)	72,382

See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

	Nine Months Ended September 30,
	2004			2003
	(in thousands)
OPERATING ACTIVITIES:
Net Income	$	8,303		$	8,535
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	407			602
Provision for loan losses	315			225
Accretion and amortization of investment security discounts and premiums	(28		)	(187		)
Securities gains, net	(1,535		)	(3,098		)
Originations of loans held for sale	(27,785		)	(16,008		)
Proceeds of loans held for sale	25,913			13,931
Earnings on bank-owned life insurance	(270		)	(304		)
Other, net	718			1,021
Net cash provided by operating activities	6,038			4,717
INVESTING ACTIVITIES:
Investment securities available for sale:
Proceeds from sales	131,196			34,623
Proceeds from calls and maturities	22,104			41,392
Purchases	(138,020		)	(110,937		)
Investment securities held to maturity:
Proceeds from calls and maturities	42			264
Purchases	(14		)	(24		)
Net increase in loans	(41,145		)	(7,860		)
Acquisition of bank premises and equipment	(474		)	(451		)
Proceeds from the sale of foreclosed assets	177			72
Proceeds from redemption of regulatory stock	2,100			196
Purchases of regulatory stock	(1,895		)	(2,523		)
Net cash used in investing activities	(25,929		)	(45,248		)
FINANCING ACTIVITIES:
Net increase in interest-bearing deposits	33,598			3,867
Net increase (decrease) in noninterest-bearing deposits	5,171			(10,121		)
Proceeds of long-term borrowings	5,000			19,100
Net increase (decrease) in short-term borrowings	(13,596		)	29,392
Dividends paid	(3,486		)	(2,726		)
Stock options exercised	31			52
Purchase of Treasury Stock	(130		)	(197		)
Net cash provided by financing activities	26,588			39,367
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	6,697			(1,164		)
CASH AND CASH EQUIVALENTS, BEGINNING	10,230			11,731
CASH AND CASH EQUIVALENTS, ENDING	$	16,927		$	10,567

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The Company paid approximately $6,452,000 and $7,313,000 interest on deposits and borrowings during the first three quarters of 2004 and 2003, respectively.

The Company made income tax payments of approximately $3,250,000 and $2,154,000 during the first nine months of 2004 and 2003, respectively.

See accompanying notes to the unaudited consolidated financial statements.

PENNS WOODS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1.  Basis of Presentation

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

The interim financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for the fair presentation of results for such periods.  All of those adjustments are of a normal, recurring nature.  The results of operations for any interim period are not necessarily indicative of results for the full year.  These financial statements should be read in conjunction with financial statements and notes thereto contained in the Company’s annual report for the year ended December 31, 2003.

Recent Accounting Pronouncements

In March 2004, the Financial Accounting Standards Board (“FASB”) reached consensus on the guidance provided by Emerging Issues Task Force Issue 03-1 (“EITF 03-1”), The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments. The guidance is applicable to debt and equity securities that are within the scope of FASB Statement of Financial Accounting Standard (“SFAS”) No. 115, Accounting for Certain Investments In Debt and Equity Securities and certain other investments. EITF 03-1 specifies that an impairment would be considered other-than-temporary unless (a) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for the recovery of the fair value up to (or beyond) the cost of the investment and (b) evidence indicating the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. EITF 03-1 cost method investment and disclosure provisions were effective for reporting periods ending after June 15, 2004. The measurement and recognition provisions relating to debt and equity securities have been delayed until the FASB issues additional guidance. The Company adopted cost method investment and disclosure provisions of EITF 03-1 on June 30, 2004. The adoption did not have a material impact on the consolidated financial statements, results of operations or liquidity of the Company.

NOTE 2. Per Share Data

The following table sets forth the composition of the weighted average common shares (denominator) used in the basic and dilutive per share computation.  There are no convertible securities which would affect the numerator in calculating basic and dilutive

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earnings per share, therefore, net income as presented on the consolidated statement of income will be used as the numerator.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2003		2004		2003
Weighted average common shares outstanding	3,327,457		3,451,961		3,327,406		3,451,572
Average treasury stock shares	(8,000	)	(120,406	)	(7,157	)	(118,855	)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share	3,319,457		3,331,555		3,320,249		3,332,717
Additional common stock equivalents (stock options) used to calculate diluted earnings per share	4,151		3,467		3,659		2,735
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share	3,323,608		3,335,022		3,323,908		3,335,452

Options to purchase 8,713 shares of common stock at the price of $48.35 were outstanding during the three and nine months ended September 30, 2004 and 10,890 shares of common stock at the price of $48.35 were outstanding for the three and nine months ended September 30, 2003, but were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive.

Note 3.  Net Periodic Benefit Cost-Defined Benefit Plans

For a detailed disclosure on the Company’s pension and employee benefits plans, please refer to Note K of the Company’s Consolidated Financial Statements included in the 2003 Annual Report on Form 10-K.

The following sets forth the components of net periodic benefit cost of the domestic non-contributory defined benefit plans for the nine months ended September 30, 2004 and September 30, 2003  respectively.

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	2004			2003
Service cost	$	349		$	332
Interest cost	299			288
Expected return on plan assets	(245		)	(192		)
Amortization of transition obligation	(2		)	(2		)
Amortization of prior service cost	19			20
Amortization of net (gain) loss	31			62
Net periodic cost	$	451		$	508

Employer Contributions

The Company previously disclosed in its consolidated financial statements included in the 2003 Annual Report on Form 10-K that it expected to contribute $560,000 to its defined benefit plan in 2004.  As of September 30, 2004, a contribution of $296,000 has been made.  The Company presently anticipates contributing an additional $84,000 to fund its pension plan in 2004 for a total of $380,000.

Note 4.  Off Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and standby letters of credit.  These instruments involve, to varying degrees, elements of credit, interest rate or liquidity risk in excess of the amount recognized in the consolidated balance sheet.  The contract amounts of these instruments express the extent of involvement the Company has in particular classes of financial instruments.

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

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

Financial instruments whose contract amounts represent credit risk are as follows:

	September 30,		December 31,
	2004		2003
Commitments to extend credit	$	54,313	$	47,454
Standby letters of credit	$	760	$	258

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Note 5.  Reclassification of Comparative Amounts

Certain comparative amounts for the prior periods have been reclassified to conform to current period presentations. Such reclassifications had no effect on net income or shareholders’ equity.

CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

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

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

EARNINGS SUMMARY

Comparison of the Nine Months Ended September 30, 2004 and 2003

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Interest Income

The $1,159,000 increase of interest income is the result of the expansion of total interest-earning assets partially offset by declining interest rates on interest-earning assets.  Total securities experienced a rate decline of 17 basis points effected by management’s repositioning from longer term States & Political securities to shorter term U.S. Government securities.  While weighted average interest rates in the loan portfolio decreased 70 basis points, the expansion into the Centre County market facilitated loan growth of over $40,903,000.  The opportunity to borrow funds at historically low interest rates, a growth of municipal deposits, and the sale of securities funded the loan growth.

Interest Expense

For the nine months ended September 30, 2004, total interest expense decreased by $613,000 or 8% compared to the first nine months of 2003.  Low interest rates have positively impacted interest expense.  Management’s adjustment of rates paid while continuing to monitor the local competition for all deposit accounts contributed the most substantial decrease in interest expense.  The weighted average rate on interest paid on deposits declined 51 basis points for the nine months ended September 30, 2004 from the same period in 2003 resulting in the decrease of interest paid on savings deposits of $404,000 and $538,000 on time deposits.

Favorable long-term borrowing rates offer opportunities to reduce interest expenses over the coming years.  At the end of the first quarter of 2003, the Company borrowed an additional $20 million in long term advances through the FHLB to minimize future borrowing costs and to enhance asset and liability positioning.  These additional borrowings were utilized by management to take advantage of current investment opportunities while minimizing interest rate risk.  The $240,000 increase in expense on long-term borrowings is the result of these additional advances with average advances of $10,260,000 offset by the 23 basis point decline in the resulting weighted average interest rate for the first three quarters of 2004 compared to the same period of 2003. Interest paid on short-term borrowings increased $89,000 as a result of an increase in the average balances of $11,812,000 offset partially by the decline in the weighted average interest rate of 32 basis points.  Overnight borrowings increased as a result of leveraging the purchase of securities and loan growth.

Provision for Loan Losses

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

The allowance is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance has been determined.  Loss factors are

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based on management’s consideration of the nature of the portfolio segments, changes in mix and volume of the loan portfolio, and historical loan loss experience.  In addition, management considers industry standards and trends with respect to nonperforming loans and its knowledge and experience with specific lending segments.

Although management believes that it uses the best information available to make such determinations and that the allowance for loan losses is adequate at September 30, 2004, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making the initial determinations.  A downturn in the local economy, employment and delays in receiving financial information from borrowers could result in increased levels of nonperforming assets and charge-offs, increased loan loss provisions and reductions in income.  Additionally, as an integral part of the examination process, bank regulatory agencies periodically review the Bank’s loan loss allowance.  The banking agencies could require the recognition of additions to the loan loss allowance based on their judgment of information available to them at the time of their examination.

While management has attributed the allowance for loan losses to various portfolio segments, the allowance is available for the entire portfolio.

The allowance for loan losses increased from $3,069,000 at December 31, 2003 to $3,248,000 at September 30, 2004.  At September 30, 2004, allowance for loan losses was 1.0% of total loans compared to 1.1% of total loans at December 31, 2003.  This percentage is consistent with the Bank’s historical experience and peer banks.  Management’s conclusion is that the allowance for loan losses is adequate to provide for probable losses inherent in its loan portfolio as of the balance sheet date.

The provision for loan losses totaled $315,000 for the nine months ended September 30, 2004.  The provision for the same period in 2003 was $225,000.  Management concluded that the increase of the provision is adequate, considering the loan growth experienced in the first three quarters in 2004.

An overall increase of $269,000 was experienced in non-performing loans from December 31, 2003 to $1,525,000 on September 30, 2004.  This increase consisted of a real estate secured loans increase of $247,000 and an installment loans increase of $22,000.

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

Other Operating Income

Total other operating income for the nine months ended September 30, 2004 decreased $758,000.  Net securities gains represent a decrease of $1,563,000. During the second quarter of 2003, management took advantage of the opportunity available to sell

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investment securities without significantly impacting the overall effective yield of the investment portfolio.  Excluding net securities gains, other income increased $805,000 primarily due to the $621,000 growth of insurance commissions earned by the Bank’s subsidiary, The M Group, Inc.  The M Group has added personnel and expanded its market area in the last year.  Service charges increased $70,000 as the weighted average balance of demand deposits increased.  Bank-owned life insurance and other operating income combined increased $114,000 due to normal operations.

Other Operating Expense

An overall increase in other expenses totaled $820,000 for the first nine months of 2004 compared to the same period in 2003 and is the result of normal operational cost increases.  The $755,000 increase of salaries and benefits consisted of the increase of $363,000 of commissions paid as a result of the growth in sales of financial products offered by The M Group, Inc. and normal salary increases of $392,000.

Provision for Income Taxes

The provision for income taxes for the nine months ended September 30, 2004 resulted in an effective income tax rate of 28.30% compared to 25.63% for the corresponding period in 2003.  This increasing effective tax rate is the result of management’s previous periods repositioning of the investment portfolio from tax-exempt securities to taxable securities.  The tax effects of the repositioning were examined by management as part of the Company’s strategic plan.

Comparison of the Three Months Ended September 30, 2004 and 2003

Interest Income

During the third quarter of 2004, interest and dividend income earned was $7,924,000, an increase of $643,000 over the same quarter in 2003.

Interest income on loans increased $533,000 due to the weighted average balance increasing $49,885,000 from the third quarter of 2003 to the third quarter of 2004 partially offset by the weighted average interest rate decrease of 53 basis points.

An increase of $110,000 occurred in interest and dividends on investments.  Taxable interest and dividends increased $229,000 while non-taxable interest decreased $119,000 due to the purchases of short-term, taxable securities and the sales of long-term, tax-free securities.

Interest Expense

Interest expense during the third quarter of 2004 decreased $98,000, or 4.2%, from interest expense incurred during the third quarter of 2003.  Interest expense on savings deposits decreased $37,000 as a result of a 22 basis point decline of the effective

14

weighted average interest rate for the period partially offset by the increase of the weighted average balance of $20,321,000.  The weighted average interest rate for time deposits decreased 31 basis points for a savings of $100,000.  The interest expense paid on short-term borrowings increased $25,000 caused by the increase of the weighted average interest rate of 3 basis points along with the increase of the weighted average balance of short-term borrowings increase of $607,000.  Interest paid on long-term borrowings increased $14,000 due to the increase in the weighted average balance of $5,000,000.

Other Operating Income

Total other operating income for the quarter ended September 30, 2004 compared to the same period in 2003 decreased $617,000.  The decrease is due to the decrease of securities gains of $840,000 partially offset by an increase in the insurance and brokerage commissions earned by the Bank’s subsidiary, The M Group, Inc. of $212,000 during the third quarter of this year.  Service charges rose $9,000 as the weighted average balance of demand deposits continued to rise.

Other Operating Expenses

Total other operating expenses increased $219,000.  Salaries and employee benefits increased $210,000 attributed to both the increase of commissions earned by The M Group, Inc. and standard cost of living salary increases for bank employees.  Occupancy expense increased $12,000 and furniture and equipment decreased $37,000 due to an increase in depreciation expense during the third quarter of 2004 compared to the third quarter of 2003.  Pennsylvania shares tax expense increased $17,000 and miscellaneous expenses increased $17,000 due to general inflationary increases.

Provision for Income Taxes

Income taxes increased $15,000 for the quarter ended September 30, 2004 compared to the third quarter of 2003.  The effective tax rates for the quarter ended September 30, 2004 and 2003 were 28.92% and 27.38%, respectively.  This increasing effective tax rate is consistent with management’s repositioning of the investment portfolio from tax-exempt securities to taxable securities.  The tax effects of the repositioning were examined by management as part of the Company’s strategic plan.

ASSET/LIABILITY MANAGEMENT

Assets

At September 30, 2004, total assets were $559.3 million compared to $527.4 million at December 31, 2003.  Cash and due from banks increased $6.7 million during the first three quarters of 2004.  Investment securities totaled $194.3 million at September 30, 2004 for a net decrease of $16.9 million from the corresponding balance

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December 31, 2003.  The decline of investments is primarily due to the principal payments on the mortgage-backed securities of $21.2 million.  Mortgage-backed agency securities were purchased and sold for a net decrease of $7.3 million and tax-free municipals were purchased and sold for a net increase of $14.9 million.  In prior periods, management had shortened the average life of the securities portfolio in anticipation of rising interest rates.  During 2004, management has lengthened the maturities of investments as yields increase.  The unrealized gain on investments decreased $3.3 million from December 31, 2003 to September 30, 2004.   During this period, net loans increased by $40.7 million as a result of expansion into Centre County and increased volume in both Lycoming and Clinton counties.

Deposits

At September 30, 2004, total deposits amounted to $373.1 million representing an increase of $38.8 million from total deposits at December 31, 2003.  Non-interest bearing demand deposits increased $5.2 million and savings deposits increased $2.9 million due to normal operations. Time deposits increased $13.9 million and interest-bearing demand deposits increased $16.8 million due to an increase of municipal deposits.

Capital

The adequacy of the Company’s capital is reviewed on an ongoing basis with reference to the size, composition and quality of the Company’s resources and regulatory guidelines.  Management seeks to maintain a level of capital sufficient to support existing assets and anticipated asset growth, maintain favorable access to capital markets and preserve high quality credit ratings.

Bank holding companies are required to comply with the Federal Reserve Board’s risk-based capital guidelines.  The risk-based capital rules are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies and to minimize disincentives for holding liquid assets.  Specifically, each is required to maintain certain minimum dollar amounts and ratios of Total risk-based, Tier I risk-based and Tier I leverage capital requirements. In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvements Act (FDICIA) established five capital categories ranging from “well capitalized” to “critically undercapitalized.” To be classified as “well capitalized”, Total risk-based, Tier I risked-based and Tier I leverage capital ratios must be at least 10%, 6%, and 5% respectively.

At September 30, 2004, the Company was “well capitalized” with a total capital ratio of 22.11%, a Tier I capital ratio of 20.27% and a Tier I leverage ratio of 12.06%.

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Liquidity and Interest Rate Sensitivity

The asset/liability committee addresses the liquidity needs of the Bank to see that sufficient funds are available to meet credit demands and deposit withdrawals as well as to the placement of available funds in the investment portfolio.  In assessing liquidity requirements, equal consideration is given to the current position as well as the future outlook.

The following liquidity measures are monitored and kept within the limits cited.

1.  Net Loans to Total Assets,  70% maximum

2.  Net Loans to Total Deposits, 92.5% maximum

3.  Net Loans to Core Deposits, 100% maximum

4.  Investments to Total Assets, 40% maximum

5.  Investments to Total Deposits, 50% maximum

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

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

8.  Net Core Funding Dependence, 35% maximum

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

The Bank, like other financial institutions, must have sufficient funds available to meet its liquidity needs for deposit withdrawals, loan commitments and expenses.   In order to control cash flow, the Bank estimates future flows of cash from deposits and loan payments.  The primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, as well as Federal Home Loan Bank borrowings.  Funds generated are used principally to fund loans and purchase investment securities.  Management believes the Company has adequate resources to meet its normal funding requirements.

Management monitors the Company’s liquidity on both a long and short-term basis thereby, providing management necessary information to react to current balance sheet trends.  Cash flow needs are assessed and sources of funds are determined.  Funding strategies consider both customer needs and economical cost.  Both short and long term funding needs are addressed by maturities and sales of available for sale investment

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securities, loan repayments and maturities, and liquidating money market investments such as federal funds sold.  The use of these resources, in conjunction with access to credit provides core ingredients to satisfy depositor, borrower and creditor needs.

Management monitors and determines the desirable level of liquidity.  Consideration is given to loan demand, investment opportunities, deposit pricing and growth potential as well as the current cost of borrowing funds.  The Company has a current borrowing capacity at the Federal Home Loan Bank of $261.9 million.  In addition to this credit arrangement, the Company has additional lines of credit with correspondent banks of $10,500,000. The Company’s management believes that it has sufficient liquidity to satisfy estimated short-term and long-term funding needs.  Federal Home Loan Bank advances totaled $95.6 million as of September 30, 2004.

Interest rate sensitivity, which is closely related to liquidity management, is a function of the repricing characteristics of the Company’s portfolio of assets and liabilities.  Asset/liability management strives to match maturities and rates between loan and investment security assets with the deposit liabilities and borrowings that fund them.  Successful asset/liability management results in a balance sheet structure which can cope effectively with market rate fluctuations. The matching process is affected by segmenting both assets 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 a specific time period to determine the “gap”, or difference. Once known, the gap is managed based on predictions about future market interest rates.  Intentional mismatching, or gapping, can enhance net interest income if market rates move as predicted.  However, if market rates behave in a manner contrary to predictions, net interest income will suffer.  Gaps, therefore, contain an element of risk and must be prudently managed.  In addition to gap management, the Company has an asset/liability management policy which incorporates a market value at risk calculation which is used to determine the effects of interest rate movements on shareholders’ equity and a simulation analysis to monitor the effects of interest rate changes on the Company’s balance sheets.

There has been no substantial changes in the Company’s GAP analyses or simulation analyses compared to the information provided in the Company’s Form 10-K for the period ended December 31, 2003.

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

Inflation

The asset and liability structure of a financial institution is primarily monetary in nature.  Therefore, interest rates rather than inflation have a more significant impact on the Company’s performance.  Interest rates are not always affected in the same direction or

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magnitude as prices of other goods and services, but are reflective of fiscal policy initiatives or economic factors which are not measured by a price index.

In reference to the attached financial statements, all adjustments are of a normal recurring nature pursuant to Rule 10-01 (b) (8) of Regulation S-X`.

Item 3.  Quantitative and Qualitative Disclosure About Market Risk

Market risk for the Company is comprised primarily from interest rate risk exposure and liquidity risk.  Interest rate risk and liquidity risk management is performed at the Bank level as well as the Company level.  The Company’s interest rate sensitivity is monitored by management through selected interest rate risk measures produced internally.  There have been no substantial changes in the Company’s GAP analyses or simulation analyses compared to the information provided in the Company’s SEC 10-K for the period ended December 31, 2003.  Additional information and details are provided in the Interest Sensitivity section of Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

Item 4.  Controls and Procedures

An analysis was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2004. There has been no change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2004, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II.  OTHER INFORMATION

Item 1.  Legal Proceedings

None.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

The Company announced a repurchase program on August 10, 2000 which was approved by the Board of Directors on August 8, 2000 for the repurchase of 171,600 shares which

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will expire on August 8, 2005.  There were no repurchases of the Company’s common stock during the quarter ended September 30, 2004.

Item 3.  Defaults Upon Senior Securities

None

Item 4.  Submission of Matters to a Vote of Security Holders

None

Item 5.  Other Information

None

Item 6.  Exhibits

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

(3)   (ii)Bylaws of the Registrant as presently in effect (incorporated by reference to Exhibit 3.2 of the Registrant’s Registration Statement on Form S-4, No. 333-65821).

(31) (i)Rule 13a-14(a) Certification of Chief Executive Officer

(31) (ii)Rule 13a-14(a) Certification of Chief Financial Officer

(32) (i)Certification of Chief Executive Officer Section 1350

(32) (ii)Certification of Chief Financial Officer Section 1350

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PENNS WOODS BANCORP, INC.
	(Registrant)
Date:    November 9, 2004	/s/ Ronald A. Walko
	Ronald A. Walko, President and Chief Executive Officer
Date:    November 9, 2004	/s/ Sonya E. Scott
	Sonya E. Scott, Secretary

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EXHIBIT INDEX

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

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