UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

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 June 30, 2007.

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

Transition Period from                                to                               .

No. 0-17077

(Commission File Number)

PENNS WOODS BANCORP, INC.

(Exact name of Registrant as specified in its charter)

 

(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 x                       NO  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

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

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

YES o                        NO x

On August 1, 2007 there were 3,881,782 shares of the Registrant’s common stock outstanding.

PENNS WOODS BANCORP, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

					Page Number
Part I		Financial Information
Item 1.		Financial Statements
Consolidated Balance Sheet (unaudited) as of June 30, 2007 and December 31, 2006					4
Consolidated Statement of Income (unaudited) for the Three and Six Months ended June 30, 2007 and 2006					5
Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the Six Months ended June 30, 2007 and 2006					6
Consolidated Statement of Comprehensive Income (unaudited) for the Three and Six Months ended June 30, 2007 and 2006					6
Consolidated Statement of Cash Flows (unaudited) for the Six Months ended June 30, 2007 and 2006					7
Notes to Consolidated Financial Statements (unaudited)					8
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3.			Quantitative and Qualitative Disclosures About Market Risk		30
Item 4.			Controls and Procedures		31
Part II			Other Information
Item 1.			Legal Proceedings		31
Item 1A.			Risk Factors		31
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds		31
Item 3.			Defaults Upon Senior Securities		32
Item 4.			Submission of Matters to a Vote of Security Holders		32
Item 5.			Other Information		32
Item 6.			Exhibits		32
Signatures					33
Exhibit Index and Exhibits					34

 

2

---

Part I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

3

---

PENNS WOODS BANCORP, INC.

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

		June 30,			December 31,
(In Thousands, Except Share Data)		2007			2006
ASSETS
Noninterest-bearing balances		$	11,315		$	15,348
Interest-bearing deposits in other financial institutions		16			25
Total cash and cash equivalents		11,331			15,373
Investment securities, available for sale, at fair value		181,308			185,200
Investment securities held to maturity (fair value of $277 and $286)		275			283
Loans held for sale		5,345			3,716
Loans		356,175			360,384
Less: Allowance for loan losses		4,162			4,185
Loans, net		352,013			356,199
Premises and equipment, net		6,964			6,737
Accrued interest receivable		3,015			2,939
Bank-owned life insurance		12,149			11,346
Investment in limited partnerships		4,666			4,950
Goodwill		3,032			3,032
Other assets		6,474			2,510
TOTAL ASSETS		$	586,572		$	592,285
LIABILITIES
Interest-bearing deposits		$	335,903		$	322,031
Noninterest-bearing deposits		70,000			73,160
Total deposits		405,903			395,191
Short-term borrowings		28,359			34,697
Long-term borrowings, Federal Home Loan Bank (FHLB)		76,378			82,878
Accrued interest payable		1,647			1,532
Other liabilities		4,565			3,393
TOTAL LIABILITIES		516,852			517,691
SHAREHOLDERS’ EQUITY
Common stock, par value $8.33, 10,000,000 shares authorized; 4,005,342 and 4,003,514 shares issued		33,378			33,362
Additional paid-in capital		17,852			17,810
Retained earnings		26,974			25,783
Accumulated other comprehensive income (loss):
Net unrealized (loss) gain on available for sale securities		(3,455		)	2,139
Defined benefit plan		(579		)	(579		)
Less: Treasury stock at cost, 117,802 and 102,772 shares		(4,450		)	(3,921		)
TOTAL SHAREHOLDERS’ EQUITY		69,720			74,594
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	586,572		$	592,285

 

See accompanying notes to the unaudited consolidated financial statements.

4

---

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

		Three Months Ended						Six Months Ended
		June 30,						June 30,
(In Thousands, Except Per Share Data)		2007			2006			2007			2006
INTEREST AND DIVIDEND INCOME
Loans including fees		$	6,516		$	6,086		$	12,939		$	11,895
Investment Securities:
Taxable		924			896			1,747			1,819
Tax-exempt		1,052			1,000			2,163			1,989
Dividend and other interest income		301			365			623			666
TOTAL INTEREST AND DIVIDEND INCOME		8,793			8,347			17,472			16,369
INTEREST EXPENSE
Deposits		2,868			1,968			5,380			3,805
Short-term borrowings		227			509			732			915
Long-term borrowings, FHLB		904			944			1,826			1,890
TOTAL INTEREST EXPENSE		3,999			3,421			7,938			6,610
NET INTEREST INCOME		4,794			4,926			9,534			9,759
PROVISION FOR LOAN LOSSES		10			198			50			396
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		4,784			4,728			9,484			9,363
NON-INTEREST INCOME
Deposit service charges		567			587			1,108			1,177
Securities gains, net		293			265			619			824
Bank-owned life insurance		86			90			201			178
Gain on sale of loans		234			210			372			360
Insurance commissions		550			670			988			1,230
Other		456			394			872			784
TOTAL NON-INTEREST INCOME		2,186			2,216			4,160			4,553
NON-INTEREST EXPENSE
Salaries and employee benefits		2,301			2,214			4,582			4,446
Occupancy, net		337			275			668			518
Furniture and equipment		297			288			583			585
Pennsylvania shares tax		161			151			322			296
Other		1,244			1,150			2,313			2,184
TOTAL NON-INTEREST EXPENSE		4,340			4,078			8,468			8,029
INCOME BEFORE INCOME TAX PROVISION		2,630			2,866			5,176			5,887
INCOME TAX PROVISION		295			432			560			998
NET INCOME		$	2,335		$	2,434		$	4,616		$	4,889
EARNINGS PER SHARE - BASIC		$	0.60		$	0.62		$	1.19		$	1.24
EARNINGS PER SHARE - DILUTED		$	0.60		$	0.62		$	1.19		$	1.24
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC		3,889,139			3,939,424			3,893,286			3,950,295
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED		3,889,401			3,939,911			3,893,586			3,950,781
DIVIDENDS PER SHARE		$	0.44		$	0.43		$	0.88		$	0.85

 

See accompanying notes to the unaudited consolidated financial statements.

5

---

CONSOLIDATED STATEMENT 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, 2006		4,003,514		$	33,362		$	17,810		$	25,783		$	1,560		$	(3,921	)	$	74,594
Comprehensive Income:
Net income										4,616									4,616
Net change in unrealized gain (loss) on investments available for sale, net of reclassification adjustment, net of income tax benefit of $2,882													(5,594		)				(5,594		)
Total comprehensive loss																			(978		)
Dividends declared, ($0.88 per share)										(3,425		)							(3,425		)
Purchase of treasury stock (15,030 shares)																(529		)	(529		)
Stock options exercised		330		3			5												8
Common shares issued for employee stock purchase plan		1,498		13			37												50
Balance, June 30, 2007		4,005,342		$	33,378		$	17,852		$	26,974		$	(4,034	)	$	(4,450	)	$	69,720

 

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

 

See accompanying notes to the unaudited consolidated financial statements.

PENNS WOODS BANCORP, INC.

 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

		Three Months Ended June 30,										Six Months Ended June 30,
(In Thousands)		2007					2006					2007					2006
Net Income				$	2,335				$	2,434				$	4,616				$	4,889
Other comprehensive (loss) income:
Change in net unrealized gains on available for sale securities		(7,194	)				(3,581	)				(7,857	)				(2,393	)
Less: Reclassification adjustment for net gains included in net income		293					265					619					824
Other comprehensive loss before tax				(7,487		)			(3,846		)			(8,476		)			(3,217		)
Income tax benefit related to other comprehensive loss				(2,546		)			(1,308		)			(2,882		)			(1,094		)
Other comprehensive loss, net of tax benefit				(4,941		)			(2,538		)			(5,594		)			(2,123		)
Comprehensive (loss) income				$	(2,606	)			$	(104	)			$	(978	)			$	2,766

 

See accompanying notes to the unaudited consolidated financial statements.

6

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

		Six Months Ended
		June 30,
(In Thousands)		2007			2006
OPERATING ACTIVITIES
Net Income		$	4,616		$	4,889
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		366			360
Provision for loan losses		50			396
Accretion and amortization of investment security discounts and premiums		(479		)	(381		)
Securities gains, net		(619		)	(824		)
Originations of loans held for sale		(19,875		)	(17,466		)
Proceeds of loans held for sale		18,618			15,594
Gain on sale of loans		(372		)	(360		)
Earnings on bank-owned life insurance		(201		)	(178		)
Other, net		207			(641		)
Net cash provided by operating activities		2,311			1,389
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from sales		39,212			18,171
Proceeds from calls and maturities		3,165			3,702
Purchases		(46,179		)	(17,910		)
Investment securities held to maturity:
Proceeds from calls and maturities		11			—
Net decrease (increase) in loans		4,136			(8,262		)
Acquisition of bank premises and equipment		(593		)	(556		)
Proceeds from the sale of foreclosed assets		66			61
Purchase of bank-owned life insurance		(602		)	—
Investment in limited partnership		—			(1,535		)
Proceeds from redemption of regulatory stock		2,550			1,509
Purchases of regulatory stock		(2,097		)	(1,135		)
Net cash used for investing activities		(331		)	(5,955		)
FINANCING ACTIVITIES
Net increase in interest-bearing deposits		13,872			21,484
Net (decrease) increase in noninterest-bearing deposits		(3,160		)	2,931
Proceeds of long-term borrowings, FHLB		10,000			—
Repayment of long-term borrowings, FHLB		(16,500		)	(1,600		)
Net decrease in short-term borrowings		(6,338		)	(13,078		)
Dividends paid		(3,425		)	(3,356		)
Issuance of common stock		50			—
Stock options exercised		8			—
Purchase of treasury stock		(529		)	(1,697		)
Net cash (used for) provided by financing activities		(6,022		)	4,684
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(4,042		)	118
CASH AND CASH EQUIVALENTS, BEGINNING		15,373			14,090
CASH AND CASH EQUIVALENTS, ENDING		$	11,331		$	14,208
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid		$	7,823		$	6,547
Income taxes paid		1,185			2,000
Transfer of loans to foreclosed real estate		—			51

 

See accompanying notes to the unaudited consolidated financial statements.

7

---

PENNS WOODS BANCORP, INC. AND SUBSIDIARIES
NOTES TO
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 on Form 10-K for the year ended December 31, 2006.

The accounting policies followed in the presentation of interim financial results are the same as those followed on an annual basis.  These policies are presented on pages 40 thru 46 of the Annual Report on Form 10-K for the year ended December 31, 2006.

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.

Note 2. Recent Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“FAS”) No. 155, Accounting for Certain Hybrid Instruments, as an amendment of FASB Statements No. 133 and 140.  FAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis.  This statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006.  The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

In March 2006, the FASB issued FAS No. 156, Accounting for Servicing of Financial Assets.  This Statement, which is an amendment to FAS No. 140, will simplify the accounting for servicing assets and liabilities, such as those common with mortgage securitization activities.  Specifically, FAS No. 156 addresses the recognition and measurement of separately recognized servicing assets and liabilities and provides an approach to simplify efforts to obtain hedge-like

8

---

(offset) accounting.  FAS No. 156 also clarifies when an obligation to service financial assets should be separately recognized as a servicing asset or a servicing liability, requires that a separately recognized servicing asset or servicing liability be initially measured at fair value, if practicable, and permits an entity with a separately recognized servicing asset or servicing liability to choose either of the amortization or fair value methods for subsequent measurement.  The provisions of FAS No. 156 are effective as of the beginning of the first fiscal year that begins after September 15, 2006.   The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position. 

In September 2006, the FASB issued FAS No. 157, Fair Value Measurements, which provides enhanced guidance for using fair value to measure assets and liabilities. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The Standard does not expand the use of fair value in any new circumstances. FAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Early adoption is permitted.  The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position. 

In September 2006, the FASB issued FAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Post  Retirement  Plans, an amendment of FASB Statements  No.  87, 88, 106 and 132(R).  FAS No. 158 requires that a company  recognize the overfunded or underfunded  status of its defined benefit post  retirement  plans (other than  multiemployer  plans) as an asset or liability in its statement of financial  position and that it recognize changes  in the funded  status in the year in which the  changes  occur  through other  comprehensive  income.  FAS No. 158 also requires the  measurement  of defined  benefit  plan  assets and  obligations  as of the fiscal  year end,  in addition  to  footnote  disclosures.  On December 31, 2006, the Company adopted FAS No. 158, except for the measurement provisions, which are effective for fiscal years ending after December 15, 2008.  The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115, which provides all entities with an option to report selected financial assets and liabilities at fair value. The objective of the FAS No. 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in earnings caused by measuring related assets and liabilities differently without having to apply the complex provisions of hedge accounting.  FAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007.  Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007 provided the entity also elects to apply the provisions of FAS No. 157, Fair Value Measurements.  The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position. 

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN 48 is an interpretation of FAS No. 109, Accounting for Income

9

---

Taxes, and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. In addition, FIN No. 48 requires expanded disclosure with respect to the uncertainty in income taxes and is effective for fiscal years beginning after December 15, 2006.  The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position. 

In September 2006, the FASB reached consensus on the guidance provided by Emerging Issues Task Force Issue 06-4 (“EITF 06-4”), Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.  The guidance is applicable to endorsement split-dollar life insurance arrangements, whereby the employer owns and controls the insurance policy, that are associated with a postretirement benefit.  EITF 06-4 requires that for a split-dollar life insurance arrangement within the scope of the Issue, an employer should recognize a liability for future benefits in accordance with FAS No. 106 (if, in substance, a postretirement benefit plan exists) or Accounting Principles Board Opinion No. 12 (if the arrangement is, in substance, an individual deferred compensation contract) based on the substantive agreement with the employee.  EITF 06-4 is effective for fiscal years beginning after December 15, 2007.  The Company is currently evaluating the impact the adoption of the EITF will have on the Company’s results of operations or financial condition.

In September 2006, the FASB reached consensus on the guidance provided by Emerging Issues Task Force Issue 06-5 (“EITF 06-5”), Accounting for Purchases of Life Insurance—Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance.  EITF 06-5 states that a policyholder should consider any additional amounts included in the contractual terms of the insurance policy other than the cash surrender value in determining the amount that could be realized under the insurance contract.  EITF 06-5 also states that a policyholder should determine the amount that could be realized under the life insurance contract assuming the surrender of an individual-life by individual-life policy (or certificate by certificate in a group policy). EITF 06-5 is effective for fiscal years beginning after December 15, 2006.   The Company is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations or financial condition.

In March 2007, the FASB ratified 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 postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact the adoption of the EITF will have on the Company’s results of operations or financial condition.

In June 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-11 (“EITF 06-11”), Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.  EITF 06-11

10

---

applies to share-based payment arrangements with dividend protection features that entitle employees to receive (a) dividends on equity-classified nonvested shares, (b) dividend equivalents on equity-classified nonvested share units, or (c) payments equal to the dividends paid on the underlying shares while an equity-classified share option is outstanding, when those dividends or dividend equivalents are charged to retained earnings under FAS No. 123R, Share-Based Payment, and result in an income tax deduction for the employer. A consensus was reached that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity-classified nonvested equity shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase in additional paid-in capital.  EITF 06-11 is effective for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years.  The impact of the adoption of the EITF will not have an impact on the Company’s financial condition.

Note 3. 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 diluted earnings per share; therefore, net income as presented on the consolidated statement of income will be used as the numerator. 

		Three Months Ended June 30,				Six Months Ended June 30,
		2007		2006		2007		2006
Weighted average common shares outstanding		4,004,798		4,002,159		4,004,369		4,002,159
Average treasury stock shares		(115,659	)	(62,735	)	(111,083	)	(51,864	)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share		3,889,139		3,939,424		3,893,286		3,950,295
Additional common stock equivalents (stock options) used to calculate diluted earnings per share		262		487		300		486
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share		3,889,401		3,939,911		3,893,586		3,950,781

 

Options to purchase 8,276 and 9,002 shares of common stock at the price of $40.29 were outstanding during the three and six months ended June 30, 2007 and 2006, respectively, but were not included in the computation of diluted earnings per share as they were anti-dilutive due to the strike price being greater than the market price as of June 30, 2007 and 2006, respectively. 

11

---

Note 4.  Net Periodic Benefit Cost-Defined Benefit Plans

For a detailed disclosure on the Company’s pension and employee benefits plans, please refer to Note 11 of the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2006.

The following sets forth the components of the net periodic benefit cost of the domestic non-contributory defined benefit plan for the three and six months ended June 30, 2007 and 2006, respectively:

		Three Months Ended						Six Months Ended
		June 30,						June 30,
(In Thousands)		2007			2006			2007			2006
Service cost		$	117		$	117		$	233		$	233
Interest cost		121			108			243			217
Expected return on plan assets		(140		)	(121		)	(281		)	(242		)
Amortization of transition obligation		(1		)	(1		)	(1		)	(2		)
Amortization of prior service cost		6			6			13			13
Amortization of net loss		—			6			—			11
Net periodic cost		$	103		$	115		$	207		$	230

 

Employer Contributions

The Company previously disclosed in its consolidated financial statements, included in the Annual Report on Form 10-K for the year ended December 31, 2006, that it expected to contribute $500,000 to its defined benefit plan in 2007.  As of June 30, 2007, there were no contributions made to the plan.

Note 5.  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 are primarily comprised of 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.

Outstanding financial instruments with off balance sheet risk are as follows:

12

---

 

 

Note 6.  Reclassification of Comparative Amounts

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

Note 7.  Employee Stock Purchase Plan

Effective April 26, 2006, the Company implemented the Penns Woods Bancorp, Inc. 2006 Employee Stock Purchase Plan (“Plan”).  The Plan is intended to encourage employee participation in the ownership and economic progress of the Company.  The Plan allows for up to 1,000,000 shares to be purchased by employees.  The purchase price of the shares is 95% of market value with an employee eligible to purchase up to the lesser of 15% of base compensation or $12,000 in market value annually.  During the three and six months ended June 30, 2007, there were 826 and 1,498 shares issued under the plan, respectively.

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 with 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.

13

---

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

EARNINGS SUMMARY

Comparison of the Three Months Ended June 30, 2007 and 2006

Summary Results

Net income for the three months ended June 30, 2007 was $2,335,000 compared to $2,434,000 for the same period of 2006.  Basic and diluted earnings per share for the three months ended June 30, 2007 were $0.60 as compared to $0.62 for the three months ended June 30, 2006.  Return on average assets and return on average equity were 1.58% and 12.57% for the three months ended June 30, 2007 as compared to 1.70% and 13.34% for the corresponding period of 2006.  Net income from core operations for the three months ended June 30, 2007 and 2006, excluding after-tax net securities gains of $193,000 and $175,000, respectively, were $2,142,000 and $2,259,000 or $0.55 and $0.57 per share, respectively, for the periods being compared.

The six months ended June 30, 2007 generated net income of $4,616,000 compared to $4,889,000 for the same period of 2006.  Earnings per share, basic and diluted, for the six months ended June 30, 2007 were $1.19 as compared to $1.24 for the comparable period of 2006.  Return on average assets and return on average equity were 1.57% and 12.35% for the six months ended June 30, 2007 as compared to 1.71% and 13.12% for the corresponding period of 2006.  Net income from core operations for the six months ended June 30, 2007, excluding after-tax securities gains of $409,000, declined to $4,207,000 from $4,345,000 for the six months ended June 30, 2006 resulting in basic and dilutive operating earnings per share of $1.08 as compared to $1.10 for the six months ended June 30, 2006.  (Management uses the non-GAAP measure of net income from core operations in its analysis of the Company’s performance.  This measure, as used by the Company, adjusts net income by significant gains or losses that are unusual in nature.  Because certain of these items and their impact on the Company’s performance are difficult to predict, management believes the presentation of financial measures excluding the impact of such items provides useful supplemental information in evaluating the 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-tax net securities gains.  These disclosures should not be viewed as a substitute for net income determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.)

Interest Income

Interest income for the three months ended June 30, 2007 increased $446,000 to $8,793,000 as compared to $8,347,000 for the same period of 2006.  The increase in total interest income was primarily the result of growth in average loans of $11,860,000 for the three months ended June 30, 2007 as compared to 2006.  The average loan growth and a 25 basis point (“bp”) increase in loan portfolio yields accounted for $430,000 of the total interest income growth.  Over this time frame, the average balance of investment securities and interest bearing deposits remained stable

14

with the portfolio yield increasing 9 bp resulting in a $16,000 increase in interest income.  On a taxable equivalent basis, the interest income from the investment portfolio and interest bearing deposits increased $43,000 as the investment portfolio was strategically shifted toward tax-exempt instruments.  The decrease in dividends received is the result of a decrease in the average book value investment in stocks of $5,000,000 when comparing the three month periods ended June 30, 2007 and 2006.

During the six months ended June 30, 2007, interest income was $17,472,000, an increase of $1,103,000 over the same period in 2006.  The reasons for the 6.7% growth in interest income for the six month period are identical to those for the three month period ending June 30, 2007 discussed above.  The growth in average loans of $14,772,000 coupled with a 30 bp increase in the loan portfolio yield resulted in an increase of $1,044,000 in loan interest and fee income.   Average investment securities and interest bearing deposits decreased slightly to $185,169,000 resulting in interest income increasing $59,000 when compared to June 30, 2006 due to an increase of 21 bp in the investment portfolio yield, while interest income on interest bearing deposits increased $15,000 for the same period.  The asset allocation between loans and the investment portfolio composition resulted in taxable equivalent interest income increasing $1,192,000 for the six months ended June 30, 2007 as compared to the same period of 2006.

Interest income composition for the three and six months ended June 30, 2007 and 2006 was as follows:

		For The Three Months Ended
		June 30, 2007					June 30, 2006					Change
(In Thousands)		Amount			% Total		Amount			% Total		Amount			%
Loans including fees		$	6,516		74.1	%	$	6,086		72.9	%	$	430		7.1	%
Investment securities:
Taxable		924			10.5		896			10.7		28			3.1
Tax-exempt		1,052			12.0		1,000			12.0		52			5.2
Dividend and other interest income		301			3.4		365			4.4		(64		)	(17.5	)
Total interest income		$	8,793		100.0	%	$	8,347		100.0	%	$	446		5.3	%

 

		For The Six Months Ended
		June 30, 2007					June 30, 2006					Change
(In Thousands)		Amount			% Total		Amount			% Total		Amount			%
Loans including fees		$	12,939		74.0	%	$	11,895		72.6	%	$	1,044		8.8	%
Investment securities:
Taxable		1,747			10.0		1,819			11.1		(72		)	(4.0	)
Tax-exempt		2,163			12.4		1,989			12.2		174			8.7
Dividend and other interest income		623			3.6		666			4.1		(43		)	(6.5	)
Total interest income		$	17,472		100.0	%	$	16,369		100.0	%	$	1,103		6.7	%

 

15

---

Interest Expense

Interest expense for the three months ended June 30, 2007 increased $578,000 to $3,999,000 as compared to $3,421,000 for the same period of 2006.  The increased expense associated with deposits is primarily the result of rate increases for time deposits, which are comprised of various certificates of deposit (“CD”) accounts, from the three months ended June 30, 2006 to the corresponding period of 2007.  Factors that led to the rate increases include, but are not limited to, a prime rate increase, competitive market pricing pressure, and campaigns conducted to attract 8 to 12 month maturity CDs to replace higher cost short-term FHLB advances. The increase in CD interest rates has exceeded the increase for other deposit accounts.  This has led to a shift of a portion of the money market and savings deposit portfolios into higher yielding CDs. 

Short-term borrowing interest expense on FHLB advances and customer repurchase accounts decreased $282,000 as rates paid decreased 47 bp.  The decrease in rates paid was a result of a change in the composition of the short-term borrowing due to the previously noted CD campaigns.  The successful campaigns caused a reduction in the higher cost average FHLB short-term advances of $18,082,000. Long-term FHLB borrowing expense decreased minimally due to a decline in average borrowings of $4,907,000.

Interest expense for the six months ended June 30, 2007 increased $1,328,000 to $7,938,000 from $6,610,000 for the comparable period of 2006.  Interest on deposits accounted for $1,575,000 of the increase due to the reasons noted in the above three month analysis.  Borrowing costs declined primarily due to the before noted CD campaigns that allowed for FHLB advances to be reduced.

Interest expense composition for the three and six months ended June 30, 2007 and 2006 were as follows:

		For The Three Months Ended
		June 30, 2007					June 30, 2006					Change
(In Thousands)		Amount			% Total		Amount			% Total		Amount			%
Deposits		$	2,868		71.7	%	$	1,968		57.5	%	$	900		45.7	%
Short-term borrowings		227			5.7		509			14.9		(282		)	(55.4	)
Long-term borrowings, FHLB		904			22.6		944			27.6		(40		)	(4.2	)
Total interest expense		$	3,999		100.0	%	$	3,421		100.0	%	$	578		16.9	%

 

		For The Six Months Ended
		June 30, 2007					June 30, 2006					Change
(In Thousands)		Amount			% Total		Amount			% Total		Amount			%
Deposits		$	5,380		67.8	%	$	3,805		57.6	%	$	1,575		41.4	%
Short-term borrowings		732			9.2		915			13.8		(183		)	(20.0	)
Long-term borrowings, FHLB		1,826			23.0		1,890			28.6		(64		)	(3.4	)
Total interest expense		$	7,938		100.0	%	$	6,610		100.0	%	$	1,328		20.1	%

 

16

---

Net Interest Margin

The net interest margin (“NIM”) for the three months ended June 30, 2007 was 3.95% as compared to 4.12% for the corresponding period of 2006.  The decrease in the NIM was the result of the yield on earning assets increasing 19 bp to 6.88% for the three months ended June 30, 2007, as compared to 2006; however, interest bearing liabilities increased 42 bp over the same period.  The increase in the yield on earning assets is attributable to growth in the taxable loan portfolio of $11,928,000 in addition to the yield on taxable loans increasing 25 bp coupled with an increase of 45 bp on the taxable investment portfolio.  The average loan growth was predominately comprised of residential and commercial real estate loans.  The yield on total loans increased to 7.29% from 7.04% due to the impact of the Federal Open Market Committee rate increases enacted since the start of the three month period ended June 30, 2006 offset by competitive factors.  The average taxable investment securities portfolio declined by $10,806,000, as the cash flow from the portfolio was invested in tax-exempt securities as part of the Company’s tax strategy. The average interest rate paid on deposit accounts increased to 3.39% as compared to 2.66% for the 2006 period.  This increase was driven by growth in average time deposits of $44,577,000 and an increase in the rate paid on time deposits of 93 bp.  A portion of the increase in deposit volume and the average interest yield paid is due to several CD promotions during the past year to attract new customers while retaining existing customers.  The promotions were designed to gather deposits that would have maturities of one year or less.  In addition, the promotions served as a catalyst to cross sell other deposit products and to implement management’s strategy to shorten the duration of the CD portfolio.

The rate paid on short-term borrowings, FHLB advances and customer repurchase accounts, decreased 47 bp to 4.09% for the three months ended June 30, 2007.  The decrease was the result of higher cost average short-term FHLB advances decreasing $18,082,000 due to the funding generated by the before mentioned CD promotions. 

The NIM for the six months ended June 30, 2007 was 3.95% as compared to 4.10% for the corresponding period of 2006.  The decrease in the NIM was the result of the before mentioned growth and change in mix of the earnings assets offset by increased rates paid on interest bearing liabilities and growth in the CD portfolio of $35,224,000. 

Following is a schedule of average balances and associated yields for the three and six month periods ended June 30, 2007 and 2006:

17

---

 

		AVERAGE BALANCES AND INTEREST RATES
		Three Months Ended								Three Months Ended
		June 30, 2007								June 30, 2006
(In Thousands)		Average Balance			Interest			Average Rate		Average Balance			Interest			Average Rate
Assets:
Tax-exempt loans		$	7,819		$	120		6.16	%	$	7,887		$	123		6.26	%
All other loans		353,019			6,437			7.31	%	341,091			6,005			7.06	%
Total loans		360,838			6,557			7.29	%	348,978			6,128			7.04	%
Taxable investment securities		83,328			1,209			5.80	%	94,134			1,259			5.35	%
Tax-exempt investment securities		100,403			1,594			6.35	%	90,530			1,515			6.69	%
Total securities		183,731			2,803			6.10	%	184,664			2,774			6.01	%
Interest bearing deposits		1,230			16			5.22	%	32			2			25.07	%
Total interest-earning assets		545,799			9,376			6.88	%	533,674			8,904			6.69	%
Other assets		43,594								39,143
Total assets		$	589,393							$	572,817
Liabilities:
Savings		$	59,906		110			0.74	%	$	63,648		136			0.86	%
Super Now deposits		47,531			153			1.29	%	48,282			169			1.40	%
Money market deposits		26,346			158			2.41	%	24,165			121			2.01	%
Time deposits		205,554			2,447			4.77	%	160,977			1,542			3.84	%
Total deposits		339,337			2,868			3.39	%	297,072			1,968			2.66	%
Short-term borrowings		22,239			227			4.09	%	44,793			509			4.56	%
Long-term borrowings, FHLB		77,971			904			4.65	%	82,878			944			4.57	%
Total borrowings		100,210			1,131			4.53	%	127,671			1,453			4.56	%
Total interest-bearing liabilities		439,547			3,999			3.65	%	424,743			3,421			3.23	%
Demand deposits		68,677								70,961
Other liabilities		6,888								4,129
Shareholders’ equity		74,281								72,984
Total liabilities and shareholders’ equity		$	589,393							$	572,817
Interest rate spread								3.23	%							3.46	%
Net interest income/margin					$	5,377		3.95	%				$	5,483		4.12	%

 

1.               Information on this table has been calculated using average daily balance sheets to obtain average balances.

2.               Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings.

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

18

---

 

		AVERAGE BALANCES AND INTEREST RATES
		Six Months Ended								Six Months Ended
		June 30, 2007								June 30, 2006
(In Thousands)		Average Balance			Interest			Average Rate		Average Balance			Interest			Average Rate
Assets:
Tax-exempt loans		$	8,022		$	247		6.21	%	$	8,038		$	248		6.22	%
All other loans		352,829			12,776			7.30	%	338,041			11,731			7.00	%
Total loans		360,851			13,023			7.28	%	346,079			11,979			6.98	%
Taxable securities		82,952			2,353			5.67	%	95,880			2,483			5.18	%
Tax-exempt securities		101,588			3,277			6.45	%	90,839			3,014			6.64	%
Total securities		184,540			5,630			6.10	%	186,719			5,497			5.89	%
Interest bearing deposits		629			17			5.45	%	22			2			18.33	%
Total interest-earning assets		546,020			18,670			6.88	%	532,820			17,478			6.60	%
Other assets		41,723								38,669
Total assets		$	587,743							$	571,489
Liabilities:
Savings		$	59,454		215			0.73	%	$	63,184		256			0.82	%
Super Now deposits		46,196			302			1.32	%	48,223			318			1.33	%
Money market deposits		24,962			283			2.29	%	24,642			237			1.94	%
Time deposits		195,712			4,580			4.72	%	160,488			2,994			3.76	%
Total Deposits		326,324			5,380			3.32	%	296,537			3,805			2.59	%
Short-term borrowings		32,206			732			4.58	%	43,100			915			4.28	%
Other borrowings		79,339			1,826			4.64	%	83,603			1,890			4.56	%
Total borrowings		111,545			2,558			4.62	%	126,703			2,805			4.46	%
Total interest-bearing liabilities		437,869			7,938			3.66	%	423,240			6,610			3.15	%
Demand deposits		68,446								68,996
Other liabilities		6,673								4,709
Shareholders’ equity		74,755								74,544
		$	587,743							$	571,489
Interest rate spread								3.22	%							3.45	%
Net interest income/margin					$	10,732		3.95	%				$	10,868		4.10	%

 

1.               Information on this table has been calculated using average daily balance sheets to obtain average balances.

2.               Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings.

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

19

---

The following table presents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the three and six month periods ended June 30, 2007 and 2006.

		For the Three Months Ended						For the Six Months Ended
		June 30,						June 30,
(In Thousands)		2007			2006			2007			2006
Total interest income		$	8,793		$	8,347		$	17,472		$	16,369
Total interest expense		3,999			3,421			7,938			6,610
Net interest income		4,794			4,926			9,534			9,759
Tax equivalent adjustment		583			557			1,198			1,109
Net interest income (fully taxable equivalent)		$	5,377		$	5,483		$	10,732		$	10,868

 

The following table sets forth the respective impact that both volume and rate changes have had on net interest income on a fully taxable equivalent basis for the three and six month periods ended June 30, 2007 and 2006:

		Three Months Ended June 30,									Six Months Ended June 30,
		2007 vs 2006									2007 vs 2006
		Increase (Decrease)									Increase (Decrease)
		Due to									Due to
(In Thousands)		Volume			Rate			Net			Volume			Rate			Net
Interest income:
Loans, tax-exempt		$	(1	)	$	(2	)	$	(3	)	$	—		$	(1	)	$	(1	)
Loans		214			218			432			527			518			1,045
Taxable investment securities		(180		)	130			(50		)	(417		)	287			(130		)
Tax-exempt investment securities		147			(68		)	79			344			(81		)	263
Interest bearing deposits		72			(58		)	14			54			(39		)	15
Total interest-earning assets		252			220			472			508			684			1,192
Interest expense:
Savings deposits		(8		)	(18		)	(26		)	(14		)	(27		)	(41		)
Super Now deposits		(3		)	(13		)	(16		)	(13		)	(3		)	(16		)
Money market deposits		12			25			37			3			43			46
Time deposits		476			429			905			726			860			1,586
Short-term borrowings		(232		)	(50		)	(282		)	(252		)	69			(183		)
Long-term borrowings, FHLB		(57		)	17			(40		)	(99		)	35			(64		)
Total interest-bearing liabilities		188			390			578			351			977			1,328
Change in net interest income		$	64		$	(170	)	$	(106	)	$	157		$	(293	)	$	(136	)

 

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

20