Penns Woods Bancorp, Inc. Annual Report 2006

FY2006 Annual Report · Penns Woods Bancorp, Inc.
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2 0 0 6 

A N N U A L 

r E P o r T

Form 10-K

Jersey Shore State Bank Locations

BUSINESS OF PENNS WOODS BANCORP, INC.

Penns  Woods  Bancorp, Inc.  is  a  bank  holding  company  incorporated  on
January 7, 1983, under the Pennsylvania Business Corporation Law.

Jersey  Shore  State  Bank, the  principal  subsidiary  of  Penns Woods  Bancorp,
Inc., is  a  full-service  commercial  bank  offering  a  wide  range  of  commercial
and consumer banking services to individual, business, public, and institutional
customers.

Currently, Jersey  Shore  State  Bank  operates  13  banking  offices  in  Jersey
Shore, Duboistown, Williamsport, Montoursville, Montgomery, Mill  Hall,
Lock Haven, Spring Mills, Centre Hall, State College and Zion.

The M Group Inc., D/B/A The Comprehensive Financial Group, operates as a
subsidiary  of  Jersey  Shore  State  Bank.  The  M  Group  offers  insurance  and
securities brokerage services through ING Financial Partners, Inc., a registered
broker dealer.

MISSION STATEMENT

Jersey  Shore  State  Bank  is  a  locally  owned, independent, community  bank
with emphasis on servicing the needs of consumers and small to medium size
businesses  at  a  profit,
thereby  enhancing  shareholder  value  through  a
professionally-trained and dedicated staff with sound financial resources.  We
are committed to community leadership and growth.

• WILLIAMSPORT• DUBOISTOWN JERSEYSHORE�• MONTGOMERY• MONTGOMERYLOCKHAVEN• MILL HALL• CENTRE HALL• SPRING MILLS• STATE COLLEGELYCOMING COUNTYCLINTON COUNTYCENTRE COUNTY•• ZION• MONTOURSVILLE• MONTOURSVILLETABLE OF CONTENTS

Letter to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Three Year Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Consolidated Statement of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Consolidated Statement of Changes in Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . 

Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2

3

4

5

6

7

8

Management’s Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

25

Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

39

Form 10-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

40

Management and Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

60

Offices of Jersey Shore State Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

61

1

To Our
Shareholders

Dear Shareholder:

As  we  look  back  on  2006  it  can  be  remembered  as  a  year  of  continuous  challenges.    Aggressive  competition  for  both  deposit  and  loan
relationships coupled with a slowing local economy and interest rate increases enacted by the Federal Open Market Committee during the first
half of the year dampened our results on operations.  However, as you will see, our operating results, although down from levels that annually
earned us recognition as one of the top performing community bank holding company’s in Pennsylvania, are still above average when compared
to other community banks with less than one billion dollars in assets.  Further, we accomplished several strategic objectives during the course
of the year, which will position us to continue to be proactive in meeting our retail and business customer’s financial product and service needs.
Our “value added” philosophy for doing business evolves from the four basic concepts of localized decision making, personal service, customer
banking convenience, and profitable asset growth.

This past year we faced several challenges to earnings ranging from the continued flat to inverted yield curve to increased competition for loans
and deposits from commercial banks, credit unions, and brokerage houses.  The competition, as were we, was strategically focused on asset and
deposit growth which resulted in higher interest rate offerings to attract and maintain deposits, while rates offered to attract loan business were
at lower than historical norms.  Our focus on earning asset growth, net loans increased $21.4 million, resulted in our ability to maintain a net
interest margin in excess of four percent.  As we move through 2007, the outlook for a prolonged flat to inverted yield curve will require us to
continue to apply our practical experiences in a diligent manner in order to reduce the earnings impact of a declining net interest margin.  We
continued to maintain strong loan portfolio quality as evidenced by our negligible nonperforming loan ratio of 0.14% at December 31, 2006, and
net loan charge-offs to average loans of only 0.04% for the year.

Net  income  for  2006  was  $9,647,000  compared  to  $10,901,000  for  2005, which  resulted  in  basic  earnings  per  share  of  $2.45  and  $2.75,
respectively.  Return on average assets was 1.67% as compared to 1.97% and return on average equity was 12.93% and 14.54%, respectively.
Our continued strong capital position has allowed us to continue to strategically pursue various growth options, increase the annual cash dividend
paid by 11% or $0.17 during 2006, and support a stock repurchase program.  

On the heels of the opening of our second State College branch in 2005, we opened a full service office in Montoursville in August 2006 to
expand the eastern edge of our market presence.  Both offices have shown strong growth during the second half of 2006 with State College and
Montoursville ending the year with $7.6 and $6.8 million in deposits, respectively.  We have also added ATMs at both of these branches as well
as the addition of one in the Lock Haven Hospital facility.  In 2007 additional ATMs will be available at our Jersey Shore Main Street office as
well as at a customer location in Slate Run.

Our  customer’s  personal  and  financial  information  security, privacy  needs, education  regarding  fraudulent  activity, and  identity  theft, have
become a critical business focus throughout our company.  To protect our customers, our shareholders, and the company, we were committed in
2006  to  further  enhancing  our  security  standards  and  practices.    Enhancements  were  made  in  the  training  programs  for  our  personnel  and
developing customer educational material that was distributed utilizing our branch office network, website, and by mail.  During the first quarter
of  2007  we  continued  our  security  and  privacy  commitment  with  the  implementation  of  multi  factor  authentication  for  our  internet  banking
customers.  

Over the course of the year we enhanced our electronic banking department to further augment our customer service capabilities.  Our offerings
now  include  internet  based  cash  management  products  and  services  for  small  business, not-for-profit  organizations, and  local  government
entities.    We  also  concentrated  our  efforts  on  expanding  our  market  presence  and  servicing  of  retail  business  customer  needs  through  our
merchant  card  program.   We  offered  new  deposit  and  loan  products  like  our  Free  Personal  Checking, Relationship  Interest  Checking, and  a
Standalone Home Equity line of credit.  

For 2007, our primary focus is the implementation of electronic transfer of checks to and from the Federal Reserve Bank.  By electronically
transmitting our daily cash letters, we will be able to take advantage of faster check clearing and the elimination of cutoff times for accepting
customer  deposits  with  same  day  availability.    We  are  also  giving  serious  consideration  to  the  implementation  of  remote  deposit  capture
technology for the convenience of our business customers, which would compliment our currently offered messenger service that is available to
pick up deposits at a customer’s place of business.  

Shareholder value is built on consistent performance from year to year, while strategically focusing on the right mix of asset growth, operational
profitability, and an adequate total return to shareholders.  Our long term shareholders have realized a significant return on their investment over
the past ten years.  For example, if you had purchased 100 shares on December 31, 1996, your investment would have been $4,250.  If left
untouched, that original investment would have had a market value of $10,977, represented by 290 shares, and realized an average annual return
of 12% for the ten year period ending December 31, 2006.  

We will continue to focus on maintaining business values that help us build profitable growth for our shareholders, meet our customer’s current
financial needs, and retain our valuable personnel, who provide the timely delivery of products and services.  

Sincerely,

Ronald A. Walko
President and Chief Executive Officer 

2

Three Year Financial Highlights

DILUTED
EARNINGS PER
SHARE

3.50

3.00

2.78

2.74

2.45

2.50

2.00

1.50

1.00

0.50

0.00

RETURN ON
AVERAGE EQUITY
(Percent)

18.00

15.49 

15.00

14.54 

12.93

12.00

9.00

6.00

3.00

0.00

DIVIDENDS
PER
SHARE

$ 2.00

1.73

1.50

1.47

1.56

1.00

0.50

0.00

’04

’05

’06

’04

’05

’06

’04

’05

’06

YEAR-END
DEPOSITS
(In Millions)

357

353

395

$ 450

375

300

225

150

75

0

RETURN ON
AVERAGE ASSETS
(Percent)

2.50

2.06

2.00

1.97

1.67

1.50

1.00

0.50

0.00

YEAR-END
LOANS
(In Millions)

360

338

325

$ 450

375

300

225

150

75

0

’04

’05

’06

’04

’05

’06

’04

’05

’06

3

Penns Woods Bancorp, Inc.
Consolidated Balance Sheet

(In Thousands, Except Share Data)

December 31,

2006

2005

ASSETS:
Noninterest-bearing balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Interest-bearing deposits in other financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . 
Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

$

$

15,348
25
15,373

Investment securities, available for sale, at fair value. . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Investment securities held to maturity (fair value of $286 and $238) . . . . . . . . . . . . . . . 
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Less: Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Loans, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Premises and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Investment in limited partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

LIABILITIES:
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

$

$

Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Long-term borrowings, Federal Home Loan Bank (FHLB) . . . . . . . . . . . . . . . . . . . . . . . 
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

SHAREHOLDERS’ EQUITY:
Common stock, par value $8.33; 10,000,000 shares authorized;

4,003,514 and 4,002,159 shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Accumulated other comprehensive income (loss):

Net unrealized gain on available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . 
Defined benefit plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Less: Treasury stock at cost, 102,772 and 26,372 shares . . . . . . . . . . . . . . . . . . . . . . . . . 

TOTAL SHAREHOLDERS’ EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

$

$

185,200
283
3,716

360,384
4,185
356,199

6,737
2,939
11,346
4,950
3,032
2,510

592,285

322,031
73,160

395,191

34,697
82,878
1,532
3,393

517,691

33,362
17,810
25,783

2,139
(579)
(3,921)

74,594

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY . . . . . . . . . . . . . . . . . . . 

$

592,285

$

See Accompanying Notes to the Consolidated Financial Statements.

14,065
25
14,090

187,018
265
3,545

338,438
3,679
334,759

6,409
2,828
10,718
3,549
3,032
2,455

568,668

281,150
71,379

352,529

54,003
84,478
1,108
2,631

494,749

33,351
17,772
22,938    

850
—
(992)

73,919

568,668

4

Penns Woods Bancorp, Inc.
Consolidated Statement of Income

(In Thousands, Except Per Share Data)

INTEREST AND DIVIDEND INCOME:
Loans including fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $
Investment Securities:

Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Dividend and other interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

TOTAL INTEREST AND DIVIDEND INCOME . . . . . . . . . . . . . . . 

INTEREST EXPENSE:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Long-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

TOTAL INTEREST EXPENSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

NET INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

PROVISION FOR LOAN LOSSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

NET INTEREST INCOME AFTER PROVISION

Year Ended December 31,

2006

2005

2004

24,878

$

22,126

$

20,261

3,577
4,027
1,271

33,753

8,908
1,503
3,799

14,210

19,543

635

4,351
3,223
1,203

30,903

5,774
931
3,676

10,381

20,522

720

6,686
1,708
1,190

29,845

4,775
539
3,454

8,768

21,077

465

FOR LOAN LOSSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

18,908

19,802

20,612

NON-INTEREST INCOME:
Service charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Securities gains, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Gain on sale of loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Insurance commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

TOTAL NON-INTEREST INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . 

NON-INTEREST EXPENSES:
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Occupancy expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Furniture and equipment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Pennsylvania shares tax expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

TOTAL NON-INTEREST EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . 

INCOME BEFORE INCOME TAX PROVISION . . . . . . . . . . . . . . . . . . 

INCOME TAX PROVISION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $

NET INCOME PER SHARE – BASIC . . . . . . . . . . . . . . . . . . . . . . . . . . .  $

NET INCOME PER SHARE – DILUTED . . . . . . . . . . . . . . . . . . . . . . . .  $

2,366
1,679
374
853
2,281
1,476

9,029

8,833
1,137
1,201
598
4,560

16,329

11,608

1,961

9,647

2.45

2.45

$

$

$

2,228
2,190
568
864
2,327
1,254

9,431

8,314
1,089
973
549
4,183

15,108

14,125

3,224

10,901

2.75

2.74

$

$

$

1,983
2,176
294
969
2,282
1,214

8,918

7,804
959
1,016
508
3,897

14,184

15,346

4,263

11,083

2.78

2.78

WEIGHTED AVERAGE SHARES OUTSTANDING – BASIC . . . . . . . 

WEIGHTED AVERAGE SHARES OUTSTANDING – DILUTED . . . . 

3,934,138

3,934,617

3,971,926

3,974,055

3,990,008

3,994,352

See Accompanying Notes to the Consolidated Financial Statements.

5

Penns Woods Bancorp, Inc.
Consolidated Statement of Changes
In Shareholders’ Equity

(In Thousands, Except Per Share Data)

Balance, December 31, 2003

Comprehensive Income:

Net income
Unrealized loss on available for

sale securities, net of reclassification
adjustments and tax benefit of $926
Total comprehensive income

Dividends declared ($1.47 per share)
Stock options exercised
Purchase of treasury stock (6,372 shares)

Balance, December 31, 2004

Stock split fractional shares

Comprehensive Income:

Net income
Unrealized loss on available for

sale securities, net of reclassification
adjustments and tax benefit of $1,793

Total comprehensive income

Dividends declared ($1.56 per share)
Stock options exercised
Purchase of treasury stock (14,000 shares)

Balance, December 31, 2005

Comprehensive Income:

Net income
Unrealized gain on available for

sale securities, net of reclassification
adjustments and tax of $664

Total comprehensive income

Cumulative effect of change in accounting
for pension obligations, net of tax benefit
of $298

Dividends declared ($1.73 per share)
Common shares issued for employee

stock purchase plan

Purchase of treasury stock (76,400 shares)

Common Stock

Shares

Amount

Additional
Paid-In
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Treasury
Stock

Total
Shareholders’
Equity

3,991,872

$

33,265

$

17,559

$ 13,022

$

6,132

$

(209 )

$ 69,769

11,083

(5,843)

(1,801)

6,332

53

141

3,998,204

33,318

17,700

18,262

4,331

(293)

(2)

2

10,901

(6,225)

(3,481)

4,248

35

70

4,002,159

33,351

17,772

22,938

850

9,647

(6,802)

1,289

(579)

1,335

11

38

11,083

(1,801)
9,282
(5,843)
194
(237)

73,165

—

10,901

(3,481)
7,420
(6,225)
105
(546)

73,919

9,647

1,289
10,936

(579)
(6,802)

49
( 2,929)

(237 )

(446 )

(546 )

(992 )

(2,929 )

Balance, December 31, 2006

4,003,514

$

33,362

$

17,810

$ 25,783

$

1,560

$

(3,921 )

$ 74,594

Components of comprehensive income (loss):

Change in net unrealized gain (loss)
on investment securities available for sale

Net realized gains included in net

income, net of taxes of $571, $745 and $740

Total

2006

2005

2004

$

2,397

$   (2,036)

$

(365)

(1,108)

(1,445)

(1,436)

$

1,289

$ (3,481)

$ (1,801)

See Accompanying Notes to the Consolidated Financial Statements

6

Penns Woods Bancorp, Inc.
Consolidated Statement of Cash Flows

(In Thousands)

OPERATING ACTIVITIES:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Adjustments to reconcile net income to net
cash provided by operating activities:

Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Provision for loan losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Accretion and amortization of investment security

discounts and premiums  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Securities gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Originations of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . 
Proceeds of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Gain of sale of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Increases in bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . 
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . 

INVESTING ACTIVITIES:

Investment securities available for sale:

Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Proceeds from calls and maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Investment securities held to maturity:

Proceeds from calls and maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Net increase in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Acquisition of bank premises and equipment . . . . . . . . . . . . . . . . . . . . . 
Proceeds from the sale of foreclosed assets . . . . . . . . . . . . . . . . . . . . . . 
Proceeds from bank-owned life insurance death benefit. . . . . . . . . . . . . 
Purchase of bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 
Investment in limited partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Proceeds from redemption of regulatory stock . . . . . . . . . . . . . . . . . . . . 
Purchases of regulatory stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Year Ended December 31,
2005

2006

2004

$

9,647

$

10,901

$

11,083

744
635

(784)
(1,679)
(37,192)
37,874
(853)
(628)
(29)

7,735

76,249
7,477
(78,241)

25
(25)
(22,353)
(1,072)
329
–
–
(1,646)
3,630
(2,899)

549
720

(453)
(2,190)
(30,353)
32,296
(864)
(568)
254

10,292

123,546
12,664
(141,798)

328
(35)
(14,745)
(2,076)
329
826
–
(3,124)
4,862
(4,760)

585
465

(132)
(2,176)
(34,398)
35,546
(969)
(294)
482

10,192

162,796
28,732
(159,295)

142
(14)
(49,002)
(842)
237
–
(1,774)
–
3,322
(2,940)

Net cash used for investing activities . . . . . . . . . . . . . . . . . . . . . . . . 

(18,526)
________________

(23,983)
________________

(18,638)
________________

FINANCING ACTIVITIES:

Net increase (decrease) in interest-bearing deposits . . . . . . . . . . . . . . . . 
Net increase (decrease) in noninterest-bearing deposits . . . . . . . . . . . . . 
Net (decrease) increase in short-term borrowings . . . . . . . . . . . . . . . . . . 
Proceeds from long term borrowings, FHLB . . . . . . . . . . . . . . . . . . . . . 
Repayment of long term borrowings, FHLB. . . . . . . . . . . . . . . . . . . . . . 
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Issuance of common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Net cash provided by financing activities. . . . . . . . . . . . . . . . . . . . . 

NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . 
CASH AND CASH EQUIVALENTS, BEGINNING . . . . . . . . . . . . . . . . . . 

CASH AND CASH EQUIVALENTS, ENDING . . . . . . . . . . . . . . . . . . . . . . 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

40,881
1,781
(19,306)
–
(1,600)
(6,802)
49
–
(2,929)
________________
12,074
________________
1,283
14,090
________________
15,373
$
________________
________________

(1,636)
(2,671)
17,528
10,000
(1,400)
(6,225)
–
105
(546)
________________
15,155
________________
1,464
12,626
________________
14,090
$
________________
________________

13,343
9,175
(10,790)
5,000
–
(5,843)
–
194
(237)
________________
10,842
________________
2,396
10,230
________________
12,626
$
________________
________________

Interest paid
Income taxes paid
Transfer of loans to foreclosed real estate

$

$

13,786
2,645
278

$

10,123
2,625
433

8,754
4,350
129

See Accompanying Notes to the Consolidated Financial Statements

7

PENNS WOODS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Penns Woods Bancorp, Inc. and its wholly owned
subsidiaries, Jersey Shore State Bank (the “Bank”), Woods Real Estate Development Co., Inc., Woods Investment Company, Inc.,
and The M Group Inc. D/B/A The Comprehensive Financial Group (“The M Group”), a wholly owned subsidiary of the Bank
(collectively, the “Company”).  All significant intercompany balances and transactions have been eliminated.
Nature of Business
The Bank engages in a full-service commercial banking business, making available to the community a wide range of financial
services including, but not limited to, installment loans, credit cards, mortgage and home equity loans, lines of credit, construction
financing, farm loans, community development loans, loans to non-profit entities and local government, and various types of time
and demand deposits including, but not limited to, checking accounts, savings accounts, clubs, money market deposit accounts,
certificates  of  deposit, and  IRAs.    Deposits  are  insured  by  the  Federal  Deposit  Insurance  Corporation  (“FDIC”)  to  the  extent
provided by law.
The financial services are provided by the Bank to individuals, partnerships, non-profit organizations, and corporations through its
thirteen offices located in Clinton, Lycoming, and Centre Counties, Pennsylvania. 
Woods Real Estate Development Co., Inc. engages in real estate transactions on behalf of Penns Woods Bancorp, Inc. and the Bank.
Woods Investment Company, Inc., a Delaware holding company, is engaged in investing activities.
The M Group engages in securities brokerage and financial planning services, which include the sale of life insurance products,
annuities, and estate planning services. 
Operations  are  managed  and  financial  performance  is  evaluated  on  a  corporate-wide  basis.   Accordingly, all  financial  services
operations are considered by management to be aggregated in one reportable operating segment.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities  at  the  date  of  the  consolidated  financial  statements  and  the  reported  amounts  of  revenues  and  expenses  during  the
reporting period.  Actual results may differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses,
deferred tax assets and liabilities, and the valuation of real estate acquired through, or in lieu of, foreclosure on settlement of debt.
Stock Split
During the fourth quarter of 2005 the Company initiated a 6 for 5 stock split.  Previously reported share and per share amounts
have been adjusted to reflect the split.
Cash and Cash Equivalents
Cash equivalents include cash on hand and in banks and interest-earning deposits.  Interest-earning deposits mature within one year
and are carried at cost.  Net cash flows are reported for loan, deposit, and short term borrowing transactions.
Restrictions on Cash and Cash Equivalents
Based on deposit levels, the Company must maintain cash and other reserves with the Federal Reserve Bank of Philadelphia (FRB).
Investment Securities
Investment securities are classified as available for sale or held to maturity.
Securities held to maturity include bonds, notes, and debentures for which the Company has the positive intent and ability to hold
to maturity and are reported at amortized cost. 
Available for sale securities consist of bonds, notes, debentures, and certain equity securities not classified as trading securities nor
as held to maturity securities.  Unrealized holding gains and losses, net of tax, on available for sale securities are reported as a net
amount in a separate component of shareholders’ equity until realized.
Gains and losses on the sale of equity securities are determined using the average cost method, while all other investment securities
use the specific cost method.
All  investment  securities, regardless  of  classification, are  monitored  and  tested  for  impairment.    An  investment  security  is
considered to be impaired when the unrealized loss is considered to be other than temporary.  When this occurs, the investment is
written down to the current fair market value with the write-down being reflected as a realized loss. 
Premiums and discounts on all securities are recognized in interest income using the level yield method over the period to maturity.
Investment  securities  fair  values  are  based  on  observed  market  prices.    Certain  investment  securities  do  not  have  observed  bid
prices  and  their  fair  value  is  based  on  instruments  with  similar  risk  elements.  Since  regulatory  stock  is  redeemable  at  par, the
Company carries it at cost.
Loans
Loans are stated at the principal amount outstanding, net of deferred fees, unamortized loan fees and costs, and the allowance for
loan losses.  Interest on loans is recognized as income when earned on the accrual method.  The Company’s general policy has
been to stop accruing interest on loans when it is determined a reasonable doubt exists as to the collectibility of additional interest.
Income  is  subsequently  recognized  only  to  the  extent  that  cash  payments  are  received  provided  the  loan  is  not  delinquent  in
payment and, in management’s judgment, the borrower has the ability and intent to make future principal payments.        
Loan  origination  and  commitment  fees  as  well  as  certain  direct  loan  origination  costs  are  being  deferred  and  amortized  as  an
adjustment to the related loan’s yield over the contractual lives of the related loans.

8

Allowance for Loan Losses
The  allowance  for  loan  losses  represents  the  amount  which  management  estimates  is  adequate  to  provide  for  probable  losses
inherent in its loan portfolio, as of the balance sheet date.  The allowance method is used in providing for loan losses.  Accordingly,
all loan losses are charged to the allowance and all recoveries are credited to it.  The allowance for loan losses is established through
a provision for loan losses charged to operations.  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 based on management’s consideration of the nature of the portfolio segments, changes in
mix and volume of the loan portfolio, historical loan loss experience, and general economic conditions.  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 December 31, 2006, 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, rising
unemployment, or  negative  performance  trends  in  financial  information  from  borrowers  could  be  indicators  of  subsequent
increased levels of nonperforming assets and possible charge-offs, which would normally require increased loan loss provisions.
An integral part of the periodic regulatory examination process is the review of the adequacy of the Bank’s loan loss allowance.
The regulatory agencies could require the Bank based on their evaluation of information available at the time of their examination
to provide additional loan loss provisions to further supplement the allowance.
Impaired loans are commercial and commercial real estate loans for which it is probable the Bank will not be able to collect all
amounts due according to the contractual terms of the loan agreement.  The Bank individually evaluates such loans for impairment
and does not aggregate loans by major risk classifications.  The definition of “impaired loans” is not the same as the definition of
“nonaccrual loans,” although the two categories overlap.  The Bank may choose to place a loan on nonaccrual status due to payment
delinquency or uncertain collectibility, while not classifying the loan as impaired if the loan is not a commercial or commercial real
estate  loan.    Factors  considered  by  management  in  determining  impairment  include  payment  status  and  collateral  value.    The
amount of impairment for these types of loans is determined by the difference between the present value of the expected cash flows
related to the loan, using the original interest rate, and its recorded value, or as a practical expedient in the case of collateralized
loans, the difference between the fair value of the collateral and the recorded amount of the loans.  When foreclosure is probable,
impairment is measured based on the fair value of the collateral.
Mortgage loans on one-to-four family properties and all consumer loans are large groups of smaller-balance homogeneous loans
and are measured for impairment collectively. Loans that experience insignificant payment delays, which are defined as 90 days or
less, generally are not classified as impaired.  Management determines the significance of payment delays on a case-by-case basis
taking into consideration all circumstances surrounding the loan and the borrower including the length of the delay, the borrower’s
prior payment record, and the amount of shortfall in relation to the principal and interest owed.
Loans Held for Sale
In general, fixed rate residential mortgage loans originated by the Bank are held for sale and are carried at cost due to their short
holding period which can range from less than two weeks up to thirty days.  Sold loans are not serviced by the Bank.  Proceeds
from the sale of loans in excess of the carrying value are accounted for as a gain.  Total gains on the sale of loans are shown as a
component of non-interest income within the consolidated statement of income.
Foreclosed Assets Held for Sale
Foreclosed assets held for sale are carried at the lower of cost or fair value minus estimated selling costs.  Prior to foreclosure, the
value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for loan
losses, if necessary.  Any subsequent write-downs are charged against operating expenses.  Net operating expenses and gains and
losses realized from disposition are included in non-interest expense and income, respectively.
Premises and Equipment
Premises  and  equipment  are  stated  at  cost  less  accumulated  depreciation.    Depreciation  is  computed  using  straight-line  and
accelerated methods over the estimated useful lives of the related assets, which range from five to ten years for furniture, fixtures,
and equipment and fifteen to forty years for buildings and improvements.  Costs incurred for routine maintenance and repairs are
charged to operations as incurred.  Costs of major additions and improvements are capitalized.
Bank-Owned Life Insurance
The Company has purchased life insurance policies on certain officers, and is the sole beneficiary on those policies.  Bank-owned
life insurance is recorded at its cash surrender value, or the amount that can be realized.  Increases in the cash surrender value are
recognized as non-interest income.
Goodwill
The Company accounts for goodwill in accordance with Statement of Financial Accounting Standards (“FAS”) No. 142, Goodwill
and  Other  Intangible  Assets.    This  statement, among  other  things, requires  a  two-step  process  for  testing  the  impairment  of
goodwill on at least an annual basis.  This approach could cause more volatility in the Company’s reported net income because
impairment losses, if any, could occur irregularly and in varying amounts.  The Company performs an annual impairment analysis
of goodwill for its purchased subsidiary, The M Group.  Based on the fair value of this reporting unit, estimated using the expected
present value of future cash flows, no impairment of goodwill was recognized in 2006 and 2005.
Investments in Limited Partnerships
The  Company  is  a  limited  partner  in  three  partnerships  at  December  31, 2006  that  provide  low  income  elderly  housing  in  the
Company’s geographic market area. The carrying value of the Company’s investments in limited partnerships was $4,950,000 at
December 31, 2006 and $3,549,000 at December 31, 2005. The Company is fully amortizing the investment in the partnership
entered into prior to 2005 over the fifteen-year holding period.  The partnerships entered into after 2004 are being fully amortized
over  the  ten-year  tax  credit  receipt  period  utilizing  the  straight-line  method.   The  partnerships  began  being  amortized  once  the 

9

projects  reached  the  level  of  occupancy  needed  to  begin  the  ten  year  tax  credit  recognition  period.    Amortization  of  limited
partnership investments amounted to $245,000 in 2006 and $90,000 for 2005 and 2004.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Company enters into off-balance sheet financial instruments. Those instruments consist of
commitments to extend credit and standby letters of credit. When those instruments are funded or become payable, the Company
reports the amounts in its financial statements.
Advertising Cost
Advertising costs are generally expensed as incurred. 
Income Taxes
Deferred tax assets and liabilities result from temporary differences in financial and income tax methods of accounting, and are
reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected
to be realized or settled.  As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
Earnings Per Share
The Company provides dual presentation of basic and diluted earnings per share.  Basic earnings per share is calculated utilizing
net income as reported in the numerator and weighted average shares outstanding in the denominator.  The computation of diluted
earnings per share differs in that the dilutive effects of any stock options are adjusted in the denominator.
Employee Benefits
Pension  and  employee  benefits  include  contributions, determined  actuarially, to  a  defined  benefit  retirement  plan  covering  the
eligible employees of the Bank.  The plan is funded on a current basis to the extent that it is deductible under existing federal tax
regulations.  Pension and other employee benefits also include contributions to a defined contribution Section 401(k) plan covering
eligible  employees.    Contributions  matching  those  made  by  eligible  employees  are  funded  throughout  the  year.  In  addition, an
elective contribution is made annually at the discretion of the Board of Directors. 
The M Group Products and Income Recognition
The M Group product line is comprised primarily of annuities, life insurance, and mutual funds.  The revenues generated from life
insurance sales are commission only, as The M Group does not underwrite the policies.  Life insurance sales include permanent
and term policies with the majority of the policies written being permanent.  Term life insurance policies are written for 10, 15, 20,
and 30 year terms with the majority of the policies being written for 20 years.  None of these products are offered as an integral
part of lending activities.
Commissions  from  the  sale  of  annuities  are  recognized  at  the  time  notice  is  received  from  the  third  party  broker/dealer  or  an
insurance  company  that  the  transaction  has  been  accepted  and  approved, which  is  also  the  time  when  commission  income  is
received.  
Life insurance commissions are recognized at varying points based on the payment option chosen by the customer.  Commissions
from monthly and annual payment plans are recognized at the start of each annual period for the life insurance, while quarterly and
semi-annual premium payments are recognized quarterly and semi-annually when the earnings process is complete.  For example,
semi-annual payments on the first of January and July would result in commission income recognition on the first of January and
July, while payments on the first of January, April, July, and October would result in commission income recognition on those
dates.  The potential for chargebacks only exists for those policies on a monthly payment plan since income is recognized at the
beginning of the annual coverage period versus at the time of each monthly payment.  No liability is maintained for chargebacks
as these are removed from income at the time of the occurrence.
Stock Options
The  Company  maintains  a  stock  option  plan  for  directors  and  certain  officers  and  employees.  For  all  options  granted  prior  to
January1, 2006, when  the  exercise  price  of  the  Company’s  stock  options  was  greater  than  or  equal  to  the  market  price  of  the
underlying stock on the date of the grant, no compensation expense was recognized in the Company’s financial statements.
Accumulated Other Comprehensive Income
The Company is required to present accumulated other comprehensive income in a full set of general-purpose financial statements
for  all  periods  presented.   Accumulated  other  comprehensive  income  is  comprised  of  unrealized  holding  gains  (losses)  on  the
available for sale securities portfolio and the unrecognized components of  net periodic benefit costs of the defined benefit pension
plan.
Segment Reporting
Statement  of  Financial Accounting  Standards  No.  131, Disclosure  about  Segments  of  an  Enterprise  and  Related  Information,
requires  that  public  business  enterprises  report  financial  and  descriptive  information  about  their  reportable  operating  segments.
Based on the guidance provided by the Statement, the company has determined that its only reportable segment is Community
Banking.
Reclassification of Comparative Amounts
Certain items previously reported have been reclassified to conform to the current year’s reporting format.  Such reclassifications
did not affect net income or shareholders’ equity.
Recent Accounting Pronouncements
In  February  2006, the  Financial Accounting  Standards  Board  (“FASB”)  issued  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 

10

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 (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 Postretirement
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 postretirement  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
in addition  to  footnote  disclosures.  On December 31, 2006, the Company adopted FAS
obligations  as of the fiscal  year-end,
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 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 Taxes, and it seeks to reduce the diversity in practice associated with certain
aspects of measurement and recognition in accounting for income taxes. This Interpretation clarifies that management is expected
to evaluate an income tax position taken or expected to be taken for likelihood of realization before recording any amounts for such
position in the financial statement.  FIN 48 also requires expanded disclosure with respect to income tax positions taken that are
not  certain  to  be  realized.   This  Interpretation  is  effective  for  fiscal  years  beginning  after  December  15, 2006, and  will  require
management to evaluate every open tax position that exists in every jurisdiction on the date of initial adoption.  The Company is
currently evaluating the impact the adoption of the standard will have on the Company’s results of operations. 
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 standard 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. 

NOTE 2 - PER SHARE DATA
There are no convertible securities, which would affect the numerator in calculating basic and dilutive earnings per share, therefore,
net income as presented on the consolidated statement of income will be used as the numerator.  The following table sets forth the
composition of the weighted average common shares (denominator) used in the basic and dilutive per share computation.  

Weighted average common shares outstanding. . . . . . . . . . . . . . 
Weighted average treasury stock shares . . . . . . . . . . . . . . . . . . . 

Weighted average common shares and common stock

2006
4,002,416
(68,278)

2005
3,986,569
(14,643)

2004
3,993,336
(3,328)

equivalents used to calculate basic earnings per share . . . . 

3,934,138

3,971,926

3,990,008

Additional common stock equivalents (stock options)

used to calculate diluted earnings per share . . . . . . . . . . . . 

479

2,129

4,344

Weighted average common shares and common stock 

equivalents used to calculate diluted earnings per share . . . 

3,934,617

3,974,055

3,994,352

Options to purchase 9,002 shares of common stock at a price of $40.29 were outstanding during 2006 and 2005, and 10,455 shares
of common stock at a price of $40.29 were outstanding during 2004.  The options were not included in the computation of diluted
earnings per share as they were anti-dilutive due to the strike price at December 31, of each period presented being greater than the
market value at that time.

11

NOTE 3 - INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities at December 31, 2006 and 2005 are as follows:

(In Thousands)

2006

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair
Value

Available for sale (AFS)

U.S. Government and agency securities. . . . . .  $
State and political securities. . . . . . . . . . . . . . . 
Other debt securities. . . . . . . . . . . . . . . . . . . . . 

Total debt securities

Equity securities . . . . . . . . . . . . . . . . . . . . . . . . 

Total investment securities AFS

$

Held to maturity (HTM)

U.S. Government and agency securities. . . . . .  $
Other debt securities. . . . . . . . . . . . . . . . . . . . . 

Total investment securities HTM

$

54,949 $
104,658
1,998
161,605
20,353
181,958 $

26 $
257

283 $

24 $

1,646
37
1,707
2,883
4,590 $

2 $
1

3 $

2005

(821) $
(358)
(11)
(1,190)
(158)
(1,348) $

— $
—

— $

54,152
105,946
2,024
162,122
23,078
185,200

28
258

286

(In Thousands)

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair
Value

Available for sale (AFS)

U.S. Government and agency securities. . . . . .  $
State and political securities. . . . . . . . . . . . . . . 
Other debt securities. . . . . . . . . . . . . . . . . . . . . 

Total debt securities

Equity securities . . . . . . . . . . . . . . . . . . . . . . . . 

Total investment securities AFS

$

Held to maturity (HTM)

U.S. Government and agency securities. . . . . .  $
Other debt securities. . . . . . . . . . . . . . . . . . . . . 

Total investment securities HTM

$

65,496 $
93,769
1,750
161,015
24,715
185,730 $

28 $
237

265 $

30 $

1,390
12
1,432
2,951
4,383 $

2 $
—

2 $

(1,573) $
(1,068)
(43)
(2,684)
(411)
(3,095) $

— $
(29)

(29) $

63,953
94,091
1,719
159,763
27,255
187,018

30
208

238

The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of
time, that the individual securities have been in a continuous unrealized loss position, at December 31, 2006 and 2005.

(In Thousands)

2006

Less than twelve months

Twelve months or greater

Total

Fair
Value

Gross
Unrealized
Losses

Estimated
Fair
Value

Gross
Unrealized
Losses

Estimated
Fair
Value

Gross
Unrealized
Losses

U.S. Government and agency securities  . . . . . . . . . . . . . . . . $
State and political securities  . . . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total debt securites  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

24,552 $
31,286
292

56,130
726

97 $
195
7

299
33

25,053 $
11,706
146

36,905
2,592

724 $
163
4

891
125

49,605 $
42,992
438

93,035
3,318

Total  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

56,856 $

332 $

39,497 $

1,016 $

96,353 $

821
358
11

1,190
158

1,348

(In Thousands)

Less than twelve months

Fair
Value

Gross
Unrealized
Losses

2005
Twelve months or greater

Estimated
Fair
Value

Gross
Unrealized
Losses

Total

Estimated
Fair
Value

Gross
Unrealized
Losses

U.S. Government and agency securities  . . . . . . . . . . . . . . . . $
State and political securities  . . . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total debt securites  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

34,028 $
46,864
707

81,599
2,721

925 $

1,063
54

2,042
249

26,038 $
586
232

26,856
1,340

648 $
5
18

671
162

60,066 $
47,450
939

108,455
4,061

Total  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

84,320 $

2,291 $

28,196 $

833 $

112,516 $

1,573
1,068
72

2,713
411

3,124

12

At December 31, 2006 there were a total of 88 and 32 individual securities that were in a continuous unrealized loss position for
less than twelve months and greater than twelve months, respectively.
The policy of the Company is to recognize other than temporary impairment of equity securities where the fair value has been
significantly below cost for four consecutive quarters.  For fixed maturity investments with unrealized losses due to interest rates
where  the  Company  has  the  positive  intent  and  ability  to  hold  the  investment  for  a  period  of  time  sufficient  to  allow  a  market
recovery, declines in value below cost are not assumed to be other than temporary.  The Company reviews its position quarterly
and has asserted that at December 31, 2006, the declines outlined in the above table represent temporary declines and the Company
does have the intent and ability to hold those securities either to maturity or to allow a market recovery.
The Company has concluded that any impairment of its investment securities portfolio is not other than temporary but is the result
of interest rate changes that are not expected to result in the non-collection of principal and interest during the period.
The amortized cost and fair value of debt securities at December 31, 2006, by contractual maturity, are shown below.  Expected
maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.

(In Thousands)

Available for Sale

Held to Maturity

Amoritized
Cost

Estimated Fair
Value

Amoritized
Cost

Estimated Fair
Value

Due in one year or less . . . . . . . . . . . . . . . . . . . . . .  $
Due after one year to five years. . . . . . . . . . . . . . . . 
Due after five years to ten years . . . . . . . . . . . . . . . 
Due after ten years. . . . . . . . . . . . . . . . . . . . . . . . . . 

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $

—
125
133
28
286
____________________ ____________________ ____________________ _________________
____________________ ____________________ ____________________ _________________

— $
25
1,477
160,620
162,122 $

— $
25
1,515
160,065
161,605 $

— $
125
132
26
283 $

Total gross proceeds from sales of securities available for sale were $76,249,000, $123,546,000, and $162,796,000 for 2006, 2005,
and 2004, respectively.  The following table represents gross realized gains and losses on those transactions:
(In Thousands)

2006

2005

2004

Gross realized gains:

U.S. Government and agency securities. . . . . . . . . . . . . . . . . . . . . .  $
State and political securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Other debt securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

— $

1,248
—
1,655

128 $
819
—
2,209

459
1,191
1
2,192

Total gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $

____________________
____________________

2,903 $

___________________
___________________

3,156 $

3,843
________________
________________

Gross realized losses:

U.S. Government and agency securities. . . . . . . . . . . . . . . . . . . . . .  $
State and political securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Other debt securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

913 $
302
—
9

Total gross relized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $

1,224 $

791 $
116
59
—

966 $

1,623
23
—
21

1,667

Investment  securities  with  a  carrying  value  of  approximately  $64,821,000  and  $72,642,000  at  December  31, 2006  and  2005,
respectively, were pledged to secure certain deposits, repurchase agreements, and for other purposes as required by law.
There is no concentration of investments that exceed ten percent of shareholders’ equity for any individual issuer, excluding those
guaranteed by the U.S. Government.

NOTE 4 - LOANS
Major loan classifications as of December 31, 2006 and 2005 are summarized as follows:
2006
Past Due
90 Days
or more
& still
Accuring

Past due
30 to 90
Days

(In Thousands)

Current

Non-
Accural

Total

Commercial and agricultural. . . . . . . . . . 
Real estate mortgage:

Residential . . . . . . . . . . . . . . . . . . . . 
Commercial . . . . . . . . . . . . . . . . . . . 
Construction . . . . . . . . . . . . . . . . . . . 
Installment loans to individuals . . . . . . . 

Less: Net deferred loan fees

Allowance for loan losses

Loans, net

$

27,682

$

764

$

109

$

— $

28,555

1,050
1,406
54
346
_________________
3,620
$

8
—
—
2
_________________
119
$

185
185
—
—
_________________
370
$

156,976
133,813
16,695
22,127
_________________
357,293
1,018
4,185
352,090

$

158,219
135,404
16,749
22,475
_______________
361,402
1,018
4,185
356,199

$

13

(In Thousands)

Commercial and agricultural. . . . . . . . . . 
Real estate mortgage:

Residential . . . . . . . . . . . . . . . . . . . . 
Commercial . . . . . . . . . . . . . . . . . . . 
Construction . . . . . . . . . . . . . . . . . . . 
Installment loans to individuals . . . . . . . 

Less: Net deferred loan fees

Allowance for loan losses

Loans, net

CURRENT
34,000

$

148,190
125,587
10,599
16,859
_________________
335,235
1,062
3,679
330,494

$

2005
PAST DUE
90 DAYS
OR MORE
& STILL
ACCRUING
$

NON-
ACCRUAL

TOTAL

— $

169

$

34,407

PAST DUE
30 TO 90
DAYS

$

238

1,413
1,544
79
388
_________________
3,662
$

34
—
—
29
_________________
63
$

363
—
3
5
_________________
540
$

150,000
127,131
10,681
17,281
_______________
339,500
1,062
3,679
334,759

$

Impaired loans totaled $574,000 at December 31, 2006.  The portion of the allowance for loan losses allocated for impaired loans
was $42,000 at December 31, 2006. The average recorded investment in impaired loans during the year ended December 31, 2006
was approximately $504,000.  There were no impaired loans for the years ended December 31, 2005 and 2004.  
The Company recognized interest income on impaired loans in the amount of $72,000 for the year ended December 31, 2006.  On
a cash basis interest income on impaired loans amounted to $58,000 for the year ended December 31, 2006.
No additional funds are committed to be advanced in connection with impaired loans.
Loans on which the accrual of interest has been discontinued or reduced, exclusive of impaired loans, amounted to approximately
$370,000 and $540,000 at December 31, 2006 and 2005, respectively.  If interest had been recorded based on the original loan
agreement terms and rate of interest for those loans, income would have approximated $23,000, $39,000, and $64,000 for the years
ended December 31, 2006, 2005, and 2004, respectively.  Interest income on such loans, is recorded as received and amounted to
approximately $15,000, $18,000, and $10,000, for the years ended December 31, 2006, 2005, and 2004, respectively.

Changes in the allowance for loan losses for the years ended December 31, are as follows:
(In Thousands)
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $
Provision charged to operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Loans charged off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

3,679
635
(327)
198

2006

$

$

2005
3,338
720
(446)
67

Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $

4,185

$

3,679

$

2004
3,069
465
(283)
87

3,338

The Company has a concentration of loans to owners of both commercial and residential rental properties at December 31, 2006
and 2005 of 15.38% and 15.09% and 15.82% and 15.92% of total loans, respectively.
The Company grants commercial, industrial, residential, and installment loans to customers throughout north-central Pennsylvania.
Although the Company has a diversified loan portfolio at December 31, 2006 and 2005, a substantial portion of its debtors’ ability
to honor their contracts is dependent on the economic conditions within this region.

NOTE 5 - PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows at December 31:
(In Thousands)
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $
Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Net premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $

2006

2005

1,370
6,038
4,844
811
__________________
13,063
6,326
__________________
6,737
__________________
__________________

$

1,046
6,022
4,118
805
________________
11,991
5,582
________________
$
6,409
________________
________________

Depreciation  and  amortization  charged  to  operations  for  the  years  ended  2006, 2005, and  2004  was  $744,000, $549,000, and
$585,000, respectively.

14

NOTE 6 - GOODWILL
As of December 31, 2006, 2005, and 2004 goodwill had a gross carrying value of $3,308,000 and accumulated amortization of
$276,000 resulting in a net carrying amount of $3,032,000.
The gross carrying amount of goodwill is tested for impairment in the third quarter of each fiscal year.  Based on fair value of the
reporting  unit, estimated  using  the  expected  present  value  of  future  cash  flows, there  was  no  evidence  of  impairment  of  the
carrying amount at December 31, 2006 and 2005, repectively.

NOTE 7 - TIME DEPOSITS
Time deposits of $100,000 or more totaled approximately $49,793,000 on December 31, 2006 and $36,762,000 on December 31,
2005.  Interest expense related to such deposits was approximately $1,873,000, $1,417,000, and $818,000, for the years ended
December 31, 2006, 2005, and 2004, respectively.

At December 31, 2006, the scheduled maturities on time deposits of $100,000 or more are as follows:

(In Thousands)

Three months or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $
Three months to six months . . . . . . . . . . . . . . . . . . . . . . . . . . 
Six months to twelve months . . . . . . . . . . . . . . . . . . . . . . . . . 
Over twelve months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $

Total time deposit maturities are as follows:

(In Thousands)

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Thereafter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $

2006

18,963
11,230
11,705
7,895

49,793

2006

157,818
23,983
7,052
3,245
546
805

193,449

NOTE 8 - SHORT-TERM BORROWINGS
Short-term borrowings consist of securities sold under agreements to repurchase and FHLB advances which generally represent
overnight or less than six month borrowings.  In addition to the outstanding balances noted below, the Bank also had additional
lines of credit totaling $28,048,000 available from correspondent banks other than the FHLB.  The outstanding balances and related
information for short-term borrowings are summarized as follows:

(In Thousands)
Repurchase Agreements:
Balance at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $
Maximum amount outstanding at any month end . . . . . . . . . . . . . . . . . . 
Average balance outstanding during the year . . . . . . . . . . . . . . . . . . . . . . 
Weighted-average interest rate:

At year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Paid during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Open Repo Plus:
Balance at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $
Maximum amount outstanding at any month end . . . . . . . . . . . . . . . . . . 
Average balance outstanding during the year . . . . . . . . . . . . . . . . . . . . . . 
Weighted-average interest rate:

At year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Paid during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Short Term FHLB:
Balance at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $
Maximum amount outstanding at any month end . . . . . . . . . . . . . . . . . . 
Average balance outstanding during the year . . . . . . . . . . . . . . . . . . . . . . 
Weighted-average interest rate:

At year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Paid during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2006

2005

2004

15,991 $
19,916
16,028

3.96%
3.55%

18,706 $
43,040
15,301

5.40%
5.07%

— $
—
3,283

—
4.82%

15,263 $
16,754
14,268

2.74%
2.19%

1,740 $

24,990
10,765

4.25%
3.33%

37,000 $
37,000
7,081

4.24%
3.66%

13,845
15,301
13,317

1.82%
1.77%

22,630
32,480
18,336

2.24%
1.64%

—
900
204

—
1.42%

15

NOTE 9 - LONG-TERM BORROWINGS
The following represents outstanding long-term borrowings with the FHLB by contractual maturities at December 31, 2006 and
2005:

(In Thousands)
Variable rate of 4.49%, maturing in 2007
Variable rates between 3.14% and 5.56%, maturing in 2008
Variable rate of 5.06%, maturing in 2009
Variable rate of 6.65%, maturing in 2010
Variable rates of 4.25% and 4.72%, maturing in 2011
Variable rate of 3.68%, maturing in 2012
Variable rate of 3.74%, maturing in 2013
Variable rate of 3.97%, maturing in 2015
Fixed rate of 2.58%, maturing in 2006
Fixed rates between 2.67% and 3.13%, maturing in 2007
Fixed rate of 6.92%, maturing in 2011
Fixed rate of 5.87%, maturing in 2013
Fixed rate of 6.92%, maturing in 2015
Total

2006

2005

5,000
29,600
5,000
5,000
10,000
5,000
5,000
10,000
—
6,500
500
528
750
82,878

$

$

5,000
29,600
5,000
5,000
10,000
5,000
5,000
10,000
1,600
6,500
500
528
750
84,478

$

$

The terms of the convertible borrowings allow the FHLB to convert the interest rate to an adjustable rate based on the three month
London Interbank Offered Rate (“LIBOR”) at a predetermined anniversary date of the borrowing’s origination, ranging from three
months to five years.  If the FHLB converts the interest rate on one of the predetermined dates, the Bank has the ability to payoff
the debt on the conversion date and quarterly thereafter without incurring the customary pre-payment penalty.  
The Bank maintains a credit arrangement, which includes a revolving line of credit with the FHLB.  Under this credit arrangement,
the  Bank  has  a  remaining  borrowing  capacity  of  $123,538,000  at  December  31, 2006, which  is  subject  to  annual  renewal, and
typically incurs no service charges.  Under terms of a blanket agreement, collateral for the FHLB borrowings must be secured by
certain qualifying assets of the Bank which consist principally of first mortgage loans and mortgage-backed securities.

NOTE 10 - INCOME TAXES
The following temporary differences gave rise to the net deferred tax position at December 31, 2006 and 2005:
(In Thousands)

2006

2005

Deferred tax asset:

Allowance for loan losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $
Deferred compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Loan fees and costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Investment securities allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Deferred tax liabilities:

Bond accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Unrealized gains on available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $

1,292
386
517
346
2
134
2,677

49
85
376
1,102
1,612
1,065

$

$

1,022
368
249
356
97
59
2,151

27
96
301
438
862
1,289

No valuation allowance was established at December 31, 2006 and 2005, in the view of the Company’s ability to carry back taxes
paid in previous years and certain tax strategies, coupled with the anticipated future taxable income as evidenced by the Company’s
earning potential.   

The provision for income taxes is comprised of the following:

(In Thousands)

Currently payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $
Deferred (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Total provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $

2006

2005

2004

2,103
(142)

1,961

$

$

3,188
36

3,224

$

$

4,512
(249)

4,263

16

A reconciliation between the expected income tax and the effective income tax rate on income before income tax provision follows:
(In Thousands)

2006

2005

2004

Provision at expected rate. . . . . .  $
Decrease in tax

3,947

Amount

%
34.0%

Amount
4,803

$

%
34.0%

Amount
5,218
$

%
34.0%

resulting from:

Tax-exempt income . . . . . . 
Other, net . . . . . . . . . . . . . . 
Effective income tax . . . . . 

(1,425)
(561)

(12.3)
(4.8)

(1,275)
(304)

(9.0)
(2.2)

(651)
(304)

(4.2)
(2.0)

and rate . . . . . . . . . . . . .  $

1,961

16.9%

$

3,224

22.8%

$

4,263

27.8%

NOTE 11 - EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plan
The Company has a noncontributory defined benefit pension plan (the “Plan”) for all employees meeting certain age, length of
service requirements, and were hired prior to January 1, 2004, at which time entrance into the Plan was frozen.  Benefits are based
primarily on years of service and the average annual compensation during the highest five consecutive years within the final ten
years of employment.
The Company adopted the recognition provisions of FAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans and initially applied them to the funded status of its defined benefit pension plan as of December 31, 2006.
The initial recognition of the funded status of its defined benefit pension plan resulted in a decrease in Shareholder’s equity of
$579,000, which was net of a tax benefit of $298,000.
The following table sets forth the incremental effect of applying FAS No. 158 on individual line items in the Consolidated Balance
Sheet at December 31, 2006.
Before
Application of
FAS No. 158

After
Application of
FAS No. 158

Adjustments

(In Thousands)

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Accumulated other comprehensive income . . . . . . . . 
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . 
Total liabilities and shareholders’ equity . . . . . . . . . . 

2,212
591,987
2,516
516,814
2,139
75,173
591,987

$

298
298
877
877
(579)
(579)
298

$

2,510
592,285
3,393
517,691
1,560
74,594
592,285

The following table sets forth the obligation and funded status as of December 31:

(In Thousands)
Change in benefit obligation:

Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . .  $
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Actuarial (gain) loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Other, change in actural assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $

Change in plan assets:

Fair value of plan assets at beginning of year . . . . . . . . . . . . . . . . . . . . .  $
Actual loss on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Employer contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Expenses paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . 
Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $

Amounts not yet recognized as a component of net periodic pension cost:
Amounts recognized in accumulated other comprehensive

income (loss) consists of:

Net trasition asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $
Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Amounts not recognized in accumulated other comprehensive

income (loss) consists of:

Net transition asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $

2006

2005

8,780
467
434
(785)
(186)
(200)
8,510

6,011
629
550
(186)
(14)
6,990
(1,520)

(15)
179
713

—
—
—
877

$

$

$

$

$

$

7,549
505
446
280
(218)
218
8,780

4,549
272
1,420
(218)
(12)
6,011
(2,769)

—
—
—

(17)
204
1,849
2,036

17

The accumulated benefit obligation for the Plan was $6,451,000 and $6,560,000 at December 31, 2006 and 2005, respectively.
Components of Net Periodic Cost and Other Amounts Recognized in other Comprehensive Income as of December 31, 2006, 2005
and 2004, respectively, are as follows:
(In Thousands)

2006

2005

2004

Net periodic pension cost:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Amortization of transition asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Recognized net actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Amortization of unrecognized net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Net periodic benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $

467
434
(485)
(3)
26
—
22
461

$

$

505
446
(402)
(2)
25
—
65
637

$

$

447
398
(376)
(3)
26
109
—
601

The  estimated  net  transition  asset  and  prior  service  cost  for  the  defined  benefit  pension  plan  that  will  be  amortized  from
accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $3,000 and $25,000,
respectively.
Assumptions
Weighted-average assumptions used to determine benefit obligations December 31:

2006
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.75%
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.75%

2005
5.50%
4.50%

Weighted-average assumptions used to determine net periodic cost for years ended December 31:

2006
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.50%
Expected long-term return on plan assets  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.00%
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.50%

2005
5.75%
8.00%
4.75%

2004
5.75%
4.75%

2004
6.00%
8.00%
5.00%

The expected long-term rate of return was estimated using market benchmarks by which the plan assets would outperform the
market value in the future, based on historical experience adjusted for changes in asset allocation and expectations for overall lower
future returns on similar investments compared to past periods.
Plan Assets
The Plan’s weighted-average asset allocations at December 31 by asset category are as follows:
Asset Category
Cash  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income securities  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2006
0.4%
39.2%
60.4%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0%

2005
0.4%
39.4%
60.2%
100.0%

The investment objective for the Plan is to maximize total return with tolerance for slightly above average risk, meaning the fund
is able to tolerate short-term volatility to achieve above-average returns over the long term.  
Asset allocation favors equities, with target allocation of approximately 60% equity securities, 37.5% fixed income securities and
2.5% cash.  Due to volatility in the market, the target allocation is not always desirable and asset allocations will fluctuate between
the  acceptable  ranges.   The  equity  portfolio’s  exposure  is  in  mid  and  large  capitalization  domestic  equities.  Exposure  to  small
capitalization and international stocks may be allowed.
It  is  management’s  intent  to  give  the  investment  managers  flexibility, within  the  overall  guidelines, with  respect  to  investment
decisions and their timing.  However, certain investments require specific review and approval by management.  Management is
also informed of anticipated, significant modifications of any previously approved investment, or anticipated use of derivatives to
execute investment strategies.
The following benefit payments that reflect expected future service, as appropriate, are expected to be paid:
Estimated future benefit payments:

(In Thousands)

2007  . . . . . . . . . . . . . . . . . . . . . . $
2008  . . . . . . . . . . . . . . . . . . . . . .
2009  . . . . . . . . . . . . . . . . . . . . . .
2010  . . . . . . . . . . . . . . . . . . . . . .
2011  . . . . . . . . . . . . . . . . . . . . . .
2012-2016  . . . . . . . . . . . . . . . . . . . .

240
246
287
315
339
2,791
$ 4,218

The company expects to contribute $500,000 to its Pension Plan in 2007.

18

401(k) Savings Plan
The Company also offers a 401(k) savings plan in which eligible participating employees may elect to contribute up to a maximum
percentage  allowable  not  to  exceed  the  limits  of  Code  Sections  401(k), 404, and  415.    The  Company  may  make  matching
contributions equal to a discretionary percentage that is determined by the Board of Directors.  Participants are at all times fully
vested  in  their  contributions  and  vest  over  a  period  of  five  years  in  the  employer  contribution.    Contribution  expense  was
approximately $96,000, $80,000, and $83,000 for the years ended December 31, 2006, 2005, and 2004, respectively.

Deferred Compensation Plan
The Company has a deferred compensation plan whereby participating directors elected to forego directors’ fees for a period of
five years.  Under this plan, the Company will make payments for a ten-year period beginning at age 65 in most cases or at death,
if earlier, at which time payments would be made to their designated beneficiaries.
To fund benefits under the deferred compensation plan, the Company has acquired bank-owned life insurance policies on the lives
of the participating directors for which insurance benefits are payable to the Company.  The Company incurred expenses related
to the plan of $69,000, $69,000, and $73,000 for the years ended December 31, 2006, 2005, and 2004, respectively.  Benefits paid
under the plan were approximately $122,000, $112,000, and $127,000 in 2006, 2005, and 2004 respectively.

NOTE 12 - 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.  For the year
ended December 31, 2006, there were 1,355 shares issued under the plan.

NOTE 13 - STOCK OPTIONS
Prior to 1998, the Company granted a select group of its officers options to purchase shares of its common stock.  These options,
which are immediately exercisable, expire within three to ten years after having been granted.  Also, in 1998, the Company adopted
the “1998 Stock Option Plan” for key employees and directors.  Incentive stock options and nonqualified stock options may be
granted  to  eligible  employees  of  the  Bank  and  nonqualified  options  may  be  granted  to  directors  of  the  Company.    Incentive
nonqualified stock options granted under the 1998 Plan may be exercised not later than ten years after the date of grant.  Each
option granted under the 1998 Plan shall be exercisable only after the expiration of six months following the date of grant of such
options.
A summary of the status of the Company’s common stock option plans are presented below:

Outstanding, beginning of year . . . . . . 
Granted . . . . . . . . . . . . . . . . . . . . . . . . 
Exercised . . . . . . . . . . . . . . . . . . . . . . . 
Forfeited . . . . . . . . . . . . . . . . . . . . . . . 
Outstanding, end of year . . . . . . . . . . . 

Options exercisable at year-end . . . . . 

2006

2005

Weighted-
Average
Exercise
Price

37.41
—
—
—
37.41

37.41

Shares

11,972 $
—
—
—
11,972 $

11,972 $

Weighted- 
Average
Exercise
Price

33.53
—
24.76
30.43
37.41

37.41

Shares

19,158
—
(4,248)
(2,938)
11,972

11,972

$

$

$

The following table summarizes information about nonqualified and incentive stock options outstanding at December 31, 2006:

Exercise Price
40.29
$
31.82
24.72

Shares
9,002
1,650
1,320

Outstanding

Exercisable

Average
Life
2
3
4

Average
Exercise
Price

$

40.29
31.82
24.72

Shares
9,002
1,650
1,320

Average
Exercise
Price

$

40.29
31.82
24.72

NOTE 14 - RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Company and the Bank, including their immediate families and companies in which
they are principal owners (more than ten percent), are indebted to the Company.  Such indebtedness was incurred in the ordinary
course of business on the same terms and at those rates prevailing at the time for comparable transactions with others.
A summary of loan activity with executive officers, directors, principal shareholders, and associates of such persons is listed below
for the years ended December 31:

(In Thousands)

Beginning
Balance

Additions

Payments

Ending
Balance

2006
2005

$

9,635
10,295

$

2,001
781

$

1,894
1,441

$

9,742
9,635

19

NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES
The following schedule of future minimum rental payments under operating leases with noncancellable terms in excess of one year
as of December 31, 2006:

(In Thousands)
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $

411
288
243
212
128
1,162
__________________
2,444
__________________
__________________

The Company’s operating lease obligations represent short and long-term lease and rental payments for facilities.  Total rental expense
for all operating leases for the years ended December 31, 2006, 2005, and 2004 were $380,000, $361,000, and $320,000 respectively.
The Company is subject to lawsuits and claims arising out of its business.  There are no such legal proceedings or claims currently
pending or threatened other than those encountered during the normal course of business.

NOTE 16 - 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 at December 31:

(In Thousands)
Commitments to extend credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

$

2006

2005

61,736
1,033

$

72,583
2,193

Commitments to extend credit are legally binding agreements to lend to customers.  Commitments generally have fixed expiration
dates or other termination clauses and may require payment of fees.  Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements.  The Company evaluates
each customer’s credit worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by the Company,
on extension of credit is based on management’s credit assessment of the counterparty.
Standby letters of credit represent conditional commitments issued by the Company to guarantee the performance of a customer to a
third party.  These instruments are issued primarily to support bid or performance related contracts.  The coverage period for these
instruments is typically a one year period with an annual renewal option subject to prior approval by management.  Fees earned from
the issuance of these letters are recognized upon expiration of the coverage period.  For secured letters of credit, the collateral is
typically Bank deposit instruments or customer business assets.

NOTE 17 - CAPITAL REQUIREMENTS
Federal regulations require the Company and the Bank to maintain minimum amounts of capital.  Specifically, each is required to
maintain certain minimum dollar amounts and ratios of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average
total assets.
In  addition  to  the  capital  requirements, the  Federal  Deposit  Insurance  Corporation  Improvement Act  (“FDICIA”)  established  five
capital  categories  ranging  from  “well  capitalized” to  “critically  undercapitalized.”
Should  any  institution  fail  to  meet  the
requirements  to  be  considered  “adequately  capitalized,” it  would  become  subject  to  a  series  of  increasingly  restrictive  regulatory
actions.
As of December 31, 2006 and 2005, the Federal Deposit Insurance Corporation (“FDIC”) categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action.  To be classified as a well capitalized financial institution, Total risk-
based, Tier 1 risk-based, and Tier 1 leverage capital ratios must be at least 10%, 6%, and 5%, respectively.

20

The Company’s and the Bank’s actual capital ratios are presented in the following tables, which shows that both met all regulatory
capital requirements.

(In Thousands)

Total Capital

(to Risk-weighted Assets)

Actual
For Capital Adequacy Purposes
To Be Well Capitalized
Tier 1 Capital

(to Risk-weighted Assets)

Actual
For Capital Adequacy Purposes
To Be Well Capitalized
Tier 1 Capital

(to Average Assets)

Actual
For Capital Adequacy Purposes
To Be Well Capitalized

(In Thousands)

Total Capital

(to Risk-weighted Assets)

Actual
For Capital Adequacy Purposes
To Be Well Capitalized
Tier 1 Capital

(to Risk-weighted Assets)

Actual
For Capital Adequacy Purposes
To Be Well Capitalized
Tier 1 Capital

(to Average Assets)

Actual
For Capital Adequacy Purposes
To Be Well Capitalized

Consolidated Company

2006

2005

Amount

Ratio

Amount

Ratio

$

$

$

$

$

$

73,342
29,299
36,623

68,931
14,649
21,974

68,931
23,332
29,165

20.2%
8.0
10.0

18.8%
4.0
6.0

11.8%
4.0
5.0

Bank

2006

Amount

Ratio

57,260
28,243
35,304

52,860
14,121
21,182

52,860
22,671
28,339

16.2%
8.0
10.0

15.0%
4.0
6.0

9.3%
4.0
5.0

$

$

$

$

73,210
27,937
34,921

68,388
13,968
20,952

68,388
22,495
28,119

21.0%
8.0
10.0

19.6%
4.0
6.0

12.2%
4.0
5.0

2005

Amount

Ratio

56,604
26,716
33,394

52,527
13,358
20,037

52,527
21,809
27,261

17.0%
8.0
10.0

15.7%
4.0
6.0

9.6%
4.0
5.0

NOTE 18 - REGULATORY RESTRICTIONS
The Pennsylvania Banking Code restricts the availability of capital funds for payment of dividends by all state-chartered banks to
the additional paid in capital of the Bank.  Accordingly, at December 31, 2006, the balance in the additional paid in capital account
totaling $11,657,000 is unavailable for dividends. 
The Bank is subject to regulatory restrictions, which limit its ability to loan funds to Penns Woods Bancorp, Inc.  At December 31,
2006, the regulatory lending limit amounted to approximately $5,715,000.
Cash and Due from Banks
Included in cash and due from banks are reserves required by the district Federal Reserve Bank of $990,000 and $1,410,000 at
December 31, 2006 and 2005.  The required reserves are computed by applying prescribed ratios to the classes of average deposit
balances.  These are held in the form of cash on hand and a balance maintained directly with the Federal Reserve Bank.

NOTE 19 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose estimated fair values for its financial instruments.  Fair value estimates are made at a specific
point in time, based on relevant market information and information about the financial instrument.  These estimates do not reflect
any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial
instrument.  Also, it is the Company’s general practice and intention to hold most of its financial instruments to maturity and not
to engage in trading or sales activities.  Because no market exists for a significant portion of the Company’s financial instruments,
fair  value  estimates  are  based  on  judgments  regarding  future  expected  loss  experience, current  economic  conditions, risk
characteristics  of  various  financial  instruments, and  other  factors.    These  estimates  are  subjective  in  nature  and  involve
uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions can
significantly affect the estimates.

21

Estimated fair values have been determined by the Company using historical data and an estimation methodology suitable for each
category of financial instruments.  The estimated fair value of the Company’s investment securities is described in Note 1.  The
Company’s fair value estimates, methods, and assumptions are set forth below for the Company’s other financial instruments.
As certain assets and liabilities, such as deferred tax assets, premises and equipment, and many other operational elements of the
Company, are  not  considered  financial  instruments  but  have  value, this  estimated  fair  value  of  financial  instruments  would  not
represent the full market value of the Company.
The estimated fair values of the Company’s financial instruments are as follows at December 31:
(In Thousands)

2006

2005

Carrying
Value

Fair
Value

Carrying
Value

Fair
Value

Financial assets:
Cash and due from equivalents . . . . . . . . . . . . . . . . . . . . . . 
Investment securities:

Available for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Bank-owned life insurance. . . . . . . . . . . . . . . . . . . . . . . . . . 
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . 

$

15,373

$

15,373

$

14,090

$

14,090

185,200
283
3,716
356,199
11,346
2,939

185,200
286
3,716
356,788
11,346
2,939

187,018
265
3,545
334,759
10,718
2,828

187,018
238
3,545
337,093
10,718
2,828

Financial liabilities:
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . 
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Long-term borrowings, FHLB . . . . . . . . . . . . . . . . . . . . . . . 
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 

$

$

322,031
73,160
34,697
82,878
1,532

$

320,906
73,160
34,697
82,050
1,532

$

281,150
71,379
54,003
84,478
1,108

278,909
71,379
54,003
83,877
1,108

Cash and Cash Equivalents, Loans Held for Sale, Regulatory Stock, Accrued Interest Receivable, Short-term
Borrowings, and Accrued Interest Payable
The fair value is equal to the carrying value.
Investment securities
The fair value of investment securities available for sale and held to maturity is equal to the available quoted market price.  If no
quoted market price is available, fair value is estimated using the quoted market price for similar securities.
Loans
Fair  values  are  estimated  for  portfolios  of  loans  with  similar  financial  characteristics.    Loans  are  segregated  by  type  such  as
commercial, commercial real estate, residential real estate, construction real estate, and other consumer.  Each loan category is
further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories.
The  fair  value  of  performing  loans  is  calculated  by  discounting  scheduled  cash  flows  through  the  estimated  maturity  using
estimated market discount rates that reflect the credit and interest rate risk inherent in the loan.  The estimate of maturity is based
on the Company’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the
effect of current economic and lending conditions.
Fair value for significant nonperforming loans is based on recent external appraisals.  If appraisals are not available, estimated cash
flows are discounted using a rate commensurate with the risk associated with the estimated cash flows.  Assumptions regarding
credit risk, cash flows, and discounted rates are judgmentally determined using available market information and specific borrower
information.
Bank-owned life insurance
The fair value is equal to the Cash Surrender Value of the life insurance policies.
Deposits
The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW, and money market
accounts, is equal to the amount payable on demand as of December 31, 2006 and 2005.  The fair value of certificates of deposit
is based on the discounted value of contractual cash flows.  
The fair value estimates above do not include the benefit that results from the low-cost funding provided by the deposit liabilities
compared to the cost of borrowing funds in the market, commonly referred to as the core deposit intangible.
Long-term borrowings
The fair value of long term borrowings is based on the discounted value of contractual cash flows.
Commitments to extend credit, standby letters of credit, and financial guarantees written
There is no material difference between the notional amount and the estimated fair value of off-balance sheet items at December 31,
2006 and 2005, respectively.  The contractual amounts of unfunded commitments and letters of credit are presented in Note 16.

22

NOTE 20 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
Condensed financial information for Penns Woods Bancorp, Inc. follows:
CONDENSED BALANCE SHEET, DECEMBER 31,
(In Thousands)
ASSETS:

2006

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Investment in subsidiaries:

Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Nonbank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

LIABILITIES AND SHAREHOLDERS’ EQUITY:

Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . 

CONDENSED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
(In Thousands)
Operating income:

Dividends from subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Equity in undistributed net income of subsidiaries . . . . . . . . . . . . . . . . . 
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(In Thousands)
OPERATING ACTIVITIES:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Adjustments to reconcile net income to net cash

provided by operating activities:

Equity in undistributed net income of subsidiaries . . . . . . . . . . . . . 
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . 

$

$

$

$

$

$

$

41

$

57,790
16,595
234
74,660

66
74,594
74,660

2006

9,890
53
(296)

$

$

$

$

2005

159

57,170
16,452
186
73,967

48
73,919
73,967

2005

2004

$

7,311
3,822
(232)

6,440
4,833
(190)

9,647

$

10,901

$

11,083

2006

2005

2004

9,647

$

10,901

$

11,083

(53)
(30)
9,564

(3,822)
(70)
7,009

(4,833)
(9)
6,241

INVESTING ACTIVITIES:

Investment in subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

—

(637)

(271)

FINANCING ACTIVITIES:

Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Issuance of common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . 
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . 
NET (DECREASE) INCREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . 
CASH, BEGINNING OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
CASH, END OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

$

(6,802)
49
—
(2,929)
(9,682)
(118)
159
41

$

(6,225)
—
105
(546)
(6,666)
(294)
453
159

$

(5,843)
—
194
(237)
(5,886)
84
369
453

23

NOTE 21 - CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)

(In Thousands, Except Per Share Data)

For the three months ended

2006

March 31,

June 30,

Sept. 30,

Dec. 31,

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Securities gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Non-interest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Income before income tax provision . . . . . . . . . . . . . . . . . . 
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Earnings per share - basic . . . . . . . . . . . . . . . . . . . . . . . . . . 

$
8,022
3,189
_________________
4,833
198
1,778
559
3,951
_________________
3,021
566
_________________
$
2,455
_________________
_________________
0.62
$

$
8,347
3,421
_________________
4,926
198
1,951
265
4,078
_________________
2,866
432
_________________
$
2,434
_________________
_________________
0.62
$

$
8,547
3,707
_________________
4,840
89
1,826
561
4,114
_________________
3,024
560
_________________
$
2,464
_________________
_________________
0.62
$

$
8,837
3,893
_______________
4,944
150
1,795
294
4,186
_______________
2,697
403
_______________
$
2,294
_______________
_______________
0.59
$

Earnings per share - diluted . . . . . . . . . . . . . . . . . . . . . . . . . 

$

0.62

$

0.62

$

0.62

$

0.59

(In Thousands, Except Per Share Data)

For the three months ended

2005

March 31,

June 30,

Sept. 30,

Dec. 31,

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Securities gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Non-interest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Income before income tax provision . . . . . . . . . . . . . . . . . . 
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Earnings per share - basic . . . . . . . . . . . . . . . . . . . . . . . . . . 

$
7,435
2,249
_________________
5,186
180
1,696
611
3,595
_________________
3,718
1,003
_________________
$
2,715
_________________
_________________
0.68
$

$
7,654
2,457
_________________
5,197
180
1,788
687
3,849
_________________
3,643
883
_________________
$
2,760
_________________
_________________
0.70
$

$
7,816
2,701
_________________
5,115
180
1,991
556
3,788
_________________
3,694
746
_________________
$
2,948
_________________
_________________
0.74
$

$
7,998
2,974
_______________
5,024
180
1,766
336
3,876
_______________
3,070
592
_______________
$
2,478
_______________
_______________
0.63
$

Earnings per share - diluted . . . . . . . . . . . . . . . . . . . . . . . . . 

$

0.68

$

0.70

$

0.74

$

0.62

24

Management’s Discussion and Analysis of
Consolidated Financial Condition and
Results of Operations

RESULTS OF OPERATIONS

NET INTEREST INCOME
Net interest income is determined by calculating the difference between the yields earned on interest-earning assets and the rates
paid  on  interest-bearing  liabilities.    To  compare  the  tax-exempt  asset  yields  to  taxable  yields, amounts  are  adjusted  to  taxable
equivalents based on the marginal corporate federal tax rate of 34%.  The tax equivalent adjustments to net interest income for
2006, 2005, and 2004 were $2,245,000, $1,764,000, and $906,000, respectively.
2006 vs 2005
Reported net interest income decreased $979,000 or 4.8% to $19,543,000 for the year ended December 31, 2006 as compared to
the year ended December 31, 2005 as the yield on earning assets increased to 6.70% from 6.29%, respectively.  On a tax equivalent
basis the change in net interest income was a decrease of $498,000 which is the result of the rate paid on interest bearing liabilities
increasing at nearly twice the rate of increases in the yield on earning assets.  Total interest income increased 9.2% or $2,850,000
primarily due to growth in the average balance of the loan portfolio of $22,150,000 coupled with an increase in loan yield to 7.10%
from 6.73% at December 31, 2005.  Interest and dividend income generated from the investment portfolio and interest bearing cash
deposits increased $98,000.  The increase was the result of the yield on the investment portfolio increasing 39 basis points while
the average balance of the investment portfolio declined by $3,474,000.   
Interest expense increased $3,829,000 to $14,210,000 for the year ended December 31, 2006 as compared to 2005.  The majority
of the increase, 82% or $3,134,000, is related to increased rates being paid on deposit accounts, which had an average rate paid of
2.88% and 1.98% for the years ended December 31, 2006 and 2005, respectively.  The increases were driven by market competition
and rate increases enacted by the Federal Open Markets Committee (FOMC).  Interest expense related to time deposits increased
$2,827,000 as the average rate paid on time deposits increased to 4.11% from 3.02% for the year ended December 31, 2005.  The
increase in time deposit rates was the result of competitive pressure, FOMC rate increases, rate specials related to the opening of
a  new  branch  and  the  one  year  anniversary  of  a  second, and  incentive  to  customers  to  invest  in  short-term  time  deposits.    In
addition, the average balance in time deposits increased $30,130,000 due to the before mentioned rate specials, transfer of dollars
from  transaction  accounts  due  to  the  increasing  rate  disparity  between  products, and  the  use  of  brokered  deposits  to  limit  the
reliance on short-term FHLB funding.
The rate paid on borrowings increased to 4.50% from 4.08% for the year ended December 31, 2006.  The increase in rate resulted
in interest expense on borrowings increasing $695,000 with the majority of the increase occurring in the short-term borrowing
category.  The short-term borrowing rate increased 144 basis points to 4.34% due to the FOMC rate increases since the start of
2005.  Interest expense associated with long-term borrowings increased $123,000 due to the average balance of long-term FHLB
borrowings increasing $2,417,000 while the weighted average interest rate on the long-term debt remained constant.
2005 vs 2004
Reported net interest income decreased $555,000 or 2.6 % from the year ended December 31, 2004 to 2005.  Total interest income
increased $1,058,000 and is attributed to the increase of $27,940,000 in the average balance of the loan portfolio coupled with an
increase of the tax equivalent yield on investment securities of 45 basis points offset partially by a decrease in the average balance
of the investment securities of $17,608,000.   
On a tax equivalent basis, net interest income increased to $22,286,000 from $21,983,000 for the year ended December 31, 2004.
The tax equivalent interest income on the investment portfolio remained stable despite a decrease in the average balance of the
investment portfolio of $17,608,000.  Offsetting the decline in average balance of the portfolio was a shift in the portfolio to tax-
exempt bonds from taxable.  This repositioning was undertaken to provide portfolio call protection, strategic investment at the
community level, and as part of the Company’s tax strategy.  The net growth in the volume of the loan portfolio was the driving
force behind the increase in loan interest income as the yield on loans increased 3 basis points to 6.73% at December 31, 2005. 
For the year ended December 31, 2005, reported interest expense increased $1,613,000 over the same period of 2004.  Over half
of the increased level of interest expense was due to market driven increases in the rates paid on deposit accounts.  The increases
are primarily the result of the continued rate increases enacted by the FOMC coupled with aggressive pricing due to competition
for deposits.  In addition, deposit dollars have shifted from lower rate transaction based accounts to higher rate time deposits during
2005.  This shift has resulted in the average balance of time deposits increasing $16,051,000 in 2005 as compared to 2004.  The
shift in dollars and the FOMC rate increases resulted in the average rate paid on deposits increasing to 1.98% from 1.65% for the
year ended December 31, 2004 with the time deposit portfolio average rate increasing 40 basis points over the time period.   
The Company increased long-term borrowing during 2005 through the FHLB to manage future borrowing costs and to enhance
liability positioning.  These additional borrowings were utilized by management to replace maturing debt and to supplement the
funding of the growth in the loan portfolio.  The increase in the expense on long-term borrowings is the result of average balances
of long-term FHLB borrowings increasing $5,093,000 while the weighted average interest rate on the long-term debt remained
constant.    Short-term  borrowing  interest  increased  $392,000  as  a  result  of  the  before  mentioned  FOMC  rate  increases  and  an
increase of the average balances outstanding during the year of $257,000.

25

AVERAGE BALANCES AND INTEREST RATES

The following tables set forth certain information relating to the Company’s average balance sheet and reflects the average yield
on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid.  Such yields and
costs  are  derived  by  dividing  income  or  expense  by  the  average  balance  of  assets  or  liabilities, respectively, for  the  periods
presented.

(In Thousands)

Average
Balance

2006

Interest

Average
Rate

ASSETS:
Tax-exempt loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $
All other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Taxable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Tax-exempt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Total securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Total interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

$

8,173
344,524

352,697

91,767
92,692

184,459

152

537,308

40,413

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $

577,721

LIABILITIES:
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Super Now deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Money Market deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

$

Total deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Long-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Total borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Total interest-bearing liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . 

Demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

61,958
47,294
23,905
176,521

309,678

34,612
83,237

117,849

427,527

69,668
5,899
74,627

503
24,545

25,048

4,837
6,102

10,939

11

35,998

509
655
493
7,251

8,908

1,503
3,799

5,302

14,210

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY . . . . 

$

57,721

Interest rate spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Net interest income/margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

$

21,788

6.15%
7.12%

7.10%

5.27%
6.58%

5.93%

7.24%

6.70%

0.82%
1.38%
2.06%
4.11%

2.88%

4.34%
4.56%

4.50%

3.32%

3.38%

4.06%

• Fees on loans are included with interest on loans. Loan fees are included in interest income as follows:

2006 $478,000, 2005 $491,000, 2004 $470,000.

• Information on this table has been calculated using average daily balance sheets to obtain average balances.
• Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings. 
• 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.

26

Average
Balance

2005

Interest

Average
Rate

Average
Balance

2004

Interest

Average
Rate

307
21,924

22,231

5,529
4,882

10,411

25

32,667

500
438
412
4,424

5,774

931
3,676

4,607

10,381

$

$

$

$

5,370
325,177

330,547

115,041
72,892

187,933

873

519,353

33,308

552,661

64,795
50,756
29,317
146,391

291,259

32,114
80,820

112,934

404,193

69,457
4,057
74,954

$

552,661

$

22,286

5.72%
6.74%

6.73%

4.81%
6.70%

5.54%

2.86%

6.29%

0.77%
0.86%
1.41%
3.02%

1.98%

2.90%
4.55%

4.08%

2.57%

3.72%

4.29%

82
20,207

20,289

7,872
2,586

10,458

4

30,751

578
391
392
3,414

4,775

539
3,454

3,993

8,768

$

$

$

$

1,359
301,248

302,607

170,876
34,665

205,541

434

508,582

29,064

537,646

69,796
54,690
35,164
130,340

289,990

31,857
75,727

107,584

397,574

64,434
4,091
71,547

$

537,646

$

21,983

Reconcilement of Taxable Equivalent Net Interest Income

2006

2005

2004

Total interest income. . . . . . . . . . . . . . . . . . . . . . . . . .  $
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . 

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Tax equivalent adjustment . . . . . . . . . . . . . . . . . . . . . 

Net interest income
(fully taxable equivalent) . . . . . . . . . . . . . . . . . . . . . .  $

$

33,753
14,210

19,543
2,245

30,903
10,381

20,522
1,764

21,788

$

22,286

$

$

29,845
8,768

21,077
906

21,983

6.03%
6.71%

6.70%

4.61%
7.46%

5.09%

0.92%

6.05%

0.83%
0.71%
1.11%
2.62%

1.65%

1.69%
4.56%

3.71%

2.21%

3.84%

4.32%

27

Rate/Volume Analysis
The table below sets forth certain information regarding changes in our interest income and interest expense for the periods indicated.
For interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume
(changes  in  average  volume  multiplied  by  old  rate)  and  (ii)  changes  in  rates  (changes  in  rate  multiplied  by  old  average  volume).
Increases and decreases due to both interest rate and volume, which cannot be separated, have been allocated proportionally to the
change due to volume and the change due to interest rate.  Income and interest rates are on a taxable equivalent basis.

(In Thousands)

Year Ended December 31,

2006 vs 2005
Increase (Decrease)
Due to
Rate

Volume

Net

2005 vs 2004
Increase (Decrease)
Due to
Rate

Volume

Net

Interest income:
Loans, tax-exempt. . . . . . . . . . . . . . . . . . . . .  $
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Taxable investment securities . . . . . . . . . . . . 
Tax-exempt investment securities . . . . . . . . . 
Interest-bearing deposits . . . . . . . . . . . . . . . . 

Total interest-earning assets. . . . . . . . . . . . 

Interest expense:
Savings deposits . . . . . . . . . . . . . . . . . . . . . . 
Super Now deposits . . . . . . . . . . . . . . . . . . . 
Money market deposits. . . . . . . . . . . . . . . . . 
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . 
Short-term borrowings . . . . . . . . . . . . . . . . . 
Long-term borrowings . . . . . . . . . . . . . . . . . 

Total interest-bearing liabilities . . . . . . . . . 

174 $

22 $

1,342
(1,192)
1,304
(32)

1,596

(23)
(32)
(86)
471
65
110

505

1,279
500
(84)
18

1,735

32
249
167
2,356
507
13

3,324

196
2,621
(692)
1,220
(14)

3,331

9
217
81
2,827
572
123

3,829

$

229 $

(4) $

1,614
(2,670)
2,585
7

1,765

(40)
(29)
(72)
161
4
231

255

103
327
(289)
14

151

(38)
76
92
849
388
(9)

1,358

225
1,717
(2,343)
2,296
21

1,916

(78)
47
20
1,010
392
222

1,613

Change in net interest income . . . . . . . . . . .  $

1,091 $

(1,589) $

(498)

$

1,510 $

(1,207) $

303

PROVISION FOR LOAN LOSSES

2006 vs 2005
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 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  December  31, 2006, 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  or
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  interest  income.    Additionally, as  an  integral  part  of  the
examination process, bank regulatory agencies periodically review the Bank’s loan loss allowance.  The banking regulators 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.  
The  allowance  for  loan  losses  increased  from  $3,679,000  at  December  31, 2005  to  $4,185,000  at  December  31, 2006.    At
December 31, 2006, allowance for loan losses was 1.16% of total loans compared to 1.09% of total loans at December 31, 2005.
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 consolidated balance sheet date.
The provision for loan losses totaled $635,000 for the year ended December 31, 2006.  The provision for the same period in 2005
was $720,000.  Management concluded that the decrease of the provision was appropriate when considering the gross loan growth
experienced during 2006 of $21,946,000 coupled with the low levels of charge-offs, delinquencies and economic changes during
the year.  Utilizing both internal and external resources, as noted, senior management has concluded that the allowance for loan
losses remains at a level adequate to provide for probable losses inherent in the loan portfolio.
2005 vs 2004
The allowance for loan losses increased 10.2% or $341,000 from fiscal 2004 after net charge-offs of $379,000 contributed to a
year-end allowance for loan losses of  $3,679,000 or 1.09% of total loans.  Based upon this analysis, as well as the others noted
above, senior  management  concluded  that  the  allowance  for  loan  losses  was  at  a  level  adequate  to  provide  for  probable  losses
inherent in the loan portfolio at December 31, 2005.

28

Following is a table showing the changes in the allowance for loan losses for the years ended December 31:

(In Thousands)

2006

2005

2004

2003

2002

Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . .  $

3,679 $

3,338 $

3,069 $

2,953 $

2,927

Charge-offs:

Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Commercial and industrial . . . . . . . . . . . . . . . . . . . . 
Installment loans to individuals. . . . . . . . . . . . . . . . . 

Total charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . 

Recoveries:

Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Commercial and industrial . . . . . . . . . . . . . . . . . . . . 
Installment loans to individuals. . . . . . . . . . . . . . . . . 

Total recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . 

Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Additions charged to operations . . . . . . . . . . . . . . . . . . . . . 

50
28
249

327

68
40
90

198

129

635

132
206
108

446

45
8
14

67

379

720

121
50
112

283

50
4
33

87

196

465

63
37
116

216

42
16
19

77

139

255

262
80
60

402

25
21
17

63

339

365

Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $

4,185 $

3,679 $

3,338 $

3,069 $

2,953

Ratio of net charge-offs during the period to average loans

outstanding during the period . . . . . . . . . . . . . . . . . . . . . . . 

0.04%

0.11%

0.06%

0.05%

0.13%

NON-INTEREST INCOME
2006 vs 2005
Total non-interest income decreased $402,000 from  the year ended December 31, 2005 to 2006.  Excluding security gains and the
gain on sale of loans, non-interest income increased $120,000.  Service charges increased $138,000 due to the full year impact of
an  overdraft  protection  program  that  was  started  in  May  2005.    Earnings  on  bank-owned  life  insurance  decreased  $194,000,
however, the year ended December 31, 2005 included the receipt of $196,000 due to a death benefit claim.  Insurance commissions
decreased  $46,000  due  to  a  reduction  in  the  overall  commission, from  the  underwriter, that  The  M  Group  receives  on  each
insurance contract written.  Management of The M Group continues to pursue new and build upon current relationships.  However,
the sales cycle for insurance and investment products can take typically from six months to one year or more to complete. The sales
call program continues to expand to other financial institutions, which results in additional revenue for The M Group.  The increase
in other income was primarily due to increases in revenues from debit cards and fees associated with the origination of mortgage
loans on the behalf of PHFA and other secondary market entities.

(In Thousands)

2006
Amount % Total

2005
Amount % Total

Change

Amount

%

Deposit service charges . . . . . . . . . . . . . . . . . . . .  $ 2,366
1,679
Securities gains, net . . . . . . . . . . . . . . . . . . . . . . . 
374
Bank-owned life insurance. . . . . . . . . . . . . . . . . . 
853
Gain on sale of loans . . . . . . . . . . . . . . . . . . . . . . 
2,281
Insurance commissions . . . . . . . . . . . . . . . . . . . . 
1,476
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Total non-interest income. . . . . . . . . . . . . . . . .  $ 9,029

26.20 %
18.60
4.14
9.45
25.26
16.35
100.00 %

$ 2,228
2,190
568
864
2,327
1,254
$ 9,431

23.62 %
23.22
6.02
9.16
24.68
13.30
100.00 %

$

$

138
(511)
(194)
(11)
(46)
222
(402)

6.19 %

(23.33)
(34.15)
(1.27)
(1.98)
17.70
(4.26)%

2005 vs 2004
Total non-interest income increased $513,000 from fiscal 2004 to 2005.  Excluding security gains and the gain on sale of loans,
non-interest  income  increased  $604,000.    Service  charges  increased  $245,000  due  to  the  implementation  of  a  new  overdraft
protection program that was started in May 2005.  Earnings on bank-owned life insurance increased $274,000 due in large part to
the receipt of  $196,000 due to a death benefit claim.  Commissions earned on the sale of insurance products increased $45,000 as
The M Group continued to expand its market area by adding sales representatives to meet commitments made with other financial
institutions  to  provide  these  same  services  to  their  customers.    Gain  on  sale  of  loans  decreased  as  the  volume  of  loans  sold
decreased as compared to 2004.  The increase in other income was primarily due to increases in card revenues from both ATM and
debit cards offset by decreases in other areas of other income.  Transaction volume increases attributed to our customers increased
utilization of debit cards resulting in debit card fees increasing $74,000.

29

(In Thousands)

2005
Amount % Total

2004
Amount % Total

Change

Amount

%

Deposit service charges . . . . . . . . . . . . . . . . . . . .  $ 2,228
2,190
Securities gains, net . . . . . . . . . . . . . . . . . . . . . . . 
568
Bank-owned life insurance. . . . . . . . . . . . . . . . . . 
864
Gain on sale of loans . . . . . . . . . . . . . . . . . . . . . . 
2,327
Insurance commissions . . . . . . . . . . . . . . . . . . . . 
1,254
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Total non-interest income. . . . . . . . . . . . . . . . .  $ 9,431

23.62 %
23.22
6.02
9.16
24.68
13.30
100.00 %

$ 1,983
2,176
294
969
2,282
1,214
$ 8,918

22.24 %
24.40
3.30
10.87
25.58
13.61
100.00 %

$

$

245
14
274
(105)
45
40
513

12.36 %
0.64
93.20
(10.84)
1.97
3.29
5.75 %

NON-INTEREST EXPENSES
2006 vs 2005
Total non-interest expenses increased $1,221,000 from the year ended December 31, 2005 to December 31, 2006. Salaries and
employee benefits increased by $519,000 and was the result of increased staffing due in part to two new branches since mid 2005,
standard  wage  increases, and  increased  health  insurance  costs.    Occupancy  expense  and  furniture  and  equipment  expenses
increased  primarily  due  to  the  before  mentioned  branch  additions  and  increased  maintenance  costs  related  to  the  software  and
equipment  utilized  by  the  Bank.    Other  expenses  increased  $377,000  as  amortization  of  the  low  income  housing  partnership
investments increased $155,000 and due to general increases in the cost of business specifically Pennsylvania shares tax, donations,
and director fees.   The increase in low income housing partnership investment amortization is the result of the Bank’s involvement
with two partnerships that became eligible for tax credit recognition during 2006.

(In Thousands)

2006
Amount % Total

2005
Amount % Total

Change

Amount

%

Salaries and employee benefits . . . . . . . . . . . . . .  $ 8,833
1,137
Occupancy, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 
1,201
Furniture and equipment . . . . . . . . . . . . . . . . . . . 
598
Pennsylvania shares tax . . . . . . . . . . . . . . . . . . . . 
4,560
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Total non-interest income. . . . . . . . . . . . . . . . .  $ 16,329

54.09 %
6.96
7.36
3.66
27.93
100.00 %

$ 8,314
1,089
973
549
4,183
$ 15,108

55.03 %
7.21
6.44
3.63
27.69
100.00 %

$

519
48
228
49
377
$ 1,221

6.24 %
4.41
23.43
8.93
9.01
8.08 %

2005 vs 2004
Total  non-interest  expenses  increased  $924,000  from  the  year  ended  December  31, 2004  to  December  31, 2005.  Salaries  and
employee benefits increased by $510,000 and was the result of increased staffing due in part to a new branch in the State College
area, standard wage increases, and increased pension and health insurance costs.  Occupancy expense increased due primarily to
the new State College office which was operational since May 2005.  Furniture and equipment expenses declined due in part to the
reduction of several computer, hardware, and equipment maintenance contracts deemed unnecessary.  Other expenses increased
$286,000  due  to  general  increases  in  the  cost  of  business  specifically  ATM  transaction  processing, advertising, telephone,
stationery, and office supplies.

(In Thousands)

2005
Amount % Total

2004
Amount % Total

Change

Amount

%

Salaries and employee benefits . . . . . . . . . . . . . .  $ 8,314
1,089
Occupancy, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 
973
Furniture and equipment . . . . . . . . . . . . . . . . . . . 
549
Pennsylvania shares tax . . . . . . . . . . . . . . . . . . . . 
4,183
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Total non-interest income. . . . . . . . . . . . . . . . .  $ 15,108

55.03 %
7.21
6.44
3.63
27.69
100.00 %

$ 7,804
959
1,016
508
3,897
$ 14,184

55.03 %
6.76
7.16
3.58
27.47
100.00 %

$

$

510
130
(43)
41
286
924

6.54 %

13.56
(4.23)
8.07
7.34
6.51 %

INCOME TAXES
2006 vs 2005
The provision for income taxes for the year ended December 31, 2006 resulted in an effective income tax rate of 16.9% compared
to 22.8% for 2005.  This decrease is the result of a shift in the investment portfolio from taxable mortgage-backed bonds to tax-
exempt municipal bonds coupled with the receipt of tax credits related to low income housing partnerships.

2005 vs 2004
The provision for income taxes for the year ended December 31, 2005 resulted in an effective income tax rate of 22.8% compared
to 27.8% for 2004.  This decrease is the result of a shift in the investment portfolio from taxable mortgage-backed bonds to tax-
exempt municipal bonds.

30

INVESTMENTS

FINANCIAL CONDITION

2006
The investment portfolio decreased $1,800,000 or 0.96% from December 31, 2005 to 2006.  The decrease was the result of the
cash flow from the portfolio being utilized to assist in the funding of the higher yielding loan portfolio.  Within the portfolio, the
asset allocation continued to be weighted in tax-exempt municipal bonds.  This continued shift to a tax-exempt weighting was part
of a strategy to increase yield, provide call protection, and to reduce the Company’s overall effective tax rate.  At December 31,
2006 the portfolio was comprised of 55.56% tax-exempt bonds as compared to 47.66% at December 31, 2005.  The taxable portion
of the portfolio was revamped to reduce exposure to falling interest rates, while at the same time increasing the current yield.

2005
The investment portfolio increased $2,562,000 or 1.39% from December 31, 2004 to 2005.  During 2005 the investment portfolio
components were shifted from taxable bonds to tax-exempt municipal bonds.  This shift was part of a strategy to increase yield,
provide call protection, and to reduce the Company’s overall effective tax rate.  This strategy resulted in available for sale state and
political tax-exempt holdings increasing $42,197,000 or 89.65% from year end 2004 to 2005, while the investment in government
agencies and treasuries has decreased by $40,076,000 or 38.5%.
The carrying amounts of investment securities at the dates indicated are summarized as follows for the years ended December 31:

(In Thousands)

U.S. Treasury securities:

2006

2005

2004

Balance %Portfolio

Balance %Portfolio

Balance %Portfolio

Available for sale . . . . . . . . . . . . . . . . . . . . .  $

—

— $

—

— $

1,024

0.55%

U.S. Government agencies:

Held to maturity . . . . . . . . . . . . . . . . . . . . . . 
Available for sale . . . . . . . . . . . . . . . . . . . . . 

26
54,152

State and political subdivisions (tax-exempt):

Held to maturity . . . . . . . . . . . . . . . . . . . . . . 
Available for sale . . . . . . . . . . . . . . . . . . . . . 

—
103,057

State and political subdivisions (taxable):

Held to maturity . . . . . . . . . . . . . . . . . . . . . . 
Available for sale . . . . . . . . . . . . . . . . . . . . . 

Other bonds, notes and debentures:

Held to maturity . . . . . . . . . . . . . . . . . . . . . . 
Available for sale . . . . . . . . . . . . . . . . . . . . . 

—
2,889

257
2,024

Total bonds, notes and debentures . . . . . . . . 
Corporate stock - Available for sale . . . . . . . . . . . . 

162,405
23,078

0.01%
29.20%

—
55.56%

—
1.56%

0.14%
1.09%

87.56%
12.44%

28
63,953

—
89,265

—
4,826

237
1,719

160,028
27,255

0.01%
34.15%

—
47.66%

—
2.58%

0.13%
0.92%

85.45%
14.55%

32
103,001

248
47,068

—
—

278
1,342

152,993
31,728

0.02%
55.76%

0.13%
25.48%

—
—

0.15%
0.73%

82.82%
17.18%

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $ 185,483

100.00% $ 187,283

100.00% $ 184,721

100.00%

31

The following table shows the maturities and repricing of investment securities, at amortized cost, at December 31, 2006 and the
weighted average yields (for tax-exempt obligations on a fully taxable basis assuming a 34% tax rate) of such:
(In Thousands)

Within
One
Year

After one
But within
Five years

After five
But within
Ten years

After
Ten
Years

Amortized
Cost
Total

U.S. Treasury securities:

HTM Amount. . . . . . . . . . . . . . . . . . .  $
Yield . . . . . . . . . . . . . . . . . . . . . . . . . . 
AFS Amount . . . . . . . . . . . . . . . . . . . 
Yield . . . . . . . . . . . . . . . . . . . . . . . . . . 

U.S. Government agencies:

HTM Amount. . . . . . . . . . . . . . . . . . . 
Yield . . . . . . . . . . . . . . . . . . . . . . . . . . 
AFS Amount . . . . . . . . . . . . . . . . . . . 
Yield . . . . . . . . . . . . . . . . . . . . . . . . . . 
State and political subdivisions (tax-exempt):
HTM Amount. . . . . . . . . . . . . . . . . . . 
Yield . . . . . . . . . . . . . . . . . . . . . . . . . . 
AFS Amount . . . . . . . . . . . . . . . . . . . 
Yield . . . . . . . . . . . . . . . . . . . . . . . . . . 
State and political subdivisions (taxable):
HTM Amount. . . . . . . . . . . . . . . . . . . 
Yield . . . . . . . . . . . . . . . . . . . . . . . . . . 
AFS Amount . . . . . . . . . . . . . . . . . . . 
Yield . . . . . . . . . . . . . . . . . . . . . . . . . . 

Other bonds, notes and debentures:

HTM Amount. . . . . . . . . . . . . . . . . . . 
Yield . . . . . . . . . . . . . . . . . . . . . . . . . . 
AFS Amount . . . . . . . . . . . . . . . . . . . 
Yield . . . . . . . . . . . . . . . . . . . . . . . . . . 
Total Amount . . . . . . . . . . . . . . . . . . .  $

Total Yield . . . . . . . . . . . . . . . . . . . . . 

— $
—
—
—

— $
—
—
—

—
—
—
—

—
—
—
—

—
—
—
—

—
—
—
—
— $

—

—
—
—
—

—
—
—
—

—
—
—
—

125
6.24 %
25
5.05 %
150 $

6.04 %

— $
—
—
—

—
—
1,500
5.14%

—
—
15
6.42%

—
—
—
—

132
5.91%
—
—
1,647 $

5.21%

— $
—
—
—

26
8.95%

53,449

5.37%

—
—
101,633

6.70%

—
—
3,010
5.02%

—
—
1,973
6.39%

—
—
—
—

26
8.96%

54,949

5.36%

—
—
101,648

6.70%

—
—
3,010
5.02%

257
6.07%
1,998
6.31%

160,091

$

161,888

6.12%

6.21%

Equity Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $
Total Investment Portfolio Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $
Total Investment Portfolio Yield. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $

20,353
182,241

5.51%

All yields represent weighted average yields expressed on a tax equivalent basis.  They are calculated on the basis of the cost,
adjusted for amortization of premium and accretion of discount, and effective yields weighted for the scheduled maturity of each
security.  The taxable equivalent adjustment represents the difference between annual income from tax-exempt obligations and the
taxable equivalent of such income at the standard 34% tax rate (derived by dividing tax-exempt interest by 66%).

LOAN PORTFOLIO
2006
Gross  loans  of  $360,384,000  at  December  31, 2006  represented  an  increase  of  $21,946,000  from  December  31, 2005.    The
continued  emphasis  on  well  collateralized  real  estate  loans  resulted  in  real  estate  secured  loans  increasing  $22,560,000  from
December 31, 2005 to 2006.  The success in carrying out this long term strategy has played a significant role in limiting net charge-
offs for 2006 to 0.04% of average loans.  Commercial and agricultural loans declined due to the before mentioned emphasis on
real estate secured loans versus equipment, receivables, or inventory secured loans.
2005
Gross loans for the year ended December 31, 2005 increased 4.29% to $338,438,000 from $324,505,000 at December 31, 2004.
The increase was concentrated in real estate mortgages which increased $8,229,000 as a whole from December 31, 2004 to 2005.
Commercial and agricultural loans and installment loans increased $4,304,000 and $1,366,000 respectively.  The growth in real
estate  secured  loans  is  part  of  the  Company’s  overall  lending  strategy  to  underwrite  well  collateralized  real  estate  loans.  The
opening of the Atherton Street, State College branch along with a home equity loan campaign also assisted in increasing real estate
loans.  Commercial and individuals loan categories increased modestly as the Company broadens its lending base and expands its
market coverage.
The amounts of loans outstanding at the indicted dates are shown in the following table according to type of loan:
(In Thousands)
Commercial and agricultural . . . . . . . .  $
Real estate mortgage:

34,407

30,103

23,523

23,708

28,555

2003

2005

2004

2006

2002

$

$

$

$

Residential . . . . . . . . . . . . . . . . . . . . . 
Commercial . . . . . . . . . . . . . . . . . . . . 
Construction. . . . . . . . . . . . . . . . . . . . 
Installment loans to individuals . . . . . . 
Less: Net deferred loan fees . . . . . . . . . 

158,219
135,404
16,749
22,475
1,018

150,000
127,131
10,681
17,281
1,062

147,461
123,757
8,365
15,915
1,096

147,697
82,896
7,652
15,000
940

Gross loans . . . . . . . . . . . . . . . . . . . . . .  $

360,384

$

338,438

$

324,505

$

275,828

$

140,724
75,892
3,356
14,934
769

257,845

32

The amounts of domestic loans at December 31, 2006 are presented below by category and maturity:

(In Thousands)

Loans with floating interest rates:

Real Estate

Commercial
and
Other

Installment
Loan to
Individuals

Total

1 year or less . . . . . . . . . . . . . . . . . . . . . . .  $
1 through 5 years. . . . . . . . . . . . . . . . . . . . 
5 through 10 years. . . . . . . . . . . . . . . . . . . 
After 10 years . . . . . . . . . . . . . . . . . . . . . . 

Total floating interest rate loans . . . . . . 

Loans with predetermined interest rates:

1 year or less . . . . . . . . . . . . . . . . . . . . . . . 
1 through 5 years. . . . . . . . . . . . . . . . . . . . 
5 through 10 years. . . . . . . . . . . . . . . . . . . 
After 10 years . . . . . . . . . . . . . . . . . . . . . . 
Total predetermned interest rate loans . . . 

Total . . . . . . . . . . . . . . . . . . . . . . . .  $

25,282
10,390
29,124
188,788
___________________
253,584
___________________

5,800
17,800
19,156
12,996
___________________
55,752
309,336
___________________
___________________

$

8,588
1,692
3,458
1,916
_____________________
15,654
_____________________

$

2,368
179
283
282
____________________
3,122
____________________

$

36,238
12,261
32,865
190,986
_____________________
272,350
_____________________

660
9,845
2,243
153
_____________________
12,901
28,555
$
_____________________
_____________________

917
10,850
7,596
18
____________________
19,381
22,493
$
____________________
____________________

7,377
38,495
28,995
13,167
_____________________
88,034
360,384
$
_____________________
_____________________

• The loan maturity information is based upon original loan terms and is not adjusted for “rollovers.” In the ordinary course of
business, loans maturing within one year may be renewed, in whole or in part, as to principal amount at interest rates prevailing
at the date of renewal. 

• Scheduled repayments are reported in maturity categories in which the payment is due.

The Bank does not make loans that provide for negative amortization nor do any loans contain conversion features. The Bank does
not have any foreign loans outstanding at December 31, 2006.

ALLOWANCE FOR LOAN LOSSES
2006
The  allowance  for  loan  losses  represents  the  amount  which  management  estimates  is  adequate  to  provide  for  probable  losses
inherent in its loan portfolio, as of the consolidated balance sheet date.  The allowance method is used in providing for loan losses.
Accordingly, all loan losses are charged to the allowance and all recoveries are credited to it.  The allowance for loan losses is
established through a provision for loan losses charged to operations.  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 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  December  31, 2006, 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  or
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  interest  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.  
The  allowance  for  loan  losses  increased  from  $3,679,000  at  December  31, 2005  to  $4,185,000  at  December  31, 2006.    At
December 31, 2006, allowance for loan losses was 1.16% of total loans compared to 1.09% of total loans at December 31, 2005.
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.

2005
At December 31, 2005, the allowance for loan losses as a percent of total loans increased to 1.09% from 1.03% at December 31,
2004.  Gross loans increased by $13,933,000 from $324,505,000 at December 31, 2004 to $338,438,000 at December 31, 2005.
Based on management’s loan-by-loan review, the past performance of the borrowers and current economic conditions, including
recent  business  closures  and  bankruptcy  levels, management  does  not  anticipate  any  current  losses  related  to  nonaccrual,
nonperforming, or classified loans above that have already been considered in its overall judgment of the adequacy of the reserve.

NONPERFORMING LOANS
Non-accrual loans decreased to $370,000 at December 31, 2006 primarily due to settlement of a commercial real estate relationship
which previously filed for bankruptcy. Overall nonperforming loans decreased $114,000 to $489,000 from fiscal year end 2005.
The following table presents information concerning nonperforming loans.  The accrual of interest will be discontinued when the
principal or interest of a loan is in default for 90 days or more, or as soon as payment is questionable, unless the loan is well secured 

33

and  in  the  process  of  collection.    Consumer  loans  and  residential  real  estate  loans  secured  by  1  to  4  family  dwellings  shall
ordinarily not be subject to those guidelines.  The reversal of previously accrued but uncollected interest applicable to any loan
placed in a nonaccrual status and the treatment of subsequent payments of either principal or interest will be handled in accordance
with U.S. generally accepted accounting principles.  These principles do not require a write-off of previously accrued interest if
principal and interest are ultimately protected by sound collateral values.  A nonperforming loan may be restored to an accruing
status when:
1. Principal and interest is no longer due and unpaid.
2. It becomes well secured and in the process of collection.
3. Prospects for future contractual payments are no longer in doubt.

(In Thousands)

Total Nonperforming Loans

Nonaccrual

90 Days
Past Due

2006 . . . . . . . . . . . . . . . . . . . . . . . .  $
2005 . . . . . . . . . . . . . . . . . . . . . . . . 
2004 . . . . . . . . . . . . . . . . . . . . . . . . 
2003 . . . . . . . . . . . . . . . . . . . . . . . . 
2002 . . . . . . . . . . . . . . . . . . . . . . . . 

$

370
540
1,381
827
871

$

119
63
345
429
1,225

Total

489
603
1,726
1,256
2,096

The level of nonaccruing loans continues to fluctuate annually and is attributed to the various economic factors experienced both
regionally  and  nationally.    Overall  the  portfolio  is  well  secured  with  a  majority  of  the  balance  making  regular  payments  or
scheduled to be satisfied in the near future.  Presently there are no significant amounts of loans where serious doubts exist as to
the ability of the borrower to comply with the current loan payment terms which are not included in the nonperforming categories
as indicated above.
Management’s judgment in determining the amount of the additions to the allowance charged to operating expense considers the
following factors:

1. Economic conditions and the impact on the loan portfolio.
2. Analysis of past loan charge-offs experienced by category and comparison to outstanding loans.
3. Problem loans on overall portfolio quality.
4. Reports of examination of the loan portfolio by the Pennsylvania State Banking Department and the Federal Deposit Insurance 

Corporation. 

Allocation in the Allowance for Loan Losses

December 31, 2006:
Balance at end of period applicable to:

Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Real estate mortgage:

Residential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Construction  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Installment loans to individuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Unallocated. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

$

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

$

December 31, 2005:
Balance at end of period applicable to:

Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Real estate mortgage:

Residential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Construction  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Installment loans to individuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Unallocated. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

$

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

$

Percent of
Loans in
Each
Category to
Total Loans

Amount

679

951
1,972
108
295
180

4,185

582

1,107
1,482
79
192
237

3,679

7.9%

43.8%
37.5%
4.6%
6.2%
—

100.0%

10.1%

44.2%
37.5%
3.1%
5.1%
—

100.0%

34

December 31, 2004:
Balance at end of period applicable to:

Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Real estate mortgage:

Residential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Construction  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Installment loans to individuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Unallocated. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

$

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

$

December 31, 2003:
Balance at end of period applicable to:

Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Real estate mortgage:

Residential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Construction  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Installment loans to individuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

$

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

$

December 31, 2002:
Balance at end of period applicable to:

Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Real estate mortgage:

Residential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Construction  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Installment loans to individuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

$

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

$

361

1,280
1,399
75
207
16

3,338

353

1,483
916
77
240

3,069

471

1,162
1,082
66
172

2,953

9.1%

46.1%
37.5%
2.5%
4.8%
—

100.0%

8.5%

53.4%
29.9%
2.8%
5.4%

100.0%

9.2%

54.4%
29.3%
1.3%
5.8%

100.0%

DEPOSITS
2006 vs 2005
Total average deposits were $379,346,000 for 2006, an increase of $18,630,000 or 5.16% from 2005.  Non-interest bearing deposits
increased slightly to $69,668,000.  Time deposits increased $30,130,000 or 20.58% as deposits shifted from transaction accounts
to time deposits due to the continued rate disparity between time deposits and other deposit types.  The rate on time deposits has
been  increasing  due  to  the  actions  taken  by  the  FOMC  and  market  competition.    In  addition, the  Bank  utilized  brokered  time
deposits to supplement market area deposit funding.

2005 vs 2004
Total average deposits were $360,716,000 for 2005, an increase of $6,292,000 or 1.78% from 2004.  Non-interest bearing deposits
increased  $5,023,000  or  7.80%  year  over  year.    Time  deposits  increased  $16,051,000  or  12.31%  as  deposits  shifted  from
transaction accounts to time deposits in light of the increasing spread in interest rates between the deposit types.  Increases in rates
paid were the result of the FOMC rate increases during 2004 and increased competition for deposits. 

The average amount and the average rate paid on deposits are summarized below:

(In Thousands)

Noninterest-bearing . . . . . . . . . . . . . . . . . 
Savings. . . . . . . . . . . . . . . . . . . . . . . . . . . 
Super Now . . . . . . . . . . . . . . . . . . . . . . . . 
Money Market . . . . . . . . . . . . . . . . . . . . . 
Time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Total average deposits . . . . 

2006

Average
Amount

$

69,668
61,958
47,294
23,905
176,521
__________________
$
379,346
__________________
__________________

2005

Average
Amount

Rate
0.00% $
0.82%
1.38%
2.06%
4.11%

2.35% $

69,457
64,795
50,756
29,317
146,391
_________________
360,716
_________________
_________________

Rate
0.00%
0.77%
0.86%
1.41%
3.02%

1.60%

2004

Average
Amount

$

Rate
64,434 0.00%
69,796 0.83%
54,690 0.71%
35,164 1.11%
130,340 2.62%

_________________
$
_________________
_________________

354,424 1.35%

35

SHAREHOLDERS’ EQUITY
2006
Shareholders’ equity  increased  $675,000  to  $74,594,000  at  December  31, 2006  as  net  income  outpaced  dividends  paid,
accumulated comprehensive income increased $710,000, and $2,929,000 in treasury stock was strategically purchased as part of
the previously announced stock buyback plan.  The increase in accumulated comprehensive income is the result of an increase in
market value, or net unrealized gains, of the investment portfolio at December 31, 2006 as compared to December 31, 2005, offset
by the net excess of the projected benefit obligation over the market value of the plan assets of the defined benefit pension plan.
The current level of shareholders’ equity equates to a book value per share of $19.12 at December 31, 2006 as compared to $18.59
at December 31, 2005 and an equity to asset ratio of 12.59% at December 31, 2006.  During the twelve months ended December
31, 2006 cash dividends of $1.73 per share were paid to shareholders.  The dividends represented an 11% increase or $0.17 per
share over the dividends paid during the comparable period of 2005.

2005
Shareholders’ equity  increased  $754,000  to  $73,919,000  at  December  31, 2005  as  net  retained  earnings  outpaced  a  decline  in
accumulated other comprehensive income of $3,481,000.  The decrease in accumulated other comprehensive income is a reflection
of  a  decline  in  market  value, unrealized  gains  and  losses, for  our  investment  portfolio, net  of  gains  and  losses  realized  in  the
available for sale portfolio during the year, at December 31, 2005 as compared to December 31, 2004. The level of shareholders’
equity equated to a book value per share of $18.59 as compared to $18.36 at December 31, 2004.  During the year ended December
31, 2005 a dividend of $1.56 per share was paid to shareholders in addition to a 6 for 5 stock split that occurred in December 2005
prior to the cash dividend payment.  The dividend represented a 6.12% increase over the dividend paid during 2004.

Bank  regulators  have  risk  based  capital  guidelines.    Under  these  guidelines  the  Company  and  Bank  are  required  to  maintain
minimum ratios of core capital and total qualifying capital as a percentage of risk weighted assets and certain off-balance sheet
items.  At December 31, 2006, both the Company’s and Bank’s required ratios were well above the minimum ratios as follows:

Tier 1 capital ratio  . . . . . . . . . . . . . . . . .
Total capital ratio  . . . . . . . . . . . . . . . . . .

Company
11.8%
20.3%

Bank
9.3%
16.2%

2006
Minimum
Standards
4.0%
8.0%

For a more comprehensive discussion of these requirements, see “Regulations and Supervision” in Item 1 of the Annual Report on
Form 10-K.  Management believes that the Company will continue to exceed regulatory capital requirements.

RETURN ON EQUITY AND ASSETS:
The ratio of net income to average total assets and average shareholders’ equity and other certain equity ratios are presented as
follows:

Percentage of net income to:

Average total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Average shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Percentage of dividends declared to net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Percentage of average shareholders’ equity to average total assets . . . . . . . . . . . . . . . . . . . 

1.67%
12.93%
70.51%
12.92%

1.97%
14.54%
57.10%
13.56%

2.06%
15.49%
52.72%
13.30%

2006

2005

2004

36

LIQUIDITY, INTEREST RATE SENSITIVITY AND MARKET RISK
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  Company, 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 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 $225,122,000 with $101,584,000 utilized, leaving $123,538,000 available.
In addition to this credit arrangement, the Company has additional lines of credit with correspondent banks of $28,048,000. The
Company’s management believes that it has sufficient liquidity to satisfy estimated short-term and long-term funding needs.  
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.

INTEREST RATE SENSITIVITY
In this analysis the Company examines the result of a 100 and 200 basis point change in market interest rates and the effect on net
interest income.  It is assumed that the change is instantaneous and that all rates move in a parallel manner.  Assumptions are also
made concerning prepayment speeds on mortgage loans and mortgage securities. 
The following is a rate shock forecast for the twelve month period ended December 31, 2007 assuming a static balance sheet as
of December 31, 2006.

(In Thousands)

-200

Parallel Rate Shock in Basis Points
+100
Static
-100

+200

Net interest income . . . . . . . . .  $
Change from static . . . . . . . . . . 

19,509 $
1,407

18,945 $
843

18,102 $       16,930
(1,172)

—

$

15,731
(2,371)

The model utilized to create the report presented above makes various estimates at each level of interest rate change regarding cash
flow from principal repayment on loans and mortgage-backed securities and or call activity on investment securities.  Actual results
could differ significantly from these estimates which would result in significant differences in the calculated projected change.  In
addition, the  limits  stated  above  do  not  necessarily  represent  the  level  of  change  under  which  management  would  undertake
specific measures to realign its portfolio in order to reduce the projected level of change.  Generally, management believes the
Company is well positioned to respond expeditiously when the market interest rate outlook changes.

37

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 magnitude as prices of other goods and services, but are reflective of fiscal policy initiatives or economic factors that are not
measured by a price index.
CRITICAL ACCOUNTING POLICIES
The Company’s accounting policies are integral to understanding the results reported.  The accounting policies are described in
detail in Note 1 of the consolidated financial statements.  Our most complex accounting policies require management’s judgment
to ascertain the valuation of assets, liabilities, commitments, and contingencies.  We have established detailed policies and control
procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period.  In
addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate
manner.    The  following  is  a  brief  description  of  our  current  accounting  policies  involving  significant  management  valuation
judgments.

Other Than Temporary Impairment of Equity Securities
Equity securities are evaluated periodically to determine whether a decline in their value is other than temporary. Management
utilizes criteria such as the magnitude and duration of the decline, in addition to the reason underlying the decline, to determine
whether the loss in value is other than temporary. The term “other than temporary” is not intended to indicate that the decline is
permanent.  It indicates that the prospects for a near term recovery of value are not necessarily favorable, or that there is a lack of
evidence to support fair values equal to, or greater than, the carrying value of the investment.  Once a decline in value is determined
to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.  For a full
discussion  of  the  Company’s  methodology  of  assessing  impairment, refer  to  Note  3  of  “Notes  and  Consolidated  Financial
Statements” of the Annual Report on Form 10-K.

Allowance for Loan Losses
Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment.  The Company’s allowance for
loan losses provides for probable losses based upon evaluations of known, and inherent risks in the loan portfolio.
Management uses historical information to assess the adequacy of the allowance for loan losses as well as the prevailing business
environment; as it is affected by changing economic conditions and various external factors, which may impact the portfolio in
ways currently unforeseen.  The allowance is increased by provisions for loan losses and by recoveries of loans previously charged-
off and reduced by loans charged-off.  For a full discussion of the Company’s methodology of assessing the adequacy of the reserve
for loan losses, refer to Note 1 of “Notes and Consolidated Financial Statements” of the Form 10-K.
Goodwill and Other Intangible Assets
As discussed in Note 6 of the “Notes to Consolidated Financial Statements” of the Annual Report on Form 10-K, the Company
must assess goodwill and other intangible assets each year for impairment.  This assessment involves estimating cash flows for
future periods.  If the future cash flows were less than the recorded goodwill and other intangible assets balances, we would be
required to take a charge against earnings to write down the assets to the lower value.

Deferred Tax Assets
We use an estimate of future earnings to support our position that the benefit of our deferred tax assets will be realized.  If future
income should prove non-existent or less than the amount of the deferred tax assets within the tax years to which they may be
applied, the asset may not be realized and our net income will be reduced.  Our deferred tax assets are described further in Note
10 of  “Notes to  Consolidated Financial Statements” of the Annual Report on Form 10-K.

CONTRACTUAL OBLIGATIONS
The Company  has various financial obligations, including contractual obligations which may require future cash payments. The
following table presents, as of December 31, 2006, significant fixed and determinable contractual obligations to third parties by
payment  date.      Further  discussion  of  the  nature  of  each  obligation  is  included  in  “Notes  to  the  Consolidated  Financial
Statements”of the Annual Report on Form 10-K.

(In Thousands)
Deposits without a stated maturity  . . . . . . . . . . . . . . . . . . . $ 201,742 $
Time deposits  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings, FHLB  . . . . . . . . . . . . . . . . . . . . . .
Long-term borrowings, FHLB  . . . . . . . . . . . . . . . . . . . . . .
Operating leases  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

157,818
15,991
18,706
11,500
411

One Year
or Less

Payments Due in
Three to
Five
Years

Over
Five
Years

One to
Three
Years

Total

— $

— $

31,035
—
—
34,600
531

3,791
—
—
15,500
220

— $ 201,742
193,449
15,991
18,706
82,878
2,444

805
—
—
21,278
1,282

The Corporation’s operating lease obligations represent short and long-term lease and rental payments for branch facilities.  The
Bank leases certain facilities under operating leases which expire on various dates through 2024.  Renewal options are available
on these leases.

38

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 Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply
with  the  terms  of  the  safe  harbor, the  Company  notes  that  a  variety  of  factors  could  cause  the  Company’s  actual  results  and
experience  to  differ  materially  from  the  anticipated  results  or  other  expectations  expressed  in  the  Company’s  forward-looking
statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company’s
business  include  the  following: general  economic  conditions  and  changes  in  interest  rates  including  their  impact  on  capital
expenditures; business conditions in the banking industry; the regulatory environment; rapidly changing technology and evolving
banking  industry  standards;  the  effect  of  changes  in  accounting  policies  and  practices, including  increased  competition  with
community, regional  and  national  financial  institutions;  new  service  and  product  offerings  by  competitors  and  price  pressures;
changes in the Company’s organization, compensation and benefit plans; and similar items.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Penns Woods Bancorp, Inc.

We have audited the consolidated balance sheets of Penns Woods Bancorp, Inc. and subsidiaries as of December 31, 2006
and 2005, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the years in
the  three-year  period  ended  December  31,  2006.    These  consolidated  financial  statements  are  the  responsibility  of  the
Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall financial statement presentation.  We believe
that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Penns Woods Bancorp, Inc. and subsidiaries as of December 31, 2006 and 2005, and the consolidated results
of  their  operations  and  their  cash  flows  for  each  of  the  years  in  the  three-year  period  ended  December  31,  2006,  in
conformity with U.S. generally accepted accounting principles.

As  discussed  in  Note 11  to  the  consolidated  financial  statements,  Penns  Woods  Bancorp,  Inc.  changed  its  method  of
accounting  for  its  defined  benefit  pension  plan  as  of  December 31,  2006,  in  accordance  with  Financial  Accounting
Standards Board Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.

We  also  have  audited,  in  accordance  with  the  standards  of  the  Public  Company  Accounting  Oversight  Board  (United
States), the effectiveness of Penns Woods Bancorp, Inc.’s internal control over financial reporting as of December 31, 2006,
based  on  criteria  established  in  “Internal  Control  –  Integrated  Framework”  issued  by  the  Committee  of  Sponsoring
Organizations of the Treadway Commission and our report dated March 9, 2007, expressed an unqualified opinion on
management’s assessment of the effectiveness of Penns Woods Bancorp, Inc.’s internal control over financial reporting and
an unqualified opinion on the effectiveness of Penns Woods Bancorp, Inc.’s internal control over financial reporting.

Wexford, Pennsylvania
March 9, 2007

39

FORM 10-K

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549

(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended              December 31, 2006

OR

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the transition period from                                                                       to

Commission file number                   0-17077

PENNS WOODS BANCORP, INC.

(exact name of registrant as specified in its charter)

Pennsylvania
(State or other jurisdiction
of incorporation or organization)

300 Market Street, P.O. Box 967
Williamsport, Pennsylvania 17703-0967 
(Address of principal executive offices)

23-2226454
(I.R.S. Employer
Identification No.)

Registrant’s telephone number, including area code               (570) 322-1111

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Common Stock, par value $8.33 per share

Name of each exchange
which registered
The NASDAQ Stock Market LLC 

Securities to be registered pursuant to Section 12(g) of the Act:

None
(Title of Class)

x

x

Indicate by check mark if the registrant is a wellknown seasoned issuer, as defined in Rule 405 of the Securities Act.
(cid:1) Yes  (cid:1) No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
(cid:1) Yes  (cid:1) No
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 the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90 days.   Yes  X     No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a nonaccelerated filer. See defin-
ition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer (cid:1) Accelerated filer    (cid:1) Non-accelerated filer (cid:1)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). (cid:1) Yes  (cid:1) No
State the aggregate market value of the voting stock held by non-affiliates of the registrant $151,295,164 at June 30, 2006.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

X

x

x

Class

Common Stock, $8.33 Par Value

Outstanding at March 9, 2007

3,896,492 Shares

40

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement prepared in connection with its annual meeting of shareholders to be held on
April 25, 2007 are incorporated by reference in Part III hereof.

INDEX

PART I

ITEM

Item 1.

Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Item 1A.

Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Item 1B.

Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Item 2.

Item 3.

Item 4.

Item 5.

Item 6.

Item 7.

Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

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

PART II

Market for the Registrant’s Common Stock, Related Stockholder Matters, and Issuer Purchase of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations. . . 

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Item 8.

Item 9.

Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . . . . . . . . . . . . 

Item 9A.

Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Item 9B.

Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

PART III

Item 10.

Item 11.

Item 12.

Item 13.

Item 14.

Directors and Executive Officers of the Registrant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Security Ownership and Certain Beneficial Owners and Management and Related
Stockholder Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

PART IV

Item 15.

Exhibits, Financial Statement Schedules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

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PART I

ITEM 1        BUSINESS
A.  General Development of Business and History
On  January  7, 1983, Penns Woods  Bancorp, Inc.  (the  “Company”)  was  incorporated  under  the  laws  of  the  Commonwealth  of
Pennsylvania as a bank holding company.  The Jersey Shore State Bank (the “Bank”) became a wholly owned subsidiary of the
Company, and each outstanding share of Bank common stock was converted into one share of Company common stock.  This
transaction was approved by the shareholders of the Bank on April 11, 1983 and was officially effective on July 12, 1983.  The
Company’s  two  other  wholly-owned  subsidiaries  are  Woods  Real  Estate  Development  Company, Inc.  and  Woods  Investment
Company, Inc.  The Company’s business has consisted primarily of managing and supervising the Bank, and its principal source
of income has been dividends paid by the Bank and Woods Investment Company, Inc.  

The Bank is engaged in commercial and retail which includes the acceptance of time, savings, and demand deposits, the funding
of  commercial, consumer, and  mortgage  loans, and  safe  deposit  services.    Utilizing  a  thirteen  branch  office  network, ATMs,
internet, and telephone banking delivery channels, the Bank delivers its products and services to the communities it resides in.

In October 2000, the Bank acquired The M Group, Inc. D/B/A The Comprehensive Financial Group (“The M Group”). The M
Group, which operates as a subsidiary of the Bank, offers insurance and securities brokerage services. Securities are offered by
The M Group through ING Financial Partners, Inc., a registered broker-dealer.

Neither the Company nor the Bank anticipates that compliance with environmental laws and regulations will have any material
effect on capital expenditures, earnings, or on its competitive position.  The Bank is not dependent on a single customer or a few
customers, the loss of whom would have a material effect on the business of the Bank.

The Bank employed 187 persons as of December 31, 2006 in either a full-time or part-time capacity.  The Company does not have
any employees.  The principal officers of the Bank also serve as officers of the Company.

Woods Investment Company, Inc., a Delaware holding company, maintains an investment portfolio that is managed for total return
and to fund dividend payments to the Company.

Woods  Real  Estate  Development  Company, Inc.  serves  the  Company  through  its  acquisition  and  ownership  of  certain  properties
utilized by the Bank.

A copy of the Code of Ethics and Code of Conduct for the Corporation can be requested from Brian Knepp, Vice President of
Finance, at 300 Market Street, Williamsport, PA  17701.  A link with access to the Corporation’s SEC 10K filings, annual reports,
and quarterly filings can be found at www.jssb.com.

B.  Regulation and Supervision
The Company is also subject to the provisions of the Bank Holding Company Act of 1956, as amended (the “BHCA”) and to
supervision and examination by the Board of Governors of the Federal Reserve System (the “FRB”).  The Bank is subject to the
supervision and examination by the Federal Deposit Insurance Corporation (the “FDIC”), as its primary federal regulator and as
the insurer of the Bank’s deposits.  The Bank is also regulated and examined by the Pennsylvania Department of Banking (the
“Department”).

The insurance activities of The M Group are subject to regulation by the insurance departments of the various states in which The
M Group conducts business including principally the Pennsylvania Department of Insurance. The securities brokerage activities of
The M Group are subject to regulation by federal and state securities commissions.

The  FRB  has  issued  regulations  under  the  BHCA  that  require  a  bank  holding  company  to  serve  as  a  source  of  financial  and
managerial strength to its subsidiary banks.  As a result, the FRB, pursuant to such regulations, may require the Company to stand
ready to use its resources to provide adequate capital funds to the Bank during periods of financial stress or adversity.  The BHCA
requires the Company to secure the prior approval of the FRB before it can acquire all or substantially all of the assets of any bank,
or acquire ownership or control of 5% or more of any voting shares of any bank.  Such a transaction would also require approval
of the Department.

A bank holding company is prohibited under the BHCA from engaging in, or acquiring direct or indirect control of, more than 5%
of the voting shares of any company engaged in non-banking activities unless the FRB, by order or regulation, has found such
activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.  Under the BHCA,
the  FRB  has  the  authority  to  require  a  bank  holding  company  to  terminate  any  activity  or  relinquish  control  of  a  non-bank
subsidiary (other than a non-bank subsidiary of a bank) upon the FRB’s determination that such activity or control constitutes a
serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.

Bank holding companies are required to comply with the FRB’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.  Currently, the required minimum ratio of total capital to risk-
weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%.  At least half of the total
capital is required to be Tier 1 capital, consisting principally of common shareholders’ equity, less certain intangible assets.  The
remainder (“Tier 2 capital”) may consist of certain preferred stock, a limited amount of subordinated debt, certain hybrid capital
instruments and other debt securities, 45% of net unrealized gains on marketable equity securities, and a limited amount of the
general  loan  loss  allowance.    The  risk-based  capital  guidelines  are  required  to  take  adequate  account  of  interest  rate  risk,
concentration of credit risk, and risks of nontraditional activities.

42

In addition to the risk-based capital guidelines, the FRB requires each bank holding company to comply with the leverage ratio,
under which the bank holding company must maintain a minimum level of Tier 1 capital to average total consolidated assets of
3%  for  those  bank  holding  companies  which  have  the  highest  regulatory  examination  ratings  and  are  not  contemplating  or
experiencing significant growth or expansion.  All other bank holding companies are expected to maintain a leverage ratio of at
least 4% to 5%.  The Bank is subject to similar capital requirements adopted by the FDIC.

C.  Regulation of the Bank
From time to time, various types of federal and state legislation have been proposed that could result in additional regulation of,
and restrictions of, the business of the Bank.  It cannot be predicted whether any such legislation will be adopted or how such
legislation would affect the business of the Bank.  As a consequence of the extensive regulation of commercial banking activities
in the United States, the Bank’s business is particularly susceptible to being affected by federal legislation and regulations that may
increase the costs of doing business.
Prompt  Corrective  Action -  The  FDIC  has  specified  the  levels  at  which  an  insured  institution  will  be  considered  “well-
capitalized,” “adequately  capitalized,” “undercapitalized,” and  “critically  undercapitalized.” In  the  event  an  institution’s  capital
deteriorates to the “undercapitalized” category or below, the Federal Deposit Insurance Act (the “FDIA”) and FDIC regulations
prescribe an increasing amount of regulatory intervention, including: (1) the institution of a capital restoration plan by a bank and
a guarantee of the plan by a parent institution; and (2) the placement of a hold on increases in assets, number of branches, or lines
of  business.    If  capital  has  reached  the  significantly  or  critically  undercapitalized  levels, further  material  restrictions  can  be
imposed, including  restrictions  on  interest  payable  on  accounts, dismissal  of  management  and  (in  critically  undercapitalized
situations) appointment of a receiver.  For well-capitalized institutions, the FDIA provides authority for regulatory intervention
where the institution is deemed to be engaging in unsafe or unsound practices or receives a less than satisfactory examination report
rating for asset quality, management, earnings or liquidity.
Deposit Insurance - Historically, there were two deposit insurance funds administered by the FDIC - the Savings Association
Insurance Fund (“SAIF”) and the Bank Insurance Fund (“BIF”).  The Bank’s deposits were insured under the BIF; however, the
deposits assumed by the Bank in connection with the merger of Lock Haven Savings Bank were treated and assessed as SAIF-
insured deposits.  The FDIC has implemented a risk-related premium schedule for all insured depository institutions that results
in the assessment of premiums based on capital and supervisory measure.  Under the risk-related premium schedule, the FDIC
assigns, on  a  semiannual  basis, each  institution  to  one  of  three  capital  groups  (well-capitalized, adequately  capitalized  or
undercapitalized) and further assigns such institution to one of three subgroups within a capital group. The institution’s subgroup
assignment  is  based  upon  the  FDIC’s  judgment  of  the  institution’s  strength  in  light  of  supervisory  evaluations, including
examination  reports, statistical  analyses, and  other  information  relevant  to  gauging  the  risk  posed  by  the  institution.    Only
institutions with a total capital to risk-adjusted assets ratio of 10.0% or greater, a Tier 1 capital  to risk-adjusted assets ratio of 6.0%
or greater and a Tier 1 leverage ratio of 5.0% or greater, are assigned to the well-capitalized group.   As of December 31, 2006, the
Bank’s ratios were well above required minimum ratios.

The assessment rates range from zero for those institutions with the least risk, to $0.27 for every $100 of insured deposits for
institutions deemed to have the highest risk.  The Bank is in the category of institutions that presently pay nothing for deposit
insurance.  While the Bank presently pays no premiums for deposit insurance, it is subject to assessments to pay the interest on
Financing Corporation (“FICO”) bonds.  FICO was created by Congress to issue bonds to finance the resolution of failed thrift
institutions.  The current annual FICO assessment for the Bank (and all banks) is $.0132 per $100 of BIF deposits.  

In February 2006, deposit insurance modernization legislation was enacted.  The legislation merged the BIF and SAIF into a single
Deposit Insurance Fund, increased deposit insurance coverage for IRAs to $250,000, provided for the future increase of deposit
insurance on all accounts by authorizing the FDIC to index the coverage to the rate of inflation, authorized the FDIC to set the
reserve ratio of the combined Deposit Insurance Fund at a level between 1.15% and 1.50%, and permited the FDIC to establish
assessments to be paid by insured banks to maintain the minimum ratios.

Other Legislation
The  Fair  and  Accurate  Credit  Transactions  Act  (“FACT”)  was  signed  into  law  on  December  4, 2003.    This  law  extends  the
previously existing Fair Credit Reporting Act.  New provisions added by FACT address the growing problem of identity theft.
Consumers will be able to initiate a fraud alert when they are victims of identity theft, and credit reporting agencies will have
additional duties.  Consumers will also be entitled to obtain free credit reports, and will be granted certain additional privacy rights.  

The Sarbanes-Oxley Act of 2002 was enacted to enhance penalties for accounting and auditing improprieties at publicly traded
companies and to protect investors by improving the accuracy and reliability of corporate disclosures under the federal securities
laws.  The Sarbanes-Oxley Act generally applies to all companies, including the Company, that file or are required to file periodic
reports  with  the  Securities  and  Exchange  Commission  under  the  Securities  Exchange Act  of  1934, or  the  Exchange Act.   The
legislation includes provisions, among other things, governing the services that can be provided by a public company’s independent
auditors and the procedures for approving such services, requiring the chief executive officer and principal accounting officer to
certify certain matters relating to the company’s periodic filings under the Exchange Act, requiring expedited filings of reports by
insiders of their securities transactions and containing other provisions relating to insider conflicts of interest, increasing disclosure
requirements  relating  to  critical  financial  accounting  policies  and  their  application, increasing  penalties  for  securities  law
violations, and creating a new public accounting oversight board, a regulatory body subject to SEC jurisdiction with broad powers
to set auditing, quality control, and ethics standards for accounting firms.  In response to the legislation, the national securities
exchanges  and  NASDAQ  have  adopted  new  rules  relating  to  certain  matters, including  the  independence  of  members  of  a
company’s audit committee as a condition to listing or continued listing.

43

In  addition, Congress  is  often  considering  some  financial  industry  legislation.  The  Company  cannot  predict  how  any  new
legislation, or new rules adopted by the federal banking agencies, may affect its business in the future.

In addition to federal banking law, the Bank is subject to the Pennsylvania Banking Code. The Banking Code was amended in late
2000  to  provide  more  complete  “parity” in  the  powers  of  state-chartered  institutions  compared  to  national  banks  and  federal
savings banks doing business in Pennsylvania. Pennsylvania banks have the same ability to form financial subsidiaries authorized
by the Gramm-Leach-Bliley Act, as do national banks.

Environmental Laws
Environmentally related hazards have become a source of high risk and potential liability for financial institutions relating to their
loans.  Environmentally contaminated properties owned by an institution’s borrowers may result in a drastic reduction in the value
of the collateral securing the institution’s loans to such borrowers, high environmental clean up costs to the borrower affecting its
ability to repay the loans, the subordination of any lien in favor of the institution to a state or federal lien securing clean up costs,
and  liability  to  the  institution  for  clean  up  costs  if  it  forecloses  on  the  contaminated  property  or  becomes  involved  in  the
management  of  the  borrower.    The  Company  is  not  aware  of  any  borrower  who  is  currently  subject  to  any  environmental
investigation  or  clean  up  proceeding  which  is  likely  to  have  a  material  adverse  effect  on  the  financial  condition  or  results  of
operations of the Company.

Effect of Government Monetary Policies
The earnings of the Company are and will be affected by domestic economic conditions and the monetary and fiscal policies of
the United States Government and its agencies.   The monetary policies of the FRB have had, and will likely continue to have, an
important impact on the operating results of commercial banks through its power to implement national monetary policy in order,
among other things, to curb inflation or combat a recession.  The FRB has a major effect upon the levels of bank loans, investments,
and deposits through its open market operations in the United States Government securities and through its regulation of, among
other things, the discount rate on borrowing of member banks and the reserve requirements against member bank deposits.  It is
not possible to predict the nature and impact of future changes in monetary and fiscal policies.

DESCRIPTION OF BANK
History and Business
Jersey Shore State Bank (“Bank”) was incorporated under the laws of the Commonwealth of Pennsylvania as a state bank in 1934
and became a wholly owned subsidiary of the Company on July 12, 1983.

As of December 31, 2006, the Bank had total assets of $576,896,000; total shareholders’ equity of $57,789,000 and total deposits
of  $396,204,000.    The  Bank’s  deposits  are  insured  by  the  Federal  Deposit  Insurance  Corporation  for  the  maximum  amount
provided under current law.

The  Bank  engages  in  business  as  a  commercial  bank, doing  business  at  several  locations  in  Lycoming, Clinton, and  Centre
Counties, Pennsylvania.  The Bank offers insurance, securities brokerage services, annuity and mutual fund investment products,
and financial planning through its wholly owned subsidiary, The M Group, Inc. D/B/A The Comprehensive Financial Group.

Services  offered  by  the  Bank  include  accepting  time, demand  and  savings  deposits  including  Super  NOW  accounts, statement
savings accounts, money market accounts, fixed rate certificates of deposit, and club accounts.  Its services also include making
secured and unsecured business and consumer loan that include financing commercial transactions as well as construction and
residential mortgage loans and revolving credit loans with overdraft protection.

The Bank’s loan portfolio mix can be classified into four principal categories.  These are real estate, agricultural, commercial, and
consumer.    Real  estate  loans  can  be  further  segmented  into  construction  and  land  development, farmland, one-to-four  family
residential, multi-family, and commercial or industrial.  Qualified borrowers are defined by policy and our underwriting standards.
Owner provided equity requirements range from 20% to 30% with a first lien status required.  Terms are generally restricted to
between 10 and 20 years with the exception of construction and land development, which are limited to one to five years.  Real
estate appraisals, property construction verifications, and site visitations comply with policy and industry regulatory standards.

Prospective residential mortgage customer’s repayment ability is determined from information contained in the application and
recent income tax returns.   Emphasis is on credit, employment, income, and residency verification.  Broad hazard insurance is
always required and flood insurance where applicable.  In the case of construction mortgages, builders risk insurance is requested.  

Agricultural loans for the purchase or improvement of real estate must meet the Bank’s real estate underwriting criteria.  The only
permissible  exception  is  when  a  Farmers  Home  Loan  Administration  guaranty  is  obtained.    Agricultural  loans  made  for  the
purchase of equipment are usually payable in five years, but never more than seven, depending upon the useful life of the purchased
asset.  Minimum borrower equity ranges from 20% to 30%.  Livestock financing criteria depends upon the nature of the operation.
Agricultural loans are also made for crop production purposes.  Such loans are structured to repay within the production cycle and
not carried over into a subsequent year.  

Commercial loans are made for the acquisition and improvement of real estate, purchase of equipment, and for working capital
purposes  on  a  seasonal  or  revolving  basis.    General  purpose  working  capital  loans  are  also  available  with  repayment  expected
within one year.  Equipment loans are generally amortized over three to seven years, with an owner equity contribution required
of at least 20% of the purchase price.  Insurance coverage with the Bank as loss payee is required, especially in the case where the
equipment is rolling stock. It is also a general policy to collateralize non-real estate loans with the asset purchased and, dependant
upon loan terms, junior liens are filed on other available assets.  Financial information required on all commercial mortgages   

44

includes the most current three years balance sheets and income statements and projections on income to be developed through the
project.  In the case of corporations and partnerships, the principals are often asked to indebt themselves personally as well.

Seasonal  and  revolving  lines  of  credit  are  offered  for  working  capital  purposes.    Collateral  for  such  a  loan  includes  the  pledge  of
inventory and/or receivables.  Drawing availability is usually 50% of inventory and 75% of eligible receivables.  Eligible receivables
are  defined  as  invoices  less  than  90  days  delinquent.    Exclusive  reliance  is  very  seldom  placed  on  such  collateral;  therefore, other
lienable assets are also taken into the collateral pool.  Where reliance is placed on inventory and accounts receivable, the applicant must
provide financial information including agings on a monthly basis.  In addition, the guaranty of the principals is usually obtained.

Letter of Credit availability is limited to standbys where the customer is well known to the Bank.  Credit criteria is the same as that
utilized in making a direct loan.  Collateral is obtained in most cases, and whenever the expiration date is beyond one year. 

Consumer  loan  products  include  second  mortgages, automobile  financing, small  loan  requests, overdraft  check  lines, and  PHEAA
referral  loans.    Our  policy  includes  standards  used  in  the  industry  on  debt  service  ratios  and  terms  are  consistent  with  prudent
underwriting  standards  and  the  use  of  proceeds.     Verifications  are  made  of  employment  and  residency, along  with  credit  history.
Second mortgages are confined to equity borrowing and home improvements.  Terms are generally ten years or less and rates are fixed.
Loan to collateral value criteria is 80% or less and verifications are made to determine values.   Automobile financing is generally
restricted to five years and done on a direct basis.  The Bank, as a practice, does not floor plan and therefore does not discount dealer
paper.  Small loan requests are to accommodate personal needs such as the purchase of small appliances or for the payment of taxes.
Overdraft check lines are limited to $5,000 or less.

The Bank’s investment portfolio is analyzed and priced on a monthly basis. Investments are made in U.S. Treasuries, U.S. Agency
issues, bank qualified municipal bonds, corporate bonds, and corporate stocks which consist of Pennsylvania bank stocks.  Bonds with
BAA or better ratings are used, unless a local issue is purchased that has a lesser or no rating.  Factors taken into consideration when
investments are purchased include liquidity, the Company’s tax position, tax equivalent yield, third party investment ratings, and the
policies of the Asset/Liability Committee.

The banking environment in Lycoming, Clinton, and Centre Counties, Pennsylvania is highly competitive.  The Bank operates thirteen
full  service  offices  in  these  markets  and  competes  for  loans  and  deposits  with  numerous  commercial  banks, savings  and  loan
associations, and  other  financial  institutions.  The  economic  base  of  the  region  is  developed  around  small  business, health  care,
educational facilities (college and public schools), light manufacturing industries, and agriculture.  

The  Bank  has  a  relatively  stable  deposit  base  and  no  material  amount  of  deposits  is  obtained  from  a  single  depositor  or  group  of
depositors, excluding public entities that account for approximately 10% of total deposits.  Although the Bank has regular opportunities
to bid on pools of funds of $100,000 or more in the hands of municipalities, hospitals, and others, it does not rely on these monies to
fund loans or intermediate or longer-term investments.  

The Bank has not experienced any significant seasonal fluctuations in the amount of its deposits.

Supervision and Regulation
The earnings of the Bank are affected by the policies of regulatory authorities including the FDIC and the FRB. An important function
of the FRB is to regulate the money supply and interest rates.  Among the instruments used to implement these objectives are open
market operations in U.S. Government Securities, changes in reserve requirements against member bank deposits, and limitations on
interest  rates  that  member  banks  may  pay  on  time  and  savings  deposits.    These  instruments  are  used  in  varying  combinations  to
influence overall growth and distribution of bank loans, investments on deposits, and their use may also affect interest rates charged on
loans or paid for deposits.

The policies and regulations of the FRB have had and will probably continue to have a significant effect on the Bank’s deposits, loans
and investment growth, as well as the rate of interest earned and paid, and are expected to affect the Bank’s operation in the future.  The
effect of such policies and regulations upon the future business and earnings of the Bank cannot accurately be predicted.

ITEM 1A  RISK FACTORS
The following sets forth several risk factors that are unique to the Company.
Changes in interest rates could reduce our income, cash flows and asset values.
Our income and cash flows and the value of our assets depend to a great extent on the difference between the interest rates we earn on
interest-earning  assets, such  as  loans  and  investment  securities, and  the  interest  rates  we  pay  on  interest-bearing  liabilities  such  as
deposits and borrowings.  These rates are highly sensitive to many factors which are beyond our control, including general economic
conditions  and  policies  of  various  governmental  and  regulatory  agencies  and, in  particular, the  Board  of  Governors  of  the  Federal
Reserve System. Changes in monetary policy, including changes in interest rates, will influence not only the interest we receive on our
loans and investment securities and the amount of interest we pay on deposits and borrowings but will also affect our ability to originate
loans and obtain deposits and the value of our investment portfolio.  If the rate of interest we pay on our deposits and other borrowings
increases more than the rate of interest we earn on our loans and other investments, our net interest income, and therefore our earnings,
could be adversely affected.  Our earnings also could be adversely affected if the rates on our loans and other investments fall more
quickly than those on our deposits and other borrowings.
Economic conditions either nationally or locally in areas in which our operations are concentrated may adversely affect our
business.
Deterioration in local, regional, national or global economic conditions could cause us to experience a reduction in deposits and new
loans, an increase in the number of borrowers who default on their loans and a reduction in the value of the collateral securing their
loans, all of which could adversely affect our performance and financial condition. Unlike larger banks that are more geographically 

45

diversified, we provide banking and financial services locally.  Therefore, we are particularly vulnerable to adverse local economic
conditions.

Our  financial  condition  and  results  of  operations  would  be  adversely  affected  if  our  allowance  for  loan  losses  is  not
sufficient to absorb actual losses or if we are required to increase our allowance.

Despite our underwriting criteria, we may experience loan delinquencies and losses.  In order to absorb losses associated with
nonperforming loans, we maintain an allowance for loan losses based on, among other things, historical experience, an evaluation
of economic conditions, and regular reviews of delinquencies and loan portfolio quality.  Determination of the allowance inherently
involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of
which may undergo material changes.  At any time there are likely to be loans in our portfolio that will result in losses but that
have  not  been  identified  as  nonperforming  or  potential  problem  credits.  We  cannot  be  sure  that  we  will  be  able  to  identify
deteriorating  credits  before  they  become  nonperforming  assets  or  that  we  will  be  able  to  limit  losses  on  those  loans  that  are
identified. We may be required to increase our allowance for loan losses for any of several reasons.  Federal regulators, in reviewing
our loan portfolio as part of a regulatory examination, may request that we increase our allowance for loan losses.  Changes in
economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and
other factors, both within and outside of our control, may require an increase in our allowance.  In addition, if charge-offs in future
periods exceed our allowance for loan losses, we will need additional increases in our allowance for loan losses.  Any increases in
our allowance for loan losses will result in a decrease in our net income and, possibly, our capital, and may materially affect our
results of operations in the period in which the allowance is increased.

Many of our loans are secured, in whole or in part, with real estate collateral which is subject to declines in value.
In addition to considering the financial strength and cash flow characteristics of a borrower, we often secure our loans with real
estate collateral.  Real estate values and the real estate market are generally affected by, among other things, changes in local,
regional or national economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes
in tax laws and other governmental statutes, regulations and policies, and acts of nature.  The real estate collateral provides an
alternate source of repayment in the event of default by the borrower.  If real estate prices in our markets decline, the value of the
real estate collateral securing our loans could be reduced.  If we are required to liquidate real estate collateral securing loans during
a period of reduced real estate values to satisfy the debt, our earnings and capital could be adversely affected.

Competition may decrease our growth or profits.
We  face  substantial  competition  in  all  phases  of  our  operations  from  a  variety  of  different  competitors, including  commercial
banks, savings  and  loan  associations, mutual  savings  banks, credit  unions, consumer  finance  companies, factoring  companies,
leasing  companies, insurance  companies, and  money  market  mutual  funds.    There  is  very  strong  competition  among  financial
services  providers  in  our  principal  service  area.    Our  competitors  may  have  greater  resources, higher  lending  limits, or  larger
branch systems than we do.  Accordingly, they may be able to offer a broader range of products and services as well as better
pricing for those products and services than we can. 

In addition, some of the financial services organizations with which we compete are not subject to the same degree of regulation
as is imposed on federally insured financial institutions.  As a result, those nonbank competitors may be able to access funding and
provide various services more easily or at less cost than we can, adversely affecting our ability to compete effectively.

We may be adversely affected by government regulation.
The banking industry is heavily regulated. Banking regulations are primarily intended to protect the federal deposit insurance funds
and depositors, not shareholders. Changes in the laws, regulations, and regulatory practices affecting the banking industry may
increase our costs of doing business or otherwise adversely affect us and create competitive advantages for others. Regulations
affecting banks and financial services companies undergo continuous change, and we cannot predict the ultimate effect of these
changes, which could have a material adverse effect on our profitability or financial condition.

We rely on our management and other key personnel, and the loss of any of them may adversely affect our operations.
We are and will continue to be dependent upon the services of our executive management team. In addition, we will continue to
depend on our ability to retain and recruit key commercial loan officers. The unexpected loss of services of any key management
personnel or commercial loan officers could have an adverse effect on our business and financial condition because of their skills,
knowledge of our market, years of industry experience, and the difficulty of promptly finding qualified replacement personnel.

Environmental liability associated with lending activities could result in losses.
In the course of our business, we may foreclose on and take title to properties securing our loans.  If hazardous substances were
discovered on any of these properties, we could be liable to governmental entities or third parties for the costs of remediation of
the  hazard, as  well  as  for  personal  injury  and  property  damage.    Many  environmental  laws  can  impose  liability  regardless  of
whether we knew of, or were responsible for, the contamination.  In addition, if we arrange for the disposal of hazardous or toxic
substances at another site, we may be liable for the costs of cleaning up and removing those substances from the site even if we
neither own nor operate the disposal site.  Environmental laws may require us to incur substantial expenses and may materially
limit use of properties we acquire through foreclosure, reduce their value or limit our ability to sell them in the event of a default
on the loans they secure.  In addition, future laws or more stringent interpretations or enforcement policies with respect to existing
laws may increase our exposure to environmental liability.

Failure to implement new technologies in our operations may adversely affect our growth or profits.
The market for financial services, including banking services and consumer finance services, is increasingly affected by advances 

46

in technology, including developments in telecommunications, data processing, computers, automation, Internet-based banking,
and telebanking. Our ability to compete successfully in our markets may depend on the extent to which we are able to exploit such
technological changes. However, we can provide no assurance that we will be able to properly or timely anticipate or implement
such technologies or properly train our staff to use such technologies.  Any failure to adapt to new technologies could adversely
affect our business, financial condition or operating results.

An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the Federal Deposit Insurance Corporation,
commonly referred to as the FDIC, any other deposit insurance fund or by any other public or private entity.  Investment in our
common stock is subject to the same market forces that affect the price of common stock in any company. 

ITEM 1B – UNRESOLVED STAFF COMMENTS

None.

ITEM  2        PROPERTIES
The Company owns and leases its properties.  Listed herewith are the locations of properties owned or leased, in which the banking
offices are located; all properties are in good condition and adequate for the Bank’s purposes:

Office
Main

Bridge Street

DuBoistown

Williamsport

Montgomery

Lock Haven

Mill Hall

Spring Mills

Centre Hall

Zion

State College

State College

Montoursville

Address
115 South Main Street
P.O. Box 5098
Jersey Shore, Pennsylvania 17740
112 Bridge Street
Jersey Shore, Pennsylvania 17740
2675 Euclid Avenue
Williamsport, Pennsylvania 17702
300 Market Street
P.O. Box 967
Williamsport, Pennsylvania 17703-0967
9094 Rt. 405 Highway
Montgomery, Pennsylvania 17752
4 West Main Street
Lock Haven, Pennsylvania 17745
(Inside Wal-Mart), 173 Hogan Boulevard
Mill Hall, Pennsylvania 17751
3635 Penns Valley Road, P.O. Box 66
Spring Mills, Pennsylvania 16875
2842 Earlystown Road
Centre Hall, Pennsylvania 16828
100 Cobblestone Road
Bellefonte, Pennsylvania 16823
(Inside Wal-Mart), 1665 North Atherton Place
State College, Pennsylvania 16803

2050 North Atherton Street
State College, Pennsylvania 16803

820 Broad Street
Montoursville, Pennsylvania 17754

The M Group, Inc.
D/B/A The Comprehensive        Williamsport, Pennsylvania 17701
Financial Group                   

705 Washington Boulevard 

Ownership
Owned

Owned

Owned

Owned

Under Lease

Owned

Under Lease

Owned

Land Under Lease

Under Lease

Under Lease

Land Under Lease

Under Lease

Under Lease

ITEM  3        LEGAL PROCEEDINGS
The  Company  is  subject  to  lawsuits  and  claims  arising  out  of  its  business.    In  the  opinion  of  management, after  review  and
consultation  with  counsel, any  proceedings  that  may  be  assessed  will  not  have  a  material  adverse  effect  on  the  consolidated
financial position of the Company.

ITEM  4        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 2006.

47

ITEM  5 MARKET FOR THE REGISTRANT’S COMMON STOCK, RELATED

STOCKHOLDER MATTERS, AND ISSUER PURCHASE OF EQUITY SECURITIES

PART II

The Common Stock is listed on the NASDAQ Global Market under the symbol “PWOD”.  The following table sets forth (1) the
quarterly  high  and  low  prices  for  a  share  of  the  Company’s  Common  Stock  during  the  periods  indicated, and  (2)  quarterly
dividends on a share of the Common Stock with respect to each quarter since January 1, 2004.  The following quotations represent
prices between buyers and sellers and do not include retail markup, markdown or commission.  They may not necessarily represent
actual transactions. 

High

Low

Dividends
Declared

2004:

First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Third quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Fourth quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2005:

First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Third quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Fourth quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2006:

First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Third quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Fourth quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

40.33
39.09
42.29
41.77

41.67
41.58
38.30
39.76

38.75
39.50
38.48
38.59

$

$

$

35.92
35.39
36.80
37.72

38.58
37.08
36.76
36.67

37.75
36.50
37.02
36.20

$

$

$

0.29
0.29
0.29
0.60

0.38
0.38
0.39
0.41

0.42
0.43
0.44
0.44

The Bank has paid cash dividends since 1941.  The Company has paid dividends since the effective date of its formation as a bank
holding  company.    It  is  the  present  intention  of  the  Registrant’s  Board  of  Directors  to  continue  the  dividend  payment  policy;
however, further dividends must necessarily depend upon earnings, financial condition, appropriate legal restrictions, and other
factors  relevant  at  the  time  the  Board  of  Directors  of  the  Registrant  considers  dividend  policy.    Cash  available  for  dividend
distributions to shareholders of the Registrant primarily comes from dividends paid by the Bank to the Company.  Therefore, the
restrictions on the Bank’s dividend payments are directly applicable to the Company.  See also the information appearing in Note
18 to Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for additional information related
to dividend restrictions.
Under the Pennsylvania Business Corporation Law of 1988 a corporation may not pay a dividend, if after giving effect thereto, the
corporation would be unable to pay its debts as they become due in the usual course of business and after giving effect thereto the
total  assets  of  the  corporation  would  be  less  than  the  sum  of  its  total  liabilities  plus  the  amount  that  would  be  needed, if  the
corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of the shareholders
whose preferential rights are superior to those receiving the dividend.
As of March 9, 2007, the Company had approximately 1,300 shareholders of record.

Following is a schedule of the shares of the Company’s common stock purchased by the Company during the fourth quarter of
2006.

Total Number of
Shares (or Units)
Purchased

Average Price Paid
per Share (or Unit)
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

—

$

—

11,400

5,000

38.40

37.65

—

11,400

5,000

—

159,600

154,600

Period

Month #1 (October 1-
October 31, 2006)

Month #2 (November 1-
November 30, 2006)

Month #3 (December 1-
December 31, 2006)

48

Set  forth  below  is  a  line  graph  comparing  the  yearly  dollar  changes  in  the  cumulative  shareholder  return  on  the  Company’s
common stock against the cumulative total return of the S&P 500 Stock Index, NASDAQ Bank Index, and NASDAQ Composite
for the period of five fiscal years assuming the investment of $100.00 on December 31, 2001 and assuming the reinvestment of
dividends. The shareholder return shown on the graph below is not necessarily indicative of future performance.

Total Return Performance

▲
■
●
◆

Penns Woods Bancorp, Inc.
S&P 500
NASDAQ Composite
NASDAQ Bank Index

▲
◆

■
●

200

175

150

125

100

■

75

50

e
u
l
a
V
x
e
d
n
I

▲

◆

●
■

▲

◆

■
●

▲

◆

●
■

◆
▲

■
●

12/31/01

12/31/02

12/31/03

12/31/04

12/31/05

12/31/06

Index

12/31/01

12/31/02

12/31/03

12/31/04

12/31/05

12/31/06

Penns Woods Bancorp, Inc.
S&P 500
NASDAQ Composite
NASDAQ Bank Index

100.00
100.00
100.00
100.00

107.85
77.90
68.76
106.95

157.86
100.24
103.67
142.29

169.44
111.14
113.16
161.73

170.79
116.59
115.57
158.61

173.77
135.00
127.58
180.53

Period Ending

49

 
ITEM  6        SELECTED FINANCIAL DATA
The following table sets forth certain financial data as of and for each of the years in the five-year period ended December 31, 2006.

(In Thousands, Except Per Share Amounts)

2006

2005

2004

2003

2002

Consolidated Statement of

Income Data:

Interest income . . . . . . . . . . . . . . . . . . .  $
Interest expense . . . . . . . . . . . . . . . . . . . 
Net interest income . . . . . . . . . . . . . . . . 
Provision for loan losses . . . . . . . . . . . . 
Net interest income after provision

33,753
14,210
__________________
19,543
635
__________________

for loan losses. . . . . . . . . . . . . . . . . 
Non-interest income . . . . . . . . . . . . . . . 
Non-interest expense . . . . . . . . . . . . . . . 
Income before income taxes . . . . . . . . . 
Applicable income taxes . . . . . . . . . . . . 
Net income. . . . . . . . . . . . . . . . . . . . . . .  $

18,908
__________________
9,029
16,329
__________________
11,608
1,961
__________________
9,647
__________________
__________________

28,465
$
10,846
_________________ __________________ __________________ _________________
17,619
365
_________________ __________________ __________________ _________________

29,845 $
8,768
21,077
465

30,903 $
10,381
20,522
720

28,384 $
9,265
19,119
255

17,254
_________________ __________________ __________________ _________________
5,965
12,086
_________________ __________________ __________________ _________________
11,133
2,247
_________________ __________________ __________________ _________________
$
8,886
_________________ __________________ __________________ _________________
_________________ __________________ __________________ _________________

18,864
9,150
13,137
14,877
3,703
11,174 $

19,802
9,431
15,108
14,125
3,224
10,901 $

20,612
8,918
14,184
15,346
4,263
11,083 $

Consolidated Balance Sheet at

End of Period:

Total assets. . . . . . . . . . . . . . . . . . . . . . .  $
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 
Allowance for loan losses . . . . . . . . . . . 
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . 
Long-term debt — other . . . . . . . . . . . . 
Shareholders’ equity . . . . . . . . . . . . . . . 

Per Share Data:
Earnings per share - basic . . . . . . . . . . .  $
Earnings per share - diluted. . . . . . . . . . 
Cash dividends declared . . . . . . . . . . . . 
Book value . . . . . . . . . . . . . . . . . . . . . . . 
Number of shares outstanding, at

$

$

592,285
360,384
(4,185)
395,191
82,878
74,594

2.45
2.45
1.73
19.12

568,668 $
338,438
(3,679)
352,529
84,478
73,919

2.75 $
2.74
1.56
18.59

546,703 $
324,505
(3,338)
356,836
75,878
73,165

2.78 $
2.78
1.47
18.36

527,381 $
275,828
(3,069)
334,318
70,878
69,769

2.79 $
2.79
1.24
17.50

472,206
257,845
(2,953)
339,848
51,778
63,142

2.22
2.22
1.03
15.78

end of period. . . . . . . . . . . . . . . . . . 

3,900,742

3,975,787

3,985,832

3,985,872

3,637,595

Average number of shares

outstanding basic . . . . . . . . . . . . . . 

3,934,138

3,971,926

3,990,008

3,996,702

4,003,575

Selected financial ratios:

Return on average

shareholders’ equity . . . . . . . . . . 
Return on average total assets . . . . 

Net interest income to average

interest earning assets. . . . . . . . . . . 
Dividend payout ratio . . . . . . . . . . . . . . 
Average shareholders’ equity to

average total assets . . . . . . . . . . . . . 
Loans to deposits, at end of period . . . . 

12.93%
1.67%

4.06%
70.51%

12.92%
91.19%

14.54%
1.97%

4.29%
57.10%

13.56%
96.00%

15.49%
2.06%

4.32%
52.72%

13.30%
90.94%

16.60%
2.24%

4.36%
44.76%

13.51%
82.50%

15.00%
2.01%

4.25%
46.40%

13.39%
75.87%

Per share data and number of shares outstanding have been adjusted in each reporting period to give retroactive effect to a 10%
stock dividend issued October 30, 2003 and a six for five stock split issued November 18, 2005.

ITEM  7        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATION

The Management’s Discussion and Analysis of Financial Condition and Results of Operation in the Annual Report are incorporated
in their entirety by reference under this Item 7.
ITEM  7A       QUANTITATIVE AND QUALITATIVE DISCLOSURES 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

50

is monitored by management through selected interest rate risk measures produced internally.  Additional information and details
are  provided  in  the  Interest  Sensitivity  section  of  Item  7.  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  8        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The  Company’s  Consolidated  Financial  Statements  and  notes  thereto  contained  in  the Annual  Report  are  incorporated  in  their
entirety by reference under this Item 8.

ITEM  9        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

ACCOUNTING AND FINANCIAL DISCLOSURE

None.
ITEM 9A      CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation of the Company’s management, including the Company’s President
and  Chief  Executive  Officer  along  with  the  Company’s  Principal  Accounting  Officer  (the  Principal  Financial  Officer), has
evaluated  the  effectiveness  as  of  December  31, 2006  of  the  design  and  operation  of  the  Company’s  disclosure  controls  and
procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended
(the  “Exchange  Act”).    Based  upon  that  evaluation, the  Company’s  President  and  Chief  Executive  Officer  along  with  the
Company’s Principal Accounting Officer concluded that the Company’s disclosure controls and procedures were effective as of
December 31, 2006. 
There have been no material changes in the Company’s internal control over financial reporting during the fourth quarter of 2006
that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as
defined  in  Rules  13a-15(f)  and  15d-15(f)  under  the  Exchange Act.  The  Company’s  internal  control  over  financial  reporting  is
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles.
Because  of  its  inherent  limitations, internal  control  over  financial  reporting  may  not  prevent  or  detect  misstatements.  Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard No.
2), or  a  combination  of  significant  deficiencies, that  results  in  there  being  more  than  a  remote  likelihood  that  a  material
misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by management or
employees in the normal course by management or employees in the normal course of performing their assigned functions.
Management  assessed  the  effectiveness  of  the  Company’s  internal  control  over  financial  reporting  as  of  December  31, 2006.
Management’s assessment did not identify any material weaknesses in the Company’s internal control over financial reporting.
In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission  (COSO)  in  Internal  Control-Integrated  Framework.  Because  there  were  no  material  weaknesses  discovered,
management believes that, as of December 31, 2006, the Company’s internal control over financial reporting was effective. 
Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006, has
been audited by S.R. Snodgrass, A.C., an independent registered public accounting firm, as stated in its attestation report which is
included herein.

Date: March 9, 2007

Chief Executive Officer

Principal Accounting Officer
(Principal Financial Officer)

51

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Penns Woods Bancorp, Inc.

We  have  audited  management’s  assessment,  included  in  the  accompanying  Report  on  Management’s  Assessment  of
Internal  Control  Over  Financial  Reporting,  that  Penns  Woods  Bancorp,  Inc.  (the  “Company”)  maintained  effective
internal  control  over  financial  reporting  as  of  December  31,  2006,  based  on  criteria  established  in  “Internal  Control—
Integrated  Framework”  issued  by  the  Committee  of  Sponsoring  Organizations  of  the  Treadway  Commission  (COSO).
Penns Woods Bancorp, Inc.’s management is responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting.  Our responsibility is to express an
opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial
reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal  control  over  financial  reporting  was  maintained  in  all  material  respects.  Our  audit  included  obtaining  an
understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we considered necessary
in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability  of  financial  reporting  and  the  preparation  of  financial  statements  for  external  purposes  in  accordance  with
generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and
procedures  that  (1)  pertain  to  the  maintenance  of  records  that,  in  reasonable  detail,  accurately  and  fairly  reflect  the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and
that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

In  our  opinion,  management’s  assessment  that  Penns  Woods  Bancorp,  Inc.  maintained  effective  internal  control  over
financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria.  Also in
our  opinion,  Penns  Woods  Bancorp,  Inc.,  maintained,  in  all  material  respects,  effective  internal  control  over  financial
reporting as of December 31, 2006, based on the COSO criteria.

We  have  also  audited,  in  accordance  with  the  standards  of  the  Public  Company  Accounting  Oversight  Board  (United
States), the consolidated balance sheet of Penns Woods Bancorp, Inc. and subsidiaries as of December 31, 2006 and 2005,
and the related consolidated statement of income, changes in shareholders’ equity, and cash flows for each of the three years
in the period ended December 31, 2006, and our report dated March 9, 2007, expressed an unqualified opinion.

Wexford, Pennsylvania
March 9, 2007

52

ITEM  9B       OTHER INFORMATION
None.

PART III

ITEM 10        DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under the captions “”The Board of Directors and Committees,” “Election of Directors,” “Section 16(a)
Beneficial  Ownership  Reporting  Compliance,” “Principal  Officers  of  the  Corporation,” “Certain  Transactions,” and  “Audit
Committee Financial Expert”” in the Company’s Proxy Statement dated March 20, 2007 (the “Proxy Statement”) is incorporated
herein by reference.

ITEM 11        EXECUTIVE COMPENSATION
Information  appearing  under  the  captions  “Compensation  of  Directors,” “Compensation  Committee  Interlocks  and  Insider
Participation,” “Compensation  Discussion  and  Analysis,” “Compensation  Committee  and  Benefits  Committee  Report,” and
“Executive Compensation” in the Proxy Statement is incorporated herein by reference.

ITEM 12       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information appearing under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy
Statement  is incorporated herein by reference.

Equity Compensation Plan Information

Number of
securities to be
issued upon
exercise of
outstanding options,
warrants and rights
(a)

Weighted-
average
exercised of
outstanding options,
warrants and rights
(b)

11,972

—

11,972

$

$

37.41

—

37.41

Number of
securities remaining
available for future
issuance under
equity compensation
plans [excluding
securities reflected in
column (a)]
(c)

—

—

—

Plan Category
Equity compensation plans
approved by security holders
Equity compensation plans
not approved by security holders

Total

ITEM 13      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 
There have been no material transactions between the Company and the Bank, nor any material transactions proposed, with any
Director or Executive Officer of the Company and the Bank, or any associate of the foregoing persons.  The Company and the
Bank have had, and intend to continue to have, banking and financial transactions in the ordinary course of business with Directors
and  Officers  of  the  Company  and  the  Bank  and  their  associates  on  comparable  terms  and  with  similar  interest  rates  as  those
prevailing from time to time for other customers of the Company and the Bank.
Total loans outstanding from the Bank at December 31, 2006 to the Company’s and the Bank’s Officers and Directors as a group
and members of their immediate families and companies in which they had an ownership interest of 10% or more was $9,742,000
or approximately 13.06% of the total equity capital of the Company.  Loans to such persons were made in the ordinary course of
business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for
comparable  transactions  with  other  persons, and  did  not  involve  more  than  the  normal  risk  of  collectability  or  present  other
unfavorable features.  See also the information appearing in Note 14 to the Consolidated Financial Statements included elsewhere
in the Annual Report. 
In addition, the information appearing under the caption “Election of Directors” in the Proxy Statement is incorporated herein by
reference.
ITEM 14      PRINCIPAL ACCOUNTANT FEES AND SERVICES 
The information appearing in the Proxy Statement under the captions, “Audit Fees,” “Audit-Related Fees,” “Tax Fees,” “All Other
Fees,” and “Audit Committee Pre-Approval Policies and Procedures” is incorporated herein by reference.

53

PART IV
ITEM 15      EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Financial Statements

The following consolidated financial statements and reports are set forth in Item 8:

Report of Independent Auditors
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Changes in Shareholders’ Equity
Consolidated Statement of Cash Flows
Notes to the Consolidated Financial Statements

2. Financial Statement Schedules

Financial statement schedules are omitted because the required information is either not applicable, not required
or is shown in the respective financial statements or in the notes thereto.

(b) 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, 2005)

(3)

(ii)  Bylaws of the Registrant as presently in effect (incorporated by reference to Exhibit 3(ii) of the Registrant’s

(10)

(i)

Current Report on Form 8-K filed on June 17, 2005).
Employment  Agreement, dated  August, 1991, between  Jersey  Shore  State  Bank  and  Ronald  A.  Walko
(incorporated by reference to Exhibit 10.3 of the Registrant’s Registration Statement on form S-4, No. 333-
65821).*

(10)

(ii) Employment Agreement, dated May 31, 2005, between Jersey Shore State Bank and Thomas A. Donofrio

(incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed on June 3, 2005).*

(10)

(iii) Employee Severance Benefit Plan, dated May 30, 1996, for Ronald A. Walko (incorporated by reference to

Exhibit 10.4 of the Registrant’s Registration Statement on form S-4, No. 333-65821).*

(10)

(iv) Penns  Woods  Bancorp, Inc.  1998  Stock  Option  Plan  (incorporated  by  reference  to  Exhibit  10.1  of  the

Registrant’s Registration Statement on form S-4, No. 333-65821).*

(v) Form of First Amendment to the Jersey Shore State Bank Amendment and Restatement of the Director Fee
Agreement, Dated  as  of  October  1, 2004  (incorporated  by  reference  to  Exhibit  10.7  of  the  Registrant’s
Current Report on Form 8-K filed on June 29, 2006).

(vi) Consulting Agreement, dated July 18, 2005 between Hubert A. Valencik and Penns Woods Bancorp, Inc.
(incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on July 18, 2005).
Subsidiaries of the Registrant.
Consent of Independent Certified Public Accountants.

(i) Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.
(ii) Rule 13a-14(a)/Rule 15d-14(a) Certification of Principle Accounting Officer.
(i)
Section 1350  Certification of Chief Executive Officer.
(ii) Section 1350  Certification of Principle Accounting Officer.

(10)

(10)

(21)
(23)
(31)
(31)
(32)
(32)

*Denotes compensatory plan or arrangement.

EXHIBIT INDEX

(21)
(23)
(31)
(31)
(32)
(32)

Subsidiaries of the Registrant.
Consent of Independent Certified Public Accountants.

(i) Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.
(ii) Rule 13a-14(a)/Rule 15d-14(a) Certification of Principle Accounting Officer.
(i)
Section 1350  Certification of Chief Executive Officer.
(ii) Section 1350  Certification of Principle Accounting Officer.

54

Subsidiaries of the Registrant

State or Jurisdiction Under
the
Law of Which Organized

Jersey Shore State Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Pennsylvania

Woods Real Estate Development Company, Inc. . . . . . . . . . . . . . . . . . . . .  Pennsylvania

Woods Investment Company, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Delaware

The M Group, Inc. (Subsidiary of the Bank) . . . . . . . . . . . . . . . . . . . . . . .  Pennsylvania 

Exhibit 21

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements (Nos. 333-134585 and 333-58682) of Penns Woods
Bancorp, Inc. on Form S-8 of our reports dated March 9, 2007 relating to our audits of the consolidated financial statements and
internal controls over financial reporting, which appear in the Annual Report on Form 10-K of Penns Woods Bancorp, Inc. for the
year ended December 31, 2006.

Wexford, PA
March 13, 2007

55

Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer

Exhibit 31(i)

I, Ronald A. Walko, Chief Executive Officer of Penns Woods Bancorp, Inc. (the “Company”), certify that:

1 .

I have reviewed this annual report on Form 10-K of the Company;

2. Based  on  my  knowledge,

state  a  material  fact  necessary  to  make  the  statements  made,
such statements were made, not misleading with respect to the period covered by this report;

this  report  does  not  contain  any  untrue  statement  of  a  material  fact  or  omit  to
in  light  of  the  circumstances  under  which

3. Based  on  my  knowledge,

the  financial  statements, and  other  financial  information  included  in  this  report,
results  of  operations  and  cash  flows  of  the

fairly  present  in  all  material  respects  the  financial  condition,
Company as of, and for, the periods presented in this report;

4. The  Company’s  other  certifying  officer  and  I  are  responsible  for  establishing  and  maintaining  disclosure
controls  and  procedures  (as  defined  in  Exchange  Act  Rules  13a-15(e)  and  15d-15(e), and  internal  control
over  financial  reporting  (as  defined 
the  Company
and have:

in  Exchange  Act  Rules  13a-15(f)  and  15d-15(f))  for 

a. designed 

such  disclosure  controls  and  procedures,

procedures  to  be  designed  under  our  supervision,
is  made  known 
the  Company,
those entities, particularly during the period in which this report is being prepared;

its  consolidated  subsidiaries,

including 

or  caused 

such  disclosure  controls  and
to  ensure  that  material  information  relating  to
to  us  by  others  within 

b. designed  such 

internal  control  over  financial  reporting, or  caused  such 
to  provide 

to  be  designed  under  our  supervision,

financial 
regarding 
external purposes in accordance with generally accepted accounting principles; 

reporting 
the  reliability  of  financial  reporting  and 

internal  control  over
reasonable  assurance 
the  preparation  of  financial  statements  for 

c.

the  effectiveness  of 

evaluated 
the  Company’s  disclosure  controls  and  procedures  and  presented
in  this  report  our  conclusions  about  the  effectiveness  of  the  disclosure  controls  and  procedures,
as of the end of the period covered by this report based on such evaluation; and 

d. disclosed  in  this  report  any  change  in  the  registrant’s  internal  control  over  financial  reporting
is 

that  occurred  during 
reasonably likely to materially affect, the registrant’s internal control over financial reporting;

the  registrant’s  fourth  fiscal  quarter 

that  has  materially  affected, or 

5. The  Company’s  other  certifying  officer  and  I  have  disclosed, based  on  our  most  recent  evaluation  of
the  audit  committee  of

the  Company’s  auditors  and 

reporting,

financial 

to 

internal  control  over 
Company’s Board of Directors:

a.

b.

all  significant  deficiencies  and  material  weakness  in  the  design  or  operation  of  internal  control
over  financial  reporting  which  are  reasonably 
the  Company’s  ability
likely 
to record, process, summarize and report financial information;

to  adversely  affect 

any  fraud, whether  or  not  material,
significant role in the Company’s internal control over financial reporting.

that  involves  management  or  other  employees  who  have  a

Date: March 13, 2007

Ronald A. Walko

Chief Executive Officer

56

Rule 13a-14(a)/Rule 15d-14(a) Certification of Principal Accounting Officer

Exhibit 31(ii)

I, Brian L. Knepp, Principal Accounting Officer of Penns Woods Bancorp, Inc. (the “Company”), certify that:

1.

I have reviewed this annual report on Form 10-K of the Company;

2. Based  on  my  knowledge,

state  a  material  fact  necessary  to  make  the  statements  made,
such statements were made, not misleading with respect to the period covered by this report;

this  report  does  not  contain  any  untrue  statement  of  a  material  fact  or  omit  to
in  light  of  the  circumstances  under  which

3. Based  on  my  knowledge,

the  financial  statements, and  other  financial  information  included  in  this  report,
results  of  operations  and  cash  flows  of  the

fairly  present  in  all  material  respects  the  financial  condition,
Company as of, and for, the periods presented in this report;

4. The  Company’s  other  certifying  officer  and  I  are  responsible  for  establishing  and  maintaining  disclosure
controls  and  procedures  (as  defined  in  Exchange  Act  Rules  13a-15(e)  and  15d-15(e), and  internal  control
over  financial  reporting  (as  defined  in  Exchange  Act  Rules  13a-15(f)  and  15d-15(f))  for  the  Company  and
have:

a. designed 

such  disclosure  controls  and  procedures,

procedures  to  be  designed  under  our  supervision,
is  made  known 
the  Company,
those entities, particularly during the period in which this report is being prepared;

its  consolidated  subsidiaries,

including 

or  caused 

such  disclosure  controls  and
to  ensure  that  material  information  relating  to 
to  us  by  others  within

b. designed  such 

internal  control  over  financial  reporting, or  caused  such 
to  provide 

to  be  designed  under  our  supervision,

financial 
regarding 
external purposes in accordance with generally accepted accounting principles; 

reporting 
the  reliability  of  financial  reporting  and 

internal  control  over
reasonable  assurance
the  preparation  of  financial  statements  for

e.

the  effectiveness  of 

evaluated 
the  Company’s  disclosure  controls  and  procedures  and  presented 
in  this  report  our  conclusions  about  the  effectiveness  of  the  disclosure  controls  and  procedures,
as of the end of the period covered by this report based on such evaluation; and 

f. disclosed  in  this  report  any  change  in  the  registrant’s  internal  control  over  financial  reporting
is

that  occurred  during 
reasonably likely to materially affect, the registrant’s internal control over financial reporting;

the  registrant’s  fourth  fiscal  quarter 

that  has  materially  affected, or 

5. The  Company’s  other  certifying  officer  and  I  have  disclosed, based  on  our  most  recent  evaluation  of 
the  audit  committee  of

the  Company’s  auditors  and 

reporting,

financial 

to 

internal  control  over 
Company’s Board of Directors:

a.

b.

all  significant  deficiencies  and  material  weakness  in  the  design  or  operation  of  internal  control
over  financial  reporting  which  are  reasonably 
the  Company’s  ability
likely 
to record, process, summarize and report financial information;

to  adversely  affect 

any  fraud, whether  or  not  material,
significant role in the Company’s internal control over financial reporting.

that  involves  management  or  other  employees  who  have  a

Date: March 13, 2007

Principal Accounting Officer
(Principal Financial Officer)

57

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Exhibit 32 (i)

In  connection  with  the  Annual  Report  of  Penns  Woods  Bancorp, Inc.  (the  “Company”)  on  Form  10-K  for  the  period  ended
December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ronald A. Walko,
Chief Executive Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:

(1)

(2)

the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and

the information contained in the Report fairly presents, in all material respects, the financial condition and result
of operations of the Company.

Ronald A. Walko
Chief Executive Officer

March 13, 2007

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Exhibit 32 (ii)

In  connection  with  the  Annual  Report  of  Penns  Woods  Bancorp, Inc.  (the  “Company”)  on  Form  10-K  for  the  period  ended
December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brian L. Knepp,
Vice President of Finance, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:

(1)

(2)

the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and

the information contained in the Report fairly presents, in all material respects, the financial condition and result
of operations of the Company.

Brian L. Knepp
Principal Accounting Officer

March 13, 2007

58

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.

March 13, 2007

PENNS WOODS BANCORP, INC.

BY: RONALD A. WALKO, President & Chief Executive Officer

Pursuant  to  the  requirements  of  the  Securities  and  Exchange Act  of  1934, this  report  has  been  signed  below  by  the  following
persons on behalf of the Registrant and in the capacities and on the dates indicated:

Ronald A. Walko, President & Chief Executive 
Officer and Director (Principal Executive Officer)

March 13, 2007

Brian L. Knepp, Principal Accounting Officer

March 13, 2007

Lynn S. Bowes, Director

March 13, 2007

Michael J. Casale, Jr., Director

March 13, 2007

H. Thomas Davis, Jr., Director

March 13, 2007

James M. Furey II, Director

Leroy H. Keiler III, Director

March 13, 2007

March 13, 2007

Jay H. McCormick, Director

March 13, 2007

R. Edward Nestlerode, Jr., Director

March 13, 2007

James E. Plummer, Director

March 13, 2007

William H. Rockey, Sr. Vice President &

March 13, 2007

Director

Hubert A. Valencik, Director

March 13, 2007

59

Management & Board of Directors
(Penns Woods Bancorp, Inc. & Jersey Shore State Bank)

Officers
Ronald A. Walko . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . President & Chief Executive Officer of 
Penns Woods Bancorp, Inc. & Jersey Shore State Bank
Thomas A. Donofrio. . . . . . . . . . . . . . . . . . . . . . . Executive Vice President & Chief Administrative
Officer of Jersey Shore State Bank
William H. Rockey . . . . . . . . . . . . . . . Senior Vice President & Secretary of Penns Woods Bancorp, Inc.
& Jersey Shore State Bank
Ann M. Riles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior Vice President & Chief Credit Officer
Paul R. Mamolen . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior Vice President & Chief Operating Officer of
The Comprehensive Financial Group
Robert J. Glunk . . . . . . . . . . . . . . . . . Vice President of Branch Administration & Business Development
Stephen M. Tasselli . . . . . . . . . . . . . . . . . . . . . . . . . Senior Vice President & Commercial Loan Manager
G. David Gundy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior Vice President
William P. Young, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EDP Systems Officer
Leon T. Koskie . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President & Loan Officer
Gerald J. Seman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President & Mortgage Officer
Brian S. Bowser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President/Commercial Lending
Leslie K. Benshoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President & Cashier
John R. Frey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President & Chief Compliance Officer
Craig A. Russell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President & Branch Manager
David R. Palski . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President & Branch Manager
Marilyn R. Neyhart. . . . . . . . . . . . . . . . Assistant Secretary & Vice President Loan Operations/Collateral  
Larry G. Garverick . . . . . . . . . . . . . . . . . . . . . . Vice President & Loan Documentation & Review Officer
William V. Mauck . . . . . . . . . . . . . . . . . . . Vice President/Information Technology & Deposit Operations
Michael A. Musto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President & Commercial Loan Officer
Brian L. Knepp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President of Finance & Assistant Secretary
Janine E. Packer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Controller
Tammy L. Gunsallus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President & Branch Manager
Registered Representatives For The Comprehensive Financial Group
Sonya L. Barclay. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Williamsport Branch
Directors
Lynn S. Bowes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Farmer
Michael J. Casale, Jr.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Attorney, Casale & Bonner P.C.
H. Thomas Davis, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . Senior Vice President, Franklin Insurance Company
James M. Furey, II . . . . . . . . . . . . . . . . . . . . . . . . . President & Owner, Eastern Wood Products Company
Leroy H. Keiler, III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Attorney, Leroy H. Keiler, III
Jay H. McCormick . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . President & Owner, J.H.M. Enterprises, Inc.
R. Edward Nestlerode, Jr. . . . . . . . . . . . . . . . . . . . . . . Vice President of Nestlerode Contracting Co., Inc.
James E. Plummer . . . . . . . . . . . . . . . . . . . . . . . Retired, Former President of Lock Haven Savings Bank;
Secretary, Jersey Shore State Bank
William H. Rockey.. . . . . . . . . . . . . . . . . . . . . . . . .  Senior Vice President of Penns Woods Bancorp, Inc.
& Jersey Shore State Bank 
Ronald A. Walko . . . . . . . . . . . . . . . . . . . . . . . . . . . President & Chief Executive Officer of Penns Woods
Bancorp, Inc. & Jersey Shore State Bank
Hubert A. Valencik . . . . . . . . . . . . Retired, Former Senior Vice Presicent of Penns Woods Bancorp, Inc.;
Former Senior Vice President & Chief Operations Officer of
Jersey Shore State Bank

Williamsport Area Advisory Directors
Robert H. Kauffeld . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Architect
James T. Wolyniec . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . President, Wolyniec Construction, Inc.
Honorary Directors
Phillip H. Bower
Raymond D. Eck
Joseph B. Gehret, Sr.

Howard M. Thompson
Allan W. Lugg
William S. Frazier

60

MAIN OFFICE
Tammy L. Gunsallus, Manager
115 South Main Street, Jersey Shore, PA  17740
Phone (570)-398-2213
Monday & Tuesday 8:30 am to 4:30 pm
Wednesday 8:30 am to 1:00 pm
Thursday 8:30 am to 5:00 pm
Friday 8:30 am to 6:00 pm
Saturday Drive-In Only 8:30 am to 12:00 pm

BRIDGE STREET OFFICE
Tammy L Gunsallus, Manager
112 Bridge Street, Jersey Shore, PA  17740
Phone (570)-398-4400
Monday and Tuesday 8:30 am to 4:30 pm
Wednesday 8:30 am to 4:30 pm 
Thursday 8:30 am to 5:00 pm
Friday 8:30 am to 6:00 pm
Saturday 8:30 am to 12:00 pm

DUBOISTOWN OFFICE
Rebecca L. Frank, Assistant Manager
2675 Euclid Avenue, Williamsport, PA  17702
Phone (570)-326-3731
Monday & Tuesday 8:30 am to 4:30 pm
Wednesday 8:30 am to 1:00 pm
Thursday 8:30 am to 5:00 pm
Friday 8:30 am to 6:00 pm
Saturday 8:30 am to 12:00 pm
Drive-up ATM Available

WILLIAMSPORT OFFICE
David R. Palski, Manager
300 Market Street, Williamsport, PA  17701
Phone (570)-322-1111
Toll-Free within Pennsylvania 1-888-412-5772
Monday & Tuesday 8:30 am to 4:30 pm
Wednesday Lobby 8:30 am to 1:00 pm
Wednesday Drive-In open until 4:30 pm
Thursday 8:30 am to 5:00 pm
Friday 8:30 am to 6:00 pm
Saturday 8:30 am to 12:00 pm
Walk-up ATM available

MONTGOMERY OFFICE
Beverly S. Rupert, Manager
9094 Rt. 405 Highway, Montgomery, PA  17752
Phone (570)-547-6642
Monday & Tuesday 8:30 am to 4:30 pm
Wednesday 8:30 am to 1:00 pm
Thursday 8:30 am to 5:00 pm
Friday 8:30 am to 6:00 pm
Saturday 8:30 am to 12:00 pm

61

LOCK HAVEN OFFICE
Craig A. Russell, Manager
4 West Main Street, Lock Haven, PA  17745
Phone (570)-748-7785
Monday & Tuesday 8:30 am to 4:30 pm
Wednesday 8:30 am to 1:00 pm
Thursday 8:30 am to 5:00 pm
Friday 8:30 am to 6:00 pm
Saturday 8:30 am to 12:00 pm
Drive-up ATM available

MILL HALL OFFICE
(Inside WAL-MART)
Kristin S. McCauley, Manager 
173 Hogan Boulevard, Mill Hall, PA  17751
Phone (570)-748-8680
Monday thru Wednesday 9:00 am to 6:00 pm
Thursday & Friday 9:00 am to 8:00 pm
Saturday 9:00 am to 4:00 pm
Walk-up ATM available

SPRING MILLS OFFICE
Bonnie H. Ripka, Manager
3635 Penns Valley Road, Spring Mills, PA 16875
Phone (814)-422-8836
Monday & Tuesday  8:30 am to 4:30 pm
Wednesday 8:30 am to 4:30 pm
Thursday 8:30 am to 5:00 pm
Friday 8:30 am to 6:00 pm
Saturday 8:30 am to 12:00 pm
Drive-up ATM available

CENTRE HALL OFFICE
Bonnie H. Ripka, Manager
2842 Earlystown Road, Centre Hall, PA 16828
Phone (814)-364-1600
Monday & Tuesday 8:30 am to 4:30 pm
Wednesday 8:30 am to 1:00 pm
Thursday 8:30 am to 5:00 pm
Friday 8:30 am to 6:00 pm
Saturday 8:30 am to 12:00 pm
Walk-up ATM available

ZION OFFICE
William H. Rockey, Manager
100 Cobblestone Road, Bellefonte, PA 16823
Phone (814)-383-2700
Monday & Tuesday 8:30 am to 4:30 pm
Wednesday 8:30 am to 1:00 pm
Thursday 8:30 am to 5:00 pm
Friday 8:30 am to 6:00 pm
Saturday 8:30 am to 12:00 pm
Drive-up ATM available

62

STATE COLLEGE OFFICE
Patricia K. Stauffer, Manager
2050 North Atherton Street, State College, PA 16803
Phone (814)-235-1710
Monday thru Wednesday 8:30 am to 4:30 pm
Thursday 8:30 am to 5:00 pm
Friday 8:30 am to 6:00 pm
Saturday 8:30 am to 12:00 pm
Drive-up ATM available

STATE COLLEGE OFFICE
(Inside WAL-MART)
Patricia K. Stauffer, Manager
1665 North Atherton Place, State College, PA 16803
Phone (814)-272-4788
Monday thru Friday 9:30 am to 6:30 pm
Saturday 9:30 am to 2:30 pm
Walk-up ATM available

MONTOURSVILLE OFFICE
Michelle M. Lawson, Manager
820 Broad Street, Montoursville, PA 17754
Phone (570)-368-1200
Monday thru Wednesday 8:30 am to 4:30 pm
Thursday 8:30 am to 5:00 pm
Friday 8:30 am to 6:00 pm
Saturday 8:30 am to 12:00 pm
Drive-up ATM available

THE M GROUP, INC.
D/B/A THE COMPREHENSIVE FINANCIAL GROUP
Paul R. Mamolen, COO
705 Washington Boulevard, Williamsport, PA 17701
Phone (570)-322-4627

INTERNET BANKING
www.jssb.com

TELEPHONE BANKING
Phone 570-320-2029 or 1-877-520-2265

Member of the Federal Deposit Insurance Corporation

63

64

Jersey Shore State Bank Locations

BUSINESS OF PENNS WOODS BANCORP, INC.

Penns  Woods  Bancorp, Inc.  is  a  bank  holding  company  incorporated  on

January 7, 1983, under the Pennsylvania Business Corporation Law.

Jersey  Shore  State  Bank, the  principal  subsidiary  of  Penns Woods  Bancorp,

Inc., is  a  full-service  commercial  bank  offering  a  wide  range  of  commercial

and consumer banking services to individual, business, public, and institutional

customers.

Currently, Jersey  Shore  State  Bank  operates  13  banking  offices  in  Jersey

Shore, Duboistown, Williamsport, Montoursville, Montgomery, Mill  Hall,

Lock Haven, Spring Mills, Centre Hall, State College and Zion.

The M Group Inc., D/B/A The Comprehensive Financial Group, operates as a

subsidiary  of  Jersey  Shore  State  Bank.  The  M  Group  offers  insurance  and

securities brokerage services through ING Financial Partners, Inc., a registered

broker dealer.

MISSION STATEMENT

Jersey  Shore  State  Bank  is  a  locally  owned, independent, community  bank

with emphasis on servicing the needs of consumers and small to medium size

businesses  at  a  profit,

thereby  enhancing  shareholder  value  through  a

professionally-trained and dedicated staff with sound financial resources.  We

are committed to community leadership and growth.

• WILLIAMSPORT• DUBOISTOWN JERSEYSHORE�• MONTGOMERY• MONTGOMERYLOCKHAVEN• MILL HALL• CENTRE HALL• SPRING MILLS• STATE COLLEGELYCOMING COUNTYCLINTON COUNTYCENTRE COUNTY•• ZION• MONTOURSVILLE• MONTOURSVILLEPenns Woods Bancorp, Inc.
P.O. Box 967
300 Market Street
Williamsport, PA 17703-0967