Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C.  20549**

 

**FORM 10-Q**

 

**x****      Quarterly Report pursuant toSection 13 or 15 (d) of the Securities Exchange Act of 1934**

 

**for the Quarterly Period Ended June 30, 2010.**

 

**o****         Transition reportpursuant to Section 13 or 15 (d) of the Exchange Act**

 

**for the Transition Period from                              to                               .**

 

**No. 0-17077**

**(Commission File Number)**

 

**PENNS WOODS BANCORP, INC.**

(Exact name of Registrant as specified in its charter)

 

| **PENNSYLVANIA**                | ** ** | **23-2226454**      |
|---------------------------------|------------|---------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer    |
| incorporation or organization)  |       | Identification No.) |

 

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

 

**(570) 322-1111**

Registrant’s telephone number, including area code

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. YES  x  NO  o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files).  YES  o  NO  o

 

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

 

| Large accelerated filer o |   | Accelerated filer x       |
|---------------------------|--------|---------------------------|
|                      |   |                      |
| Non-accelerated filer o   |   | Small reporting company o |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  YES  o  NO  x

 

OnAugust 5, 2010 there were 3,833,849 shares of the Registrant’s common stockoutstanding.

 

 

 

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Table of Contents

 

**PENNS WOODS BANCORP, INC.**

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

 
| ** **                                                                                                                        | ** **                                                                                     | **Page**   |
|-----------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                        | ** **                                                                                     | **Number** |
| ** **                                                                                                                        | ** **                                                                                     |       |
| **Part I**                                                                                                                   | **Financial  Information**                                                                     |       |
| ** **                                                                                                                        | ** **                                                                                     |       |
| **Item  1.**                                                                                                                      | **Financial  Statements**                                                                      |       |
| ** **                                                                                                                        | ** **                                                                                     |       |
| Consolidated Balance Sheet  (unaudited) as of June 30, 2010 and December 31, 2009                                       | 3                                                                                              |
|                                                                                                                              |                                                                                           |
| Consolidated  Statement of Income (unaudited) for the Three and Six Months ended  June 30, 2010 and 2009                     | 4                                                                                              |
|                                                                                                                              |                                                                                           |
| Consolidated  Statement of Changes in Shareholders’ Equity (unaudited) for the Six Months  ended June 30, 2010 and 2009 | 5                                                                                              |
|                                                                                                                              |                                                                                           |
| Consolidated  Statement of Comprehensive Income (unaudited) for the Three and Six Months  ended June 30, 2010 and 2009       | 5                                                                                              |
|                                                                                                                              |                                                                                           |
| Consolidated  Statement of Cash Flows (unaudited) for the Six Months ended June 30,  2010 and 2009                           | 6                                                                                              |
|                                                                                                                              |                                                                                           |
| Notes to  Consolidated Financial Statements (unaudited)                                                                           | 7                                                                                              |
|                                                                                                                              |                                                                                           |
| **Item 2.**                                                                                                                       | **Management’s  Discussion and Analysis of Financial Conditionand Results of Operations** | 22         |
| **Item 3.**                                                                                                                       | **Quantitative  and Qualitative Disclosures About Market Risk**                                | 40         |
| **Item 4.**                                                                                                                       | **Controls and  Procedures**                                                                   | 40         |
| ** **                                                                                                                        | ** **                                                                                     |       |
| **Part II**                                                                                                                  | **Other Information**                                                                          |       |
| ** **                                                                                                                        | ** **                                                                                     |       |
| **Item 1.**                                                                                                                       | **Legal Proceedings**                                                                          | 41         |
| **Item 1A.**                                                                                                                      | **Risk Factors**                                                                               | 41         |
| **Item 2.**                                                                                                                       | **Unregistered  Sales of Equity Securities and Use of Proceeds**                               | 41         |
| **Item 3.**                                                                                                                       | **Defaults  Upon Senior Securities**                                                           | 41         |
| **Item 4.**                                                                                                                       | **(Removed and  Reserved)**                                                                    | 41         |
| **Item 5.**                                                                                                                       | **Other Information**                                                                          | 41         |
| **Item 6.**                                                                                                                       | **Exhibits**                                                                                   | 42         |
| **Signatures**                                                                                                                    | 43                                                                                             |
| **Exhibit Index  and Exhibits**                                                                                              | 44                                                                                             |

 

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**Part I.  FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**PENNSWOODS BANCORP, INC.**

**CONSOLIDATED BALANCE SHEET**

**(UNAUDITED)**

 
| ** **                                                                                          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(In  Thousands, Except Share Data)**                                                              | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| ** **                                                                                          |       |              |       |                  |       |
| **ASSETS:**                                                                                         |       |              |       |                  |       |
| Noninterest-bearing balances                                                                        |       | $                 | 12,378     |                  | $          | 13,760 |   |
| Interest-bearing deposits in other financial  institutions                                          |       | 11,963            |       | 28                    |       |
| Total cash and cash equivalents                                                                     |       | 24,341            |       | 13,788                |       |
|                                                                                                |       |              |       |                  |       |
| Investment securities, available for sale, at fair  value                                           |       | 225,625           |       | 208,768               |       |
| Investment securities held to maturity (fair value  of $83 and $108)                                |       | 82                |       | 107                   |       |
| Loans held for sale                                                                                 |       | 5,584             |       | 4,063                 |       |
| Loans                                                                                               |       | 411,960           |       | 405,529               |       |
| Less: Allowance for loan losses                                                                     |       | 5,047             |       | 4,657                 |       |
| Loans, net                                                                                          |       | 406,913           |       | 400,872               |       |
| Premises and equipment, net                                                                         |       | 7,966             |       | 7,988                 |       |
| Accrued interest receivable                                                                         |       | 3,673             |       | 3,523                 |       |
| Bank-owned life insurance                                                                           |       | 15,188            |       | 14,942                |       |
| Investment in limited partnerships                                                                  |       | 4,615             |       | 4,898                 |       |
| Goodwill                                                                                            |       | 3,032             |       | 3,032                 |       |
| Deferred tax asset                                                                                  |       | 8,399             |       | 9,491                 |       |
| Other assets                                                                                        |       | 4,873             |       | 4,732                 |       |
| **TOTAL ASSETS**                                                                                    |       | $                 | 710,291    |                  | $          | 676,204 |   |
|                                                                                                |       |              |       |                  |       |
| **LIABILITIES:**                                                                                    |       |              |       |                  |       |
| Interest-bearing deposits                                                                           |       | $                 | 442,002    |                  | $          | 417,388 |   |
| Noninterest-bearing deposits                                                                        |       | 87,979            |       | 79,899                |       |
| Total deposits                                                                                      |       | 529,981           |       | 497,287               |       |
|                                                                                                |       |              |       |                  |       |
| Short-term borrowings                                                                               |       | 14,209            |       | 18,354                |       |
| Long-term borrowings, Federal Home Loan Bank (FHLB)                                                 |       | 86,778            |       | 86,778                |       |
| Accrued interest payable                                                                            |       | 900               |       | 1,073                 |       |
| Other liabilities                                                                                   |       | 7,820             |       | 5,796                 |       |
| TOTAL LIABILITIES                                                                                   |       | 639,688           |       | 609,288               |       |
|                                                                                                |       |              |       |                  |       |
| SHAREHOLDERS’ EQUITY                                                                           |       |              |       |                  |       |
| Common stock, par value $8.33, 10,000,000 shares  authorized; 4,014,272 and 4,011,985 shares issued |       | 33,452            |       | 33,443                |       |
| Additional paid-in capital                                                                          |       | 18,032            |       | 18,008                |       |
| Retained earnings                                                                                   |       | 28,910            |       | 27,218                |       |
| Accumulated other comprehensive loss:                                                               |       |              |       |                  |       |
| Net unrealized loss on available for sale  securities                                               |       | (1,561            | )          | (3,569                | )          |
| Defined benefit plan                                                                                |       | (1,920            | )          | (1,920                | )          |
| Less: Treasury stock at cost, 180,596 and 179,028  shares                                           |       | (6,310            | )          | (6,264                | )          |
| TOTAL SHAREHOLDERS’ EQUITY                                                                     |       | 70,603            |       | 66,916                |       |
| **TOTAL LIABILITIES AND  SHAREHOLDERS’ EQUITY**                                                |       | $                 | 710,291    |                  | $          | 676,204 |   |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

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**PENNSWOODS BANCORP, INC.**

**CONSOLIDATED STATEMENT OF INCOME**

**(UNAUDITED)**

 
| ** **                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                              | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **(In  Thousands, Except Per Share Data)**              | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                              | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **INTEREST AND DIVIDEND INCOME:**                       |       |                   |       |                 |       |   |   |   |   |
| Loans  including fees                                   |       | $                      | 6,398      |                 | $          | 6,349 |   | $ | 12,728 |   | $ | 12,568 |   |
| Investment  securities:                                 |       |                   |       |                 |       |   |   |   |   |
| Taxable                                                 |       | 1,405                  |       | 1,374                |       | 2,754 |   | 2,737 |   |
| Tax-exempt                                              |       | 1,270                  |       | 1,249                |       | 2,528 |   | 2,495 |   |
| Dividend  and other interest income                     |       | 51                     |       | 41                   |       | 103 |   | 130 |   |
| TOTAL  INTEREST AND DIVIDEND INCOME                     |       | 9,124                  |       | 9,013                |       | 18,113 |   | 17,930 |   |
|                                                    |       |                   |       |                 |       |   |   |   |   |
| **INTEREST EXPENSE:**                                   |       |                   |       |                 |       |   |   |   |   |
| Deposits                                                |       | 1,551                  |       | 2,204                |       | 3,261 |   | 4,209 |   |
| Short-term  borrowings                                  |       | 56                     |       | 78                   |       | 120 |   | 236 |   |
| Long-term  borrowings, FHLB                             |       | 927                    |       | 926                  |       | 1,844 |   | 1,843 |   |
| TOTAL  INTEREST EXPENSE                                 |       | 2,534                  |       | 3,208                |       | 5,225 |   | 6,288 |   |
|                                                    |       |                   |       |                 |       |   |   |   |   |
| **NET INTEREST INCOME**                                 |       | 6,590                  |       | 5,805                |       | 12,888 |   | 11,642 |   |
|                                                    |       |                   |       |                 |       |   |   |   |   |
| PROVISION  FOR LOAN LOSSES                              |       | 400                    |       | 186                  |       | 700 |   | 312 |   |
|                                                    |       |                   |       |                 |       |   |   |   |   |
| **NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES** |       | 6,190                  |       | 5,619                |       | 12,188 |   | 11,330 |   |
|                                                    |       |                   |       |                 |       |   |   |   |   |
| **NON-INTEREST INCOME:**                                |       |                   |       |                 |       |   |   |   |   |
| Service  charges                                        |       | 537                    |       | 541                  |       | 1,047 |   | 1,066 |   |
| Securities  gains (losses), net                         |       | 56                     |       | (2,086               | )          | 53 |   | (4,455 | ) |
| Earnings  on bank-owned life insurance                  |       | 128                    |       | 112                  |       | 299 |   | 274 |   |
| Gain  on sale of loans                                  |       | 330                    |       | 103                  |       | 512 |   | 221 |   |
| Insurance  commissions                                  |       | 273                    |       | 347                  |       | 537 |   | 701 |   |
| Other                                                   |       | 684                    |       | 591                  |       | 1,256 |   | 1,025 |   |
| TOTAL  NON-INTEREST INCOME                              |       | 2,008                  |       | (392                 | )          | 3,704 |   | (1,168 | ) |
|                                                    |       |                   |       |                 |       |   |   |   |   |
| **NON-INTEREST EXPENSE:**                               |       |                   |       |                 |       |   |   |   |   |
| Salaries  and employee benefits                         |       | 2,615                  |       | 2,595                |       | 5,352 |   | 5,077 |   |
| Occupancy,  net                                         |       | 313                    |       | 318                  |       | 644 |   | 657 |   |
| Furniture  and equipment                                |       | 322                    |       | 306                  |       | 626 |   | 613 |   |
| Pennsylvania  shares tax                                |       | 169                    |       | 172                  |       | 338 |   | 343 |   |
| Amortization  of investment in limited partnerships     |       | 141                    |       | 141                  |       | 283 |   | 283 |   |
| Other                                                   |       | 1,430                  |       | 1,353                |       | 2,733 |   | 2,557 |   |
| TOTAL  NON-INTEREST EXPENSE                             |       | 4,990                  |       | 4,885                |       | 9,976 |   | 9,530 |   |
|                                                    |       |                   |       |                 |       |   |   |   |   |
| **INCOME BEFORE INCOME TAX PROVISION (BENEFIT)**        |       | 3,208                  |       | 342                  |       | 5,916 |   | 632 |   |
| INCOME  TAX PROVISION (BENEFIT)                         |       | 436                    |       | (490                 | )          | 696 |   | (1,039 | ) |
| **NET INCOME**                                          |       | $                      | 2,772      |                 | $          | 832 |   | $ | 5,220 |   | $ | 1,671 |   |
|                                                    |       |                   |       |                 |       |   |   |   |   |
| **NET INCOME PER SHARE - BASIC**                        |       | $                      | 0.72       |                 | $          | 0.22 |   | $ | 1.36 |   | $ | 0.44 |   |
|                                                    |       |                   |       |                 |       |   |   |   |   |
| **NET INCOME PER SHARE - DILUTED**                      |       | $                      | 0.72       |                 | $          | 0.22 |   | $ | 1.36 |   | $ | 0.44 |   |
|                                                    |       |                   |       |                 |       |   |   |   |   |
| **WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC**         |       | 3,834,164              |       | 3,832,520            |       | 3,834,230 |   | 3,832,135 |   |
|                                                    |       |                   |       |                 |       |   |   |   |   |
| **WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED**       |       | 3,834,291              |       | 3,832,596            |       | 3,834,370 |   | 3,832,173 |   |
|                                                    |       |                   |       |                 |       |   |   |   |   |
| **DIVIDENDS PER SHARE**                                 |       | $                      | 0.46       |                 | $          | 0.46 |   | $ | 0.92 |   | $ | 0.92 |   |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

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**PENNSWOODS BANCORP, INC.**

**CONSOLIDATED STATEMENT OF CHANGES INSHAREHOLDERS’ EQUITY**

**(UNAUDITED)**

 
| ** **                                             | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **        | ** ** | **ACCUMULATED**    | ** ** | ** **             | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|-------------------|------------|--------------------|------------|------------------------|------------|------------|------------|
| ** **                                             | ** ** | **COMMON** | ** ** | **ADDITIONAL** | ** ** | ** **   | ** ** | **OTHER**         | ** ** | ** **         | ** ** | **TOTAL**              | ** ** |
| ** **                                             | ** ** | **STOCK**  | ** ** | **PAID-IN**    | ** ** | **RETAINED** | ** ** | **COMPREHENSIVE** | ** ** | **TREASURY**       | ** ** | **SHAREHOLDERS’** | ** ** |
| **(In  Thousands, Except Per Share Data)**             | ** ** | **SHARES** | ** ** | **AMOUNT**     | ** ** | **CAPITAL**  | ** ** | **EARNINGS**      | ** ** | **INCOME  (LOSS)** | ** ** | **STOCK**              | ** ** | **EQUITY** | ** ** |
| Balance,  December 31, 2008                       |       | 4,010,528  |       | $              | 33,421     |         | $          | 17,959            |       | $                  | 28,177     |                   | $          | (12,266    | )          | $ | (6,264 | ) | $ | 61,027 |   |
|                                                   |       |       |       |           |       |         |       |              |       |               |       |                   |       |       |       |
| Comprehensive  income:                                 |       |       |       |           |       |         |       |              |       |               |       |                   |       |       |       |
| Net  income                                            |       |       |       |           |       |         |       | 1,671             |       |               |       |                   |       | 1,671      |       |
| Other  comprehensive income                            |       |       |       |           |       |         |       |              |       | 2,163              |       |                   |       | 2,163      |       |
| Dividends  declared, ($0.92 per share)                 |       |       |       |           |       |         |       | (3,526            | )          |               |       |                   |       | (3,526     | )          |
| Common  shares issued for employee stock purchase plan |       | 1,457      |       | 12             |       | 24           |       |              |       |               |       |                   |       | 36         |       |
| Balance,  June 30, 2009                           |       | 4,011,985  |       | $              | 33,433     |         | $          | 17,983            |       | $                  | 26,322     |                   | $          | (10,103    | )          | $ | (6,264 | ) | $ | 61,371 |   |

 
| ** **                                             | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **        | ** ** | **ACCUMULATED**    | ** ** | ** **             | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|-------------------|------------|--------------------|------------|------------------------|------------|------------|------------|
| ** **                                             | ** ** | **COMMON** | ** ** | **ADDITIONAL** | ** ** | ** **   | ** ** | **OTHER**         | ** ** | ** **         | ** ** | **TOTAL**              | ** ** |
| ** **                                             | ** ** | **STOCK**  | ** ** | **PAID-IN**    | ** ** | **RETAINED** | ** ** | **COMPREHENSIVE** | ** ** | **TREASURY**       | ** ** | **SHAREHOLDERS’** | ** ** |
| **(In  Thousands, Except Per Share Data)**             | ** ** | **SHARES** | ** ** | **AMOUNT**     | ** ** | **CAPITAL**  | ** ** | **EARNINGS**      | ** ** | **INCOME  (LOSS)** | ** ** | **STOCK**              | ** ** | **EQUITY** | ** ** |
| Balance,  December 31, 2009                       |       | 4,013,142  |       | $              | 33,443     |         | $          | 18,008            |       | $                  | 27,218     |                   | $          | (5,489     | )          | $ | (6,264 | ) | $ | 66,916 |   |
|                                                   |       |       |       |           |       |         |       |              |       |               |       |                   |       |       |       |
| Comprehensive  income:                                 |       |       |       |           |       |         |       |              |       |               |       |                   |       |       |       |
| Net  income                                            |       |       |       |           |       |         |       | 5,220             |       |               |       |                   |       | 5,220      |       |
| Other  comprehensive income                            |       |       |       |           |       |         |       |              |       | 2,008              |       |                   |       | 2,008      |       |
| Dividends  declared, ($0.92 per share)                 |       |       |       |           |       |         |       | (3,528            | )          |               |       |                   |       | (3,528     | )          |
| Common  shares issued for employee stock purchase plan |       | 1,130      |       | 9              |       | 24           |       |              |       |               |       |                   |       | 33         |       |
| Purchase  of treasury stock (1,568 shares)             |       |       |       |           |       |         |       |              |       |               |       | (46                    | )          | (46        | )          |
| Balance,  June 30, 2010                           |       | 4,014,272  |       | $              | 33,452     |         | $          | 18,032            |       | $                  | 28,910     |                   | $          | (3,481     | )          | $ | (6,310 | ) | $ | 70,603 |   |

 

**PENNSWOODS BANCORP, INC.**

**CONSOLIDATED STATEMENT OFCOMPREHENSIVE INCOME**

**(UNAUDITED)**

 
| ** **                                                                       | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **(In  Thousands)**                                                              | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                             |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Income                                                                       |       |                                 |       | $                                  | 2,772      |   |   |   | $ | 832 |   |   |   | $ | 5,220 |   |   |   | $ | 1,671 |   |
| Other Comprehensive income:                                                      |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Change in unrealized gain (loss) on available for  sale securities               |       | 2,557                                |       |                               |       | 3,520 |   |   |   | 3,095 |   |   |   | (1,178 | ) |   |   |
| Less: Reclassification adjustment for net gains  (losses) included in net income |       | 56                                   |       |                               |       | (2,086 | ) |   |   | 53 |   |   |   | (4,455 | ) |   |   |
| Other comprehensive income before tax expense                                    |       |                                 |       | 2,501                              |       |   |   | 5,606 |   |   |   | 3,042 |   |   |   | 3,277 |   |
| Income tax expense related to other comprehensive  income                        |       |                                 |       | 850                                |       |   |   | 1,906 |   |   |   | 1,034 |   |   |   | 1,114 |   |
| Other comprehensive income, net of tax                                           |       |                                 |       | 1,651                              |       |   |   | 3,700 |   |   |   | 2,008 |   |   |   | 2,163 |   |
| Comprehensive income                                                             |       |                                 |       | $                                  | 4,423      |   |   |   | $ | 4,532 |   |   |   | $ | 7,228 |   |   |   | $ | 3,834 |   |

 

See accompanying notes to the unaudited consolidatedfinancial statements.

 

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**PENNSWOODS BANCORP, INC.**

**CONSOLIDATED STATEMENT OF CASH FLOWS**

**(UNAUDITED)**

 
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                         | ** ** | **June 30,**    | ** ** |
| **(In  Thousands)**                                                                | ** ** | **2010**             | ** ** | **2009** | ** ** |
|                                                                               |       |                 |       |   |   |
| **OPERATING ACTIVITIES:**                                                          |       |                 |       |   |   |
| Net  Income                                                                        |       | $                    | 5,220      |   | $ | 1,671 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                 |       |   |   |
| Depreciation  and amortization                                                     |       | 385                  |       | 364 |   |
| Provision  for loan losses                                                         |       | 700                  |       | 312 |   |
| Accretion  and amortization of investment security discounts and premiums          |       | (1,088               | )          | (518 | ) |
| Securities  (gains) losses, net                                                    |       | (53                  | )          | 4,455 |   |
| Originations  of loans held for sale                                               |       | (22,939              | )          | (10,202 | ) |
| Proceeds  of loans held for sale                                                   |       | 21,930               |       | 9,450 |   |
| Gain  on sale of loans                                                             |       | (512                 | )          | (221 | ) |
| Earnings  on bank-owned life insurance                                             |       | (299                 | )          | (274 | ) |
| Other,  net                                                                        |       | 665                  |       | (1,327 | ) |
| Net  cash provided by operating activities                                         |       | 4,009                |       | 3,710 |   |
| **INVESTING ACTIVITIES**                                                           |       |                 |       |   |   |
| Investment  securities available for sale:                                         |       |                 |       |   |   |
| Proceeds  from sales                                                               |       | 430                  |       | 4,682 |   |
| Proceeds  from calls and maturities                                                |       | 10,573               |       | 5,132 |   |
| Purchases                                                                          |       | (22,486              | )          | (9,955 | ) |
| Investment  securities held to maturity:                                           |       |                 |       |   |   |
| Proceeds  from calls and maturities                                                |       | 26                   |       | 26 |   |
| Net  increase in loans                                                             |       | (6,773               | )          | (11,501 | ) |
| Acquisition  of bank premises and equipment                                        |       | (363                 | )          | (155 | ) |
| Proceeds  from the sale of foreclosed assets                                       |       | 79                   |       | — |   |
| Purchase  of bank-owned life insurance                                             |       | (32                  | )          | (42 | ) |
| Proceeds  from bank-owned life insurance death benefit                             |       | 82                   |       | — |   |
| Investment  in limited partnership                                                 |       | —               |       | (738 | ) |
| Purchases  of regulatory stock                                                     |       | —               |       | (170 | ) |
| Net  cash used for investing activities                                            |       | (18,464              | )          | (12,721 | ) |
| **FINANCING ACTIVITIES**                                                           |       |                 |       |   |   |
| Net  increase in interest-bearing deposits                                         |       | 24,614               |       | 75,159 |   |
| Net  increase (decrease) in noninterest-bearing deposits                           |       | 8,080                |       | (1,526 | ) |
| Net  decrease in short-term borrowings                                             |       | (4,145               | )          | (59,066 | ) |
| Dividends  paid                                                                    |       | (3,528               | )          | (3,526 | ) |
| Issuance  of common stock                                                          |       | 33                   |       | 36 |   |
| Purchase  of treasury stock                                                        |       | (46                  | )          | — |   |
| Net  cash provided by financing activities                                         |       | 25,008               |       | 11,077 |   |
| NET  INCREASE IN CASH AND CASH EQUIVALENTS                                         |       | 10,553               |       | 2,066 |   |
| CASH  AND CASH EQUIVALENTS, BEGINNING                                              |       | 13,788               |       | 16,581 |   |
| CASH  AND CASH EQUIVALENTS, ENDING                                                 |       | $                    | 24,341     |   | $ | 18,647 |   |
|                                                                               |       |                 |       |   |   |
| **SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION**                              |       |                 |       |   |   |
|                                                                               |       |                 |       |   |   |
| Interest  paid                                                                     |       | $                    | 5,398      |   | $ | 6,385 |   |
| Income  taxes paid                                                                 |       | 1,600                |       | 1,175 |   |
| Transfer  of loans to foreclosed real estate                                       |       | 32                   |       | 614 |   |

 

See accompanying notes to the unaudited consolidatedfinancial statements.

 

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

**NOTES TO**

**CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 1.  Basis of Presentation**

 

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

 

Theinterim financial statements are unaudited but, in the opinion of management,reflect all adjustments necessary for the fair presentation of results for suchperiods.  The results of operations forany interim period are not necessarily indicative of results for the full year.  These financial statements should be read inconjunction with the financial statements and notes thereto contained in theCompany’s Annual Report on Form 10-K for the year ended December 31,2009.

 

Theaccounting policies followed in the presentation of interim financial resultsare the same as those followed on an annual basis.  These policies arepresented on pages 38 through 44 of the Annual Report on Form 10-Kfor the year ended December 31, 2009.

 

Inreference to the attached financial statements, all adjustments are of a normalrecurring nature pursuant to Rule 10-01(b) (8) of RegulationS-X.

 

**Note 2. Recent Accounting Pronouncements**

 

InDecember 2009, the FASB issued ASU 2009-16, *Accountingfor Transfer of Financial Assets*. ASU 2009-16 provides guidance to improve the relevance, representationalfaithfulness, and comparability of the information that an entity provides inits financial statements about a transfer of financial assets; the effects of atransfer on its financial position, financial performance, and cash flows; anda transferor’s continuing involvement, if any, in transferred financialassets.  ASU 2009-16 is effective forannual periods beginning after November 15, 2009 and for interim periodswithin those fiscal years.  The adoptionof this guidance did not have a material impact on the Company’s financialstatements.

 

InJanuary 2010, the FASB issued ASU 2010-01, *Equity(Topic 505): Accounting for Distributions to Shareholders with Components ofStock and Cash — a consensus of the FASB Emerging Issues Task Force*.ASU 2010-01 clarifies that the stock portion of a distribution to shareholdersthat allows them to elect to receive cash or stock with a potential limitationon the total amount of cash that all shareholders can elect to receive in theaggregate is considered a share issuance that is reflected in EPS prospectivelyand is not a stock dividend.  ASU 2010-01is effective for interim and annual periods ending on or after December 15,2009 and should be 

 

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appliedon a retrospective basis.  The adoptionof this guidance did not have a material impact on the Company’s financialstatements.

 

InJanuary 2010, the FASB issued ASU 2010-05, *Compensation— Stock Compensation (Topic 718): Escrowed Share Arrangements and thePresumption of Compensation*. ASU 2010-05 updates existing guidanceto address the SEC staff’s views on overcoming the presumption that for certainshareholders escrowed share arrangements represent compensation.  ASU 2010-05 is effective January 15,2010.  The adoption of this guidance didnot have a material impact on the Company’s financial statements.

 

InJanuary 2010, the FASB issued ASU No. 2010-06, *Fair ValueMeasurements and Disclosures (Topic 820): Improving Disclosures about FairValue Measurements*. ASU 2010-06 amends Subtopic 820-10 to clarifyexisting disclosures, require new disclosures, and includes conformingamendments to guidance on employers’ disclosures about postretirement benefitplan assets. ASU 2010-06 is effective for interim and annual periods beginningafter December 15, 2009, except for disclosures about purchases, sales,issuances, and settlements in the roll forward of activity in Level 3 fairvalue measurements. Those disclosures are effective for fiscal years beginningafter December 15, 2010 and for interim periods within those fiscalyears.  The Company has presented thenecessary disclosures in Note 4 (NetPeriodic Benefit Cost-Defined Benefit Plans) herein.

 

InFebruary 2010, the FASB issued ASU 2010-08, *TechnicalCorrections to Various Topics*. ASU 2010-08 clarifies guidance onembedded derivatives and hedging. ASU 2010-08 is effective for interim andannual periods beginning after December 15, 2009. The adoption of thisguidance did not have a material impact on the Company’s financial position orresults.

 

InMarch 2010, the FASB issued ASU 2010-11, *Derivativesand Hedging*.  ASU 2010-11provides clarification and related additional examples to improve financialreporting by resolving potential ambiguity about the breadth of the embeddedcredit derivative scope exception in ASC 815-15-15-8.  ASU 2010-11 is effective at the beginning ofthe first fiscal quarter beginning after June 15, 2010. The adoption ofthis guidance did not have a material impact on the Company’s financialstatements.

 

InApril 2010, the FASB issued ASU 2010-18, *Receivables(Topic 310):  Effect of a LoanModification When the Loan is a Part of a Pool That is Accounted for as aSingle Asset — a consensus of the FASB Emerging Issues Task Force*.  ASU 2010-18 clarifies the treatment for amodified loan that was acquired as part of a pool of assets.  Refinancing or restructuring the loan doesnot make it eligible for removal from the pool, the FASB said.  The amendment will be effective for loansthat are part of an asset pool and are modified during financial reportingperiods that end July 15, 2010 or later. The amendment is not expected to have a significant impact on theCompany’s financial statements.

 

InJuly 2010, FASB issued ASU No. 2010-20, *Receivables (Topic 310): Disclosures about the Credit Quality ofFinancing Receivables and the Allowance for Credit Losses. *ASU2010-20 is intended to provide additional information to assist financialstatement users in assessing an entity’s credit risk exposures and evaluatingthe adequacy of its allowance for credit losses. The 

 

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disclosuresas of the end of a reporting period are effective for interim and annualreporting periods ending on or after December 15, 2010. The disclosuresabout activity that occurs during a reporting period are effective for interimand annual reporting periods beginning on or after December 15,2010.  The amendments in ASU 2010-20 encourage, but do not require,comparative disclosures for earlier reporting periods that ended before initialadoption. However, an entity should provide comparative disclosures for thosereporting periods ending after initial adoption.  The Company is currentlyevaluating the impact the adoption of this guidance will have on the Company’sfinancial position or results of operations.

 

**Note 3. Per Share Data**

 

There are no convertible securities which would affectthe denominator in calculating basic and dilutive earnings per share.  Net income as presented on the consolidatedstatement of income will be used as the numerator.  The following table sets forth thecomposition of the weighted average common shares (denominator) used in thebasic and dilutive per share computation.

 
| ** **                                                                                                | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                                                      |       |                                 |       |                               |       |   |   |   |   |
| Weighted average common shares issued                                                                     |       | 4,013,892                            |       | 4,011,548                          |       | 4,013,610 |   | 4,011,163 |   |
|                                                                                                      |       |                                 |       |                               |       |   |   |   |   |
| Average treasury stock shares                                                                             |       | (179,728                             | )          | (179,028                           | )          | (179,380 | ) | (179,028 | ) |
|                                                                                                      |       |                                 |       |                               |       |   |   |   |   |
| Weighted average common shares and common stock  equivalents used to calculate basic earnings per share   |       | 3,834,164                            |       | 3,832,520                          |       | 3,834,230 |   | 3,832,135 |   |
|                                                                                                      |       |                                 |       |                               |       |   |   |   |   |
| Additional common stock equivalents (stock  options) used to calculate diluted earnings per share         |       | 127                                  |       | 76                                 |       | 140 |   | 38 |   |
|                                                                                                      |       |                                 |       |                               |       |   |   |   |   |
| Weighted average common shares and common stock equivalents  used to calculate diluted earnings per share |       | 3,834,291                            |       | 3,832,596                          |       | 3,834,370 |   | 3,832,173 |   |

 

Options to purchase 990 shares of common stock at astrike price of $24.72 were outstanding during the six months ended June 30,2010.   The average market price of theCompany’s stock was $31.46 for the six months ended June 30, 2010.  Options to purchase 990 shares of commonstock were outstanding during the six months ended June 30, 2009 but werenot included in the computation of diluted earnings per share as they wereanti-dilutive due to the strike price range being greater than the averagemarket price for the six months ended June 30, 2009.

 

**Note 4.****  Net Periodic Benefit Cost-DefinedBenefit Plans**

 

Fora detailed disclosure on the Company’s pension and employee benefits plans,please refer to Note 12 of the Company’s Consolidated Financial Statementsincluded in the Annual Report on Form 10-K for the year ended December 31,2009.

 

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Thefollowing sets forth the components of the net periodic benefit cost of thedomestic non-contributory defined benefit plan for the six months ended June 30,2010 and 2009, respectively:

 
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                            | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **(In  Thousands)**                   | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                  |       |                   |       |                 |       |   |   |   |   |
| Service cost                          |       | $                      | 131        |                 | $          | 136 |   | $ | 263 |   | $ | 272 |   |
| Interest cost                         |       | 171                    |       | 170                  |       | 342 |   | 340 |   |
| Expected return on plan assets        |       | (160                   | )          | (127                 | )          | (321 | ) | (254 | ) |
| Amortization of transition obligation |       | (1                     | )          | —               |       | (2 | ) | (1 | ) |
| Amortization of prior service cost    |       | 7                      |       | 7                    |       | 13 |   | 13 |   |
| Amortization of net loss              |       | 37                     |       | 84                   |       | 73 |   | 169 |   |
| Net periodic cost                     |       | $                      | 185        |                 | $          | 270 |   | $ | 368 |   | $ | 539 |   |

 

Thefollowing table sets forth by level, within the fair value hierarchy detailedin Note 8 (Fair Value Measurements), the Plan’s assets at fair value as of June 30,2010:

 
| ** **                           | ** ** | **June 30, 2010** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| **(In  Thousands)**                  | ** ** | **Level I**            | ** ** | **Level II** | ** ** | **Level III** | ** ** | **Total** | ** ** |
| Assets:                              |       |                   |       |   |   |   |   |   |   |
| Cash  and cash equivalents           |       | $                      | 206        |   | $ | — |   | $ | — |   | $ | 206 |   |
| Mutual  funds - taxable fixed income |       | 3,073                  |       | — |   | — |   | 3,073 |   |
| Mutual  funds - domestic equity      |       | 3,351                  |       | — |   | — |   | 3,351 |   |
| Mutual  funds - international equity |       | 1,138                  |       | — |   | — |   | 1,138 |   |
| Total  assets at fair value          |       | $                      | 7,768      |   | $ | — |   | $ | — |   | $ | 7,768 |   |

 

**Employer Contributions**

 

TheCompany previously disclosed in its consolidated financial statements, includedin the Annual Report on Form 10-K for the year ended December 31,2009, that it expected to contribute a minimum of $400,000 to its definedbenefit plan in 2010.  As of June 30, 2010, there were contributionsof $244,000 made to the plan.

 

**Note5.  Off Balance Sheet Risk**

 

The Company is a party to financial instrumentswith off-balance sheet risk in the normal course of business to meet thefinancing needs of its customers.  Thesefinancial instruments are primarily comprised of commitments to extend creditand standby letters of credit.  Theseinstruments involve, to varying degrees, elements of credit, interest rate, orliquidity risk in excess of the amount recognized in the consolidated balancesheet.  The contract amounts of theseinstruments express the extent of involvement the Company has in particularclasses of financial instruments.

 

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

 

Financial instruments whose contract amountsrepresent credit risk are as follows at June 30, 2010 and December 31,2009:

 
| ** **                   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(In  Thousands)**          | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| Commitments to extend credit |       | $                 | 83,015     |                  | $          | 80,061 |   |
| Standby letters of credit    |       | 1,341             |       | 1,334                 |       |
|                              |            |                   |            |                       |            |  |  |

 

Commitmentsto extend credit are legally binding agreements to lend to customers.  Commitments generally have fixed expirationdates or other termination clauses and may require payment of fees.  Since many of the commitments are expected toexpire without being drawn upon, the total commitment amounts do notnecessarily represent future liquidity requirements.  The Company evaluates each customer’s creditworthiness on a case-by-case basis.  Theamount of collateral obtained, if deemed necessary by the Company, on anextension of credit is based on management’s credit assessment of thecounterparty.

 

Standbyletters of credit represent conditional commitments issued by the Company toguarantee the performance of a customer to a third party.  These instruments are issued primarily tosupport bid or performance related contracts. The coverage period for these instruments is typically a one year periodwith an annual renewal option subject to prior approval by management.  Fees earned from the issuance of theseletters are recognized upon expiration of the coverage period.  For secured letters of credit, the collateralis typically Bank deposit instruments or customer business assets.

 

**Note 6.  Reclassification ofComparative Amounts**

 

Certaincomparative amounts for the prior period have been reclassified to conform tocurrent period presentations. Such reclassifications had no effect on netincome or shareholders’ equity.

 

**Note 7.  Employee Stock PurchasePlan**

 

TheCompany maintains the Penns Woods Bancorp, Inc. 2006 Employee StockPurchase Plan (“Plan”). The Plan is intended to encourage employeeparticipation in the ownership and economic progress of the Company.  The Plan allows for up to 1,000,000 shares tobe purchased by employees.  The purchaseprice of the shares is 95% of market value with an employee eligible topurchase up to the lesser of 15% of base compensation or $12,000 in market valueannually.  During the six months ended June 30,2010 and 2009, there were 1,130 and 1,457 shares issued under the plan,respectively.

 

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**Note 8.  Fair Value Measurements**

 

Thefollowing disclosures show the hierarchal disclosure framework associated withthe level of pricing observations utilized in measuring assets and liabilitiesat fair value.

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

 

Thishierarchy requires the use of observable market data when available.

 

Thefollowing table presents the assets reported on the balance sheet at their fairvalue on a recurring basis as of June 30, 2010 and December 31, 2009,by level within the fair value hierarchy. Financial assets and liabilities areclassified in their entirety based on the lowest level of input that issignificant to the fair value measurement.

 

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| ** **                                  | ** ** | **June 30, 2010** | ** ** |
|---------------------------------------------|------------|------------------------|------------|
| **(In  Thousands)**                         | ** ** | **Level I**            | ** ** | **Level II** | ** ** | **Level III** | ** ** | **Total** | ** ** |
|                                        |       |                   |       |   |   |   |   |   |   |
| Assets  measured on a recurring basis:      |       |                   |       |   |   |   |   |   |   |
| Investment  securities, available for sale  |       |                   |       |   |   |   |   |   |   |
| U.S.  Government and agency securities      |       | $                      | —     |   | $ | 31,694 |   | $ | — |   | $ | 31,694 |   |
| State  and political securities             |       | —                 |       | 161,745 |   | — |   | 161,745 |   |
| Other  debt securties                       |       | —                 |       | 19,339 |   | — |   | 19,339 |   |
| Equity  securities                          |       | 12,847                 |       | — |   | — |   | 12,847 |   |
| Total  assets measured on a recurring basis |       | $                      | 12,847     |   | $ | 212,778 |   | $ | — |   | $ | 225,625 |   |

 
| ** **                                  | ** ** | **December 31, 2009** | ** ** |
|---------------------------------------------|------------|----------------------------|------------|
| **(In  Thousands)**                         | ** ** | **Level I**                | ** ** | **Level II** | ** ** | **Level III** | ** ** | **Total** | ** ** |
|                                        |       |                       |       |   |   |   |   |   |   |
| Assets  measured on a recurring basis:      |       |                       |       |   |   |   |   |   |   |
| Investment  securities, available for sale: |       |                       |       |   |   |   |   |   |   |
| U.S.  Government and agency securities      |       | $                          | —     |   | $ | 39,136 |   | $ | — |   | $ | 39,136 |   |
| State  and political securities             |       | —                     |       | 144,877 |   | — |   | 144,877 |   |
| Other  debt securties                       |       | —                     |       | 12,976 |   | — |   | 12,976 |   |
| Equity  securities                          |       | 11,779                     |       | — |   | — |   | 11,779 |   |
| Total  assets measured on a recurring basis |       | $                          | 11,779     |   | $ | 196,989 |   | $ | — |   | $ | 208,768 |   |

 

Thefollowing table presents the assets reported on the Consolidated Balance Sheetat their fair value on a non-recurring basis as of June 30, 2010 and December 31,2009, by level within the fair value hierarchy. Financial assets and liabilitiesare classified in their entirety based on the lowest level of input that issignificant to the fair value measurement.

 
| ** **                                 | ** ** | **June 30, 2010** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| **(In  Thousands)**                        | ** ** | **Level I**            | ** ** | **Level II** | ** ** | **Level III** | ** ** | **Total** | ** ** |
|                                       |       |                   |       |   |   |   |   |   |   |
| Assets  Measured on a Non-recurring Basis: |       |                   |       |   |   |   |   |   |   |
| Impaired  Loans                            |       | $                      | —     |   | $ | 7,652 |   | $ | — |   | $ | 7,652 |   |
| Other  real estate owned                   |       | —                 |       | 616 |   | — |   | 616 |   |
|                                            |            |                        |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                 | ** ** | **December 31, 2009** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|
| **(In  Thousands)**                        | ** ** | **Level I**                | ** ** | **Level II** | ** ** | **Level III** | ** ** | **Total** | ** ** |
|                                       |       |                       |       |   |   |   |   |   |   |
| Assets  Measured on a Non-recurring Basis: |       |                       |       |   |   |   |   |   |   |
| Impaired  Loans                            |       | $                          | —     |   | $ | 7,510 |   | $ | — |   | $ | 7,510 |   |
| Other  real estate owned                   |       | —                     |       | 672 |   | — |   | 672 |   |
|                                            |            |                            |            |  |  |  |  |  |  |  |  |  |  |

 

**Note 9.Estimated Fair Value of Financial Instruments**

 

The Company is required todisclose estimated fair values for its financial instruments.  Fair value estimates are made at a specificpoint in time, based on relevant market information and information about thefinancial instrument.  These estimates donot reflect any premium or discount that could result from offering for sale atone time the Company’s entire holdings of a particular financialinstrument.  Also, it is the Company’sgeneral practice and intention to hold most of its financial instruments tomaturity and not to engage in trading or sales activities.  Because no market exists for a significantportion of the Company’s financial instruments, fair value estimates are basedon judgments regarding future expected loss experience, current

 

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economic conditions, riskcharacteristics of various financial instruments, and other factors.  These estimates are subjective in nature andinvolve uncertainties and matters of significant judgment and therefore cannotbe determined with precision.  Changes inassumptions can significantly affect the estimates.

 

Estimated fair values havebeen determined by the Company using historical data and an estimation methodologysuitable for each category of financial instruments.  The Company’s fair value estimates, methods,and assumptions are set forth below for the Company’s other financialinstruments.

 

As certain assets andliabilities, such as deferred tax assets, premises and equipment, and manyother operational elements of the Company, are not considered financialinstruments but have value, this estimated fair value of financial instrumentswould not represent the full market value of the Company.

 

The estimated fair values ofthe Company’s financial instruments are as follows at June 30, 2010 and December 31,2009:

 
| ** **                   | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                   | ** ** | **Carrying**           | ** ** | **Fair**                   | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| **(In  Thousands)**          | ** ** | **Value**              | ** ** | **Value**                  | ** ** | **Value** | ** ** | **Value** | ** ** |
| Financial assets:            |       |                   |       |                       |       |   |   |   |   |
| Cash and cash equivalents    |       | $                      | 24,341     |                       | $          | 24,341 |   | $ | 13,788 |   | $ | 13,788 |   |
| Investment securities:       |       |                   |       |                       |       |   |   |   |   |
| Available for sale           |       | 225,625                |       | 225,625                    |       | 208,768 |   | 208,768 |   |
| Held to maturity             |       | 82                     |       | 83                         |       | 107 |   | 108 |   |
| Loans held for sale          |       | 5,584                  |       | 5,584                      |       | 4,063 |   | 4,063 |   |
| Loans, net                   |       | 406,913                |       | 402,225                    |       | 400,872 |   | 403,279 |   |
| Bank-owned life insurance    |       | 15,188                 |       | 15,188                     |       | 14,942 |   | 14,942 |   |
| Accrued interest receivable  |       | 3,673                  |       | 3,673                      |       | 3,523 |   | 3,523 |   |
|                         |       |                   |       |                       |       |   |   |   |   |
| Financial liabilities:       |       |                   |       |                       |       |   |   |   |   |
| Interest-bearing deposits    |       | $                      | 442,002    |                       | $          | 435,834 |   | $ | 417,388 |   | $ | 408,056 |   |
| Noninterest-bearing deposits |       | 87,979                 |       | 87,979                     |       | 79,899 |   | 79,899 |   |
| Short-term borrowings        |       | 14,209                 |       | 14,209                     |       | 18,354 |   | 18,354 |   |
| Long-term borrowings, FHLB   |       | 86,778                 |       | 91,363                     |       | 86,778 |   | 89,082 |   |
| Accrued interest payable     |       | 900                    |       | 900                        |       | 1,073 |   | 1,073 |   |

 

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**Cash andCash Equivalents, Loans Held for Sale, Accrued Interest Receivable, Short-termBorrowings, and Accrued Interest Payable:**

 

Thefair value is equal to the carrying value.

 

**InvestmentSecurities:**

 

Thefair value of investment securities available for sale and held to maturity isequal to the available quoted market price. If no quoted market price isavailable, fair value is estimated using the quoted market price for similarsecurities.  Regulatory stocks’ fairvalue is equal to the carrying value.

 

**Loans:**

 

Fairvalues are estimated for portfolios of loans with similar financialcharacteristics.  Loans are segregated bytype 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 rateinterest terms and by performing and nonperforming categories.

 

The fair value of performing loans is calculatedby discounting scheduled cash flows through the estimated maturity usingestimated market discount rates that reflect the credit and interest rate riskinherent in the loan.  The estimate ofmaturity is based on the Company’s historical experience with repayments foreach loan classification, modified, as required, by an estimate of the effectof current economic and lending conditions.

 

Fairvalue for significant nonperforming loans is based on recent externalappraisals.  If appraisals are notavailable, estimated cash flows are discounted using a rate commensurate withthe risk associated with the estimated cash flows.  Assumptions regarding credit risk, cashflows, and discounted rates are judgmentally determined using available marketinformation and specific borrower information.

 

**Bank-OwnedLife Insurance:**

 

Thefair value is equal to the cash surrender value of the life insurance policies.

 

**Deposits:**

 

Thefair value of deposits with no stated maturity, such as noninterest-bearingdemand deposits, savings, NOW, and money market accounts, is equal to theamount payable on demand as of June 30, 2010 and December 31,2009.  The fair value of certificates ofdeposit is based on the discounted value of contractual cash flows.

 

Thefair value estimates above do not include the benefit that results from thelow-cost funding provided by the deposit liabilities compared to the cost ofborrowing funds in the market, commonly referred to as the core deposit intangible.

 

**LongTerm Borrowings:**

 

Thefair value of long term borrowings is based on the discounted value ofcontractual cash flows.

 

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**Commitmentsto Extend Credit, Standby Letters of Credit, and Financial Guarantees Written:**

 

There is no material difference between the notional amount and theestimated fair value of off-balance sheet items at June 30, 2010 and December 31,2009.  The contractual amounts ofunfunded commitments and letters of credit are presented in Note 5.

 

**Note 10.  Federal Home Loan BankStock**

 

TheBank is a member of the Federal Home Loan Bank of Pittsburgh (the “FHLB”),which is one of 12 regional Federal Home Loan Banks. Each Federal Home LoanBank serves as a reserve or central bank for its members within its assignedregion.  It is funded primarily from funds deposited by memberinstitutions and proceeds from the sale of consolidated obligations of theFederal Home Loan Bank System. It makes loans to members (i.e., advances) inaccordance with policies and procedures established by the board of directorsof the Federal Home Loan Bank.  As a member, the Bank is required topurchase and maintain stock in the FHLB in an amount equal to the greater of 1%of its aggregate unpaid residential mortgage loans, home purchase contracts orsimilar obligations at the beginning of each year or 5% of its outstandingadvances from the FHLB.  At June 30, 2010, the Bank held $7,271,300in stock of the FHLB, which was in compliance with this requirement.

 

The Company evaluated its holding of FHLBstock for impairment and deemed the stock to not be impaired due to theexpected recoverability of the par value, which equals the value reflectedwithin the Company’s financial statements. The decision was based on several items ranging from the estimated trueeconomic losses embedded within the FHLB’s mortgage portfolio to the FHLB’sliquidity position and credit rating. The Company utilizes the impairment framework outlined in GAAP toevaluate FHLB stock for impairment.

 

The following factors were evaluated todetermine the ultimate recoverability of the par value of the Company’s FHLBstock holding; (i) the significance of the decline in net assets of theFHLB as compared to the capital stock amount for the FHLB and the length oftime this situation has persisted; (ii) commitments by the FHLB to makepayments required by law or regulation and the level of such payments in relationto the operating performance of the FHLB; (iii) the impact of legislativeand regulatory changes on the institutions and, accordingly, on the customerbase of the FHLB; (iv) the liquidity position of the FHLB; and (v) whethera decline is temporary or whether it affects the ultimate recoverability of theFHLB stock based on (a) the materiality of the carrying amount to themember institution and (b) whether an assessment of the institution’soperational needs for the foreseeable future allow management to dispose of thestock.

 

Based on its analysis of these factors, theCompany determined that its holding of FHLB stock was not impaired on June 30,2010.

 

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**Note 11. Investment Securities**

 

The amortized cost and estimated fair values ofinvestment securities at June 30, 2010 and December 31, 2009 are asfollows:

 
| ** **                            | ** ** | **June 30, 2010** | ** ** |
|---------------------------------------|------------|------------------------|------------|
| ** **                            | ** ** | ** **             | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **Amortized**          | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| **(In Thousands)**                    | ** ** | **Cost**               | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| Available for sale (AFS)              |       |                   |       |   |   |   |   |   |   |
| U.S. Government and agency securities |       | $                      | 29,335     |   | $ | 2,359 |   | $ | — |   | $ | 31,694 |   |
| State and political securities        |       | 167,860                |       | 1,623 |   | (7,738 | ) | 161,745 |   |
| Other debt securities                 |       | 18,868                 |       | 641 |   | (170 | ) | 19,339 |   |
| Total debt securities                 |       | 216,063                |       | 4,623 |   | (7,908 | ) | 212,778 |   |
| Equity securities                     |       | 11,927                 |       | 1,163 |   | (243 | ) | 12,847 |   |
| Total investment securities AFS       |       | $                      | 227,990    |   | $ | 5,786 |   | $ | (8,151 | ) | $ | 225,625 |   |
|                                  |       |                   |       |   |   |   |   |   |   |
| Held to maturity (HTM)                |       |                   |       |   |   |   |   |   |   |
| U.S. Government and agency securities |       | $                      | 5          |   | $ | 1 |   | $ | — |   | $ | 6 |   |
| Other debt securities                 |       | 77                     |       | — |   | — |   | 77 |   |
| Total investment securities HTM       |       | $                      | 82         |   | $ | 1 |   | $ | — |   | $ | 83 |   |

 
| ** **                            | ** ** | **December 31, 2009** | ** ** |
|---------------------------------------|------------|----------------------------|------------|
| ** **                            | ** ** | ** **                 | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **Amortized**              | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| **(In Thousands)**                    | ** ** | **Cost**                   | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| Available for sale (AFS)              |       |                       |       |   |   |   |   |   |   |
| U.S. Government and agency securities |       | $                          | 37,038     |   | $ | 2,098 |   | $ | — |   | $ | 39,136 |   |
| State and political securities        |       | 153,914                    |       | 733 |   | (9,770 | ) | 144,877 |   |
| Other debt securities                 |       | 12,271                     |       | 834 |   | (129 | ) | 12,976 |   |
| Total debt securities                 |       | 203,223                    |       | 3,665 |   | (9,899 | ) | 196,989 |   |
| Equity securities                     |       | 10,952                     |       | 981 |   | (154 | ) | 11,779 |   |
| Total investment securities AFS       |       | $                          | 214,175    |   | $ | 4,646 |   | $ | (10,053 | ) | $ | 208,768 |   |
|                                  |       |                       |       |   |   |   |   |   |   |
| Held to maturity (HTM)                |       |                       |       |   |   |   |   |   |   |
| U.S. Government and agency securities |       | $                          | 6          |   | $ | — |   | $ | — |   | $ | 6 |   |
| Other debt securities                 |       | 101                        |       | 1 |   | — |   | 102 |   |
| Total investment securities HTM       |       | $                          | 107        |   | $ | 1 |   | $ | — |   | $ | 108 |   |

 

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The following tables show the Company’s grossunrealized losses and fair value, aggregated by investment category and lengthof time, that the individual securities have been in a continuous unrealizedloss position, at June 30, 2010 and December 31, 2009.

 
| ** **                            | ** ** | **June 30, 2010**      | ** ** |
|---------------------------------------|------------|-----------------------------|------------|
| ** **                            | ** ** | **Less than Twelve Months** | ** ** | **Twelve Months or Greater** | ** ** | **Total** | ** ** |
| ** **                            | ** ** | ** **                  | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** |
| ** **                            | ** ** | **Fair**                    | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| **(In  Thousands)**                   | ** ** | **Value**                   | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
|                                  |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government and agency securities |       | $                           | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| State and political securities        |       | 36,129                      |       | 1,593 |   | 35,452 |   | 6,145 |   | 71,581 |   | 7,738 |   |
| Other debt securities                 |       | 6,537                       |       | 58 |   | 1,013 |   | 112 |   | 7,550 |   | 170 |   |
| Total debt securities                 |       | 42,666                      |       | 1,651 |   | 36,465 |   | 6,257 |   | 79,131 |   | 7,908 |   |
| Equity securities                     |       | 1,119                       |       | 167 |   | 496 |   | 76 |   | 1,615 |   | 243 |   |
| Total                                 |       | $                           | 43,785     |   | $ | 1,818 |   | $ | 36,961 |   | $ | 6,333 |   | $ | 80,746 |   | $ | 8,151 |   |

 
| ** **                            | ** ** | **December 31, 2009**  | ** ** |
|---------------------------------------|------------|-----------------------------|------------|
| ** **                            | ** ** | **Less than Twelve Months** | ** ** | **Twelve Months or Greater** | ** ** | **Total** | ** ** |
| ** **                            | ** ** | ** **                  | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** |
| ** **                            | ** ** | **Fair**                    | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| **(In  Thousands)**                   | ** ** | **Value**                   | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
|                                  |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government and agency securities |       | $                           | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| State and political securities        |       | 60,005                      |       | 2,336 |   | 36,267 |   | 7,434 |   | 96,272 |   | 9,770 |   |
| Other debt securities                 |       | —                      |       | — |   | 1,191 |   | 129 |   | 1,191 |   | 129 |   |
| Total debt securities                 |       | 60,005                      |       | 2,336 |   | 37,458 |   | 7,563 |   | 97,463 |   | 9,899 |   |
| Equity securities                     |       | 159                         |       | 27 |   | 918 |   | 127 |   | 1,077 |   | 154 |   |
| Total                                 |       | $                           | 60,164     |   | $ | 2,363 |   | $ | 38,376 |   | $ | 7,690 |   | $ | 98,540 |   | $ | 10,053 |   |

 

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At June 30, 2010 therewere a total of 79 and 99 individual securities that were in a continuousunrealized loss position for less than twelve months and greater than twelvemonths, respectively.

 

The Company reviews itsposition quarterly and has determined that, at June 30, 2010, the declinesoutlined in the above table represent temporary declines and the Company does not intend to sell and does not believe they willbe required to sell these securities before recovery of their cost basis, whichmay be at maturity.  There were178 positions that were temporarily impaired at June 30, 2010.  The Company has concluded that the unrealizedlosses disclosed above are not other than temporary but are the result ofinterest rate changes, sector credit ratings changes, or company-specificratings changes that are not expected to result in the non-collection ofprincipal and interest during the period.

 

Theamortized cost and estimated fair value of debt securities at June 30,2010, by contractual maturity, are shown below. Expected maturities may differfrom contractual maturities since borrowers may have the right to call orprepay obligations with or without call or prepayment penalties.

 
| ** **                        | ** ** | **Available for Sale** | ** ** | **Held to Maturity** | ** ** |
|-----------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                        | ** ** | **Amortized**          | ** ** | ** **           | ** ** | **Amortized** | ** ** | ** ** | ** ** |
| **(In  Thousands)**               | ** ** | **Cost**               | ** ** | **Fair Value**       | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| Due in one year or less           |       | $                      | 1,004      |                 | $          | 1,011 |   | $ | 25 |   | $ | 25 |   |
| Due after one year to five years  |       | 17,073                 |       | 17,682               |       | 52 |   | 52 |   |
| Due after five years to ten years |       | 4,261                  |       | 3,986                |       | — |   | — |   |
| Due after ten years               |       | 193,725                |       | 190,099              |       | 5 |   | 6 |   |
| Total                             |       | $                      | 216,063    |                 | $          | 212,778 |   | $ | 82 |   | $ | 83 |   |

 

Totalgross proceeds from sales of securities available for sale were $430,000 and$4,682,000, for June 30, 2010 and 2009, respectively.  The following table represents gross realizedgains and losses on those transactions:

 
| ** **                            | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------|------------|------------------------------------|------------|
| **(In  Thousands)**                   | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| Gross realized gains:                 |       |                               |       |   |   |
| U.S. Government and agency securities |       | $                                  | —     |   | $ | — |   |
| State and political securities        |       | —                             |       | — |   |
| Other debt securities                 |       | 6                                  |       | 162 |   |
| Equity securities                     |       | 56                                 |       | 4 |   |
| Total gross realized gains            |       | $                                  | 62         |   | $ | 166 |   |
|                                  |       |                               |       |   |   |
| Gross realized losses:                |       |                               |       |   |   |
| U.S. Government and agency securities |       | $                                  | —     |   | $ | — |   |
| State and political securities        |       | —                             |       | — |   |
| Other debt securities                 |       | 9                                  |       | 37 |   |
| Equity securities                     |       | —                             |       | 4,584 |   |
| Total gross realized losses           |       | $                                  | 9          |   | $ | 4,621 |   |

 

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Grossrealized losses for the equity securities portfolio include impairment chargesof $0 and $4,584,000 for the six months ended June 30, 2010 and 2009,respectively.

 

**Note 12. Loans**

 

Theallocation of the loan portfolio, by delinquency status, as of June 30,2010 and December 31, 2009 is presented below:

 
| ** **                        | ** **                 | **June 30, 2010** | ** ** |
|-----------------------------------|----------------------------|------------------------|------------|
| ** **                        | ** **                 | ** **             | ** ** | ** ** | ** ** | **Past Due** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** **                 | ** **             | ** ** | ** ** | ** ** | **90 Days** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** **                 | ** **             | ** ** | **Past Due** | ** ** | **Or More** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** **                 | ** **             | ** ** | **30 To 89** | ** ** | **& Still** | ** ** | **Non-** | ** ** | ** ** | ** ** |
| **(In  Thousands)**               | ** **                 | **Current**            | ** ** | **Days** | ** ** | **Accruing** | ** ** | **Accrual** | ** ** | **Total** | ** ** |
| Commercial  and agricultural      |                       | $                      | 54,379     |   | $ | 100 |   | $ | 14 |   | $ | 9 |   | $ | 54,502 |   |
| Real  estate mortgage:            |                       |                   |       |   |   |   |   |   |   |   |   |
| Residential                       |                       | 170,191                |       | 1,742 |   | 332 |   | 952 |   | 173,217 |   |
| Commercial                        |                       | 147,593                |       | 1,886 |   | — |   | 1,950 |   | 151,429 |   |
| Construction                      |                       | 19,589                 |       | 97 |   | — |   | 3,386 |   | 23,072 |   |
| Installment  loans to individuals |                       | 10,658                 |       | 99 |   | 2 |   | 2 |   | 10,761 |   |
|                              |                       | 402,410                |       | $ | 3,924 |   | $ | 348 |   | $ | 6,299 |   | 412,981 |   |
| Less:                             | Net  deferred loan fees    |                   | 1,021      |   |   |   |   |   |   |   | 1,021 |   |
|                              | Allowance  for loan losses |                   | 5,047      |   |   |   |   |   |   |   | 5,047 |   |
| Loans,  net                       |                       | $                      | 396,342    |   |   |   |   |   |   |   | $ | 406,913 |   |

 
| ** **                        | ** **                 | **December 31, 2009** | ** ** |
|-----------------------------------|----------------------------|----------------------------|------------|
| ** **                        | ** **                 | ** **                 | ** ** | ** ** | ** ** | **Past Due** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** **                 | ** **                 | ** ** | ** ** | ** ** | **90 Days** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** **                 | ** **                 | ** ** | **Past Due** | ** ** | **Or More** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** **                 | ** **                 | ** ** | **30 To 90** | ** ** | **& Still** | ** ** | **Non-** | ** ** | ** ** | ** ** |
| **(In  Thousands)**               | ** **                 | **Current**                | ** ** | **Days** | ** ** | **Accruing** | ** ** | **Accrual** | ** ** | **Total** | ** ** |
| Commercial  and agricultural      |                       | $                          | 45,930     |   | $ | 457 |   | $ | 182 |   | $ | 78 |   | $ | 46,647 |   |
| Real  estate mortgage:            |                       |                       |       |   |   |   |   |   |   |   |   |
| Residential                       |                       | 165,313                    |       | 7,333 |   | 951 |   | 749 |   | 174,346 |   |
| Commercial                        |                       | 147,455                    |       | 2,860 |   | 1,429 |   | 465 |   | 152,209 |   |
| Construction                      |                       | 18,247                     |       | 2,992 |   | — |   | 556 |   | 21,795 |   |
| Installment  loans to individuals |                       | 11,192                     |       | 311 |   | 3 |   | 43 |   | 11,549 |   |
|                              |                       | 388,137                    |       | $ | 13,953 |   | $ | 2,565 |   | $ | 1,891 |   | 406,546 |   |
| Less:                             | Net  deferred loan fees    |                       | 1,017      |   |   |   |   |   |   |   | 1,017 |   |
|                              | Allowance  for loan losses |                       | 4,657      |   |   |   |   |   |   |   | 4,657 |   |
| Loans,  net                       |                       | $                          | 382,463    |   |   |   |   |   |   |   | $ | 400,872 |   |

 

Therecorded investment in loans for which impairment has been recognized amountedto $8,621,000 at June 30, 2010, compared to $8,312,000 at December 31,2009.  The valuation allowance related toimpaired loans amounted to $969,000 at June 30, 2010 and $802,000 at December 31,2009.  The increase in impaired loans andvaluation allowance is primarily from a few commercial relationships.

 

Aloan is considered impaired, based on current information and events, if it isprobable that the Bank will be unable to collect the scheduled payments ofprincipal or interest when due according to the contractual terms of the loanagreement. The measurement of impaired loans is generally based on the presentvalue of expected future cash flows discounted at the historical effectiveinterest rate, except that all collateral-dependent loans are measured forimpairment based on the fair value of the collateral.

 

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**CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE**

**SECURITIES LITIGATION REFORM ACT OF 1995**

 

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

 

Youshould not put undue reliance on any forward-looking statements.  These statements speak only as of the date ofthis Quarterly Report on Form 10-Q, even if subsequently made available by theCompany on its website or otherwise.  TheCompany undertakes no obligation to update or revise these statements toreflect events or circumstances occurring after the date of this QuarterlyReport on Form 10-Q.

 

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

 

**EARNINGS SUMMARY**

 

**Comparisonof the Three and Six Months Ended June 30, 2010 and 2009**

 

**SummaryResults**

 

Netincome for the three months ended June 30, 2010 was $2,772,000 compared to$832,000 for the same period of 2009 as after-tax securities losses decreased$1,413,000 (from a loss of $1,376,000 to a gain of $37,000).  Included within the change in after-taxsecurities losses for the three months ended June 30, 2009 was an other thantemporary impairment charge relating to certain equity securities held in theinvestment portfolio of $2,251,000. Basic and diluted earnings per share forthe three months ended June 30, 2010 were $0.72 compared to $0.22 for the threemonths ended June 30, 2009.  Return onaverage assets and return on average equity were 1.58% and 15.76% for the threemonths ended June 30, 2010 compared to 0.51% and 5.45% for the correspondingperiod of 2009.  Net income from coreoperations (“operating earnings”) increased to $2,735,000 for the three monthsended June 30, 2010 compared to $2,208,000 for the same period of 2009.  Operating earnings per share for the threemonths ended June 30, 2010 were $0.71 basic and dilutive compared to $0.58basic and dilutive for the three months ended June 30, 2009.

 

Thesix months ended June 30, 2010 generated net income of $5,220,000 compared to$1,671,000 for the same period of 2009. Comparable results were impacted by a decrease in after-tax securitieslosses of $2,975,000 (from a loss of $2,940,000 for the 2009 period to a gainof $35,000 for the 2010 period). Earnings per share, basic and diluted, for thesix months ended June 30, 2010 were $1.36 as compared to $0.44 for thecomparable period of 2009.  Return onaverage assets and return on average equity were 1.50% and 15.05% for the sixmonths ended June 30, 2010 compared to 0.51% and 5.54% for the correspondingperiod of 2009.  Operating earningsincreased 12.4% to $5,185,000 for the six months ended June 30, 2010 comparedto $4,611,000 for the comparable period of 2009, resulting in basic anddilutive operating earnings per share increasing 12.5% to $1.35 from $1.20 forthe six month periods ended June 30, 2010 and 2009, respectively.

 

Managementuses the non-GAAP measure of net income from core operations, or operatingearnings, in its analysis of the Company’s performance.  This measure, as used by the Company, adjustsnet income by excluding significant gains or losses that are unusual innature.  Because certain of these itemsand their impact on the Company’s performance are difficult to predict,management believes the presentation of financial measures excluding the impactof such items provides useful supplemental information in evaluating the operatingresults of the Company’s core businesses. For purposes of this Quarterly Report on Form 10-Q, net income from coreoperations, or operating earnings, means net income adjusted to excludeafter-tax net securities gains or losses. These disclosures should not be viewed as a substitute for net incomedetermined in accordance with GAAP, nor are they necessarily comparable tonon-GAAP performance measures that may be presented by other companies.

 

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**Reconciliationof GAAP and non-GAAP Income**

 
| ** **                                                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                      | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** |
| **(Dollars in Thousands, Except Per Share Data)** | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| GAAP  net income                                                                |       | $                      | 2,772      |                 | $          | 832 |   | $ | 5,220 |   | $ | 1,671 |   |
| Less:  securities gains (losses), net of tax                                    |       | 37                     |       | (1,376               | )          | 35 |   | (2,940 | ) |
| Non-GAAP  operating earnings                                                    |       | $                      | 2,735      |                 | $          | 2,208 |   | $ | 5,185 |   | $ | 4,611 |   |

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                   | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| Return  on average assets (ROA)              |       | 1.58                             | %          | 0.51                           | %          | 1.50 | % | 0.51 | % |
| Less:  securities gains (losses), net of tax |       | 0.02                             | %          | -0.83                          | %          | 0.01 | % | -0.90 | % |
| Non-GAAP  operating ROA                      |       | 1.56                             | %          | 1.34                           | %          | 1.49 | % | 1.41 | % |

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                   | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| Return  on average equity (ROE)              |       | 15.76                            | %          | 5.45                           | %          | 15.05 | % | 5.54 | % |
| Less:  securities gains (losses), net of tax |       | 0.21                             | %          | -9.01                          | %          | 0.10 | % | -9.76 | % |
| Non-GAAP  operating ROE                      |       | 15.55                            | %          | 14.46                          | %          | 14.95 | % | 15.30 | % |

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                   | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| Basic  earnings per share (EPS)              |       | $                                | 0.72       |                           | $          | 0.22 |   | $ | 1.36 |   | $ | 0.44 |   |
| Less:  securities gains (losses), net of tax |       | 0.01                             |       | (0.36                          | )          | 0.01 |   | (0.76 | ) |
| Non-GAAP  basic operating EPS                |       | $                                | 0.71       |                           | $          | 0.58 |   | $ | 1.35 |   | $ | 1.20 |   |

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                   | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| Dilutive  EPS                                |       | $                                | 0.72       |                           | $          | 0.22 |   | $ | 1.36 |   | $ | 0.44 |   |
| Less:  securities gains (losses), net of tax |       | 0.01                             |       | (0.36                          | )          | 0.01 |   | (0.76 | ) |
| Non-GAAP  dilutive operating EPS             |       | $                                | 0.71       |                           | $          | 0.58 |   | $ | 1.35 |   | $ | 1.20 |   |

 

**Interestand Dividend Income**

 

Interestand dividend income for the three months ended June 30, 2010 increased $111,000to $9,124,000 compared to $9,013,000 for the same period of 2009.  The increase in interest income was led by anincrease in loan interest resulting from growth in the average gross loanportfolio of $23,480,000.  The growthoffset a decline in the average taxable equivalent yield of 31 basis points (“bp”)caused by the low interest rate environment that has existed over the pastyear.   The increase in investmentportfolio income was the result of portfolio growth that offset a decline of 30bp in yield.

 

Duringthe six months ended June 30, 2010, interest and dividend income was$18,113,000, an increase of $183,000 over the same period in 2009.  Interest income on the loan portfolio 

 

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increasedas the growth in the portfolio countered a 28 bp decline in average yield.  The investment portfolio interest incomeremained steady as the increase in portfolio size was offset by a decline inyield and a reduction in dividends received. The reduced level of dividend income is the result of a decreased levelof equity investment and general decline in dividends paid by the holdings inour portfolio.

 

Interestand dividend income composition for the three and six months ended June 30,2010 and 2009 was as follows:

 
| ** **                         | ** ** | **For The Three Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------------------------|------------|
| ** **                         | ** ** | **June 30, 2010**                        | ** ** | **June 30, 2009** | ** ** | **Change** | ** ** |
| **(In Thousands)**            | ** ** | **Amount**                                         | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Loans including fees               |       | $                                                  | 6,398      |   | 70.1 | % | $ | 6,349 |   | 70.4 | % | $ | 49 |   | 0.8 | % |
| Investment securities:             |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                            |       | 1,405                                              |       | 15.4 |   | 1,374 |   | 15.2 |   | 31 |   | 2.3 |   |
| Tax-exempt                         |       | 1,270                                              |       | 13.9 |   | 1,249 |   | 13.9 |   | 21 |   | 1.7 |   |
| Dividend and other interest income |       | 51                                                 |       | 0.6 |   | 41 |   | 0.5 |   | 10 |   | 24.4 |   |
| Total interest and dividend income |       | $                                                  | 9,124      |   | 100.0 | % | $ | 9,013 |   | 100.0 | % | $ | 111 |   | 1.2 | % |

 
| ** **                         | ** ** | **For The Six Months Ended** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| ** **                         | ** ** | **June 30, 2010**                      | ** ** | **June 30, 2009** | ** ** | **Change** | ** ** |
| **(In Thousands)**            | ** ** | **Amount**                                       | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Loans including fees               |       | $                                                | 12,728     |   | 70.3 | % | $ | 12,568 |   | 70.1 | % | $ | 160 |   | 1.3 | % |
| Investment securities:             |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                            |       | 2,754                                            |       | 15.2 |   | 2,737 |   | 15.3 |   | 17 |   | 0.6 |   |
| Tax-exempt                         |       | 2,528                                            |       | 13.9 |   | 2,495 |   | 13.9 |   | 33 |   | 1.3 |   |
| Dividend and other interest income |       | 103                                              |       | 0.6 |   | 130 |   | 0.7 |   | (27 | ) | (20.8 | ) |
| Total interest and dividend income |       | $                                                | 18,113     |   | 100.0 | % | $ | 17,930 |   | 100.0 | % | $ | 183 |   | 1.0 | % |

 

**InterestExpense**

 

Interestexpense for the three months ended June 30, 2010 decreased $674,000 to$2,534,000 compared to $3,208,000 for the same period of 2009.  The substantial decrease associated withdeposits is primarily the result of a reduction of 76 bp in rate paid and ashift from higher cost time deposits to core deposits.  Factors that led to the rate decreasesinclude, but are not limited to, Federal Open Market Committee (“FOMC”)interest rate actions and campaigns conducted by the Company during the pasttwo years to attract short-term CDs resulting in an increased repricingfrequency.  In addition, the MarcellusShale natural gas exploration in north central Pennsylvania is creatingopportunities to create new and build upon existing deposit relationships.  Short-term borrowings interest expensedecreased as the average balance of such borrowings decreased with currentshort-term borrowings consisting solely of customer repurchase agreements.  Long-term borrowing interest expense remainedstable, as there have been no changes to the composition of long-termborrowings.

 

Interestexpense for the six months ended June 30, 2010 decreased 16.9% from the sameperiod of 2009.  The reasons noted forthe decline in interest expense for the three month period comparison alsoapply to the six month period.

 

24

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Interestexpense composition for the three and six months ended June 30, 2010 and 2009was as follows:

 
| ** **                 | ** ** | **For The Three Months Ended** | ** ** |
|----------------------------|------------|--------------------------------|------------|
| ** **                 | ** ** | **June 30, 2010**              | ** ** | **June 30, 2009** | ** ** | **Change** | ** ** |
| **(In  Thousands)**        | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Deposits                   |       | $                              | 1,551      |   | 61.2 | % | $ | 2,204 |   | 68.7 | % | $ | (653 | ) | (29.6 | )% |
| Short-term borrowings      |       | 56                             |       | 2.2 |   | 78 |   | 2.4 |   | (22 | ) | (28.2 | ) |
| Long-term borrowings, FHLB |       | 927                            |       | 36.6 |   | 926 |   | 28.9 |   | 1 |   | 0.1 |   |
| Total interest expense     |       | $                              | 2,534      |   | 100.0 | % | $ | 3,208 |   | 100.0 | % | $ | (674 | ) | (21.0 | )% |

 
| ** **                 | ** ** | **For The Six Months Ended** | ** ** |
|----------------------------|------------|--------------------------------------------------|------------|
| ** **                 | ** ** | **June 30, 2010**                      | ** ** | **June 30, 2009** | ** ** | **Change** | ** ** |
| **(In Thousands)**    | ** ** | **Amount**                                       | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Deposits                   |       | $                                                | 3,261      |   | 62.4 | % | $ | 4,209 |   | 66.9 | % | $ | (948 | ) | (22.5 | )% |
| Short-term borrowings      |       | 120                                              |       | 2.3 |   | 236 |   | 3.8 |   | (116 | ) | (49.2 | ) |
| Long-term borrowings, FHLB |       | 1,844                                            |       | 35.3 |   | 1,843 |   | 29.3 |   | 1 |   | 0.1 |   |
| Total interest expense     |       | $                                                | 5,225      |   | 100.0 | % | $ | 6,288 |   | 100.0 | % | $ | (1,063 | ) | (16.9 | )% |

 

**Net Interest Margin**

 

Thenet interest margin (“NIM”) for the three months ended June 30, 2010 was 4.56%compared to 4.36% for the corresponding period of 2009.  The increase in the NIM was driven by a 63 bpdecline in the rate paid on interest bearing liabilities that more thancompensated for a 40 bp decline in the yield on interest earning assets.  The decrease in earning asset yield is due tothe impact on the loan and investment portfolios of the current low rateenvironment.  The decrease in the cost ofinterest bearing liabilities to 1.87% from 2.50% was driven by a reduction inthe rate paid on time deposits of 75 bp. The reduction in the rate paid on time deposits was the result of ashortening of the time deposit portfolio that has resulted in an increasingrepricing frequency during this period of decreasing rates.  The duration of the time deposit portfoliohas been lengthening due to the apparent bottoming or near bottoming of depositrates.

 

TheNIM for the six months ended June 30, 2010 was 4.52% compared to 4.42% for thesame period of 2009.  The impact of theitems mentioned in the three month discussion also applies to the six monthperiod.  A 77 bp decline in the rate paidon time deposits served as the foundation for a 71 bp decline in rate paid ondeposits, while the FOMC and general market actions affected the yield onearning assets and cost of borrowings.

 

Thefollowing is a schedule of average balances and associated yields for the threeand six months ended June 30, 2010 and 2009:

 

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| ** **                                       | ** ** | **AVERAGE BALANCES AND INTEREST RATES** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                       | ** ** | **Three Months Ended**                            | ** ** | **Three Months Ended** | ** ** |
| ** **                                       | ** ** | **June 30, 2010**                                 | ** ** | **June 30, 2009** | ** ** |
| **(In Thousands)**                          | ** ** | **Average Balance**                                    | ** ** | **Interest** | ** ** | **Average Rate** | ** ** | **Average Balance** | ** ** | **Interest** | ** ** | **Average Rate** | ** ** |
| Assets:                                          |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Tax-exempt  loans                                |       | $                                                           | 18,750     |   | $ | 312 |   | 6.67 | % | $ | 16,934 |   | $ | 271 |   | 6.42 | % |
| All  other loans                                 |       | 398,988                                                     |       | 6,192 |   | 6.22 | % | 377,324 |   | 6,170 |   | 6.56 | % |
| Total  loans                                     |       | 417,738                                                     |       | 6,504 |   | 6.24 | % | 394,258 |   | 6,441 |   | 6.55 | % |
|                                             |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Taxable  securities                              |       | 112,538                                                     |       | 1,454 |   | 5.17 | % | 101,984 |   | 1,415 |   | 5.55 | % |
| Tax-exempt  securities                           |       | 108,011                                                     |       | 1,924 |   | 7.13 | % | 103,848 |   | 1,892 |   | 7.29 | % |
| Total  securities                                |       | 220,549                                                     |       | 3,378 |   | 6.13 | % | 205,832 |   | 3,307 |   | 6.43 | % |
|                                             |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  deposits                       |       | 8,938                                                       |       | 2 |   | 0.09 | % | 1,371 |   | — |   | 0.00 | % |
|                                             |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                   |       | 647,225                                                     |       | 9,884 |   | 6.12 | % | 601,461 |   | 9,748 |   | 6.52 | % |
|                                             |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Other  assets                                    |       | 54,681                                                      |       |   |   |   |   | 55,793 |   |   |   |   |   |
|                                             |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Total  assets                                    |       | $                                                           | 701,906    |   |   |   |   |   | $ | 657,254 |   |   |   |   |   |
|                                             |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Liabilities  and shareholders’ equity:      |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Savings                                          |       | $                                                           | 65,483     |   | 45 |   | 0.28 | % | $ | 61,383 |   | 81 |   | 0.53 | % |
| Super  Now deposits                              |       | 64,931                                                      |       | 92 |   | 0.57 | % | 56,645 |   | 131 |   | 0.93 | % |
| Money  market deposits                           |       | 101,361                                                     |       | 291 |   | 1.15 | % | 64,374 |   | 367 |   | 2.29 | % |
| Time  deposits                                   |       | 209,344                                                     |       | 1,123 |   | 2.15 | % | 224,918 |   | 1,625 |   | 2.90 | % |
| Total  interest-bearing deposits                 |       | 441,119                                                     |       | 1,551 |   | 1.41 | % | 407,320 |   | 2,204 |   | 2.17 | % |
|                                             |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Short-term  borrowings                           |       | 12,306                                                      |       | 56 |   | 1.82 | % | 18,035 |   | 78 |   | 1.73 | % |
| Long-term  borrowings, FHLB                      |       | 86,778                                                      |       | 927 |   | 4.23 | % | 86,778 |   | 926 |   | 4.22 | % |
| Total  borrowings                                |       | 99,084                                                      |       | 983 |   | 3.92 | % | 104,813 |   | 1,004 |   | 3.79 | % |
|                                             |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities              |       | 540,203                                                     |       | 2,534 |   | 1.87 | % | 512,133 |   | 3,208 |   | 2.50 | % |
|                                             |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Demand  deposits                                 |       | 83,205                                                      |       |   |   |   |   | 73,930 |   |   |   |   |   |
| Other  liabilities                               |       | 8,150                                                       |       |   |   |   |   | 10,113 |   |   |   |   |   |
| Shareholders’  equity                       |       | 70,348                                                      |       |   |   |   |   | 61,078 |   |   |   |   |   |
|                                             |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Total  liabilities and shareholders’ equity |       | $                                                           | 701,906    |   |   |   |   |   | $ | 657,254 |   |   |   |   |   |
| Interest  rate spread                            |       |                                                        |       |   |   | 4.25 | % |   |   |   |   | 4.02 | % |
| Net  interest income/margin                      |       |                                                        |       | $ | 7,350 |   | 4.56 | % |   |   | $ | 6,540 |   | 4.36 | % |

 

----

1.               Information onthis table has been calculated using average daily balance sheets to obtainaverage balances.

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

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

 

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| ** **                                       | ** ** | **AVERAGE BALANCES AND INTEREST RATES** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                       | ** ** | **Six Months Ended**                    | ** ** | **Six Months Ended** | ** ** |
| ** **                                       | ** ** | **June 30, 2010**                       | ** ** | **June 30, 2009** | ** ** |
| **(In  Thousands)**                              | ** ** | **Average Balance**                     | ** ** | **Interest** | ** ** | **Average Rate** | ** ** | **Average Balance** | ** ** | **Interest** | ** ** | **Average Rate** | ** ** |
| Assets:                                          |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Tax-exempt  loans                                |       | $                                       | 18,018     |   | $ | 604 |   | 6.76 | % | $ | 16,420 |   | $ | 538 |   | 6.61 | % |
| All  other loans                                 |       | 397,018                                 |       | 12,329 |   | 6.26 | % | 375,687 |   | 12,213 |   | 6.56 | % |
| Total  loans                                     |       | 415,036                                 |       | 12,933 |   | 6.28 | % | 392,107 |   | 12,751 |   | 6.56 | % |
|                                             |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Taxable  securities                              |       | 109,607                                 |       | 2,854 |   | 5.21 | % | 101,937 |   | 2,867 |   | 5.63 | % |
| Tax-exempt  securities                           |       | 107,515                                 |       | 3,830 |   | 7.12 | % | 102,757 |   | 3,780 |   | 7.36 | % |
| Total  securities                                |       | 217,122                                 |       | 6,684 |   | 6.16 | % | 204,694 |   | 6,647 |   | 6.49 | % |
|                                             |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Interest  bearing deposits                       |       | 8,257                                   |       | 3 |   | 0.07 | % | 700 |   | — |   | 0.00 | % |
|                                             |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                   |       | 640,415                                 |       | 19,620 |   | 6.16 | % | 597,501 |   | 19,398 |   | 6.53 | % |
|                                             |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Other  assets                                    |       | 54,988                                  |       |   |   |   |   | 55,459 |   |   |   |   |   |
|                                             |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Total  assets                                    |       | $                                       | 695,403    |   |   |   |   |   | $ | 652,960 |   |   |   |   |   |
|                                             |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Liabilities  and shareholders’ equity:      |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Savings                                          |       | $                                       | 63,891     |   | 97 |   | 0.31 | % | $ | 60,517 |   | 159 |   | 0.53 | % |
| Super  Now deposits                              |       | 63,994                                  |       | 201 |   | 0.63 | % | 55,276 |   | 260 |   | 0.95 | % |
| Money  market deposits                           |       | 94,313                                  |       | 579 |   | 1.24 | % | 52,888 |   | 580 |   | 2.21 | % |
| Time  deposits                                   |       | 214,749                                 |       | 2,384 |   | 2.24 | % | 215,069 |   | 3,210 |   | 3.01 | % |
| Total  interest-bearing deposits                 |       | 436,947                                 |       | 3,261 |   | 1.50 | % | 383,750 |   | 4,209 |   | 2.21 | % |
|                                             |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Short-term  borrowings                           |       | 13,518                                  |       | 120 |   | 1.79 | % | 39,641 |   | 236 |   | 1.19 | % |
| Long-term  borrowings, FHLB                      |       | 86,778                                  |       | 1,844 |   | 4.23 | % | 86,778 |   | 1,843 |   | 4.22 | % |
| Total  borrowings                                |       | 100,296                                 |       | 1,964 |   | 3.90 | % | 126,419 |   | 2,079 |   | 3.27 | % |
|                                             |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities              |       | 537,243                                 |       | 5,225 |   | 1.95 | % | 510,169 |   | 6,288 |   | 2.48 | % |
|                                             |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Demand  deposits                                 |       | 80,636                                  |       |   |   |   |   | 72,633 |   |   |   |   |   |
| Other  liabilities                               |       | 8,142                                   |       |   |   |   |   | 9,870 |   |   |   |   |   |
| Shareholders’  equity                       |       | 69,382                                  |       |   |   |   |   | 60,288 |   |   |   |   |   |
|                                             |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Total  liabilities and shareholders’ equity |       | $                                       | 695,403    |   |   |   |   |   | $ | 652,960 |   |   |   |   |   |
| Interest  rate spread                            |       |                                    |       |   |   | 4.21 | % |   |   |   |   | 4.05 | % |
| Net  interest income/margin                      |       |                                    |       | $ | 14,395 |   | 4.52 | % |   |   | $ | 13,110 |   | 4.42 | % |

 

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Thefollowing table presents the adjustment to convert net interest income to netinterest income on a fully taxable equivalent basis for the three and sixmonths ended June 30, 2010****and 2009.

 
| ** **                                     | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                     | ** ** | **June 30,**                   | ** ** | **June 30,**                 | ** ** |
| **(In  Thousands)**                            | ** ** | **2010**                       | ** ** | **2009**                     | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                           |       |                           |       |                         |       |   |   |   |   |
| Total interest income                          |       | $                              | 9,124      |                         | $          | 9,013 |   | $ | 18,113 |   | $ | 17,930 |   |
| Total interest expense                         |       | 2,534                          |       | 3,208                        |       | 5,225 |   | 6,288 |   |
|                                           |       |                           |       |                         |       |   |   |   |   |
| Net interest income                            |       | 6,590                          |       | 5,805                        |       | 12,888 |   | 11,642 |   |
| Tax equivalent adjustment                      |       | 760                            |       | 735                          |       | 1,507 |   | 1,468 |   |
|                                           |       |                           |       |                         |       |   |   |   |   |
| Net interest income (fully taxable equivalent) |       | $                              | 7,350      |                         | $          | 6,540 |   | $ | 14,395 |   | $ | 13,110 |   |

 

Thefollowing table sets forth the respective impact that both volume and ratechanges have had on net interest income on a fully taxable equivalent basis forthe three and six month periods ended June 30, 2010 and 2009:

 
| ** **                         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                         | ** ** | **2010 vs 2009**                | ** ** | **2010 vs 2009**              | ** ** |
| ** **                         | ** ** | **Increase (Decrease)**         | ** ** | **Increase (Decrease)**       | ** ** |
| ** **                         | ** ** | **Due to**                      | ** ** | **Due to**                    | ** ** |
| **(In  Thousands)**                | ** ** | **Volume**                      | ** ** | **Rate**                      | ** ** | **Net** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Net** | ** ** |
| Interest income:                   |       |                            |       |                          |       |   |   |   |   |   |   |   |   |
| Loans, tax-exempt                  |       | $                               | 30         |                          | $          | 11 |   | $ | 41 |   | $ | 39 |   | $ | 27 |   | $ | 66 |   |
| Loans                              |       | 1,360                           |       | (1,338                        | )          | 22 |   | 999 |   | (883 | ) | 116 |   |
| Taxable investment securities      |       | 491                             |       | (452                          | )          | 39 |   | 773 |   | (786 | ) | (13 | ) |
| Tax-exempt investment securities   |       | 238                             |       | (206                          | )          | 32 |   | 243 |   | (193 | ) | 50 |   |
| Interest bearing deposits          |       | 2                               |       | —                        |       | 2 |   | 3 |   | — |   | 3 |   |
| Total interest-earning assets      |       | 2,121                           |       | (1,985                        | )          | 136 |   | 2,057 |   | (1,835 | ) | 222 |   |
|                               |       |                            |       |                          |       |   |   |   |   |   |   |   |   |
| Interest expense:                  |       |                            |       |                          |       |   |   |   |   |   |   |   |   |
| Savings deposits                   |       | 34                              |       | (70                           | )          | (36 | ) | 16 |   | (78 | ) | (62 | ) |
| Super Now deposits                 |       | 101                             |       | (140                          | )          | (39 | ) | 65 |   | (124 | ) | (59 | ) |
| Money market deposits              |       | 744                             |       | (820                          | )          | (76 | ) | 493 |   | (494 | ) | (1 | ) |
| Time deposits                      |       | (106                            | )          | (396                          | )          | (502 | ) | (5 | ) | (821 | ) | (826 | ) |
| Short-term borrowings              |       | (48                             | )          | 26                            |       | (22 | ) | (200 | ) | 84 |   | (116 | ) |
| Long-term borrowings, FHLB         |       | —                          |       | 1                             |       | 1 |   | — |   | 1 |   | 1 |   |
| Total interest-bearing liabilities |       | 725                             |       | (1,399                        | )          | (674 | ) | 369 |   | (1,432 | ) | (1,063 | ) |
| Change in net interest income      |       | $                               | 1,396      |                          | $          | (586 | ) | $ | 810 |   | $ | 1,688 |   | $ | (403 | ) | $ | 1,285 |   |

 

**Provision for Loan Losses**

 

Theprovision for loan losses is based upon management’s quarterly review of theloan portfolio.  The purpose of thereview is to assess loan quality, identify impaired loans, analyzedelinquencies, ascertain loan growth, evaluate potential charge-offs andrecoveries, and assess general economic conditions in the markets served.  An external independent loan review is alsoperformed annually for the Bank. Management remains committed to an aggressive program of problem loanidentification and resolution.

 

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

 

Althoughmanagement believes it uses the best information available to make suchdeterminations and that the allowance for loan losses is adequate at June 30,2010, future adjustments could be necessary if circumstances or economicconditions differ substantially from the assumptions used in making the initialdeterminations.  A downturn in the localeconomy, increased unemployment, and delays in receiving financial informationfrom borrowers could result in increased levels of nonperforming assets,charge-offs, loan loss provisions, and reductions in income.  Additionally, as an integral part of theexamination process, bank regulatory agencies periodically review the Bank’sloan loss allowance.  The bankingagencies could require the recognition of additions to the loan loss allowancebased on their judgment of information available to them at the time of theirexamination.

 

Whiledetermining the appropriate allowance level, management has attributed theallowance for loan losses to various portfolio segments; however, the allowanceis available for the entire portfolio as needed.

 

Theallowance for loan losses increased from $4,657,000 at December 31, 2009to $5,047,000 at June 30, 2010.  At June 30,2010 and December 31, 2009, the allowance for loan losses to total loanswas 1.23% and 1.15%, respectively.

 

Theprovision for loan losses totaled $400,000 and $700,000 for the three and sixmonths ended June 30, 2010, compared to $186,000 and $312,000 for the sameperiods in 2009.  The amount of theincrease in the provision was the result of several factors, including but notlimited to, an increase in gross loans of $19,886,000 since June 30, 2009,a ratio of annualized net charge-offs to average loans of 0.15% for the sixmonths ended June 30, 2010, a ratio of nonperforming loans to total loansof 1.61% at June 30, 2010, and a ratio of the allowance for loan losses tononperforming loans of 75.94% at June 30, 2010.  Nonperforming loans increased to $6,646,000at June 30, 2010****from$4,456,000 at December 31, 2009 due to a commercial real estate loan beingchanged to nonaccrual status.  Internalloan review and analysis and the continued uncertainty surrounding the economy,coupled with the ratios noted previously, dictated an increase in the provisionfor loan losses.  The increase did notequate to the change in charge-offs and nonperforming loans due to the economicsituation and the collateral status of the nonperforming loans and overall loanportfolio in general, which limits the loan specific allocation of theallowance for loan losses.

 

Followingis a table showing the changes in the allowance for loan losses for the sixmonths ended June 30, 2010****and 2009:

 

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| ** **                                                                                             | ** ** | **For the Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| **(In  Thousands)**                                                                                    | ** ** | **June 30, 2010**       | ** ** | **June 30, 2009** | ** ** |
| Balance  at beginning of period                                                                        |       | $                            | 4,657      |   | $ | 4,356 |   |
| Charge-offs:                                                                                           |       |                         |       |   |   |
| Real  estate                                                                                           |       | 53                           |       | 192 |   |
| Commercial  and industrial                                                                             |       | 261                          |       | 64 |   |
| Installment  loans to individuals                                                                      |       | 70                           |       | 90 |   |
| Total  charge-offs                                                                                     |       | 384                          |       | 346 |   |
| Recoveries:                                                                                            |       |                         |       |   |   |
| Real  estate                                                                                           |       | 10                           |       | 8 |   |
| Commercial  and industrial                                                                             |       | —                       |       | — |   |
| Installment  loans to individuals                                                                      |       | 64                           |       | 47 |   |
| Total  recoveries                                                                                      |       | 74                           |       | 55 |   |
| Net  charge-offs                                                                                       |       | 310                          |       | 291 |   |
| Additions  charged to operations                                                                       |       | 700                          |       | 312 |   |
| Balance  at end of period                                                                              |       | $                            | 5,047      |   | $ | 4,377 |   |
| Ratio  of net annualized charge-offs during the period to average loans outstanding  during the period |       | 0.15                         | %          | 0.15 | % |

 

Followingis a table showing the changes in total nonperforming loans as of:

 
| ** **               | ** ** | **Total Nonperforming Loans** | ** ** |
|--------------------------|------------|-------------------------------|------------|
| ** **               | ** ** | ** **                    | ** ** | **90 Days** | ** ** | ** ** | ** ** |
| **(In  Thousands)**      | ** ** | **Nonaccrual**                | ** ** | **Past Due** | ** ** | **Total** | ** ** |
| June 30,  2010      |       | $                             | 6,299      |   | $ | 347 |   | $ | 6,646 |   |
| March 31,  2010     |       | 3,703                         |       | 160 |   | 3,863 |   |
| December 31,  2009  |       | 1,891                         |       | 2,565 |   | 4,456 |   |
| September 30,  2009 |       | 1,448                         |       | 4,396 |   | 5,844 |   |
| June 30,  2009      |       | 2,089                         |       | 578 |   | 2,667 |   |
|                          |            |                               |            |  |  |  |  |  |  |  |

 

Loansnot included above which are troubled debt restructurings, totaled $744,000,$426,000, and $0 at June 30, 2010, December 31, 2009, and June 30,2009, respectively.

 

**Non-interestIncome**

 

Totalnon-interest income for the three months ended June 30, 2010****compared to the same period in 2009 increased $2,400,000 to$2,008,000 due to a $2,142,000 decrease in net securities losses.  Excluding net securities gains and losses,non-interest income for the second quarter of 2010 would have increased$258,000 compared to the 2009 period. Deposit service charges decreased minimally as overdraft fee incomedecreased slightly, in addition to customers migrating to no service chargechecking accounts that were introduced in previous periods as part of customeracquisition and retention programs.  Gainon sale of loans provided the primary increase in non-interest income.  The significant increase was primarily theresult of increased volume attributed to the home buyer tax credit.

 

Insurancecommissions for the three months ended June 30, 2010 decreased due to asoftening market and shift in product mix. Management of The M Group continues to pursue new and 

 

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buildupon current relationships.  The salescall program continues to expand to other financial institutions, which resultsin additional revenue for The M Group if another sales outlet is added.  However, the addition of another sales outletfor The M Group can take up to a year or more to be completed.

 

Totalnon-interest income for the six months ended June 30, 2010 compared to thesame period in 2009 increased $4,872,000. Excluding net securities gains, non-interest income would have increased$364,000 compared to the 2009 period.  The increase in non-interest income for the six month period is theresult of the same items noted in the three month discussion.

 

Non-interestincome composition for the three and six months ended June 30, 2010****and 2009 was as follows:

 
| ** **                     | ** ** | **For the Three Months Ended** | ** ** |
|--------------------------------|------------|--------------------------------|------------|
| ** **                     | ** ** | **June 30, 2010**         | ** ** | **June 30, 2009** | ** ** | **Change** | ** ** |
| **(In  Thousands)**            | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Deposit service charges        |       | $                              | 537        |   | 26.7 | % | $ | 541 |   | (138.0 | )% | $ | (4 | ) | (0.7 | )% |
| Securities gains (losses), net |       | 56                             |       | 2.8 |   | (2,086 | ) | 532.1 |   | 2,142 |   | 102.7 |   |
| Bank owned life insurance      |       | 128                            |       | 6.4 |   | 112 |   | (28.6 | ) | 16 |   | 14.3 |   |
| Gain on sale of loans          |       | 330                            |       | 16.4 |   | 103 |   | (26.3 | ) | 227 |   | 220.4 |   |
| Insurance commissions          |       | 273                            |       | 13.6 |   | 347 |   | (88.5 | ) | (74 | ) | (21.3 | ) |
| Other                          |       | 684                            |       | 34.1 |   | 591 |   | (150.7 | ) | 93 |   | 15.7 |   |
| Total non-interest income      |       | $                              | 2,008      |   | 100.0 | % | $ | (392 | ) | 100.0 | % | $ | 2,400 |   | (612.2 | )% |

 
| ** **                     | ** ** | **For the Six Months Ended** | ** ** |
|--------------------------------|------------|------------------------------|------------|
| ** **                     | ** ** | **June 30, 2010**       | ** ** | **June 30, 2009** | ** ** | **Change** | ** ** |
| **(In  Thousands)**            | ** ** | **Amount**                   | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Deposit service charges        |       | $                            | 1,047      |   | 28.3 | % | $ | 1,066 |   | (91.3 | )% | $ | (19 | ) | (1.8 | )% |
| Securities gains (losses), net |       | 53                           |       | 1.4 |   | (4,455 | ) | 381.5 |   | 4,508 |   | 101.2 |   |
| Bank owned life insurance      |       | 299                          |       | 8.1 |   | 274 |   | (23.5 | ) | 25 |   | 9.1 |   |
| Gain on sale of loans          |       | 512                          |       | 13.8 |   | 221 |   | (18.9 | ) | 291 |   | 131.7 |   |
| Insurance commissions          |       | 537                          |       | 14.5 |   | 701 |   | (60.0 | ) | (164 | ) | (23.4 | ) |
| Other                          |       | 1,256                        |       | 33.9 |   | 1,025 |   | (87.8 | ) | 231 |   | 22.5 |   |
| Total non-interest income      |       | $                            | 3,704      |   | 100.0 | % | $ | (1,168 | ) | 100.0 | % | $ | 4,872 |   | (417.1 | )% |

 

**Non-interestExpense**

 

Totalnon-interest expense increased $105,000 for the three months ended June 30,2010****compared to the same period of2009.  The increase in salaries andemployee benefits was attributable to several items including standard cost ofliving wage adjustments for employees, increased pension expense, and otherbenefit costs.  Other expenses increasedprimarily due to normal anticipated inflationary adjustments to ongoingbusiness operating costs.

 

Totalnon-interest expense increased $446,000 for the six months ended June 30,2010 compared to the same period of 2009. The increase in non-interest expense for the six month period is theresult of the same items noted in the three month discussion.

 

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Non-interest expense composition for the six monthsended June 30, 2010****and 2009 wasas follows:

 
| ** **                                         | ** ** | **For the Three Months Ended** | ** ** |
|----------------------------------------------------|------------|--------------------------------|------------|
| ** **                                         | ** ** | **June 30, 2010**         | ** ** | **June 30, 2009** | ** ** | **Change** | ** ** |
| **(In  Thousands)**                                | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Salaries and employee benefits                     |       | $                              | 2,615      |   | 52.4 | % | $ | 2,595 |   | 53.1 | % | $ | 20 |   | 0.8 | % |
| Occupancy, net                                     |       | 313                            |       | 6.3 |   | 318 |   | 6.5 |   | (5 | ) | (1.6 | ) |
| Furniture and equipment                            |       | 322                            |       | 6.5 |   | 306 |   | 6.3 |   | 16 |   | 5.2 |   |
| Pennsylvania shares tax                            |       | 169                            |       | 3.4 |   | 172 |   | 3.5 |   | (3 | ) | (1.7 | ) |
| Amortization of investment in limited partnerships |       | 141                            |       | 2.8 |   | 141 |   | 2.9 |   | — |   | — |   |
| Other                                              |       | 1,430                          |       | 28.6 |   | 1,353 |   | 27.7 |   | 77 |   | 5.7 |   |
| Total non-interest expense                         |       | $                              | 4,990      |   | 100.0 | % | $ | 4,885 |   | 100.0 | % | $ | 105 |   | 2.1 | % |

 
| ** **                                         | ** ** | **For the Six Months Ended** | ** ** |
|----------------------------------------------------|------------|------------------------------|------------|
| ** **                                         | ** ** | **June 30, 2010**       | ** ** | **June 30, 2009** | ** ** | **Change** | ** ** |
| **(In  Thousands)**                                | ** ** | **Amount**                   | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Salaries and employee benefits                     |       | $                            | 5,352      |   | 53.6 | % | $ | 5,077 |   | 53.3 | % | $ | 275 |   | 5.4 | % |
| Occupancy, net                                     |       | 644                          |       | 6.5 |   | 657 |   | 6.9 |   | (13 | ) | (2.0 | ) |
| Furniture and equipment                            |       | 626                          |       | 6.3 |   | 613 |   | 6.4 |   | 13 |   | 2.1 |   |
| Pennsylvania shares tax                            |       | 338                          |       | 3.4 |   | 343 |   | 3.6 |   | (5 | ) | (1.5 | ) |
| Amortization of investment in limited partnerships |       | 283                          |       | 2.8 |   | 283 |   | 3.0 |   | — |   | — |   |
| Other                                              |       | 2,733                        |       | 27.4 |   | 2,557 |   | 26.8 |   | 176 |   | 6.9 |   |
| Total non-interest expense                         |       | $                            | 9,976      |   | 100.0 | % | $ | 9,530 |   | 100.0 | % | $ | 446 |   | 4.7 | % |

 

**Provisionfor Income Taxes**

 

Incometaxes increased $926,000 and $1,735,000 for the three and six months ended June 30,2010****compared to the same period of2009.  The primary cause of the changesin tax expense is the impact of net securities losses in the three and sixmonth periods of 2009.  Excluding theimpact of the net securities gains and losses, the effective tax rate for thethree and six months ended June 30, 2010 was 13.23% and 11.36% compared to9.02% and 9.36% for the same period of 2009. The Company currently is in a deferred tax asset position due to the lowincome housing tax credits earned both currently and previously.  Management has reviewed the deferred taxasset and has determined that the asset will be utilized within the appropriatecarry forward period and therefore does not require a valuation allowance.

 

**ASSET/LIABILITY MANAGEMENT**

 

**Cash and Cash Equivalents**

 

Cashand cash equivalents increased $10,553,000 from $13,788,000 at December 31,2009 to $24,341,000 at June 30, 2010****primarily as aresult of the following activities during the six months ended June 30,2010:

 

**Loans Held for Sale**

 

Activityregarding loans held for sale resulted in loan originations exceeding saleproceeds, less $512,000 in realized gains, by $1,521,000 for the six monthsended June 30, 2010.

 

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**Loans**

 

Grossloans increased $6,431,000 since December 31, 2009 due primarily to anincrease of non-real estate and construction loans, which was partially offsetby a decrease in residential and commercial real estate loans.

 

The allocation of the loan portfolio, by category,as of June 30, 2010 and December 31,2009 is presented below:

 
| ** **                             | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** | **Change** | ** ** |
|----------------------------------------|------------|------------------------|------------|----------------------------|------------|------------|------------|
| **(In  Thousands)**                    | ** ** | **Amount**             | ** ** | **% Total**                | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Commercial, financial and agricultural |       | $                      | 54,502     |                       | 13.2       | %          | $          | 46,647 |   | 11.5 | % | $ | 7,855 |   | 16.8 | % |
| Real estate mortgage:                  |       |                   |       |                       |       |       |       |   |   |   |   |   |   |
| Residential                            |       | 173,217                |       | 42.0                       |       | 174,346    |       | 43.1 |   | (1,129 | ) | (0.6 | ) |
| Commercial                             |       | 151,429                |       | 36.8                       |       | 152,209    |       | 37.5 |   | (780 | ) | (0.5 | ) |
| Construction                           |       | 23,072                 |       | 5.6                        |       | 21,795     |       | 5.4 |   | 1,277 |   | 5.9 |   |
| Installment loans to individuals       |       | 10,761                 |       | 2.6                        |       | 11,549     |       | 2.8 |   | (788 | ) | (6.8 | ) |
| Less: Net deferred loan fees           |       | 1,021                  |       | (0.2                       | )          | 1,017      |       | (0.3 | ) | 4 |   | 0.4 |   |
| Gross loans                            |       | $                      | 411,960    |                       | 100.0      | %          | $          | 405,529 |   | 100.0 | % | $ | 6,431 |   | 1.6 | % |

 

**Investments**

 

Theestimated fair value of the investment securities portfolio at June 30,2010 has increased $16,832,000 since December 31, 2009.  The change is primarily due to purchases ofstate and political securities and short-term corporate securities as the levelof net unrealized losses remained constant. The unrealized losses within the debt securities portfolio are theresult of market activity, not credit issues/ratings, as approximately 90% ofthe debt securities portfolio is currently rated A or higher by either S&Por Moody’s.

 

TheCompany considers various factors, which include examples from applicableaccounting guidance, when analyzing the available for sale portfolio forpossible other than temporary impairment. The Company primarily considers the following factors in its analysis:length of time and severity of the market value being less than carrying value,reduction of dividend paid (equities), continued payment of dividend/interest,credit rating, and financial condition of an issuer, intent and ability to holduntil anticipated recovery (which may be maturity), and general outlook for theeconomy, specific industry, and entity in question.

 

Thebond portion of the portfolio review is conducted with emphases on several factors.  Continued payment of principal and interestis given primary importance with credit rating and financial condition of theissuer following as the next most important. Credit ratings were reviewed with the ratings of the bonds beingsatisfactory.  Those that were notcurrently rated were discussed with a third party and/or underwent an internalfinancial review.  The Company alsomonitors whether each of the investments incurred a decline in market valuefrom carrying value of at least 20% for twelve consecutive months or a similardecline of at least 50% for six consecutive months.  Each bond is reviewed to determine whether itis a general obligation bond, which is backed by the credit and taxing power ofthe issuing jurisdiction, or revenue bond, which is only payable from specifiedrevenues.  Based on the review undertakenby the 

 

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Company, the Company determined that the decline invalue of the various bond holdings were deemed to be temporary and were theresult of the general market downturns and interest rate/yield curve changes,not credit issues.  The fact that almostall of such bonds are general obligation bonds further solidified the Company’sdetermination that the decline in the value of these bond holdings istemporary.

 

Thefair value of the equity portfolio continues to fluctuate as the economicturbulence continues to impact financial sector stock pricing.  The stock market improvement over the firstsix months of 2010 has led to an increase in net unrealized gains of $182,000to $1,163,000 at June 30, 2010.  Inaddition, the amortized cost of the equity securities portfolio has increased$975,000 as the Company has begun to build the portfolio balance, whilecontinuing to diversify geographic risk.

 

Theequity portion of the portfolio, which is invested entirely in financialinstitutions, is reviewed for possible other than temporary impairment in asimilar manner to the bond portfolio with greater emphasis placed on the lengthof time the market value has been less than the carrying value and financialsector outlook.  The Company also reviewsdividend payment activities and, in the case of financial institutions, whetheror not such issuer was participating in the TARP Capital Purchase Program.  The starting point for the equity analysis isthe length and severity of a market price decline.  The Company monitors two primary measures:20% decline for twelve consecutive months and 50% decline for six consecutivemonths in market value from carrying value.

 

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Thedistribution of credit ratings by amortized cost and estimated fair values forthe debt security portfolio at June 30, 2010****follows:

 
| ** **                             | ** ** | **A- to  AAA** | ** ** | **B- to  BBB+** | ** ** | **C to  CCC+** | ** ** | **Not  Rated** | ** ** | **Total**     | ** ** |
|----------------------------------------|------------|----------------|------------|-----------------|------------|----------------|------------|----------------|------------|---------------|------------|
| **(In Thousands)**                     | ** ** | **Amortized**  | ** ** | **Fair**        | ** ** | **Amortized**  | ** ** | **Fair**       | ** ** | **Amortized** | ** ** | **Fair** | ** ** | **Amortized** | ** ** | **Fair** | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| **Available for sale (AFS)**           | ** ** | **Cost**       | ** ** | **Value**       | ** ** | **Cost**       | ** ** | **Value**      | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Cost** | ** ** | **Value** | ** ** | **Cost** | ** ** | **Value** | ** ** |
| U.S.  Government and agency securities |       | $              | 29,335     |            | $          | 31,694         |       | $              | —     |          | $          | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 29,335 |   | $ | 31,694 |   |
| State  and political securities        |       | 152,431        |       | 147,993         |       | 5,823          |       | 5,129          |       | —        |       | — |   | 9,606 |   | 8,623 |   | 167,860 |   | 161,745 |   |
| Other  debt securities                 |       | 18,022         |       | 18,561          |       | 800            |       | 733            |       | —        |       | — |   | 46 |   | 45 |   | 18,868 |   | 19,339 |   |
| Total  debt securities AFS             |       | $              | 199,788    |            | $          | 198,248        |       | $              | 6,623      |          | $          | 5,862 |   | $ | — |   | $ | — |   | $ | 9,652 |   | $ | 8,668 |   | $ | 216,063 |   | $ | 212,778 |   |
|                                   |       |           |       |            |       |           |       |           |       |          |       |   |   |   |   |   |   |   |   |   |   |
| Held  to maturity (HTM)                |       |           |       |            |       |           |       |           |       |          |       |   |   |   |   |   |   |   |   |   |   |
| U.S.  Government and agency securities |       | $              | 5          |            | $          | 6              |       | $              | —     |          | $          | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 5 |   | $ | 6 |   |
| Other  debt securities                 |       | 77             |       | 77              |       | —         |       | —         |       | —        |       | — |   | — |   | — |   | 77 |   | 77 |   |
| Total  debt securities HTM             |       | $              | 82         |            | $          | 83             |       | $              | —     |          | $          | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 82 |   | $ | 83 |   |

 

**Financing Activities**

 

**Deposits**

 

Totaldeposits increased 6.6% or $32,694,000 from December 31, 2009 to June 30,2010.  The growth was led by asubstantial increase in money market deposits of 35.7% from December 31,2009 to June 30, 2010.  The increasein core deposits (deposits less time deposits) has provided relationship drivenfunding for the loan and investment portfolios, while also reducing theutilization of FHLB borrowings.  Theincrease in deposits is the result of a deposit gathering program coupled withcustomers coming back to their hometown bank in the wake of the economicturbulence.  Electronic deliverychannels, such as remote deposit capture and mobile banking, are beingemphasized as efforts to capitalize on the economic stimulus being provided bythe Marcellus Shale natural gas exploration.

 

Depositbalances and their changes for the periods being discussed follow:

 
| ** **            | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** | **Change** | ** ** |
|-----------------------|------------|------------------------|------------|----------------------------|------------|------------|------------|
| **(In Thousands)**    | ** ** | **Amount**             | ** ** | **% Total**                | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Demand deposits       |       | $                      | 87,979     |                       | 16.6       | %          | $          | 79,899 |   | 16.1 | % | $ | 8,080 |   | 10.1 | % |
| NOW accounts          |       | 65,802                 |       | 12.4                       |       | 64,361     |       | 12.9 |   | 1,441 |   | 2.2 |   |
| Money market deposits |       | 101,301                |       | 19.1                       |       | 74,634     |       | 15.0 |   | 26,667 |   | 35.7 |   |
| Savings deposits      |       | 66,789                 |       | 12.6                       |       | 60,827     |       | 12.2 |   | 5,962 |   | 9.8 |   |
| Time deposits         |       | 208,110                |       | 39.3                       |       | 217,566    |       | 43.8 |   | (9,456 | ) | (4.3 | ) |
| Total deposits        |       | $                      | 529,981    |                       | 100.0      | %          | $          | 497,287 |   | 100.0 | % | $ | 32,694 |   | 6.6 | % |

 

**Borrowed Funds**

 

Totalborrowed funds decreased 3.9% or $4,145,000 to $100,987,000 at June 30,2010****compared to $105,132,000 at December 31,2009.  The decrease in borrowed funds isprimarily the result of growth in deposits as part of the previously discusseddeposit gathering campaigns that were utilized to provide loan portfoliofunding and to reduce the level of total borrowings.  FHLB

 

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repurchaseagreements were utilized as their structure allowed for a reduction in interestexpense, while providing the ability to reduce the borrowings at our discretionas deposit levels increased.

 
| ** **                                    | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** | **Change** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|----------------------------|------------|------------|------------|
| **(In  Thousands)**                           | ** ** | **Amount**             | ** ** | **% Total**                | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Short-term borrowings:                        |       |                   |       |                       |       |       |       |   |   |   |   |   |   |
| FHLB repurchase agreements                    |       | $                      | —     |                       | —     | %          | $          | 5,155 |   | 4.9 | % | $ | (5,155 | ) | (100.0 | )% |
| Securities sold under agreement to repurchase |       | 14,209                 |       | 14.1                       |       | 13,199     |       | 12.6 |   | 1,010 |   | 7.7 |   |
| Total short-term borrowings                   |       | 14,209                 |       | 14.1                       |       | 18,354     |       | 17.5 |   | (4,145 | ) | (22.6 | ) |
|                                          |       |                   |       |                       |       |       |       |   |   |   |   |   |   |
| Long-term borrowings, FHLB                    |       | 86,778                 |       | 85.9                       |       | 86,778     |       | 82.5 |   | — |   | — |   |
| Total borrowed funds                          |       | $                      | 100,987    |                       | 100.0      | %          | $          | 105,132 |   | 100.0 | % | $ | (4,145 | ) | (3.9 | )% |

 

**Capital**

 

Theadequacy of the Company’s capital is reviewed on an ongoing basis withreference to the size, composition, and quality of the Company’s resources andregulatory guidelines.  Management seeksto maintain a level of capital sufficient to support existing assets andanticipated asset growth, maintain favorable access to capital markets, andpreserve high quality credit ratings.

 

Bankholding companies are required to comply with the Federal Reserve Board’srisk-based capital guidelines.  Therisk-based capital rules are designed to make regulatory capitalrequirements more sensitive to differences in risk profiles among banks andbank holding companies and to minimize disincentives for holding liquidassets.  Specifically, each is requiredto maintain certain minimum dollar amounts and ratios of total risk-based, tierI risk-based, and tier I leverage capital. In addition to the capital requirements,the Federal Deposit Insurance Corporation Improvements Act (FDICIA) establishedfive capital categories ranging from “well capitalized” to “criticallyundercapitalized.” To be classified as “well capitalized”, total risk-based,tier I risked-based, and tier I leverage capital ratios must be at least 10%,6%, and 5%, respectively.

 

Capitalratios as of June 30, 2010 and December 31, 2009 were as follows:

 

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| ** **                                          | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-----------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| **(In Thousands)**                             | ** ** | **Amount**                  | ** ** | **Ratio**                       | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| **Total Capital****(to Risk-weighted Assets)******  |       |                        |       |                            |       |   |   |   |   |
| Actual                                              |       | $                           | 69,907     |                            | 15.2       | % | $ | 67,738 |   | 15.4 | % |
| For Capital Adequacy Purposes                       |       | 36,828                      |       | 8.0                             |       | 35,094 |   | 8.0 |   |
| To Be Well Capitalized                              |       | 46,036                      |       | 10.0                            |       | 43,867 |   | 10.0 |   |
|                                                |       |                        |       |                            |       |   |   |   |   |
| **Tier I Capital****(to Risk-weighted Assets)****** |       |                        |       |                            |       |   |   |   |   |
| Actual                                              |       | $                           | 64,446     |                            | 14.0       | % | $ | 62,709 |   | 14.3 | % |
| For Capital Adequacy Purposes                       |       | 18,414                      |       | 4.0                             |       | 17,547 |   | 4.0 |   |
| To Be Well Capitalized                              |       | 27,621                      |       | 6.0                             |       | 26,320 |   | 6.0 |   |
|                                                |       |                        |       |                            |       |   |   |   |   |
| **Tier I Capital****(to Average Assets)******       |       |                        |       |                            |       |   |   |   |   |
| Actual                                              |       | $                           | 64,446     |                            | 9.3        | % | $ | 62,709 |   | 9.3 | % |
| For Capital Adequacy Purposes                       |       | 27,785                      |       | 4.0                             |       | 26,914 |   | 4.0 |   |
| To Be Well Capitalized                              |       | 34,732                      |       | 5.0                             |       | 33,642 |   | 5.0 |   |

 

**Liquidity; Interest Rate Sensitivity and Market Risk**

 

Theasset/liability committee addresses the liquidity needs of the Company toensure that sufficient funds are available to meet credit demands and depositwithdrawals as well as to the placement of available funds in the investmentportfolio.  In assessing liquidityrequirements, equal consideration is given to the current position as well asthe future outlook.

 

Thefollowing liquidity measures are monitored for compliance and were within thelimits cited at June 30, 2010:

 

1.  Net Loans to Total Assets, 85% maximum

2.  Net Loans to Total Deposits, 100% maximum

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

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

 

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

 

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TheBank, like other financial institutions, must have sufficient funds availableto meet its liquidity needs for deposit withdrawals, loan commitments andoriginations, and expenses.  In order tocontrol cash flow, the Bank estimates future cash flows from deposits, loanpayments, and investment security payments. The primary sources of funds are deposits, principal and interestpayments on loans and investment securities, FHLB borrowings, and brokereddeposits.  Management believes the Bankhas adequate resources to meet its normal funding requirements.

 

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

 

Managementmonitors and determines the desirable level of liquidity.  Consideration is given to loan demand,investment opportunities, deposit pricing and growth potential, as well as thecurrent cost of borrowing funds.  TheCompany has a current borrowing capacity at the FHLB of $216,627,000.  In addition to this credit arrangement, theCompany has additional lines of credit with correspondent banks of $13,934,000.Management believes it has sufficient liquidity to satisfy estimated short-termand long-term funding needs.  FHLB borrowingstotaled $86,778,000 as of June 30, 2010.

 

Interestrate sensitivity, which is closely related to liquidity management, is afunction of the repricing characteristics of the Company’s portfolio of assetsand liabilities.  Asset/liabilitymanagement strives to match maturities and rates between loan and investmentsecurity assets with the deposit liabilities and borrowings that fundthem.  Successful asset/liabilitymanagement results in a balance sheet structure which can cope effectively withmarket rate fluctuations. The matching process is affected by segmenting bothassets and liabilities into future time periods (usually 12 months, or less)based upon when repricing can be effected. Repriceable assets are subtracted from repriceable liabilities, for aspecific time period to determine the “gap”, or difference. Once known, the gapis managed based on predictions about future market interest rates.  Intentional mismatching, or gapping, canenhance net interest income if market rates move as predicted.  However, if market rates behave in a mannercontrary to predictions, net interest income will suffer.  Gaps, therefore, contain an element of riskand must be prudently managed.  Inaddition to gap management, the Company has an asset/liability managementpolicy which incorporates a market value at risk calculation which is used todetermine the effects of interest rate movements on shareholders’ equity and asimulation analysis to monitor the effects of interest rate changes on theCompany’s balance sheet.

 

TheCompany currently maintains a GAP position of being liability sensitive.  The Company has strategically taken thisposition as it has decreased the duration of the time deposit portfolio, whilecontinuing to maintain a primarily fixed rate earning asset portfolio with aduration greater than the liabilities utilized to fund earning assets.  Lengthening of the liability portfoliocoupled 

 

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withthe addition of limited short-term assets is being undertaken.  These actions are expected to reduce, but noteliminate, the liability sensitive structure of the balance sheet.

 

Amarket value at risk calculation is utilized to monitor the effects of interestrate changes on the Company’s balance sheet and more specifically shareholders’equity.  The Company does not manage thebalance sheet structure in order to maintain compliance with thiscalculation.  The calculation serves as aguideline with greater emphases placed on interest rate sensitivity.  Changes to calculation results from period toperiod are reviewed as changes in results could be a signal of futureevents.  As of the most recent analysis,the results of the market value at risk calculation were outside of establishedguidelines due to the strategic direction being taken.

 

**InterestRate Sensitivity**

 

Inthis analysis the Company examines the result of a 100 and 200 basis pointchange in market interest rates and the effect on net interest income. It isassumed that the change is instantaneous and that all rates move in a parallelmanner.  Assumptions are also madeconcerning prepayment speeds on mortgage loans and mortgage securities.

 

Thefollowing is a rate shock forecast for the twelve month period ended June 30,2011 assuming a static balance sheet as of June 30, 2010.

 
| ** **                 | ** ** | **Parallel Rate Shock in Basis Points** | ** ** |
|----------------------------|------------|-----------------------------------------|------------|
| **(In  Thousands)**        | ** ** | **-200**                                | ** ** | **-100** | ** ** | **Static** | ** ** | **+100** | ** ** | **+200** | ** ** |
| Net interest income        |       | $                                       | 23,295     |   | $ | 24,567 |   | $ | 25,092 |   | $ | 25,294 |   | $ | 25,657 |   |
| Change from static         |       | (1,797                                  | )          | (525 | ) | — |   | 202 |   | 565 |   |
| Percent change from static |       | -7.16                                   | %          | -2.09 | % | — |   | 0.81 | % | 2.25 | % |
|                            |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Themodel utilized to create the report presented above makes various estimates ateach level of interest rate change regarding cash flow from principal repaymenton loans and mortgage-backed securities and or call activity on investmentsecurities.  Actual results could differsignificantly from these estimates which would result in significantdifferences in the calculated projected change. In addition, the limits stated above do not necessarily represent thelevel of change under which management would undertake specific measures torealign its portfolio in order to reduce the projected level of change.  Generally, management believes the Company iswell positioned to respond expeditiously when the market interest rate outlookchanges.

 

**Inflation**

 

Theasset and liability structure of a financial institution is primarily monetaryin nature.  Therefore, interest ratesrather than inflation have a more significant impact on the Company’sperformance.  Interest rates are notalways affected in the same direction or magnitude as prices of other goods andservices, but are reflective of fiscal policy initiatives or economic factorswhich are not measured by a price index.

 

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

 

Marketrisk for the Company is comprised primarily of interest rate risk exposure andliquidity risk.  Interest rate risk andliquidity risk management is performed at the Bank level as well as the Companylevel.  The Company’s interest ratesensitivity is monitored by management through selected interest rate riskmeasures produced by an independent third party.  There have been no substantial changes in theCompany’s gap analyses or simulation analyses compared to the informationprovided in the Annual Report on Form 10-K for the period ended December 31,2009.  Additional information and detailsare provided in the “Liquidity and Interest Rate Sensitivity” section of “Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations.”

 

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

 

**Item 4.  Controls and Procedures**

 

Ananalysis was performed under the supervision and with the participation of theCompany’s management, including the Chief Executive Officer and the ChiefFinancial Officer, of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures. Based on that evaluation, theCompany’s Chief Executive Officer and Chief Financial Officer concluded thatthe Company’s disclosure controls and procedures were effective as of June 30,2010.  There were no changes in theCompany’s internal control over financial reporting that occurred during thequarter ended June 30, 2010, that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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**Part II.  OTHER INFORMATION**

** **

**Item 1.          Legal Proceedings**

 

None.

 

**Item 1A.  Risk Factors**

 

There are no materialchanges to the risk factors set forth in Part I, Item 1A, “RiskFactors,” of the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2009.  Please refer tothat section for disclosures regarding the risks and uncertainties related tothe Company’s business.

 

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

** **
| ** **                                    | ** ** | **Total**           | ** ** | **Average**         | ** ** | **Total Number of**           | ** ** | **Maximum Number (or**                    | ** ** |
|-----------------------------------------------|------------|---------------------|------------|---------------------|------------|-----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                    | ** ** | **Number of**  | ** ** | **Price Paid** | ** ** | **Shares (or Units)**         | ** ** | **Approximate Dollar Value)**             | ** ** |
| ** **                                    | ** ** | **Shares (or** | ** ** | **per Share**  | ** ** | **Purchased as Part of** | ** ** | **of Shares (or Units) that**   | ** ** |
| ** **                                    | ** ** | **Units)**          | ** ** | **(or Units)** | ** ** | **Publicly Announced**             | ** ** | **May Yet Be Purchased**             | ** ** |
| **Period**                                    | ** ** | **Purchased**       | ** ** | **Purchased**       | ** ** | **Plans or Programs**         | ** ** | **Under the Plans or Programs** | ** ** |
|                                          |       |                |       |                |       |                                    |       |                                                |       |
| Month #1 (April 1 - April 30, 2010) |       | —              |       | $                   | —     |                                    | —     |                                                | 78,344     |   |
|                                          |       |                |       |                |       |                                    |       |                                                |       |
| Month #2 (May 1 - May 31, 2010)     |       | 1,568               |       | 29.27               |       | 1,568                                   |       | 76,776                                              |       |
|                                          |       |                |       |                |       |                                    |       |                                                |       |
| Month #3 (June 1 - June 30, 2010)   |       | —              |       | —              |       | —                                  |       | 76,776                                              |       |
|                                               |            |                     |            |                     |            |                                         |            |                                                     |            |  |

 

OnApril 27, 2010, the Board of Directors extended the previously approvedauthorization to repurchase up to 197,000 shares, or approximately 5%, of theoutstanding shares of the Company for an additional year to April 30,2011.  To date, there have been 120,224shares repurchased under this plan.

 

**Item 3.          Defaults Upon Senior Securities**

 

None

 

**Item 4.          (Removed and Reserved)**

 

**Item 5.          Other Information**

 

None

 

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**Item 6.          Exhibits**

 
| (3)   (i)  |   | Articles  of Incorporation of the Registrant, as presently in effect (incorporated by  reference to Exhibit 3(i) of the Registrant’s Annual Report on  Form 10-K for the year ended December 31, 2005). |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3)   (ii) |   | Bylaws  of the Registrant’s as presently in effect (incorporated by reference to  Exhibit 3(ii) of the Registrant’s Current Report on Form 8-K  filed June 17, 2005).                              |
| (31)  (i)       |   | Rule 13a-14(a)/Rule 15d-14(a) Certification  of Chief Executive Officer.                                                                                                                                          |
| (31)  (ii)      |   | Rule 13a-14(a)/Rule 15d-14(a) Certification  of Chief Financial Officer.                                                                                                                                          |
| (32)  (i)       |   | Section 1350  Certification of Chief Executive Officer.                                                                                                                                                                     |
| (32)  (ii)      |   | Section 1350  Certification of Chief Financial Officer.                                                                                                                                                                     |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                                  | PENNS  WOODS BANCORP, INC.                                 |
|---------------------------------------|-----------------------------------------------------------------|
|                                  | (Registrant)                                                    |
|                                  |                                                            |
|                                  |                                                            |
| Date:   August 9, 2010 | /s/  Ronald A. Walko                                            |
|                                  | Ronald  A. Walko, President and Chief Executive Officer         |
|                                  | (Principal  Executive Officer)                                  |
|                                  |                                                            |
|                                  |                                                            |
| Date:   August 9, 2010 | /s/  Brian L. Knepp                                             |
|                                  | Brian  L. Knepp, Chief Financial Officer                        |
|                                  | (Principal  Financial Officer and Principal Accounting Officer) |

 

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**EXHIBIT INDEX**

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

 

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