Table of Contents

 

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

**FORM 10-Q**

 

| **x** | **Quarterly  Report pursuant to Section 13 or 15 (d) of the Securities Exchange  Act of 1934 for the Quarterly Period Ended September 30, 2009.** |
|-------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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

 

**Transition Period from                              to                               .**

 

**No. 0-17077**

(Commission File Number)

 

**PENNS WOODS BANCORP, INC.**

(Exact name of Registrant as specified in its charter)

 

| **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 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant 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” in Rule 12b-2of 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

 

OnNovember 4, 2009 there were 3,833,764 shares of the Registrant’s commonstock outstanding.

 

 

 

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Table of Contents

 

**PENNSWOODS BANCORP, INC.**

**INDEX TOQUARTERLY REPORT ON FORM 10-Q**

 
| ** **                                                                                                                                        | ** ** | **Page**   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **                                                                                                                                        | ** ** | **Number** |
|                                                                                                                                              |       |       |
| **Part I          Financial Information**                                                       |       |       |
|                                                                                                                                              |       |       |
| **Item 1.        Financial Statements**                                                                        |       |       |
|                                                                                                                                              |       |       |
| Consolidated  Balance Sheet (unaudited) as of September 30, 2009 and December 31,  2008                                                 |       | 3          |
|                                                                                                                                              |       |       |
| Consolidated  Statement of Income (unaudited) for the Three and Nine Months ended  September 30, 2009 and 2008                               |       | 4          |
|                                                                                                                                              |       |       |
| Consolidated  Statement of Changes in Shareholders’ Equity (unaudited) for the Nine Months  ended September 30, 2009 and 2008           |       | 5          |
|                                                                                                                                              |       |       |
| Consolidated  Statement of Comprehensive Income (unaudited) for the Three and Nine Months  ended September 30, 2009 and 2008                 |       | 5          |
|                                                                                                                                              |       |       |
| Consolidated  Statement of Cash Flows (unaudited) for the Nine Months ended  September 30, 2009 and 2008                                     |       | 6          |
|                                                                                                                                              |       |       |
| Notes to Consolidated Financial  Statements (unaudited)                                                                                           |       | 7          |
|                                                                                                                                              |       |       |
| **Item 2.        Management’s  Discussion and Analysis of Financial Condition and Results of Operations** |       | 22         |
| **Item 3.        Quantitative  and Qualitative Disclosures About Market Risk**                                 |       | 41         |
| **Item 4.        Controls and  Procedures**                                                                    |       | 41         |
| ** **                                                                                                                                        |       |       |
| **Part II         Other Information**                                                                |       |       |
| ** **                                                                                                                                        |       |       |
| **Item 1.        Legal Proceedings**                                                                           |       | 42         |
| **Item 1A.     Risk Factors**                                                                                                 |       | 42         |
| **Item 2.        Unregistered  Sales of Equity Securities and Use of Proceeds**                                |       | 42         |
| **Item 3.        Defaults Upon  Senior Securities**                                                            |       | 42         |
| **Item 4.        Submission of  Matters to a Vote of Security Holders**                                        |       | 42         |
| **Item 5.        Other Information**                                                                           |       | 42         |
| **Item  6.        Exhibits**                                                                                   |       | 43         |
| **Signatures**                                                                                                                                    |       | 44         |
| **Exhibit Index and Exhibits**                                                                                                               |       | 45         |

 

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Table of Contents

 

**Part I.  FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

** **

PENNS WOODS BANCORP, INC.CONSOLIDATED BALANCE SHEET

 (UNAUDITED)

 
| **(In Thousands, Except Share  Data)**                                                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                          | ** ** | **2009**               | ** ** | **2008**              | ** ** |
|                                                                                                |       |                   |       |                  |       |
| ASSETS                                                                                              |       |                   |       |                  |       |
| Noninterest-bearing balances                                                                        |       | $                      | 12,633     |                  | $          | 16,563 |   |
| Interest-bearing deposits in other financial  institutions                                          |       | 30                     |       | 18                    |       |
| Total cash and cash equivalents                                                                     |       | 12,663                 |       | 16,581                |       |
|                                                                                                |       |                   |       |                  |       |
| Investment securities, available for sale, at fair  value                                           |       | 219,404                |       | 208,251               |       |
| Investment securities held to maturity (fair value  of $111 and $136)                               |       | 110                    |       | 135                   |       |
| Loans held for sale                                                                                 |       | 5,403                  |       | 3,622                 |       |
| Loans                                                                                               |       | 400,825                |       | 381,478               |       |
| Less: Allowance for loan losses                                                                     |       | 4,478                  |       | 4,356                 |       |
| Loans, net                                                                                          |       | 396,347                |       | 377,122               |       |
| Premises and equipment, net                                                                         |       | 7,791                  |       | 7,865                 |       |
| Accrued interest receivable                                                                         |       | 3,515                  |       | 3,614                 |       |
| Bank-owned life insurance                                                                           |       | 15,023                 |       | 14,546                |       |
| Investment in limited partnerships                                                                  |       | 5,040                  |       | 4,727                 |       |
| Goodwill                                                                                            |       | 3,032                  |       | 3,032                 |       |
| Deferred tax asset                                                                                  |       | 6,907                  |       | 10,879                |       |
| Other assets                                                                                        |       | 3,450                  |       | 2,429                 |       |
| TOTAL ASSETS                                                                                        |       | $                      | 678,685    |                  | $          | 652,803 |   |
|                                                                                                |       |                   |       |                  |       |
| LIABILITIES                                                                                         |       |                   |       |                  |       |
| Interest-bearing deposits                                                                           |       | $                      | 414,493    |                  | $          | 345,333 |   |
| Noninterest-bearing deposits                                                                        |       | 75,569                 |       | 76,035                |       |
| Total deposits                                                                                      |       | 490,062                |       | 421,368               |       |
|                                                                                                |       |                   |       |                  |       |
| Short-term borrowings                                                                               |       | 21,440                 |       | 73,946                |       |
| Long-term borrowings, Federal Home Loan Bank (FHLB)                                                 |       | 86,778                 |       | 86,778                |       |
| Accrued interest payable                                                                            |       | 1,191                  |       | 1,317                 |       |
| Other liabilities                                                                                   |       | 8,675                  |       | 8,367                 |       |
| TOTAL LIABILITIES                                                                                   |       | 608,146                |       | 591,776               |       |
|                                                                                                |       |                   |       |                  |       |
| SHAREHOLDERS’ EQUITY                                                                           |       |                   |       |                  |       |
| Common stock, par value $8.33, 10,000,000 shares  authorized; 4,012,519 and 4,010,528 shares issued |       | 33,437                 |       | 33,421                |       |
| Additional paid-in capital                                                                          |       | 17,995                 |       | 17,959                |       |
| Retained earnings                                                                                   |       | 26,481                 |       | 28,177                |       |
| Accumulated other comprehensive gain (loss):                                                        |       |                   |       |                  |       |
| Net unrealized gain (loss) on available for sale  securities                                        |       | 2,670                  |       | (8,486                | )          |
| Defined benefit plan                                                                                |       | (3,780                 | )          | (3,780                | )          |
| Less: Treasury stock at cost, 179,028 and 179,028  shares                                           |       | (6,264                 | )          | (6,264                | )          |
| TOTAL SHAREHOLDERS’ EQUITY                                                                     |       | 70,539                 |       | 61,027                |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                     |       | $                      | 678,685    |                  | $          | 652,803 |   |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

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PENNS WOODS BANCORP, INC.CONSOLIDATED STATEMENT OF INCOME 

(UNAUDITED)

 
| **(In Thousands, Except Per Share  Data)**           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                           | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                           | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                 |       |                   |       |                   |       |   |   |   |   |
| INTEREST  AND DIVIDEND INCOME                        |       |                   |       |                   |       |   |   |   |   |
| Loans  including fees                                |       | $                      | 6,457      |                   | $          | 6,311 |   | $ | 19,025 |   | $ | 18,936 |   |
| Investment  securities:                              |       |                   |       |                   |       |   |   |   |   |
| Taxable                                              |       | 1,368                  |       | 1,391                  |       | 4,105 |   | 3,857 |   |
| Tax-exempt                                           |       | 1,253                  |       | 1,205                  |       | 3,748 |   | 3,641 |   |
| Dividend  and other interest income                  |       | 35                     |       | 201                    |       | 165 |   | 658 |   |
| TOTAL  INTEREST AND DIVIDEND INCOME                  |       | 9,113                  |       | 9,108                  |       | 27,043 |   | 27,092 |   |
|                                                 |       |                   |       |                   |       |   |   |   |   |
| INTEREST  EXPENSE                                    |       |                   |       |                   |       |   |   |   |   |
| Deposits                                             |       | 2,148                  |       | 2,410                  |       | 6,357 |   | 7,502 |   |
| Short-term  borrowings                               |       | 82                     |       | 310                    |       | 318 |   | 996 |   |
| Long-term  borrowings, FHLB                          |       | 938                    |       | 875                    |       | 2,781 |   | 3,044 |   |
| TOTAL  INTEREST EXPENSE                              |       | 3,168                  |       | 3,595                  |       | 9,456 |   | 11,542 |   |
|                                                 |       |                   |       |                   |       |   |   |   |   |
| NET  INTEREST INCOME                                 |       | 5,945                  |       | 5,513                  |       | 17,587 |   | 15,550 |   |
|                                                 |       |                   |       |                   |       |   |   |   |   |
| PROVISION  FOR LOAN LOSSES                           |       | 270                    |       | 110                    |       | 582 |   | 230 |   |
|                                                 |       |                   |       |                   |       |   |   |   |   |
| NET  INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |       | 5,675                  |       | 5,403                  |       | 17,005 |   | 15,320 |   |
|                                                 |       |                   |       |                   |       |   |   |   |   |
| NON-INTEREST  INCOME                                 |       |                   |       |                   |       |   |   |   |   |
| Service  charges                                     |       | 553                    |       | 594                    |       | 1,619 |   | 1,704 |   |
| Securities  losses, net                              |       | (507                   | )          | (1,504                 | )          | (4,962 | ) | (1,717 | ) |
| Earnings  on bank-owned life insurance               |       | 144                    |       | 121                    |       | 418 |   | 367 |   |
| Gain  on sale of loans                               |       | 305                    |       | 314                    |       | 526 |   | 678 |   |
| Insurance  commissions                               |       | 287                    |       | 416                    |       | 988 |   | 1,482 |   |
| Other                                                |       | 599                    |       | 531                    |       | 1,624 |   | 1,493 |   |
| TOTAL  NON-INTEREST INCOME                           |       | 1,381                  |       | 472                    |       | 213 |   | 4,007 |   |
|                                                 |       |                   |       |                   |       |   |   |   |   |
| NON-INTEREST  EXPENSE                                |       |                   |       |                   |       |   |   |   |   |
| Salaries  and employee benefits                      |       | 2,588                  |       | 2,355                  |       | 7,665 |   | 7,275 |   |
| Occupancy,  net                                      |       | 299                    |       | 315                    |       | 956 |   | 967 |   |
| Furniture  and equipment                             |       | 293                    |       | 304                    |       | 906 |   | 876 |   |
| Pennsylvania  shares tax                             |       | 171                    |       | 105                    |       | 514 |   | 315 |   |
| Amortization  of investment in limited partnerships  |       | 142                    |       | 178                    |       | 425 |   | 534 |   |
| Other                                                |       | 1,604                  |       | 1,194                  |       | 4,161 |   | 3,440 |   |
| TOTAL  NON-INTEREST EXPENSE                          |       | 5,097                  |       | 4,451                  |       | 14,627 |   | 13,407 |   |
|                                                 |       |                   |       |                   |       |   |   |   |   |
| INCOME  BEFORE INCOME TAX (BENEFIT) PROVISION        |       | 1,959                  |       | 1,424                  |       | 2,591 |   | 5,920 |   |
| INCOME  TAX (BENEFIT) PROVISION                      |       | 37                     |       | (128                   | )          | (1,002 | ) | 180 |   |
| NET  INCOME                                          |       | $                      | 1,922      |                   | $          | 1,552 |   | $ | 3,593 |   | $ | 5,740 |   |
|                                                 |       |                   |       |                   |       |   |   |   |   |
| EARNINGS  PER SHARE - BASIC                          |       | $                      | 0.50       |                   | $          | 0.40 |   | $ | 0.94 |   | $ | 1.49 |   |
|                                                 |       |                   |       |                   |       |   |   |   |   |
| EARNINGS  PER SHARE - DILUTED                        |       | $                      | 0.50       |                   | $          | 0.40 |   | $ | 0.94 |   | $ | 1.49 |   |
|                                                 |       |                   |       |                   |       |   |   |   |   |
| WEIGHTED  AVERAGE SHARES OUTSTANDING - BASIC         |       | 3,833,131              |       | 3,855,348              |       | 3,832,471 |   | 3,865,317 |   |
|                                                 |       |                   |       |                   |       |   |   |   |   |
| WEIGHTED  AVERAGE SHARES OUTSTANDING - DILUTED       |       | 3,833,305              |       | 3,855,458              |       | 3,832,555 |   | 3,865,463 |   |
|                                                 |       |                   |       |                   |       |   |   |   |   |
| DIVIDENDS  PER SHARE                                 |       | $                      | 0.46       |                   | $          | 0.46 |   | $ | 1.38 |   | $ | 1.38 |   |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

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PENNS WOODS BANCORP, INC.CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

 
| **(In Thousands, Except Per Share Data)**         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **        | ** ** | **ACCUMULATED** | ** ** | ** **             | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|-------------------|------------|-----------------|------------|------------------------|------------|------------|------------|
| ** **                                             | ** ** | **COMMON** | ** ** | **ADDITIONAL** | ** ** | ** **   | ** ** | **OTHER**         | ** ** | ** **      | ** ** | **TOTAL**              | ** ** |
| ** **                                             | ** ** | **STOCK**  | ** ** | **PAID-IN**    | ** ** | **RETAINED** | ** ** | **COMPREHENSIVE** | ** ** | **TREASURY**    | ** ** | **SHAREHOLDERS’** | ** ** |
| ** **                                             | ** ** | **SHARES** | ** ** | **AMOUNT**     | ** ** | **CAPITAL**  | ** ** | **EARNINGS**      | ** ** | **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                                            |       |       |       |           |       |         |       | 3,593             |       |            |       |                   |       | 3,593      |       |
| Other  comprehensive income                            |       |       |       |           |       |         |       |              |       | 11,156          |       |                   |       | 11,156     |       |
| Dividends  declared ($1.38 per share)                  |       |       |       |           |       |         |       | (5,289            | )          |            |       |                   |       | (5,289     | )          |
| Common  shares issued for employee stock purchase plan |       | 1,991      |       | 16             |       | 36           |       |              |       |            |       |                   |       | 52         |       |
| Balance,  September 30, 2009                      |       | 4,012,519  |       | $              | 33,437     |         | $          | 17,995            |       | $               | 26,481     |                   | $          | (1,110     | )          | $ | (6,264 | ) | $ | 70,539 |   |

 
| **(In Thousands, Except Per Share Data)**                         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **        | ** ** | **ACCUMULATED** | ** ** | ** **             | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|-------------------|------------|-----------------|------------|------------------------|------------|------------|------------|
| ** **                                                             | ** ** | **COMMON** | ** ** | **ADDITIONAL** | ** ** | ** **   | ** ** | **OTHER**         | ** ** | ** **      | ** ** | **TOTAL**              | ** ** |
| ** **                                                             | ** ** | **STOCK**  | ** ** | **PAID-IN**    | ** ** | **RETAINED** | ** ** | **COMPREHENSIVE** | ** ** | **TREASURY**    | ** ** | **SHAREHOLDERS’** | ** ** |
| ** **                                                             | ** ** | **SHARES** | ** ** | **AMOUNT**     | ** ** | **CAPITAL**  | ** ** | **EARNINGS**      | ** ** | **LOSS**        | ** ** | **STOCK**              | ** ** | **EQUITY** | ** ** |
| Balance,  December 31, 2007                                       |       | 4,006,934  |       | $              | 33,391     |         | $          | 17,888            |       | $               | 27,707     |                   | $          | (3,534     | )          | $ | (4,893 | ) | $ | 70,559 |   |
|                                                                   |       |       |       |           |       |         |       |              |       |            |       |                   |       |       |       |
| Cumulative  effect of change in accounting for postretirement benefits |       |       |       |           |       |         |       | (437              | )          |            |       |                   |       | (437       | )          |
| Comprehensive  loss:                                                   |       |       |       |           |       |         |       |              |       |            |       |                   |       |       |       |
| Net  income                                                            |       |       |       |           |       |         |       | 5,740             |       |            |       |                   |       | 5,740      |       |
| Other  comprehensive loss                                              |       |       |       |           |       |         |       |              |       | (10,188         | )          |                   |       | (10,188    | )          |
| Dividends  declared, ($1.38 per share)                                 |       |       |       |           |       |         |       | (5,330            | )          |            |       |                   |       | (5,330     | )          |
| Stock  options exercised                                               |       | 330        |       | 3              |       | 8            |       |              |       |            |       |                   |       | 11         |       |
| Common  shares issued for employee stock purchase plan                 |       | 2,282      |       | 19             |       | 48           |       |              |       |            |       |                   |       | 67         |       |
| Purchase  of treasury stock (27,726 shares)                            |       |       |       |           |       |         |       |              |       |            |       | (861                   | )          | (861       | )          |
| Balance,  Semptember 30, 2008                                          |       | 4,009,546  |       | $              | 33,413     |         | $          | 17,944            |       | $               | 27,680     |                   | $          | (13,722    | )          | $ | (5,754 | ) | $ | 59,561 |   |

 

PENNS WOODS BANCORP, INC.CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 (UNAUDITED)

 
| **(In Thousands)**                                                         | ** ** | **Three  Months Ended September 30,** | ** ** | **Nine  Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                 | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                       |       |                                       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  Income                                                                |       |                                       |       | $                                         | 1,922      |   |   |   | $ | 1,552 |   |   |   | $ | 3,593 |   |   |   | $ | 5,740 |   |
| Other  comprehensive income (loss):                                        |       |                                       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Change  in net unrealized gains (losses) on available for sale securities  |       | 13,119                                     |       |                                      |       | (8,301 | ) |   |   | 11,941 |   |   |   | (17,153 | ) |   |   |
| Less:  Reclassification adjustment for net losses included in net income   |       | (507                                       | )          |                                      |       | (1,504 | ) |   |   | (4,962 | ) |   |   | (1,717 | ) |   |   |
| Other  comprehensive income (loss) before tax expense (benefit)            |       |                                       |       | 13,626                                    |       |   |   | (6,797 | ) |   |   | 16,903 |   |   |   | (15,436 | ) |
| Income  tax expense (benefit) related to other comprehensive income (loss) |       |                                       |       | 4,633                                     |       |   |   | (2,311 | ) |   |   | 5,747 |   |   |   | (5,248 | ) |
| Other  comprehensive income (loss), net of tax                             |       |                                       |       | 8,993                                     |       |   |   | (4,486 | ) |   |   | 11,156 |   |   |   | (10,188 | ) |
| Comprehensive  income (loss)                                               |       |                                       |       | $                                         | 10,915     |   |   |   | $ | (2,934 | ) |   |   | $ | 14,749 |   |   |   | $ | (4,448 | ) |

 

See accompanying notes tothe unaudited consolidated financial statements.

 

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PENNS WOODS BANCORP, INC.CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 
| **(In Thousands)**                                                                 | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **September 30,** | ** ** |
| ** **                                                                         | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                                                                               |       |                   |       |   |   |
| OPERATING  ACTIVITIES                                                              |       |                   |       |   |   |
| Net  Income                                                                        |       | $                      | 3,593      |   | $ | 5,740 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                   |       |   |   |
| Depreciation  and amortization                                                     |       | 541                    |       | 490 |   |
| Provision  for loan losses                                                         |       | 582                    |       | 230 |   |
| Accretion  and amortization of investment security discounts and premiums          |       | (1,052                 | )          | (982 | ) |
| Securities  losses, net                                                            |       | 4,962                  |       | 1,717 |   |
| Originations  of loans held for sale                                               |       | (24,448                | )          | (31,276 | ) |
| Proceeds  of loans held for sale                                                   |       | 23,193                 |       | 31,181 |   |
| Gain  on sale of loans                                                             |       | (526                   | )          | (678 | ) |
| Earnings  on bank-owned life insurance                                             |       | (418                   | )          | (367 | ) |
| Other,  net                                                                        |       | (1,169                 | )          | (1,445 | ) |
| Net  cash provided by operating activities                                         |       | 5,258                  |       | 4,610 |   |
| INVESTING  ACTIVITIES                                                              |       |                   |       |   |   |
| Investment  securities available for sale:                                         |       |                   |       |   |   |
| Proceeds  from sales                                                               |       | 5,377                  |       | 39,994 |   |
| Proceeds  from calls and maturities                                                |       | 7,596                  |       | 5,905 |   |
| Purchases                                                                          |       | (10,963                | )          | (49,733 | ) |
| Investment  securities held to maturity:                                           |       |                   |       |   |   |
| Proceeds  from calls and maturities                                                |       | 25                     |       | 179 |   |
| Net  increase in loans                                                             |       | (20,728                | )          | (11,458 | ) |
| Acquisition  of bank premises and equipment                                        |       | (467                   | )          | (1,551 | ) |
| Proceeds  from the sale of foreclosed assets                                       |       | —                 |       | 79 |   |
| Purchase  of bank-owned life insurance                                             |       | (59                    | )          | (715 | ) |
| Investment  in limited partnership                                                 |       | (738                   | )          | — |   |
| Proceeds  from redemption of regulatory stock                                      |       | —                 |       | 3,663 |   |
| Purchases  of regulatory stock                                                     |       | (170                   | )          | (2,802 | ) |
| Net  cash used for investing activities                                            |       | (20,127                | )          | (16,439 | ) |
| FINANCING  ACTIVITIES                                                              |       |                   |       |   |   |
| Net  increase in interest-bearing deposits                                         |       | 69,160                 |       | 42,634 |   |
| Net  decrease in noninterest-bearing deposits                                      |       | (466                   | )          | (1,085 | ) |
| Proceeds  of long-term borrowings, FHLB                                            |       | —                 |       | 10,000 |   |
| Repayment  of long-term borrowings, FHLB                                           |       | —                 |       | (29,600 | ) |
| Net  decrease in short-term borrowings                                             |       | (52,506                | )          | (6,886 | ) |
| Dividends  paid                                                                    |       | (5,289                 | )          | (5,330 | ) |
| Issuance  of common stock                                                          |       | 52                     |       | 67 |   |
| Stock  options exercised                                                           |       | —                 |       | 11 |   |
| Purchase  of treasury stock                                                        |       | —                 |       | (861 | ) |
| Net  cash provided by financing activities                                         |       | 10,951                 |       | 8,950 |   |
| NET  DECREASE IN CASH AND CASH EQUIVALENTS                                         |       | (3,918                 | )          | (2,879 | ) |
| CASH  AND CASH EQUIVALENTS, BEGINNING                                              |       | 16,581                 |       | 15,433 |   |
| CASH  AND CASH EQUIVALENTS, ENDING                                                 |       | $                      | 12,663     |   | $ | 12,554 |   |
|                                                                               |       |                   |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION                                 |       |                   |       |   |   |
|                                                                               |       |                   |       |   |   |
| Interest  paid                                                                     |       | $                      | 9,582      |   | $ | 11,915 |   |
| Income  taxes paid                                                                 |       | 1,175                  |       | 1,425 |   |
| Transfer  of loans to foreclosed real estate                                       |       | 921                    |       | 297 |   |

 

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.  Basisof 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.**

# ** **

The interim financialstatements are unaudited but, in the opinion of management, reflect alladjustments 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 financial statements and notes thereto contained in theCompany’s Annual Report on Form 10-K for the year ended December 31,2008.

 

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, 2008.

 

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

 

**Note 2. Recent Accounting Pronouncements**

** **

In April 2009, the FASBissued new guidance impacting ASC Topic 820, *Fair ValueMeasurements and Disclosures*. This ASC provides additional guidance in determining fair values whenthere is no active market or where the price inputs being used representdistressed sales.  It reaffirms the needto use judgment to ascertain if a formerly active market has become inactiveand in determining fair values when markets have become inactive.  The adoption of this new guidance did nothave a material effect on the Company’s results of operations or financialposition.

 

In April 2009, the FASBissued new guidance impacting ASC 825-10-50, *FinancialInstruments*, which relates to fair value disclosures for anyfinancial instruments that are not currently reflected on the balance sheet ofcompanies at fair value.  This guidanceamended existing GAAP to require disclosures about fair value of financialinstruments for interim reporting periods of publicly traded companies as wellas in annual financial statements.  Thisguidance is effective for interim and annual periods ending after June 15,2009.  The adoption of this new guidancedid not have a material impact on the Company’s financial position or resultsof operations.

 

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In April 2009, the FASBissued new guidance impacting ASC 320-10, *Investments — Debt andEquity Securities*, which provides additional guidance designed tocreate greater clarity and consistency in accounting for and presentingimpairment losses on securities.  Thisguidance is effective for interim and annual periods ending after June 15,2009.  The adoption of this new guidancedid not have a material impact on the Company’s financial position.

 

InJune 2009, the Financial Accounting Standards Board (“FASB”) issuedAccounting Standards Update (“ASU”) No. 2009-01, *Topic 105 -Generally Accepted Accounting Principles - FASB Accounting StandardsCodificationTM and the Hierarchy of Generally Accepted AccountingPrinciples*.* *TheCodification is the single source of authoritative nongovernmental U.S.generally accepted accounting principles (“GAAP”).  The Codificationdoes not change current GAAP, but is intended to simplify user access to allauthoritative GAAP by providing all the authoritative literature related to aparticular topic in one place.  Rules and interpretive releasesof the SEC under federal securities laws are also sources of authoritative GAAPfor SEC registrants. The Company adopted this standard for the interimreporting period ending September 30, 2009.  The adoption ofthis standard did not have a material impact on the Company’s results ofoperations or financial position.

 

In June 2009, the FASBissued an accounting standard related to the accounting for transfers offinancial assets, which is effective for fiscal years beginning after November 15,2009, and interim periods within those fiscal years.  This standard enhances reporting abouttransfers of financial assets, including securitizations, and where companieshave continuing exposure to the risks related to transferred financial assets.This standard eliminates the concept of a “qualifying special-purpose entity”and changes the requirements for derecognizing financial assets. This standardalso requires additional disclosures about all continuing involvements withtransferred financial assets including information about gains and lossesresulting from transfers during the period. This accounting standard was subsequently codified into ASC Topic860.  The adoption of this standard is notexpected to have a material effect on the Company’s results of operations orfinancial position.

 

InJune 2009, the FASB issued FAS No. 167, *Amendmentsto FASB Interpretation No. 46(R)*. FAS 167, which amends FASBInterpretation No. 46 (revised December 2003), *Consolidationof Variable Interest Entities*, (FIN 46(R)). Under FASB’s Codificationat ASC 105-10-65-1-d, FAS No. 167 will remain authoritative untilintegrated into the FASB Codification. This statement prescribes a qualitative model for identifying whether acompany has a controlling financial interest in a variable interest entity(VIE) and eliminates the quantitative model prescribed by FIN 46(R). The newmodel identifies two primary characteristics of a controlling financialinterest: (1) provides a company with the power to direct significantactivities of the VIE, and (2) obligates a company to absorb losses ofand/or provides rights to receive benefits from the VIE. FAS No. 167requires a company to reassess on an ongoing basis whether it holds acontrolling financial interest in a VIE. A company that holds a controllingfinancial interest is deemed to be the primary beneficiary of the VIE and isrequired to consolidate the VIE. This statement is effective for fiscal yearsbeginning after November 15, 2009, and interim periods within those fiscalyears. The adoption of this standard is not expected to have a material effecton the Company’s results of operations or financial position.

 

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In August 2009, theFASB issued ASU No. 2009-05, *Fair Value Measurementsand Disclosures (Topic 820) — Measuring Liabilities at Fair Value*.  ThisASU provides amendments for fair value measurements ofliabilities.  It provides clarification that in circumstances inwhich a quoted price in an active market for the identical liability is notavailable, a reporting entity is required to measure fair value using one ormore techniques.  ASU 2009-05 also clarifies that when estimating afair value of a liability, a reporting entity is not required to include aseparate input or adjustment to other inputs relating to the existence of arestriction that prevents the transfer of the liability.  ASU 2009-05is effective for the first reporting period (including interim periods)beginning after issuance or fourth quarter 2009.  The Company iscurrently evaluating the impact of this standard on the Company’s financialcondition, results of operations, and disclosures.

 

**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  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Weighted average common shares issued                                                                     |       | 4,012,159                                  |       | 4,009,070                                 |       | 4,011,499 |   | 4,008,094 |   |
|                                                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Average treasury stock shares                                                                             |       | (179,028                                   | )          | (153,722                                  | )          | (179,028 | ) | (142,777 | ) |
|                                                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Weighted average common shares and common stock  equivalents used to calculate basic earnings per share   |       | 3,833,131                                  |       | 3,855,348                                 |       | 3,832,471 |   | 3,865,317 |   |
|                                                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Additional common stock equivalents (stock options)  used to calculate diluted earnings per share         |       | 174                                        |       | 110                                       |       | 84 |   | 146 |   |
|                                                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Weighted average common shares and common stock  equivalents used to calculate diluted earnings per share |       | 3,833,305                                  |       | 3,855,458                                 |       | 3,832,555 |   | 3,865,463 |   |

 

Options to purchase 990 shares of common stock at astrike price of $31.82 and 990 shares at a strike price of $24.72 wereoutstanding during the three and nine months ended September 30, 2009.   The average market price of the company’sstock was $32.62 and $28.41 for the three and nine months ended September 30,2009.  Options to purchase 8,273 and9,593 shares of common stock were outstanding during the three and nine monthsended September 30, 2008 but were not included in the computation ofdiluted earnings per share as they were anti-dilutive due to the strike pricebeing greater than the average market price for the three and nine months endedSeptember 30, 2008.

 

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

 

For a detailed disclosure onthe Company’s pension and employee benefits plans, please refer to Note 11 ofthe Company’s Consolidated Financial Statements included in the Annual Reporton Form 10-K for the year ended December 31, 2008.

 

The following sets forth thecomponents of the net periodic benefit cost of the domestic non-contributorydefined benefit plan for the three and nine months ended September 30,2009 and 2008, respectively:

 
| **(In Thousands)**                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                            | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                            | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                  |       |                   |       |                   |       |   |   |   |   |
| Service cost                          |       | $                      |  136  |                   | $          |  137 |   | $ |  408 |   | $ |  410 |   |
| Interest cost                         |       | 170                    |       | 152                    |       | 510 |   | 456 |   |
| Expected return on plan assets        |       | (127                   | )          | (161                   | )          | (381 | ) | (481 | ) |
| Amortization of transition obligation |       | (1                     | )          | (1                     | )          | (2 | ) | (2 | ) |
| Amortization of prior service cost    |       | 6                      |       | 6                      |       | 19 |   | 19 |   |
| Amortization of net loss              |       | 85                     |       | 14                     |       | 254 |   | 42 |   |
| Net periodic cost                     |       | $                      |  269  |                   | $          |  147 |   | $ |  808 |   | $ |  444 |   |

 

**Employer Contributions**

** **

The Company previouslydisclosed in its consolidated financial statements, included in the AnnualReport on Form 10-K for the year ended December 31, 2008, that itexpected to contribute a minimum of $325,000 to its defined benefit plan in2009.  As of September 30, 2009, there were contributions of $662,000made to the plan.  The Company expects tocontribute a minimum of $143,000 to the defined benefit plan during theremaining period of 2009.

 

**Note 5.  Off Balance Sheet Risk**

 

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

 

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

 

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Financial instruments whose contract amounts representcredit risk are as follows at September 30, 2009 and December 31,2008:

 
| **(In Thousands)**           | ** ** | **September 30,** | ** **   | **December 31,** | ** ** |
|------------------------------|------------|------------------------|--------------|-----------------------|------------|
| ** **                   | ** ** | **2009**               | ** **   | **2008**              | ** ** |
| Commitments to extend credit |       | $                      |  82,526 |                  | $          |  85,871 |   |
| Standby letters of credit    |       | 1,524                  |         | 841                   |       |
|                              |            |                        |              |                       |            |  |  |

 

# **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 of Comparative 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 Purchase Plan**

# ** **

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 Planallows for up to 1,000,000 shares to be purchased by employees.  The purchase price of the shares is 95% ofmarket value with an employee eligible to purchase up to the lesser of 15% ofbase compensation or $12,000 in market value annually.  During the nine months ended September 30,2009 and 2008, there were 1,991 and 2,282 shares issued under the plan,respectively.

 

# **Note 8.  Fair Value Measurements**

# ** **

TheCompany adopted FASB ASC Topic 820 “Fair Value Measurements and Disclosures”effective January 1, 2008, which provides a framework for measuring fairvalue under GAAP.

 

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FASBASC Topic 820 “Fair Value Measurements and Disclosures” defines fair value asthe exchange price that would be received for an asset or paid to transfer aliability (an exit price) in the principal or most advantageous market for theasset or liability in an orderly transaction between market participants on themeasurement date.  FASB ASC Topic 820 also establishes a fair valuehierarchy which requires an entity to maximize the use of observable inputs andminimize the use of unobservable inputs when measuring fair value. The standarddescribes three levels of inputs that may be used to measure 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.                                                                    |

 

Thefollowing table presents the assets reported on the balance sheet at their fairvalue on a recurring basis as of September 30, 2009 and December 31,2008, by level within the fair value hierarchy. As required by GAAP, financialassets and liabilities are classified in their entirety based on the lowestlevel of input that is significant to the fair value measurement.

 
| **(In Thousands)**                        | ** ** | **September 30, 2009** | ** **   |
|-------------------------------------------|------------|-----------------------------|--------------|
| ** **                                | ** ** | **Level I**                 | ** **   | **Level II** | ** ** | **Level  III** | ** ** | **Total** | ** ** |
|                                      |       |                        |         |   |   |   |   |   |   |
| Assets Measured on a Recurring Basis:     |       |                        |         |   |   |   |   |   |   |
| Investment Securities, available-for-sale |       | $                           |  12,075 |   | $ |  207,329 |   | $ |  — |   | $ |  219,404 |   |
|                                      |       |                        |         |   |   |   |   |   |   |
| **(In Thousands)**                        | ** ** | **December 31, 2008**  | ** **   |
| ** **                                | ** ** | **Level I**                 | ** **   | **Level II** | ** ** | **Level  III** | ** ** | **Total** | ** ** |
|                                      |       |                        |         |   |   |   |   |   |   |
| Assets Measured on a Recurring Basis:     |       |                        |         |   |   |   |   |   |   |
| Investment Securities, available-for-sale |       | $                           |  13,269 |   | $ |  194,982 |   | $ |  — |   | $ |  208,251 |   |

 

The following table presents the assets reported onthe balance sheet at their fair value on a non-recurring basis as of September 30,2009 and December 31, 2008, by level within the fair value hierarchy. Asrequired by GAAP, financial assets and liabilities are classified in theirentirety based on the lowest level of input that is significant to the fairvalue measurement.

 

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| **(In Thousands)**                        | ** ** | **September 30, 2009** | ** **   |
|-------------------------------------------|------------|-----------------------------|--------------|
| ** **                                | ** ** | **Level I**                 | ** **   | **Level II** | ** ** | **Level  III** | ** ** | **Total** | ** ** |
|                                      |       |                        |         |   |   |   |   |   |   |
| Assets Measured on a Non-recurring Basis: |       |                        |         |   |   |   |   |   |   |
| Impaired Loans                            |       | $                           |  — |   | $ |  6,802 |   | $ |  — |   | $ |  6,802 |   |
|                                      |       |                        |         |   |   |   |   |   |   |
| **(In Thousands)**                        | ** ** | **December 31, 2008**  | ** **   |
| ** **                                | ** ** | **Level I**                 | ** **   | **Level II** | ** ** | **Level  III** | ** ** | **Total** | ** ** |
|                                      |       |                        |         |   |   |   |   |   |   |
| Assets Measured on a Non-recurring Basis: |       |                        |         |   |   |   |   |   |   |
| Impaired Loans                            |       | $                           |  — |   | $ |  4,876 |   | $ |  — |   | $ |  4,876 |   |

 

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

 

TheCompany is required to disclose estimated fair values for its financialinstruments.  Fair value estimates aremade at a specific point in time, based on relevant market information andinformation about the financial instrument. These estimates do not reflect any premium or discount that could resultfrom offering for sale at one time the Company’s entire holdings of aparticular financial instrument.  Also,it is the Company’s general practice and intention to hold most of itsfinancial instruments to maturity and not to engage in trading or salesactivities.  Because no market exists fora significant portion of the Company’s financial instruments, fair valueestimates are based on judgments regarding future expected loss experience,current economic conditions, risk characteristics of various financialinstruments, and other factors.  Theseestimates are subjective in nature and involve uncertainties and matters ofsignificant judgment and therefore cannot be determined with precision.  Changes in assumptions can significantlyaffect the estimates.

 

Estimatedfair values have been determined by the Company using historical data and anestimation methodology suitable for each category of financialinstruments.  The Company’s fair valueestimates, methods, and assumptions are set forth below for the Company’s otherfinancial instruments.

 

Ascertain assets and liabilities, such as deferred tax assets, premises andequipment, and many other operational elements of the Company, are notconsidered financial instruments but have value, this estimated fair value offinancial instruments would not represent the full market value of the Company.

 

Theestimated fair values of the Company’s financial instruments are as follows at September 30,2009 and December 31, 2008:

 

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| **(In Thousands)**            | ** ** | **September 30, 2009** | ** **    | **December 31, 2008** | ** ** |
|-------------------------------|------------|-----------------------------|---------------|----------------------------|------------|
| ** **                    | ** ** | **Carrying**                | ** **    | **Fair**                   | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                    | ** ** | **Value**                   | ** **    | **Value**                  | ** ** | **Value** | ** ** | **Value** | ** ** |
| Financial assets:             |       |                        |          |                       |       |   |   |   |   |
| Cash and cash equivalents     |       | $                           |  12,663  |                       | $          |  12,663 |   | $ |  16,581 |   | $ |  16,581 |   |
| Investment securities:        |       |                        |          |                       |       |   |   |   |   |
| Available for sale            |       | 219,404                     |          | 219,404                    |       | 208,251 |   | 208,251 |   |
| Held to maturity              |       | 110                         |          | 111                        |       | 135 |   | 136 |   |
| Loans held for sale           |       | 5,403                       |          | 5,403                      |       | 3,622 |   | 3,622 |   |
| Loans, net                    |       | 396,347                     |          | 403,527                    |       | 377,122 |   | 380,771 |   |
| Bank-owned life insurance     |       | 15,023                      |          | 15,023                     |       | 14,546 |   | 14,546 |   |
| Accrued interest  receivable  |       | 3,515                       |          | 3,515                      |       | 3,614 |   | 3,614 |   |
|                          |       |                        |          |                       |       |   |   |   |   |
| Financial liabilities:        |       |                        |          |                       |       |   |   |   |   |
| Interest-bearing deposits     |       | $                           |  414,493 |                       | $          |  417,427 |   | $ |  345,333 |   | $ |  347,657 |   |
| Noninterest-bearing  deposits |       | 75,569                      |          | 75,569                     |       | 76,035 |   | 76,035 |   |
| Short-term borrowings         |       | 21,440                      |          | 21,440                     |       | 73,946 |   | 73,946 |   |
| Long-term borrowings, FHLB    |       | 86,778                      |          | 89,932                     |       | 86,778 |   | 88,188 |   |
| Accrued interest payable      |       | 1,191                       |          | 1,191                      |       | 1,317 |   | 1,317 |   |

 

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**Cash and Cash Equivalents,Loans Held for Sale, Accrued Interest Receivable, Short-term Borrowings, andAccrued Interest Payable:**

 

Thefair value is equal to the carrying value.

 

**Investment Securities:**

 

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 calculated bydiscounting scheduled cash flows through the estimated maturity using estimatedmarket discount rates that reflect the credit and interest rate risk inherentin the loan.  The estimate of maturity isbased on the Company’s historical experience with repayments for each loanclassification, modified, as required, by an estimate of the effect of currenteconomic and lending conditions.

 

Fairvalue for significant nonperforming loans is based on recent externalappraisals.  If appraisals are not available,estimated cash flows are discounted using a rate commensurate with the riskassociated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discounted rates arejudgmentally determined using available market information and specificborrower information.

 

**Bank-Owned Life 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 September 30, 2009 and December 31,2008.  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 depositintangible.

 

**Long Term Borrowings:**

 

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

 

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

 

Thereis no material difference between the notional amount and the estimated fairvalue of off-balance sheet items at September 30, 2009 and December 31,2008.  The contractual amounts ofunfunded commitments and letters of credit are presented in Note 5.

 

# **Note 10.  Federal Home Loan Bank Stock**

# ** **

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 September 30, 2009, the Bank held$7,271,300 in 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 reflected withinthe Company’s financial statements.  Thedecision was based on several items ranging from the estimated true economiclosses embedded within the FHLB’s mortgage portfolio to the FHLB’s liquidityposition and credit rating.  The Companyutilizes the impairment framework outlined in GAAP to evaluate FHLB stock forimpairment.

 

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 inrelation to the operating performance of the FHLB; (iii) the impact oflegislative and regulatory changes on the institutions and, accordingly, on thecustomer base 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,the Company determined that its holding of FHLB stock was not impaired on September 30,2009.

 

**Note 11. Investment Securities**

 

Theamortized cost and estimated fair values of investment securities at September 30,2009 and December 31, 2008 are as follows:

 

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| **(In Thousands)**                    | ** ** | **September 30, 2009** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|
| ** **                            | ** ** | ** **                  | ** ** | **Gross** | ** ** | **Gross** | ** ** | **Estimated** | ** ** |
| ** **                            | ** ** | **Amortized**               | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                            | ** ** | **Cost**                    | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| Available for sale (AFS)              |       |                        |       |   |   |   |   |   |   |
| U.S. Government and agency securities |       | $                           | 38,518     |   | $ | 2,099 |   | $ | — |   | $ | 40,617 |   |
| State and political securities        |       | 144,464                     |       | 4,351 |   | (4,160 | ) | 144,655 |   |
| Other debt securities                 |       | 21,111                      |       | 1,287 |   | (341 | ) | 22,057 |   |
| Total debt securities                 |       | 204,093                     |       | 7,737 |   | (4,501 | ) | 207,329 |   |
| Equity securities                     |       | 11,266                      |       | 1,005 |   | (196 | ) | 12,075 |   |
| Total investment securities AFS       |       | $                           | 215,359    |   | $ | 8,742 |   | $ | (4,697 | ) | $ | 219,404 |   |
|                                  |       |                        |       |   |   |   |   |   |   |
| Held to maturity (HTM)                |       |                        |       |   |   |   |   |   |   |
| U.S. Government and agency securities |       | $                           | 9          |   | $ | 1 |   | $ | — |   | $ | 10 |   |
| Other debt securities                 |       | 101                         |       | — |   | — |   | 101 |   |
| Total investment securities HTM       |       | $                           | 110        |   | $ | 1 |   | $ | — |   | $ | 111 |   |
|                                  |       |                        |       |   |   |   |   |   |   |
| **(In Thousands)**                    | ** ** | **December 31, 2008**  | ** ** |
| ** **                            | ** ** | ** **                  | ** ** | **Gross** | ** ** | **Gross** | ** ** | **Estimated** | ** ** |
| ** **                            | ** ** | **Amortized**               | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                            | ** ** | **Cost**                    | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| Available for sale (AFS)              |       |                        |       |   |   |   |   |   |   |
| U.S. Government and agency securities |       | $                           | 46,452     |   | $ | 1,134 |   | $ | — |   | $ | 47,586 |   |
| State and political securities        |       | 142,258                     |       | 348 |   | (10,764 | ) | 131,842 |   |
| Other debt securities                 |       | 15,970                      |       | 649 |   | (1,065 | ) | 15,554 |   |
| Total debt securities                 |       | 204,680                     |       | 2,131 |   | (11,829 | ) | 194,982 |   |
| Equity securities                     |       | 16,429                      |       | 225 |   | (3,385 | ) | 13,269 |   |
| Total investment securities AFS       |       | $                           | 221,109    |   | $ | 2,356 |   | $ | (15,214 | ) | $ | 208,251 |   |
|                                  |       |                        |       |   |   |   |   |   |   |
| Held to maturity (HTM)                |       |                        |       |   |   |   |   |   |   |
| U.S. Government and agency securities |       | $                           | 10         |   | $ | 1 |   | $ | — |   | $ | 11 |   |
| Other debt securities                 |       | 125                         |       | — |   | — |   | 125 |   |
| Total investment securities HTM       |       | $                           | 135        |   | $ | 1 |   | $ | — |   | $ | 136 |   |

 

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The following tables show the Company’sgross unrealized losses and estimated fair value, aggregated by investmentcategory and length of time, that the individual securities have been in acontinuous unrealized loss position, at September 30, 2009 and December 31,2008.

 
| **(In Thousands)**                     | ** ** | **September 30, 2009** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **Less than Twelve Months** | ** ** | **Twelve Months or Greater** | ** ** | **Total** | ** ** |
| ** **                             | ** ** | **Estimated**               | ** ** | **Gross** | ** ** | **Estimated** | ** ** | **Gross** | ** ** | **Estimated** | ** ** | **Gross** | ** ** |
| ** **                             | ** ** | **Fair**                    | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **                             | ** ** | **Value**                   | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
|                                   |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government and agency  securities |       | $                           | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| State and political  securities        |       | 700                         |       | 35 |   | 38,818 |   | 4,125 |   | 39,518 |   | 4,160 |   |
| Other debt securities                  |       | —                      |       | — |   | 3,968 |   | 341 |   | 3,968 |   | 341 |   |
| Total debt securities                  |       | 700                         |       | 35 |   | 42,786 |   | 4,466 |   | 43,486 |   | 4,501 |   |
| Equity securities                      |       | 743                         |       | 122 |   | 500 |   | 74 |   | 1,243 |   | 196 |   |
| Total                                  |       | $                           | 1,443      |   | $ | 157 |   | $ | 43,286 |   | $ | 4,540 |   | $ | 44,729 |   | $ | 4,697 |   |
|                                   |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| **(In Thousands)**                     | ** ** | **December 31, 2008**  | ** ** |
| ** **                             | ** ** | **Less than Twelve Months** | ** ** | **Twelve Months or Greater** | ** ** | **Total** | ** ** |
| ** **                             | ** ** | **Estimated**               | ** ** | **Gross** | ** ** | **Estimated** | ** ** | **Gross** | ** ** | **Estimated** | ** ** | **Gross** | ** ** |
| ** **                             | ** ** | **Fair**                    | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **                             | ** ** | **Value**                   | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
|                                   |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government and agency  securities |       | $                           | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| State and political  securities        |       | 48,388                      |       | 4,378 |   | 67,412 |   | 6,386 |   | 115,800 |   | 10,764 |   |
| Other debt securities                  |       | 6,341                       |       | 451 |   | 2,012 |   | 614 |   | 8,353 |   | 1,065 |   |
| Total debt securities                  |       | 54,729                      |       | 4,829 |   | 69,424 |   | 7,000 |   | 124,153 |   | 11,829 |   |
| Equity securities                      |       | 164                         |       | 80 |   | 5,364 |   | 3,305 |   | 5,528 |   | 3,385 |   |
| Total                                  |       | $                           | 54,893     |   | $ | 4,909 |   | $ | 74,788 |   | $ | 10,305 |   | $ | 129,681 |   | $ | 15,214 |   |

 

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AtSeptember 30, 2009 there were a total of 10 and 115 individual securitiesthat were in a continuous unrealized loss position for less than twelve monthsand greater than twelve months, respectively.

 

The Company reviews itsposition quarterly and has asserted that at September 30, 2009, thedeclines outlined in the above table represent temporary declines and theCompany does have the intent and ability either to hold those securities tomaturity or to allow a market recovery. There were 125 positions that were temporarily impaired at September 30,2009.  The Company has concluded that theunrealized losses disclosed above are not other than temporary but are theresult of interest rate changes, sector credit ratings changes, orcompany-specific ratings changes that are not expected to result in thenon-collection of principal and interest during the period.

 

The amortized cost and estimated fair value ofdebt securities at September 30, 2009, by contractual maturity, are shownbelow. Expected maturities may differ from contractual maturities sinceborrowers may have the right to call or prepay obligations with or without callor prepayment penalties.

 
| **(In Thousands)**                 | ** ** | **Available for Sale** | ** ** | **Held to Maturity** | ** ** |
|------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                         | ** ** | **Amortized**          | ** ** | **Estimated**        | ** ** | **Amortized** | ** ** | **Estimated** | ** ** |
| ** **                         | ** ** | **Cost**               | ** ** | **Fair Value**       | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| Due in one year or less            |       | $                      | 25         |                 | $          | 25 |   | $ | 25 |   | $ | 25 |   |
| Due after one year to five  years  |       | 11,228                 |       | 12,001               |       | 76 |   | 76 |   |
| Due after five years to  ten years |       | 1,142                  |       | 1,165                |       | — |   | — |   |
| Due after ten years                |       | 191,698                |       | 194,138              |       | 9 |   | 10 |   |
| Total                              |       | $                      | 204,093    |                 | $          | 207,329 |   | $ | 110 |   | $ | 111 |   |

 

Total gross proceeds from sales ofsecurities available for sale were $5,377,000 and $39,994,000, for September 30,2009 and 2008, respectively.  Thefollowing table represents gross realized gains and losses on thosetransactions:

 
| **(In Thousands)**                     | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
|----------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                             | ** ** | **2009**               | ** ** | **2008**               | ** ** |
| Gross realized gains:                  |       |                   |       |                   |       |
| U.S. Government and agency  securities |       | $                      | —     |                   | $          | 253 |   |
| State and political  securities        |       | —                 |       | 235                    |       |
| Other debt securities                  |       | 180                    |       | —                 |       |
| Equity securities                      |       | 21                     |       | 486                    |       |
| Total gross realized gains             |       | $                      | 201        |                   | $          | 974 |   |
|                                   |       |                   |       |                   |       |
| Gross realized losses:                 |       |                   |       |                   |       |
| U.S. Government and agency  securities |       | $                      | —     |                   | $          | 36 |   |
| State and political  securities        |       | —                 |       | 204                    |       |
| Other debt securities                  |       | 165                    |       | 232                    |       |
| Equity securities                      |       | 4,998                  |       | 2,219                  |       |
| Total gross realized  losses           |       | $                      | 5,163      |                   | $          | 2,691 |   |

 

Gross realized losses for the equitysecurities portfolio include impairment charges of $4,614,000 and $2,425,000for the nine months ended September 30, 2009 and 2008, respectively.

 

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**Note 12. Loans**

 

The allocation of the loan portfolio, bydelinquency status, as of September 30, 2009 and December 31, 2008 ispresented below:

 
| **(In Thousands)**               | ** **                | **September 30, 2009** | ** ** |
|----------------------------------|---------------------------|-----------------------------|------------|
| ** **                       | ** **                | ** **                  | ** ** | ** ** | ** ** | **Past Due** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** **                | ** **                  | ** ** | ** ** | ** ** | **90 Days** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** **                | ** **                  | ** ** | **Past Due** | ** ** | **Or More** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** **                | ** **                  | ** ** | **30 To 90** | ** ** | **& Still** | ** ** | **Non-** | ** ** | ** ** | ** ** |
| ** **                       | ** **                | **Current**                 | ** ** | **Days** | ** ** | **Accruing** | ** ** | **Accrual** | ** ** | **Total** | ** ** |
| Commercial and agricultural      |                      | $                           | 46,801     |   | $ | 412 |   | $ | — |   | $ | 1 |   | $ | 47,214 |   |
| Real estate mortgage:            |                      |                        |       |   |   |   |   |   |   |   |   |
| Residential                      |                      | 170,233                     |       | 2,790 |   | 1,209 |   | 502 |   | 174,734 |   |
| Commercial                       |                      | 143,893                     |       | 4,779 |   | 245 |   | 341 |   | 149,258 |   |
| Construction                     |                      | 15,400                      |       | 27 |   | 2,898 |   | 556 |   | 18,881 |   |
| Installment loans to individuals |                      | 11,435                      |       | 200 |   | 44 |   | 48 |   | 11,727 |   |
|                             |                      | 387,762                     |       | $ | 8,208 |   | $ | 4,396 |   | $ | 1,448 |   | 401,814 |   |
| Less:                            | Net deferred loan fees    |                        | 989        |   |   |   |   |   |   |   | 989 |   |
|                             | Allowance for loan losses |                        | 4,478      |   |   |   |   |   |   |   | 4,478 |   |
| Loans, net                       |                      | $                           | 382,295    |   |   |   |   |   |   |   | $ | 396,347 |   |
|                             |                      |                        |       |   |   |   |   |   |   |   |   |
|                             |                      |                        |       |   |   |   |   |   |   |   |   |
| **(In Thousands)**               | ** **                | **Decmeber 31, 2008**       | ** ** |
| ** **                       | ** **                | ** **                  | ** ** | **Past Due** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** **                | ** **                  | ** ** | **90 Days** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** **                | **Past Due**                | ** ** | **Or More** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** **                | **30 To 90**                | ** ** | **& Still** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** **                | **Current**                 | ** ** | **Days** | ** ** | **Accruing** | ** ** | **Accrual** | ** ** | **Total** | ** ** |
| Commercial and agricultural      |                      | $                           | 40,006     |   | $ | 517 |   | $ | — |   | $ | 79 |   | $ | 40,602 |   |
| Real estate mortgage:            |                      |                        |       |   |   |   |   |   |   |   |   |
| Residential                      |                      | 170,011                     |       | 6,582 |   | 223 |   | 590 |   | 177,406 |   |
| Commercial                       |                      | 134,647                     |       | 775 |   | — |   | 736 |   | 136,158 |   |
| Construction                     |                      | 15,652                      |       | 167 |   | — |   | 19 |   | 15,838 |   |
| Installment loans to individuals |                      | 12,053                      |       | 346 |   | 36 |   | 52 |   | 12,487 |   |
|                             |                      | 372,369                     |       | $ | 8,387 |   | $ | 259 |   | $ | 1,476 |   | 382,491 |   |
| Less:                            | Net deferred loan fees    |                        | 1,013      |   |   |   |   |   |   |   | 1,013 |   |
|                             | Allowance for loan losses |                        | 4,356      |   |   |   |   |   |   |   | 4,356 |   |
| Loans, net                       |                      | $                           | 367,000    |   |   |   |   |   |   |   | $ | 377,122 |   |

 

The recorded investment in loans for whichimpairment has been recognized amounted to $6,802,000 at September 30, 2009,compared to $5,042,000 at December 31, 2008.  The valuation allowance related to impairedloans amounted to $536,000 at September 30, 2009 and $166,000 at December 31,2008.  The increase in impaired loans andvaluation allowance is primarily from a few commercial relationships.

 

A loan is considered impaired, based oncurrent information and events, if it is probable that the Bank will be unableto collect the scheduled payments of principal or interest when due accordingto the contractual terms of the loan agreement. The measurement of impairedloans is generally based on the present value of expected future cash flowsdiscounted at the historical effective interest rate, except that allcollateral-dependent loans are measured for impairment based on the fair valueof the collateral.

 

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**Note 13. Subsequent Events**

 

TheCompany assessed events occurring subsequent to September 30, 2009 throughNovember 9, 2009 for potential recognition and disclosure in theconsolidated financial statements.  Noevents have occurred that would require adjustment to or disclosure in theconsolidated financial statements which were issued on November 9, 2009.

 

**CAUTIONARYSTATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF1995**

 

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

 

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 bythe Company on its website or otherwise. The Company undertakes no obligation to update or revise thesestatements to reflect events or circumstances occurring after the date of thisQuarterly Report on Form 10-Q.

 

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

 

# **EARNINGS SUMMARY**

# ** **

**Comparison of the Three and Nine Months Ended September 30, 2009and 2008**

 

**Summary Results**

 

Netincome for the three months ended September 30, 2009 was $1,922,000compared to $1,552,000 for the same period of 2008 as after-tax securitieslosses decreased $658,000 (from a loss of $993,000 to a loss of $335,000).  Included within the change in after-taxsecurities losses was an other than temporary impairment charge relating tocertain equity securities held in the investment portfolio of $30,000. Basicand diluted earnings per share for the three months ended September 30,2009 were $0.50 compared to $0.40 for the three months ended September 30,2008.  Return on average assets andreturn on average equity were 1.15% and 12.08% for the three months ended September 30,2009 compared to 0.98% and 9.43% for the corresponding period of 2008.  Net income from core operations (“operatingearnings”) decreased to $2,257,000 for the three months ended September 30,2009 compared to $2,545,000 for the same period of 2008.  Operating earnings per share for the three monthsended September 30, 2009 were $0.59 basic and dilutive compared to $0.66basic and dilutive for the three months ended September 30, 2008.

 

The nine months ended September 30,2009 generated net income of $3,593,000 compared to $5,740,000 for the sameperiod of 2008.  Comparable results wereimpacted by an increase in after-tax securities losses of $2,142,000 (from aloss of $1,133,000 to a loss of $3,275,000). Earnings per share, basic anddiluted, for the nine months ended September 30, 2009 were $0.94 ascompared to $1.49 for the comparable period of 2008.  Return on average assets and return onaverage equity were 0.73% and 7.80% for the nine months ended September 30,2009 compared to 1.21% and 11.10% for the corresponding period of 2008.  Operating earnings remained stable at$6,868,000 for the nine months ended September 30, 2009 compared to$6,873,000 for the comparable period of 2008, resulting in basic and dilutiveoperating earnings per share increasing to $1.79 from $1.78 for the nine monthperiods ended September 30, 2009 and 2008, respectively.

 

Management uses thenon-GAAP measure of net income from core operations, or operating earnings, inits analysis of the Company’s performance. This measure, as used by the Company, adjusts net income by excludingsignificant gains or losses that are unusual in nature.  Because certain of these items and theirimpact on the Company’s performance are difficult to predict, managementbelieves the presentation of financial measures excluding the impact of suchitems 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 fromcore operations, 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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**Reconciliation of GAAP and non-GAAPIncome**

** **
| **(In Thousands)**            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                    | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                    | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| GAAP net income               |       | $                      | 1,922      |                   | $          | 1,552 |   | $ | 3,593 |   | $ | 5,740 |   |
| Securities losses, net of tax |       | (335                   | )          | (993                   | )          | (3,275 | ) | (1,133 | ) |
| Non-GAAP operating earnings   |       | $                      | 2,257      |                   | $          | 2,545 |   | $ | 6,868 |   | $ | 6,873 |   |

 

**Interest and Dividend Income**

 

Interestand dividend income for the three months ended September 30, 2009 remainedstable at $9,113,000 compared to $9,108,000 for the same period of 2008.  The increase in interest income was theresult of an increase in loan interest of $146,000 which offset the decline ininvestment securities income of $141,000. The increase in loan interest is the result of growth in the averagegross loan portfolio of $25,843,000.  Thegrowth offset a decline in the average taxable equivalent yield of 27 basispoints (“bp”) caused by the low interest rate environment that has existed overthe past year.   Dividend incomedecreased as a direct result of the current status of the economy that hascaused many of the issuers of equity holdings in our portfolio to decrease orsuspend their dividend.  In addition, theFederal Home Loan Bank of Pittsburgh (“FHLB”) has suspended payment ofdividends on shares of its common stock, which resulted in a decrease ofapproximately $81,000 in dividend income for the third quarter of 2009 comparedto 2008.  On a taxable equivalent basis,total interest income increased $74,000 due to volume increases that offset thedecline in yield.

 

Duringthe nine months ended September 30, 2009, interest and dividend income was$27,043,000, a decrease of $49,000 over the same period in 2008.  Interest income on the loan portfolioincreased $89,000 as the growth in the portfolio countered a 38 bp decline inaverage yield.  The investment portfoliointerest income was negatively impacted by approximately $240,000 due to thesuspension of FHLB dividends which resulted in total interest income frominvestment securities decreasing $138,000 from the comparable period of2008.  Tax-equivalent interest incomeincreased $144,000 due to an overall increase in earning assets of $21,368,000,and a shift in the earning asset portfolio towards loans from investments.

 

Interestand dividend income composition for the three and nine months ended September 30,2009 and 2008 was as follows:

 

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| **(In Thousands)**                 | ** ** | **For The Three Months Ended** | ** ** |
|------------------------------------|------------|--------------------------------|------------|
| ** **                         | ** ** | **September 30, 2009**    | ** ** | **September 30, 2008** | ** ** | **Change** | ** ** |
| ** **                         | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Loans including fees               |       | $                              | 6,457      |   | 70.9 | % | $ | 6,311 |   | 69.3 | % | $ | 146 |   | 2.3 | % |
| Investment securities:             |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                            |       | 1,368                          |       | 15.0 |   | 1,391 |   | 15.3 |   | (23 | ) | (1.7 | ) |
| Tax-exempt                         |       | 1,253                          |       | 13.7 |   | 1,205 |   | 13.2 |   | 48 |   | 4.0 |   |
| Dividend and other interest income |       | 35                             |       | 0.4 |   | 201 |   | 2.2 |   | (166 | ) | (82.6 | ) |
| Total interest and dividend income |       | $                              | 9,113      |   | 100.0 | % | $ | 9,108 |   | 100.0 | % | $ | 5 |   | 0.1 | % |
|                               |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| **(In Thousands)**                 | ** ** | **For The Nine Months Ended**  | ** ** |
| ** **                         | ** ** | **September 30, 2009**    | ** ** | **September 30, 2008** | ** ** | **Change** | ** ** |
| ** **                         | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Loans including fees               |       | $                              | 19,025     |   | 70.4 | % | $ | 18,936 |   | 69.9 | % | $ | 89 |   | 0.5 | % |
| Investment securities:             |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                            |       | 4,105                          |       | 15.2 |   | 3,857 |   | 14.2 |   | 248 |   | 6.4 |   |
| Tax-exempt                         |       | 3,748                          |       | 13.9 |   | 3,641 |   | 13.5 |   | 107 |   | 2.9 |   |
| Dividend and other interest income |       | 165                            |       | 0.5 |   | 658 |   | 2.4 |   | (493 | ) | (74.9 | ) |
| Total interest and dividend income |       | $                              | 27,043     |   | 100.0 | % | $ | 27,092 |   | 100.0 | % | $ | (49 | ) | (0.2 | )% |

 

**Interest Expense**

 

Interestexpense for the three months ended September 30, 2009 decreased $427,000to $3,168,000 compared to $3,595,000 for the same period of 2008.  The decreased expense of $262,000 associatedwith deposits is primarily the result of a reduction of 86 bp in rates paid ontime deposits.  Factors that led to therate decreases include, 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.  Short-term borrowingsinterest expense decreased $228,000 as the average balance of such borrowingsdecreased $35,758,000, while the rate paid declined 25 bp.  Long-term borrowing interest expenseincreased $63,000 as the average balance of such borrowings increased slightly,while the average rate decreased 10 bp to 4.23%.

 

Interestexpense for the nine months ended September 30, 2009 decreased $2,086,000from the same period of 2008.  Thereasons noted for the decline in interest expense for the three month periodcomparison also apply to the nine month period.

 

Interestexpense composition for the three and nine months ended September 30, 2009and 2008 was as follows:

 

24

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Tableof Contents

 
| **(In Thousands)**         | ** ** | **For The Three Months Ended** | ** ** |
|----------------------------|------------|--------------------------------|------------|
| ** **                 | ** ** | **September 30, 2009**    | ** ** | **September 30, 2008** | ** ** | **Change** | ** ** |
| ** **                 | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Deposits                   |       | $                              | 2,148      |   | 67.8 | % | $ | 2,410 |   | 67.0 | % | $ | (262 | ) | (10.9 | )% |
| Short-term borrowings      |       | 82                             |       | 2.6 |   | 310 |   | 8.6 |   | (228 | ) | (73.5 | ) |
| Long-term borrowings, FHLB |       | 938                            |       | 29.6 |   | 875 |   | 24.4 |   | 63 |   | 7.2 |   |
| Total interest expense     |       | $                              | 3,168      |   | 100.0 | % | $ | 3,595 |   | 100.0 | % | $ | (427 | ) | (11.9 | )% |
|                       |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| **(In Thousands)**         | ** ** | **For The Nine Months Ended**  | ** ** |
| ** **                 | ** ** | **September 30, 2009**    | ** ** | **September 30, 2008** | ** ** | **Change** | ** ** |
| ** **                 | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Deposits                   |       | $                              | 6,357      |   | 67.2 | % | $ | 7,502 |   | 65.0 | % | $ | (1,145 | ) | (15.3 | )% |
| Short-term borrowings      |       | 318                            |       | 3.4 |   | 996 |   | 8.6 |   | (678 | ) | (68.1 | ) |
| Long-term borrowings, FHLB |       | 2,781                          |       | 29.4 |   | 3,044 |   | 26.4 |   | (263 | ) | (8.6 | ) |
| Total interest expense     |       | $                              | 9,456      |   | 100.0 | % | $ | 11,542 |   | 100.0 | % | $ | (2,086 | ) | (18.1 | )% |

 

**Net Interest Margin**

** **

Thenet interest margin (“NIM”) for the three months ended September 30, 2009was 4.35% compared to 4.23% for the corresponding period of 2008.  The increase in the NIM was driven by a 52 bpdecline in the rate paid on interest bearing liabilities that more thancompensated for a 27 bp decline in the yield on 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 2.41% from 2.93% was driven by a reduction inthe rate paid on time deposits of 86 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 portfoliobegan to be lengthened during the second and through the third quarter of 2009due to the apparent bottoming or near bottoming of deposit rates.

 

TheNIM for the nine months ended September 30, 2009 was 4.39% compared to4.04% for the same period of 2008.  Theimpact of the items mentioned in the three month discussion also applies to thenine month period.  A 113 bp decline inthe rate paid on time deposits served as the foundation for an 78 bp decline inrate paid on deposits, while the FOMC and general market actions affected the yieldon earning assets and cost of borrowings.

 

Thefollowing is a schedule of average balances and associated yields for the threeand nine months ended September 30, 2009 and 2008:

 

25

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Tableof Contents

 
| **(In Thousands)**                              | ** ** | **AVERAGE BALANCES AND INTEREST  RATES** | ** ** |
|-------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                      | ** ** | **Three Months Ended**                   | ** ** | **Three Months Ended** | ** ** |
| ** **                                      | ** ** | **September 30, 2009**              | ** ** | **September 30, 2008** | ** ** |
| ** **                                      | ** ** | **Average Balance**                      | ** ** | **Interest** | ** ** | **Average Rate** | ** ** | **Average Balance** | ** ** | **Interest** | ** ** | **Average Rate** | ** ** |
| Assets:                                         |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Tax-exempt loans                                |       | $                                        | 17,207     |   | $ | 279 |   | 6.43 | % | $ | 9,108 |   | $ | 148 |   | 6.46 | % |
| All other loans                                 |       | 382,670                                  |       | 6,273 |   | 6.50 | % | 364,926 |   | 6,213 |   | 6.77 | % |
| Total loans                                     |       | 399,877                                  |       | 6,552 |   | 6.50 | % | 374,034 |   | 6,361 |   | 6.77 | % |
|                                            |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Taxable investment securities                   |       | 104,905                                  |       | 1,402 |   | 5.35 | % | 107,751 |   | 1,592 |   | 5.91 | % |
| Tax-exempt investment securities                |       | 104,719                                  |       | 1,898 |   | 7.25 | % | 103,431 |   | 1,826 |   | 7.06 | % |
| Total securities                                |       | 209,624                                  |       | 3,300 |   | 6.30 | % | 211,182 |   | 3,418 |   | 6.47 | % |
|                                            |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing deposits                       |       | 4,218                                    |       | 1 |   | 0.09 | % | 34 |   | — |   | 0.00 | % |
|                                            |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning assets                   |       | 613,719                                  |       | 9,853 |   | 6.39 | % | 585,250 |   | 9,779 |   | 6.66 | % |
|                                            |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Other assets                                    |       | 54,284                                   |       |   |   |   |   | 50,225 |   |   |   |   |   |
|                                            |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Total assets                                    |       | $                                        | 668,003    |   |   |   |   |   | $ | 635,475 |   |   |   |   |   |
|                                            |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Liabilities and shareholders’ equity:      |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Savings                                         |       | $                                        | 62,265     |   | 85 |   | 0.54 | % | $ | 62,792 |   | 120 |   | 0.76 | % |
| Super Now deposits                              |       | 60,476                                   |       | 127 |   | 0.83 | % | 52,970 |   | 175 |   | 1.31 | % |
| Money market deposits                           |       | 71,204                                   |       | 345 |   | 1.92 | % | 34,915 |   | 208 |   | 2.37 | % |
| Time deposits                                   |       | 222,816                                  |       | 1,591 |   | 2.83 | % | 205,346 |   | 1,907 |   | 3.69 | % |
| Total deposits                                  |       | 416,761                                  |       | 2,148 |   | 2.04 | % | 356,023 |   | 2,410 |   | 2.69 | % |
|                                            |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Short-term borrowings                           |       | 15,457                                   |       | 82 |   | 2.13 | % | 51,215 |   | 310 |   | 2.38 | % |
| Long-term borrowings, FHLB                      |       | 86,778                                   |       | 938 |   | 4.23 | % | 79,061 |   | 875 |   | 4.33 | % |
| Total borrowings                                |       | 102,235                                  |       | 1,020 |   | 3.91 | % | 130,276 |   | 1,185 |   | 3.57 | % |
|                                            |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing liabilities              |       | 518,996                                  |       | 3,168 |   | 2.41 | % | 486,299 |   | 3,595 |   | 2.93 | % |
|                                            |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                 |       | 75,114                                   |       |   |   |   |   | 75,863 |   |   |   |   |   |
| Other liabilities                               |       | 10,256                                   |       |   |   |   |   | 7,467 |   |   |   |   |   |
| Shareholders’ equity                       |       | 63,637                                   |       |   |   |   |   | 65,846 |   |   |   |   |   |
| Total liabilities and shareholders’ equity |       | $                                        | 668,003    |   |   |   |   |   | $ | 635,475 |   |   |   |   |   |
|                                            |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Interest rate spread                            |       |                                     |       |   |   | 3.97 | % |   |   |   |   | 3.73 | % |
| Net interest income/margin                      |       |                                     |       | $ | 6,685 |   | 4.35 | % |   |   | $ | 6,184 |   | 4.23 | % |

----

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

 

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

 

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

 

26

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Tableof Contents

 
| **(In Thousands)**                              | ** ** | **AVERAGE BALANCES AND INTEREST  RATES** | ** ** |
|-------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                      | ** ** | **Nine Months Ended**                    | ** ** | **Nine Months Ended** | ** ** |
| ** **                                      | ** ** | **September 30, 2009**              | ** ** | **September 30, 2008** | ** ** |
| ** **                                      | ** ** | **Average Balance**                      | ** ** | **Interest** | ** ** | **Average Rate** | ** ** | **Average Balance** | ** ** | **Interest** | ** ** | **Average Rate** | ** ** |
| Assets:                                         |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Tax-exempt loans                                |       | $                                        | 16,682     |   | $ | 817 |   | 6.55 | % | $ | 8,534 |   | $ | 411 |   | 6.43 | % |
| All other loans                                 |       | 378,043                                  |       | 18,486 |   | 6.54 | % | 359,570 |   | 18,665 |   | 6.93 | % |
| Total loans                                     |       | 394,725                                  |       | 19,303 |   | 6.54 | % | 368,104 |   | 19,076 |   | 6.92 | % |
|                                            |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Taxable securities                              |       | 102,937                                  |       | 4,269 |   | 5.53 | % | 104,604 |   | 4,514 |   | 5.75 | % |
| Tax-exempt securities                           |       | 103,418                                  |       | 5,679 |   | 7.32 | % | 108,877 |   | 5,517 |   | 6.76 | % |
| Total securities                                |       | 206,355                                  |       | 9,948 |   | 6.43 | % | 213,481 |   | 10,031 |   | 6.27 | % |
|                                            |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing deposits                       |       | 1,886                                    |       | 1 |   | 0.07 | % | 13 |   | 1 |   | 10.28 | % |
|                                            |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning assets                   |       | 602,966                                  |       | 29,252 |   | 6.48 | % | 581,598 |   | 29,108 |   | 6.68 | % |
|                                            |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Other assets                                    |       | 55,080                                   |       |   |   |   |   | 49,638 |   |   |   |   |   |
|                                            |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Total assets                                    |       | $                                        | 658,046    |   |   |   |   |   | $ | 631,236 |   |   |   |   |   |
|                                            |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Liabilities and shareholders’ equity:      |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Savings                                         |       | $                                        | 61,106     |   | 244 |   | 0.53 | % | $ | 60,857 |   | 343 |   | 0.75 | % |
| Super Now deposits                              |       | 57,028                                   |       | 387 |   | 0.91 | % | 51,228 |   | 513 |   | 1.34 | % |
| Money market deposits                           |       | 59,061                                   |       | 924 |   | 2.09 | % | 28,372 |   | 481 |   | 2.26 | % |
| Time deposits                                   |       | 217,679                                  |       | 4,802 |   | 2.95 | % | 201,950 |   | 6,165 |   | 4.08 | % |
| Total Deposits                                  |       | 394,874                                  |       | 6,357 |   | 2.15 | % | 342,407 |   | 7,502 |   | 2.93 | % |
|                                            |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Short-term borrowings                           |       | 31,491                                   |       | 318 |   | 1.39 | % | 47,894 |   | 996 |   | 2.75 | % |
| Other borrowings                                |       | 86,778                                   |       | 2,781 |   | 4.23 | % | 90,088 |   | 3,044 |   | 4.44 | % |
| Total borrowings                                |       | 118,269                                  |       | 3,099 |   | 3.47 | % | 137,982 |   | 4,040 |   | 3.85 | % |
|                                            |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing liabilities              |       | 513,143                                  |       | 9,456 |   | 2.46 | % | 480,389 |   | 11,542 |   | 3.19 | % |
|                                            |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                 |       | 73,469                                   |       |   |   |   |   | 73,205 |   |   |   |   |   |
| Other liabilities                               |       | 10,018                                   |       |   |   |   |   | 8,672 |   |   |   |   |   |
| Shareholders’ equity                       |       | 61,416                                   |       |   |   |   |   | 68,970 |   |   |   |   |   |
|                                            |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Total liabilities and shareholders’ equity |       | $                                        | 658,046    |   |   |   |   |   | $ | 631,236 |   |   |   |   |   |
| Interest rate spread                            |       |                                     |       |   |   | 4.02 | % |   |   |   |   | 3.49 | % |
| Net interest income/margin                      |       |                                     |       | $ | 19,796 |   | 4.39 | % |   |   | $ | 17,566 |   | 4.04 | % |

----

 

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

 

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

 

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

 

27

----

# **Table ofContents**

 

# **Thefollowing table presents the adjustment to convert net interest income to netinterest income on a fully taxable equivalent basis for the three and ninemonths ended September 30, 2009 and 2008.**

 
| **(In Thousands)**                             | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                     | ** ** | **September 30,**         | ** ** | **September 30,**        | ** ** |
| ** **                                     | ** ** | **2009**                       | ** ** | **2008**                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                           |       |                           |       |                          |       |   |   |   |   |
| Total interest income                          |       | $                              | 9,113      |                          | $          | 9,108 |   | $ | 27,043 |   | $ | 27,092 |   |
| Total interest expense                         |       | 3,168                          |       | 3,595                         |       | 9,456 |   | 11,542 |   |
|                                           |       |                           |       |                          |       |   |   |   |   |
| Net interest income                            |       | 5,945                          |       | 5,513                         |       | 17,587 |   | 15,550 |   |
| Tax equivalent adjustment                      |       | 740                            |       | 671                           |       | 2,209 |   | 2,016 |   |
|                                           |       |                           |       |                          |       |   |   |   |   |
| Net interest income (fully taxable equivalent) |       | $                              | 6,685      |                          | $          | 6,184 |   | $ | 19,796 |   | $ | 17,566 |   |

 

# **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 nine month periods ended September 30, 2009 and 2008:**

 
| **(In Thousands)**                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                         | ** ** | **2009 vs 2008**                           | ** ** | **2009 vs 2008**                          | ** ** |
| ** **                         | ** ** | **Increase (Decrease)**                    | ** ** | **Increase (Decrease)**                   | ** ** |
| ** **                         | ** ** | **Due to**                                 | ** ** | **Due to**                                | ** ** |
| ** **                         | ** ** | **Volume**                                 | ** ** | **Rate**                                  | ** ** | **Net** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Net** | ** ** |
| Interest income:                   |       |                                       |       |                                      |       |   |   |   |   |   |   |   |   |
| Loans, tax-exempt                  |       | $                                          | 132        |                                      | $          | (1 | ) | $ | 131 |   | $ | 398 |   | $ | 8 |   | $ | 406 |   |
| Loans                              |       | 306                                        |       | (246                                      | )          | 60 |   | 916 |   | (1,095 | ) | (179 | ) |
| Taxable investment securities      |       | (40                                        | )          | (150                                      | )          | (190 | ) | (71 | ) | (174 | ) | (245 | ) |
| Tax-exempt investment securities   |       | 22                                         |       | 50                                        |       | 72 |   | (268 | ) | 430 |   | 162 |   |
| Interest bearing deposits          |       | 1                                          |       | —                                    |       | 1 |   | 144 |   | (144 | ) | — |   |
| Total interest-earning assets      |       | 421                                        |       | (347                                      | )          | 74 |   | 1,119 |   | (975 | ) | 144 |   |
|                               |       |                                       |       |                                      |       |   |   |   |   |   |   |   |   |
| Interest expense:                  |       |                                       |       |                                      |       |   |   |   |   |   |   |   |   |
| Savings deposits                   |       | (1                                         | )          | (34                                       | )          | (35 | ) | 1 |   | (100 | ) | (99 | ) |
| Super Now deposits                 |       | 22                                         |       | (70                                       | )          | (48 | ) | 53 |   | (179 | ) | (126 | ) |
| Money market deposits              |       | 182                                        |       | (45                                       | )          | 137 |   | 483 |   | (40 | ) | 443 |   |
| Time deposits                      |       | 152                                        |       | (468                                      | )          | (316 | ) | 450 |   | (1,813 | ) | (1,363 | ) |
| Short-term borrowings              |       | (193                                       | )          | (35                                       | )          | (228 | ) | (9 | ) | (669 | ) | (678 | ) |
| Long-term borrowings, FHLB         |       | 83                                         |       | (20                                       | )          | 63 |   | (106 | ) | (157 | ) | (263 | ) |
| Total interest-bearing liabilities |       | 245                                        |       | (672                                      | )          | (427 | ) | 872 |   | (2,958 | ) | (2,086 | ) |
| Change in net interest income      |       | $                                          | 176        |                                      | $          | 325 |   | $ | 501 |   | $ | 247 |   | $ | 1,983 |   | $ | 2,230 |   |

 

# **Provision for Loan Losses**

# ** **

The provision for loan losses is based upon management’squarterly review of the loan portfolio. The purpose of the review is to assess loan quality, identify impairedloans, analyze delinquencies, ascertain loan growth, evaluate potentialcharge-offs and recoveries, and assess general economic conditions in themarkets served.  An external independentloan review is also 

 

28

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performed annually for the Bank.  Management remains committed to an aggressiveprogram of problem loan identification and resolution.

 

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

 

Although managementbelieves it uses the best information available to make such determinations andthat the allowance for loan losses is adequate at September 30, 2009,future adjustments could be necessary if circumstances or economic conditionsdiffer 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 banking agenciescould require the recognition of additions to the loan loss allowance based ontheir judgment of information available to them at the time of theirexamination.

 

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

 

The allowance for loanlosses increased from $4,356,000 at December 31, 2008 to $4,478,000 at September 30,2009.  At September 30, 2009 and December 31,2008, the allowance for loan losses to total loans was 1.12% and 1.14%,respectively.

 

The provision for loanlosses totaled $270,000 and $582,000 for the three and nine months ended September 30,2009, compared to $110,000 and $230,000 for the same period in 2008.  The amount of the increase in the provisionwas the result of several factors, including but not limited to, an increase ingross loans of $19,347,000 since December 31, 2008, a ratio of net chargeoffs to average loans of 0.12% for the nine months ended September 30,2009, a ratio of nonperforming loans to total loans of 1.46%, and a ratio ofthe allowance for loan losses to nonperforming loans of 76.63% at September 30,2009.  As noted in the followingschedules, there has been an increase in nonperforming loans and netcharge-offs over the past year. Nonperforming loans increased to $5,844,000 at September 30, 2009from $1,735,000 at December 31, 2008 due primarily to a commercial realestate loan of approximately $2,800,000 being classified as 90 days past due asof September 30, 2009.  The loan iscollateralized with no loss anticipated at this time.  Continued uncertainty surrounding the economyand internal loan review and analysis, coupled with the ratios notedpreviously, dictated an increase in the provision for loan losses.  The increase did not equate to the increasein charge-offs and nonperforming loans due to the collateral status of thenonperforming loans and overall loan portfolio in general, which limits theloan specific allocation of the allowance for loan losses.

 

29

----

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Followingis a table showing the changes in the allowance for loan losses for the ninemonth periods ended September 30, 2009 and 2008:

 
| **(In Thousands)**                                                                         | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Balance at beginning of period                                                             |       | $        | 4,356      |     | $          | 4,130 |   |
| Charge-offs:                                                                               |       |     |       |     |       |
| Real estate                                                                                |       | 272      |       | 29       |       |
| Commercial and industrial                                                                  |       | 129      |       | 31       |       |
| Installment loans to individuals                                                           |       | 142      |       | 174      |       |
| Total charge-offs                                                                          |       | 543      |       | 234      |       |
| Recoveries:                                                                                |       |     |       |     |       |
| Real estate                                                                                |       | 11       |       | 13       |       |
| Commercial and industrial                                                                  |       | 2        |       | 60       |       |
| Installment loans to individuals                                                           |       | 70       |       | 69       |       |
| Total recoveries                                                                           |       | 83       |       | 142      |       |
| Net charge-offs                                                                            |       | 460      |       | 92       |       |
| Additions charged to operations                                                            |       | 582      |       | 230      |       |
| Balance at end of period                                                                   |       | $        | 4,478      |     | $          | 4,268 |   |
| Ratio of net charge-offs during the period to  average loans outstanding during the period |       | 0.12     | %          | 0.02     | %          |

 

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

 
| **(In Thousands)** | ** ** | **Total Nonperforming Loans** | ** ** |
|--------------------|------------|-------------------------------|------------|
| ** **         | ** ** | ** **                    | ** ** | **90 Days** | ** ** | ** ** | ** ** |
| ** **         | ** ** | **Nonaccrual**                | ** ** | **Past Due** | ** ** | **Total** | ** ** |
| 09/30/09           |       | $                             | 1,448      |   | $ | 4,396 |   | 5,844 |   |
| 06/30/09           |       | 2,089                         |       | 578 |   | 2,667 |   |
| 03/31/09           |       | 2,033                         |       | 236 |   | 2,269 |   |
| 12/31/08           |       | 1,476                         |       | 259 |   | 1,735 |   |
| 09/30/08           |       | 818                           |       | 123 |   | 941 |   |
|                    |            |                               |            |  |  |  |  |  |  |

 

Loansnot included above which are “troubled debt restructurings” as defined in FAS15, *Accounting by Debtors and Creditors for TroubledDebt Restructurings*, totaled $275,000, $31,000, and $353,000 at September 30,2008, December 31, 2008, and September 30, 2009, respectively.

 

**Non-interest Income**

 

Totalnon-interest income for the three months ended September 30, 2009 comparedto the same period in 2008 increased $909,000 to $1,381,000 due to a $997,000decrease in net securities losses. Excluding net securities gains and losses, non-interest income for thethird quarter of 

 

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2009would have decreased $88,000 compared to the 2008 period.  Deposit service charges decreased $41,000 asoverdraft fee income decreased $29,000, in addition to customers migrating tono service charge checking accounts that were introduced as part of a customeracquisition and retention program.  Gainon sale of loans decreased $9,000 due primarily from a change in product mixwhich has resulted in a greater percentage of the fee collected beingcategorized as other income.  This shiftin product mix resulted in other income increasing 12.8% or $68,000.

 

Insurancecommissions for the three months ended September 30, 2009 decreased$129,000 compared to the same period in 2008 due to a softening market andshift in product mix.  Management of TheM Group continues to pursue new and build upon current relationships.  The sales call program continues to expand toother financial institutions, which results in additional revenue for The MGroup if another sales outlet is added. However, the addition of another sales outlet for The M Group can takeup to a year or more to be completed.

 

Totalnon-interest income for the nine months ended September 30, 2009 comparedto the same period in 2008 decreased $3,794,000.  Excluding net securities gains, non-interestincome would have decreased $549,000 compared to the 2008 period.   The decrease in non-interest income for thenine month period is the result of the same items noted in the three monthdiscussion.

 

Non-interestincome composition for the three and nine months ended September 30, 2009and 2008 was as follows:

 
| **(In Thousands)**        | ** ** | **For The Three Months Ended** | ** ** |
|---------------------------|------------|--------------------------------|------------|
| ** **                | ** ** | **September 30, 2009**    | ** ** | **September 30, 2008** | ** ** | **Change** | ** ** |
| ** **                | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Deposit service charges   |       | $                              | 553        |   | 40.0 | % | $ | 594 |   | 125.8 | % | $ | (41 | ) | (6.9 | )% |
| Securities losses, net    |       | (507                           | )          | (36.7 | ) | (1,504 | ) | (318.6 | ) | 997 |   | (66.3 | ) |
| Bank owned life insurance |       | 144                            |       | 10.4 |   | 121 |   | 25.6 |   | 23 |   | 19.0 |   |
| Gain on sale of loans     |       | 305                            |       | 22.1 |   | 314 |   | 66.5 |   | (9 | ) | (2.9 | ) |
| Insurance commissions     |       | 287                            |       | 20.8 |   | 416 |   | 88.1 |   | (129 | ) | (31.0 | ) |
| Other                     |       | 599                            |       | 43.4 |   | 531 |   | 112.6 |   | 68 |   | 12.8 |   |
| Total non-interest income |       | $                              | 1,381      |   | 100.0 | % | $ | 472 |   | 100.0 | % | $ | 909 |   | 192.6 | % |
|                      |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| **(In Thousands)**        | ** ** | **For The Nine Months Ended**  | ** ** |
| ** **                | ** ** | **September 30, 2009**    | ** ** | **September 30, 2008** | ** ** | **Change** | ** ** |
| ** **                | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Deposit service charges   |       | $                              | 1,619      |   | 760.1 | % | $ | 1,704 |   | 42.5 | % | $ | (85 | ) | (5.0 | )% |
| Securities losses, net    |       | (4,962                         | )          | (2,329.5 | ) | (1,717 | ) | (42.9 | ) | (3,245 | ) | 189.0 |   |
| Bank owned life insurance |       | 418                            |       | 196.2 |   | 367 |   | 9.2 |   | 51 |   | 13.9 |   |
| Gain on sale of loans     |       | 526                            |       | 246.9 |   | 678 |   | 16.9 |   | (152 | ) | (22.4 | ) |
| Insurance commissions     |       | 988                            |       | 463.8 |   | 1,482 |   | 37.0 |   | (494 | ) | (33.3 | ) |
| Other                     |       | 1,624                          |       | 762.5 |   | 1,493 |   | 37.3 |   | 131 |   | 8.8 |   |
| Total non-interest income |       | $                              | 213        |   | 100.0 | % | $ | 4,007 |   | 100.0 | % | $ | (3,794 | ) | (94.7 | )% |

 

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**Non-interest Expense**

 

Totalnon-interest expense increased $646,000 for the three months ended September 30,2009 compared to the same period of 2008. The $233,000 increase in salaries and employee benefits was attributableto several items including standard cost of living wage adjustments foremployees, increased pension expense, and other benefit costs.  Pennsylvania shares tax increased due to theutilization of Pennsylvania Enterprise Zone tax credits from a low incomehousing partnership during 2008.  Otherexpenses increased primarily due to normal anticipated inflationary adjustmentsto ongoing business operating costs in addition to increased FDIC insurancecost.

 

Totalnon-interest expense increased $1,220,000 for the nine months ended September 30,2009 compared to the same period of 2008. The increase in non-interest expense for the nine month period is theresult of the same items noted in the three month discussion.

 

Non-interestexpense composition for the three and nine months ended September 30, 2009and 2008 was as follows:

 
| **(In Thousands)**                                 | ** ** | **For The Three Months Ended** | ** ** |
|----------------------------------------------------|------------|--------------------------------|------------|
| ** **                                         | ** ** | **September 30, 2009**    | ** ** | **September 30, 2008** | ** ** | **Change** | ** ** |
| ** **                                         | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Salaries and employee benefits                     |       | $                              | 2,588      |   | 50.8 | % | $ | 2,355 |   | 52.9 | % | $ | 233 |   | 9.9 | % |
| Occupancy, net                                     |       | 299                            |       | 5.9 |   | 315 |   | 7.1 |   | (16 | ) | (5.1 | ) |
| Furniture and equipment                            |       | 293                            |       | 5.7 |   | 304 |   | 6.8 |   | (11 | ) | (3.6 | ) |
| Pennsylvania shares tax                            |       | 171                            |       | 3.4 |   | 105 |   | 2.4 |   | 66 |   | 62.9 |   |
| Amortization of investment in limited partnerships |       | 142                            |       | 2.8 |   | 178 |   | 4.0 |   | (36 | ) | (20.2 | ) |
| Other                                              |       | 1,604                          |       | 31.4 |   | 1,194 |   | 26.8 |   | 410 |   | 34.3 |   |
| Total non-interest expense                         |       | $                              | 5,097      |   | 100.0 | % | $ | 4,451 |   | 100.0 | % | $ | 646 |   | 14.5 | % |
|                                               |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| **(In Thousands)**                                 | ** ** | **For The Nine Months Ended**  | ** ** |
| ** **                                         | ** ** | **September 30, 2009**    | ** ** | **September 30, 2008** | ** ** | **Change** | ** ** |
| ** **                                         | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Salaries and employee benefits                     |       | $                              | 7,665      |   | 52.4 | % | $ | 7,275 |   | 54.3 | % | $ | 390 |   | 5.4 | % |
| Occupancy, net                                     |       | 956                            |       | 6.5 |   | 967 |   | 7.2 |   | (11 | ) | (1.1 | ) |
| Furniture and equipment                            |       | 906                            |       | 6.2 |   | 876 |   | 6.5 |   | 30 |   | 3.4 |   |
| Pennsylvania shares tax                            |       | 514                            |       | 3.5 |   | 315 |   | 2.3 |   | 199 |   | 63.2 |   |
| Amortization of investment in limited partnerships |       | 425                            |       | 2.9 |   | 534 |   | 4.0 |   | (109 | ) | (20.4 | ) |
| Other                                              |       | 4,161                          |       | 28.5 |   | 3,440 |   | 25.7 |   | 721 |   | 21.0 |   |
| Total non-interest expense                         |       | $                              | 14,627     |   | 100.0 | % | $ | 13,407 |   | 100.0 | % | $ | 1,220 |   | 9.1 | % |

 

**Provision for Income Taxes**

 

Incometaxes increased $165,000 and decreased $1,182,000 for the three and nine monthsended September 30, 2009 compared to the same periods of 2008.  The primary cause of the changes in tax expenseis the impact of net securities losses. Excluding the impact of the net securities gains and losses, theeffective tax rate for the three and nine months ended September 30, 2009was 8.48% and 9.07% as compared to 13.08% and 10.00% for the same periods of2008.  The Company currently is in adeferred tax asset position due to the low income housing tax credits earnedboth currently and previously. Management has reviewed the deferred tax asset and has determined thatthe asset will be utilized within the appropriate carry forward period andtherefore does not require a valuation allowance.

 

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# **ASSET/LIABILITYMANAGEMENT**

# ** **

# **Cash and CashEquivalents**

# ** **

Cash and cash equivalentsdecreased $3,918,000 from $16,581,000 at December 31, 2008 to $12,663,000at September 30, 2009 primarily as a result of the following activitiesduring the nine months ended September 30, 2009:

 

# **Loans Held forSale**

# ** **

Activity regarding loansheld for sale resulted in loan originations exceeding sale proceeds, less$526,000 in realized gains, by $1,781,000 for the nine months ended September 30,2009.

 

**Loans**

 

Gross loans increased$19,347,000 since December 31, 2008 due to the increase of commercialrelated loans, while non-commercial loans remained relatively constant.

 

The allocation of the loan portfolio, by category,as of September 30, 2009 and December 31, 2008 is presented below:

 
| **(In Thousands)**                      | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** | **Change** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|----------------------------|------------|------------|------------|
| ** **                              | ** ** | **Amount**                  | ** ** | **% Total**                | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Commercial,  financial and agricultural |       | $                           | 47,214     |                       | 11.8       | %          | $          | 40,602 |   | 10.6 | % | $ | 6,612 |   | 16.3 | % |
| Real  estate mortgage:                  |       |                        |       |                       |       |       |       |   |   |   |   |   |   |
| Residential                             |       | 174,734                     |       | 43.6                       |       | 177,406    |       | 46.5 |   | (2,672 | ) | (1.5 | ) |
| Commercial                              |       | 149,258                     |       | 37.2                       |       | 136,158    |       | 35.7 |   | 13,100 |   | 9.6 |   |
| Construction                            |       | 18,881                      |       | 4.7                        |       | 15,838     |       | 4.2 |   | 3,043 |   | 19.2 |   |
| Installment  loans to individuals       |       | 11,727                      |       | 2.9                        |       | 12,487     |       | 3.3 |   | (760 | ) | (6.1 | ) |
| Less:  Net deferred loan fees           |       | 989                         |       | (0.2                       | )          | 1,013      |       | (0.3 | ) | (24 | ) | (2.4 | ) |
| Gross  loans                            |       | $                           | 400,825    |                       | 100.0      | %          | $          | 381,478 |   | 100.0 | % | $ | 19,347 |   | 5.1 | % |

 

**Investments**

 

Theestimated fair value of the investment securities portfolio at September 30,2009 has increased $11,128,000 since December 31, 2008.  The change is primarily due to an increase inthe estimated fair market value of the state and political securities segmentof the portfolio.  The amortized cost ofthis segment increased $2,206,000 since December 31, 2008, however, theestimated fair market value increased $12,813,000 over the same time period asthe market for these securities has begun to rebound.  The unrealized losses within the debtsecurities portfolio are the result of market activity, not creditissues/ratings, as approximately 90% of the debt securities portfolio iscurrently rated A or higher by either S&P or 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 

 

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(equities),continued payment of dividend/interest, credit rating, and financial conditionof an issuer, intent and ability to hold until anticipated recovery (which maybe maturity), and general outlook for the economy, specific industry, andentity in question.

 

Thebond portion of the portfolio review is conducted with emphases on severalfactors.  Continued payment of principaland interest is given primary importance with credit rating and financialcondition of the issuer following as the next most important.  Credit ratings were reviewed with the ratingsof the bonds being satisfactory.  Thosethat were not currently rated were discussed with a third party and/orunderwent an internal financial review. The Company also monitors whether each of the investments incurred adecline in market value from carrying value of at least 20% for twelveconsecutive months or a similar decline of at least 50% for three consecutivemonths.  Each bond is reviewed todetermine whether it is a general obligation bond, which is backed by thecredit and taxing power of the issuing jurisdiction, or revenue bond, which isonly payable from specified revenues. Based on the review undertaken by the Company and the intent and abilityto hold the bonds until anticipated recovery (which may be maturity) theCompany determined that the decline in value of the various bond holdings weredeemed to be temporary and were the result of the general market downturns andinterest rate/yield curve changes, not credit issues.  Consistent with the Company’s review of theportfolio as a whole, the intent and ability to hold such bonds untilanticipated recovery and the fact that almost all of such bonds are generalobligation bonds, the Company determined that the decline in the value of thesebond holdings were deemed to be temporary.

 

Theequity portfolio continues to feel the effects of the economic turbulence thatis affecting the financial sector.  Thissector of the portfolio, as of September 30, 2009, held $196,000 inunrealized losses on an amortized cost basis of $11,266,000.  However, the portfolio held $1,005,000 inunrealized gains at September 30, 2009 with a portion of these gainsrelated to holdings that were previously written down.  The amount of the declines has caused severalof our equity holdings to be deemed other than temporarily impaired resultingin a write down in value of these holdings of $30,000 and $4,614,000 for thethree and nine months ended September 30, 2009.  Certain positions may be liquidated, in wholeor part, through the remainder of 2009 so that the losses can be carried backfor tax purposes and offset against gains that have been recognized over thepast several years.

 

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 three consecutivemonths in market value from carrying value.

 

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Theamortized cost of investment securities and their estimated fair values at September 30,2009 and December 31, 2008 are as follows:

 
| **(In Thousands)**                    | ** ** | **September 30, 2009** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|
| ** **                            | ** ** | ** **                  | ** ** | **Gross** | ** ** | **Gross** | ** ** | **Estimated** | ** ** |
| ** **                            | ** ** | **Amortized**               | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                            | ** ** | **Cost**                    | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| Available  for sale (AFS)             |       |                        |       |   |   |   |   |   |   |
| U.S.  Government and agencysecurities |       | $                           | 38,518     |   | $ | 2,099 |   | $ | — |   | $ | 40,617 |   |
| State  and political securities       |       | 144,464                     |       | 4,351 |   | (4,160 | ) | 144,655 |   |
| Other  debt securities                |       | 21,111                      |       | 1,287 |   | (341 | ) | 22,057 |   |
| Total  debt securities                |       | 204,093                     |       | 7,737 |   | (4,501 | ) | 207,329 |   |
| Equity  securities                    |       | 11,266                      |       | 1,005 |   | (196 | ) | 12,075 |   |
| Total  investment securities AFS      |       | $                           | 215,359    |   | $ | 8,742 |   | $ | (4,697 | ) | $ | 219,404 |   |
|                                  |       |                        |       |   |   |   |   |   |   |
| Held  to maturity (HTM)               |       |                        |       |   |   |   |   |   |   |
| U.S.  Government and agencysecurities |       | $                           | 9          |   | $ | 1 |   | $ | — |   | $ | 10 |   |
| Other  debt securities                |       | 101                         |       | — |   | — |   | 101 |   |
| Total  investment securities HTM      |       | $                           | 110        |   | $ | 1 |   | $ | — |   | $ | 111 |   |

 
| **(In Thousands)**                    | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|
| ** **                            | ** ** | ** **                  | ** ** | **Gross** | ** ** | **Gross** | ** ** | **Estimated** | ** ** |
| ** **                            | ** ** | **Amortized**               | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                            | ** ** | **Cost**                    | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| Available  for sale (AFS)             |       |                        |       |   |   |   |   |   |   |
| U.S.  Government and agencysecurities |       | $                           | 46,452     |   | $ | 1,134 |   | $ | — |   | $ | 47,586 |   |
| State  and political securities       |       | 142,258                     |       | 348 |   | (10,764 | ) | 131,842 |   |
| Other  debt securities                |       | 15,970                      |       | 649 |   | (1,065 | ) | 15,554 |   |
| Total  debt securities                |       | 204,680                     |       | 2,131 |   | (11,829 | ) | 194,982 |   |
| Equity  securities                    |       | 16,429                      |       | 225 |   | (3,385 | ) | 13,269 |   |
| Total  investment securities AFS      |       | $                           | 221,109    |   | $ | 2,356 |   | $ | (15,214 | ) | $ | 208,251 |   |
|                                  |       |                        |       |   |   |   |   |   |   |
| Held  to maturity (HTM)               |       |                        |       |   |   |   |   |   |   |
| U.S.  Government and agencysecurities |       | $                           | 10         |   | $ | 1 |   | $ | — |   | $ | 11 |   |
| Other  debt securities                |       | 125                         |       | — |   | — |   | 125 |   |
| Total  investment securities HTM      |       | $                           | 135        |   | $ | 1 |   | $ | — |   | $ | 136 |   |

 

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Thedistribution of credit ratings by amortized cost and estimated fair values forthe debt security portfolio at September 30, 2009 follows:

 
| **(In Thousands)**                     | ** ** | **A- to  AAA** | ** ** | **B- to  BBB+** | ** ** | **C to  CCC+** | ** ** | **Not  Rated** | ** ** | **Total**     | ** ** |
|----------------------------------------|------------|----------------|------------|-----------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                             | ** ** | ** **     | ** ** | **Estimated**   | ** ** | ** **     | ** ** | **Estimated**  | ** ** | ** **    | ** ** | **Estimated** | ** ** | ** ** | ** ** | **Estimated** | ** ** | ** ** | ** ** | **Estimated** | ** ** |
| ** **                             | ** ** | **Amortized**  | ** ** | **Fair**        | ** ** | **Amortized**  | ** ** | **Fair**       | ** ** | **Amortized** | ** ** | **Fair** | ** ** | **Amortized** | ** ** | **Fair** | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| ** **                             | ** ** | **Cost**       | ** ** | **Value**       | ** ** | **Cost**       | ** ** | **Value**      | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Cost** | ** ** | **Value** | ** ** | **Cost** | ** ** | **Value** | ** ** |
| Available  for sale (AFS)              |       |           |       |            |       |           |       |           |       |          |       |   |   |   |   |   |   |   |   |   |   |
| U.S.  Government and agency securities |       | $              | 38,518     |            | $          | 40,617         |       | $              | —     |          | $          | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 38,518 |   | $ | 40,617 |   |
| State  and political securities        |       | 127,182        |       | 127,861         |       | 8,308          |       | 7,991          |       | —        |       | — |   | 8,974 |   | 8,803 |   | 144,464 |   | 144,655 |   |
| Other  debt securities                 |       | 19,320         |       | 20,340          |       | 681            |       | 611            |       | —        |       | — |   | 1,110 |   | 1,106 |   | 21,111 |   | 22,057 |   |
| Total  debt securities AFS             |       | $              | 185,020    |            | $          | 188,818        |       | $              | 8,989      |          | $          | 8,602 |   | $ | — |   | $ | — |   | $ | 10,084 |   | $ | 9,909 |   | $ | 204,093 |   | $ | 207,329 |   |
|                                   |       |           |       |            |       |           |       |           |       |          |       |   |   |   |   |   |   |   |   |   |   |
| Held  to maturity (HTM)                |       |           |       |            |       |           |       |           |       |          |       |   |   |   |   |   |   |   |   |   |   |
| U.S.  Government and agency securities |       | $              | 9          |            | $          | 10             |       | $              | —     |          | $          | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 9 |   | $ | 10 |   |
| Other  debt securities                 |       | 101            |       | 101             |       | —         |       | —         |       | —        |       | — |   | — |   | — |   | 101 |   | 101 |   |
| Total  debt securities HTM        |       | $              | 110        |            | $          | 111            |       | $              | —     |          | $          | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 110 |   | $ | 111 |   |

 

# **Financing Activities**

# ** **

# **Deposits**

# ** **

Totaldeposits increased 16.3% or $68,694,000 from December 31, 2008 to September 30,2009.  The growth was led by a 100.3% or$35,972,000 increase in money market deposits from December 31, 2008 to September 30,2009.  The increase in core deposits(deposits less time deposits) of 21.21% or $47,589,000 has providedrelationship driven funding for the loan portfolio, 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.

 

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

 
| **(In Thousands)**     | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** | **Change** | ** ** |
|------------------------|------------|-----------------------------|------------|----------------------------|------------|------------|------------|
| ** **             | ** ** | **Amount**                  | ** ** | **% Total**                | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Demand  deposits       |       | $                           | 75,569     |                       | 15.4       | %          | $          | 76,035 |   | 18.0 | % | $ | (466 | ) | (0.6 | )% |
| NOW  accounts          |       | 61,855                      |       | 12.6                       |       | 53,821     |       | 12.8 |   | 8,034 |   | 14.9 |   |
| Money  market deposits |       | 71,820                      |       | 14.7                       |       | 35,848     |       | 8.5 |   | 35,972 |   | 100.3 |   |
| Savings  deposits      |       | 62,717                      |       | 12.8                       |       | 58,668     |       | 13.9 |   | 4,049 |   | 6.9 |   |
| Time  deposits         |       | 218,101                     |       | 44.5                       |       | 196,996    |       | 46.8 |   | 21,105 |   | 10.7 |   |
| Total  deposits        |       | $                           | 490,062    |                       | 100.0      | %          | $          | 421,368 |   | 100.0 | % | $ | 68,694 |   | 16.3 | % |

 

# **Borrowed Funds**

# ** **

Total borrowed fundsdecreased 32.7% or $52,506,000 to $108,218,000 at September 30, 2009compared to $160,724,000 at December 31, 2008.  The decrease in borrowed funds is primarilythe result of growth in deposits as part of the previously discussed depositgathering campaigns that were utilized to provide loan portfolio funding and toreduce the level of total borrowings. FHLB repurchase agreements were utilized as their structure allowed fora reduction in interest expense, while providing the ability to reduce theborrowings at our discretion as deposit levels increased.

 

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| **(In Thousands)**                            | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** | **Change** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|------------|------------|
| ** **                                    | ** ** | **Amount**                  | ** ** | **% Total**                | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Short-term borrowings:                        |       |                        |       |                       |       |       |       |   |   |   |   |   |   |
| FHLB repurchase agreements                    |       | $                           | 9,005      |                       | 8.3        | %          | $          | 61,013 |   | 38.0 | % | $ | (52,008 | ) | (85.2 | )% |
| Securities sold under agreement to repurchase |       | 12,435                      |       | 11.5                       |       | 12,933     |       | 8.0 |   | (498 | ) | (3.9 | ) |
| Total short-term borrowings                   |       | 21,440                      |       | 19.8                       | %          | 73,946     |       | 46.0 | % | (52,506 | ) | (71.0 | ) |
|                                          |       |                        |       |                       |       |       |       |   |   |   |   |   |   |
| Long-term borrowings, FHLB                    |       | 86,778                      |       | 80.2                       |       | 86,778     |       | 54.0 |   | — |   | — |   |
| Total borrowed funds                          |       | $                           | 108,218    |                       | 100.0      | %          | $          | 160,724 |   | 100.0 | % | $ | (52,506 | ) | (32.7 | )% |

 

# **Capital**

# ** **

## The adequacy ofthe Company’s capital is reviewed on an ongoing basis with reference to thesize, composition, and quality of the Company’s resources and regulatoryguidelines.  Management seeks to maintaina level of capital sufficient to support existing assets and anticipated assetgrowth, maintain favorable access to capital markets, and preserve high qualitycredit ratings.

##  

## Bank holdingcompanies are required to comply with the Federal Reserve Board’s risk-basedcapital guidelines.  The risk-basedcapital rules are designed to make regulatory capital requirements moresensitive to differences in risk profiles among banks and bank holdingcompanies and to minimize disincentives for holding liquid assets.  Specifically, each is required to maintaincertain minimum dollar amounts and ratios of total risk-based, tier I risk-based,and tier I leverage capital. In addition to the capital requirements, theFederal 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 September 30, 2009 and December 31, 2008 were asfollows:

 

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| **(In Thousands)**                        | ** ** | **2009**   | ** ** | **2008**  | ** ** |
|-------------------------------------------|------------|------------|------------|-----------|------------|
| ** **                                | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| Total Capital  (to Risk-weighted Assets)  |       |       |       |      |       |   |   |   |   |
|                                      |       |       |       |      |       |   |   |   |   |
| Actual                                    |       | $          | 66,553     |      | 15.0       | % | $ | 66,891 |   | 16.0 | % |
| For Capital Adequacy Purposes             |       | 35,541     |       | 8.0       |       | 33,410 |   | 8.0 |   |
| To Be Well Capitalized                    |       | 44,426     |       | 10.0      |       | 41,763 |   | 10.0 |   |
|                                      |       |       |       |      |       |   |   |   |   |
| Tier I Capital  (to Risk-weighted Assets) |       |       |       |      |       |   |   |   |   |
|                                      |       |       |       |      |       |   |   |   |   |
| Actual                                    |       | $          | 61,710     |      | 13.9       | % | $ | 62,540 |   | 15.0 | % |
| For Capital Adequacy Purposes             |       | 17,770     |       | 4.0       |       | 16,705 |   | 4.0 |   |
| To Be Well Capitalized                    |       | 26,656     |       | 6.0       |       | 25,058 |   | 6.0 |   |
|                                      |       |       |       |      |       |   |   |   |   |
| Tier I Capital  (to Average Assets)       |       |       |       |      |       |   |   |   |   |
|                                      |       |       |       |      |       |   |   |   |   |
| Actual                                    |       | $          | 61,710     |      | 9.3        | % | $ | 62,540 |   | 9.7 | % |
| For Capital Adequacy Purposes             |       | 26,633     |       | 4.0       |       | 25,773 |   | 4.0 |   |
| To Be Well Capitalized                    |       | 33,292     |       | 5.0       |       | 32,216 |   | 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.

##  

The following liquiditymeasures are monitored for compliance and were within the limits cited at September 30,2009:

 

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.  Theobjective of interest rate sensitivity management is 

 

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toincrease net interest income by managing interest sensitive assets andliabilities in such a way that they can be repriced in response to changes inmarket interest rates.

 

TheBank, like other financial institutions, must have sufficient funds availableto meet its liquidity needs for deposit withdrawals, loan commitments andoriginations, and expenses.  In order tocontrol cash flow, the Bank estimates future 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 to satisfydepositor, 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 $208,971,000.  In addition to this credit arrangement, theCompany has additional lines of credit with correspondent banks of $15,423,000.Management believes it has sufficient liquidity to satisfy estimated short-termand long-term funding needs.  FHLB borrowings totaled$95,783,000 as of September 30, 2009.

 

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, 

 

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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 with the addition of limited short-term assets is beingundertaken.  These actions are expectedto reduce, but not eliminate, the liability sensitive structure of the balancesheet.

 

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.

 

**Interest Rate 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 September 30,2010 assuming a static balance sheet as of September 30, 2009.

 
| **(In Thousands)**         | ** ** | **Parallel Rate Shock in Basis  Points** | ** ** |
|----------------------------|------------|------------------------------------------|------------|
| ** **                 | ** ** | **-200**                                 | ** ** | **-100** | ** ** | **Static** | ** ** | **+100** | ** ** | **+200** | ** ** |
| Net interest income        |       | $                                        | 20,537     |   | $ | 21,110 |   | $ | 21,459 |   | $ | 21,424 |   | $ | 21,193 |   |
| Change from static         |       | (922                                     | )          | (349 | ) | — |   | (35 | ) | (266 | ) |
| Percent change from static |       | -4.30                                    | %          | -1.63 | % | — |   | -0.16 | % | -1.24 | % |
|                            |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**

 

The asset and liabilitystructure of a financial institution is primarily monetary in nature.  Therefore, interest rates rather thaninflation have a more significant impact on the Company’s performance.  Interest rates are not always affected in thesame direction or magnitude as prices of other goods and services, but are reflectiveof fiscal policy initiatives or economic factors which are not measured by aprice 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 31,2008.  Additional information and detailsare provided in the “Liquidity and Interest Rate Sensitivity” section of “Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations.”

 

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

 

**Item 4.  Controls and Procedures**

 

An analysis was performed under thesupervision and with the participation of the Company’s management, includingthe Chief Executive Officer and the Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures. Based on that evaluation, the Company’s Chief Executive Officerand Chief Financial Officer concluded that the Company’s disclosure controlsand procedures were effective as of September 30, 2009.  There were no changes in the Company’sinternal control over financial reporting that occurred during the quarterended September 30, 2009, that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

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**Part II.  OTHER INFORMATION**

** **

**Item 1.****          ****Legal Proceedings**

 

None.

 

**Item1A.  Risk Factors**

 

There are no materialchanges to the risk factors set forth in Part I, Item 1A, “Risk Factors,”of the Company’s Annual Report on Form 10-K for the year ended December 31,2008.  Please refer to that section fordisclosures regarding the risks and uncertainties related to the Company’sbusiness.

 

**Item 2.****          ****Unregistered Sales of EquitySecurities 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 (July 1 -   July 31, 2009)           |       | —         |       | —         |       | —                        |       | —                          |       |
|                                                    |       |           |       |           |       |                          |       |                            |       |
| Month #2 (August 1 -   August 31, 2009)       |       | —         |       | —         |       | —                        |       | —                          |       |
|                                                    |       |           |       |           |       |                          |       |                            |       |
| Month #3 (September 1 -   September 30, 2009) |       | —         |       | —         |       | —                        |       | —                          |       |

 

On April 28, 2009,the Board of Directors extended the previously approved authorization torepurchase up to 197,000 shares, or approximately 5%, of the outstanding sharesof the Company for an additional year to April 30, 2010.  To date, there have been 118,656 sharesrepurchased under this plan.

 

**Item 3.****          ****Defaults Upon Senior Securities**

 

None

 

**Item 4.****          ****Submission of Matters to a Voteof Security Holders**

 

### **None**

### ** **

### **Item 5.**           OtherInformation

### ** **

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**

##  

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

 

|                                    |   | PENNS WOODS BANCORP,  INC.                                      |
|-----------------------------------------|--------|-----------------------------------------------------------------|
|                                    |   | (Registrant)                                                    |
|                                    |   |                                                            |
|                                    |   |                                                            |
|                                    |   |                                                            |
| Date:  November 9,  2009 |   | /s/ Ronald A. Walko                                             |
|                                    |   | Ronald A. Walko,  President and Chief Executive Officer         |
|                                    |   | (Principal Executive  Officer)                                  |
|                                    |   |                                                            |
|                                    |   |                                                            |
| Date:  November 9,  2009 |   | /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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