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 March 31, 2010.**

** **
| **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

 

OnMay 5, 2010 there were 3,834,887 shares of the Registrant’s common stockoutstanding.

 

 

 

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**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 March 31, 2010 and December 31, 2009                                         | 3                                                                                               |
|                                                                                                                                 |                                                                                            |       |
| Consolidated Statement of Income  (unaudited) for the Three Months ended March 31, 2010 and 2009                                | 4                                                                                               |
|                                                                                                                                 |                                                                                            |       |
| Consolidated Statement of  Changes in Shareholders’ Equity (unaudited) for the Three Months ended  March 31, 2010 and 2009 | 5                                                                                               |
|                                                                                                                                 |                                                                                            |
| Consolidated Statement of  Comprehensive Income (unaudited) for the Three Months ended March 31,  2010 and 2009                 | 5                                                                                               |
|                                                                                                                                 |                                                                                            |
| Consolidated Statement of  Cash Flows (unaudited) for the Three Months ended March 31, 2010 and  2009                           | 6                                                                                               |
|                                                                                                                                 |                                                                                            |       |
| Notes to  Consolidated Financial Statements (unaudited)                                                                              | 7                                                                                               |
|                                                                                                                                 |                                                                                            |       |
| **Item 2.**                                                                                                                          | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** | 23         |
| **Item 3.**                                                                                                                          | **Quantitative  and Qualitative Disclosures About Market Risk**                                 | 40         |
| **Item 4.**                                                                                                                          | **Controls and  Procedures**                                                                    | 40         |
|                                                                                                                                 |                                                                                            |       |
| **Part II**                                                                                                                     | **Other Information**                                                                           |       |
|                                                                                                                                 |                                                                                            |       |
| **Item 1.**                                                                                                                          | **Legal Proceedings**                                                                           | 41         |
| **Item 1A.**                                                                                                                         | **Risk Factors**                                                                                | 41         |
| **Item 2.**                                                                                                                          | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                | 41         |
| **Item 3.**                                                                                                                          | **Defaults  Upon Senior Securities**                                                            | 41         |
| **Item 4.**                                                                                                                          | **(Removed and  Reserved)**                                                                     | 41         |
| **Item 5.**                                                                                                                          | **Other Information**                                                                           | 41         |
| **Item 6.**                                                                                                                          | **Exhibits**                                                                                    | 42         |
| **Signatures**                                                                                                                       | 43                                                                                              |
| **Exhibit Index and Exhibits**                                                                                                  | 44                                                                                              |

 

 

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**Part I.  FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

PENNS WOODS BANCORP, INC.

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 
| ** **                                                                                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(In  Thousands, Except Share Data)**                                                              | ** ** | **2010**           | ** ** | **2009**              | ** ** |
|                                                                                                |       |               |       |                  |       |
| **ASSETS:**                                                                                         |       |               |       |                  |       |
| Noninterest-bearing balances                                                                        |       | $                  | 20,335     |                  | $          | 13,760 |   |
| Interest-bearing deposits in other financial  institutions                                          |       | 89                 |       | 28                    |       |
| Total cash and cash equivalents                                                                     |       | 20,424             |       | 13,788                |       |
|                                                                                                |       |               |       |                  |       |
| Investment securities, available for sale, at fair  value                                           |       | 217,252            |       | 208,768               |       |
| Investment securities held to maturity (fair value  of $108 and $108)                               |       | 107                |       | 107                   |       |
| Loans held for sale                                                                                 |       | 4,364              |       | 4,063                 |       |
| Loans                                                                                               |       | 409,919            |       | 405,529               |       |
| Less: Allowance for loan losses                                                                     |       | 4,864              |       | 4,657                 |       |
| Loans, net                                                                                          |       | 405,055            |       | 400,872               |       |
| Premises and equipment, net                                                                         |       | 8,013              |       | 7,988                 |       |
| Accrued interest receivable                                                                         |       | 3,531              |       | 3,523                 |       |
| Bank-owned life insurance                                                                           |       | 15,062             |       | 14,942                |       |
| Investment in limited partnerships                                                                  |       | 4,756              |       | 4,898                 |       |
| Goodwill                                                                                            |       | 3,032              |       | 3,032                 |       |
| Deferred tax asset                                                                                  |       | 9,069              |       | 9,491                 |       |
| Other assets                                                                                        |       | 5,090              |       | 4,732                 |       |
| **TOTAL ASSETS**                                                                                    |       | $                  | 695,755    |                  | $          | 676,204 |   |
|                                                                                                |       |               |       |                  |       |
| **LIABILITIES:**                                                                                    |       |               |       |                  |       |
| Interest-bearing deposits                                                                           |       | $                  | 440,127    |                  | $          | 417,388 |   |
| Noninterest-bearing deposits                                                                        |       | 80,913             |       | 79,899                |       |
| Total deposits                                                                                      |       | 521,040            |       | 497,287               |       |
|                                                                                                |       |               |       |                  |       |
| Short-term borrowings                                                                               |       | 12,978             |       | 18,354                |       |
| Long-term borrowings, Federal Home Loan Bank (FHLB)                                                 |       | 86,778             |       | 86,778                |       |
| Accrued interest payable                                                                            |       | 990                |       | 1,073                 |       |
| Other liabilities                                                                                   |       | 5,997              |       | 5,796                 |       |
| TOTAL LIABILITIES                                                                                   |       | 627,783            |       | 609,288               |       |
|                                                                                                |       |               |       |                  |       |
| SHAREHOLDERS’ EQUITY                                                                           |       |               |       |                  |       |
| Common stock, par value $8.33, 10,000,000 shares  authorized; 4,013,663 and 4,013,142 shares issued |       | 33,447             |       | 33,443                |       |
| Additional paid-in capital                                                                          |       | 18,020             |       | 18,008                |       |
| Retained earnings                                                                                   |       | 27,901             |       | 27,218                |       |
| Accumulated other comprehensive loss:                                                               |       |               |       |                  |       |
| Net unrealized loss on available for sale  securities                                               |       | (3,212             | )          | (3,569                | )          |
| Defined benefit plan                                                                                |       | (1,920             | )          | (1,920                | )          |
| Less: Treasury stock at cost, 179,028 shares                                                        |       | (6,264             | )          | (6,264                | )          |
| TOTAL SHAREHOLDERS’ EQUITY                                                                     |       | 67,972             |       | 66,916                |       |
| **TOTAL LIABILITIES AND  SHAREHOLDERS’ EQUITY**                                                |       | $                  | 695,755    |                  | $          | 676,204 |   |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

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PENNS WOODSBANCORP, INC.

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

 
| ** **                                              | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|
| ** **                                              | ** ** | **March 31,**     | ** ** |
| **(In  Thousands, Except Per Share Data)**              | ** ** | **2010**               | ** ** | **2009** | ** ** |
|                                                    | ** ** | ** **             | ** ** | ** ** | ** ** |
| **INTEREST AND DIVIDEND INCOME:**                       |       |                   |       |   |   |
| Loans  including fees                                   |       | $                      | 6,330      |   | $ | 6,219 |   |
| Investment  securities:                                 |       |                   |       |   |   |
| Taxable                                                 |       | 1,349                  |       | 1,363 |   |
| Tax-exempt                                              |       | 1,258                  |       | 1,246 |   |
| Dividend  and other interest income                     |       | 52                     |       | 89 |   |
| TOTAL  INTEREST AND DIVIDEND INCOME                     |       | 8,989                  |       | 8,917 |   |
|                                                    |       |                   |       |   |   |
| **INTEREST EXPENSE:**                                   |       |                   |       |   |   |
| Deposits                                                |       | 1,710                  |       | 2,005 |   |
| Short-term  borrowings                                  |       | 64                     |       | 158 |   |
| Long-term  borrowings, FHLB                             |       | 917                    |       | 917 |   |
| TOTAL  INTEREST EXPENSE                                 |       | 2,691                  |       | 3,080 |   |
|                                                    |       |                   |       |   |   |
| **NET INTEREST INCOME**                                 |       | 6,298                  |       | 5,837 |   |
|                                                    |       |                   |       |   |   |
| PROVISION  FOR LOAN LOSSES                              |       | 300                    |       | 126 |   |
|                                                    |       |                   |       |   |   |
| **NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES** |       | 5,998                  |       | 5,711 |   |
|                                                    |       |                   |       |   |   |
| **NON-INTEREST INCOME:**                                |       |                   |       |   |   |
| Service  charges                                        |       | 510                    |       | 525 |   |
| Securities  losses, net                                 |       | (3                     | )          | (2,369 | ) |
| Earnings  on bank-owned life insurance                  |       | 171                    |       | 162 |   |
| Gain  on sale of loans                                  |       | 182                    |       | 118 |   |
| Insurance  commissions                                  |       | 264                    |       | 354 |   |
| Other                                                   |       | 572                    |       | 434 |   |
| TOTAL  NON-INTEREST INCOME                              |       | 1,696                  |       | (776 | ) |
|                                                    |       |                   |       |   |   |
| **NON-INTEREST EXPENSE:**                               |       |                   |       |   |   |
| Salaries  and employee benefits                         |       | 2,737                  |       | 2,482 |   |
| Occupancy,  net                                         |       | 331                    |       | 339 |   |
| Furniture  and equipment                                |       | 304                    |       | 307 |   |
| Pennsylvania  shares tax                                |       | 169                    |       | 171 |   |
| Amortization  of investment in limited partnerships     |       | 142                    |       | 142 |   |
| Other                                                   |       | 1,303                  |       | 1,204 |   |
| TOTAL  NON-INTEREST EXPENSE                             |       | 4,986                  |       | 4,645 |   |
|                                                    |       |                   |       |   |   |
| **INCOME BEFORE INCOME TAX PROVISION (BENEFIT)**        |       | 2,708                  |       | 290 |   |
| INCOME  TAX PROVISION (BENEFIT)                         |       | 260                    |       | (549 | ) |
| **NET INCOME**                                          |       | $                      | 2,448      |   | $ | 839 |   |
| ** **                                              |       |                   |       |   |   |
| **NET INCOME PER SHARE - BASIC**                        |       | $                      | 0.64       |   | $ | 0.22 |   |
| ** **                                              |       |                   |       |   |   |
| **NET INCOME PER SHARE - DILUTED**                      |       | $                      | 0.64       |   | $ | 0.22 |   |
| ** **                                              |       |                   |       |   |   |
| **WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC**         |       | 3,834,296              |       | 3,831,747 |   |
| ** **                                              |       |                   |       |   |   |
| **WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED**       |       | 3,834,448              |       | 3,831,747 |   |
| ** **                                              |       |                   |       |   |   |
| **DIVIDENDS PER SHARE**                                 |       | 0.46                   |       | 0.46 |   |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

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PENNS WOODSBANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’EQUITY

(UNAUDITED)

 
| ** **                                             | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **        | ** ** | **ACCUMULATED**    | ** ** | ** **             | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|-------------------|------------|--------------------|------------|------------------------|------------|------------|------------|
| ** **                                             | ** ** | **COMMON** | ** ** | **ADDITIONAL** | ** ** | ** **   | ** ** | **OTHER**         | ** ** | ** **         | ** ** | **TOTAL**              | ** ** |
| ** **                                             | ** ** | **STOCK**  | ** ** | **PAID-IN**    | ** ** | **RETAINED** | ** ** | **COMPREHENSIVE** | ** ** | **TREASURY**       | ** ** | **SHAREHOLDERS’** | ** ** |
| **(In  Thousands, Except Per Share Data)**             | ** ** | **SHARES** | ** ** | **AMOUNT**     | ** ** | **CAPITAL**  | ** ** | **EARNINGS**      | ** ** | **INCOME  (LOSS)** | ** ** | **STOCK**              | ** ** | **EQUITY** | ** ** |
| Balance,  December 31, 2008                       |       | 4,010,528  |       | $              | 33,421     |         | $          | 17,959            |       | $                  | 28,177     |                   | $          | (12,266    | )          | $ | (6,264 | ) | $ | 61,027 |   |
|                                                   |       |       |       |           |       |         |       |              |       |               |       |                   |       |       |       |
| Comprehensive  income:                                 |       |       |       |           |       |         |       |              |       |               |       |                   |       |       |       |
| Net  income                                            |       |       |       |           |       |         |       | 839               |       |               |       |                   |       | 839        |       |
| Other  comprehensive income                            |       |       |       |           |       |         |       |              |       | (1,537             | )          |                   |       | (1,537     | )          |
| Dividends  declared, ($1.84 per share)                 |       |       |       |           |       |         |       | (1,762            | )          |               |       |                   |       | (1,762     | )          |
| Common  shares issued for employee stock purchase plan |       | 723        |       | 6              |       | 11           |       |              |       |               |       |                   |       | 17         |       |
| Balance,  March 31, 2009                          |       | 4,011,251  |       | $              | 33,427     |         | $          | 17,970            |       | $                  | 27,254     |                   | $          | (13,803    | )          | $ | (6,264 | ) | $ | 58,584 |   |

 
| ** **                                                         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **        | ** ** | **ACCUMULATED**        | ** ** | ** **             | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|-------------------|------------|------------------------|------------|------------------------|------------|------------|------------|
| ** **                                                         | ** ** | **COMMON** | ** ** | **ADDITIONAL** | ** ** | ** **   | ** ** | **OTHER**         | ** ** | ** **             | ** ** | **TOTAL**              | ** ** |
| ** **                                                         | ** ** | **STOCK**  | ** ** | **PAID-IN**    | ** ** | **RETAINED** | ** ** | **COMPREHENSIVE** | ** ** | **TREASURY**           | ** ** | **SHAREHOLDERS’** | ** ** |
| **(In Thousands, Except Per Share Data)** | ** ** | **SHARES** | ** ** | **AMOUNT**     | ** ** | **CAPITAL**  | ** ** | **EARNINGS**      | ** ** | **INCOME (LOSS)** | ** ** | **STOCK**              | ** ** | **EQUITY** | ** ** |
| Balance,  December 31, 2009                                   |       | 4,013,142  |       | $              | 33,443     |         | $          | 18,008            |       | $                      | 27,218     |                   | $          | (5,489     | )          | $ | (6,264 | ) | $ | 66,916 |   |
|                                                               |       |       |       |           |       |         |       |              |       |                   |       |                   |       |       |       |
| Comprehensive  income:                                             |       |       |       |           |       |         |       |              |       |                   |       |                   |       |       |       |
| Net  income                                                        |       |       |       |           |       |         |       | 2,448             |       |                   |       |                   |       | 2,448      |       |
| Other  comprehensive income                                        |       |       |       |           |       |         |       |              |       | 357                    |       |                   |       | 357        |       |
| Dividends  declared, ($.46 per share)                              |       |       |       |           |       |         |       | (1,765            | )          |                   |       |                   |       | (1,765     | )          |
| Common  shares issued for employee stock purchase plan             |       | 521        |       | 4              |       | 12           |       |              |       |                   |       |                   |       | 16         |       |
| Balance,  March 31, 2010                                      |       | 4,013,663  |       | $              | 33,447     |         | $          | 18,020            |       | $                      | 27,901     |                   | $          | (5,132     | )          | $ | (6,264 | ) | $ | 67,972 |   |

 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OFCOMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 
| ** **                                                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------------|------------|
| **(In  Thousands)**                                                        | ** ** | **2010**                              | ** ** | **2009** | ** ** |
|                                                                       |       |                                  |       |   |   |   |   |   |   |
| Net Income                                                                 |       |                                  |       | $ | 2,448 |   |   |   | $ | 839 |   |
| Other Comprehensive income (loss):                                         |       |                                  |       |   |   |   |   |   |   |
| Change in unrealized gain (loss) on available for  sale securities         |       | 538                                   |       |   |   | (4,697 | ) |   |   |
| Less: Reclassification adjustment for net losses  included in net income   |       | (3                                    | )          |   |   | (2,369 | ) |   |   |
| Other comprehensive income (loss) before tax  expense (benefit)            |       |                                  |       | 541 |   |   |   | (2,328 | ) |
| Income tax expense (benefit) related to other  comprehensive income (loss) |       |                                  |       | 184 |   |   |   | (791 | ) |
| Other comprehensive income (loss), net of tax                              |       |                                  |       | 357 |   |   |   | (1,537 | ) |
| Comprehensive income (loss)                                                |       |                                  |       | $ | 2,805 |   |   |   | $ | (698 | ) |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

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PENNS WOODSBANCORP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

 (UNAUDITED)

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **March 31,**     | ** ** |
| **(In  Thousands)**                                                                | ** ** | **2010**               | ** ** | **2009** | ** ** |
|                                                                               |       |                   |       |   |   |
| **OPERATING ACTIVITIES:**                                                          |       |                   |       |   |   |
| Net  Income                                                                        |       | $                      | 2,448      |   | $ | 839 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                   |       |   |   |
| Depreciation  and amortization                                                     |       | 190                    |       | 181 |   |
| Provision  for loan losses                                                         |       | 300                    |       | 126 |   |
| Accretion  and amortization of investment security discounts and premiums          |       | (547                   | )          | (23 | ) |
| Securities  losses, net                                                            |       | 3                      |       | 2,369 |   |
| Originations  of loans held for sale                                               |       | (7,130                 | )          | (3,797 | ) |
| Proceeds  of loans held for sale                                                   |       | 7,011                  |       | 5,023 |   |
| Gain  on sale of loans                                                             |       | (182                   | )          | (118 | ) |
| Earnings  on bank-owned life insurance                                             |       | (171                   | )          | (162 | ) |
| Other,  net                                                                        |       | 138                    |       | (398 | ) |
| Net  cash provided by operating activities                                         |       | 2,060                  |       | 4,040 |   |
| **INVESTING ACTIVITIES**                                                           |       |                   |       |   |   |
| Investment  securities available for sale:                                         |       |                   |       |   |   |
| Proceeds  from sales                                                               |       | 147                    |       | 17 |   |
| Proceeds  from calls and maturities                                                |       | 7,046                  |       | 2,178 |   |
| Purchases                                                                          |       | (14,592                | )          | (100 | ) |
| Investment  securities held to maturity:                                           |       |                   |       |   |   |
| Proceeds  from calls and maturities                                                |       | —                 |       | 25 |   |
| Net  increase in loans                                                             |       | (4,515                 | )          | (5,886 | ) |
| Acquisition  of bank premises and equipment                                        |       | (215                   | )          | (49 | ) |
| Proceeds  from the sale of foreclosed assets                                       |       | 26                     |       | — |   |
| Purchase  of bank-owned life insurance                                             |       | (31                    | )          | (42 | ) |
| Proceeds  from bank-owned life insurance death benefit                             |       | 82                     |       | — |   |
| Investment  in limited partnership                                                 |       | —                 |       | (701 | ) |
| Purchases  of regulatory stock                                                     |       | —                 |       | (170 | ) |
| Net  cash used for investing activities                                            |       | (12,052                | )          | (4,728 | ) |
| **FINANCING ACTIVITIES**                                                           |       |                   |       |   |   |
| Net  increase in interest-bearing deposits                                         |       | 22,739                 |       | 31,511 |   |
| Net  increase (decrease) in noninterest-bearing deposits                           |       | 1,014                  |       | (4,072 | ) |
| Net  decrease in short-term borrowings                                             |       | (5,376                 | )          | (28,678 | ) |
| Dividends  paid                                                                    |       | (1,765                 | )          | (1,762 | ) |
| Issuance  of common stock                                                          |       | 16                     |       | 17 |   |
| Net  cash provided by (used for) financing activities                              |       | 16,628                 |       | (2,984 | ) |
| NET  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                              |       | 6,636                  |       | (3,672 | ) |
| CASH  AND CASH EQUIVALENTS, BEGINNING                                              |       | 13,788                 |       | 16,581 |   |
| CASH  AND CASH EQUIVALENTS, ENDING                                                 |       | $                      | 20,424     |   | $ | 12,909 |   |
|                                                                               |       |                   |       |   |   |
| **SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION**                              |       |                   |       |   |   |
|                                                                               |       |                   |       |   |   |
| Interest  paid                                                                     |       | $                      | 2,774      |   | $ | 3,204 |   |
| Income  taxes paid                                                                 |       | 550                    |       | 150 |   |
| Transfer  of loans to foreclosed real estate                                       |       | 32                     |       | 131 |   |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

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

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

# ** **

# **Note1.  Basis of Presentation**

# ** **

# **The consolidated financial statementsinclude the accounts of Penns Woods Bancorp, Inc. (the “Company”) and itswholly-owned subsidiaries: Woods Investment Company, Inc., Woods RealEstate Development Company, Inc., and Jersey Shore State Bank (the “Bank”)and its wholly-owned subsidiary, The M Group, Inc. D/B/A The ComprehensiveFinancial Group (“The M Group”).  Allsignificant inter-company balances and transactions have been eliminated in theconsolidation.**

# ** **

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 the financial statements and notes thereto contained in theCompany’s Annual Report on Form 10-K for the year ended December 31,2009.

 

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

 

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**

** **

InDecember 2009, the FASB issued Accounting Standards Update (ASU) 2009-16, *Accounting for Transfer of Financial Assets*.  ASU 2009-16 provides guidance to improve therelevance, representational faithfulness, and comparability of the informationthat an entity provides in its financial statements about a transfer offinancial assets; the effects of a transfer on its financial position,financial performance, and cash flows; and a transferor’s continuinginvolvement, if any, in transferred financial assets.  ASU 2009-16 is effective for annual periodsbeginning after November 15, 2009 and for interim periods within thosefiscal years.  The adoption of thisguidance did not have a significant impact on the Company’s financialstatements.

 

InDecember 2009, the FASB issued ASU 2009-17, *Improvements to Financial Reporting by Enterprises Involved withVariable Interest Entities*. The objective of ASU 2009-17 is to improve financial reporting byenterprises involved with variable interest entities and to provide morerelevant and reliable information to users of financial statements.  ASU 2009-17 is effective for annual periodsbeginning after November 15, 2009 and for interim periods within thosefiscal years.  The adoption of thisguidance did not have a material impact on the Company’s financial position orresults of operation.

 

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InSeptember 2009, the FASB issued new guidance impacting Topic 820.  This creates a practical expedient to measurethe fair value of an alternative investment that does not have a readilydeterminable fair value.  This guidancealso requires certain additional disclosures. This guidance is effective for interim and annual periods ending after December 15,2009.  The Company has presented thenecessary disclosures in Note 8 (Fair Value Measurements) herein.

 

InOctober 2009, the FASB issued ASU 2009-15, *Accounting for Own-Share Lending Arrangements in Contemplation ofConvertible Debt Issuance or Other Financing*.  ASU 2009-15 amends Subtopic 470-20 to expandaccounting and reporting guidance for own-share lending arrangements issued incontemplation of convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning on or after December 15,2009 and interim periods within those fiscal years for arrangements outstandingas of the beginning of those fiscal years. The adoption of this guidance did not have a material impact on theCompany’s financial position or results of operation.

 

InJanuary 2010, the FASB issued ASU 2010-01, *Equity (Topic 505): Accounting for Distributions to Shareholders with Componentsof Stock and Cash — a consensus of the FASB Emerging Issues Task Force*.ASU 2010-01 clarifies that the stock portion of a distribution to shareholdersthat allows them to elect to receive cash or stock with a potential limitationon the total amount of cash that all shareholders can elect to receive in theaggregate is considered a share issuance that is reflected in EPS prospectivelyand is not a stock dividend.  ASU 2010-01is effective for interim and annual periods ending on or after December 15,2009 and should be applied on a retrospective basis.  The adoption of this guidance did not have amaterial impact on the Company’s financial position or results of operation.

 

InJanuary 2010, the FASB issued ASU 2010-02, *Consolidation (Topic 810): Accounting and reporting for Decreases inOwnership of a Subsidiary — a Scope Clarification*. ASU 2010-02amends Subtopic 810-10 to address implementation issues related to changes inownership provisions including clarifying the scope of the decrease in ownershipand additional disclosures.  ASU 2010-02is effective beginning in the period that an entity adopts Statement 160.  If an entity has previously adopted Statement160, ASU 2010-02 is effective beginning in the first interim or annualreporting period ending on or after December 15, 2009 and should beapplied retrospectively to the first period Statement 160 was adopted.   The adoption of this guidance did not have amaterial impact on the Company’s financial position or results of operation.

 

InJanuary 2010, the FASB issued ASU 2010-04, *Accounting for Various Topics — Technical Corrections to SEC Paragraphs*.ASU 2010-04 makes technical corrections to existing SEC guidance including thefollowing topics: accounting for subsequent investments, termination of aninterest rate swap, issuance of financial statements - subsequent events, useof residual method to value acquired assets other than goodwill, adjustments inassets and liabilities for holding gains and losses, and selections of discountrate used for measuring defined benefit obligation.  ASU 2010-04 is effective January 15,2010.  The adoption of this guidance didnot have a material impact on the Company’s financial position or results ofoperation.

 

InJanuary 2010, the FASB issued ASU 2010-05, *Compensation — Stock Compensation (Topic 718): Escrowed ShareArrangements and the Presumption of Compensation*. ASU 2010-05 

 

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updatesexisting guidance to address the SEC staff’s views on overcoming thepresumption that for certain shareholders escrowed share arrangements representcompensation.  ASU 2010-05 is effective January 15,2010.  The adoption of this guidance didnot have a material impact on the Company’s financial position or results ofoperation.

 

In January 2010, the FASB issued ASU No. 2010-06,*Fair Value Measurements and Disclosures(Topic 820): Improving Disclosures about Fair Value Measurements*.  ASU 2010-06 amends Subtopic 820-10 to clarifyexisting disclosures, require new disclosures, and includes conformingamendments to guidance on employers’ disclosures about postretirement benefitplan assets.  ASU 2010-06 is effectivefor interim and annual periods beginning after December 15, 2009, exceptfor disclosures about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair value measurements.  Those disclosures are effective for fiscalyears beginning after December 15, 2010 and for interim periods withinthose fiscal years.  The Company haspresented the necessary disclosures in Note 4 (Net Periodic Benefit Cost-Defined Benefit Plans) herein.

 

InFebruary 2010, the FASB issued ASU 2010-08, *Technical Corrections to Various Topics*. ASU 2010-08clarifies guidance on embedded derivatives and hedging. ASU 2010-08 iseffective for interim and annual periods beginning after December 15,2009.  The adoption of this guidance didnot have a material impact on the Company’s financial position or results.

 

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

 

InApril 2010, the FASB issued ASU 2010-13, *Compensation— Stock Compensation (Topic 718):  Effectof Denominating the Exercise Price of a Share-Based Payment Award in theCurrency of the Market in Which the Underlying Equity Security Trades*.  ASU 2010-13 provides guidance on theclassification of a share-based payment award as either equity or aliability.  A share-based payment thatcontains a condition that is not a market, performance, or service condition isrequired to be classified as a liability. ASU 2010-13 is effective for fiscal years, and interim periods withinthose fiscal years, beginning on or after December 15, 2010 and is notexpected to have a significant impact on the Company’s financial statements.

 

**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.

 

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| ** **                                                                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                              | ** ** | **2010**                              | ** ** | **2009** | ** ** |
|                                                                                                    |       |                                  |       |   |   |
| Weighted  average common shares issued                                                                  |       | 4,013,324                             |       | 4,010,775 |   |
|                                                                                                    |       |                                  |       |   |   |
| Average  treasury stock shares                                                                          |       | (179,028                              | )          | (179,028 | ) |
|                                                                                                    |       |                                  |       |   |   |
| Weighted  average common shares andcommon stock equivalents used tocalculate basic earnings per share   |       | 3,834,296                             |       | 3,831,747 |   |
|                                                                                                    |       |                                  |       |   |   |
| Additional  common stock equivalents(stock options) used to calculatediluted earnings per share         |       | 152                                   |       | — |   |
|                                                                                                    |       |                                  |       |   |   |
| Weighted  average common shares andcommon stock equivalents usedto calculate diluted earnings per share |       | 3,834,448                             |       | 3,831,747 |   |

 

Options to purchase 990 shares of common stock at astrike price of $24.72 were outstanding during the three months ended March 31,2010.   The average market price of theCompany’s stock was $32.23 for the three months ended March 31, 2010.  Options to purchase 1,980 shares of commonstock were outstanding during the three months ended March 31, 2009 butwere not included in the computation of diluted earnings per share as they wereanti-dilutive due to the strike price range being greater than the averagemarket price for the three months ended March 31, 2009.

 

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

 

For a detailed disclosure on the Company’s pension andemployee benefits plans, please refer to Note 12 of the Company’s ConsolidatedFinancial Statements included in the Annual Report on Form 10-K for theyear ended December 31, 2009.

 

The following sets forth the components of the netperiodic benefit cost of the domestic non-contributory defined benefit plan forthe three months ended March 31, 2010 and 2009, respectively:

 

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| ** **                             | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------|------------|------------------------|------------|
| ** **                             | ** ** | **March 31,**     | ** ** |
| **(In  Thousands)**                    | ** ** | **2010**               | ** ** | **2009** | ** ** |
|                                   |       |                   |       |   |   |
| Service  cost                          |       | $                      | 132        |   | $ | 136 |   |
| Interest  cost                         |       | 171                    |       | 170 |   |
| Expected  return on plan assets        |       | (161                   | )          | (127 | ) |
| Amortization  of transition obligation |       | (1                     | )          | (1 | ) |
| Amortization  of prior service cost    |       | 6                      |       | 6 |   |
| Amortization  of net loss              |       | 36                     |       | 85 |   |
| Net  periodic cost                     |       | $                      | 183        |   | $ | 269 |   |

 

Thefollowing table sets forth by level, within the fair value hierarchy detailedin Note 8 (Fair Value Measurements), the Plan’s assets at fair value as of March 31,2010:

 
| ** **                           | ** ** | **March 31, 2010** | ** ** |
|--------------------------------------|------------|-------------------------|------------|
| **(In  Thousands)**                  | ** ** | **Level I**             | ** ** | **Level II** | ** ** | **Level III** | ** ** | **Total** | ** ** |
| Assets:                              |       |                    |       |   |   |   |   |   |   |
| Cash  and cash equivalents           |       | $                       | 46         |   | $ | — |   | $ | — |   | $ | 46 |   |
| Mutual  funds - taxable fixed income |       | 3,343                   |       | — |   | — |   | 3,343 |   |
| Mutual  funds - domestic equity      |       | 4,038                   |       | — |   | — |   | 4,038 |   |
| Mutual  funds - international equity |       | 1,020                   |       | — |   | — |   | 1,020 |   |
| Total  assets at fair value          |       | $                       | 8,447      |   | $ | — |   | $ | — |   | $ | 8,447 |   |

 

**EmployerContributions**

** **

The Company previously disclosed in its consolidatedfinancial statements, included in the Annual Report on Form 10-K for theyear ended December 31, 2009, that it expected to contribute a minimum of$400,000 to its defined benefit plan in 2010.  As of March 31, 2010,there were contributions of $144,000 made to the plan.

 

**Note5.  Off Balance Sheet Risk**

 

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

 

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 

 

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Company uses the same credit policies in makingcommitments and conditional obligations as it does for on-balance sheetinstruments.  The Company may requirecollateral or other security to support financial instruments with off-balancesheet credit risk.

 

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

 
| ** **                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(In  Thousands)**           | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| Commitments  to extend credit |       | $                  | 84,424     |                  | $          | 80,061 |   |
| Standby  letters of credit    |       | 1,460              |       | 1,334                 |       |
|                               |            |                    |            |                       |            |  |  |

 

# **Commitments to extend credit arelegally 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.**

# ** **

# **Standby letters of credit representconditional commitments issued by the Company to guarantee the performance of acustomer to a third party.  Theseinstruments are issued primarily to support bid or performance relatedcontracts.  The coverage period for theseinstruments is typically a one year period with an annual renewal optionsubject to prior approval by management. Fees earned from the issuance of these letters are recognized uponexpiration of the coverage period.  Forsecured letters of credit, the collateral is typically Bank deposit instrumentsor customer business assets.**

# ** **

# **Note6.  Reclassification of ComparativeAmounts**

# ** **

Certain comparativeamounts for the prior period have been reclassified to conform to currentperiod presentations. Such reclassifications had no effect on net income orshareholders’ 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 three months ended March 31,2010 and 2009, there were 521 and 723 shares issued under the plan,respectively.

 

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# **Note 8.  FairValue Measurements**

# ** **

Thefollowing disclosures show the hierarchal disclosure framework associated withthe level of pricing observations utilized in measuring assets and liabilitiesat fair value.  The three broad levelsdefined by GAAP are as follows:

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

 

Thishierarchy requires the use of observable market data when available.

 

Thefollowing table presents the assets reported on the balance sheet at their fairvalue on a recurring basis as of March 31, 2010 and December 31,2009, 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.

 
| ** **                                  | ** ** | **March 31, 2010** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|
| **(In  Thousands)**                         | ** ** | **Level I**             | ** ** | **Level II** | ** ** | **Level III** | ** ** | **Total** | ** ** |
|                                        |       |                    |       |   |   |   |   |   |   |
| Assets  measured on a recurring basis:      |       |                    |       |   |   |   |   |   |   |
| Investment  securities, available for sale  |       |                    |       |   |   |   |   |   |   |
| U.S.  Government and agency securities      |       | $                       | —     |   | $ | 33,827 |   | $ | — |   | $ | 33,827 |   |
| State  and political securities             |       | —                  |       | 156,114 |   | — |   | 156,114 |   |
| Other  debt securties                       |       | —                  |       | 14,052 |   | — |   | 14,052 |   |
| Equity  securities                          |       | 13,259                  |       | — |   | — |   | 13,259 |   |
| Total  assets measured on a recurring basis |       | $                       | 13,259     |   | $ | 203,993 |   | $ | — |   | $ | 217,252 |   |

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

 

The following table presents the assets reported on the ConsolidatedBalance Sheet at their fair value on a non-recurring basis as of March 31,2010 and December 31, 2009, by level within the 

 

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fair value hierarchy. As required by GAAP, financial assets andliabilities are classified in their entirety based on the lowest level of inputthat is significant to the fair value measurement.

 
| ** **                                 | ** ** | **March 31, 2010** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|
| **(In  Thousands)**                        | ** ** | **Level I**             | ** ** | **Level II** | ** ** | **Level III** | ** ** | **Total** | ** ** |
|                                       |       |                    |       |   |   |   |   |   |   |
| Assets  Measured on a Non-recurring Basis: |       |                    |       |   |   |   |   |   |   |
| Impaired  Loans                            |       | $                       | —     |   | $ | 7,872 |   | $ | — |   | $ | 7,872 |   |
| Other  real estate owned                   |       | —                  |       | 678 |   | — |   | 678 |   |
|                                            |            |                         |            |  |  |  |  |  |  |  |  |  |  |

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

 

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

 

The Company isrequired to disclose estimated fair values for its financial instruments.  Fair value estimates are made at a specificpoint in time, based on relevant market information and information about thefinancial instrument.  These estimates donot reflect any premium or discount that could result from offering for sale atone time the Company’s entire holdings of a particular financialinstrument.  Also, it is the Company’sgeneral practice and intention to hold most of its financial instruments tomaturity and not to engage in trading or sales activities.  Because no market exists for a significantportion of the Company’s financial instruments, fair value estimates are basedon judgments regarding future expected loss experience, current economicconditions, risk characteristics of various financial instruments, and otherfactors.  These estimates are subjectivein nature and involve uncertainties and matters of significant judgment andtherefore cannot be determined with precision. Changes in assumptions can significantly affect the estimates.

 

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

 

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

 

The estimated fairvalues of the Company’s financial instruments are as follows at March 31,2010 and December 31, 2009:

 

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| ** **                   | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                   | ** ** | **Carrying**            | ** ** | **Fair**                   | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| **(In  Thousands)**          | ** ** | **Value**               | ** ** | **Value**                  | ** ** | **Value** | ** ** | **Value** | ** ** |
| Financial assets:            |       |                    |       |                       |       |   |   |   |   |
| Cash and cash equivalents    |       | $                       | 20,424     |                       | $          | 20,424 |   | $ | 13,788 |   | $ | 13,788 |   |
| Investment securities:       |       |                    |       |                       |       |   |   |   |   |
| Available for sale           |       | 217,252                 |       | 217,252                    |       | 208,768 |   | 208,768 |   |
| Held to maturity             |       | 107                     |       | 108                        |       | 107 |   | 108 |   |
| Loans held for sale          |       | 4,364                   |       | 4,364                      |       | 4,063 |   | 4,063 |   |
| Loans, net                   |       | 405,055                 |       | 403,437                    |       | 400,872 |   | 403,279 |   |
| Bank-owned life insurance    |       | 15,062                  |       | 15,062                     |       | 14,942 |   | 14,942 |   |
| Accrued interest receivable  |       | 3,531                   |       | 3,531                      |       | 3,523 |   | 3,523 |   |
|                         |       |                    |       |                       |       |   |   |   |   |
| Financial liabilities:       |       |                    |       |                       |       |   |   |   |   |
| Interest-bearing deposits    |       | $                       | 440,127    |                       | $          | 442,144 |   | $ | 417,388 |   | $ | 408,056 |   |
| Noninterest-bearing deposits |       | 80,913                  |       | 80,913                     |       | 79,899 |   | 79,899 |   |
| Short-term borrowings        |       | 12,978                  |       | 12,978                     |       | 18,354 |   | 18,354 |   |
| Long-term borrowings, FHLB   |       | 86,778                  |       | 89,508                     |       | 86,778 |   | 89,082 |   |
| Accrued interest payable     |       | 990                     |       | 990                        |       | 1,073 |   | 1,073 |   |

 

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

 

Fairvalue for significant nonperforming loans is based on recent externalappraisals.  If appraisals are 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 March 31, 2010 and December 31,2009.  The fair value of certificates ofdeposit is based on the discounted value of contractual cash flows.

 

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

 

**LongTerm 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:**

 

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

 

# **Note 10.  Federal Home Loan BankStock**

# ** **

TheBank is a member of the Federal Home Loan Bank of Pittsburgh (the “FHLB”),which is one of 12 regional Federal Home Loan Banks. Each Federal Home LoanBank serves as a reserve or central bank for its members within its assignedregion.  It is funded primarily from funds deposited by memberinstitutions and proceeds from the sale of consolidated obligations of theFederal Home Loan Bank System. It makes loans to members (i.e., advances) inaccordance with policies and procedures established by the board of directorsof the Federal Home Loan Bank.  As a member, the Bank is required topurchase and maintain stock in the FHLB in an amount equal to the greater of 1%of its aggregate unpaid residential mortgage loans, home purchase contracts orsimilar obligations at the beginning of each year or 5% of its outstandingadvances from the FHLB.  At March 31, 2010, the Bank held $7,271,300in stock of the FHLB, which was in compliance with this requirement.

 

The Company evaluated its holding of FHLB stockfor impairment and deemed the stock to not be impaired due to the expectedrecoverability of the par value, which equals the value reflected within the Company’sfinancial statements.  The decision wasbased on several items ranging from the estimated true economic losses embeddedwithin the FHLB’s mortgage portfolio to the FHLB’s liquidity position andcredit rating.  The Company utilizes theimpairment framework outlined in GAAP to evaluate FHLB stock for impairment.

 

The following factors were evaluated todetermine the ultimate recoverability of the par value of the Company’s FHLBstock holding; (i) the significance of the decline in net assets of the FHLBas compared to the capital stock amount for the FHLB and the length of timethis 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, theCompany determined that its holding of FHLB stock was not impaired on March 31,2010.

 

**Note 11. Investment Securities**

 

Theamortized cost and estimated fair values of investment securities at March 31,2010 and December 31, 2009 are as follows:

 

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| ** **                            | ** ** | **March 31, 2010** | ** ** |
|---------------------------------------|------------|-------------------------|------------|
| ** **                            | ** ** | ** **              | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **Amortized**           | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| **(In Thousands)**                    | ** ** | **Cost**                | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| Available  for sale (AFS)             |       |                    |       |   |   |   |   |   |   |
| U.S.  Government and agencysecurities |       | $                       | 31,790     |   | $ | 2,041 |   | $ | (4 | ) | $ | 33,827 |   |
| State  and political securities       |       | 165,297                 |       | 686 |   | (9,869 | ) | 156,114 |   |
| Other  debt securities                |       | 13,306                  |       | 812 |   | (66 | ) | 14,052 |   |
| Total  debt securities                |       | 210,393                 |       | 3,539 |   | (9,939 | ) | 203,993 |   |
| Equity  securities                    |       | 11,725                  |       | 1,571 |   | (37 | ) | 13,259 |   |
| Total  investment securities AFS      |       | $                       | 222,118    |   | $ | 5,110 |   | $ | (9,976 | ) | $ | 217,252 |   |
|                                  |       |                    |       |   |   |   |   |   |   |
| Held  to maturity (HTM)               |       |                    |       |   |   |   |   |   |   |
| U.S.  Government and agencysecurities |       | $                       | 6          |   | $ | — |   | $ | — |   | $ | 6 |   |
| Other  debt securities                |       | 101                     |       | 1 |   | — |   | 102 |   |
| Total  investment securities HTM      |       | $                       | 107        |   | $ | 1 |   | $ | — |   | $ | 108 |   |

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

 

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

 
| ** **                            | ** ** | **March 31, 2010**     | ** ** |
|---------------------------------------|------------|-----------------------------|------------|
| ** **                            | ** ** | **Less than Twelve Months** | ** ** | **Twelve Months or Greater** | ** ** | **Total** | ** ** |
| ** **                            | ** ** | ** **                  | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** |
| ** **                            | ** ** | **Fair**                    | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| **(In  Thousands)**                   | ** ** | **Value**                   | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
|                                  |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government and agency securities |       | $                           | 995        |   | $ | 4 |   | $ | — |   | $ | — |   | $ | 995 |   | $ | 4 |   |
| State and political securities        |       | 68,081                      |       | 2,472 |   | 36,801 |   | 7,397 |   | 104,882 |   | 9,869 |   |
| Other debt securities                 |       | 1,083                       |       | 2 |   | 1,081 |   | 64 |   | 2,164 |   | 66 |   |
| Total debt securities                 |       | 70,159                      |       | 2,478 |   | 37,882 |   | 7,461 |   | 108,041 |   | 9,939 |   |
| Equity securities                     |       | 68                          |       | 1 |   | 1,010 |   | 36 |   | 1,078 |   | 37 |   |
| Total                                 |       | $                           | 70,227     |   | $ | 2,479 |   | $ | 38,892 |   | $ | 7,497 |   | $ | 109,119 |   | $ | 9,976 |   |
|                                  |       |                        |       |   |   |   |   |   |   |   |   |   |   |

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

 

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AtMarch 31, 2010 there were a total of 95 and 103 individual securities thatwere in a continuous unrealized loss position for less than twelve months andgreater than twelve months, respectively.

 

The Company reviews its position quarterly and hasdetermined that, at March 31, 2010, the declines outlined in the abovetable represent temporary declines and the Company does not intend to sell and does not believe they will be required to sellthese securities before recovery of their cost basis, which may be atmaturity.  There were 198positions that were temporarily impaired at March 31, 2010.  The Company has concluded that the unrealizedlosses disclosed above are not other than temporary but are the result ofinterest rate changes, sector credit ratings changes, or company-specificratings changes that are not expected to result in the non-collection ofprincipal and interest during the period.

 

The amortized cost and estimated fair value ofdebt securities at March 31, 2010, by contractual maturity, are shownbelow. Expected maturities may differ from contractual maturities since borrowersmay have the right to call or prepay obligations with or without call orprepayment penalties.

 
| ** **                        | ** ** | **Available for Sale** | ** ** | **Held to Maturity** | ** ** |
|-----------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                        | ** ** | **Amortized**          | ** ** | ** **           | ** ** | **Amortized** | ** ** | ** ** | ** ** |
| **(In  Thousands)**               | ** ** | **Cost**               | ** ** | **Fair Value**       | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| Due in one year or less           |       | $                      | —     |                 | $          | — |   | $ | 50 |   | $ | 50 |   |
| Due after one year to five years  |       | 13,564                 |       | 14,351               |       | 51 |   | 52 |   |
| Due after five years to ten years |       | 3,469                  |       | 3,232                |       | — |   | — |   |
| Due after ten years               |       | 193,360                |       | 186,410              |       | 6 |   | 6 |   |
| Total                             |       | $                      | 210,393    |                 | $          | 203,993 |   | $ | 107 |   | $ | 108 |   |

 

Total gross proceeds from sales of securitiesavailable for sale were $147,000 and $17,000, for March 31, 2010 and 2009,respectively.  The following tablerepresents gross realized gains and losses on those transactions:

 
| ** **                            | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
|---------------------------------------|------------|--------------------|------------|--------------------|------------|
| **(In  Thousands)**                   | ** ** | **2010**           | ** ** | **2009**           | ** ** |
| Gross realized gains:                 |       |               |       |               |       |
| U.S. Government and agency securities |       | $                  | —     |               | $          | — |   |
| State and political securities        |       | —             |       | —             |       |
| Other debt securities                 |       | 6                  |       | —             |       |
| Equity securities                     |       | —             |       | 1                  |       |
| Total gross realized gains            |       | $                  | 6          |               | $          | 1 |   |
|                                  |       |               |       |               |       |
| Gross realized losses:                |       |               |       |               |       |
| U.S. Government and agency securities |       | $                  | —     |               | $          | — |   |
| State and political securities        |       | —             |       | —             |       |
| Other debt securities                 |       | 9                  |       | 37                 |       |
| Equity securities                     |       | —             |       | 2,333              |       |
| Total gross realized losses           |       | $                  | 9          |               | $          | 2,370 |   |

 

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Gross realized losses for the equity securitiesportfolio include impairment charges of $0 and $2,333,000 for the three monthsended March 31, 2010 and 2009, respectively.

 

**Note 12. Loans**

 

The allocation of the loan portfolio, by delinquencystatus, as of March 31, 2010 and December 31, 2009 is presentedbelow:

 
| ** **                        | ** ** | **March 31, 2010** | ** ** |
|-----------------------------------|------------|-------------------------|------------|
| ** **                        | ** ** | ** **              | ** ** | ** ** | ** ** | **Past Due** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | ** **              | ** ** | ** ** | ** ** | **90 Days** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | ** **              | ** ** | **Past Due** | ** ** | **Or More** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | ** **              | ** ** | **30 To 90** | ** ** | **& Still** | ** ** | **Non-** | ** ** | ** ** | ** ** |
| **(In  Thousands)**               | ** ** | **Current**             | ** ** | **Days** | ** ** | **Accruing** | ** ** | **Accrual** | ** ** | **Total** | ** ** |
| Commercial  and agricultural      |       | $                       | 48,449     |   | $ | 253 |   | $ | 47 |   | $ | 184 |   | $ | 48,933 |   |
| Real  estate mortgage:            |       |                    |       |   |   |   |   |   |   |   |   |
| Residential                       |       | 165,835                 |       | 6,122 |   | — |   | 985 |   | 172,942 |   |
| Commercial                        |       | 152,679                 |       | 700 |   | 113 |   | 1,961 |   | 155,453 |   |
| Construction                      |       | 18,987                  |       | 2,965 |   | — |   | 555 |   | 22,507 |   |
| Installment  loans to individuals |       | 10,952                  |       | 129 |   | — |   | 18 |   | 11,099 |   |
|                              |       | 396,902                 |       | $ | 10,169 |   | $ | 160 |   | $ | 3,703 |   | 410,934 |   |
| Less:  Net deferred loan fees     |       | 1,015                   |       |   |   |   |   |   |   | 1,015 |   |
|  Allowance for loan losses   |       | 4,864                   |       |   |   |   |   |   |   | 4,864 |   |
| Loans,  net                       |       | $                       | 391,023    |   |   |   |   |   |   |   | $ | 405,055 |   |

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

 

The recorded investment in loans for which impairment has beenrecognized amounted to $8,749,000 at March 31, 2010, compared to$8,312,000 at December 31, 2009. The valuation allowance related to impaired loans amounted to $877,000at March 31, 2010 and $802,000 at December 31, 2009.  The increase in impaired loans and valuationallowance is primarily from a few commercial relationships.

 

A loan is considered impaired, based on current information and events,if it is probable that the Bank will be unable to collect the scheduledpayments of principal or interest when due according to the contractual termsof the loan agreement. The measurement of impaired loans is generally based onthe present value of expected future cash flows discounted at the historicaleffective interest rate, except that all collateral-dependent loans aremeasured for impairment based on the fair value of the collateral.

 

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**CAUTIONARYSTATEMENT FOR PURPOSES OF THE PRIVATE**

**SECURITIESLITIGATION REFORM ACT OF 1995**

 

This Report containscertain “forward-looking statements” including statements concerning plans,objectives, future events or performance and assumptions and other statementswhich are other than statements of historical fact.  The Company cautions readers that thefollowing important factors, among others, may have affected and could in thefuture affect the Company’s actual results and could cause the Company’s actualresults for subsequent periods to differ materially from those expressed in anyforward-looking statement made by or on behalf of the Company herein:  (i) the effect of changes in laws andregulations, including federal and state banking laws and regulations, withwhich the Company must comply, and the associated costs of compliance with suchlaws and regulations either currently or in the future as applicable; (ii) theeffect of changes in accounting policies and practices, as may be adopted bythe regulatory agencies as well as by the Financial Accounting Standards Board,or of changes in the Company’s organization, compensation and benefit plans; (iii) theeffect on the Company’s competitive 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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**Item 2.   Management’s Discussion and Analysis ofFinancial Condition and Results of Operation**

 

# **EARNINGS SUMMARY**

# ** **

**Comparisonof the Three Months Ended March 31, 2010 and 2009**

 

**SummaryResults**

 

Netincome for the three months ended March 31, 2010 was $2,448,000 comparedto $839,000 for the same period of 2009 as after-tax securities lossesdecreased $1,562,000 (from a loss of $1,564,000 to a loss of $2,000).  Included within the change in after-taxsecurities losses for the three  monthsended March 31, 2009 was an other than temporary impairment chargerelating to certain equity securities held in the investment portfolio of $2,333,000.Basic and diluted earnings per share for the three months ended March 31,2010 were $0.64 compared to $0.22 for the three months ended March 31,2009.  Return on average assets andreturn on average equity were 1.42% and 14.31% for the three months ended March 31,2010 compared to 0.52% and 5.64% for the corresponding period of 2009.  Net income from core operations (“operatingearnings”) increased to $2,450,000 for the three months ended March 31,2010 compared to $2,403,000 for the same period of 2009.  Operating earnings per share for the threemonths ended March 31, 2010 were $0.64 basic and dilutive compared to$0.63 basic and dilutive for the three months ended March 31, 2009.

 

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 from core operations, or operating earnings, means net incomeadjusted to exclude after-tax net securities gains or losses.  These disclosures should not be viewed as asubstitute for net income determined in accordance with GAAP, nor are theynecessarily comparable to non-GAAP performance measures that may be presentedby other companies.

 

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**Reconciliationof GAAP and non-GAAP Income**

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------|------------|------------------------|------------|
| ** **                                   | ** ** | **March 31,**     | ** ** |
| **(In  Thousands)**                          | ** ** | **2010**               | ** ** | **2009** | ** ** |
| GAAP  net income                             |       | $                      | 2,448      |   | $ | 839 |   |
| Less:  securities gains (losses), net of tax |       | (2                     | )          | (1,564 | ) |
| Non-GAAP  operating earnings                 |       | $                      | 2,450      |   | $ | 2,403 |   |

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **March 31,**               | ** ** |
| **(In Thousands)**                      | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Return  on average assets (ROA)              |       | 1.42                             | %          | 0.52 | % |
| Less:  securities gains (losses), net of tax |       | 0.00                             | %          | -0.96 | % |
| Non-GAAP  operating ROA                      |       | 1.42                             | %          | 1.48 | % |

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **March 31,**               | ** ** |
| **(In Thousands)**                      | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Return  on average equity (ROE)              |       | 14.31                            | %          | 5.64 | % |
| Less:  securities gains (losses), net of tax |       | -0.02                            | %          | -10.52 | % |
| Non-GAAP  operating ROE                      |       | 14.33                            | %          | 16.16 | % |

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **March 31,**               | ** ** |
| **(In Thousands)**                      | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Basic  earnings per share (EPS)              |       | $                                | 0.64       |   | $ | 0.22 |   |
| Less:  securities gains (losses), net of tax |       | 0.00                             |       | (0.41 | ) |
| Non-GAAP  basic operating EPS                |       | $                                | 0.64       |   | $ | 0.63 |   |

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **March 31,**               | ** ** |
| **(In Thousands)**                      | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Dilutive  EPS                                |       | $                                | 0.64       |   | $ | 0.22 |   |
| Less:  securities gains (losses), net of tax |       | 0.00                             |       | (0.41 | ) |
| Non-GAAP  dilutive operating EPS             |       | $                                | 0.64       |   | $ | 0.63 |   |

 

**Interestand Dividend Income**

 

Interestand dividend income for the three months ended March 31, 2010 increased$72,000 to $8,989,000 compared to $8,917,000 for the same period of 2009.  The increase in interest income was theresult of an increase in loan interest of $111,000 which offset the decline ininvestment securities income of $39,000. The increase in loan interest is the result of growth in the averagegross loan portfolio of $22,373,000.  Thegrowth offset a decline in the average taxable equivalent yield of 24 basispoints (“bp”) caused by the low interest rate environment 

 

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thathas existed over the past year.  Dividend income decreased as a direct result of the current status ofthe economy that has caused many of the issuers of equity holdings in ourportfolio to decrease or suspend their dividend.  On a taxable equivalent basis, total interestincome increased $87,000 due to volume increases that offset the decline inyield.

 

Interestand dividend income composition for the three months ended March 31, 2010and 2009 was as follows:

 
| ** **                          | ** ** | **For The Three Months Ended** | ** ** |
|-------------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **March 31, 2010**        | ** ** | **March 31, 2009** | ** ** | **Change** | ** ** |
| **(In  Thousands)**                 | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Loans  including fees               |       | $                              | 6,330      |   | 70.4 | % | $ | 6,219 |   | 69.7 | % | $ | 111 |   | 1.8 | % |
| Investment  securities:             |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                             |       | 1,349                          |       | 15.0 |   | 1,363 |   | 15.3 |   | (14 | ) | (1.0 | ) |
| Tax-exempt                          |       | 1,258                          |       | 14.0 |   | 1,246 |   | 14.0 |   | 12 |   | 1.0 |   |
| Dividend  and other interest income |       | 52                             |       | 0.6 |   | 89 |   | 1.0 |   | (37 | ) | (41.6 | ) |
| Total  interest and dividend income |       | $                              | 8,989      |   | 100.0 | % | $ | 8,917 |   | 100.0 | % | $ | 72 |   | 0.8 | % |

 

**InterestExpense**

 

Interestexpense for the three months ended March 31, 2010 decreased $389,000 to$2,691,000 compared to $3,080,000 for the same period of 2009.  The decreased expense of $295,000 associatedwith deposits is primarily the result of a reduction of 82 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 $94,000 as the average balance of such borrowingsdecreased $46,742,000, while the rate paid increased 73 bp.  Long-term borrowing interest expense remainedthe same, as the average balance and the average rate paid on such borrowingsdid not change.

 

Interestexpense composition for the three months ended March 31, 2010 and 2009 wasas follows:

 
| ** **                  | ** ** | **For The Three Months Ended** | ** ** |
|-----------------------------|------------|--------------------------------|------------|
| ** **                  | ** ** | **March 31, 2010**        | ** ** | **March 31, 2009** | ** ** | **Change** | ** ** |
| **(In  Thousands)**         | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Deposits                    |       | $                              | 1,710      |   | 63.5 | % | $ | 2,005 |   | 65.1 | % | $ | (295 | ) | (14.7 | )% |
| Short-term  borrowings      |       | 64                             |       | 2.4 |   | 158 |   | 5.1 |   | (94 | ) | (59.5 | ) |
| Long-term  borrowings, FHLB |       | 917                            |       | 34.1 |   | 917 |   | 29.8 |   | — |   | — |   |
| Total  interest expense     |       | $                              | 2,691      |   | 100.0 | % | $ | 3,080 |   | 100.0 | % | $ | (389 | ) | (12.6 | )% |

 

**Net Interest Margin**

** **

Thenet interest margin (“NIM”) for the three months ended March 31, 2010 was4.49% compared to 4.47% for the corresponding period of 2009.  The increase in the NIM was driven 

 

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bya 42 bp decline in the rate paid on interest bearing liabilities that more thancompensated for a 36 bp decline in the yield on interest earning assets.  The decrease in earning asset yield is due tothe impact on the loan and investment portfolios of the current low rateenvironment.  The decrease in the cost ofinterest bearing liabilities to 2.03% from 2.45% was driven by a reduction inthe rate paid on time deposits of 82 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 quarter of 2009 due to the apparentbottoming or near bottoming of deposit rates.

 

Thefollowing is a schedule of average balances and associated yields for the threemonths ended March 31, 2010 and 2009:

 

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| ** **                                       | ** ** | **AVERAGE BALANCES AND INTEREST RATES** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                       | ** ** | **Three Months Ended**                  | ** ** | **Three Months Ended** | ** ** |
| ** **                                       | ** ** | **March 31, 2010**                 | ** ** | **March 31, 2009** | ** ** |
| **(In  Thousands)**                              | ** ** | **Average Balance**                     | ** ** | **Interest** | ** ** | **Average Rate** | ** ** | **Average Balance** | ** ** | **Interest** | ** ** | **Average Rate** | ** ** |
| Assets:                                          |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Tax-exempt  loans                                |       | $                                       | 17,346     |   | $ | 292 |   | 6.83 | % | $ | 16,052 |   | $ | 265 |   | 6.70 | % |
| All  other loans                                 |       | 394,957                                 |       | 6,137 |   | 6.30 | % | 373,878 |   | 6,044 |   | 6.56 | % |
| Total  loans                                     |       | 412,303                                 |       | 6,429 |   | 6.32 | % | 389,930 |   | 6,309 |   | 6.56 | % |
|                                             |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Taxable  investment securities                   |       | 106,645                                 |       | 1,400 |   | 5.25 | % | 101,890 |   | 1,452 |   | 5.70 | % |
| Tax-exempt  investment securities                |       | 107,013                                 |       | 1,906 |   | 7.12 | % | 101,654 |   | 1,888 |   | 7.43 | % |
| Total  securities                                |       | 213,658                                 |       | 3,306 |   | 6.19 | % | 203,544 |   | 3,340 |   | 6.56 | % |
|                                             |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  deposits                       |       | 7,569                                   |       | 1 |   | 0.05 | % | 23 |   | — |   | 0.00 | % |
|                                             |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                   |       | 633,530                                 |       | 9,736 |   | 6.20 | % | 593,497 |   | 9,649 |   | 6.56 | % |
|                                             |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Other  assets                                    |       | 55,410                                  |       |   |   |   |   | 55,256 |   |   |   |   |   |
|                                             |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Total  assets                                    |       | $                                       | 688,940    |   |   |   |   |   | $ | 648,753 |   |   |   |   |   |
|                                             |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Liabilities  and shareholders’ equity:      |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Savings                                          |       | $                                       | 62,282     |   | 53 |   | 0.35 | % | $ | 59,642 |   | 78 |   | 0.53 | % |
| Super  Now deposits                              |       | 63,046                                  |       | 109 |   | 0.70 | % | 53,890 |   | 129 |   | 0.97 | % |
| Money  market deposits                           |       | 87,186                                  |       | 287 |   | 1.34 | % | 41,276 |   | 212 |   | 2.08 | % |
| Time  deposits                                   |       | 220,214                                 |       | 1,261 |   | 2.32 | % | 205,110 |   | 1,586 |   | 3.14 | % |
| Total  interest-bearing deposits                 |       | 432,728                                 |       | 1,710 |   | 1.60 | % | 359,918 |   | 2,005 |   | 2.26 | % |
|                                             |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Short-term  borrowings                           |       | 14,745                                  |       | 64 |   | 1.76 | % | 61,487 |   | 158 |   | 1.03 | % |
| Long-term  borrowings, FHLB                      |       | 86,778                                  |       | 917 |   | 4.23 | % | 86,778 |   | 917 |   | 4.23 | % |
| Total  borrowings                                |       | 101,523                                 |       | 981 |   | 3.87 | % | 148,265 |   | 1,075 |   | 2.90 | % |
|                                             |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities              |       | 534,251                                 |       | 2,691 |   | 2.03 | % | 508,183 |   | 3,080 |   | 2.45 | % |
|                                             |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Demand  deposits                                 |       | 78,039                                  |       |   |   |   |   | 71,321 |   |   |   |   |   |
| Other  liabilities                               |       | 8,245                                   |       |   |   |   |   | 9,760 |   |   |   |   |   |
| Shareholders’  equity                       |       | 68,405                                  |       |   |   |   |   | 59,489 |   |   |   |   |   |
| Total  liabilities and shareholders’ equity |       | $                                       | 688,940    |   |   |   |   |   | $ | 648,753 |   |   |   |   |   |
|                                             |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Interest  rate spread                            |       |                                    |       |   |   | 4.17 | % |   |   |   |   | 4.11 | % |
| Net  interest income/margin                      |       |                                    |       | $ | 7,045 |   | 4.49 | % |   |   | $ | 6,569 |   | 4.47 | % |

 

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.

 

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# **The following table presents theadjustment to convert net interest income to net interest income on a fullytaxable equivalent basis for the three months ended**March 31, 2010and 2009.

 
| ** **                                      | ** ** | **For the Three Months Ended** | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|
| ** **                                      | ** ** | **March 31,**             | ** ** |
| **(In  Thousands)**                             | ** ** | **2010**                       | ** ** | **2009** | ** ** |
|                                            |       |                           |       |   |   |
| Total  interest income                          |       | $                              | 8,989      |   | $ | 8,917 |   |
| Total  interest expense                         |       | 2,691                          |       | 3,080 |   |
|                                            |       |                           |       |   |   |
| Net  interest income                            |       | 6,298                          |       | 5,837 |   |
| Tax  equivalent adjustment                      |       | 747                            |       | 732 |   |
|                                            |       |                           |       |   |   |
| Net  interest income (fully taxable equivalent) |       | $                              | 7,045      |   | $ | 6,569 |   |

 

# **The following table sets forth therespective impact that both volume and rate changes have had on net interestincome on a fully taxable equivalent basis for the three months ended**March 31, 2010 and 2009:

 

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| ** **                          | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|
| ** **                          | ** ** | **2010 vs 2009**                      | ** ** |
| ** **                          | ** ** | **Increase (Decrease)**               | ** ** |
| ** **                          | ** ** | **Due to**                            | ** ** |
| **(In  Thousands)**                 | ** ** | **Volume**                            | ** ** | **Rate** | ** ** | **Net** | ** ** |
| Interest  income:                   |       |                                  |       |   |   |   |   |
| Loans,  tax-exempt                  |       | $                                     | 22         |   | $ | 5 |   | $ | 27 |   |
| Loans                               |       | 1,196                                 |       | (1,103 | ) | 93 |   |
| Taxable  investment securities      |       | 321                                   |       | (373 | ) | (52 | ) |
| Tax-exempt  investment securities   |       | 359                                   |       | (341 | ) | 18 |   |
| Interest  bearing deposits          |       | 1                                     |       | — |   | 1 |   |
| Total  interest-earning assets      |       | 1,899                                 |       | (1,812 | ) | 87 |   |
|                                |       |                                  |       |   |   |   |   |
| Interest  expense:                  |       |                                  |       |   |   |   |   |
| Savings  deposits                   |       | 22                                    |       | (47 | ) | (25 | ) |
| Super  Now deposits                 |       | 103                                   |       | (123 | ) | (20 | ) |
| Money  market deposits              |       | 524                                   |       | (449 | ) | 75 |   |
| Time  deposits                      |       | 666                                   |       | (991 | ) | (325 | ) |
| Short-term  borrowings              |       | (513                                  | )          | 419 |   | (94 | ) |
| Long-term  borrowings, FHLB         |       | —                                |       | — |   | — |   |
| Total  interest-bearing liabilities |       | 802                                   |       | (1,191 | ) | (389 | ) |
| Change  in net interest income      |       | $                                     | 1,097      |   | $ | (621 | ) | $ | 476 |   |

 

# **Provision for LoanLosses**

 

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

 

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 March 31, 2010, future adjustments could be necessaryif circumstances or economic conditions differ substantially from theassumptions used in making the initial determinations.  A downturn in the local economy, increasedunemployment, and delays in receiving financial information from borrowerscould 

 

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result in increasedlevels of nonperforming assets, charge-offs, loan loss provisions, andreductions in income.  Additionally, asan integral part of the examination process, bank regulatory agenciesperiodically review the Bank’s loan loss allowance.  The banking agencies could require therecognition of additions to the loan loss allowance based on their judgment ofinformation available to them at the time of their examination.

 

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 $4,657,000 at December 31, 2009 to $4,864,000 at March 31,2010.  At March 31, 2010 and December 31, 2009, the allowancefor loan losses to total loans was 1.19% and 1.15%, respectively.

 

The provision for loanlosses totaled $300,000 for the three months ended March 31, 2010, compared to $126,000 for the sameperiod in 2009.  The amount of theincrease in the provision was the result of several factors, including but notlimited to, an increase in gross loans of $4,390,000 since December 31,2009, a ratio of annualized net charge-offs to average loans of 0.09% for thethree months ended March 31, 2010, a ratio of nonperforming loans to total loans of0.94% at March 31, 2010, and a ratio of the allowance for loan losses tononperforming loans of 125.91% at March 31, 2010. Nonperforming loans decreased to $3,863,000 at March 31,2010****from $4,456,000 at December 31, 2009.  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 change incharge-offs and nonperforming loans due to the economic situation and thecollateral status of the nonperforming loans and overall loan portfolio ingeneral, which limits the loan specific allocation of the allowance for loanlosses.

 

Followingis a table showing the changes in the allowance for loan losses for the threemonths ended March 31, 2010****and 2009:

 

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| ** **                                                                                             | ** ** | **For the Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| **(In  Thousands)**                                                                                    | ** ** | **March 31, 2010**        | ** ** | **March 31, 2009** | ** ** |
| Balance  at beginning of period                                                                        |       | $                              | 4,657      |   | $ | 4,356 |   |
| Charge-offs:                                                                                           |       |                           |       |   |   |
| Real  estate                                                                                           |       | 22                             |       | 16 |   |
| Commercial  and industrial                                                                             |       | 90                             |       | — |   |
| Installment  loans to individuals                                                                      |       | 37                             |       | 54 |   |
| Total  charge-offs                                                                                     |       | 149                            |       | 70 |   |
| Recoveries:                                                                                            |       |                           |       |   |   |
| Real  estate                                                                                           |       | 6                              |       | 3 |   |
| Commercial  and industrial                                                                             |       | —                         |       | — |   |
| Installment  loans to individuals                                                                      |       | 50                             |       | 26 |   |
| Total  recoveries                                                                                      |       | 56                             |       | 29 |   |
| Net  charge-offs                                                                                       |       | 93                             |       | 41 |   |
| Additions  charged to operations                                                                       |       | 300                            |       | 126 |   |
| Balance  at end of period                                                                              |       | $                              | 4,864      |   | $ | 4,441 |   |
| Ratio  of net annualized charge-offs during the period to average loans outstanding  during the period |       | 0.09                           | %          | 0.04 | % |

 

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

 
| ** **               | ** ** | **Total Nonperforming Loans** | ** ** |
|--------------------------|------------|-------------------------------|------------|
| ** **               | ** ** | ** **                    | ** ** | **90 Days** | ** ** | ** ** | ** ** |
| **(In  Thousands)**      | ** ** | **Nonaccrual**                | ** ** | **Past Due** | ** ** | **Total** | ** ** |
| March 31,  2010     |       | $                             | 3,703      |   | $ | 160 |   | $ | 3,863 |   |
| December 31,  2009  |       | 1,891                         |       | 2,565 |   | 4,456 |   |
| September 30,  2009 |       | 1,448                         |       | 4,396 |   | 5,844 |   |
| June 30,  2009      |       | 2,089                         |       | 578 |   | 2,667 |   |
| March 31,  2009     |       | 2,033                         |       | 236 |   | 2,269 |   |
|                          |            |                               |            |  |  |  |  |  |  |  |

 

Loansnot included above which are troubled debt restructurings, totaled $747,000,$426,000, and $0 at March 31, 2010, December 31, 2009, and March 31,2009, respectively.

 

**Non-interestIncome**

 

Totalnon-interest income for the three months ended March 31, 2010****compared to the same period in 2009 increased $2,472,000 to$1,696,000 due to a $2,366,000 decrease in net securities losses.  Excluding net securities gains and losses,non-interest income for the first quarter of 2010 would have increased $106,000compared to the 2009 period.  Depositservice charges decreased $15,000 as overdraft fee income decreased $7,000, inaddition to customers migrating to no service charge checking accounts thatwere introduced as part of a customer acquisition and retention program.  Gain on sale of loans increased $64,000 dueprimarily to an increase in  volume thatcompensated for a change in product mix which has resulted in a greaterpercentage of the fee collected being categorized as other income.  Some of the increase in volume can beattributed to the home buyer tax credit that expired April 30, 2010.

 

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Insurancecommissions for the three months ended March 31, 2010 decreased $90,000compared to the same period in 2009 due to a softening market and shift inproduct mix.  Management of The M Groupcontinues 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.

 

Non-interestincome composition for the three months ended March 31, 2010****and 2009 was as follows:

 
| ** **                 | ** ** | **For the Three Months Ended** | ** ** |
|----------------------------|------------|--------------------------------|------------|
| ** **                 | ** ** | **March 31, 2010**        | ** ** | **March 31, 2009** | ** ** | **Change** | ** ** |
| **(In Thousands)**         | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Deposit  service charges   |       | $                              | 510        |   | 30.1 | % | $ | 525 |   | (67.7 | )% | $ | (15 | ) | (2.9 | )% |
| Securities  losses, net    |       | (3                             | )          | (0.2 | ) | (2,369 | ) | 305.3 |   | 2,366 |   | 99.9 |   |
| Bank  owned life insurance |       | 171                            |       | 10.1 |   | 162 |   | (20.9 | ) | 9 |   | 5.6 |   |
| Gain  on sale of loans     |       | 182                            |       | 10.7 |   | 118 |   | (15.2 | ) | 64 |   | 54.2 |   |
| Insurance  commissions     |       | 264                            |       | 15.6 |   | 354 |   | (45.6 | ) | (90 | ) | (25.4 | ) |
| Other                      |       | 572                            |       | 33.7 |   | 434 |   | (55.9 | ) | 138 |   | 31.8 |   |
| Total  non-interest income |       | $                              | 1,696      |   | 100.0 | % | $ | (776 | ) | 100.0 | % | $ | 2,472 |   | (318.6 | )% |

 

**Non-interestExpense**

 

Totalnon-interest expense increased $341,000 for the three months ended March 31,2010****compared to the same period of2009.  The $255,000 increase in salariesand employee benefits was attributable to several items including standard costof living wage adjustments for employees, increased pension expense, and otherbenefit costs.  Other expenses increasedprimarily due to normal anticipated inflationary adjustments to ongoingbusiness operating costs in addition to increased FDIC insurance cost.

 

Non-interestexpense composition for the three months ended March 31, 2010****and 2009 was as follows:

 
| ** **                                          | ** ** | **For the Three Months Ended** | ** ** |
|-----------------------------------------------------|------------|--------------------------------|------------|
| ** **                                          | ** ** | **March 31, 2010**        | ** ** | **March 31, 2009** | ** ** | **Change** | ** ** |
| **(In Thousands)**                                  | ** ** | **Amount**                     | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Salaries  and employee benefits                     |       | $                              | 2,737      |   | 54.9 | % | $ | 2,482 |   | 53.4 | % | $ | 255 |   | 10.3 | % |
| Occupancy,  net                                     |       | 331                            |       | 6.6 |   | 339 |   | 7.3 |   | (8 | ) | (2.4 | ) |
| Furniture  and equipment                            |       | 304                            |       | 6.1 |   | 307 |   | 6.6 |   | (3 | ) | (1.0 | ) |
| Pennsylvania  shares tax                            |       | 169                            |       | 3.4 |   | 171 |   | 3.7 |   | (2 | ) | (1.2 | ) |
| Amortization  of investment in limited partnerships |       | 142                            |       | 2.9 |   | 142 |   | 3.1 |   | — |   | — |   |
| Other                                               |       | 1,303                          |       | 26.1 |   | 1,204 |   | 25.9 |   | 99 |   | 8.2 |   |
| Total  non-interest expense                         |       | $                              | 4,986      |   | 100.0 | % | $ | 4,645 |   | 100.0 | % | $ | 341 |   | 7.3 | % |

 

**Provisionfor Income Taxes**

 

Incometaxes increased $809,000 for the three months ended March 31, 2010****compared to the same period of 2009.  The primary cause of the changes in taxexpense is the impact of net 

 

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securitieslosses.  Excluding the impact of the netsecurities gains and losses, the effective tax rate for the three months ended March 31,2010 and 2009****was 9.63%.  The Company currently is in a deferred taxasset position due to the low income housing tax credits earned both currentlyand previously.  Management has reviewedthe deferred tax asset and has determined that the asset will be utilizedwithin the appropriate carry forward period and therefore does not require avaluation allowance.

 

# **ASSET/LIABILITYMANAGEMENT**

 

# **Cash and CashEquivalents**

# ** **

Cash and cash equivalentsincreased $6,636,000 from $13,788,000 at December 31, 2009 to $20,424,000at March 31, 2010****primarily as a result of the followingactivities during the three months ended March 31, 2010:

 

# **Loans Held forSale**

# ** **

Activity regarding loansheld for sale resulted in loan originations exceeding sale proceeds, less$182,000 in realized gains, by $301,000 for the three months ended March 31,2010.

 

**Loans**

 

Gross loans increased$4,390,000 since December 31, 2009 due to an increase of commercial andconstruction related loans, which was partially offset by a decrease inresidential real estate loans.

 

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

 
| ** **                              | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** | **Change** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|----------------------------|------------|------------|------------|
| **(In  Thousands)**                     | ** ** | **Amount**              | ** ** | **% Total**                | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Commercial,  financial and agricultural |       | $                       | 48,933     |                       | 11.9       | %          | $          | 46,647 |   | 11.5 | % | $ | 2,286 |   | 4.9 | % |
| Real  estate mortgage:                  |       |                    |       |                       |       |       |       |   |   |   |   |   |   |
| Residential                             |       | 172,942                 |       | 42.2                       |       | 174,346    |       | 43.1 |   | (1,404 | ) | (0.8 | ) |
| Commercial                              |       | 155,453                 |       | 37.9                       |       | 152,209    |       | 37.5 |   | 3,244 |   | 2.1 |   |
| Construction                            |       | 22,507                  |       | 5.5                        |       | 21,795     |       | 5.4 |   | 712 |   | 3.3 |   |
| Installment  loans to individuals       |       | 11,099                  |       | 2.7                        |       | 11,549     |       | 2.8 |   | (450 | ) | (3.9 | ) |
| Less:  Net deferred loan fees           |       | 1,015                   |       | (0.2                       | )          | 1,017      |       | (0.3 | ) | (2 | ) | (0.2 | ) |
| Gross  loans                            |       | $                       | 409,919    |                       | 100.0      | %          | $          | 405,529 |   | 100.0 | % | $ | 4,390 |   | 1.1 | % |

 

**Investments**

 

Theestimated fair value of the investment securities portfolio at March 31,2010 has increased $8,484,000 since December 31, 2009.  The change is primarily due to purchases ofstate and political securities as the level of net unrealized losses remainedconstant.  The unrealized losses withinthe debt securities 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.

 

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

 

Thebond portion of the portfolio review is conducted with emphases on 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, the Company determined that the decline in value of the variousbond holdings were deemed to be temporary and were the result of the generalmarket downturns and interest rate/yield curve changes, not credit issues.  The fact that almost all of such bonds aregeneral obligation bonds further solidified the Company’s determination thatthe decline in the value of these bond holdings is temporary.

 

Thefair value of the equity portfolio continues to fluctuate as the economicturbulence continues to impact financial sector stock pricing.  The stock market improvement over the firstquarter of 2010 has led to an increase in net unrealized gains of $707,000 to$1,534,000 at March 31, 2010.  Inaddition, the amortized cost of  theequity securities portfolio has increased $773,000 as the company has begun tobuild the portfolio balance, while continuing to diversify geographic risk.

 

Theequity portion of the portfolio, which is invested entirely in financialinstitutions, is reviewed for possible other than temporary impairment in asimilar manner to the bond portfolio with greater emphasis placed on the lengthof time the market value has been less than the carrying value and financial sectoroutlook.  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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Thedistribution of credit ratings by amortized cost and estimated fair values forthe debt security portfolio at March 31, 2010****follows:

 
| ** **                             | ** ** | **A- to  AAA** | ** ** | **B- to  BBB+** | ** ** | **C to  CCC+** | ** ** | **Not  Rated** | ** ** | **Total**     | ** ** |
|----------------------------------------|------------|----------------|------------|-----------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                             | ** ** | **Amortized**  | ** ** | **Fair**        | ** ** | **Amortized**  | ** ** | **Fair**       | ** ** | **Amortized** | ** ** | **Fair** | ** ** | **Amortized** | ** ** | **Fair** | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| **(In Thousands)**                     | ** ** | **Cost**       | ** ** | **Value**       | ** ** | **Cost**       | ** ** | **Value**      | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Cost** | ** ** | **Value** | ** ** | **Cost** | ** ** | **Value** | ** ** |
| Available  for sale (AFS)              |       |           |       |            |       |           |       |           |       |          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.  Government and agency securities |       | $              | 31,790     |            | $          | 33,827         |       | $              | —     |          | $          | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 31,790 |   | $ | 33,827 |   |
| State  and political securities        |       | 147,327        |       | 140,201         |       | 8,966          |       | 7,861          |       | —        |       | — |   | 9,004 |   | 8,052 |   | 165,297 |   | 156,114 |   |
| Other  debt securities                 |       | 12,384         |       | 13,172          |       | 850            |       | 811            |       | —        |       | — |   | 72 |   | 69 |   | 13,306 |   | 14,052 |   |
| Total  debt securities AFS             |       | $              | 191,501    |            | $          | 187,200        |       | $              | 9,816      |          | $          | 8,672 |   | $ | — |   | $ | — |   | $ | 9,076 |   | $ | 8,121 |   | $ | 210,393 |   | $ | 203,993 |   |
|                                   |       |           |       |            |       |           |       |           |       |          |       |   |   |   |   |   |   |   |   |   |   |
| Held  to maturity (HTM)                |       |           |       |            |       |           |       |           |       |          |       |   |   |   |   |   |   |   |   |   |   |
| U.S.  Government and agency securities |       | $              | 6          |            | $          | 6              |       | $              | —     |          | $          | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 6 |   | $ | 6 |   |
| Other  debt securities                 |       | 101            |       | 102             |       | —         |       | —         |       | —        |       | — |   | — |   | — |   | 101 |   | 102 |   |
| Total  debt securities HTM             |       | $              | 107        |            | $          | 108            |       | $              | —     |          | $          | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 107 |   | $ | 108 |   |

 

# **Financing Activities**

 

# **Deposits**

# ** **

Totaldeposits increased 4.8% or $23,753,000 from December 31, 2009 to March 31,2010.  The growth was led by a 26.9% or$20,091,000 increase in money market deposits from December 31, 2009 to March 31,2010.  The increase in core deposits(deposits less time deposits) of 8.8% or $24,534,000 has provided relationshipdriven funding for the loan portfolio, while also reducing the utilization ofFHLB borrowings.  The increase indeposits is the result of a deposit gathering program coupled with customerscoming back to their hometown bank in the wake of the economic turbulence.

 

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

 
| ** **             | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** | **Change** | ** ** |
|------------------------|------------|-------------------------|------------|----------------------------|------------|------------|------------|
| **(In Thousands)**     | ** ** | **Amount**              | ** ** | **% Total**                | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Demand  deposits       |       | $                       | 80,913     |                       | 15.5       | %          | $          | 79,899 |   | 16.1 | % | $ | 1,014 |   | 1.3 | % |
| NOW  accounts          |       | 64,362                  |       | 12.4                       |       | 64,361     |       | 12.9 |   | 1 |   | 0.0 |   |
| Money  market deposits |       | 94,725                  |       | 18.2                       |       | 74,634     |       | 15.0 |   | 20,091 |   | 26.9 |   |
| Savings  deposits      |       | 64,255                  |       | 12.3                       |       | 60,827     |       | 12.2 |   | 3,428 |   | 5.6 |   |
| Time  deposits         |       | 216,785                 |       | 41.6                       |       | 217,566    |       | 43.8 |   | (781 | ) | (0.4 | ) |
| Total  deposits        |       | $                       | 521,040    |                       | 100.0      | %          | $          | 497,287 |   | 100.0 | % | $ | 23,753 |   | 4.8 | % |

# ** **

# **Borrowed Funds**

# ** **

Total borrowed fundsdecreased 5.1% or $5,376,000 to $99,756,000 at March 31, 2010****comparedto $105,132,000 at December 31, 2009. The decrease in borrowed funds is primarily the result of growth indeposits as part of the previously discussed deposit gathering campaigns thatwere utilized to provide loan portfolio funding and to reduce the level oftotal borrowings.  FHLB repurchase agreementswere utilized as their structure allowed for a reduction in interest expense,while providing the ability to reduce the borrowings at our discretion asdeposit levels increased.

 

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| ** **                                     | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** | **Change** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|------------|------------|
| **(In  Thousands)**                            | ** ** | **Amount**              | ** ** | **% Total**                | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Short-term  borrowings:                        |       |                    |       |                       |       |       |       |   |   |   |   |   |   |
| FHLB  repurchase agreements                    |       | $                       | —     |                       | —     | %          | $          | 5,155 |   | 4.9 | % | $ | (5,155 | ) | (100.0 | )% |
| Securities  sold under agreement to repurchase |       | 12,978                  |       | 13.0                       |       | 13,199     |       | 12.6 |   | (221 | ) | (1.7 | ) |
| Total  short-term borrowings                   |       | 12,978                  |       | 13.0                       |       | 18,354     |       | 17.5 |   | (5,376 | ) | (29.3 | ) |
|                                           |       |                    |       |                       |       |       |       |   |   |   |   |   |   |
| Long-term  borrowings, FHLB                    |       | 86,778                  |       | 87.0                       |       | 86,778     |       | 82.5 |   | — |   | — |   |
| Total  borrowed funds                          |       | $                       | 99,756     |                       | 100.0      | %          | $          | 105,132 |   | 100.0 | % | $ | (5,376 | ) | (5.1 | )% |

 

# **Capital**

# ** **

## The adequacy of theCompany’s capital is reviewed on an ongoing basis with reference to the size,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 holding companiesare required to comply with the Federal Reserve Board’s risk-based capitalguidelines.  The risk-based capital rules aredesigned to make regulatory capital requirements more sensitive to differencesin risk profiles among banks and bank holding companies and to minimizedisincentives for holding liquid assets. Specifically, each is required to maintain certain minimum dollaramounts and ratios of total risk-based, tier I risk-based, and tier I leveragecapital. In addition to the capital requirements, the Federal Deposit InsuranceCorporation Improvements Act (FDICIA) established five capital categoriesranging from “well capitalized” to “critically undercapitalized.” To beclassified as “well capitalized”, total risk-based, tier I risked-based, andtier I leverage capital ratios must be at least 10%, 6%, and 5%,respectively.

##  

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

 

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| ** **                                   | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| **(In  Thousands)**                          | ** ** | **Amount**              | ** ** | **Ratio**                  | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| **Total Capital (to Risk-weighted Assets)**  |       |                    |       |                       |       |   |   |   |   |
| Actual                                       |       | $                       | 69,201     |                       | 15.4       | % | $ | 67,738 |   | 15.4 | % |
| For  Capital Adequacy Purposes               |       | 35,845                  |       | 8.0                        |       | 35,094 |   | 8.0 |   |
| To  Be Well Capitalized                      |       | 44,806                  |       | 10.0                       |       | 43,867 |   | 10.0 |   |
|                                         |       |                    |       |                       |       |   |   |   |   |
| **Tier I Capital (to Risk-weighted Assets)** |       |                    |       |                       |       |   |   |   |   |
| Actual                                       |       | $                       | 63,647     |                       | 14.2       | % | $ | 62,709 |   | 14.3 | % |
| For  Capital Adequacy Purposes               |       | 17,922                  |       | 4.0                        |       | 17,547 |   | 4.0 |   |
| To  Be Well Capitalized                      |       | 26,883                  |       | 6.0                        |       | 26,320 |   | 6.0 |   |
|                                         |       |                    |       |                       |       |   |   |   |   |
| **Tier I Capital (to Average Assets)**       |       |                    |       |                       |       |   |   |   |   |
| Actual                                       |       | $                       | 63,647     |                       | 9.3        | % | $ | 62,709 |   | 9.3 | % |
| For  Capital Adequacy Purposes               |       | 27,374                  |       | 4.0                        |       | 26,914 |   | 4.0 |   |
| To  Be Well Capitalized                      |       | 34,217                  |       | 5.0                        |       | 33,642 |   | 5.0 |   |

# ** **

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

# ** **

## The asset/liabilitycommittee addresses the liquidity needs of the Company to ensure thatsufficient funds are available to meet credit demands and deposit withdrawalsas 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 March 31,2010:

 

1.  Net Loans to Total Assets, 85% maximum

2.  Net Loans to Total Deposits, 100% maximum

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

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

 

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

 

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

 

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

 

Managementmonitors and determines the desirable level of liquidity.  Consideration is given to loan demand,investment opportunities, deposit pricing and growth potential, as well as thecurrent cost of borrowing funds.  TheCompany has a current borrowing capacity at the FHLB of $214,013,000.  In addition to this credit arrangement, theCompany has additional lines of credit with correspondent banks of $14,278,000.Management believes it has sufficient liquidity to satisfy estimated short-termand long-term funding needs.  FHLB borrowings totaled$86,778,000 as of March 31, 2010.

 

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

 

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

 

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

 

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

 

**InterestRate Sensitivity**

 

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

 

The following is arate shock forecast for the twelve month period ended March 31, 2011assuming a static balance sheet as of March 31, 2010.

 
| ** **                  | ** ** | **Parallel Rate Shock in Basis Points** | ** ** |
|-----------------------------|------------|-----------------------------------------|------------|
| **(In  Thousands)**         | ** ** | **-200**                                | ** ** | **-100** | ** ** | **Static** | ** ** | **+100** | ** ** | **+200** | ** ** |
| Net  interest income        |       | $                                       | 21,312     |   | $ | 23,101 |   | $ | 23,833 |   | $ | 23,813 |   | $ | 23,721 |   |
| Change  from static         |       | (2,521                                  | )          | (732 | ) | — |   | (20 | ) | (112 | ) |
| Percent  change from static |       | -10.58                                  | %          | -3.07 | % | — |   | -0.08 | % | -0.47 | % |
|                             |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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 significant differencesin the calculated projected change.  Inaddition, the limits stated above do not necessarily represent the level ofchange under which management would undertake specific measures to realign itsportfolio 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 than inflationhave 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 arereflective of fiscal policy initiatives or economic factors which are notmeasured by a price index.

 

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

 

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

 

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

 

**Item 4.  Controls and Procedures**

 

An analysis was performed under the supervision and with theparticipation of the Company’s management, including the Chief ExecutiveOfficer and the Chief Financial Officer, of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures. Based on thatevaluation, the Company’s Chief Executive Officer and Chief Financial Officerconcluded that the Company’s disclosure controls and procedures were effectiveas of March 31, 2010.  There were nochanges in the Company’s internal control over financial reporting thatoccurred during the quarter ended March 31, 2010, that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

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### **Part II.  OTHER INFORMATION**

### ** **

**Item 1.         LegalProceedings**

 

None.

 

**Item 1A.  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 31,2009.  Please refer to that section fordisclosures regarding the risks and uncertainties related to the Company’sbusiness.

 

**Item 2.         UnregisteredSales of Equity Securities and Use of Proceeds**

 
| ** **                                          | ** ** | **Total**      | ** ** | **Average**    | ** ** | **Total Number of**           | ** ** | **Maximum Number (or**          | ** ** |
|-----------------------------------------------------|------------|----------------|------------|----------------|------------|-------------------------------|------------|---------------------------------|------------|
| ** **                                          | ** ** | **Number of**  | ** ** | **Price Paid** | ** ** | **Shares (or Units)**         | ** ** | **Approximate Dollar Value)**   | ** ** |
| ** **                                          | ** ** | **Shares (or** | ** ** | **per Share**  | ** ** | **Purchased as Part of** | ** ** | **of Shares (or Units) that**   | ** ** |
| ** **                                          | ** ** | **Units)**     | ** ** | **(or Units)** | ** ** | **Publicly Announced**        | ** ** | **May Yet Be Purchased**   | ** ** |
| **Period**                                          | ** ** | **Purchased**  | ** ** | **Purchased**  | ** ** | **Plans or Programs**         | ** ** | **Under the Plans or Programs** | ** ** |
|                                                |       |           |       |           |       |                          |       |                            |       |
| Month  #1 (January 1 -January 31, 2010)   |       | —         |       | —         |       | —                        |       | 78,344                          |       |
|                                                |       |           |       |           |       |                          |       |                            |       |
| Month  #2 (February 1 -February 28, 2010) |       | —         |       | —         |       | —                        |       | 78,344                          |       |
|                                                |       |           |       |           |       |                          |       |                            |       |
| Month  #3 (March 1 -March 31, 2010)       |       | —         |       | —         |       | —                        |       | 78,344                          |       |

 

On April 27, 2010,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, 2011.  To date, there have been 118,656 sharesrepurchased under this plan.

 

**Item 3.         DefaultsUpon Senior Securities**

 

None

 

**Item 4.         (Removedand Reserved)**

 

### **Item 5.         Other Information**

 

None

 

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**Item 6.         Exhibits**

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

 

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## **SIGNATURES**

##  

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: May 10, 2010 | /s/ Ronald A. Walko                                             |
|                    | Ronald A. Walko,  President and Chief Executive Officer         |
|                    | (Principal Executive  Officer)                                  |
|                    |                                                            |
|                    |                                                            |
| Date: May 10, 2010 | /s/ Brian L. Knepp                                              |
|                    | Brian L. Knepp, Chief  Financial Officer                        |
|                    | (Principal Financial  Officer and Principal Accounting Officer) |

 

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**EXHIBIT INDEX**

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

 

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