Penns Woods Bancorp, Inc.

PEPENNNSNS
WWOOODSODS
BBAANCONCORRP,P, IINC.NC.

2009 Annual Report &
Form 10-K

Penns Woods Bancorp, Inc.
P.O. Box 967
300 Market Street
Williamsport, PA 17703-0967

MISSION STATEMENT

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

Jersey Shore State Bank Locations

CLINTON COUNTY

LYCOMING COUNTY

JERSEY
SHORE

• MONTOURSVILLE
•• MONTOURSVILLE
MONTOURSVILLE

• WILLIAMSPORT

• DUBOISTOWN

• MONTGOMERY
•• MONTGOMERY
 MONTGOMERY

LOCK
HAVEN

•

• MILL HALL

CENTRE COUNTY

• ZION

• CENTRE HALL

• SPRING MILLS

• STATE COLLEGE

TABLE OF CONTENTS

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

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

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

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

Consolidated Statement of Changes in Shareholders’ Equity

and Comprehensive Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

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

2

3

4

5

6

7

8

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

28

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

29

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

44

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

65

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

66

1

To Our
Shareholders

Dear Shareholder:

For the last several years, I have started my letter by noting the uncertain economic environment.
It goes without saying that
2009’s economic environment was not vastly different than 2008. There is no doubt that every person and business was
impacted, whether directly or indirectly, by the continued turbulence. We were no exception. However, we held to our values
and our plan for long-term success, which led to another year of strong core operating earnings (defined as net income
adjusted for net after tax securities losses). Highlighting the year was growth in net loans of 6.3% or $23,750,000, deposit
growth of 18.0% or $75,919,000, and a 26 basis point increase in the net interest margin to 4.40%. At a time when the media
and government are convinced that obtaining credit is rare, your company continues to fund the needs of its market area
through quality well collateralized loans with a minimal net charge-off
In addition, the
reputation of the company as being safe and secure is greatly assisting in the development of deposit relationships. Being a
community leader for over 75 years, having a focus on customer service, giving back to the community, and sticking to
simple, straight-forward banking have all also played a vital role in reaching double digit deposit growth. Throughout the
past two years, we have been noting the strategic decision to shorten the duration of our liabilities. This strategy has resulted
in the increasing net interest margin, which is primarily the result of the rate paid on the time deposit portfolio decreasing
108 basis points. In aggregate, the items noted above resulted in core operating earnings of $9,291,000 for the year ended
December 31, 2009.

to average loan ratio of 0.16% .

Through 2009, several initiatives to enhance customer service were undertaken. At the core of these enhancements was
technology. Not only did we increase the usage of remote deposit capture and internet banking, but we also added mobile
banking to better serve our on-the-move customer base. The past year also witnessed the beginning of the interior remodeling
of the Lock Haven branch. The recently completed project not only will brighten the atmosphere of the branch, but will also
be more customer friendly in design. Throughout 2010, we will continue to undertake projects and implement technologies
that will further solidify and enhance our position within our market footprint.

The regulatory theme and the media headlines of 2009 continued to focus on the capital position of financial institutions.
Your company remains well capitalized, as defined by regulation. This status has been maintained, while building
shareholder value through a dividend yielding greater than 5%, a stock price that has increased from $23.03 at December 31,
2008 to $32.44 at December 31, 2009, and inclusion in the Russell 3000® and Russell 2000® indexes. These
accomplishments have all occurred without any government assistance. We have not applied for any government funding
including TARP and the results of 2009 confirmed that none was needed.

I must also mention a significant item that negatively impacted the company during the past year. We, as with many financial
institutions, were faced with other than temporary impairment charges totaling $4,614,000 related to the equity segment of
the investment portfolio. These charges occurred primarily during the first half of 2009 with only $30,000 occurring during
the second half of the year.

During 2009 Jersey Shore State Bank celebrated its 75th anniversary, 2010 will mark the beginning of another 75 years of
success. Whether discussing past, present, or future, the success of the company is due to the dedication, knowledge, and
community commitment of the company’s employees. Your company’s employees provide a commitment and depth of
knowledge that continuously makes this company a top performer.

Shareholder value is built over time, not overnight, which is why we will remain committed to long-term success, not
overnight fame. We often state that we will maintain the path taken as we move forward, this is again true for 2010. As we
progress, leaving past success behind, we will continue to navigate around challenges, while remaining focused on loan and
deposit growth, credit quality, and risk management. This is how we have conducted business for many years, and it remains
the path to our future success.

Sincerely,

Ronald A. Walko
President and Chief Executive Officer

2

Three Year Financial Highlights

DILUTED
EARNINGS PER
SHARE

RETURN ON
AVERAGE EQUITY
(Percent)

2.28

2.07

1.59

$2.50

2.00

1.50

1.00

0.50

12.14

12.02

9.66

13.00

11.00

9.00

7.00

5.00

DIVIDENDS
PER
SHARE

$ 2.00

1.84

1.84

1.79

1.75

1.50

1.25

1.00

’07

’08

’09

’07

’08

’09

’07

’08

’09

YEAR-END
DEPOSITS
(In Millions)

$ 525

497

450

421

389

375

300

225

RETURN ON
AVERAGE ASSETS
(Percent)

1.49

1.27

0.92

1.70

1.40

1.10

0.90

0.50

YEAR-END
LOANS
(In Millions)

$ 425

406

375

360

381

325

275

225

’07

’08

’09

’07

’08

’09

’07

’08

’09

3

Penns Woods Bancorp, Inc.
Consolidated Balance Sheet

(In Thousands, Except Share Data)

December 31,

2009

2008

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

$

$

13,760
28
13,788

Investment securities, available for sale, at fair value. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities, held to maturity, (fair value of $108 and $136) . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

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

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

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

$

$

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

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

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

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

4,013,142 and 4,010,528 shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss:

Net unrealized loss on available for sale securities . . . . . . . . . . . . . . . . . . . . . . . .
Defined benefit plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Treasury stock at cost, 179,028 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

$

$

208,768
107
4,063

405,529
4,657
400,872

7,988
3,523
14,942
4,898
3,032
9,491
4,732

676,204

417,388
79,899

497,287

18,354
86,778
1,073
5,796

609,288

33,443
18,008
27,218

(3,569)
(1,920)
(6,264)

66,916

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

$

676,204

$

See Accompanying Notes to the Consolidated Financial Statements.

16,563
18
16,581

208,251
135
3,622

381,478
4,356
377,122

7,865
3,614
14,546
4,727
3,032
10,879
2,429

652,803

345,333
76,035

421,368

73,946
86,778
1,317
8,367

591,776

33,421
17,959
28,177

(8,486)
(3,780)
(6,264)

61,027

652,803

4

Penns Woods Bancorp, Inc.
Consolidated Statement of Income

(In Thousands, Except Per Share Data)

INTEREST AND DIVIDEND INCOME:
Loans including fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities:

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

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

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

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

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

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

NET INTEREST INCOME AFTER PROVISION

Year Ended December 31,

2009

2008

2007

$

25,568

$

25,228

$

26,099

5,424
5,005
194

36,191

8,284
396
3,718

12,398

23,793

917

5,241
4,871
768

36,108

9,670
1,181
3,981

14,832

21,276

375

4,098
4,357
1,395

35,949

10,951
1,639
3,857

16,447

19,502

150

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

22,876

20,901

19,352

NON-INTEREST INCOME:
Service charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities losses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings on bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

NON-INTEREST EXPENSE:
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania shares tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of investment in limited partnerships . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

TOTAL NON-INTEREST EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . .

INCOME BEFORE INCOME TAX (BENEFIT) PROVISION. . . . . . . .

INCOME TAX (BENEFIT) PROVISION . . . . . . . . . . . . . . . . . . . . . . . . . . .

NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

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

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

WEIGHTED AVERAGE SHARES OUTSTANDING – DILUTED . . . .

DIVIDENDS PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

$

2,200
(4,846)
713
826
1,189
2,205

2,287

10,189
1,266
1,212
685
567
5,893

19,812

5,351

(742)

6,093

1.59

1.59

See Accompanying Notes to the Consolidated Financial Statements.

2,289
(2,031)
472
882
1,928
1,916

5,456

9,634
1,288
1,182
421
712
4,712

2,246
(54)
410
921
2,222
1,733

7,478

9,078
1,306
1,126
643
761
4,402

17,949

17,316

8,408

405

8,003

2.07

2.07

$

$

$

$

$

$

3,832,789

3,832,886

1.84

3,859,724

3,859,833

1.84

9,514

637

8,877

2.28

2.28

3,886,277

3,886,514

1.79

5

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

(In Thousands, Except Per Share Data)

Balance, December 31, 2006

Comprehensive income:

Net income
Other comprehensive loss

Dividends declared ($1.79 per share)
Stock options exercised
Common shares issued for employee

stock purchase plan

Purchase of treasury stock (28,530 shares)

Common Stock

Shares

Amount

Additional
Paid-In
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Treasury
Stock

Total
Shareholders’
Equity

4,003,514

$

33,362

$

17,810

$ 25,783

$

1,560

$

(3,921)

$ 74,594

330

3,090

3

26

5

73

8,877

(6,953)

(5,094)

8,877
(5,094)
(6,953)
8

99
(972)

(972)

Balance, December 31, 2007

4,006,934

33,391

17,888

27,707

(3,534)

(4,893)

70,559

Cumulative effect of change in accounting

for endorsement split-dollar life
insurance contracts
Comprehensive loss:

Net income
Other comprehensive loss

Dividends declared ($1.84 per share)
Stock options exercised
Common shares issued for employee

stock purchase plan

Purchase of treasury stock (47,726 shares)

Balance, December 31, 2008

Comprehensive income:

Net income
Other comprehensive income

Dividends declared ($1.84 per share)
Common shares issued for employee

stock purchase plan

(437)

8,003

(7,096)

(8,732)

330

3,264

3

27

8

63

4,010,528

33,421

17,959

28,177

(12,266)

(1,371)

(6,264)

6,093

(7,052)

6,777

2,614

22

49

(437)

8,003
(8,732)
(7,096)
11

90
(1,371)

61,027

6,093
6,777
(7,052)

71

Balance, December 31, 2009

4,013,142

$

33,443

$

18,008

$ 27,218

$ (5,489)

$

(6,264)

$ 66,916

Penns Woods Bancorp, Inc.
Consolidated Statement of Comprehensive Income (Loss)

Net Income
Other comprehensive income (loss), net of tax:
Change in unrealized gain (loss) on available

for sale securities

Net realized loss included in net income,

net of tax benefit of $1,648,
$691, and $18

Defined benefit pension plan, net of tax:

Net transition asset
Prior service cost
Net gain (loss)

Year Ended December 31,

2009
$

6,093

2008
$

8,003

2007
$

8,877

1,719

3,198

4,917

1
16
1,843

(7,667)

1,340

(6,327)

(2)
17
(2,420)

(4,334)

36

(4,298)

(2)
17
(811)

Other comprehensive income (loss), net of tax
Comprehensive income (loss)

6,777
12,870

$

(8,732)
(729)

$

(5,094)
3,783

$

6

See Accompanying Notes to the Consolidated Financial Statements

Penns Woods Bancorp, Inc.
Consolidated Statement of Cash Flows

(In Thousands)

OPERATING ACTIVITIES:

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

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

discounts and premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities losses, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Originations of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds of loans held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain of sale of loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings on bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . .
Increase in prepaid federal deposit insurance . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . .

INVESTING ACTIVITIES:

Investment securities available for sale:

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

Investment securities held to maturity:

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

Year Ended December 31,
2008

2009

2007

$

6,093

$

8,003

$

8,877

724
917

(1,590)
4,846
(34,723)
35,108
(826)
(713)
(2,315)
(1,202)
6,319

14,757
9,084
(20,006)

29
–
(25,375)
(847)
491
(59)
376
(738)
–
(170)

663
375

(1,361)
2,031
(39,456)
40,930
(882)
(472)
–
(2,830)
7,001

40,169
6,759
(50,995)

4
176
(21,613)
(1,754)
112
(1,699)
–
–
4,606
(4,629)

680
150

(1,011)
54
(43,783)
44,206
(921)
(410)
–
(214)
7,628

60,485
5,233
(98,799)

12
–
(374)
(717)
65
(619)
–
(1,250)
5,081
(6,816)

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

(22,458)
________________

(28,864)
________________

(37,699)
________________

FINANCING ACTIVITIES:

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

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

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS. . . .
CASH AND CASH EQUIVALENTS, BEGINNING . . . . . . . . . . . . . . . . . .

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

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

72,055
3,864
–
–
(55,592)
(7,052)
71
–
–
________________
13,346
________________
(2,793)
16,581
________________
$
13,788
________________
________________

30,982
1,364
10,000
(29,600)
18,631
(7,096)
90
11
(1,371)
________________
23,011
________________
1,148
15,433
________________
$
16,581
________________
________________

(7,680)
1,511
40,000
(16,500)
20,618
(6,953)
99
8
(972)
________________
30,131
________________
60
15,373
________________
$
15,433
________________
________________

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

$

$

12,642
1,325
708

$

15,259
2,085
464

16,235
1,610
75

See Accompanying Notes to the Consolidated Financial Statements

7

PENNS WOODS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Penns Woods Bancorp, Inc. and its wholly owned
subsidiaries, Jersey Shore State Bank (the “Bank”), Woods Real Estate Development Co., Inc., Woods Investment Company, Inc.,
and The M Group Inc. D/B/A The Comprehensive Financial Group (“The M Group”), a wholly owned subsidiary of the Bank
(collectively, the “Company”). All significant intercompany balances and transactions have been eliminated.
Nature of Business
The Bank engages in a full-service commercial banking business, making available to the community a wide range of financial
services including, but not limited to, installment loans, credit cards, mortgage and home equity loans, lines of credit, construction
financing, farm loans, community development loans, loans to non-profit entities and local government, and various types of time
and demand deposits including, but not limited to, checking accounts, savings accounts, clubs, money market deposit accounts,
certificates of deposit, and IRAs. Deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) to the extent
provided by law.
The financial services are provided by the Bank to individuals, partnerships, non-profit organizations, and corporations through
its twelve offices located in Clinton, Lycoming, and Centre Counties, Pennsylvania.
Woods Real Estate Development Co., Inc. engages in real estate transactions on behalf of Penns Woods Bancorp, Inc. and the Bank.
Woods Investment Company, Inc., a Delaware holding company, is engaged in investing activities.
The M Group engages in securities brokerage and financial planning services, which include the sale of life insurance products,
annuities, and estate planning services.
Operations are managed and financial performance is evaluated on a corporate-wide basis. Accordingly, all financial service
operations are considered by management to be aggregated in one reportable operating segment.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses,
deferred tax assets and liabilities, and the valuation of real estate acquired through, or in lieu of, foreclosure on settlement of debt.
Cash and Cash Equivalents
Cash equivalents include cash on hand and in banks. Interest-earning deposits mature within 90 days and are carried at cost. Net
cash flows are reported for loan, deposit, and short-term borrowing transactions.
Restrictions on Cash and Cash Equivalents
Based on deposit levels, the Company must maintain cash and other reserves with the Federal Reserve Bank of Philadelphia (FRB).
Investment Securities
Investment securities are classified at the time of purchase, based on management’s intention and ability, as securities held to
maturity or securities available for sale. Debt securities acquired with the intent and ability to hold to maturity are stated at cost,
adjusted for amortization of premium and accretion of discount, which are computed using the interest method and recognized as
adjustments of interest income. Certain other debt securities have been classified as available for sale to serve principally as a
source of liquidity. Unrealized holding gains and losses for available for sale securities are reported as a separate component of
stockholders’ equity, net of tax, until realized. Realized security gains and losses are computed using the specific identification
method for debt securities and the average cost method for marketable equity securities.
Interest and dividends on investment
securities are recognized as income when earned.
Securities are periodically reviewed for other-than-temporary impairment based upon a number of factors, including, but not
limited to, the length of time and extent to which the market value has been less than cost, the financial condition of the underlying
issuer, the ability of the issuer to meet contractual obligations, the likelihood of the security’s ability to recover any decline in its
market value, whether it is more likely than not that the Company would be required to sell the security before its anticipated
recovery in market value, and a review of the Company’s capital adequacy, interest rate risk position, and liquidity. The assessment
of a security’s ability to recover any decline in market value, the ability of the issuer to meet contractual obligations, and
management’s intent and ability requires considerable judgment. A decline in value that is considered to be other-than-temporary
is recorded as a loss within noninterest income in the consolidated statement of income.
Investment securities fair values are based on observed market prices. Certain investment securities do not have observed bid
prices and their fair value is based on instruments with similar risk elements. Since regulatory stock is redeemable at par, the
Company carries it at cost.
Loans
Loans are stated at the principal amount outstanding, net of deferred fees, unamortized loan fees and costs, and the allowance for
loan losses. Interest on loans is recognized as income when earned on the accrual method. The Company’s general policy has been
to stop accruing interest on loans when it is determined a reasonable doubt exists as to the collectability of additional interest.
Income is subsequently recognized only to the extent that cash payments are received provided the loan is not delinquent in
payment and, in management’s judgment, the borrower has the ability and intent to make future principal payments.
Loan origination and commitment fees as well as certain direct loan origination costs are being deferred and amortized as an
adjustment to the related loan’s yield over the contractual lives of the related loans.

8

Allowance for Loan Losses
The allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses
inherent in its loan portfolio, as of the balance sheet date. The allowance method is used in providing for loan losses. Accordingly,
all loan losses are charged to the allowance and all recoveries are credited to it. The allowance for loan losses is established through
a provision for loan losses charged to operations. The provision for loan losses is based upon management’s quarterly review of
the loan portfolio. The purpose of the review is to assess loan quality, identify impaired loans, analyze delinquencies, ascertain
loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets served. An
external independent loan review is also performed annually for the Bank. Management remains committed to an aggressive
program of problem loan identification and resolution.
The allowance is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance
has been determined. Loss factors are based on management’s consideration of the nature of the portfolio segments, changes in
mix and volume of the loan portfolio, historical loan loss experience, and general economic conditions. In addition, management
considers industry standards and trends with respect to nonperforming loans and its knowledge and experience with specific
lending segments.
Although management believes that it uses the best information available to make such determinations and that the allowance for
loan losses is adequate at December 31, 2009, future adjustments could be necessary if circumstances or economic conditions differ
substantially from the assumptions used in making the initial determinations. A downturn in the local economy, rising
unemployment, or negative performance trends in financial information from borrowers could be indicators of subsequent
increased levels of nonperforming assets and possible charge-offs, which would normally require increased loan loss provisions.
An integral part of the periodic regulatory examination process is the review of the adequacy of the Bank’s loan loss allowance.
The regulatory agencies could require the Bank, based on their evaluation of information available at the time of their examination,
to provide additional loan loss provisions to further supplement the allowance.
Impaired loans are commercial and commercial real estate loans for which it is probable the Bank will not be able to collect all
amounts due according to the contractual terms of the loan agreement. The Bank individually evaluates such loans for impairment
and does not aggregate loans by major risk classifications. The definition of “impaired loans” is not the same as the definition of
“nonaccrual loans,” although the two categories overlap. The Bank may choose to place a loan on nonaccrual status due to payment
delinquency or uncertain collectability, while not classifying the loan as impaired if the loan is not a commercial or commercial
real estate loan. Factors considered by management in determining impairment include payment status and collateral value. The
amount of impairment for these types of loans is determined by the difference between the present value of the expected cash flows
related to the loan, using the original interest rate, and its recorded value, or as a practical expedient in the case of collateralized
loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable,
impairment is measured based on the fair value of the collateral.
Mortgage loans on one-to-four family properties and all consumer loans are large groups of smaller-balance homogeneous loans
and are measured for impairment collectively. Loans that experience insignificant payment delays, which are defined as 90 days or
less, generally are not classified as impaired. Management determines the significance of payment delays on a case-by-case basis
taking into consideration all circumstances surrounding the loan and the borrower including the length of the delay, the borrower’s
prior payment record, and the amount of shortfall in relation to the principal and interest owed.
Loans Held for Sale
In general, fixed rate residential mortgage loans originated by the Bank are held for sale and are carried at cost due to their short
holding period, which can range from less than two weeks to a maximum of thirty days. Sold loans are not serviced by the Bank.
Proceeds from the sale of loans in excess of the carrying value are accounted for as a gain. Total gains on the sale of loans are
shown as a component of non-interest income within the consolidated statement of income.
Foreclosed Assets Held for Sale
Foreclosed assets held for sale are carried at the lower of cost or fair value less estimated selling costs. Prior to foreclosure, the
value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for loan
losses, if necessary. Any subsequent write-downs are charged against operating expenses. Net operating expenses and gains and
losses realized from disposition are included in non-interest expense and income, respectively.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using straight-line and
accelerated methods over the estimated useful lives of the related assets, which range from five to ten years for furniture, fixtures,
and equipment and fifteen to forty years for buildings and improvements. Costs incurred for routine maintenance and repairs are
charged to operations as incurred. Costs of major additions and improvements are capitalized.
Bank-Owned Life Insurance
The Company has purchased life insurance policies on certain officers and directors. Bank-owned life insurance is recorded at its
cash surrender value, or the amount that can be realized. Increases in the cash surrender value are recognized as a component of
non-interest income within the consolidated statement of income.
Endorsement Split-Dollar Life Insurance Arrangements
On January 1, 2008, the Company changed its accounting policy and recognized a cumulative-effect adjustment to retained
earnings totaling $437,000 related to account for certain endorsement split-dollar life insurance arrangements in connection with
the adoption of Emerging Issues Task Force Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split Dollar Life Insurance Arrangements. This statement was subsequently codified into Financial
Accounting Standard Board (“FASB”) ASC Topic 715-60 Compensation - Retirement Benefits.
Goodwill
The Company performs an annual impairment analysis of goodwill for its purchased subsidiary, The M Group. Based on the fair
value of this reporting unit, estimated using the expected present value of future cash flows, no impairment of goodwill was
recognized in 2009 and 2008.

9

Investments in Limited Partnerships
The Company is a limited partner in four partnerships at December 31, 2009 that provide low income elderly housing in the
Company’s geographic market area. The carrying value of the Company’s investments in limited partnerships was $4,898,000 at
December 31, 2009 and $4,727,000 at December 31, 2008. The Company is fully amortizing the investment in the partnership
entered into prior to 2005 over the fifteen-year holding period. The partnerships entered into after 2004 are being fully amortized
over the ten-year tax credit receipt period utilizing the straight-line method. The partnerships are amortized once the projects reach
the level of occupancy needed to begin the ten year tax credit recognition period. Amortization of limited partnership investments
amounted to $567,000 in 2009, $712,000 in 2008, and $761,000 in 2007.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Company enters into off-balance sheet financial instruments. Those instruments consist of
commitments to extend credit and standby letters of credit. When those instruments are funded or become payable, the Company
reports the amounts in its financial statements.
Advertising Cost
Advertising costs are generally expensed as incurred.
Income Taxes
The Company prescribes a recognition threshold and a measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in
the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the
appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-
than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized
upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be
recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that
no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting
period in which that threshold is no longer met.
Deferred tax assets and liabilities result from temporary differences in financial and income tax methods of accounting, and are
reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected
to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. The Company analyzed its deferred tax asset position and determined that there was not a need for a
valuation allowance due to the Company’s ability to generate future ordinary and capital taxable income.
Earnings Per Share
The Company provides dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated utilizing
net income as reported in the numerator and weighted average shares outstanding in the denominator. The computation of diluted
earnings per share differs in that the dilutive effects of any stock options are adjusted in the denominator.
Employee Benefits
Pension and employee benefits include contributions, determined actuarially, to a defined benefit retirement plan covering the
eligible employees of the Bank. The plan is funded on a current basis to the extent that it is deductible under existing federal tax
regulations. Pension and other employee benefits also include contributions to a defined contribution Section 401(k) plan covering
eligible employees. Contributions matching those made by eligible employees are funded throughout the year. In addition, an
elective contribution is made annually at the discretion of the Board of Directors.
The M Group Products and Income Recognition
The M Group product line is comprised primarily of annuities, life insurance, and mutual funds. The revenues generated from life
insurance sales are commission only, as The M Group does not underwrite the policies. Life insurance sales include permanent
and term policies with the majority of the policies written being permanent. Term life insurance policies are written for 10, 15, 20,
and 30 year terms with the majority of the policies being written for 20 years. None of these products are offered as an integral
part of lending activities.
Commissions from the sale of annuities are recognized at the time notice is received from the third party broker/dealer or an
insurance company that the transaction has been accepted and approved, which is also the time when commission income is
received.
Life insurance commissions are recognized at varying points based on the payment option chosen by the customer. Commissions
from monthly and annual payment plans are recognized at the start of each annual period for the life insurance, while quarterly and
semi-annual premium payments are recognized quarterly and semi-annually when the earnings process is complete. For example,
semi-annual payments on the first of January and July would result in commission income recognition on the first of January and
July, while payments on the first of January, April, July, and October would result in commission income recognition on those dates.
The potential for chargebacks only exists for those policies on a monthly payment plan since income is recognized at the beginning
of the annual coverage period versus at the time of each monthly payment. No liability is maintained for chargebacks as these are
removed from income at the time of the occurrence.
Stock Options
The Company maintains a stock option plan for directors and certain officers and employees with the last option grant being in
2000. All options were granted when the exercise price of the Company’s stock options was greater than or equal to the market
price of the underlying stock on the date of the grant, therefore, no compensation expense was recognized in the Company’s
financial statements.
Accumulated Other Comprehensive Income
The Company is required to present accumulated other comprehensive income in a full set of general-purpose financial statements
for all periods presented. Accumulated other comprehensive income is comprised of unrealized holding gains (losses) on the
available for sale securities portfolio and the unrecognized components of net periodic benefit costs of the defined benefit pension
plan.

10

Segment Reporting
ASC 280, Segment Reporting, requires that public business enterprises report financial and descriptive information about their
reportable operating segments. Based on the guidance provided by the standard, the Company has determined that its only
reportable segment is Community Banking.
Reclassification of Comparative Amounts
Certain items previously reported have been reclassified to conform to the current year’s reporting format. Such reclassifications
did not affect net income or shareholders’ equity.
Recent Accounting Pronouncements
On December 30, 2008, the FASB issued new authoritative accounting guidance under ASC Topic 715, Compensation-Retirement
Benefits, which provides guidance related to an employer’s disclosures about plan assets of defined benefit pension or other post-
retirement benefit plans. Under ASC Topic 715, disclosures should provide users of financial statements with an understanding of
how investment allocation decisions are made, the factors that are pertinent to an understanding of investment policies and
strategies, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the
effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period and significant
concentrations of risk within plan assets. This guidance is effective fiscal year ending after December 15, 2009. The new
authoritative accounting guidance under ASC Topic 715 became effective for the Company’s financial statements for the year ended
December 31, 2009 and the required disclosures are reported in Note 12.
In April 2009, the FASB issued new authoritative accounting guidance under ASC Topic 805, Business Combinations, which
became effective for periods beginning after December 15, 2008. ASC Topic 805 applies to all transactions and other events in
which one entity obtains control over one or more other businesses. ASC Topic 805 requires an acquirer, upon initially obtaining
control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the
acquisition date. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather
than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt. This fair value approach
replaces the cost-allocation process required under previous accounting guidance whereby the cost of an acquisition was allocated
to the individual assets acquired and liabilities assumed based on their estimated fair value. ASC Topic 805 requires acquirers to
expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was
previously the case under prior accounting guidance. Assets acquired and liabilities assumed in a business combination that arise
from contingencies are to be recognized at fair value if fair value can be reasonably estimated. If fair value of such an asset or
liability cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with ASC Topic 450,
Contingencies. Under ASC Topic 805, the requirements of ASC Topic 420, Exit or Disposal Cost Obligations, would have to be
met in order to accrue for a restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair
value, unless it is a non-contractual contingency that is not likely to materialize, in which case, nothing should be recognized in
purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria of ASC Topic
450, Contingencies. The adoption of this new guidance did not have a material impact on the Company’s financial position or
results of operations.
In April 2009, the FASB issued new guidance impacting ASC Topic 820, Fair Value Measurements and Disclosures. This ASC
provides additional guidance in determining fair values when there is no active market or where the price inputs being used
represent distressed sales. It reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and
in determining fair values when markets have become inactive. The adoption of this new guidance did not have a material effect
on the Company’s results of operations or financial position.
In April 2009, the FASB issued new guidance impacting ASC 825-10-50, Financial Instruments, which relates to fair value
disclosures for any financial instruments that are not currently reflected on the balance sheet of companies at fair value. This
guidance amended existing GAAP to require disclosures about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. This guidance is effective for interim and annual periods
ending after June 15, 2009. The adoption of this new guidance did not have a material impact on the Company’s financial position
or results of operations.
In April 2009, the FASB issued new guidance impacting ASC 320-10, Investments - Debt and Equity Securities, which provides
additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on
securities. This guidance is effective for interim and annual periods ending after June 15, 2009. The adoption of this new guidance
did not have a material impact on the Company’s financial position or results of operations.
In June 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-01, Topic 105 - Generally Accepted Accounting
Principles - FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles. The
Codification is the single source of authoritative nongovernmental GAAP. The Codification does not change current GAAP, but
is intended to simplify user access to all authoritative GAAP by providing all the authoritative literature related to a particular topic
in one place. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for
SEC registrants. The Company adopted this standard for the interim reporting period ending September 30, 2009.
In June 2009, the FASB issued an accounting standard related to the accounting for transfers of financial assets, which is effective
for fiscal years beginning after November 15, 2009, and interim periods within those fiscal years. This standard enhances reporting
about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to
transferred financial assets. This standard eliminates the concept of a “qualifying special-purpose entity” and changes the
requirements for derecognizing financial assets. This standard also requires additional disclosures about all continuing
involvements with transferred financial assets including information about gains and losses resulting from transfers during the
period. This accounting standard was subsequently codified into ASC Topic 860, Transfers and Servicing. The adoption of this
standard is not expected to have a material effect on the Company’s results of operations or financial position.

11

In August 2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) - Measuring Liabilities
at Fair Value. This ASU provides amendments for fair value measurements of liabilities.
It provides clarification that in
circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required
to measure fair value using one or more techniques. ASU 2009-05 also clarifies that when estimating a fair value of a liability, a
reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that
prevents the transfer of the liability. ASU 2009-05 is effective for the first reporting period (including interim periods) beginning
after issuance or fourth quarter 2009. The adoption of this new guidance did not have a material impact on the Company’s financial
position or results of operations.
The FASB issued new authoritative accounting guidance under ASC Topic 855, Subsequent Events, which establishes general
standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are
issued or available to be issued. ASC Topic 855 defines (i) the period after the balance sheet date during which a reporting entity’s
management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial
statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet
date in its financial statements, and (iii) the disclosures an entity should make about events or transactions that occurred after the
balance sheet date. The new authoritative accounting guidance under ASC Topic 855 is effective for periods ending after June 15,
2009. The required disclosures are provided in Note 24.

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

Weighted average common shares issued . . . . . . . . . . . . . . . . . .
Average treasury stock shares . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weighted average common shares and common stock

2009
4,011,817
(179,028)

2008
4,008,553
(148,829)

2007
4,005,181
(118,904)

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

3,832,789

3,859,724

3,886,277

Additional common stock equivalents (stock options)

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

97

109

237

Weighted average common shares and common stock

equivalents used to calculate diluted earnings per share . . .

3,832,886

3,859,833

3,886,514

Options to purchase 990, 1,980, and 10,913 shares of common stock at a range in price of $24.72 to $31.82 were outstanding at
December 31, 2009, 2008, and 2007, respectively. The options were included in the computation of diluted earnings per share on
a weighted average basis determined by the length of time during each period that the market value exceeded the strike price.

NOTE 3 - INVESTMENT SECURITIES
The amortized cost and fair values of investment securities at December 31, 2009 and 2008 are as follows:

(In Thousands)

2009

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Available for sale (AFS)

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

Held to maturity (HTM)

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

Total investment securities HTM . . . . . . . . . . . . . . . . . . . $

37,038
153,914
12,271
203,223
10,952
214,175

6
101

107

$

$

$

$

2,098
733
834
3,665
981
4,646

$

$

— $

1

1

$

12

Fair
Value

39,136
144,877
12,976
196,989
11,779
208,768

— $

(9,770)
(129)
(9,899)
(154)
(10,053)

$

— $
—

— $

6
102

108

(In Thousands)

2008

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Available for sale (AFS)

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

Held to maturity (HTM)

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

Total investment securities HTM . . . . . . . . . . . . . . . . . . . $

46,452
142,258
15,970
204,680
16,429
221,109

10
125

135

$

$

$

$

1,134
348
649
2,131
225
2,356

1
—

1

$

$

$

$

Fair
Value

47,586
131,842
15,554
194,982
13,269
208,251

— $

(10,764)
(1,065)
(11,829)
(3,385)
(15,214)

$

— $
—

— $

11
125

136

The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time,
that the individual securities have been in a continuous unrealized loss position, at December 31, 2009 and 2008.
(In Thousands)

2009

Less than twelve months

Twelve months or greater

Total

Fair
Value

Gross
Unrealized
Losses

Fair
Value

Gross
Unrealized
Losses

Fair
Value

Gross
Unrealized
Losses

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

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

— $

— $

— $

— $

— $

60,005
—

60,005
159

2,336
—

2,336
27

36,267
1,191

37,458
918

7,434
129

7,563
127

96,272
1,191

97,463
1,077

—
9,770
129

9,899
154

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

60,164 $

2,363 $

38,376 $

7,690 $

98,540 $

10,053

(In Thousands)

Less than twelve months

Fair
Value

Gross
Unrealized
Losses

2008
Twelve months or greater

Fair
Value

Gross
Unrealized
Losses

Total

Gross
Unrealized
Losses

Fair
Value

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

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

— $

— $

— $

— $

— $

48,388
6,341

54,729
164

4,378
451

4,829
80

67,412
2,012

69,424
5,364

6,386
614

7,000
3,305

115,800
8,353

124,153
5,528

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

54,893 $

4,909 $

74,788 $

10,305 $

129,681 $

—
10,764
1,065

11,829
3,385

15,214

At December 31, 2009 and 2008 there were 86 and 95 individual securities in a continuous unrealized loss position for less than twelve
months and 106 and 184 individual securities in a continuous unrealized loss position for greater than twevle months, respectively.
There were 192 and 279 positions that were considered temporarily impaired as of December 31, 2009 and 2008 respectively. The
Company reviews its position quarterly and has asserted that at December 31, 2009 and 2008 , the declines outlined in the above table
represent temporary declines and the Company does not intend to sell and does not believe they will be required to sell these securities
before recovery of their cost basis, which may be at maturity. The Company has concluded that any impairment of its investment
securities portfolio is not other than temporary but is the result of interest rate changes that are not expected to result in the noncollection
of principal and interest during the period.
The amortized cost and fair value of debt securities at December 31, 2009, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
(In Thousands)

Available for Sale

Held to Maturity

Amortized
Cost

Fair
Value

Amortized
Cost

Fair
Value

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

$

$

25
77
—
6
108
$
____________________ ____________________ ____________________ _________________
____________________ ____________________ ____________________ _________________

25
11,355
1,456
190,387
203,223

25
12,172
1,472
183,320
196,989

25
76
—
6
107

$

$

$

$

$

13

Total gross proceeds from sales of securities available for sale were $14,757,000, $40,169,000, and $60,485,000 for 2009, 2008,
and 2007, respectively. The following table represents gross realized gains and losses on those transactions in addition to
impairment charges related to the equity securities portfolio:

(In Thousands)
Gross realized gains:

2009

2008

2007

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

$

— $
—
575
22

$

253
236
6
539

68
840
2
772

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

$
597
____________________
____________________

$
1,034
___________________
___________________

$
1,682
________________
________________

Gross realized losses:

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

$

Total gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

— $
—
1,062
4,381

5,443

$

36
204
510
2,315

3,065

$

$

902
—
—
834

1,736

Gross realized losses for the equity securities portfolio include impairment charges of $4,614,000, $2,797,000 and $834,000 for
the years ended December 31, 2009, 2008 and 2007, respectively.
Investment securities with a carrying value of approximately $97,366,000 and $102,362,000 at December 31, 2009 and 2008,
respectively, were pledged to secure certain deposits, repurchase agreements, and for other purposes as required by law.
There is no concentration of investments that exceed ten percent of shareholders’ equity for any individual issuer, excluding those
guaranteed by the U.S. Government.

NOTE 4 - FEDERAL HOME LOAN BANK STOCK
The Bank 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 Loan Bank serves as a reserve or central bank for its members within its assigned region. It is
funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the
Federal Home Loan Bank System. It makes loans to members (i.e., advances) in accordance with policies and procedures
established by the board of directors of the Federal Home Loan Bank. As a member, the Bank is required to purchase 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 or similar obligations at the beginning of each year or 5% of its outstanding advances from the FHLB. At December 31,
2009, the Bank held $7,271,000 in stock of the FHLB, which was in compliance with this requirement.
The Company evaluated its holding of FHLB stock for impairment and deemed the stock to not be impaired due to the expected
recoverability of the par value, which equals the value reflected within the Company’s financial statements. The decision was based
on several items ranging from the estimated true economic losses embedded within the FHLB’s mortgage portfolio to the FHLB’s
liquidity position and credit rating. The Company utilizes the impairment framework outlined in GAAP to evaluate FHLB stock
for impairment.
The following factors were evaluated to determine the ultimate recoverability of the par value of the Company’s FHLB stock
holding; (i) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and
the length of time this situation has persisted; (ii) commitments by the FHLB to make payments required by law or regulation and
the level of such payments in relation to the operating performance of the FHLB; (iii) the impact of legislative and regulatory
changes on the institutions and, accordingly, on the customer base of the FHLB; (iv) the liquidity position of the FHLB; and (v)
whether a decline is temporary or whether it affects the ultimate recoverability of the FHLB stock based on (a) the materiality of
the carrying amount to the member institution and (b) whether an assessment of the institution’s operational needs for the
foreseeable future allow management to dispose of the stock.
Based on its analysis of these factors, the Company determined that its holding of FHLB stock was not impaired on December 31, 2009.

NOTE 5 - LOANS
Major loan classifications as of December 31, 2009 and 2008 are summarized as follows:
2009
(In Thousands)
Past Due
90 Days
or more
& still
Accruing

Past due
30 to 90
Days

Current

Non-
Accrual

Total

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

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

Less: Net deferred loan fees

Allowance for loan losses

Loans, net

$

45,930

$

457

$

182

$

78

$

46,647

7,333
2,860
2,992
311
_________________
13,953
$

951
1,429
—
3
_________________
2,565
$

749
465
556
43
_________________
1,891
$

165,313
147,455
18,247
11,192
_________________
388,137
1,017
4,657
382,463

$

174,346
152,209
21,795
11,549
_______________
406,546
1,017
4,657
400,872

$

14

(In Thousands)

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

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

Less: Net deferred loan fees

Allowance for loan losses

Loans, net

Current

Past due
30 to 90
Days

2008
Past Due
90 Days
or more
& still
Accruing

Non-
Accrual

Total

$

40,006

$

517

$

— $

79

$

40,602

6,582
775
167
346
_________________
8,387
$

223
—
—
36
_________________
259
$

590
736
19
52
_________________
1,476
$

170,011
134,647
15,652
12,053
_________________
372,369
1,013
4,356
367,000

$

177,406
136,158
15,838
12,487
_______________
382,491
1,013
4,356
377,122

$

Impaired loans totaled $8,312,000 and $5,042,000 at December 31, 2009 and 2008, respectively with $5,343,000 and $4,066,000
not having a specific allocation within the allowance for loan losses. The portion of the allowance for loan losses allocated for
impaired loans was $802,000 and $166,000 at December 31, 2009 and 2008, respectively. The average recorded investment in
impaired loans during the years ended December 31, 2009 and 2008 was approximately $6,699,000 and $3,410,000, respectively.
The Company recognized interest income on impaired loans in the amount of $278,000 and $123,000 for the years ended
December 31, 2009 and 2008, respectively. On a cash basis, interest income on impaired loans amounted to $36,000 and $7,000
for the years ended December 31, 2009 and 2008, respectively.
No additional funds are committed to be advanced in connection with impaired loans.
Loans on which the accrual of interest has been discontinued or reduced, exclusive of impaired loans, amounted to approximately
$1,891,000 and $1,476,000 at December 31, 2009 and 2008, respectively. If interest had been recorded based on the original loan
agreement terms and rate of interest for those loans, income would have approximated $134,000, $72,000, and $87,000 for the
years ended December 31, 2009, 2008, and 2007, respectively.
Interest income on such loans, is recorded as received and
amounted to approximately $48,000, $9,000, and $17,000 for the years ended December 31, 2009, 2008, and 2007, respectively.
Changes in the allowance for loan losses for the years ended December 31, 2009, 2008, and 2007 are as follows:

(In Thousands)
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision charged to operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans charged off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

2009

2008

2007

$

4,356
917
(732)
116

$

4,130
375
(313)
164

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

$

4,657

$

4,356

$

4,185
150
(304)
99

4,130

The Company has a concentration of loans to both owners of commercial and residential rental properties at December 31, 2009
and 2008 of 15.26% and 15.07% and 15.62% and 14.67% of total loans, respectively.
The Company grants commercial, industrial, residential, and installment loans to customers throughout north-central Pennsylvania.
Although the Company has a diversified loan portfolio at December 31, 2009 and 2008, a substantial portion of its debtors’ ability
to honor their contracts is dependent on the economic conditions within this region.

NOTE 6 - PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows at December 31, 2009 and 2008:

(In Thousands)
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

2009

2008

$

1,480
6,929
6,067
871
__________________ ________________
15,347
7,482
__________________ ________________
7,865
__________________ ________________
__________________ ________________

1,480
7,206
6,623
885
16,194
8,206
7,988

$

Depreciation and amortization charged to operations for the years ended 2009, 2008, and 2007 was $724,000, $663,000, and
$680,000, respectively.

15

NOTE 7 - GOODWILL
As of December 31, 2009, 2008, and 2007 goodwill had a gross carrying value of $3,308,000 and accumulated amortization of
$276,000 resulting in a net carrying amount of $3,032,000.
The gross carrying amount of goodwill is tested for impairment in the third quarter of each fiscal year. Based on fair value of the
reporting unit, estimated using the expected present value of future cash flows, there was no evidence of impairment of the
carrying amount at December 31, 2009, 2008 and 2007, respectively.

NOTE 8 - TIME DEPOSITS
Time deposits of $100,000 or more totaled approximately $79,840,000 on December 31, 2009 and $67,356,000 on December 31,
2008. Interest expense related to such deposits was approximately $2,336,000, $2,894,000, and $3,216,000, for the years ended
December 31, 2009, 2008, and 2007, respectively.

At December 31, 2009, the scheduled maturities on time deposits of $100,000 or more are as follows:

(In Thousands)

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

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

Total time deposit maturities are as follows at December 31, 2009:

(In Thousands)

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

2009

23,707
16,300
23,321
16,512

79,840

2009

154,702
34,895
14,120
12,117
685
1,047

217,566

NOTE 9 - SHORT-TERM BORROWINGS
Short-term borrowings consist of securities sold under agreements to repurchase and primarily FHLB advances, which generally
represent overnight or less than six month borrowings. In addition to the outstanding balances noted below, the Bank also had
additional lines of credit totaling $15,139,000 available from correspondent banks other than the FHLB. The outstanding balances
and related information for short-term borrowings are summarized as follows at December 31, 2009, 2008, and 2007:

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

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

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

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

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

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

2009

2008

2007

13,199 $
16,008
13,664

2.01%
2.21%

5,155 $

40,330
11,772

0.62%
0.71%

12,933 $
18,839
15,840

2.83%
2.83%

61,013 $
61,013
31,495

0.59%
2.04%

— $

— $

15,000
2,205

—
0.42%

10,000
3,210

—
2.58%

17,155
19,058
16,746

3.37%
3.69%

38,160
38,895
19,299

4.32%
5.09%

—
15,000
771

—
5.06%

16

NOTE 10 - LONG-TERM BORROWINGS
The following represents outstanding long-term borrowings with the FHLB by contractual maturities at December 31, 2009 and
2008:
(In Thousands)

Weighted-
Average Interest
Rate 2009

Weighted-
Average Interest
Rate 2008

Stated Interest
Rate Range

From

3.98%
4.25%
3.68%
3.74%
3.97%
4.15%
3.18%

6.92%
5.87%
6.92%

To

6.65%
4.72%
4.43%
3.74%
3.97%
4.28%
3.18%

6.92%
5.87%
6.92%

2009

$ 15,000
10,000
15,000
5,000
10,000
20,000
10,000
85,000
500
528
750
1,778
$ 86,778

2008

$ 15,000
10,000
15,000
5,000
10,000
20,000
10,000
85,000
500
528
750
1,778
$ 86,778

Description

Maturity

4.87%
4.49%
4.18%
3.74%
3.97%
4.22%
3.18%
4.18%
6.92%
5.87%
6.92%
6.61%
4.23%

Variable
Variable
Variable
Variable
Variable
Variable
Variable
Total Variable
Fixed
Fixed
Fixed
Total Fixed
Total

(In Thousands)
Year ending
December 31,

2010
2011
2012
2013
2014 and after

2010
2011
2012
2013
2015
2017
2018

2011
2013
2015

4.87%
4.49%
4.18%
3.74%
3.97%
4.22%
3.18%
4.18%
6.92%
5.87%
6.92%
6.61%
4.23%

Amount

Weighted-
Average Rate

$

$

15,000
10,500
15,000
5,528
40,750

86,778

4.87%
4.60%
4.18%
3.94%
3.95%

4.23%

The terms of the convertible borrowings allow the FHLB to convert the interest rate to an adjustable rate based on the three month
London Interbank Offered Rate (“LIBOR”) at a predetermined anniversary date of the borrowing’s origination, ranging from three
months to five years. If the FHLB converts the interest rate on one of the predetermined dates, the Bank has the ability to payoff
the debt on the conversion date and quarterly thereafter without incurring the customary pre-payment penalty.
The Bank maintains a credit arrangement which includes a revolving line of credit with the FHLB. Under this credit arrangement,
the Bank has a remaining borrowing capacity of $124,296,000 at December 31, 2009, which is subject to annual renewal, and
typically incurs no service charges. Under terms of a blanket agreement, collateral for the FHLB borrowings must be secured by
certain qualifying assets of the Bank which consist principally of first mortgage loans and mortgage-backed securities.
NOTE 11 - INCOME TAXES
The following temporary differences gave rise to the net deferred tax asset position at December 31, 2009 and 2008:

(In Thousands)
Deferred tax asset:

2009

2008

Allowance for loan losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Deferred compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan fees and costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Low income housing credit carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

1,583
403
1,148
346
1,620
1,839
2,132
1,195
296

1,481
402
2,014
344
548
4,372
1,571
503
373

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

10,562

11,608

Deferred tax liabilities:

Bond accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

207
263
601
1,071
9,491

$

61
141
526
728
10,880

17

No valuation allowance was established at December 31, 2009 and 2008, because of the Company’s ability to carry back capital
losses to recover taxes paid in previous years and certain tax strategies, together with the anticipated future taxable income as
evidenced by the Company’s earning potential.
The benefit or provision for income taxes is comprised of the following for the year ended December 31, 2009, 2008, and 2007:

(In Thousands)
Currently payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total (benefit) provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2009

2008

2007

$

$

1,360
(2,102)

(742)

$

$

1,967
(1,562)

405

$

$

1,758
(1,121)

637

A reconciliation between the expected income tax and the effective income tax rate on income before income tax provision follows
for the year ended December 31, 2009, 2008, and 2007:

(In Thousands)

2009

2008

2007

Provision at expected rate . . . . . .
Decrease in tax resulting from:

Tax-exempt income . . . . . .
Tax credits . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . .
Effective income tax (benefit) . .
provision and rate . . . . . . . .

Amount
$

1,819

%
34.0%

Amount
2,859

$

%
34.0%

Amount
3,235
$

%
34.0%

(2,005)
(560)
4

(37.5)
(10.5)
0.1

(1,757)
(601)
(96)

(20.9)
(7.2)
(1.1)

(1,512)
(1,048)
(38)

(15.9)
(11.0)
(0.4)

$

(742)

(13.9)%

$

405

4.8%

$

637

6.7%

NOTE 12 - EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plan
The Company has a noncontributory defined benefit pension plan (the “Plan”) for all employees meeting certain age and length of
service requirements that were hired prior to January 1, 2004, at which time entrance into the Plan was frozen. Benefits are based
primarily on years of service and the average annual compensation during the highest five consecutive years within the final ten
years of employment.
The following table sets forth the obligation and funded status as of December 31, 2009 and 2008:

(In Thousands)
Change in benefit obligation:

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

Change in plan assets:

Fair value of plan assets at beginning of year . . . . . . . . . . . . . . . . . . . . .
Actual loss on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employer contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment to fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . . . . . . . .
Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accounts recognized on balance sheet as:
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

income (loss) consist of:

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

$

$

$

$

$

2009

2008

11,987
525
679
(6)
(293)
(1,563)
11,329

6,065
1,396
805
(312)
—
7,954
(3,375)

(3,375)

(7)
102
2,814
2,909

$

$

$

$

$

10,450
546
609
(166)
(210)
758
11,987

7,891
(2,504)
875
(210)
13
6,065
(5,922)

(5,922)

(9)
127
5,609
5,727

18

The accumulated benefit obligation for the Plan was $9,871,000 and $9,410,000 at December 31, 2009 and 2008, respectively.
Components of Net Periodic Cost and Other Amounts Recognized in other Comprehensive Income as of December 31, 2009, 2008,
and 2007 are as follows:

(In Thousands)

2009

2008

2007

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

$

$

544
679
(508)
(3)
25
339
1,076

$

$

546
609
(641)
(3)
25
57
593

$

$

467
486
(562)
(3)
26
—
414

The estimated net transition asset and prior service cost for the defined benefit pension plan that will be amortized from
accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $3,000 and $25,000,
respectively.
Assumptions
Weighted-average assumptions used to determine benefit obligations at December 31, 2009, 2008, and 2007:

2009
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.00%
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.00%

2008
5.75%
4.75%

2007
6.00%
5.00%

Weighted-average assumptions used to determine net periodic cost for years ended December 31, 2009, 2008, and 2007:

2009
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.75%
Expected long-term return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.00%
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.75%

2008
6.00%
8.00%
5.00%

2007
5.75%
8.00%
4.75%

The expected long-term rate of return was estimated using market benchmarks by which the plan assets would outperform the
market value in the future, based on historical experience adjusted for changes in asset allocation and expectations for overall lower
future returns on similar investments compared to past periods.
Plan Assets
The Plan’s weighted-average asset allocations at December 31, 2009 and 2008 by asset category are as follows:
Asset Category
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2009
0.4%
40.0%
59.6%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0%

0.3%
39.2%
60.5%
100.0%

2008

The investment objective for the Plan is to maximize total return with tolerance for slightly above average risk, meaning the fund
is able to tolerate short-term volatility to achieve above-average returns over the long term.
Asset allocation favors equities, with target allocation of approximately 60% equity securities, 37.5% fixed income securities and
2.5% cash. Due to volatility in the market, the target allocation is not always desirable and asset allocations will fluctuate between
the acceptable ranges. The equity portfolio’s exposure is primarily in mid and large capitalization domestic equities with limited
exposure to small capitalization and international stocks.
It is management’s intent to give the investment managers flexibility, within the overall guidelines, with respect to investment
decisions and their timing. However, certain investments require specific review and approval by management. Management is
also informed of anticipated, significant modifications of any previously approved investment, or anticipated use of derivatives to
execute investment strategies.
The following table sets forth by level, within the fair value hierarchy detailed in Note 20. Fair Value Measurements, the Plan’s
assets at fair value as of December 31, 2009:

(In Thousands)
Assets:

December 31, 2009

Level I

Level II

Level III

Total

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Mutual Funds - Taxable Fixed Income . . . . . . . . . . . . . . . . . . . .
Mutual Funds - Domestic Equity . . . . . . . . . . . . . . . . . . . . . . . .
Mutual Funds - International Equity. . . . . . . . . . . . . . . . . . . . . .
Total assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

34 $

3,184
3,782
954
7,954 $

— $
—
—
—
— $

— $
—
—
—
— $

34
3,184
3,782
954
7,954

19

The following benefit payments that reflect expected future service, as appropriate, are expected to be paid:
Estimated future benefit payments (in thousands):

2010 . . . . . . . . . . . . . . . . . . . . . . $
2011 . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . .
2015-2019 . . . . . . . . . . . . . . . . . . . .

336
361
532
553
601
3,404
$ 5,787

The company expects to contribute a minimum of $400,000 to its Pension Plan in 2010.

401(k) Savings Plan
The Company also offers a 401(k) savings plan in which eligible participating employees may elect to contribute up to a maximum
percentage allowable not to exceed the limits of Code Sections 401(k), 404, and 415. The Company may make matching
contributions equal to a discretionary percentage that is determined by the Board of Directors. Participants are at all times fully
vested in their contributions and vest over a period of five years regarding the employer contribution. Contribution expense was
approximately $112,000, $97,000, and $97,000 for the years ended December 31, 2009, 2008, and 2007, respectively.
Deferred Compensation Plan
The Company has a deferred compensation plan whereby participating directors elect to forego directors’ fees paid in cash. Under
this plan, the Company will make payments for a ten-year period beginning at age 65 in most cases or at death, if earlier, at which
time payments would be made to their designated beneficiaries.
To fund benefits under the deferred compensation plan, the Company has acquired bank-owned life insurance policies on the lives
of the participating directors for which insurance benefits are payable to the Company. The Company incurred expenses related to
the plan of $96,000, $96,000, and $85,000 for the years ended December 31, 2009, 2008, and 2007, respectively. Benefits paid
under the plan were approximately $161,000, $180,000, and $125,000 in 2009, 2008, and 2007, respectively.

NOTE 13 - EMPLOYEE STOCK PURCHASE PLAN
Effective April 26, 2006, the Company implemented the Penns Woods Bancorp, Inc. 2006 Employee Stock Purchase Plan (“Plan”).
The Plan is intended to encourage employee participation in the ownership and economic progress of the Company. The Plan
allows for up to 1,000,000 shares to be purchased by employees. The purchase price of the shares is 95% of market value with an
employee eligible to purchase up to the lesser of 15% of base compensation or $12,000 in market value annually. There were 2,614
and 3,264 shares issued under the plan for the years ended December 31, 2009 and 2008, respectively.

NOTE 14 - STOCK OPTIONS
In 1998, the Company adopted the 1998 Stock Option Plan (“1998 Plan”) for key employees and directors. Incentive stock options
and nonqualified stock options may be granted to eligible employees of the Bank and nonqualified options may be granted to
directors of the Company. Incentive nonqualified stock options granted under the 1998 Plan may be exercised not later than ten
years after the date of grant. Each option granted under the 1998 Plan shall be exercisable only after the expiration of six months
following the date of grant of such options.
A summary of the status of the Company’s common stock option plans are presented below:

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

Options exercisable at year-end. . . . . .

2009

2008

Weighted-
Average
Exercise
Price

28.27
—
—
31.82
24.72

24.72

Shares

1,980
—
—
(990)
990

990

$

$

$

Weighted-
Average
Exercise
Price

37.60
—
31.82
39.97
28.27

28.27

Shares

10,913
—
(330)
(8,603)
1,980

1,980

$

$

$

The following table summarizes information about nonqualified and incentive stock options outstanding at December 31, 2009:

Exercise Price
24.72
$

Shares
990

Outstanding

Average
Life
1

Average
Exercise
Price

$

24.72

Exercisable

Average
Exercise
Price

$

24.72

Shares
990

20

NOTE 15 - RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Company and the Bank, including their immediate families and companies in which
they are principal owners (more than ten percent), are indebted to the Company. Such indebtedness was incurred in the ordinary
course of business on the same terms and at those rates prevailing at the time for comparable transactions with others.
A summary of loan activity with executive officers, directors, principal shareholders, and associates of such persons is listed below
for the years ended December 31, 2009 and 2008:
Beginning
Balance

Other
Changes

Ending
Balance

(In Thousands)

Additions

Payments

2009
2008

$

8,942
9,335

$

980
1,626

$

(1,178)
(1,776)

$

— $

(243)

8,744
8,942

Deposits from related parties held by the Bank amounted to $7,576,000 at December 31, 2009 and $7,377,000 at December 31,
2008.

NOTE 16 - COMMITMENTS AND CONTINGENT LIABILITIES
The following schedule shows future minimum rental payments under operating leases with noncancellable terms in excess of one
year as of December 31, 2009:

(In Thousands)
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

383
317
296
227
181
1,522
__________________
$
2,926
__________________
__________________

The Company’s operating lease obligations represent short and long-term lease and rental payments for facilities. Total rental expense
for all operating leases for the years ended December 31, 2009, 2008, and 2007 were $392,000, $406,000, and $423,000.
The Company is subject to lawsuits and claims arising out of its business. There are no such legal proceedings or claims currently
pending or threatened other than those encountered during the normal course of business.

NOTE 17 - OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These
instruments involve, to varying degrees, elements of credit, interest rate, or liquidity risk in excess of the amount recognized in the
consolidated balance sheet. The contract amounts of these instruments express the extent of involvement the Company has in
particular classes of financial instruments.
The Company’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to
extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same
credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company may
require collateral or other security to support financial instruments with off-balance sheet credit risk.
Financial instruments whose contract amounts represent credit risk are as follows at December 31, 2009 and 2008:

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

2009

2008

$

80,061
1,334

$

85,871
841

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

21

NOTE 18 - CAPITAL REQUIREMENTS
Federal regulations require the Company and the Bank to maintain minimum amounts of capital. Specifically, each is required to
maintain certain minimum dollar amounts and ratios of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average
total assets.
In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) established five
capital categories ranging from “well capitalized” to “critically undercapitalized.” Should any institution fail to meet the requirements
to be considered “adequately capitalized,” it would become subject to a series of increasingly restrictive regulatory actions.
As of December 31, 2009 and 2008, the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be classified as a well capitalized financial institution, Total risk-based, Tier 1 risk-based, and Tier 1 leverage
capital ratios must be at least 10%, 6%, and 5%, respectively.
The Company’s and the Bank’s actual capital ratios are presented in the following tables, which shows that both met all regulatory
capital requirements.

(In Thousands)

Total Capital

(to Risk-weighted Assets)

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

(to Risk-weighted Assets)

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

(to Average Assets)

Actual
For Capital Adequacy Purposes
To Be Well Capitalized

(In Thousands)

Total Capital

(to Risk-weighted Assets)

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

(to Risk-weighted Assets)

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

(to Average Assets)

Actual
For Capital Adequacy Purposes
To Be Well Capitalized

Consolidated Company

2009

2008

Amount

Ratio

Amount

Ratio

$

$

$

$

$

$

67,738
35,094
43,867

62,709
17,547
26,320

62,709
26,914
33,642

15.4%
8.0
10.0

14.3%
4.0
6.0

9.3%
4.0
5.0

Bank

2009

Amount

Ratio

58,024
34,632
43,290

53,359
17,316
25,974

53,359
26,669
33,336

13.4%
8.0
10.0

12.3%
4.0
6.0

8.0%
4.0
5.0

$

$

$

$

$

$

66,891
33,410
41,763

62,540
16,705
25,058

62,540
25,773
32,216

16.0%
8.0
10.0

15.0%
4.0
6.0

9.7%
4.0
5.0

2008

Amount

Ratio

56,876
32,799
40,998

52,520
16,399
24,599

52,520
25,423
31,778

13.9%
8.0
10.0

12.8%
4.0
6.0

8.3%
4.0
5.0

22

NOTE 19 - REGULATORY RESTRICTIONS
The Pennsylvania Banking Code restricts the availability of capital funds for payment of dividends by all state-chartered banks.
Accordingly, at December 31, 2009, the balance in the additional paid in capital account totaling $11,657,000 is unavailable for
dividends.
The Bank is subject to regulatory restrictions, which limit its ability to loan funds to Penns Woods Bancorp, Inc. At December 31,
2009, the regulatory lending limit amounted to approximately $8,704,000.
Cash and Due from Banks
Included in cash and due from banks are reserves required by the district Federal Reserve Bank of $1,064,000 and $1,046,000 at
December 31, 2009 and 2008, respectively. The required reserves are computed by applying prescribed ratios to the classes of
average deposit balances. These are held in the form of cash on hand and a balance maintained directly with the Federal Reserve
Bank.

NOTE 20 - FAIR VALUE MEASUREMENTS
The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in
measuring assets and liabilities at fair value. The three broad levels defined by GAAP are as follows:
Level I:
Level II:

Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
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 includes 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.
Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are
unobservable.

Level III:

This hierarchy requires the use of observable market data when available.
The following table presents the assets reported on the balance sheet at their fair value on a recurring basis as of December 31,
2009 and 2008, by level within the fair value hierarchy. As required by GAAP, financial assets and liabilities are classified in their
entirety based on the lowest level of input that is significant to the fair value measurement.
(In Thousands)

2009

Level I

Level II

Level III

Total

Assets Measured on a Recurring Basis:
Investment securities, available for sale
U.S. Government and agency securities. . . . . . . . . . . . . . . . $
State and political securities. . . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(In Thousands)

Assets Measured on a Recurring Basis:
Investment securities, available for sale
U.S. Government and agency securities. . . . . . . . . . . . . . . . $
State and political securities. . . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

— $
—
—
11,779

$

39,136
144,877
12,976
—

2008

— $
—
—
—

39,136
144,877
12,976
11,779

Level I

Level II

Level III

Total

— $
—
—
13,269

$

47,586
131,842
15,554
—

— $
—
—
—

47,586
131,842
15,554
13,269

23

The following table presents the assets reported on the balance sheet at their fair value on a non-recurring basis as of December
31, 2009 and 2008, by level within the fair value hierarchy. As required by GAAP, financial assets and liabilities are classified in
their entirety based on the lowest level of input that is significant to the fair value measurement.
2009
(In Thousands)

Level I

Level II

Level III

Total

Assets Measured on a Non-recurring Basis:
Impaired Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . .

— $
—

(In Thousands)

7,510
672

$

2008

— $
—

7,510
672

Assets Measured on a Non-recurring Basis:
Impaired Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . .

— $
—

4,876
466

$

— $
—

4,876
466

Level I

Level II

Level III

Total

NOTE 21 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose fair values for its financial instruments. Fair values are made at a specific point in time, based
on relevant market information and information about the financial instrument. These fair values do not reflect any premium or
discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.
Also, it is the Company’s general practice and intention to hold most of its financial instruments to maturity and not to engage in
trading or sales activities. Because no market exists for a significant portion of the Company’s financial instruments, fair values
are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These fair values are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the fair
values.
Fair values have been determined by the Company using historical data and an estimation methodology suitable for each category
of financial instruments. The Company’s fair values, methods, and assumptions are set forth below for the Company’s other
financial instruments.
As certain assets and liabilities, such as deferred tax assets, premises and equipment, and many other operational elements of the
Company, are not considered financial instruments but have value, the fair value of financial instruments would not represent the
full market value of the Company.
The fair values of the Company’s financial instruments are as follows at December 31, 2009 and 2008:

(In Thousands)

Financial assets:
Cash and cash equivalents. . . . . . . . . . . . .
Investment securities:

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

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

2009

2008

Carrying
Value

Fair
Value

Carrying
Value

Fair
Value

$

13,788 $

13,788

$

16,581 $

16,581

208,768
107
4,063
400,872
14,942
3,523

208,768
108
4,063
403,279
14,942
3,523

208,251
135
3,622
377,122
14,546
3,614

208,251
136
3,622
380,771
14,546
3,614

$ 417,388 $ 408,056
79,899
18,354
89,082
1,073

79,899
18,354
86,778
1,073

$ 345,333 $ 347,657
76,035
73,946
88,188
1,317

76,035
73,946
86,778
1,317

24

Cash and Cash Equivalents, Loans Held for Sale, Accrued Interest Receivable, Short-term Borrowings, and Accrued
Interest Payable:
The fair value is equal to the carrying value.
Investment Securities:
The fair value of investment securities available for sale and held to maturity is equal to the available quoted market price. If no
quoted market price is available, fair value is determined by using the quoted market price for similar securities. Regulatory
stocks’ fair value is equal to the carrying value.
Loans:
Fair values are determined for portfolios of loans with similar financial characteristics. Loans are segregated by type such as
commercial, commercial real estate, residential real estate, construction real estate, and other consumer. Each loan category is
further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories.
The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using market
discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Company’s
historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current
economic and lending conditions.
Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash
flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding
credit risk, cash flows, and discounted rates are judgmentally determined using available market information and specific borrower
information.
Bank-Owned Life Insurance:
The fair value is equal to the cash surrender value of the life insurance policies.
Deposits:
The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW, and money market
accounts, is equal to the amount payable on demand as of December 31, 2009 and 2008. The fair value of certificates of deposit
is based on the discounted value of contractual cash flows.
The fair values above do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared
to the cost of borrowing funds in the market, commonly referred to as the core deposit intangible.
Long Term Borrowings:
The fair value of long term borrowings is based on the discounted value of contractual cash flows.
Commitments to Extend Credit, Standby Letters of Credit, and Financial Guarantees Written:
There is no material difference between the notional amount and the fair value of off-balance sheet items at December 31, 2009
and 2008. The contractual amounts of unfunded commitments and letters of credit are presented in Note 17.

25

NOTE 22 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
Condensed financial information for Penns Woods Bancorp, Inc. follows:
CONDENSED BALANCE SHEET, DECEMBER 31,

(In Thousands)
ASSETS:

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

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

2009

2008

$

103

$

94

55,117
11,553
223

49,327
11,463
225

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

66,996

$

61,109

LIABILITIES AND SHAREHOLDERS’ EQUITY:

Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . .

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

Operating income:

Dividends from subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security gains. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed earnings of subsidiaries . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

$

80
66,916

$

82
61,027

66,996

$

61,109

2009

2008

2007

$

7,283
1
(897)
(294)

$

8,763
—
(485)
(275)

8,039
—
1,152
(314)

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

$

6,093

$

8,003

$

8,877

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

OPERATING ACTIVITIES:

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

provided by operating activities:

Equity in undistributed earnings of subsidiaries . . . . . . . . . . . . . . .
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

2009

2008

2007

$

6,093

$

8,003

$

8,877

897
—

6,990

485
(43)

8,445

(1,152)
67

7,792

INVESTING ACTIVITIES:

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

—

—

—

FINANCING ACTIVITIES:

Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . .

NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH, BEGINNING OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(7,052)
71
—
—

(6,981)

9
94

CASH, END OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

103

$

(7,096)
90
11
(1,371)

(8,366)

79
15

94

$

(6,953)
99
8
(972)

(7,818)

(26)
41

15

26

NOTE 23 - CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)

(In Thousands, Except Per Share Data)

For the Three Months Ended

2009

March 31,

June 30,

Sept. 30,

Dec. 31,

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

$

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax (benefit) provision. . . . . . . . . . .
Income tax (benefit) provision. . . . . . . . . . . . . . . . . . . . . . .

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

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

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

(In Thousands, Except Per Share Data)

2008

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

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax provision (benefit). . . . . . . . . . .
Income tax provision (benefit). . . . . . . . . . . . . . . . . . . . . . .

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

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

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

$

$

$

$

$

$

$

8,917
3,080

5,837
126
1,593
(2,369)
4,645
290
(549)

839

0.22

0.22

$

$

$

$

9,013
3,208

5,805
186
1,694
(2,086)
4,885
342
(490)

832

0.22

0.22

$

$

$

$

9,113
3,168

5,945
270
1,888
(507)
5,097
1,959
37

1,922

0.50

0.50

$

$

$

$

9,148
2,942

6,206
335
1,958
116
5,185
2,760
260

2,500

0.65

0.65

For the Three Months Ended

March 31,

June 30,

Sept. 30,

Dec. 31,

9,048
4,167

4,881
60
1,876
38
4,445
2,290
159

2,131

0.55

0.55

$

$

$

$

8,936
3,780

5,156
60
1,872
(251)
4,511
2,206
149

2,057

0.53

0.53

$

$

$

$

$

$

$

9,108
3,595

5,513
110
1,976
(1,504)
4,451
1,424
(128)

1,552

0.40

0.40

9,016
3,290

5,726
145
1,763
(314)
4,542
2,488
225

2,263

0.59

0.59

NOTE 24 - SUBSEQUENT EVENTS
The Company assessed events occurring subsequent to December 31, 2009 through March 9, 2010 for potential recognition and
disclosure in the consolidated financial statements. No events have occurred that would require adjustment to or disclosure in the
consolidated financial statements which were issued on March 9, 2010.

27

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Penns Woods Bancorp, Inc.

We have audited the accompanying consolidated balance sheets of Penns Woods Bancorp, Inc. (the “Company”) and subsidiaries
as of December 31, 2009 and 2008, and the related consolidated statements of income, comprehensive income, stockholders’
equity, and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of the Company and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2008, the Company adopted Emerging Issues
Task Force No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements. This guidance was subsequently codified into Financial Accounting Standards Board ASC Topic 715-
60, Compensation – Retirement Benefits.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s and subsidiaries’ internal control over financial reporting as of December 31, 2009, based on criteria established in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission,
and our report dated March 9, 2010 expressed an unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.

Wexford, PA
March 9, 2010

28

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

RESULTS OF OPERATIONS

NET INTEREST INCOME
Net interest income is determined by calculating the difference between the yields earned on interest-earning assets and the rates
paid on interest-bearing liabilities. To compare the tax-exempt asset yields to taxable yields, amounts are adjusted to taxable
equivalents based on the marginal corporate federal tax rate of 34%. The tax equivalent adjustments to net interest income for
2009, 2008, and 2007 were $2,952,000, $2,714,000, and $2,410,000, respectively.

2009 vs 2008
Reported net interest income increased $2,517,000 or 11.83% to $23,793,000 for the year ended December 31, 2009 compared to
the year ended December 31, 2008, although the yield on earning assets decreased to 6.43% from 6.68%, respectively. On a tax
equivalent basis, the change in net interest income was an increase of $2,755,000 or 11.48% to $26,745,000 for the year ended
December 31, 2009 compared to the year ended December 31, 2008. Total interest income increased $83,000 due to growth in the
average balance of the loan portfolio offset by a decrease in investment portfolio income resulting from decreased dividends. The
increase in earning asset volume compensated for the negative impact on earning asset yields caused by the prolonged low interest
rate cycle enacted by the Federal Open Markets Committee (“FOMC”). Interest income recognized on the loan portfolio increased
$340,000 as a portion of the portfolio repriced downward due to the FOMC actions that have maintained the prime rate at 3.25%
for the past year coupled with the market dictating that new loan generation occurred at lower rates than during 2008. Interest and
dividend income generated from the investment portfolio and interest bearing cash deposits decreased $257,000. The decrease was
the result of a minimal decrease in the yield on the investment portfolio of 3 basis points (“bp”) in conjunction with the average
balance of the investment portfolio decreasing by $2,137,000. Dividend and other interest income decreased $574,000 to $194,000
for the year ended December 31, 2009. The decrease is the result of the FHLB ceasing to pay dividends on its stock, a reduction
in equity holdings of $5,470,000, and a general reduction in the dividends paid by the various equity holdings.

Interest expense decreased $2,434,000 to $12,398,000 for the year ended December 31, 2009 compared to 2008. Leading the
decrease in interest expense was a decline of 14.33% or $1,386,000 related to deposits. The FOMC actions noted previously
together with a strategic shortening of the duration of the portfolio led to a 108 bp decline in the rate paid on time deposits from
3.92% for the year ended December 31, 2008 to 2.84% for the year ended December 31, 2009 resulting in a $1,633,000 decline
in expense, while the average balance of time deposits increased $18,692,000. Growth in the average balance of money market
deposits of $31,985,000 resulted in an increase in interest expense of $528,000 despite a decline of 31 bp in rate. The overall
growth in average deposit balances of $58,642,000 allowed for a reduction in average short-term borrowings of $22,904,000 which
coupled with a reduction in rate paid on such borrowings of 89 bp resulted in interest expense on short-term borrowings decreasing
$785,000.

2008 vs 2007
Reported net interest income increased $1,774,000 or 9.10% to $21,276,000 for the year ended December 31, 2008 compared to
the year ended December 31, 2007, although the yield on earning assets decreased to 6.68% from 6.91%, respectively. On a tax
equivalent basis the change in net interest income was an increase of $2,078,000 or 9.48% to $23,990,000 for the year ended
December 31, 2008 compared to the year ended December 31, 2007. Total interest income increased $159,000 primarily due to
growth in the average balance of the loan and securities portfolios. The increase in earning asset volume compensated for the
negative impact on earning asset yields caused by the rate reductions enacted by the FOMC. Interest income recognized on the
loan portfolio decreased $871,000 as a portion of the portfolio repriced downward due to the FOMC actions that lowered the prime
rate from 7.25% at December 31, 2007 to 3.25% at December 31, 2008 coupled with the market dictating that new loan generation
occurred at lower rates than during 2007.
Interest and dividend income generated from the investment portfolio and interest
bearing cash deposits increased $1,030,000. The increase was the result of the yield on the investment portfolio increasing 12 basis
points (“bp”) while the average balance of the investment portfolio increased by $17,067,000. The majority of the increase in the
securities portfolio was from a leverage strategy undertaken during the second half of 2007.

Interest expense decreased $1,615,000 to $14,832,000 for the year ended December 31, 2008 compared to 2007. Leading the
decrease in interest expense was a decline of 11.70% or $1,281,000 related to deposits. The FOMC actions noted previously
together with a strategic shortening of the duration of the portfolio led to an 81 bp decline in the rate paid on time deposits from
4.73% for the year ended December 31, 2007 to 3.92% for the year ended December 31, 2008 resulting in a $1,502,000 decline
in expense. The economic turmoil experienced over the past year has led to a significant decline in short-term interest rates which
has allowed for a 214 bp decline in the rate paid on short-term borrowings. Several long-term debt maturities paved the way for
a decline in the rate paid on long-term borrowings of 23 bp to 4.39% for the year ended December 31, 2008 versus 4.62% for the
year ended December 31, 2007.

29

AVERAGE BALANCES AND INTEREST RATES

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

(Dollars In Thousands)

Average
Balance

2009

Interest

Average
Rate

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

$

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

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

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

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

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

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

$

16,688
382,433

399,121

103,338
104,800

208,138

1,938

609,197

54,642

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

663,839

LIABILITIES AND SHAREHOLDERS’ EQUITY:
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Super Now deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

Total interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . .

Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term borrowings, FHLB . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

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

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

60,815
58,591
62,906
219,264

401,576

27,641
86,778

114,419

515,995

74,618
10,169
63,057

1,100
24,842

25,942

5,617
7,583

13,200

1

39,143

313
507
1,227
6,237

8,284

396
3,718

4,114

12,398

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY . . . .

$

663,839

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

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

$

26,745

6.59%
6.50%

6.50%

5.44%
7.24%

6.34%

0.05%

6.43%

0.51%
0.87%
1.95%
2.84%

2.06%

1.42%
4.23%

3.55%

2.39%

4.03%

4.40%

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

2009-$349,000, 2008-$472,000, 2007-$453,000.

• Information on this table has been calculated using average daily balance sheets to obtain average balances.
• Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings.
• Income and rates on a fully taxable equivalent basis include an adjustment for the difference between annual income from

tax-exempt obligations and the taxable equivalent of such income at the standard 34% tax rate.

30

Average
Balance

2008

Interest

Average
Rate

Average
Balance

2007

Interest

Average
Rate

$

$

$

9,230
361,945

$

603
24,830

All other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6.53%
6.86%

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

371,175

25,433

6.85%

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

104,245
106,030

5.76%
6.96%

6,008
7,380

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

210,275

13,388

6.37%

1
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10.00%

10

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

581,460

38,822

6.68%

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

50,779

$

$

7,857
353,528

361,385

93,480
99,728

193,208

345

554,938

42,602

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

632,239

$

597,540

Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Super Now deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

60,324
52,117
30,921
200,572

0.73%
1.26%
2.26%
3.92%

443
658
699
7,870

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

343,934

2.81%

9,670

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

50,545
89,256

2.31%
4.39%

1,181
3,981

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

139,801

3.64%

5,162

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

483,735

14,832

3.05%

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

73,618
8,282
66,604

$

58,710
46,596
23,920
198,029

327,255

36,816
83,490

120,306

447,561

69,953
6,924
73,102

485
25,779

26,264

5,474
6,602

12,076

19

38,359

428
611
540
9,372

10,951

1,639
3,857

5,496

16,447

$

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY . . . .

632,239

$

597,540

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

3.63%

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

23,990

4.14%

$

$

21,912

Reconcilement of Taxable Equivalent Net Interest Income

(In Thousands)

2009

2008

2007

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

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

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

$

36,191
12,398

23,793
2,952

36,108
14,832

21,276
2,714

26,745

$

23,990

$

$

35,949
16,447

19,502
2,410

21,912

6.17%
7.29%

7.27%

5.86%
6.62%

6.25%

5.51%

6.91%

0.73%
1.31%
2.26%
4.73%

3.35%

4.45%
4.62%

4.57%

3.67%

3.24%

3.95%

31

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

(In Thousands)

Year Ended December 31,

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

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

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

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

2009 vs 2008
Increase (Decrease)
Due to
Rate

Volume

Net

2008 vs 2007
Increase (Decrease)
Due to
Rate

Volume

Net

$

491 $

6 $

1,358
(51)
(87)
3

1,714

4
75
636
682
(425)
(113)

859

(1,346)
(340)
290
(3)

(1,393)

(134)
(226)
(108)
(2,315)
(360)
(150)

(3,293)

497
12
(391)
203
—

321

(130)
(151)
528
(1,633)
(785)
(263)

(2,434)

$

92 $
638
621
532
(27)

1,856

12
71
158
119
484
260

1,104

26 $

(1,587)
(87)
246
9

(1,393)

3
(24)
1
(1,621)
(942)
(136)

(2,719)

118
(949)
534
778
(18)

463

15
47
159
(1,502)
(458)
124

(1,615)

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

$

855 $

1,900 $

2,755

$

752 $

1,326 $

2,078

PROVISION FOR LOAN LOSSES
2009 vs 2008
The provision for loan losses is based upon management’s quarterly review of the loan portfolio. The purpose of the review is to
assess loan quality, identify impaired loans, analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and
recoveries, and assess general economic conditions in the markets served. An external independent loan review is also performed
annually for the Bank. Management remains committed to an aggressive program of problem loan identification and resolution.
The allowance is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance
has been determined. Loss factors are based on management’s consideration of the nature of the portfolio segments, changes in
mix and volume of the loan portfolio, and historical loan loss experience. In addition, management considers industry standards
and trends with respect to nonperforming loans and its knowledge and experience with specific lending segments.
Although management believes that it uses the best information available to make such determinations and that the allowance for
loan losses is adequate at December 31, 2009, future adjustments could be necessary if circumstances or economic conditions
differ substantially from the assumptions used in making the initial determinations. A downturn in the local economy or
employment and delays in receiving financial information from borrowers could result in increased levels of nonperforming assets
and charge-offs, increased loan loss provisions and reductions in interest income. Additionally, as an integral part of the
examination process, bank regulatory agencies periodically review the Bank’s loan loss allowance adequacy. The banking
regulators could require the recognition of additions to the loan loss allowance based on their judgment of information available
to them at the time of their examination.
While determining the appropriate allowance level, management has attributed the allowance for loan losses to various portfolio
segments; however, the allowance is available for the entire portfolio as needed.
The allowance for loan losses increased from $4,356,000 at December 31, 2008 to $4,657,000 at December 31, 2009. At
December 31, 2009, allowance for loan losses was 1.15% of total loans compared to 1.14% of total loans at December 31, 2008.
The provision for loan losses totaled $917,000 for the year ended December 31, 2009 compared to $375,000 for the year ended
December 31, 2008. The increase of the provision was appropriate when considering the gross loan growth experienced during
2009 of $24,051,000 coupled with net charge-offs of $616,000 to average loans for the year ended December 31, 2008 of 0.16%
In addition, nonperforming loans increased to
compared to $149,000 and 0.04% for the year ended December 31, 2008.
$4,456,000 from $1,735,000 at December 31, 2008 primarily due to a commercial real estate loan. The loan is collateralized with
no loss anticipated at this time. Continued uncertainty surrounding the economy and internal loan review and analysis, coupled
with the ratios noted previously, dictated an increase in the provision for loan losses. The increase did not equate to the increase
in charge-offs and nonperforming loans due to the collateral status of the nonperforming loans and overall loan portfolio in general,
which limits the loan specific allocation of the allowance for loan losses. Utilizing both internal and external resources, as noted,

32

senior management has concluded that the allowance for loan losses remains at a level adequate to provide for probable losses
inherent in the loan portfolio.
2008 vs 2007
The allowance for loan losses increased from $4,130,000 at December 31, 2007 to $4,356,000 at December 31, 2008. At
December 31, 2008, allowance for loan losses was 1.14% of total loans compared to 1.15% of total loans at December 31, 2007.
The provision for loan losses totaled $375,000 for the year ended December 31, 2008 compared to $150,000 for the year ended
December 31, 2007. Management concluded that the increase of the provision was appropriate when considering the gross loan
growth experienced during 2008 of $21,000,000 coupled with net charge-offs to average loans for the year ended December 31,
2008 of 0.04%. Utilizing both internal and external resources, as noted, senior management has concluded that the allowance for
loan losses remains at a level adequate to provide for probable losses inherent in the loan portfolio.
Following is a table showing the changes in the allowance for loan losses for the years ended December 31, 2009, 2008, 2007,
2006, and 2005:

(In Thousands)

2009

2008

2007

2006

2005

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

$

4,356 $

4,130 $

4,185 $

3,679 $

3,338

Charge-offs:

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

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

Recoveries:

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

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

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

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

374
133
225

732

14
10
92

116

616

917

48
51
214

313

17
60
87

164

149

375

—
103
201

304

13
1
85

99

205

150

50
28
249

327

68
40
90

198

129

635

132
206
108

446

45
8
14

67

379

720

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

$

4,657 $

4,356 $

4,130 $

4,185 $

3,679

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

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

0.16%

0.04%

0.06%

0.04%

0.11%

NON-INTEREST INCOME
2009 vs 2008
Total non-interest income decreased $3,169,000 from the year ended December 31, 2008 to 2009. Excluding security losses, non-
interest income decreased $354,000 year over year. Service charges decreased as overdraft protection fees decreased $44,000 and
customers continued to migrate to checking accounts having reduced or no service charges. Earnings on bank-owned life insurance
increased due to the full year impact of policies purchased during 2008 and a gain on death benefit. Insurance commissions
decreased due to the general economic downturn, which has led to a decrease in volume of sales. Management of The M Group
continues to pursue new and build upon current relationships. However, the sales cycle for insurance and investment products can
take typically from six months to one year or more to complete. The increase in other income was primarily due to increases in
revenues from debit/credit card transactions and merchant card commissions.
(In Thousands)

Change

2009
Amount % Total

2008
Amount % Total

Deposit service charges . . . . . . . . . . . . . . . . . . . .
Securities losses, net. . . . . . . . . . . . . . . . . . . . . . .
Bank-owned life insurance. . . . . . . . . . . . . . . . . .
Gain on sale of loans . . . . . . . . . . . . . . . . . . . . . .
Insurance commissions . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest income. . . . . . . . . . . . . . . . .

$ 2,200

96.20 %

(4,846) (211.89)
31.18
36.12
51.99
96.40
100.00 %

713
826
1,189
2,205
$ 2,287

$ 2,289
(2,031)
472
882
1,928
1,916
$ 5,456

41.95 %
(37.23)
8.65
16.17
35.34
35.12
100.00 %

Amount

$

(89)
(2,815)
241
(56)
(739)
289
$ (3,169)

%

(3.89)%

(138.60)
51.06
(6.35)
(38.33)
15.08
(58.08)%

2008 vs 2007
Total non-interest income decreased $2,022,000 from the year ended December 31, 2007 to 2008. Excluding security losses, non-
interest income decreased $45,000. Service charges increased as overdraft protection fees increased $100,000 and offset customer
migrations to checking accounts having reduced or no service charges. Earnings on bank-owned life insurance increased as
additional policies were purchased. Insurance commissions decreased due to the general economic downturn, which has led to a
decrease in volume of sales. Management of The M Group continues to pursue new and build upon current relationships.
However, the sales cycle for insurance and investment products can take typically from six months to one year or more to complete.
The increase in other income was primarily due to increases in revenues from debit card transactions, merchant card commissions,
and title insurance.

33

(In Thousands)

2008
Amount % Total

2007
Amount % Total

Deposit service charges . . . . . . . . . . . . . . . . . . . . $ 2,289
(2,031)
Securities losses, net. . . . . . . . . . . . . . . . . . . . . . .
472
Bank-owned life insurance. . . . . . . . . . . . . . . . . .
882
Gain on sale of loans . . . . . . . . . . . . . . . . . . . . . .
1,928
Insurance commissions . . . . . . . . . . . . . . . . . . . .
1,916
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest income. . . . . . . . . . . . . . . . . $ 5,456

41.95 %
(37.23)
8.65
16.17
35.34
35.12
100.00 %

$ 2,246
(54)
410
921
2,222
1,733
$ 7,478

30.03 %
(0.72)
5.48
12.32
29.72
23.17
100.00 %

Change

Amount

$

43
(1,977)
62
(39)
(294)
183
$ (2,022)

%

1.91 %

(3,661.11)
15.12
(4.23)
(13.23)
10.56
(27.04)%

NON-INTEREST EXPENSE
2009 vs 2008
Total non-interest expenses increased $1,863,000 from the year ended December 31, 2008 to December 31, 2009. Salaries and
employee benefits increased due to several factors including standard cost of living wage adjustments for employees and increased
benefit costs. Pennsylvania shares tax increased due to tax credits associated with an investment in low income housing within the
Lycoming County market that were utilized during 2008. Other expenses increased primarily due to an increase in FDIC insurance
expense of $1,010,000.

(In Thousands)

2009
Amount % Total

2008
Amount % Total

Change

Amount

%

Salaries and employee benefits . . . . . . . . . . . . . . $ 10,189
1,266
Occupancy, net . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,212
Furniture and equipment . . . . . . . . . . . . . . . . . . .
Pennsylvania shares tax . . . . . . . . . . . . . . . . . . . .
685
Amortization of investment in

limited partnership . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

567
5,893
Total non-interest expense . . . . . . . . . . . . . . . . $ 19,812

51.43 %
6.39
6.12
3.46

2.86
29.74
100.00 %

$ 9,634
1,288
1,182
421

712
4,712
$ 17,949

53.67 %
7.18
6.59
2.35

$

555
(22)
30
264

5.76 %
(1.71)
2.54
62.71

3.97
26.24
100.00 %

(145)
1,181
$ 1,863

(20.37)
25.06
10.40 %

2008 vs 2007
Total non-interest expenses increased $633,000 from the year ended December 31, 2007 to December 31, 2008. Salaries and
employee benefits increased due to several factors including standard cost of living wage adjustments for employees, increased
benefit costs, and expenses associated with the post-retirement segment of split-dollar bank owned life insurance. Pennsylvania
shares tax decreased due to tax credits associated with an investment in low income housing within the Lycoming County market.
Other expenses increased primarily due to increases in legal and insurance costs coupled with our continued emphasis on giving
back to the communities that we serve resulting in a doubling of donations during 2008 compared to 2007.

(In Thousands)

2008
Amount % Total

2007
Amount % Total

Change

Amount

%

Salaries and employee benefits . . . . . . . . . . . . . . $ 9,634
1,288
Occupancy, net . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,182
Furniture and equipment . . . . . . . . . . . . . . . . . . .
Pennsylvania shares tax . . . . . . . . . . . . . . . . . . . .
421
Amortization of investment in

limited partnership . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

712
4,712
Total non-interest expense . . . . . . . . . . . . . . . . $ 17,949

53.67 %
7.18
6.59
2.35

3.97
26.24
100.00 %

$ 9,078
1,306
1,126
643

761
4,402
$ 17,316

52.43 %
7.54
6.50
3.71

4.39
25.43
100.00 %

$

$

556
(18)
56
(222)

(49)
310
633

6.12 %
(1.38)
4.97
(34.53)

(6.44)
7.04
3.66 %

INCOME TAXES
2009 vs 2008
The provision for income taxes for the year ended December 31, 2009 resulted in an effective income tax rate of (13.9)% compared
to 4.8% for 2008. This decrease is primarily the result of an increase in net securities losses of $2,815,000 which accounted for a
reduction in tax expense of approximately $957,000. In addition, tax-exempt investment income and bank-owned life insurance
income increased $134,000 and $241,000, respectively resulting in approximately and additional reduction in tax expense of
$128,000.
An analysis has been performed to determine if there is a need for a valuation allowance related to the deferred tax asset that has
been booked due to the investment losses. As of December 31, 2009, management determined that a valuation analysis was not
necessary.
2008 vs 2007
The provision for income taxes for the year ended December 31, 2008 resulted in an effective income tax rate of 4.8% compared
to 6.7% for 2007. This decrease is the result of the continued shift in the investment portfolio from taxable mortgage-backed bonds
to tax-exempt municipal bonds coupled with the recognition of tax credits related to low income housing partnerships investments.

34

FINANCIAL CONDITION

INVESTMENTS
2009
The carrying value of the investment portfolio increased $489,000 from December 31, 2008 to 2009, while the amortized cost
decreased $6,955,000 over the same period. The decrease in amortized value was due to a reduction of U.S. Government and
agency securities due to routine principal payments and a reduction in equity securities due to both other than temporary
impairment write downs and that certain positions were liquidated to maximize the ability to carry back capital losses for tax
purposes. Offsetting these decreases in part was an increase in state and political securities. This segment of the aggregate
portfolio was increased due to its ability to complement the shorter duration assets within the earning asset composition. The
increase in carrying or fair value was the result of the previously noted reduction in amortized cost offset by a reduction in
aggregate net unrealized losses of $7,451,000 primarily related to the equity segment of the portfolio.
2008
The carrying value of the investment portfolio decreased $6,346,000 or 2.96% from December 31, 2007 to 2008, while the
amortized cost increased $3,241,000 over the same period. The majority of the changes in value occurred within the state and
municipal segment of the portfolio. The amortized cost position in state and political securities increased $22,607,000 as the Bank
continued to build call protection, maintain taxable equivalent yields, reduce the effective federal income tax rate, and invest in
communities across the Commonwealth of Pennsylvania and the country. The amortized cost position of U.S. Government and
agency securities decreased $15,934,000 due to the focus on building the municipal bond segment of the portfolio. The increased
level of unrealized losses, which offset the increase in amortized cost, was the result of changes in the yield curve and illiquid
markets, not credit quality, as the credit quality of the portfolio remained sound.
The carrying amounts of investment securities are summarized as follows for the years ended December 31, 2009, 2008, and 2007:

(In Thousands)

U.S. Government agencies:

2009

2008

2007

Balance % Portfolio

Balance % Portfolio

Balance % Portfolio

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

$

6
39,136

0.00% $
18.74%

10
47,586

0.00% $
22.84%

14
62,904

State and political subdivisions (tax-exempt):

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

—
106,928

State and political subdivisions (taxable):

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

Other bonds, notes and debentures:

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

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

—
37,949

101
12,976

197,096
11,779

—
51.19%

—
18.17%

0.05%
6.21%

94.36%
5.64%

—
103,173

—
28,668

125
15,554

195,116
13,270

—
49.51%

—
13.76%

0.06%
7.46%

93.63%
6.37%

—
107,314

—
10,501

263
15,767

196,763
17,969

0.01%
29.29%

—
49.98%

—
4.89%

0.12%
7.34%

91.63%
8.37%

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

$ 208,875

100.00% $ 208,386

100.00% $ 214,732

100.00%

35

The following table shows the maturities and repricing of investment securities, at amortized cost and the weighted average yields
(for tax-exempt obligations on a fully taxable basis assuming a 34% tax rate) at December 31, 2009:
(In Thousands)

Within
One
Year

After one
But Within
Five Years

After five
But Within
Ten Years

After
Ten
Years

Amortized
Cost
Total

U.S. Government agencies:

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

Other bonds, notes and debentures:

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

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

— $
—
—
—

—
—
—
—

—
—
—
—

25
7.31%
25
0.66%
50

3.99%

— $
—
—
—

—
—
—
—

—
—
1,007
6.01%

76
6.30%

10,349

5.11%

— $
—
—

$

6
8.62%

37,038

5.82%

—
—
1,454
7.98%

—
—
—
—

—
—
1
0.90%

—
—
111,159

6.60%

—
—
40,294

5.98%

—
—
1,896
6.82%

6
8.62%

37,038

5.82%

—
—
112,613

6.61%

—
—
41,301

5.98%

101
6.55%

12,271

5.37%

$

11,432

$

1,455

$

190,393

$

203,330

5.20%

7.97%

6.32%

6.27%

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

10,959
214,289

5.94%

All yields represent weighted average yields expressed on a tax equivalent basis. They are calculated on the basis of the cost,
adjusted for amortization of premium and accretion of discount, and effective yields weighted for the scheduled maturity of each
security. The taxable equivalent adjustment represents the difference between annual income from tax-exempt obligations and the
taxable equivalent of such income at the standard 34% tax rate (derived by dividing tax-exempt interest by 66%).
The distribution of credit ratings by amortized cost and estimated fair value for the debt security portfolio at December 31, 2009
follows:

(In Thousands)

Available for sale (AFS)
U.S. Government and

A- to AAA
Fair
Value

Amortized
Cost

B- to BBB+
Fair
Value

Amortized
Cost

C to CCC+
Fair
Value

Amortized
Cost

Not Rated
Fair
Value

Amortized
Cost

Total

Amortized
Cost

Fair
Value

— $

8,340
400
8,740 $

— $

7,370
355
7,725

$

— $
—
—
— $

— $
—
—
— $

— $

8,989
956
9,945 $

— $ 37,038 $ 39,136
144,877
12,976
$ 203,223 $ 196,989

153,914
12,271

8,288
997
9,285

— $
—
— $

— $
—
— $

— $
—
— $

— $
—
— $

— $
—
— $

— $
—
— $

6 $

101
107 $

6
102
108

agency securities . . . . . . . . . . . $ 37,038 $ 39,136
129,219
State and political securities . . . .
Other debt securities . . . . . . . . . .
11,624
Tota debt securities AFS . . . . . . . $ 184,538 $ 179,979

136,585
10,915

Held to maturity (HTM)
U.S. Government and

agency securities . . . . . . . . . . . $

Other debt securities . . . . . . . . . .
Total debt securities HTM . . . . . . $

6 $

101
107 $

6
102
108

$

$

$

$

36

LOAN PORTFOLIO
2009
Gross loans of $405,529,000 at December 31, 2009 represented an increase of $24,051,000 from December 31, 2008. The
continued emphasis on well collateralized real estate loans resulted in commercial real estate secured loans increasing $16,051,000
from December 31, 2008 to 2009. The success in carrying out this long term strategy has played a significant role in limiting net
charge-offs for 2009 to 0.16% of average loans. The composition of the portfolio has shifted toward commercial from residential
since December 31, 2008. This shift is the by-product of the majority of residential mortgages being sold into the secondary
market versus being added to the loan portfolio.
2008
Gross loans of $381,478,000 at December 31, 2008 represented an increase of $21,000,000 from December 31, 2007. The
continued emphasis on well collateralized real estate loans resulted in real estate secured loans increasing $17,039,000 from
December 31, 2007 to 2008. The success in carrying out this long term strategy has played a significant role in limiting net
chargeoffs for 2008 to 0.04% of average loans. Despite the softening economy, the Bank has increased outstanding loans while
maintaining its lending practices and is capitalizing on opportunities because larger regional banks have withdrawn, in part, from
select market segments.
The amounts of loans outstanding at the indicted dates are shown in the following table according to type of loan at December 31,
2009, 2008, 2007, 2006, and 2005:

(In Thousands)

2009
Amount %Total

2008
Amount %Total

2007
Amount %Total

2006
Amount %Total

2005
Amount %Total

Commercial, financial
and agricultural
Real estate mortgage:

. . . . . . . . . . . . $ 46,647

11.5 % $ 40,602

10.6 % $ 35,739

9.9 % $ 36,995

10.3 % $ 37,553

11.1 %

Residental . . . . . . . . . . . . . . . . .
Commercial
. . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . .

174,346
152,209
21,795

43.1
37.5
5.4

177,406
136,158
15,838

46.5
35.7
4.2

163,268
132,943
16,152

45.3
36.9
4.5

158,219
135,404
16,749

43.9
37.6
4.6

150,000
127,131
10,681

44.3
37.5
3.2

Installment loans to

11,549
individuals . . . . . . . . . . . . . . . .
Less: Net deferred loan fees . . . .
1,017
Gross loans . . . . . . . . . . . . . . . . . $ 405,529

2.8
(0.3)

12,487
1,013
100.0 % $ 381,478

3.3
(0.3)

13,317
941
100.0 % $ 360,478

3.7
(0.3)

14.035
1,018
100.0 % $ 360,384

3.9
(0.3)

14,135
1,062
100.0 % $ 338,438

4.2
(0.3)
100.0 %

The amounts of domestic loans at December 31, 2009 are presented below by category and maturity:

(In Thousands)

Loans with floating interest rates:

Real Estate

Commercial
and
Other

Installment
Loan to
Individuals

Total

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

Total floating interest rate loans . . . . . .

$

23,811
16,313
27,916
225,824
___________________
293,864
___________________

$

11,100
2,083
2,917
10,620
_____________________
26,720
_____________________

$

2,070
10
1
873
____________________
2,954
____________________

$

36,981
18,406
30,834
237,317
_____________________
323,538
_____________________

Loans with predetermined interest rates:

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

3,295
15,788
20,379
13,736
___________________
53,198
$
347,062
___________________
___________________

1,557
12,426
2,586
3,539
_____________________
20,108
$
46,828
_____________________
_____________________

1,025
6,865
767
28
____________________
8,685
$
11,639
____________________
____________________

5,877
35,079
23,732
17,303
_____________________
81,991
$
405,529
_____________________
_____________________

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

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

The Bank does not make loans that provide for negative amortization nor do any loans contain conversion features. The Bank does
not have any foreign loans outstanding at December 31, 2009.

37

ALLOWANCE FOR LOAN LOSSES
2009
The allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses
inherent in its loan portfolio, as of the consolidated balance sheet date. All loan losses are charged to the allowance and all
recoveries are credited to it per the allowance method of providing for loan losses. The allowance for loan losses is established
through a provision for loan losses charged to operations. The provision for loan losses is based upon management’s quarterly
review of the loan portfolio. The purpose of the review is to assess loan quality, identify impaired loans, analyze delinquencies,
ascertain loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets served.
An external independent loan review is also performed annually for the Bank. Management remains committed to an aggressive
program of problem loan identification and resolution.

The allowance is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance
has been determined. Loss factors are based on management’s consideration of the nature of the portfolio segments, changes in
mix and volume of the loan portfolio, and historical loan loss experience. In addition, management considers industry standards
and trends with respect to nonperforming loans and its knowledge and experience with specific lending segments.

The allowance for loan losses increased from $4,356,000 at December 31, 2008 to $4,657,000 at December 31, 2009. At
December 31, 2009, the allowance for loan losses was 1.15% of total loans compared to 1.14% of total loans at December 31,
2008. This percentage is consistent with the Bank’s historical experience and peer banks. Management’s conclusion is that the
allowance for loan losses is adequate to provide for probable losses inherent in its loan portfolio as of the balance sheet date.

Based on management’s loan-by-loan review, the past performance of the borrowers, and current economic conditions, including
recent business closures and bankruptcy levels, management does not anticipate any current losses related to nonaccrual,
nonperforming, or classified loans above those that have already been considered in its overall judgment of the adequacy of the
reserve.

2008
At December 31, 2008, the allowance for loan losses as a percent of total loans decreased to 1.14% from 1.15% at December 31,
2007. An increase in gross loans of $21,000,000 from $360,478,000 at December 31, 2007 to $381,478,000 at December 31, 2008
coupled with net charge-offs of $149,000 led to the slight decline in the allowance for loan losses as a percent of total loans.

Allocation in the Allowance for Loan Losses

December 31, 2009:
Balance at end of period applicable to:

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

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

$

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

$

December 31, 2008:
Balance at end of period applicable to:

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

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

$

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

$

Percent of
Loans in
Each
Category to
Total Loans

Amount

566

968
1,484
1,396
221
22

4,657

580

659
1,326
1,471
250
70

4,356

11.5%

42.9%
37.4%
5.4%
2.8%
—

100.0%

10.6%

46.4%
35.6%
4.1%
3.3%
—

100.0%

38

December 31, 2007:
Balance at end of period applicable to:

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

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

$

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

$

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

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

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

$

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

$

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

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

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

$

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

$

Percent of
Loans in
Each
Category to
Total Loans

Amount

823

1,031
1,634
112
228
302

4,130

679

951
1,972
108
295
180

4,185

582

1,107
1,482
79
192
237

3,679

9.9%

45.1%
36.8%
4.5%
3.7%
—

100.0%

10.2%

43.8%
37.5%
4.6%
3.9%
—

100.0%

10.1%

44.2%
37.5%
3.1%
5.1%
—

100.0%

NONPERFORMING LOANS
Nonaccrual loans increased $415,000 to $1,891,000 at December 31, 2009 as several commercial real estate relationships
deteriorated in quality. Overall nonperforming loans increased $2,721,000 to $4,456,000 from fiscal year end 2008 due to one
commercial loan that is well secured with no loss expected at this time.
The following table presents information concerning nonperforming loans. The accrual of interest will be discontinued when the
principal or interest of a loan is in default for 90 days or more, or as soon as payment is questionable, unless the loan is well secured
and in the process of collection. Consumer loans and residential real estate loans secured by 1 to 4 family dwellings are not
ordinarily subject to those guidelines. The reversal of previously accrued but uncollected interest applicable to any loan placed in
a nonaccrual status and the treatment of subsequent payments of either principal or interest will be handled in accordance with
GAAP. These principles do not require a write-off of previously accrued interest if principal and interest are ultimately protected
by sound collateral values. A nonperforming loan may be restored to accruing status when:
1. Principal and interest is no longer due and unpaid;
2. It becomes well secured and in the process of collection;
3. Prospects for future contractual payments are no longer in doubt;

(In Thousands)

Total Nonperforming Loans

Nonaccrual

90 Days
Past Due

Total

$

2009 . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . .
2005 . . . . . . . . . . . . . . . . . . . . . . . .
2004 . . . . . . . . . . . . . . . . . . . . . . . .
2003 . . . . . . . . . . . . . . . . . . . . . . . .

$

1,891
1,476
955
370
540
1,381
827

$

2,565
259
365
119
63
345
429

4,456
1,735
1,320
489
603
1,726
1,256

39

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

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

DEPOSITS
2009 vs 2008
Total average deposits were $476,194,000 for 2009, an increase of $58,642,000 or 14.04% from 2008. Core deposits, which
exclude time deposits, increased due to growth in average money market accounts of $31,985,000 or 103.44%. This growth is the
result of the impact of natural gas exploration throughout our market footprint and municipal account gathering efforts. Time
deposits also increased due to the reasons noted previously. In addition, the Bank has continued to capitalize on its reputation of
safety and soundness during this prolonged economic downturn.
2008 vs 2007
Total average deposits were $417,552,000 for 2008, an increase of $20,344,000 or 5.12% from 2007. Core deposits, which exclude
time deposits, increased due to renewed focus on deposit gathering efforts and the impact of natural gas exploration through out
our market footprint. Time deposits remained stable as the Bank focused on service rather than attracting deposits purely on rate.
In addition, the Bank has been able to capitalize on its reputation of safety and soundness during the events of 2008 that unsettled
consumer confidence. Additionally, the FDIC temporarily raised the limit on federal deposit insurance from $100,000 to $250,000.
The average amount and the average rate paid on deposits are summarized below for the years ended December 31, 2009, 2008,
and 2007:

(In Thousands)

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

$

2009

Average
Amount

Rate

74,618 0.00%
0.51%
60,815
0.87%
58,591
1.95%
62,906
2.84%
219,264

$

2008

Average
Amount

73,618
60,324
52,117
30,921
200,572

Rate
0.00%
0.73%
1.26%
2.26%
3.92%

$

2007

Average
Amount

Rate
69,953 0.00%
58,710 0.73%
46,596 1.31%
23,920 2.26%
198,029 4.73%

Total average deposits . . . .

$

476,194

1.74%

$

417,552

2.31%

$

397,208 2.76%

SHAREHOLDERS’ EQUITY
2009
Shareholders’ equity increased $5,889,000 to $66,916,000 at December 31, 2009 compared to December 31, 2008 as accumulated
other comprehensive loss was reduced by $6,777,000. The reduction in accumulated other comprehensive loss is primarily a result
of a change in unrealized losses on available for sale securities from an unrealized loss of $8,486,000 at December 31, 2008 to an
unrealized loss of $3,569,000 at December 31, 2009. The other component in the reduction of accumulated other comprehensive
loss is a decrease of $1,860,000 in the net excess of the projected benefit obligation over the market value of the plan assets of the
defined benefit pension plan, due to an increase in the market value of the plan assets caused by relative improved performance in
the stock and bond markets over the past year. The current level of shareholders’ equity equates to a book value per share of $17.45
at December 31, 2009 compared to $15.93 at December 31, 2008 and an equity to asset ratio of 9.90% at December 31, 2009.
Book value per share, excluding accumulated other comprehensive loss, was $18.88 at December 31, 2009 compared to $19.13 at
December 31, 2008. Dividends paid to shareholders were $1.84 for each of the twelve months ended December 31, 2009 and 2008.
2008
Shareholders’ equity decreased $9,532,000 to $61,027,000 at December 31, 2008 as accumulated comprehensive loss increased
$6,327,000, and $1,371,000 in common stock was strategically repurchased as part of the previously announced stock buyback
plan, while net income outpaced dividends paid. The decrease in accumulated other comprehensive income is a result of a decline
in the market value of certain securities held in the investment portfolio at December 31, 2008 compared to December 31, 2007,
resulting in a net unrealized loss of $8,486,000 at December 31, 2008 compared to a net unrealized loss of $2,159,000 at December
31, 2007. In addition, the net excess of the projected benefit obligation over the market value of the plan assets of the defined
benefit pension plan increased $2,405,000 due to a decline in the market value of the plan assets caused by the significant downturn
in the stock and bond markets over the past year. The current level of shareholders’ equity equates to a book value per share of
$15.93 at December 31, 2008 compared to $18.21 at December 31, 2007 and an equity to asset ratio of 9.35% at December 31,
2008. Book value per share, excluding accumulated other comprehensive loss, was $19.13 at December 31, 2008 compared to
$19.12 at December 31, 2007. During the twelve months ended December 31, 2008 cash dividends of $1.84 per share were paid
to shareholders compared to $1.79 for the comparable period of 2007.

40

Bank regulators have risk based capital guidelines. Under these guidelines the Company and Bank are required to maintain
minimum ratios of core capital and total qualifying capital as a percentage of risk weighted assets and certain off-balance sheet
items. At December 31, 2009, both the Company’s and Bank’s required ratios were well above the minimum ratios as follows:

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

Company
9.3%
15.4%

Bank
8.0%
13.4%

Minimum
Standards
4.0%
8.0%

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

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

Percentage of net income to:

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

0.92%
9.66%
115.74%
9.50%

1.27%
12.02%
88.67%
10.53%

1.49%
12.14%
78.33%
12.23%

2009

2008

2007

LIQUIDITY, INTEREST RATE SENSITIVITY AND MARKET RISK
The asset/liability committee addresses the liquidity needs of the Company to ensure that sufficient funds are available to meet
credit demands and deposit withdrawals as well as to the placement of available funds in the investment portfolio. In assessing
liquidity requirements, equal consideration is given to the current position as well as the future outlook.
The following liquidity measures are monitored for compliance and were within the limits cited at December 31, 2009:
1. Net Loans to Total Assets, 85% maximum
2. Net Loans to Total Deposits, 100% maximum
3. Cumulative 90 day Maturity GAP %, +/- 20% maximum
4. Cumulative 1 Year Maturity GAP %, +/- 25% maximum
Fundamental objectives of the Company’s asset/liability management process are to maintain adequate liquidity while minimizing
interest rate risk. The maintenance of adequate liquidity provides the Company with the ability to meet its financial obligations to
depositors, loan customers, and shareholders. Additionally, it provides funds for normal operating expenditures and business
opportunities as they arise. The objective of interest rate sensitivity management is to increase net interest income by managing
interest sensitive assets and liabilities in such a way that they can be repriced in response to changes in market interest rates.
The Company, like other financial institutions, must have sufficient funds available to meet its liquidity needs for deposit
withdrawals, loan commitments, and expenses. In order to control cash flow, the Bank estimates future flows of cash from deposits
and loan payments. The primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed
securities, as well as FHLB borrowings. Funds generated are used principally to fund loans and purchase investment securities.
Management believes the Company has adequate resources to meet its normal funding requirements.
Management monitors the Company’s liquidity on both a long and short-term basis, thereby, providing management necessary
information to react to current balance sheet trends. Cash flow needs are assessed and sources of funds are determined. Funding
strategies consider both customer needs and economical cost. Both short and long term funding needs are addressed by maturities
and sales of available for sale investment securities, loan repayments and maturities, and liquidating money market investments
such as federal funds sold. The use of these resources, in conjunction with access to credit, provides core ingredients to satisfy
depositor, borrower, and creditor needs.
Management monitors and determines the desirable level of liquidity. Consideration is given to loan demand, investment
opportunities, deposit pricing and growth potential, as well as the current cost of borrowing funds. The Company has a current
borrowing capacity at the FHLB of $216,229,000 with $91,933,000 utilized, leaving $124,296,000 available. In addition to this
credit arrangement, the Company has additional lines of credit with correspondent banks of $13,845,000. The Company’s
management believes that it has sufficient liquidity to satisfy estimated short-term and long-term funding needs.
Interest rate sensitivity, which is closely related to liquidity management, is a function of the repricing characteristics of the
Company’s portfolio of assets and liabilities. Asset/liability management strives to match maturities and rates between loan and
investment security assets with the deposit liabilities and borrowings that fund them. Successful asset/liability management results
in a balance sheet structure which can cope effectively with market rate fluctuations. The matching process is affected by
segmenting both assets and liabilities into future time periods (usually 12 months, or less) based upon when repricing can be
effected. Repriceable assets are subtracted from repriceable liabilities, for a specific time period to determine the “gap”, or
difference. Once known, the gap is managed based on predictions about future market interest rates. Intentional mismatching, or
gapping, can enhance net interest income if market rates move as predicted. However, if market rates behave in a manner contrary
to predictions, net interest income will suffer. Gaps, therefore, contain an element of risk and must be prudently managed. In
addition to gap management, the Company has an asset liability management policy which incorporates a market value at risk
calculation which is used to determine the effects of interest rate movements on shareholders’ equity and a simulation analysis to
monitor the effects of interest rate changes on the Company’s balance sheet.

41

The Company currently maintains a gap position of being liability sensitive. The Company has strategically taken this position as
it has decreased the duration of the time deposit portfolio, while continuing to maintain a primarily fixed rate earning asset
portfolio with a duration greater than the liabilities utilized to fund earning assets. Lengthening of the liability portfolio coupled
with the addition of limited short-term assets is being undertaken. These actions are expected to reduce, but not eliminate, the
liability sensitive structure of the balance sheet.
A market value at risk calculation is utilized to monitor the effects of interest rate changes on the Company’s balance sheet and
more specifically shareholders’ equity. The Company does not manage the balance sheet structure in order to maintain compliance
with this calculation. The calculation serves as a guideline with greater emphases placed on interest rate sensitivity. Changes to
calculation results from period to period are reviewed as changes in results could be a signal of future events. As of the most recent
analysis, the results of the market value at risk calculation were outside of established guidelines due to the strategic direction being
taken.

INTEREST RATE SENSITIVITY
In this analysis the Company examines the result of a 100 and 200 basis point change in market interest rates and the effect on net
interest income. It is assumed that the change is instantaneous and that all rates move in a parallel manner. Assumptions are also
made concerning prepayment speeds on mortgage loans and mortgage securities.
The following is a rate shock forecast for the twelve month period ended December 31, 2009 assuming a static balance sheet as of
December 31, 2008.

(In Thousands)

Net interest income . . . . . . . . .
Change from static . . . . . . . . . .
Percent change from static . . . .

$

-200

$

21,612
(1,039 )
-4.59%

Parallel Rate Shock in Basis Points
+100
Static
-100
22,569
(82)
-0.36%

22,308
(343)
-1.51%

22,651
—
—

$

$

$

+200
22,301
(350)
-1.55%

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

INFLATION
The asset and liability structure of a financial institution is primarily monetary in nature; therefore, interest rates rather than
inflation have a more significant impact on the Company’s performance. Interest rates are not always affected in the same direction
or magnitude as prices of other goods and services, but are reflective of fiscal policy initiatives or economic factors that are not
measured by a price index.
CRITICAL ACCOUNTING POLICIES
The Company’s accounting policies are integral to understanding the results reported. The accounting policies are described in
detail in Note 1 of the consolidated financial statements. Our most complex accounting policies require management’s judgment
to ascertain the valuation of assets, liabilities, commitments, and contingencies. We have established detailed policies and control
procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. In
addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate
manner. The following is a brief description of our current accounting policies involving significant management valuation
judgments.
Other Than Temporary Impairment of Debt and Equity Securities
Debt and equity securities are evaluated periodically to determine whether a decline in their value is other than temporary.
Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reason underlying the decline,
to determine whether the loss in value is other than temporary. The term “other than temporary” is not intended to indicate that the
decline is permanent. It indicates that the prospects for a near term recovery of value are not necessarily favorable, or that there
is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Once a decline in value
is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.
For a full discussion of the Company’s methodology of assessing impairment, refer to Note 3 of the “Notes to Consolidated
Financial Statements” of the Annual Report on Form 10-K.
Allowance for Loan
Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. The Company’s allowance for
loan losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio.
Management uses historical information to assess the adequacy of the allowance for loan losses as well as the prevailing business
environment; as it is affected by changing economic conditions and various external factors, which may impact the portfolio in
ways currently unforeseen. The allowance is increased by provisions for loan losses and by recoveries of loans previously charged-
off and reduced by loans charged-off. For a full discussion of the Company’s methodology of assessing the adequacy of the reserve
for allowance for loan losses, refer to Note 1 of the “Notes to Consolidated Financial Statements” of the Annual Report of Form
10-K.

42

Goodwill and Other Intangible Assets
As discussed in Note 7 of the “Notes to Consolidated Financial Statements” of the Annual Report on Form 10-K, the Company
must assess goodwill and other intangible assets each year for impairment. This assessment involves estimating cash flows for
future periods. If the future cash flows were less than the recorded goodwill and other intangible assets balances, we would be
required to take a charge against earnings to write down the assets to the lower value.
Deferred Tax Assets
We use an estimate of future earnings to support our position that the benefit of our deferred tax assets will be realized. If future
income should prove non-existent or less than the amount of the deferred tax assets within the tax years to which they may be
applied, the asset may not be realized and our net income will be reduced. Our deferred tax assets are described further in Note
11 of the “Notes to Consolidated Financial Statements” of the Annual Report on Form 10-K.
Pension Benefits
Pension costs and liabilities are dependent on assumptions used in calculating such amounts. These assumptions include discount
rates, benefits earned, interest costs, expected return on plan assets, mortality rates, and other factors. In accordance with GAAP,
actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect
recognized expense and the recorded obligation of future periods. While management believes that the assumptions used are
appropriate, differences in actual experience or changes in assumptions may affect the Company’s pension obligations and future
expense. Our pension benefits are described further in Note 12 of the “Notes to Consolidated Financial Statements” of the Annual
Report on Form 10-K.

CONTRACTUAL OBLIGATIONS
The Company has various financial obligations, including contractual obligations which may require future cash payments. The
following table presents, as of December 31, 2009, significant fixed and determinable contractual obligations to third parties by
payment date. Further discussion of the nature of each obligation is included in the “Notes to Consolidated Financial Statements”
of the Annual Report on Form 10-K.
(In Thousands)

One Year
or Less

One to
Three
Years

Payments Due In
Three to
Five
Years

Over
Five
Years

Total

Deposits without a stated maturity . . . . . . . . . . . . . . . . . . . $ 279,721 $
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings, FHLB . . . . . . . . . . . . . . . . . . . . . .
Long-term borrowings, FHLB . . . . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

154,702
13,199
5,155
—
383

— $

— $

49,015
—
—
35,000
613

12,802
—
—
15,500
408

— $ 279,721
217,566
13,199
5,155
86,778
2,926

1,047
—
—
36,278
1,522

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

CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Report contains certain “forward-looking statements” including statements concerning plans, objectives, future events or
performance and assumptions and other statements which are other than statements of historical fact. The Company wishes to
caution readers that the following important factors, among others, may have affected and could in the future affect the Company’s
actual results and could cause the Company’s actual results for subsequent periods to differ materially from those expressed in any
forward-looking statement made by or on behalf of the Company herein: (i) the effect of changes in laws and regulations, including
federal and state banking laws and regulations, with which the Company must comply, and the associated costs of compliance with
such laws and regulations either currently or in the future as applicable; (ii) the effect of changes in accounting policies and
practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or of changes in
the Company’s organization, compensation and benefit plans; (iii) the effect on the Company’s competitive position within its
market area of the
increasing consolidation within the banking and financial services industries, including the increased
competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial
services; (iv) the effect of changes in interest rates; and (v) the effect of changes in the business cycle and downturns in the local,
regional or national economies.

43

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-K

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

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended

December 31, 2009

OR

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

THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the transition period from

to

Commission file number

0-17077

PENNS WOODS BANCORP, INC.

(Exact name of registrant as specified in its charter)

Pennsylvania
(State or other jurisdiction
of incorporation or organization)

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

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

17703-0967
(Zip code)

Registrant’s telephone number, including area code

(570) 322-1111

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

Title of each class

Common Stock, par value $8.33 per share

Name of each exchange
which registered
The NASDAQ Stock Market LLC

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

None
(Title of Class)

x

X

No

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  No
x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, or a smaller reporting com-
pany. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer 
x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No
State the aggregate market value of the voting stock held by non-affiliates of the registrant $111,692,367 at June 30, 2009.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Accelerated filer  Non-accelerated filer  Smaller reporting company 

No

X

x

Class

Common Stock, $8.33 Par Value

Outstanding at March 2, 2010

3,834,475 Shares

44

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement prepared in connection with its annual meeting of shareholders to be held on
April 28, 2010 are incorporated by reference in Part III hereof.

INDEX

PART I

ITEM

Item 1.

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

Item 1A.

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

Item 1B.

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

Item 2.

Item 3.

Item 4.

Item 5.

Item 6.

Item 7.

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

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

(Removed and Reserved). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART II

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

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

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

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 8.

Item 9.

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

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

Item 9A.

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

Item 9B.

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

PART III

Item 10.

Item 11.

Item 12.

Item 13.

Item 14.

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

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

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

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

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

Item 15.

Exhibits and Financial Statement Schedules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

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

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

PART IV

PAGE

46

49

52

52

52

52

53

55

55

55

56

56

56

58

58

58

58

58

58

59

59

60

64

45

PART I

BUSINESS

ITEM 1
A. General Development of Business and History
On January 7, 1983, Penns Woods Bancorp, Inc. (the “Company”) was incorporated under the laws of the Commonwealth of
Pennsylvania as a bank holding company. The Jersey Shore State Bank, a Pennsylvania state-charted bank, (the “Bank”) became
a wholly owned subsidiary of the Company, and each outstanding share of Bank common stock was converted into one share of
Company common stock. This transaction was approved by the shareholders of the Bank on April 11, 1983 and was effective on
July 12, 1983. The Company’s two other wholly-owned subsidiaries are Woods Real Estate Development Company, Inc. and
Woods Investment Company, Inc. The Company’s business has consisted primarily of managing and supervising the Bank, and its
principal source of income has been dividends paid by the Bank and Woods Investment Company, Inc.
The Bank is engaged in commercial and retail banking which includes the acceptance of time, savings, and demand deposits, the
funding of commercial, consumer, and mortgage loans, and safe deposit services. Utilizing a thirteen branch office network, ATMs,
internet, and telephone banking delivery channels, the Bank delivers its products and services to the communities it resides in.
In October 2000, the Bank acquired The M Group, Inc. D/B/A The Comprehensive Financial Group (“The M Group”). The M
Group, which operates as a subsidiary of the Bank, offers insurance and securities brokerage services. Securities are offered by
The M Group through ING Financial Partners, Inc., a registered broker-dealer.
Neither the Company nor the Bank anticipates that compliance with environmental laws and regulations will have any material
effect on capital expenditures, earnings, or on its competitive position. The Bank is not dependent on a single customer or a few
customers, the loss of whom would have a material effect on the business of the Bank.
The Bank employed 192 persons as of December 31, 2009 in either a full-time or part-time capacity. The Company does not have
any employees. The principal officers of the Bank also serve as officers of the Company.
Woods Investment Company, Inc., a Delaware holding company, maintains an investment portfolio that is managed for total return
and to fund dividend payments to the Company.
Woods Real Estate Development Company, Inc. serves the Company through its acquisition and ownership of certain properties
utilized by the Bank.
B. Regulation and Supervision
The Company is also subject to the provisions of the Bank Holding Company Act of 1956, as amended (the “BHCA”) and to
supervision and examination by the Board of Governors of the Federal Reserve System (the “FRB”). The Bank is subject to the
supervision and examination by the Federal Deposit Insurance Corporation (the “FDIC”), as its primary federal regulator and as
the insurer of the Bank’s deposits. The Bank is also regulated and examined by the Pennsylvania Department of Banking (the
“Department”).
The insurance activities of The M Group are subject to regulation by the insurance departments of the various states in which The
M Group conducts business, including principally the Pennsylvania Department of Insurance. The securities brokerage activities
of The M Group are subject to regulation by federal and state securities commissions.
The FRB has issued regulations under the BHCA that require a bank holding company to serve as a source of financial and
managerial strength to its subsidiary banks. As a result, the FRB, pursuant to such regulations, may require the Company to stand
ready to use its resources to provide adequate capital funds to the Bank during periods of financial stress or adversity. The BHCA
requires the Company to secure the prior approval of the FRB before it can acquire all or substantially all of the assets of any bank,
or acquire ownership or control of 5% or more of any voting shares of any bank. Such a transaction would also require approval
of the Department.
A bank holding company is prohibited under the BHCA from engaging in, or acquiring direct or indirect control of, more than 5%
of the voting shares of any company engaged in non-banking activities unless the FRB, by order or regulation, has found such
activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Under the BHCA,
the FRB has the authority to require a bank holding company to terminate any activity or relinquish control of a non-bank
subsidiary (other than a non-bank subsidiary of a bank) upon the FRB’s determination that such activity or control constitutes a
serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.
Bank holding companies are required to comply with the FRB’s risk-based capital guidelines. The risk-based capital rules are
designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding
companies and to minimize disincentives for holding liquid assets. Currently, the required minimum ratio of total capital to risk-
weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%. At least half of the total
capital is required to be Tier 1 capital, consisting principally of common shareholders’ equity, less certain intangible assets. The
remainder (“Tier 2 capital”) may consist of certain preferred stock, a limited amount of subordinated debt, certain hybrid capital
instruments and other debt securities, 45% of net unrealized gains on marketable equity securities, and a limited amount of the
general loan loss allowance. The risk-based capital guidelines are required to take adequate account of interest rate risk,
concentration of credit risk, and risks of nontraditional activities.
In addition to the risk-based capital guidelines, the FRB requires each bank holding company to comply with the leverage ratio,
under which the bank holding company must maintain a minimum level of Tier 1 capital to average total consolidated assets of 3%
for those bank holding companies which have the highest regulatory examination ratings and are not contemplating or experiencing
significant growth or expansion. All other bank holding companies are expected to maintain a leverage ratio of at least 4% to 5%.
The Bank is subject to similar capital requirements adopted by the FDIC.

46

Dividends
Federal and state laws impose limitations on the payment of dividends by the Bank. The Pennsylvania Banking Code restricts the
availability of capital funds for payment of dividends by the Bank to its additional paid-in capital.
In addition to the dividend restrictions described above, the banking regulators have the authority to prohibit or to limit the payment
of dividends by the Bank if, in the banking regulator’s opinion, payment of a dividend would constitute an unsafe or unsound
practice in light of the financial condition of the Bank.
Under Pennsylvania law, the Company may not pay a dividend, if, after giving effect thereto, it would be unable to pay its debts as
they become due in the usual course of business and, after giving effect to the dividend, the total assets of the Company would be
less than the sum of its total liabilities plus the amount that would be needed, if the Company were to be dissolved at the time of
distribution, to satisfy the preferential rights upon dissolution of shareholders whose rights are superior to those receiving the
dividend.
It is also the policy of the FRB that a bank holding company generally only pay dividends on common stock out of net income
available to common shareholders over the past year and only if the prospective rate of earnings retention appears consistent with
In the current financial and economic
a bank holding company’s capital needs, asset quality, and overall financial condition.
environment, the FRB has indicated that bank holding companies should carefully review their dividend policy and has
discouraged dividend pay-out ratios at the 100% level unless both asset quality and capital are very strong. A bank holding
company also should not maintain a dividend level that places undue pressure on the capital of such institution’s subsidiaries, or
that may undermine the bank holding company’s ability to serve as a source of strength for such subsidiaries.
C. Regulation of the Bank
From time to time, various types of federal and state legislation have been proposed that could result in additional regulation of,
and restrictions of, the business of the Bank. It cannot be predicted whether any such legislation will be adopted or how such
legislation would affect business of the Bank. As a consequence of the extensive regulation of commercial banking activities in
the United States, the Bank’s business is particularly susceptible to being affected by federal legislation and regulations that may
increase the costs of doing business.
Prompt Corrective Action
The FDIC has specified the levels at which an insured institution will be considered “well-capitalized,” “adequately capitalized,”
“undercapitalized,” and “critically undercapitalized.” In the event an institution’s capital deteriorates to the “undercapitalized”
category or below, the Federal Deposit Insurance Act (the “FDIA”) and FDIC regulations prescribe an increasing amount of
regulatory intervention, including: (1) the institution of a capital restoration plan by a bank and a guarantee of the plan by a parent
institution and liability for civil money damages for failure to fulfill its commitment on that guarantee; and (2) the placement of a
hold on increases in assets, number of branches, or lines of business.
If capital has reached the significantly or critically
undercapitalized levels, further material restrictions can be imposed, including restrictions on interest payable on accounts,
dismissal of management and (in critically undercapitalized situations) appointment of a receiver. For well-capitalized institutions,
the FDIA provides authority for regulatory intervention where the institution is deemed to be engaging in unsafe or unsound
practices or receives a less than satisfactory examination report rating for asset quality, management, earnings or liquidity.
Deposit Insurance
The FDIC maintains the Deposit Insurance Fund (“DIF”) by assessing depository institutions an insurance premium. The amount
each institution is assessed is based upon a variety of factors that include the balance of insured deposits as well as the degree of
risk the institution poses to the insurance fund. As a result of the enactment of the Emergency Economic Stabilization Act of 2008,
the FDIC increased the amount of deposits it insures from $100,000 to $250,000. This increase is temporary and will continue
through December 31, 2013. The Bank pays an insurance premium into the DIF based on the quarterly average daily deposit
liabilities net of certain exclusions. The FDIC uses a risk-based premium system that assesses higher rates on those institutions
that pose greater risks to the DIF. The FDIC places each institution in one of four risk categories using a two-step process based
first on capital ratios (the capital group assignment) and then on other relevant information (the supervisory group assignment).
Subsequently, the rate for each institution within a risk category may be adjusted depending upon different factors that either
enhance or reduce the risk the institution poses to the DIF, including the unsecured debt, secured liabilities and brokered deposits
related to each institution. Finally, certain risk multipliers may be applied to the adjusted assessment. In 2009, the FDIC increased
the amount assessed from financial institutions by increasing its risk-based deposit insurance assessment scale. The quarterly
annualized assessment scale for 2009 ranged from twelve basis points of assessable deposits for the strongest institutions to over
fifty basis points for the weakest.
In 2009, the FDIC also adopted a uniform special assessment rate for all institutions not to
exceed 10 basis points on the individual bank’s assessment base.
On November 12, 2009, the FDIC approved a rule to require insured institutions to prepay their estimated quarterly risk-based
assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012. An insured institution’s risk-based deposit
insurance assessments will continue to be calculated on a quarterly basis, but will be paid from the amount the institution prepaid
until the later of the date that amount is exhausted or June 30, 2013, at which point any remaining funds would be returned to the
insured institution. Consequently, the Company’s prepayment of DIF premiums made in December 2009 resulted in a prepaid asset
of $2,366,000.
Federal Home Loan Bank System
The Bank 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 Loan Bank serves as a reserve or central bank for its members within its assigned region. It is
funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of theFederal
Home Loan Bank System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by
the board of directors of the Federal Home Loan Bank. At December 31, 2009, the Bank had $91,933,000 in FHLB advances.
As a member, the Bank is required to purchase 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 or similar obligations at the beginning of each year or 5%
of its outstanding advances from the FHLB. At December 31, 2009, the Bank had $7,271,000 million in stock of the FHLB which
was in compliance with this requirement.

47

Other Legislation
The Fair and Accurate Credit Transactions Act (“FACT”) was signed into law on December 4, 2003. This law extends the
previously existing Fair Credit Reporting Act. New provisions added by FACT address the growing problem of identity theft.
Consumers will be able to initiate a fraud alert when they are victims of identity theft, and credit reporting agencies will have
additional duties. Consumers will also be entitled to obtain free credit reports through the credit beaures, and will be granted
certain additional privacy rights.
The Sarbanes-Oxley Act of 2002 was enacted to enhance penalties for accounting and auditing improprieties at publicly traded
companies and to protect investors by improving the accuracy and reliability of corporate disclosures under the federal securities
laws. The Sarbanes-Oxley Act generally applies to all companies, including the Company, that file or are required to file periodic
reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934, or the Exchange Act. The
legislation includes provisions, among other things, governing the services that can be provided by a public company’s independent
auditors and the procedures for approving such services, requiring the chief executive officer and principal accounting officer to
certify certain matters relating to the company’s periodic filings under the Exchange Act, requiring expedited filings of reports by
insiders of their securities transactions and containing other provisions relating to insider conflicts of interest, increasing disclosure
requirements relating to critical financial accounting policies and their application, increasing penalties for securities law
violations, and creating a new public accounting oversight board, a regulatory body subject to SEC jurisdiction with broad powers
to set auditing, quality control, and ethics standards for accounting firms. In response to the legislation, the national securities
exchanges and NASDAQ have adopted new rules relating to certain matters, including the independence of members of a
company’s audit committee as a condition to listing or continued listing.
Congress is currently debating major legislation that may fundamentally change the regulatory oversight of banking institutions in
the United States. Whether any legislation will be enacted or additional regulations will be adopted, and how they might impact
the Company cannot be determined at this time.
In addition to federal banking law, the Bank is subject to the Pennsylvania Banking Code. The Banking Code was amended in late
2000 to provide more complete “parity” in the powers of state-chartered institutions compared to national banks and federal
savings banks doing business in Pennsylvania. Pennsylvania banks have the same ability to form financial subsidiaries authorized
by the Gramm-Leach-Bliley Act, as do national banks.
Environmental Laws
Environmentally related hazards have become a source of high risk and potential liability for financial institutions relating to their
loans. Environmentally contaminated properties owned by an institution’s borrowers may result in a drastic reduction in the value
of the collateral securing the institution’s loans to such borrowers, high environmental clean up costs to the borrower affecting its
ability to repay the loans, the subordination of any lien in favor of the institution to a state or federal lien securing clean up costs,
and liability to the institution for clean up costs if it forecloses on the contaminated property or becomes involved in the
management of the borrower. The Company is not aware of any borrower who is currently subject to any environmental
investigation or clean up proceeding which is likely to have a material adverse effect on the financial condition or results of
operations of the Company.
Effect of Government Monetary Policies
The earnings of the Company are and will be affected by domestic economic conditions and the monetary and fiscal policies of
the United States Government and its agencies. The monetary policies of the FRB have had, and will likely continue to have, an
important impact on the operating results of commercial banks through its power to implement national monetary policy in order,
among other things, to curb inflation or combat a recession. The FRB has a major effect upon the levels of bank loans, investments,
and deposits through its open market operations in the United States Government securities and through its regulation of, among
other things, the discount rate on borrowing of member banks and the reserve requirements against member bank deposits. It is
not possible to predict the nature and impact of future changes in monetary and fiscal policies.
DESCRIPTION OF BANK
History and Business
Jersey Shore State Bank (“Bank”) was incorporated under the laws of the Commonwealth of Pennsylvania as a state bank in 1934
and became a wholly owned subsidiary of the Company on July 12, 1983.
As of December 31, 2009, the Bank had total assets of $667,933,000; total shareholders’ equity of $55,117,000 and total deposits
of $500,100,000. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation for the maximum amount provided
under current law.
The Bank engages in business as a commercial bank, doing business at several locations in Lycoming, Clinton, and Centre
Counties, Pennsylvania. The Bank offers insurance, securities brokerage services, annuity and mutual fund investment products,
and financial planning through its wholly owned subsidiary, The M Group, Inc. D/B/A The Comprehensive Financial Group.
Services offered by the Bank include accepting time, demand and savings deposits including Super NOW accounts, statement
savings accounts, money market accounts, fixed rate certificates of deposit, and club accounts. Its services also include making
secured and unsecured business and consumer loans that include financing commercial transactions as well as construction and
residential mortgage loans and revolving credit loans with overdraft protection.
The Bank’s loan portfolio mix can be classified into four principal categories. These are real estate, agricultural, commercial, and
consumer. Real estate loans can be further segmented into construction and land development, farmland, one-to-four family
residential, multi-family, and commercial or industrial. Qualified borrowers are defined by policy and our underwriting standards.
Owner provided equity requirements range from 20% to 30% with a first lien status required. Terms are generally restricted to
between 10 and 20 years with the exception of construction and land development, which are limited to one to five years. Real
estate appraisals, property construction verifications, and site visitations comply with policy and industry regulatory standards.

48

Prospective residential mortgage customer’s repayment ability is determined from information contained in the application and
recent income tax returns. Emphasis is on credit, employment, income, and residency verification. Broad hazard insurance is
always required and flood insurance where applicable. In the case of construction mortgages, builders risk insurance is requested.
Agricultural loans for the purchase or improvement of real estate must meet the Bank’s real estate underwriting criteria. The only
permissible exception is when a Farmers Home Loan Administration guaranty is obtained. Agricultural loans made for the
purchase of equipment are usually payable in five years, but never more than seven, depending upon the useful life of the purchased
asset. Minimum borrower equity ranges from 20% to 30%. Livestock financing criteria depends upon the nature of the operation.
Agricultural loans are also made for crop production purposes. Such loans are structured to repay within the production cycle and
not carried over into a subsequent year.
Commercial loans are made for the acquisition and improvement of real estate, purchase of equipment, and for working capital
purposes on a seasonal or revolving basis. General purpose working capital loans are also available with repayment expected
within one year. Equipment loans are generally amortized over three to seven years, with an owner equity contribution required
of at least 20% of the purchase price. Insurance coverage with the Bank as loss payee is required, especially in the case where the
equipment is rolling stock. It is also a general policy to collateralize non-real estate loans with the asset purchased and, dependant
upon loan terms, junior liens are filed on other available assets. Financial information required on all commercial mortgages
includes the most current three years balance sheets and income statements and projections on income to be developed through the
project. In the case of corporations and partnerships, the principals are often asked to personally guaranty the entity’s debt.
Seasonal and revolving lines of credit are offered for working capital purposes. Collateral for such a loan includes the pledge of
inventory and/or receivables. Drawing availability is usually 50% of inventory and 75% of eligible receivables. Eligible
receivables are defined as invoices less than 90 days delinquent. Exclusive reliance is very seldom placed on such collateral;
therefore, other lienable assets are also taken into the collateral pool. Where reliance is placed on inventory and accounts
receivable, the applicant must provide financial information including agings on a monthly basis. In addition, the guaranty of the
principals is usually obtained.
Letter of Credit availability is limited to standbys where the customer is well known to the Bank. Credit criteria is the same as that
utilized in making a direct loan. Collateral is obtained in most cases, and whenever the expiration date is beyond one year.
Consumer loan products include second mortgages, automobile financing, small loan requests, overdraft check lines, and PHEAA
referral loans. Our policy includes standards used in the industry on debt service ratios and terms are consistent with prudent
underwriting standards and the use of proceeds. Verifications are made of employment and residency, along with credit history.
Second mortgages are confined to equity borrowing and home improvements. Terms are generally ten years or less and rates are
fixed. Loan to collateral value criteria is 80% or less and verifications are made to determine values. Automobile financing is
generally restricted to five years and done on a direct basis. The Bank, as a practice, does not floor plan and therefore does not
discount dealer paper. Small loan requests are to accommodate personal needs such as the purchase of small appliances or for the
payment of taxes. Overdraft check lines are limited to $5,000 or less.
The Bank’s investment portfolio is analyzed and priced on a monthly basis. Investments are made in U.S. Treasuries, U.S. Agency
issues, bank qualified municipal bonds, corporate bonds, and corporate stocks which consist of Pennsylvania bank stocks. Bonds
with BAA or better ratings are used, unless a local issue is purchased that has a lesser or no rating. Factors taken into consideration
when investments are purchased include liquidity, the Company’s tax position, tax equivalent yield, third party investment ratings,
and the policies of the Asset/Liability Committee.
The banking environment in Lycoming, Clinton, and Centre Counties, Pennsylvania is highly competitive. The Bank operates
thirteen full service offices in these markets and competes for loans and deposits with numerous commercial banks, savings and
loan associations, and other financial institutions. The economic base of the region is developed around small business, health care,
educational facilities (college and public schools), light manufacturing industries, and agriculture.
The Bank has a relatively stable deposit base and no material amount of deposits is obtained from a single depositor or group of
depositors, excluding public entities that account for approximately 10% of total deposits. Although the Bank has regular
opportunities to bid on pools of funds of $100,000 or more in the hands of municipalities, hospitals, and others, it does not rely on
these monies to fund loans or intermediate or longer-term investments.
The Bank has not experienced any significant seasonal fluctuations in the amount of its deposits.
Supervision and Regulation
The earnings of the Bank are affected by the policies of regulatory authorities including the FDIC and the FRB. An important
function of the FRB is to regulate the money supply and interest rates. Among the instruments used to implement these objectives
are open market operations in U.S. Government Securities, changes in reserve requirements against member bank deposits, and
limitations on interest rates that member banks may pay on time and savings deposits. These instruments are used in varying
combinations to influence overall growth and distribution of bank loans, investments on deposits, and their use may also affect
interest rates charged on loans or paid for deposits.
The policies and regulations of the FRB have had and will probably continue to have a significant effect on the Bank’s deposits,
loans and investment growth, as well as the rate of interest earned and paid, and are expected to affect the Bank’s operation in the
future. The effect of such policies and regulations upon the future business and earnings of the Bank cannot accurately be predicted.

ITEM 1A RISK FACTORS
The following sets forth several risk factors that are unique to the Company.
Changes in interest rates could reduce our income, cash flows and asset values.
Our income and cash flows and the value of our assets depend to a great extent on the difference between the interest rates we earn
on interest-earning assets, such as loans and investment securities, and the interest rates we pay on interest-bearing liabilities such
as deposits and borrowings. These rates are highly sensitive to many factors which are beyond our control, including general
economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of

49

the Federal Reserve System. Changes in monetary policy, including changes in interest rates, will influence not only the interest
we receive on our loans and investment securities and the amount of interest we pay on deposits and borrowings but will also affect
our ability to originate loans and obtain deposits and the value of our investment portfolio. If the rate of interest we pay on our
deposits and other borrowings increases more than the rate of interest we earn on our loans and other investments, our net interest
income, and therefore our earnings, could be adversely affected. Our earnings also could be adversely affected if the rates on our
loans and other investments fall more quickly than those on our deposits and other borrowings.
Economic conditions either nationally or locally in areas in which our operations are concentrated may adversely affect our
business.
Deterioration in local, regional, national or global economic conditions could cause us to experience a reduction in deposits and
new loans, an increase in the number of borrowers who default on their loans and a reduction in the value of the collateral securing
their loans, all of which could adversely affect our performance and financial condition. Unlike larger banks that are more
geographically diversified, we provide banking and financial services locally. Therefore, we are particularly vulnerable to adverse
local economic conditions.
Our financial condition and results of operations would be adversely affected if our allowance for loan losses is not
sufficient to absorb actual losses or if we are required to increase our allowance.
Despite our underwriting criteria, we may experience loan delinquencies and losses.
In order to absorb losses associated with
nonperforming loans, we maintain an allowance for loan losses based on, among other things, historical experience, an evaluation
of economic conditions, and regular reviews of delinquencies and loan portfolio quality. Determination of the allowance inherently
involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of
which may undergo material changes. At any time there are likely to be loans in our portfolio that will result in losses but that
have not been identified as nonperforming or potential problem credits. We cannot be sure that we will be able to identify
deteriorating credits before they become nonperforming assets or that we will be able to limit losses on those loans that are
identified. We may be required to increase our allowance for loan losses for any of several reasons. Federal regulators, in reviewing
our loan portfolio as part of a regulatory examination, may request that we increase our allowance for loan losses. Changes in
economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and
other factors, both within and outside of our control, may require an increase in our allowance. In addition, if charge-offs in future
periods exceed our allowance for loan losses, we will need additional increases in our allowance for loan losses. Any increases in
our allowance for loan losses will result in a decrease in our net income and, possibly, our capital, and may materially affect our
results of operations in the period in which the allowance is increased.
Many of our loans are secured, in whole or in part, with real estate collateral which is subject to declines in value.
In addition to considering the financial strength and cash flow characteristics of a borrower, we often secure our loans with real
estate collateral. Real estate values and the real estate market are generally affected by, among other things, changes in local,
regional or national economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes
in tax laws and other governmental statutes, regulations and policies, and acts of nature. The real estate collateral provides an
alternate source of repayment in the event of default by the borrower. If real estate prices in our markets decline, the value of the
real estate collateral securing our loans could be reduced. If we are required to liquidate real estate collateral securing loans during
a period of reduced real estate values to satisfy the debt, our earnings and capital could be adversely affected.
Competition may decrease our growth or profits.
We face substantial competition in all phases of our operations from a variety of different competitors, including commercial
banks, savings and loan associations, mutual savings banks, credit unions, consumer finance companies, factoring companies,
leasing companies, insurance companies, and money market mutual funds. There is very strong competition among financial
services providers in our principal service area. Our competitors may have greater resources, higher lending limits, or larger
branch systems than we do. Accordingly, they may be able to offer a broader range of products and services as well as better pricing
for those products and services than we can.
In addition, some of the financial services organizations with which we compete are not subject to the same degree of regulation
as is imposed on federally insured financial institutions. As a result, those nonbank competitors may be able to access funding and
provide various services more easily or at less cost than we can, adversely affecting our ability to compete effectively.
The value of certain investment securities is volatile and future declines or other-than-temporary impairments could
materially adversely affect our future earnings and regulatory capital.
Continued volatility in the market value for certain of our investment securities, whether caused by changes in market perceptions
of credit risk, as reflected in the expected market yield of the security, or actual defaults in the portfolio could result in significant
fluctuations in the value of the securities. This could have a material adverse impact on our accumulated other comprehensive loss
and shareholders’ equity depending on the direction of the fluctuations. Furthermore, future downgrades or defaults in these
securities could result in future classifications of investment securities as other than temporarily impaired. This could have a
material impact on our future earnings, although the impact on shareholders’ equity will be offset by any amount already included
in other comprehensive income for securities where we have recorded temporary impairment.
We may be adversely affected by government regulation.
The banking industry is heavily regulated. Banking regulations are primarily intended to protect the federal deposit insurance funds
and depositors, not shareholders. Changes in the laws, regulations, and regulatory practices affecting the banking industry may
increase our costs of doing business or otherwise adversely affect us and create competitive advantages for others. Regulations
affecting banks and financial services companies undergo continuous change, and we cannot predict the ultimate effect of these
changes, which could have a material adverse effect on our profitability or financial condition.
We rely on our management and other key personnel, and the loss of any of them may adversely affect our operations.
We are and will continue to be dependent upon the services of our executive management team. In addition, we will continue to
depend on our ability to retain and recruit key commercial loan officers. The unexpected loss of services of any key management
personnel or commercial loan officers could have an adverse effect on our business and financial condition because of their skills,
knowledge of our market, years of industry experience, and the difficulty of promptly finding qualified replacement personnel.

50

Environmental liability associated with lending activities could result in losses.
In the course of our business, we may foreclose on and take title to properties securing our loans. If hazardous substances were
discovered on any of these properties, we could be liable to governmental entities or third parties for the costs of remediation of
the hazard, as well as for personal injury and property damage. Many environmental laws can impose liability regardless of
whether we knew of, or were responsible for, the contamination. In addition, if we arrange for the disposal of hazardous or toxic
substances at another site, we may be liable for the costs of cleaning up and removing those substances from the site even if we
neither own nor operate the disposal site. Environmental laws may require us to incur substantial expenses and may materially
limit use of properties we acquire through foreclosure, reduce their value or limit our ability to sell them in the event of a default
on the loans they secure. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing
laws may increase our exposure to environmental liability.
Failure to implement new technologies in our operations may adversely affect our growth or profits.
The market for financial services, including banking services and consumer finance services is increasingly affected by advances
in technology, including developments in telecommunications, data processing, computers, automation, Internet-based banking,
and telebanking. Our ability to compete successfully in our markets may depend on the extent to which we are able to exploit such
technological changes. However, we can provide no assurance that we will be able to properly or timely anticipate or implement
such technologies or properly train our staff to use such technologies. Any failure to adapt to new technologies could adversely
affect our business, financial condition or operating results.
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the Federal Deposit Insurance Corporation,
commonly referred to as the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our
common stock is subject to the same market forces that affect the price of common stock in any company.

51

ITEM 1B – UNRESOLVED STAFF COMMENTS
None.

ITEM 2
The Company owns and leases its properties. Listed herewith are the locations of properties owned or leased as of December 31,
2009, in which the banking offices are located; all properties are in good condition and adequate for the Bank’s purposes:

PROPERTIES

Office

Main

Bridge Street

DuBoistown

Williamsport

Montgomery

Lock Haven

Mill Hall

Spring Mills

Centre Hall

Zion

State College

Montoursville

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

Address

115 South Main Street
P.O. Box 5098
Jersey Shore, Pennsylvania 17740

112 Bridge Street
Jersey Shore, Pennsylvania 17740

2675 Euclid Avenue
Williamsport, Pennsylvania 17702

300 Market Street
P.O. Box 967
Williamsport, Pennsylvania 17703-0967

9094 Rt. 405 Highway
Montgomery, Pennsylvania 17752

4 West Main Street
Lock Haven, Pennsylvania 17745

(Inside Wal-Mart), 173 Hogan Boulevard
Mill Hall, Pennsylvania 17751

3635 Penns Valley Road, P.O. Box 66
Spring Mills, Pennsylvania 16875

2842 Earlystown Road
Centre Hall, Pennsylvania 16828

100 Cobblestone Road
Bellefonte, Pennsylvania 16823

2050 North Atherton Street
State College, Pennsylvania 16803

820 Broad Street
Montoursville, Pennsylvania 17754

705 Washington Boulevard
Williamsport, Pennsylvania 17701

Ownership

Owned

Owned

Owned

Owned

Owned

Owned

Under Lease

Owned

Land Under Lease

Under Lease

Land Under Lease

Under Lease

Under Lease

LEGAL PROCEEDINGS

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

ITEM 4

(REMOVED AND RESERVED)

52

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

STOCKHOLDER MATTERS, AND ISSUER PURCHASE OF EQUITY SECURITIES

PART II

The Common Stock is listed on the NASDAQ Global Select Market under the symbol “PWOD”. The following table sets forth
(1) the quarterly high and low close prices for a share of the Company’s Common Stock during the periods indicated, and (2)
quarterly dividends on a share of the Common Stock with respect to each quarter since January 1, 2006. The following quotations
represent prices between buyers and sellers and do not include retail markup, markdown or commission. They may not necessarily
represent actual transactions.

High

Low

Dividends
Declared

2007:

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

2008:

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

2009:

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

37.75
35.00
35.00
32.50

33.47
33.15
35.00
30.40

25.61
31.81
34.25
33.24

$

$

$

35.00
33.86
30.80
30.33

29.66
33.01
29.00
23.00

23.00
24.89
29.89
30.37

$

$

$

0.44
0.44
0.45
0.46

0.46
0.46
0.46
0.46

0.46
0.46
0.46
0.46

The Bank has paid cash dividends since 1941. The Company has paid dividends since the effective date of its formation as a bank
holding company.
It is the present intention of the Registrant’s Board of Directors to continue the dividend payment policy;
however, further dividends must necessarily depend upon earnings, financial condition, appropriate legal restrictions, and other
factors relevant at the time the Board of Directors of the Company considers dividend policy. Cash available for dividend
distributions to shareholders of the Company primarily comes from dividends paid by the Bank to the Company. Therefore, the
restrictions on the Bank’s dividend payments are directly applicable to the Company. See also the information appearing in Note
19 to Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for additional information related
to dividend restrictions.
Under the Pennsylvania Business Corporation Law of 1988 a corporation may not pay a dividend, if after giving effect thereto, the
corporation would be unable to pay its debts as they become due in the usual course of business and after giving effect thereto the
total assets of the corporation would be less than the sum of its total liabilities plus the amount that would be needed, if the
corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of the shareholders
whose preferential rights are superior to those receiving the dividend.
As of March 2, 2010, the Company had approximately 1,270 shareholders of record.
Following is a schedule of the shares of the Company’s common stock purchased by the Company during the fourth quarter of
2009.

Total Number of
Shares (or Units)
Purchased

Average Price Paid
per Share (or Unit)
Purchased

Total Number of
Shares (or Units)
Purchased as Part
of Publicly Announced
Plans or Programs

Maximum Number (or
Approximate Dollar Value)
of Shares (or Units) that
May Yet Be Purchased
Under the Plans or Programs

—

—

—

—

—

—

—

—

—

78,344

78,344

78,344

Period

Month #1 (October 1-
October 31, 2009)

Month #2 (November 1-
November 30, 2009)

Month #3 (December 1-
December 31, 2009)

53

Set forth below is a line graph comparing the yearly dollar changes in the cumulative shareholder return on the Company’s common
stock against the cumulative total return of the S&P 500 Stock Index, NASDAQ Bank Index, and NASDAQ Composite for the
period of five fiscal years assuming the investment of $100.00 on December 31, 2004 and assuming the reinvestment of dividends.
The shareholder return shown on the graph below is not necessarily indicative of future performance.

Total Return Performance






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




















140

120

100



80

60

40

e
u
l
a
V
x
e
d
n
I














12/31/04

12/31/05

12/31/06

12/31/07

12/31/08

12/31/09

Index

12/31/04

12/31/05

12/31/06

12/31/07

12/31/08

12/31/09

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

100.00
100.00
100.00
100.00

100.79
104.91
101.37
95.67

102.55
121.48
111.03
106.20

93.06
128.16
121.92
82.76

70.13
80.74
72.49
62.96

105.20
102.11
104.31
51.31

Period Ending

54

ITEM 6
The following table sets forth certain financial data as of and for each of the years in the five-year period ended December 31, 2009.

SELECTED FINANCIAL DATA

(In Thousands, Except Per Share Amounts)

2009

2008

2007

2006

2005

Consolidated Statement of

Income Data:

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

for loan losses. . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense. . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . .
Applicable income taxes . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

36,191
12,398
23,793
917

22,876
2,287
19,812
5,351
(742)
6,093

Consolidated Balance Sheet at

End of Period:

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

676,204
405,529
(4,657)
497,287
86,778
66,916

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

1.59
1.59
1.84
17.45

$

$

$

$

$

$

$

$

36,108
14,832
21,276
375

20,901
5,456
17,949
8,408
405
8,003

652,803
381,478
(4,356)
421,368
86,778
61,027

2.07
2.07
1.84
15.93

$

$

$

$

35,949
16,447
19,502
150

19,352
7,478
17,316
9,514
637
8,877

628,138
360,478
(4,130)
389,022
106,378
70,559

2.28
2.28
1.79
18.21

$

$

$

$

33,753
14,210
19,543
635

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

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

2.45
2.45
1.73
19.12

30,903
10,381
20,522
720

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

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

2.75
2.74
1.56
18.59

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

3,834,114

3,831,500

3,875,632

3,900,742

3,975,787

Average number of shares

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

3,832,789

3,859,724

3,886,277

3,934,138

3,971,926

Selected financial ratios:
Return on average

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

Net interest income to average

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

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

9.66%
0.92%

4.40%
115.74%

9.50%
81.55%

12.02%
1.27%

4.14%
88.67%

10.53%
90.53%

12.14%
1.49%

3.95%
78.33%

12.23%
92.66%

12.93%
1.67%

4.06%
70.51%

12.92%
91.19%

14.54%
1.97%

4.29%
57.10%

13.56%
96.00%

Per share data and number of shares outstanding have been adjusted to give retroactive effect to a six for five stock split issued November
18, 2005.

ITEM 7

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Management’s Discussion and Analysis of Financial Condition and Results of Operation in the Annual Report are incorporated in
their entirety by reference under this Item 7.
ITEM 7A
Market risk for the Company is comprised primarily from interest rate risk exposure and liquidity risk. Interest rate risk and liquidity
risk management is performed at the Bank level as well as the Company level. The Company’s interest rate sensitivity is monitored by
management through selected interest rate risk measures produced internally. Additional information and details are provided in the
Interest Sensitivity section of Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Generally, management believes the Company is well positioned to respond expeditiously when the market interest rate outlook changes.

55

ITEM 8
The Company’s Consolidated Financial Statements and notes thereto contained in the Annual Report are incorporated in their
entirety by reference under this Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ITEM 9

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

CONTROLS AND PROCEDURES

None
ITEM 9A
The Company, under the supervision and with the participation of the Company’s management, including the Company’s President
and Chief Executive Officer along with the Company’s Chief Financial Officer, conducted an evaluated of the effectiveness as of
December 31, 2009 of the design and operation of the Company’s disclosure controls and procedures, as such term is defined under
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that
evaluation, the Company’s President and Chief Executive Officer along with the Company’s Chief Financial Officer concluded that
the Company’s disclosure controls and procedures were effective as of December 31, 2009.
There have been no changes in the Company’s internal control over financial reporting during the fourth quarter of 2009 that have
materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard
No. 2), or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by management or
employees in the normal course of performing their assigned functions.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009.
Management’s assessment did not identify any material weaknesses in the Company’s internal control over financial reporting.
In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework. Because there were no material weaknesses discovered,
management believes that, as of December 31, 2009, the Company’s internal control over financial reporting was effective.
S.R. Snodgrass, A.C. an independent registered public accounting firm, has audited the consolidated financial statements included
in this Annual Report on Form 10-K, as part of the audit, has issued a report, which appears below, on the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2009.

Date: March 9, 2010

Chief Executive Officer

Chief Financial Officer

56

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Penns Woods Bancorp, Inc.

We have audited Penns Woods Bancorp, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Penns Woods Bancorp, Inc. management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the
accompanying Report on Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express
an opinion on the Company’s internal control over financial reporting based on our audit.

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

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

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

In our opinion, Penns Woods Bancorp, Inc. maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Penns Woods Bancorp, Inc. as of December 31, 2009 and 2008, and the related consolidated
statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2009, and our report dated March 9, 2010, expressed an unqualified opinion.

Wexford, Pennsylvania
March 9, 2010

57

ITEM 9B
None.

OTHER INFORMATION

PART III

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

ITEM 10
The information appearing under the captions “The Board of Directors and Committees,” “Election of Directors,” “Section 16(a)
Beneficial Ownership Reporting Compliance,” “Principal Officers of the Corporation,” and “Certain Transactions” in the
Company’s Proxy Statement dated March 24, 2010 (the “Proxy Statement”) is incorporated herein by reference.

EXECUTIVE COMPENSATION

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

ITEM 12

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

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

ITEM 13

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE

The information appearing under the captions “Election of Directors” and “Certain Transactions” in the Proxy Statement is
incorporated herein by reference.
ITEM 14
The information appearing in the Proxy Statement under the captions, “Audit Fees,” “Audit-Related Fees,” “Tax Fees,” “All Other
Fees,” and “Audit Committee Pre-Approval Policies and Procedures” is incorporated herein by reference.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

58

ITEM 15
(a)1. Financial Statements

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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

PART IV

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

2. Financial Statement Schedules

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

(b) Exhibits:
(3)

(i) Articles of Incorporation of the Registrant, as presently in effect (incorporated by reference to Exhibit 3(i)

Annual Report on Form 10-K for the year ended December 31, 2005).

(3)

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

(10)

(i)

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

(10)

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

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

(10)

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

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

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

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

(vi) Employment Agreement, dated January 11, 1999, among Penns Woods Bancorp, Inc., Jersey Shore State
Bank and William H. Rockey (incorporated by reference to Exhibit 10.7 of the Registrant’s Annual Report
on 10-K filed on March 14, 2008).*
Subsidiaries of the Registrant.
Consent of Independent Certified Public Accountants.

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

Section 1350 Certification of Chief Executive Officer.

(10)

(10)

(10)

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

*Denotes compensatory plan or arrangement.

EXHIBIT INDEX

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

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

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

Section 1350 Certification of Chief Executive Officer.

59

Subsidiaries of the Registrant

State or Jurisdiction Under
the
Law of Which Organized

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

Pennsylvania

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

Pennsylvania

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

The M Group (Subsidiary of the Bank) . . . . . . . . . . . . . . . . . . . . . . . . . . .

Pennsylvania

Exhibit 21

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
Penns Woods Bancorp, Inc.:
We consent to the incorporation by reference in the Registration Statements (Nos. 333-134585 and 333-58682) on Form S-8 of
Penns Woods Bancorp, Inc. of our reports dated March 9, 2010, relating to our audits of the consolidated financial statements and
internal controls over financial reporting, which appear in the Annual Report on Form 10-K of Penns Woods Bancorp, Inc. for the
year ended December 31, 2009.

Wexford, PA
March 9, 2010

60

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

Exhibit 31(i)

I, Ronald A. Walko, certify that:

1.

I have reviewed this annual report on Form 10-K of Penns Woods Bancorp, Inc. (the “Company”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods
presented in this report;

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

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;

c.

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

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting;

5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over

financial reporting, to the Company’s auditors and the audit committee of Company’s Board of Directors:

a.

b.

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

any fraud, whether or not material, that involves management or other employees who have a significant role in the
Company’s internal control over financial reporting.

Date: March 9, 2010

Ronald A. Walko
Chief Executive Officer
(Principal Executive Officer)

61

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

Exhibit 31(ii)

I, Brian L. Knepp, certify that:

1.

I have reviewed this annual report on Form 10-K of Penns Woods Bancorp, Inc. (the “Company”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods
presented in this report;

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

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;

c.

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

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting;

5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over

financial reporting, to the Company’s auditors and the audit committee of Company’s Board of Directors:

a.

b.

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

any fraud, whether or not material, that involves management or other employees who have a significant role in the
Company’s internal control over financial reporting.

Date: March 9, 2010

Brian L. Knepp
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)

62

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

Exhibit 32 (i)

In connection with the Annual Report of Penns Woods Bancorp, Inc. (the “Company”) on Form 10-K for the period ended
December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ronald A. Walko,
Chief Executive Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:

(1)

(2)

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

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

Ronald A. Walko
Chief Executive Officer

March 9, 2010

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

Exhibit 32 (ii)

In connection with the Annual Report of Penns Woods Bancorp, Inc. (the “Company”) on Form 10-K for the period ended
December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brian L. Knepp,
Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that:

(1)

(2)

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

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

Brian L. Knepp
Chief Financial Officer

March 9, 2010

63

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.

March 9, 2010

PENNS WOODS BANCORP, INC.

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

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

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

March 9, 2010

Brian L. Knepp, Chief Financial Officer

(Principal Financial Officer)

March 9, 2010

Michael J. Casale, Jr., Director

March 9, 2010

H. Thomas Davis, Jr., Director

March 9, 2010

James M. Furey II, Director

March 9, 2010

D. Michael Hawbaker, Director

March 9, 2010

Leroy H. Keiler III, Director

March 9, 2010

R. Edward Nestlerode, Jr., Director

March 9, 2010

James E. Plummer, Director

March 9, 2010

William H. Rockey, Sr. Vice President

and Director

March 9, 2010

Hubert A. Valencik, Director

March 9, 2010

64

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

Officers
Ronald A. Walko . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . President & Chief Executive Officer of
Penns Woods Bancorp, Inc. & Jersey Shore State Bank
William H. Rockey . . . . . . . . . . . . . . . Senior Vice President & Secretary of Penns Woods Bancorp, Inc.
& Jersey Shore State Bank
Ann M. Riles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior Vice President & Chief Credit Officer
Paul R. Mamolen. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior Vice President & Chief Operating Officer of
The Comprehensive Financial Group
Brian L. Knepp . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chief Financial Officer/Cashier & Assistant Secretary
Robert J. Glunk . . . . . . . . . . . . . . . . . Vice President of Branch Administration & Business Development
Stephen M. Tasselli . . . . . . . . . . . . . . . . . . . . . . . . . Senior Vice President & Commercial Loan Manager
G. David Gundy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior Vice President
William P. Young, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EDP Systems Officer
Leon T. Koskie . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President & Loan Officer
Gerald J. Seman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President & Mortgage Officer
Leslie K. Benshoff . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President & Bank Secrecy Operations Officer
John R. Frey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President & Chief Compliance Officer
Craig A. Russell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President & Branch Manager
David R. Palski . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President & Branch Manager
Stephen G. Yohannan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President & Regional Lending Officer
Marilyn R. Neyhart . . . . . . . . . . . . . . . Vice President Loan System Administrator & Assistant Secretary
Larry G. Garverick . . . . . . . . . . . . . . . . . . . . . Vice President & Loan Documentation & Review Officer
William V. Mauck . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President Computer Operations/IT
Michael A. Musto. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President & Commercial Loan Officer
Janine E. Packer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Controller
Tammy L. Gunsallus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President & Branch Manager
Roxanna M. Chapman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President Loan Servicing
Mark A. Beatty . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President Network & Telecommunications/Security
Aaron J. Cunningham . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President Credit & Risk Management
Lori A. Strimple . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President Marketing
Registered Representatives For The Comprehensive Financial Group
Stephen D. Lowe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Williamsport Branch
Directors
Michael J. Casale, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Attorney, Casale & Bonner P.C.
H. Thomas Davis, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . Senior Vice President, Franklin Insurance Company
James M. Furey, II . . . . . . . . . . . . . . . . . . . . . . . . . President & Owner, Eastern Wood Products Company
D. Michael Hawbaker . . . . . . . . . . . . . . . . . . . . . . . . . Executive Vice President, Glenn O. Hawbaker, Inc.
Leroy H. Keiler, III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Attorney, Leroy H. Keiler, III
R. Edward Nestlerode, Jr. . . . . . . . . . . . . . . . . . . . . . . Vice President of Nestlerode Contracting Co., Inc.
James E. Plummer . . . . . . . . . . . . . . . . . . . . . . . Retired, Former President of Lock Haven Savings Bank;
Secretary, Jersey Shore State Bank
Hubert A. Valencik . . . . . . . . . . . . Retired, Former Senior Vice President of Penns Woods Bancorp, Inc.;
Former Senior Vice President & Chief Operations Officer of
Jersey Shore State Bank
William H. Rockey. . . . . . . . . . . . . . . . . . . . . . . . . . Senior Vice President of Penns Woods Bancorp, Inc.
& Jersey Shore State Bank
Ronald A. Walko . . . . . . . . . . . . . . . . . . . . . . . . . . . President & Chief Executive Officer of Penns Woods
Bancorp, Inc. & Jersey Shore State Bank

Honorary Directors

Phillip H. Bower
Lynn S. Bowes
Raymond D. Eck
Robert H. Kauffeld

Allan W. Lugg
Jay H. McCormick
Howard M. Thompson

65

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

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

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

WILLIAMSPORT OFFICE
David R. Palski, Manager
300 Market Street, Williamsport, PA 17703-0967
Phone (570) 322-1111
Toll-Free within Pennsylvania 1-888-412-5772
Monday & Tuesday 8:30 am to 4:30 pm
Wednesday Lobby 8:30 am to 1:00 pm
Thursday 8:30 am to 5:00 pm
Friday 8:30 am to 6:00 pm
Saturday 8:30 am to 12:00 pm
Wednesday Drive-In open until 4:30 pm
Walk-up ATM available

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

66

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

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

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

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

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

67

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

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

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

INTERNET BANKING
www.jssb.com

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

Member of the Federal Deposit Insurance Corporation

68

MISSION STATEMENT

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

Jersey Shore State Bank Locations

CLINTON COUNTY

LYCOMING COUNTY

JERSEY
SHORE

• MONTOURSVILLE
•• MONTOURSVILLE
MONTOURSVILLE

• WILLIAMSPORT

• DUBOISTOWN

• MONTGOMERY
•• MONTGOMERY
 MONTGOMERY

LOCK
HAVEN

•

• MILL HALL

CENTRE COUNTY

• ZION

• CENTRE HALL

• SPRING MILLS

• STATE COLLEGE

PEPENNNSNS
WWOOODSODS
BBAANCONCORRP,P, IINC.NC.

2009 Annual Report &
Form 10-K

Penns Woods Bancorp, Inc.
P.O. Box 967
300 Market Street
Williamsport, PA 17703-0967