PENSECO FINANCIAL SERVICES CORP - FORM 10-Q

Attached files

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EX-32 - PENSECO FINANCIAL SERVICES CORP	penseco10qsept30-10exh32.htm
EX-31 - PENSECO FINANCIAL SERVICES CORP	penseco10qsept30-10exh31.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________

FORM 10-Q

__________________

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

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

SECURITIES EXCHANGE ACT OF 1934

__________________

Commission file number 000-23777

PENSECO FINANCIAL SERVICES CORPORATION

Incorporated pursuant to the laws of Pennsylvania

__________________

Internal Revenue Service — Employer Identification No. 23-2939222

150 North Washington Avenue, Scranton, Pennsylvania 18503-1848

(570) 346-7741

__________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨		Accelerated filer x
Non-accelerated filer ¨ (Do not check if a smaller reporting company)		Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The total number of shares of the registrant’s Common Stock, $0.01 par value, outstanding on October 21, 2010 was 3,276,079.

PENSECO FINANCIAL SERVICES CORPORATION

		Page
Part I — FINANCIAL INFORMATION

Item 1.Unaudited Financial Statements - Consolidated
Balance Sheets:
	September 30, 2010	3
	December 31, 2009	3
Statements of Income:
	Three Months Ended September 30, 2010	4
	Three Months Ended September 30, 2009	4
	Six Months Ended September 30, 2010	5
	Six Months Ended September 30, 2009	5
Statements of Changes in Stockholders’ Equity:
	Three Months Ended September 30, 2010	6
	Three Months Ended September 30, 2009	6
	Six Months Ended September 30, 2010	7
	Six Months Ended September 30, 2009	7
Statements of Cash Flows:
	Six Months Ended September 30, 2010	8
	Six Months Ended September 30, 2009	8
Notes to Unaudited Consolidated Financial Statements		9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46

Item 4.	Controls and Procedures	46

Part II — OTHER INFORMATION

Item 1.	Legal Proceedings	47

Item 1A.	Risk Factors	47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 3.	Defaults Upon Senior Securities	48

Item 4.	Removed and Reserved	48

Item 5.	Other Information	48

Item 6.	Exhibits	48

Signatures		48

PART I. FINANCIAL INFORMATION, Item 1 — Financial Statements

PENSECO FINANCIAL SERVICES CORPORATION

CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except share and per share amounts)

	September 30,		December 31,
	2010		2009
ASSETS
Cash and due from banks	$	13,000	$	11,100
Interest bearing balances with banks		2,581		2,274
Federal funds sold		-		-
Cash and Cash Equivalents		15,581		13,374
Investment securities:
Available-for-sale, at fair value		156,933		149,079
Held-to-maturity (fair value of $39,839
and $49,054, respectively)		37,928		46,851
Total Investment Securities		194,861		195,930
Loans, net of unearned income		620,553		603,970
Less: Allowance for loan losses		6,500		6,300
Loans, Net		614,053		597,670

Bank premises and equipment		13,314		12,396
Other real estate owned		925		528
Accrued interest receivable		3,673		4,317
Goodwill		26,398		26,398
Cash surrender value of life insurance		15,226		14,380
Federal Home Loan Bank stock		6,402		6,402
Other assets		10,149		11,932
Total Assets	$	900,582	$	883,327

LIABILITIES
Deposits:
Non-interest bearing	$	113,746	$	109,855
Interest bearing		563,765		535,579
Total Deposits		677,511		645,434
Other borrowed funds:
Repurchase agreements		21,972		18,168
Short-term borrowings		143		27,430
Long-term borrowings		70,940		68,094
Accrued interest payable		1,143		1,317
Other liabilities		5,100		5,487
Total Liabilities		776,809		765,930

STOCKHOLDERS' EQUITY
Common stock; $ .01 par value, 15,000,000 shares authorized,
3,276,079 shares issued and outstanding		33		33
Surplus		48,865		48,865
Retained earnings		72,999		68,086
Accumulated other comprehensive income		1,876		413
Total Stockholders' Equity		123,773		117,397
Total Liabilities and Stockholders' Equity	$	900,582	$	883,327

(See accompanying Notes to Unaudited Consolidated Financial Statements)

PENSECO FINANCIAL SERVICES CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(in thousands, except share and per share amounts)

	Three Months Ended		Three Months Ended
	September 30, 2010		September 30, 2009
INTEREST INCOME
Interest and fees on loans	$	8,690	$	8,718
Interest and dividends on investments:
U.S. Treasury securities and U.S. Agency obligations		706		800
States & political subdivisions		999		1,216
Other securities		15		8
Interest on Federal funds sold		-		-
Interest on balances with banks		2		3
Total Interest Income		10,412		10,745
INTEREST EXPENSE
Interest on time deposits of $100,000 or more		621		507
Interest on other deposits		818		1,376
Interest on other borrowed funds		676		719
Total Interest Expense		2,115		2,602
Net Interest Income		8,297		8,143
Provision for loan losses		858		342
Net Interest Income After Provision for Loan Losses		7,439		7,801
NON-INTEREST INCOME
Trust department income		400		369
Service charges on deposit accounts		537		546
Merchant transaction income		1,597		1,564
Brokerage fee income		98		93
Other fee income		378		398
Bank-owned life insurance income		132		132
Other operating income		248		14
Realized gains (losses) on securities, net		248		27
Total Non-Interest Income		3,638		3,143
NON-INTEREST EXPENSES
Salaries and employee benefits		3,177		3,224
Expense of premises and fixed assets		888		827
Merchant transaction expenses		1,089		1,061
Merger related costs		-		-
FDIC insurance assessments		256		127
Other operating expenses		1,791		1,798
Total Non-Interest Expenses		7,201		7,037
Income before income taxes		3,876		3,907
Applicable income taxes		832		812
Net Income	$	3,044	$	3,095
Earnings per Common Share
(Based on weighted average shares outstanding of 3,276,079)	$	0.93	$	0.94
Cash Dividends Declared Per Common Share	$	0.42	$	0.42

(See accompanying Notes to Unaudited Consolidated Financial Statements)

PENSECO FINANCIAL SERVICES CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(in thousands, except share and per share amounts)

	Nine Months Ended		Nine Months Ended
	September 30, 2010		September 30, 2009
INTEREST INCOME
Interest and fees on loans	$	25,984	$	23,729
Interest and dividends on investments:
U.S. Treasury securities and U.S. Agency obligations		2,129		2,550
States & political subdivisions		3,232		3,210
Other securities		38		30
Interest on Federal funds sold		-		-
Interest on balances with banks		6		9
Total Interest Income		31,389		29,528
INTEREST EXPENSE
Interest on time deposits of $100,000 or more		1,586		1,267
Interest on other deposits		2,678		3,760
Interest on other borrowed funds		2,054		2,320
Total Interest Expense		6,318		7,347
Net Interest Income		25,071		22,181
Provision for loan losses		1,723		1,573
Net Interest Income After Provision for Loan Losses		23,348		20,608
NON-INTEREST INCOME
Trust department income		1,117		1,054
Service charges on deposit accounts		1,632		1,366
Merchant transaction income		3,666		3,613
Brokerage fee income		260		289
Other fee income		1,141		1,016
Bank-owned life insurance income		384		343
Other operating income		481		302
Realized gains (losses) on securities, net		541		341
Total Non-Interest Income		9,222		8,324
NON-INTEREST EXPENSES
Salaries and employee benefits		9,442		8,951
Expense of premises and fixed assets		2,673		2,435
Merchant transaction expenses		2,539		2,523
Merger related costs		-		1,550
FDIC insurance assessments		892		571
Other operating expenses		5,497		5,063
Total Non-Interest Expenses		21,043		21,093
Income before income taxes		11,527		7,839
Applicable income taxes		2,486		1,434
Net Income	$	9,041	$	6,405

Weighted average shares outstanding		3,276,079		2,900,053

Earnings per Common Share	$	2.76	$	2.21

Cash Dividends Declared Per Common Share	$	1.26	$	1.26

(See accompanying Notes to Unaudited Consolidated Financial Statements)

PENSECO FINANCIAL SERVICES CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(unaudited)

(in thousands, except per share amounts)

	Common Stock		Surplus		Retained Earnings			Accumulated Other Comprehensive Income			Total Stockholders' Equity

Balance, June 30, 2009	$	33	$	48,865	$	65,777		$	(1,462	)	$	113,213

Comprehensive income:
Net income		-		-		3,095			-			3,095
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment		-		-		-			2,292			2,292
Other comprehensive income									2,292			2,292

Comprehensive income												5,387

Cash dividends declared ($0.42 per share)		-		-		(1,377	)		-			(1,377	)

Balance, September 30, 2009	$	33	$	48,865	$	67,495		$	830		$	117,223


Balance, June 30, 2010	$	33	$	48,865	$	71,330		$	880		$	121,108

Comprehensive income:
Net income		-		-		3,044			-			3,044
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment		-		-		-			996			996
Other comprehensive income									996			996

Comprehensive income												4,040

Cash dividends declared ($0.42 per share)		-		-		(1,375	)		-			(1,375	)

Balance, September 30, 2010	$	33	$	48,865	$	72,999		$	1,876		$	123,773

(See accompanying Notes to Unaudited Consolidated Financial Statements)

PENSECO FINANCIAL SERVICES CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(unaudited)

(in thousands, except per share amounts)

	Common Stock		Surplus		Retained Earnings			Accumulated Other Comprehensive Income			Total Stockholders' Equity

Balance, December 31, 2008	$	21	$	10,819	$	64,745		$	(1,943	)	$	73,642

Fair value of consideration exchanged in merger		12		38,046		-			-			38,058

Comprehensive income:
Net income		-		-		6,405			-			6,405
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment		-		-		-			2,773			2,773
Other comprehensive income									2,773			2,773

Comprehensive income												9,178

Cash dividends declared ($1.26 per share)		-		-		(3,655	)		-			(3,655	)

Balance, September 30, 2009	$	33	$	48,865	$	67,495		$	830		$	117,223


Balance, December 31, 2009	$	33	$	48,865	$	68,086		$	413		$	117,397

Comprehensive income:
Net income		-		-		9,041			-			9,041
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment		-		-		-			1,463			1,463
Other comprehensive income									1,463			1,463

Comprehensive income												10,504

Cash dividends declared ($1.26 per share)		-		-		(4,128	)		-			(4,128	)

Balance, September 30, 2010	$	33	$	48,865	$	72,999		$	1,876		$	123,773

(See accompanying Notes to Unaudited Consolidated Financial Statements)

PENSECO FINANCIAL SERVICES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

		Nine Months Ended		Nine Months Ended
		September 30, 2010		September 30, 2009
OPERATING ACTIVITIES
Net Income	$	9,041		$	6,405
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		803			730
Provision for loan losses		1,723			1,573
Deferred income tax provision (benefit)		222			(381	)
Amortization of securities, (net of accretion)		365			346
Net realized (gains) losses on securities		(541	)		(341	)
(Gain) loss on other real estate		(11	)		52
Decrease (increase) in interest receivable		644			297
(Increase) decrease in cash surrender value of life insurance		(846	)		(343	)
Decrease (increase) in other assets		1,561			2,012
Increase (decrease) in income taxes payable		1,238			1,284
(Decrease) increase in interest payable		(174	)		(194	)
(Decrease) increase in other liabilities		(3,692	)		77
Net cash provided (used) by operating activities		10,333			11,517
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale		(26,773	)		(51,018	)
Purchase of investment securities to be held-to-maturity		-			-
Proceeds from sales and maturities of investment securities available-for-sale		18,245			29,561
Proceeds from sales and maturities of investment securities held-to-maturity		3,644			-
Proceeds from repayments of investment securities available-for-sale		3,157			3,252
Proceeds from repayments of investment securities held-to-maturity		5,187			10,540
Net loans (originated) repaid		(17,766	)		2,289
Proceeds from other real estate		589			480
Investment in premises and equipment		(1,721	)		(921	)
Net cash received (paid) in merger		-			(12,645	)
Net cash (used) provided by investing activities		(15,438	)		(18,462	)
FINANCING ACTIVITIES
Net increase (decrease) in demand and savings deposits		2,323			20,598
Net proceeds (payments) on time deposits		29,754			14,706
Increase (decrease) in repurchase agreements		3,804			(4,051	)
Net (decrease) increase in short-term borrowings		(27,287	)		(11,230	)
Increase in long-term borrowings		12,800			3,000
Payments on long-term borrowings		(9,954	)		(9,848	)
Cash dividends paid		(4,128	)		(3,655	)
Net cash provided (used) by financing activities		7,312			9,520
Net increase (decrease) in cash and cash equivalents		2,207			2,575
Cash and cash equivalents at January 1		13,374			9,355
Cash and cash equivalents at June 30	$	15,581		$	11,930

The Company paid interest and income taxes of $6,492 and $1,800 and $7,125 and $122 for the nine months ended September 30, 2010 and 2009, respectively.

(See accompanying Notes to Unaudited Consolidated Financial Statements)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the Quarter Ended September 30, 2010

(unaudited)

These Notes to Unaudited Consolidated Financial Statements reflect events subsequent to December 31, 2009, the date of the most recent Report of Independent Registered Public Accounting Firm, through the date of this Quarterly Report on Form 10-Q. These Notes to Unaudited Consolidated Financial Statements should be read in conjunction with Parts I and II of this Report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, which was filed with the Securities and Exchange Commission (SEC) on March 12, 2010.

FORWARD LOOKING INFORMATION

This Quarterly Report on Form 10-Q contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of Penseco Financial Services Corporation. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. Penseco Financial Services Corporation’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of Penseco Financial Services Corporation and its subsidiary include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in Penseco Financial Services Corporation’s market area, changes in real estate market values in Penseco Financial Services Corporation’s market area, changes in relevant accounting principles and guidelines and inability of third party service providers to perform. Additional factors that may affect our results are discussed in Part II, Item 1A to this Quarterly Report on Form 10-Q titled “Risk Factors”.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, Penseco Financial Services Corporation does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

Unless the context indicates otherwise, all references in this Annual Report to “Company,” “we,” “us” and “our” refer to Penseco Financial Services Corporation and its subsidiary.

NOTE 1 — Principles of Consolidation

Penseco Financial Services Corporation is a financial holding company incorporated under the laws of Pennsylvania. It is the parent company of Penn Security Bank and Trust Company (Bank), a Pennsylvania state chartered bank.

Intercompany transactions have been eliminated in preparing the consolidated financial statements.

The accounting policies of the Company conform with accounting principles generally accepted in the United States of America (GAAP) and with general practices within the banking industry.

On April 1, 2009, the Company completed its acquisition of Old Forge Bank in a cash and stock transaction valued at approximately $55.5 million (the “Merger”). The Merger was accounted for using the acquisition method of accounting and, accordingly, the assets and liabilities of Old Forge Bank have been recorded at their respective fair values on the date the Merger was completed. The Merger was effected by the issuance of 1,128,079 shares of Company common stock to former Old Forge Bank shareholders. Each share of Old Forge Bank common stock was exchanged for 2.9012 shares of Company common stock, with any fractional shares as a result of the exchange paid to Old Forge Bank shareholders in cash based on $35.255 per share of Company stock.

NOTE 2 — Basis of Presentation

The unaudited consolidated financial statements have been prepared in accordance with the instructions to SEC Form 10-Q and GAAP for interim financial information. In the opinion of management, all adjustments that are of a normal recurring nature and are considered necessary for a fair presentation have been included. They are not, however, necessarily indicative of the results of consolidated operations for a full year or any other period.

All information is presented in thousands of dollars, except share and per share amounts.

For further information, refer to the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

NOTE 3 — Use of Estimates

The preparation of financial statements in conformity with 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties.

NOTE 4 — Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

NOTE 5 — Investment Securities

Investments in securities are classified in two categories and accounted for as follows:

Securities Held-to-Maturity Bonds, notes, debentures and mortgage-backed securities for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts computed on the straight-line basis, which approximates the interest method, over the remaining period to maturity.

Securities Available-for-Sale Bonds, notes, debentures, mortgage-backed securities and certain equity securities not classified as securities to be held to maturity are carried at fair value with unrealized holding gains and losses, net of tax, reported as a net amount in a separate component of stockholders’ equity until realized.

The amortization of premiums on mortgage-backed securities is done based on management's estimate of the lives of the securities, adjusted, when necessary, for advanced prepayments in excess of those estimates.

Realized gains and losses on the sale of securities available-for-sale are determined using the specific identification method and are reported as a separate component of other income in the Statements of Income. Unrealized gains and losses are included as a separate item in computing comprehensive income.

Investments 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 reasons 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.

The amortized cost and fair value of investment securities at September 30, 2010 and December 31, 2009 are as follows:

Available-for-Sale

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2010	Cost		Gains		Losses		Value
U.S. Agency securities	$	69,150	$	886	$	-	$	70,036
Mortgage-backed securities		13,854		791		-		14,645
States & political subdivisions		63,600		3,626		6		67,220
Corporate securities		4,097		15		-		4,112
Total Debt Securities		150,701		5,318		6		156,013
Equity securities		539		452		71		920
Total Available-for-Sale	$	151,240	$	5,770	$	77	$	156,933

Available-for-Sale

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2009	Cost		Gains		Losses		Value
U.S. Agency securities	$	54,165	$	595	$	65	$	54,695
Mortgage-backed securities		16,999		568		-		17,567
States & political subdivisions		74,060		1,784		411		75,433
Total Debt Securities		145,224		2,947		476		147,695
Equity securities		378		1,006		-		1,384
Total Available-for-Sale	$	145,602	$	3,953	$	476	$	149,079


Held-to-Maturity

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2010	Cost		Gains		Losses		Value
Mortgage-backed securities	$	18,418	$	1,388	$	-	$	19,806
States & political subdivisions		19,510		523		-		20,033
Total Held-to-Maturity	$	37,928	$	1,911	$	-	$	39,839

Held-to-Maturity

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2009	Cost		Gains		Losses		Value
Mortgage-backed securities	$	23,700	$	1,281	$	-	$	24,981
States & political subdivisions		23,151		922		-		24,073
Total Held-to-Maturity	$	46,851	$	2,203	$	-	$	49,054

Equity securities at September 30, 2010 and December 31, 2009 consisted primarily of other financial institutions’ stock.

The amortized cost and fair value of debt securities at September 30, 2010 by contractual maturity are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

September 30, 2010	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less:
U.S. Agency securities	$	22,075	$	22,324	$	-	$	-
After one year through five years:
U.S. Agency securities		47,075		47,712		-		-
States & political subdivisions		95		102		245		252
Corporate securities		4,097		4,112		-		-
After five year through ten years:
States & political subdivisions		2,225		2,354		10,597		10,846
After ten years:
States & political subdivisions		61,280		64,764		8,668		8,935
Subtotal		136,847		141,368		19,510		20,033
Mortgage-backed securities		13,854		14,645		18,418		19,806
Total Debt Securities	$	150,701	$	156,013	$	37,928	$	39,839

The gross fair value and unrealized losses of the Company's investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2010 and December 31, 2009, are as follows:

	Less than twelve months				Twelve months or more				Totals
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
September 30, 2010	Value		Losses		Value		Losses		Value		Losses
States & political subdivisions	$	-	$	-	$	794	$	6	$	794	$	6
Equities		186		71		-		-		186		71
Total	$	186	$	71	$	794	$	6	$	980	$	77

	Less than twelve months				Twelve months or more				Totals
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2009	Value		Losses		Value		Losses		Value		Losses
U.S. Agency securities	$	14,259	$	65	$	-	$	-	$	14,259	$	65
States & political subdivisions		9,212		383		3,817		28		13,029		411
Total	$	23,471	$	448	$	3,817	$	28	$	27,288	$	476

The table at September 30, 2010 includes nine (9) securities that have unrealized losses for less than twelve months and two (2) securities that have been in an unrealized loss position for twelve or more months. The table at December 31, 2009, includes fourteen (14) securities that have unrealized losses for less than twelve months and ten (10) securities that have been in an unrealized loss position for twelve or more months.

U.S. Agency Securities

The unrealized losses on the Company’s investments in U.S. Agency securities were caused by interest rate fluctuations. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2010.

States and Political Subdivisions

The unrealized losses on the Company’s investments in states and political subdivisions were caused by interest rate fluctuations and not credit quality. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment. Because the Company does not intend to sell the

investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2010.

Marketable Equity Securities

The unrealized losses on the Company's investments in marketable equity securities were caused primarily by interest rate fluctuations and other market conditions. The Company's investments in marketable equity securities consist primarily of investments in common stock of companies in the financial services industry. The Company has analyzed its equity portfolio and determined that the market value fluctuation in these equity securities is consistent with the broader market and not a cause for recognition of a current loss. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their cost bases, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2010.

NOTE 6 — Loan Portfolio

Details regarding the Company’s loan portfolio on September 30, 2010 and December 31, 2009 are as follows:

	September 30,		December 31,
As of:	2010		2009
Loans secured by real estate:
Construction and land development	$	36,218	$	32,910
Secured by 1-4 family residential properties:
Revolving, open-end loans		32,972		31,674
Secured by first liens		236,127		240,615
Secured by junior liens		20,328		21,840
Secured by multi-family properties		7,652		3,969
Secured by non-farm, non-residential properties		182,760		171,995
Commercial and industrial loans to U.S. addressees		32,742		30,743
Loans to individuals for household, family and
other personal expenditures:
Credit card and related plans		3,259		3,365
Other (installment and student loans, etc.)		53,726		56,426
Obligations of states & political subdivisions		10,114		6,873
All other loans		4,657		3,562
Gross Loans		620,555		603,972
Less: Unearned income on loans		2		2
Loans, net of unearned income	$	620,553	$	603,970

The Company does not engage in any sub-prime or Alt-A credit lending. Therefore, the Company is not subject to any credit risks associated with such loans. The Company’s loan portfolio consists primarily of residential and commercial mortgage loans secured by properties located in Northeastern Pennsylvania and subject to conservative underwriting standards.

NOTE 7 — Loan Servicing

The Company generally retains the right to service mortgage loans sold to third parties. The cost allocated to the mortgage servicing rights retained has been recognized as a separate asset and is amortized in proportion to and over the period of estimated net servicing income.

Mortgage servicing rights are evaluated for impairment based on the fair value of those rights. Fair values are estimated using discounted cash flows based on current market rates of interest and expected future prepayment rates. For purposes of measuring impairment, the rights must be stratified by one or more predominant risk characteristics of the underlying loans. The Company stratifies its capitalized mortgage servicing rights based on the product type, interest rate and term of the underlying loans. The amount of impairment recognized is the amount, if any, by which the amortized cost of the rights for each stratum exceed the fair value.

NOTE 8 — Goodwill

Goodwill represents the excess of the purchase price over the underlying fair value of merged entities. Goodwill is assessed for impairment at least annually and as triggering events occur. In making this assessment, management considers a number of factors including, but not limited to, operating results, business plans, economic projections, anticipated future cash flows, and current market data. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of goodwill impairment. Changes in economic and operating conditions, as well as other factors, could result in goodwill impairment in future periods.

NOTE 9 — Other Intangible Assets

Intangible assets include the premium assigned to the core deposit relationships acquired in the Merger. The core deposit intangible is being amortized over ten years on a sum-of-the-years-digits basis. Amortization expense is expected to be as follows:

September 30,
2011	$	313
2012		276
2013		240
2014		203
2015		166
2016 and thereafter		295
	$	1,493

NOTE 10 — Long-Term Debt

The loans from the Federal Home Loan Bank of Pittsburgh are secured by a general collateral pledge of the Company’s assets. The Company has agreed to maintain sufficient qualifying collateral to fully secure the borrowings below.

A summary of long-term debt, including amortizing principal and interest payments, at September 30, 2010 is as follows:

Monthly Installment		Fixed Rate	Maturity Date		Balance
Amortizing loans
$	29	1.84%	08/28/12	$	645
	90	3.10%	02/28/13		2,513
	430	3.74%	03/13/13		12,299
	18	2.66%	08/28/14		795
	67	3.44%	03/02/15		3,293
	13	3.48%	03/31/15		671
	10	3.83%	04/02/18		792
	186	4.69%	03/13/23		21,132
	Total amortizing				42,140
Non-amortizing loans
		2.88%	02/28/11		2,000
		3.27%	02/29/12		2,000
		3.49%	02/28/13		7,000
		2.89%	11/28/14		2,000
		2.58%	05/18/15		6,300
		3.32%	11/27/15		3,000
		2.36%	09/22/17		6,500
	Total non-amortizing				28,800
	Total long-term debt				$ 70,940

Aggregate maturities of long-term debt at September 30, 2010 are as follows:

September 30,	Principal
2011	$	10,536
2012		10,827
2013		12,605
2014		2,696
2015		10,355
Thereafter		23,921
	$	70,940

NOTE 11 — Employee Benefit Plans

The Company provides, among other benefits, a defined benefit pension plan, currently under curtailment, a post-retirement benefit plan for eligible employees and a Long-Term Incentive Plan.

The components of the net periodic benefit cost are as follows:

	Pension Benefits						Other Benefits
Nine months ended September 30,	2010			2009			2010		2009
Service cost	$	-		$	-		$	3	$	4
Interest cost		532			526			15		14
Expected return on plan assets		(660	)		(614	)		-		-
Amortization of prior service cost		-			-			6		5
Amortization of net loss (gain)		43			145			-		-
Net periodic pension cost	$	(85	)	$	57		$	24	$	23

Effective June 22, 2008 the Company curtailed its defined benefit pension plan. The Company previously disclosed in its financial statements for the year ended December 31, 2009 that it did not expect to contribute to its pension plan but expected to contribute $35 to its post-retirement plan during 2010. Readers should refer to the Company’s Annual Report on Form 10-K for 2009 for further details on the Company’s defined benefit pension plan. The actuarially computed information on the plan curtailment, as to the pension obligation and funded status, was disclosed in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, as filed with the SEC on August 7, 2008.

The Company sponsors a 401(k) profit sharing plan for all eligible employees. The Company’s profit sharing expense for the nine months ended September 30, 2010 and 2009 was $390 and $335 respectively.

The Company granted restricted stock awards during the nine months ended September 30, 2009 valued at $75. There were no awards during the nine months ended September 30, 2010.

NOTE 12 — Regulatory Matters

The Company and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company and the Bank’s Consolidated Financial Statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and the Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the Capital Adequacy table on the following page) of Tier I and Total Capital to risk-weighted assets and of Tier I Capital to average assets (Leverage ratio). The table also presents

the Company’s actual capital amounts and ratios. Management believes, as of September 30, 2010, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

As of September 30, 2010 and December 31, 2009, the most recent regulatory notifications categorized the Company and Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized”, the Company must maintain minimum Tier I Capital, Total Capital and Leverage ratios as set forth in the Capital Adequacy table. There are no conditions or events since that notification that management believes have changed the Company’s categorization by the FDIC.

The Company and Bank are also subject to minimum capital levels, which could limit the payment of dividends, although the Company and Bank currently have capital levels which are in excess of minimum capital level ratios required.

The Pennsylvania Banking Code restricts capital funds available for payment of dividends to the retained earnings of the Bank. The balances in the capital stock and surplus accounts are unavailable for dividends.

In addition, the Bank is subject to restrictions imposed by Federal law on certain transactions with the Company’s affiliates. These transactions include extensions of credit, purchases of or investments in stock issued by the affiliate, purchases of assets subject to certain exceptions, acceptance of securities issued by an affiliate as collateral for loans, and the issuance of guarantees, acceptances, and letters of credit on behalf of affiliates. These restrictions prevent the Company’s affiliates from borrowing from the Bank unless the loans are secured by obligations of designated amounts. Further, the aggregate of such transactions by the Bank with a single affiliate is limited in amount to 10 percent of the Bank’s capital stock and surplus, and the aggregate of such transactions with all affiliates is limited to 20 percent of the Bank’s capital stock and surplus. The Federal Reserve System has interpreted “capital stock and surplus” to include undivided profits.

Actual							Regulatory Requirements

							For Capital							To Be
							Adequacy Purposes							"Well Capitalized"
As of September 30, 2010	Amount		Ratio				Amount			Ratio				Amount			Ratio

Total Capital (to Risk Weighted Assets)
PFSC (Company)	$	99,297		16.72	%	>	$	47,510	>		8.0	%	>	$	59,388	>		10.0	%
PSB (Bank)	$	95,792		16.15	%	>	$	47,452	>		8.0	%	>	$	59,315	>		10.0	%

Tier 1 Capital (to Risk Weighted Assets)
PFSC (Company)	$	92,797		15.63	%	>	$	23,755	>		4.0	%	>	$	35,633	>		6.0	%
PSB (Bank)	$	89,292		15.05	%	>	$	23,726	>		4.0	%	>	$	35,589	>		6.0	%

Tier 1 Capital (to Average Assets)
PFSC (Company)	$	92,797		10.86	%	>	$	*	>		*		>	$	42,732	>		5.0	%
PSB (Bank)	$	89,292		10.50	%	>	$	*	>		*		>	$	42,514	>		5.0	%

PFSC - *3.0% ($25,639), 4.0% ($34,185) or 5.0% ($42,732) depending on the bank's CAMELS Rating and other regulatory risk factors.
PSB - *3.0% ($25,508), 4.0% ($34,011) or 5.0% ($42,514) depending on the bank's CAMELS Rating and other regulatory risk factors.

Actual							Regulatory Requirements

							For Capital							To Be
							Adequacy Purposes							"Well Capitalized"
As of September 30, 2010	Amount		Ratio				Amount			Ratio				Amount			Ratio

Total Capital (to Risk Weighted Assets)
PFSC (Company)	$	95,492		16.90	%	>	$	47,198	>		8.0	%	>	$	56,497	>		10.0	%
PSB (Bank)	$	92,077		16.31	%	>	$	45,170	>		8.0	%	>	$	56,463	>		10.0	%

Tier 1 Capital (to Risk Weighted Assets)
PFSC (Company)	$	89,192		15.79	%	>	$	22,599	>		4.0	%	>	$	33,898	>		6.0	%
PSB (Bank)	$	85,777		15.19	%	>	$	22,585	>		4.0	%	>	$	33,878	>		6.0	%

Tier 1 Capital (to Average Assets)
PFSC (Company)	$	89,192		11.48	%	>	$	*	>		*		>	$	38,846	>		5.0	%
PSB (Bank)	$	85,777		11.09	%	>	$	*	>		*		>	$	38,658	>		5.0	%

PFSC - *3.0% ($22,308), 4.0% ($31,077) or 5.0% ($38,846) depending on the bank's CAMELS Rating and other regulatory risk factors.
PSB - *3.0% ($23,195), 4.0% ($30,926) or 5.0% ($38,658) depending on the bank's CAMELS Rating and other regulatory risk factors.

NOTE 13 — Merger

An Agreement and Plan of Merger (the Agreement) by and between the Company, the Bank and Old Forge Bank, was entered into on December 5, 2008. The Agreement provided for, among other things, the Company to acquire 100% of the outstanding common shares of Old Forge Bank through a two-step merger transaction (the Merger). The Company consummated the acquisition of Old Forge Bank on April 1, 2009, at which time Old Forge Bank was merged with and into the Bank. Following the Merger, the Bank continues to operate as a banking subsidiary of the Company.

Shareholders of Old Forge Bank were entitled to receive the merger consideration in either cash or shares of Company common stock, or any combination thereof, subject to certain limitations and allocation procedures set forth in the Agreement. The per share amount was calculated from the cash consideration and the value of the stock consideration based on the Company’s closing price of the Company’s common stock over a fixed period of time, as provided for in the Agreement.

Old Forge Bank was an independent $215 million community bank, operating from three locations in Lackawanna and Luzerne Counties of Pennsylvania. As a result of the Merger, the Company is now an $901 million financial institution serving Northeastern Pennsylvania from 12 locations. Management of the Company believes that the combined entity is in a more favorable position to compete with local and regional banks in the marketplace.

There was approximately $26.4 million of goodwill created in the Merger, largely based on the Company’s evaluation of the business growth opportunities inherent in the Old Forge Bank customer base, as well as operating synergies and economy of scale resulting from the Merger. None of the goodwill is expected to be deductible for income tax purposes.

The following table summarizes the consideration paid for Old Forge Bank and the identifiable assets acquired and liabilities assumed on the acquisition date.

	April 1, 2009
Consideration
Cash	$	17,405
Common Stock issued – 1,128,079 shares of the Company, net of issuance costs of $184		38,058
Fair value of consideration transferred	$	55,463

The fair value of the 1,128,079 common shares of the Company issued as part of the consideration paid to former Old Forge Bank shareholders was $38,058, determined by use of the weighted average price of Company common shares traded on March 31, 2009 ($33.90 per share). The Company believes that the weighted average price of the Company’s common stock traded on March 31, 2009 is the best indication of value since the Company’s common stock is not a heavily traded security.

Acquisition-related costs recorded in the income statement of the acquirer for the year ended December 31, 2009	$	1,550

Acquisition-related costs recorded as an offset to surplus of the acquirer as of December 31, 2009	$	184

Recognized amounts of identifiable assets acquired and liabilities assumed on April 1, 2009 are:

Cash	$	4,760
Investments		32,095
Loans		159,949
Property and equipment		1,576
Core Deposit Intangible		2,027
All other assets		12,193
Identifiable Assets		212,600

Deposits		177,018
Borrowings		5,000
All other liabilities		1,517
Identifiable Liabilities		183,535

Identifiable net assets		29,065

Goodwill		26,398

Total consideration transferred	$	55,463

The fair value of the financial assets acquired included loans receivable with a gross amortized cost basis of $166,348 at April 1, 2009.

The table below illustrates the fair value adjustments made to the amortized cost basis in order to present the fair value of the loans acquired.

Gross amortized cost basis at April 1, 2009	$	166,348
Market rate adjustment		640
Credit fair value adjustment in pools of homogeneous loans		(5,648	)
Credit fair value adjustment on distressed loans		(1,391	)
Fair value of purchased loans at April 1, 2009	$	159,949

In connection with its acquisition of Old Forge Bank, the Company acquired loans with evidence of credit deterioration that have been accounted for under ASC 310-30. As part of the Company’s acquisition of Old Forge Bank, the acquired loan portfolio of Old Forge Bank was evaluated based on risk characteristics and other credit and market criteria to determine a credit adjustment to the fair value of the loans acquired. The acquired loan balance was reduced by the aggregate amount of the credit fair value adjustment for both homogeneous pools and specific loans in determining the fair value of the loans. The credit fair value adjustment accounted for acquired loans deemed to require a specific allocation in accordance with Accounting Standard Codification 310-30-30, previously known as Statement of Position (SOP) 03-3, “Accounting for Certain Loans Acquired in a Transfer.” These loans are accounted for in the credit fair value adjustment considering the portion of the loan balance that has been deemed uncollectible based on management’s expectations of future cash flows for each respective loan. Based on management’s evaluation of the acquired loan portfolio of Old Forge Bank, six loans with a carrying value of $2,151 exhibited credit quality deterioration resulting in a credit fair value adjustment of $1,391. As of December 31, 2009, there were a total of three loans remaining with a carrying value of $1,966 with a credit fair value adjustment of $1,307. As of September 30, 2010, there were a total of two loans remaining with a carrying value of

$714 with a credit fair value adjustment of $370. There is no accretable yield for the specific loans accounted for under Accounting Standard Codification 310-30-30. There is an allowance for loan losses of $50 for one of these loans as of September 30, 2010. There were no significant prepayment estimates by Management in the determination of contractual cash flows and cash flows expected to be collected.

Changes in the credit fair value adjustment on specific loans purchased are as follows:

Nine Months Ended September 30, 2010
				Credit
	Carrying			Fair Value			Net
	Value			Adjustment			Amount
Balance, December 31, 2009
Residential Mortgages	$	-		$	-		$	-
Commercial		1,966			1,307			659
Consumer / Other		-			-			-
		1,966			1,307			659
Charge-offs
Residential Mortgages		-			-			-
Commercial		-			-			-
Consumer / Other		-			-			-
Total Charge-offs		-			-			-
Loans transferred to other real estate owned
Residential Mortgages		-			-			-
Commercial		(1,240	)		(925	)		(315	)
Consumer / Other		-			-			-
Total loans transferred to other real estate owned		(1,240	)		(925	)		(315	)
Payments
Residential Mortgages		-			-			-
Commercial		(12	)		(12	)		-
Consumer / Other		-			-			-
Total Payments		(12	)		(12	)		-

Balance, September 30, 2010	$	714		$	370		$	344

For the Period April 1, 2009 thru December 31, 2009
				Credit
	Carrying			Fair Value			Net
	Value			Adjustment			Amount
Balance, April 1, 2009
Residential Mortgages	$	178		$	77		$	101
Commercial		1,973			1,314			659
Consumer / Other		-			-			-
		2,151			1,391			760
Charge-offs
Residential Mortgages		-			-			-
Commercial		-			-			-
Consumer / Other		-			-			-
Total Charge-offs		-			-			-
Loans transferred to other real estate owned
Residential Mortgages		(178	)		(77	)		(101	)
Commercial		-			-			-
Consumer / Other		-			-			-
Total loans transferred to other real estate owned		(178	)		(77	)		(101	)
Payments
Residential Mortgages		-			-			-
Commercial		(7	)		(7	)		-
Consumer / Other		-			-			-
Total Payments		(7	)		(7	)		-

Balance, December 31, 2009	$	1,966		$	1,307		$	659

Pro Forma Income Statement
For the Nine Months Ended September 30, 2009

	Penseco
	Financial Services			Old Forge
	Corporation			Bank							Pro Forma
($ = 000's)	9/30/2009			9/30/2009			Adjustments				9/30/2009
INTEREST INCOME
Interest and fees on loans	$	23,729		$	2,524		$	184		(a)	$	26,437
Interest and dividends on investments		5,790			377			(30	)	(b)		6,137
Interest on Federal funds sold		-			1							1
Interest on balances with banks		9			-							9
Total Interest Income		29,528			2,902			154				32,584

INTEREST EXPENSE
Interest on deposits		5,027			897			(70	)	(c)		5,854
Interest on borrowed funds		2,320			9							2,329
Total Interest Expense		7,347			906			(70	)			8,183
Net Interest Income		22,181			1,996			224				24,401
Provision for loan losses		1,573			75							1,648
Net Interest Income After Provision
for Loan Losses		20,608			1,921			224				22,753

NON-INTEREST INCOME
Service Charges on Deposits		1,366			80							1,446
Other Non-Interest Income		6,617			97							6,714
Realized gains (losses) on securities		341			-							341
Total Non-Interest Income		8,324			177							8,501

NON-INTEREST EXPENSES
Salaries and employee benefits		8,951			696							9,647
Expense of premises and equipment		2,435			146							2,581
Other Non-Interest Expense		8,157			428			61		(d)		8,646
Total Non-Interest Expenses		19,543			1,270			61				20,874

Income before income taxes		9,389			828			163				10,380
Applicable income taxes		1,822			315			55				2,192
Net Income	$	7,567	(f)	$	513	(f)	$	108			$	8,188

Earnings Per Common Share	$	3.52		$	0.92					(e)	$	2.50



Footnotes:
(a) Amortization of loan fair value adjustment
(b) Opportunity cost of cash paid to Old Forge shareholders at 0.70% rate
(c) Amortization of certificate of deposit fair value adjustment
(d) Amortization of core deposit intangible over a 10 year period using the sum of the years digits method
(e) Pro Forma EPS based on weighted average shares outstanding of 3,276,079
(f) Excludes merger related costs of $1,550,000 and $451,000 and related tax effect incurred by Penseco and Old Forge Bank, respectively

Note 14 – Fair Value Measurements

The following table sets forth the Company’s financial assets that were accounted for at fair value and are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Level I - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level II- Observable inputs other than Level I prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices in markets that are not active for identical or similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level III- Unobservable inputs that are supported by little or no market activity and significant to the fair value of the assets or liabilities that are developed using the reporting entities’ estimates and assumptions, which reflect those that market participants would use.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

A description of the valuation methodologies used for financial assets measured at fair value on a recurring basis, as well as the classification of the assets pursuant to the valuation hierarchy, are as follows:

Securities Available-for-Sale

Securities classified as available-for-sale are reported using Level I, Level II and Level III inputs. Level I instruments generally include equity securities valued in accordance with quoted market prices in active markets. Level II instruments include U.S. government agency obligations, state and municipal bonds, mortgage-backed securities and corporate bonds. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things. Level III instruments include certain non-public equity securities and real estate sold under contract. See Note 5 – Investment Securities for additional information.

Assets and liabilities measured at fair value on a recurring basis are summarized below:

	September 30, 2010
	Level I		Level II		Level III		Total
Assets:
Securities available-for-sale
U.S. Agency securities	$	-	$	70,036	$	-	$	70,036
Mortgage-backed securities:
Residential		-		14,645		-		14,645
States & political subdivisions:
Bank qualified tax exempt		-		67,220		-		67,220
Corporate securities:
Aaa credit rating		-		4,112		-		4,112
Equity securities:
Financial services industry		920		-		-		920
Total securities available-for-sale	$	920	$	156,013	$	-	$	156,933

	December 31, 2009
	Level I		Level II		Level III		Total
Assets:
Securities available-for-sale
U.S. Agency securities	$	-	$	54,695	$	-	$	54,695
Mortgage-backed securities:
Residential		-		17,567		-		17,567
States & political subdivisions:
Bank qualified tax exempt		-		75,433		-		75,433
Equity securities:
Financial services industry		1,384		-		-		1,384
Total securities available-for-sale	$	1,384	$	147,695	$	-	$	149,079

Assets Measured at Fair Value on a Nonrecurring Basis

Disclosure of non-financial assets and non-financial liabilities became effective January 1, 2009. Certain non-financial assets and non-financial liabilities, measured at fair value on a non-recurring basis, include foreclosed assets, goodwill and intangible assets.

A description of the valuation methodologies and classification levels used for non-financial assets and non-financial liabilities measured at fair value on a nonrecurring basis are listed below.

Goodwill and Other Identifiable Intangibles

The Company employs general industry practices in evaluating the fair value of its goodwill and other identifiable intangibles. The Company calculates the fair value, with the assistance of a third party specialist, using a combination of the following valuation methods: dividend discount analysis under the income approach, which calculates the present value of all excess cash flows plus the present value of a terminal value and market multiples (pricing ratios) under the market approach. Management performed an initial review of goodwill and other identifiable intangibles as of December 31, 2009. Goodwill and other identifiable intangibles were not evaluated during the nine months ended September 30, 2010 as a result of managements determination that no evidence of impairment was present during the period.

Impaired Loans

At September 30, 2010 certain impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for possible loan losses based upon the fair value of the underlying collateral and the evaluation of expected future cash flows. Impaired loans with a carrying value of $5,073 were reduced by a specific valuation allowance allocation totaling $1,298, to a total reported fair value of $3,775 based on collateral valuations utilizing Level III valuation inputs.

Other Real Estate Owned

Other real estate owned, which at December 31, 2009 also included a real estate sales contract of $123, was adjusted to fair values with any impairment charge included in earnings for the year. Foreclosed real estate, which is considered to be non-financial assets, has been valued using a market approach. The values were determined using market prices of similar real estate assets, which the Company considered to be Level II inputs.

Certain assets measured at fair value on a non-recurring basis as of September 30, 2010 are presented below:

	Fair Value Measurement Using
	Quoted Prices in Active Markets for Identical Assets/Liabilities		Significant Other Observable Inputs		Significant Unobservable Inputs		Balance September 30, 2010
	Level I		Level II		Level III		Total
Assets
Impaired loans	$	-	$	-	$	3,775	$	3,775
Other real-estate owned		-		925		-		925
Total non-financial assets	$	-	$	925	$	3,775	$	4,700

Certain assets measured at fair value on a non-recurring basis as of December 31, 2009 are presented below:

	Fair Value Measurement Using
	Quoted Prices in Active Markets for Identical Assets/Liabilities		Significant Other Observable Inputs		Significant Unobservable Inputs		Balance December 31, 2009
	Level I		Level II		Level III		Total
Assets
Core deposit intangible	$	-	$	-	$	1,751	$	1,751
Goodwill		-		-		26,398		26,398
Other real-estate owned		-		405		123		528
Total non-financial assets	$	-	$	405	$	28,272	$	28,677

A reconciliation of items in Level III as of September 30, 2010 is as follows:

	Non-Financial Assets
	Real estate
	sold
	under contract

Balance, December 31, 2009	$	123
Payments received on real estate sold		(123	)
Balance, September 30, 2010	$	-

A reconciliation of items in Level III as of December 31, 2009 is as follows:

	Non-Financial Assets
	Core deposit intangible			Goodwill		Real estate sold under contract			Total
Balance December 31, 2008	$	-		$	-	$	-		$	-
Additions due to the Merger		2,027			26,398		129			28,554
Amortization of core deposit intangible		(276	)		-		-			(276	)
Payments received on real estate sold		-			-		(6	)		(6	)
Balance December 31, 2009	$	1,751		$	26,398	$	123		$	28,272

Disclosures about Fair Value of Financial Instruments

General Accepted Accounting Principles (GAAP) require disclosure of the estimated fair value of an entity’s assets and liabilities considered to be financial instruments. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments. However, many such instruments lack an

available trading market, as characterized by a willing buyer and seller engaging in an exchange transaction. Also, it is the Company’s general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities, except for certain loans and investments. Therefore, the Company had to use significant estimates and present value calculations to prepare this disclosure.

Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, management is concerned that there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values.

Estimated fair values have been determined by the Company using the best available data and an estimation methodology suitable for each category of financial instruments. The estimation methodologies used at September 30, 2010 and December 31, 2009 are outlined below. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed in the fair value measurements section above. The estimated fair value approximates carrying value for cash and cash equivalents, accrued interest and the cash surrender value of life insurance policies. The methodologies for other financial assets and financial liabilities are discussed below:

Short-term financial instruments

The carrying value of short-term financial instruments including cash and due from banks, federal funds sold, interest-bearing deposits in banks and other short-term investments and borrowings, approximates the fair value of these instruments. These financial instruments generally expose the Company to limited credit risk and have no stated maturities or have short-term maturities with interest rates that approximate market rates.

Investment securities held-to-maturity

The estimated fair values of investment securities held to maturity are based on quoted market prices, provided by independent third parties that specialize in those investment sectors. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable instruments.

Federal Home Loan Bank Stock

Federal Home Loan Bank of Pittsburgh (FHLB) stock, which is a required investment in order for the Company to participate in a FHLB line of credit program. The FHLB stock is stated at par value as it is restricted to purchases and sales with the FHLB. The FHLB had indefinitely suspended its stock repurchase and dividend payments during December 2008. Subsequent to the balance sheet date, the FHLB repurchased $320 of capital stock which represented 5.0% of the Bank’s $6,402 investment. Based on current financial information available, management does not believe the FHLB stock value is impaired as of September 30, 2010.

Loans

The loan portfolio, net of unearned income, has been valued by a third party specialist using quoted market prices, if available. When market prices were not available, a credit risk based present value discounted cash flow analysis was utilized. The primary assumptions utilized in this analysis are the discount rate based on the libor curve, adjusted for credit risk, and prepayment estimates based on factors such as refinancing incentives, age of the loan and seasonality. These assumptions were applied by loan category and different spreads were applied based upon prevailing market rates by category.

Deposits

The estimated fair values of demand deposits (i.e., interest and non-interest bearing checking accounts, savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair value for certificates of deposit was calculated by an independent third party by discounting contractual cash flows using current market rates for instruments with similar maturities, using a credit based risk model. The carrying amount of accrued interest receivable and payable approximates fair value.

Long-term borrowings

The amounts assigned to long-term borrowings was based on quoted market prices, when available, or were based on discounted cash flow calculations using prevailing market interest rates for debt of similar terms.

The carrying and fair values of certain financial instruments were as follows:

	September 30, 2010						December 31, 2009
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Cash and cash equivalents	$	15,581		$	15,581		$	13,374		$	13,374
Investment securities held-to-maturity		37,928			39,839			46,851			49,054
Loans, net		614,053			630,384			597,670			606,814
Cash surrender value of life insurance		15,226			15,226			14,380			14,380
Federal Home Loan Bank stock		6,402			6,402			6,402			6,402
Demand deposits		441,838			441,838			439,515			439,515
Time deposits		235,673			239,471			205,919			208,205
Short-term borrowings		22,115			22,115			45,598			45,598
Long-term borrowings		70,940			75,338			68,094			69,853

Standby Letters of Credit	$	(164	)	$	(164	)	$	(161	)	$	(161	)

PART I. FINANCIAL INFORMATION, Item 2 —

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following commentary provides an overview of the financial condition and significant changes in the results of operations of Penseco Financial Services Corporation (the “Company”) and its subsidiary, Penn Security Bank and Trust Company (the “Bank”), at September 30, 2010 and for the three and nine month periods ended September 30, 2010 and September 30, 2009. All information is presented in thousands of dollars, except as indicated. The Company consummated the acquisition of Old Forge Bank on April 1, 2009. Therefore, the operating results for Old Forge Bank for the three month period ended March 31, 2009 are not included herein. See Note 13 of the “Notes to Consolidated Financial Statements” for the presentation of the pro forma results of the Company for the nine months ended September 30, 2009.

Critical Accounting Policies

The preparation of financial statements in conformity with 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Provision (allowance) for loan losses - The provision for loan losses is based on past loan loss experience, management's evaluation of the probable loss in the current loan portfolio under current economic conditions and such other factors as, in management's best judgment, deserve current recognition in estimating loan losses. The annual provision for loan losses charged to operating expense is that amount which is sufficient to bring the balance of the allowance for loan losses to an adequate level to absorb anticipated losses.

Actuarial assumptions associated with pension, post-retirement and other employee benefit plans - These assumptions include discount rate, rate of future compensation increases and expected return on plan assets.

Income taxes - The calculation of the provision for federal income taxes is complex and requires the use of estimates and judgments. Deferred federal income tax assets or liabilities represent the estimated impact of temporary differences between the recognition of assets and liabilities under GAAP, and how such assets and liabilities are recognized under the federal tax code. The Company uses an estimate of future earnings to support management’s position that the benefit of the 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 net income will be reduced. Deferred tax assets are described further in Note 17 of the “Notes to Consolidated Financial Statements” in the Company’s most recent Annual Report on Form 10-K.

The Company and its subsidiary file income tax and other returns in the U.S Federal jurisdiction, Pennsylvania state jurisdiction and local jurisdictions.

Management evaluated the Company’s tax positions and concluded that the aggregate liabilities related to taxes are appropriately reflected in the consolidated financial statements. With few exceptions, the Company is no longer subject to income tax examinations by the U.S. Federal, state or local tax authorities for years before 2006.

Fair Value Measurements – Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayment speeds and other factors. Changes in assumptions or in market conditions could significantly affect the estimates. Fair value measurements are classified within one of three levels within a valuation hierarchy based on the transparency of inputs to each valuation as of the fair value measurement date. The three levels are defined as follows:

Level I – quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level II – inputs include quoted prices for similar assets and liabilities in active markets, quoted prices of identical or similar assets or liabilities in markets that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level III – inputs that are unobservable and significant to the fair value measurement. Financial instruments are considered Level III when values are determined using pricing models, discounted cash flow methodologies, or similar techniques, and at least one significant model assumption or input is unobservable.

Other-than-temporary impairment of investments - Investments 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 reasons 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.

Premium amortization - The amortization of premiums on mortgage-backed securities is done based on management's estimate of the lives of the securities, adjusted, when necessary, for advanced prepayments in excess of those estimates.

Loans purchased – Loans purchased as a result of the Merger were recorded at the acquisition date fair value. Management made three different types of fair value adjustments in order to record the loans at fair value. An interest rate fair value adjustment was made comparing current weighted average rates of the acquired loans to stated market rates of similar loan types. A general credit fair value adjustment was made on similar loan types based on historical loss projections plus a discount for the weak economic environment. A specific credit fair value adjustment was made to loans identified by management as being problematic. The specific loans have been discounted by management based on collateral values and expected cash flows. The interest rate and general credit fair value adjustments are being accreted over an eight year period based on a sum-of-the-years-digits basis. The specific credit fair value adjustment is reduced only when cash flows are received or loans are charged-off or transferred to other real estate owned.

Loan servicing rights – Mortgage servicing rights are evaluated for impairment based on the fair value of those rights. Fair values are estimated using discounted cash flows based on current market rates of interest and current expected future prepayment rates. For purposes of measuring impairment, the rights must be stratified by one or more predominant risk characteristics of the underlying loans. The Company stratifies its capitalized mortgage servicing rights based on the product type, interest rate and term of the underlying loans. The amount of impairment recognized is the amount, if any, by which the amortized cost of the rights for each stratum exceed the fair value.

Time deposits – Time deposits acquired through the Merger have been recorded at their acquisition date fair value. The fair value of time deposits represents the present value of the time deposits’ expected contractual payments

discounted by market rates for similar deposits. The fair value adjustment is amortized monthly based a level yield methodology.

Repurchase agreements - The Company also offers repurchase agreements as an alternative to conventional savings deposits for its customers. The repurchase agreements are accounted for as a collateralized borrowing with a one day maturity and are collateralized by U.S. Agency securities.

Core deposit intangible – The fair value assigned to the core deposit intangible asset represents the future economic benefit of the potential cost savings from acquiring core deposits in the Merger compared to the cost of obtaining alternative funding, such as brokered deposits, from market sources. Management utilized an income approach to present value the expected after tax cash flow benefits of the acquired core deposits. The core deposit intangible is being amortized over ten years on a sum-of-the-years-digits basis.

Goodwill – Goodwill arose in connection with the Merger. It is reviewed by management for possible impairment at least annually or more frequently upon the occurrence of an event or when circumstances indicate that its carrying amount exceeds fair value. Management has obtained a professional evaluation of the Company value as of December 31, 2009. The evaluation disclosed that the fair value of the Company stock is approximately 43% above book value, considering both income and market approaches. Market conditions that could negatively impact the value of goodwill in the future are essentially those Risk Factors discussed in Part 1A of the Company’s most recent Annual Report on Form 10-K.

Comparison of Operating Results

		Three Months Ended September 30,					Nine Months Ended September 30,
		2010		2009			2010			2009
Interest Income	$	10,412		$	10,745		$	31,389		$	29,528
Interest Expense		2,115			2,602			6,318			7,347
Net Interest Income		8,297			8,143			25,071			22,181

Non-Interest Income		3,638			3,143			9,222			8,324

Total Revenue	$	14,050		$	13,888		$	40,611		$	37,852

Non-Interest Expense		7,201			7,037			21,043			21,093

Net Income	$	3,044		$	3,095		$	9,041		$	6,405

Net Interest Margin		4.08	%		4.13	%		4.13	%		4.09	%

ROA		1.37	%		1.44	%		1.36	%		1.09	%

ROE		9.94	%		10.82	%		9.99	%		8.43	%

The Company reported net income for the three months ended September 30, 2010 of $3,044 or $0.93 per share, which remained relatively unchanged from the year ago period at $3,095 or $0.94 per share. Pre-provision net interest income increased $154 or 1.9%. Net interest income, after provision for loan losses, decreased $362 or 4.6% during the 2010 period, partly from a $516 increase in the provision for loan losses, along with reduced interest and fees on loans and investment income offset by reduced interest expense from lower funding costs. The ratio of the allowance for loan losses to total loans stood at 1.05% as of September 30, 2010 and 2009, respectively. Non-interest income increased $495 or 15.7% primarily as a result of higher other operating income and realized gains on securities. Non-interest expenses increased $164 or 2.3%, mainly from increased FDIC insurance assessments of $129.

The Company reported net income for the nine months ended September 30, 2010 of $9,041 or $2.76 per share, an increase from the year ago period of $2,636 compared with $6,405 or $2.21 per weighted average share from the year ago period. The increase in net income was primarily attributed to the fact that there were no merger related costs in 2010 whereas the Company incurred $1,550 in merger related costs associated with the Company’s acquisition of Old Forge Bank and reduced interest expense from lower funding costs. Net interest income, after provision for loan losses, increased $2,740 or 13.3% for the nine months ended September 30, 2010 largely due to

increased interest and fees on loans as a result of the loans and deposits acquired in the Merger, which was completed on April 1, 2009, as well as a reduction in deposit costs.

Net income from core operations (“operating earnings”), which is a non-GAAP measure of net income, increased $1,613 for the nine months ended September 30, 2010 to $9,041 compared to $7,428 for the same period of 2009. Operating earnings for the nine months ended September 30, 2010 have been positively impacted by the Merger primarily through increased net income from a greater amount of loans and deposits. A reconciliation of the non-GAAP operating earnings and disclosure of the non-GAAP operating return on assets, operating return on equity and dividend payout ratio are described within the non-GAAP reconciliation schedule included in this Quarterly Report on Form 10-Q.

Net income from accretion and amortization of acquisition date fair value adjustments included in the financial results during the periods indicated are as follows:

	Three Months Ended
		September 30, 2010			September 30, 2009
Homogeneous loan pools		$	231		$	183
Time deposits			62			92
Core deposit intangible expense			(83	)		(61	)
Net income from acquisition fair value adjustment		$	210		$	214

	Nine Months Ended
		September 30, 2010			September 30, 2009
Homogeneous loan pools		$	728		$	367
Time deposits			225			235
Core deposit intangible expense			(258	)		(122	)
Net income from acquisition fair value adjustment		$	695		$	480

Accretion of the loan pools credit fair value adjustment and market rate fair value adjustment is calculated on a sum-of-the-years-digits basis over an eight year period. The fair value market rate adjustment of the time deposits is amortized monthly based on a level yield methodology over five years. The core deposit intangible is being amortized over ten years on a sum-of-the-years-digits basis.

Market Area

Our market area has been affected by the economic decline that has affected the U.S. economy as a whole. The local unemployment rates as of December 31, 2009 for the counties in which the Bank operates were: Lackawanna County, 9.2%; Luzerne County, 10.1%; Monroe County, 9.7% and Wayne County, 8.19%. The unemployment rate for the Scranton/Wilkes-Barre metropolitan areas rose to 9.5% in December 2009, the highest level since April 1996. Increases in unemployment can be attributed to a gradual decline in manufacturing in Northeastern Pennsylvania and much like the rest of the country a slowdown in construction of residential and commercial property.

Weak labor conditions coupled with rising unemployment led to a 31.5% increase in the number of personal bankruptcy filings in the United States in 2009. In addition, the number of personal bankruptcy filings in our local market area increased 10.9% to 12,225 filings in 2009 from 11,025 filings in 2008.

One of the strengths of the Northeast Pennsylvania housing market during 2008 and 2009 was that it was not impacted by the loss of home equity that has affected the rest of the country. The pace of housing sales declined during the recession, and the loss of jobs will keep housing prices soft. During 2010 the most significant improvement came from the Case-Shiller House Price Index which swung back into positive territory on a year ago basis for the first time since December 2006.

The Beige Book for the Third District – Philadelphia continues to report throughout 2008 and 2009 that nonresidential real estate firms indicate that leasing and purchase activity has continued to decline and that vacancy rates remain on the rise. Effective rents have been falling, prompting some relocations and lease renegotiations by

tenants. Based on the preceding, a decrease in values in commercial real estate is expected to continue within our market area during 2010.

Net Interest Income and Net Interest Margin

Net interest income, the principal component of the Company’s earnings, is defined as the difference between interest and fees earned on interest-earning assets and interest paid on deposits and other borrowings. Average earning assets are composed primarily of loans and investments while deposits, short-term and long-term borrowings represent interest-bearing liabilities. Variations in the volume and mix of these assets and liabilities, as well as changes in the yields earned and rates paid, are determinants of changes in net interest income.

Net interest income before provision for loan losses increased $154 or 1.9% to $8,297 for the three months ended September 30, 2010 compared to $8,143 for the three months ended September 30, 2009. The average yield on interest earning assets decreased 39 basis points or 6.8%.

The net interest margin represents the Company’s net yield on its average interest earning assets and is calculated as net interest income divided by average interest earning assets. In the three months ended September 30, 2010, net interest margin decreased 5 basis points to 4.08% from 4.13% in the same period of 2009.

Total average interest earning assets and average interest bearing funds increased during the three months ended September 30, 2010 and 2009, respectively. Average interest earning assets increased $25.0 million or 3.2%, from $789.1 million in 2009 to $814.1 million in 2010 and average interest bearing funds increased $12.3 million, or 1.9%, from $634.3 million to $646.6 million for the same period. Average long-term borrowings remained relatively unchanged during the three months ended September 30, 2010 from year ago levels. As a percentage of average assets, average earning assets, including bank-owned life insurance (BOLI) remained unchanged for the three months ended September 30, 2010 and 2009, respectively.

Changes in the mix of both interest earning assets and funding sources also impacted net interest income in the three months ended September 30, 2010 and 2009. Average loans as a percentage of average interest earning assets remained relatively unchanged at 74.9% in 2009 compared to 75.1% in 2010. Average investments increased $3.5 million year over year but decreased as a percentage of interest earning assets to 23.4% at September 30, 2010 from 23.7% at September 30, 2009. Average short-term investments, federal funds sold, FHLB stock and interest bearing balances with banks, increased as a percentage of average assets to 0.7% at September 30, 2010 from 0.6% at September 30, 2009. Average time deposits increased $9.6 million or 4.5% from $215.1 million or 33.9% of interest bearing liabilities in 2009 to $224.7 million or 34.7% of interest bearing liabilities for the 2010 period. In addition, during the three months ended September 30, 2010, average repurchase agreements decreased $2.1 million, average short-term borrowings increased $4.6 million and average long-term borrowings increased $0.2 million when compared to the prior year period.

Shifts in the interest rate environment and competitive factors affected the rates paid for funds as well as the yields earned on assets. The investment securities tax equivalent yield decreased 94 basis points from 5.48% for the three months ended September 30, 2009 to 4.54% for the three months ended September 30, 2010. Also, average loan yields decreased 21 basis points from 5.90% for the three months ended September 30, 2009 to 5.69% for the three months ended September 30, 2010.

The average time deposit costs decreased 51 basis points from 2.42% for the three months ended September 30, 2009 to 1.91% for the three months ended September 30, 2010. In addition, the average cost of money market accounts decreased 43 basis points from 1.03% for the three months ended September 30, 2009 to 0.60% for the three months ended September 30, 2010.

Distribution of Assets, Liabilities and Stockholders’ Equity / Interest Rates and Interest Differential

The table below presents average balances, interest income on a fully taxable equivalent basis and interest expense, as well as average rates earned and paid on the Company’s major asset and liability items for the three months ended September 30, 2010 and September 30, 2009.

	September 30, 2010							September 30, 2009
ASSETS	Average		Revenue/		Yield/			Average		Revenue/		Yield/
	Balance		Expense		Rate			Balance		Expense		Rate
Investment Securities
Available-for-sale:
U.S. Agency obligations	$	80,720	$	472		2.34	%	$	58,751	$	487		3.32	%
States & political subdivisions		65,539		739		6.83	%		73,418		854		7.05	%
Other		5,235		15		1.15	%		1,310		8		2.44	%
Held-to-maturity:
U.S. Agency obligations		19,272		234		4.86	%		26,477		313		4.73	%
States & political subdivisions		19,810		260		7.95	%		27,162		362		8.08	%
Loans, net of unearned income:
Real estate mortgages		326,985		4,302		5.26	%		327,289		4,542		5.55	%
Commercial real estate		182,574		2,361		5.17	%		167,031		2,206		5.28	%
Commercial		30,817		482		6.26	%		24,609		392		6.37	%
Consumer and other		71,025		1,545		8.70	%		72,178		1,578		8.75	%
Federal funds sold		-		-		-			-		-		-
Federal Home Loan Bank stock		6,402		-		-			6,402		-		-
Interest on balances with banks		5,712		2		0.14	%		4,467		3		0.27	%
Total Interest Earning Assets/
Total Interest Income		814,091	$	10,412		5.37	%		789,094	$	10,745		5.76	%
Cash and due from banks		10,871							10,320
Bank premises and equipment		13,152							12,231
Accrued interest receivable		3,602							4,003
Goodwill		26,398							26,398
Cash surrender value of life insurance		15,005							14,171
Other assets		12,658							11,448
Less: Allowance for loan losses		6,003							6,011
Total Assets	$	889,774						$	861,654
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand-Interest bearing	$	68,607	$	69		0.40	%	$	67,497	$	93		0.55	%
Savings		115,549		82		0.28	%		110,555		108		0.39	%
Money markets		143,520		217		0.60	%		146,933		379		1.03	%
Time - Over $100		107,896		621		2.30	%		79,674		507		2.55	%
Time - Other		116,786		450		1.54	%		135,441		796		2.35	%
Federal funds purchased		-		-		-			2,723		3		0.44	%
Repurchase agreements		22,633		42		0.74	%		24,687		73		1.18	%
Short-term borrowings		4,832		8		0.66	%		174		1		2.30	%
Long-term borrowings		66,802		626		3.75	%		66,622		642		3.85	%
Total Interest Bearing Liabilities/
Total Interest Expense		646,625	$	2,115		1.31	%		634,306	$	2,602		1.64	%
Demand - Non-interest bearing		113,213							104,370
All other liabilities		7,420							8,511
Stockholders' equity		122,516							114,467
Total Liabilities and Stockholders' Equity	$	889,774						$	861,654
Interest Spread						4.06	%						4.12	%
Net Interest Income			$	8,297						$	8,143
FINANCIAL RATIOS
Net interest margin						4.08	%						4.13	%
Return on average assets						1.37	%						1.44	%
Return on average equity						9.94	%						10.82	%
Average equity to average assets						13.77	%						13.28	%
Dividend payout ratio						45.16	%						44.68	%

Net interest income before provision for loan losses increased $2,890 or 13.0% to $25,071 for the nine months ended September 30, 2010, compared to $22,181 for the nine months ended September 30, 2009. The average yield on interest earning assets decreased 30 basis points or 5.2%.

The net interest margin represents the Company’s net yield on its average interest earning assets and is calculated as net interest income divided by average interest earning assets. For the nine months ended September 30, 2010, net interest margin was 4.13%, an increase of 4 basis points from 4.09% in the same period of 2009.

Total average interest earning assets and average interest bearing funds increased for the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009. Average interest earning assets increased $86.0 million or 11.9%, from $722.8 million in 2009 to $808.8 million in 2010 and average interest bearing funds increased $64.9 million, or 11.2%, from $580.0 million to $644.9 million for the same period. As a percentage of average assets, average earning assets, including BOLI, decreased to 93.2% for the nine months ended September 30, 2010 from 94.1% for the year ago period.

Changes in the mix of both interest earning assets and funding sources also impacted net interest income in the nine months ended September 30, 2010 and 2009. Average loans as a percentage of average interest earning assets increased from 74.6% in 2009 to 75.2% in 2010. Average investments increased $17.2 million year over year but decreased as a percentage of average interest earning assets to 23.6% at September 30, 2010 from 24.0% at September 30, 2009. Average short-term investments, federal funds sold, FHLB stock and interest bearing balances with banks, remained at 0.5% of average assets during the nine months ended September 30, 2010 and 2009. Average time deposits increased $40.6 million or 23.1% from 30.3% of interest bearing liabilities in 2009 to 33.6% of interest bearing liabilities for the 2010 period. In addition, during the nine months ended September 30, 2010, average federal funds purchased increased $1.7 million, average repurchase agreements decreased $6.5 million, average short-term borrowings increased $2.4 million and average long-term borrowings decreased $2.8 million when compared to the prior year period.

Shifts in the interest rate environment and competitive factors affected the rates paid for funds as well as the yields earned on assets. The investment securities tax equivalent yield decreased 75 basis points from 5.53% for the nine months ended September 30, 2009 to 4.78% for the nine months ended September 30, 2010. Also, average loan yields decreased 17 basis points, from 5.87% for the nine months ended September 30, 2009 to 5.70% for the same period of 2010.

The average time deposit costs decreased 63 basis points from 2.54% for the nine months ended September 30, 2009 to 1.91% for the nine months ended September 30, 2010, along with the average cost of money market accounts decreasing 45 basis points from 1.07% for the nine months ended September 30, 2009 to 0.62% for the nine months ended September 30, 2010.

Distribution of Assets, Liabilities and Stockholders’ Equity / Interest Rates and Interest Differential

The table below presents average balances, interest income on a fully taxable equivalent basis and interest expense, as well as average rates earned and paid on the Company’s major asset and liability items for the nine months ended September 30, 2010 and September 30, 2009.

	September 30, 2010							September 30, 2009
ASSETS	Average		Revenue/		Yield/			Average		Revenue/		Yield/
	Balance		Expense		Rate			Balance		Expense		Rate
Investment Securities
Available-for-sale:
U.S. Agency obligations	$	74,265	$	1,378		2.47	%	$	56,958	$	1,502		3.52	%
States & political subdivisions		71,048		2,399		6.82	%		57,611		2,083		7.30	%
Other		3,280		38		1.54	%		1,353		30		2.96	%
Held-to-maturity:
U.S. Agency obligations		20,910		751		4.79	%		29,429		1,048		4.75	%
States & political subdivisions		21,200		833		7.94	%		28,150		1,127		8.09	%
Loans, net of unearned income:
Real estate mortgages		329,255		13,051		5.29	%		313,986		13,312		5.65	%
Commercial real estate		176,961		6,813		5.13	%		141,636		5,714		5.38	%
Commercial		30,354		1,512		6.64	%		25,227		1,090		5.76	%
Consumer and other		71,365		4,608		8.61	%		58,580		3,613		8.22	%
Federal funds sold		-		-		-			-		-		-
Federal Home Loan Bank stock		6,402		-		-			6,100		-		-
Interest on balances with banks		3,753		6		0.21	%		3,805		9		0.32	%
Total Interest Earning Assets/
Total Interest Income		808,793	$	31,389		5.45	%		722,835	$	29,528		5.75	%
Cash and due from banks		10,550							9,907
Bank premises and equipment		12,769							11,700
Accrued interest receivable		3,757							3,741
Goodwill		26,398							17,598
Cash surrender value of life insurance		14,667							11,979
Other assets		13,020							8,948
Less: Allowance for loan losses		6,219							5,890
Total Assets	$	883,735						$	780,818
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand-Interest bearing	$	69,329	$	247		0.48	%	$	62,582	$	281		0.60	%
Savings		114,217		245		0.29	%		98,928		299		0.40	%
Money markets		143,088		666		0.62	%		135,743		1,092		1.07	%
Time - Over $100		95,142		1,586		2.22	%		62,721		1,267		2.69	%
Time - Other		121,474		1,520		1.67	%		113,286		2,088		2.46	%
Federal funds purchased		5,248		22		0.56	%		3,521		20		0.76	%
Repurchase agreements		19,842		124		0.83	%		26,328		277		1.40	%
Short-term borrowings		10,525		35		0.44	%		8,066		35		0.58	%
Long-term borrowings		66,066		1,873		3.78	%		68,864		1,988		3.85	%
Total Interest Bearing Liabilities/
Total Interest Expense		644,931	$	6,318		1.31	%		580,039	$	7,347		1.69	%
Demand - Non-interest bearing		110,473							92,662
All other liabilities		7,717							6,838
Stockholders' equity		120,614							101,279
Total Liabilities and Stockholders' Equity	$	883,735						$	780,818
Interest Spread						4.14	%						4.06	%
Net Interest Income			$	25,071						$	22,181
FINANCIAL RATIOS
Net interest margin						4.13	%						4.09	%
Return on average assets						1.36	%						1.09	%
Return on average equity						9.99	%						8.43	%
Average equity to average assets						13.65	%						12.97	%
Dividend payout ratio						45.65	%						57.01	%

Investments

The Company’s investment portfolio has primarily two functions: To provide liquidity and to contribute to earnings. To provide liquidity the Company may invest in short-term securities such as Federal funds sold, interest bearing deposits with banks, U.S. Treasury securities and U.S. Agency securities all with maturities of one year or less. These funds are invested short-term to ensure the availability of funds to meet customer demand for credit needs. The Company enhances interest income by securing long-term investments within its investment portfolio, by means of U.S. Treasury securities, U.S. Agency securities, municipal securities and mortgage-backed securities, generally with maturities greater than one year. The Company’s mortgage-backed securities portfolio does not contain any sub-prime or Alt-A credits.

Investments in securities are classified in two categories and accounted for as follows:

Federal Home Loan Bank Stock Impairment Evaluation

The Company's banking subsidiary, Penn Security Bank, is required to maintain certain amounts of FHLB stock in order to participate in a FHLB line of credit program. The FHLB stock is stated at par value as it is restricted to purchases and sales with the FHLB. FHLB stock is less liquid than other tradable equity securities and the fair value is equal to cost. No impairment write-downs have been recorded on FHLB stock during 2010 or 2009.

The FHLB had indefinitely suspended its stock repurchase and dividend payments during December 2008. A reduction in the level of core earnings resulting from lower short-term interest rates, the increased cost of maintaining liquidity and constrained access to the debt markets at attractive rates and maturities are the main reasons the FHLB cited as significant for the decision to suspend dividends and the repurchase of excess capital stock. Accounting guidance indicates that investors should recognize impairment in FHLB Pittsburgh capital stock if it is determined that it is not probable that the Bank will ultimately recover the par value of its shares. An investor in FHLB Pittsburgh must determine whether impairment exists based on its long-term performance, the severity and duration of declines in the market value of its net assets related to its capital stock amount, its commitment to make payments required by law or regulation and the level of such payments in relation to its operating performance, the impact of legislation and regulatory changes and its liquidity. Subsequent to the balance sheet date, the FHLB repurchased $320 of capital stock which represented 5.0% of the Bank’s $6,402 investment. Based on current financial information available, management does not believe the FHLB stock value is impaired as of September 30, 2010.

Deposits

Details regarding the Company’s deposit portfolio on September 30, 2010 and December 31, 2009 are as follows:

	September 30,		December 31,
	2010		2009
Demand - Non-interest bearing	$	113,746	$	109,855
Demand - Interest bearing		66,798		72,477
Savings		113,989		110,994
Money markets		147,305		146,189
Time - Over $100,000		119,958		78,702
Time - Other		115,715		127,217
Total	$	677,511	$	645,434

The Company is largely dependent on its core deposit base to fund operations. Management has competitively priced its deposit products in checking, savings, money market and time deposits to provide a stable source of funding.

As general interest rates in the economy change, there is migration of some deposits among investment options as customers seek increased yields. Historically, such changes in the Company’s deposit base have been minimal.

As of September 30, 2010, the Company had Certificate of Deposit Account Registry Service (“CDARS”) reciprocal deposits in the amount of $20.3 million. The Company also participates in a brokered money market program; the balance of this funding as of September 30, 2010 was approximately $1.8 million. The Company also issues brokered certificates of deposit from time to time as an alternative to wholesale funding. As of September 30, 2010, the dollar amount of brokered deposits, exclusive of CDARS reciprocal deposits, was $41.3 million or 6.10% of total deposits, compared to $1.8 million or 0.28% at December 31, 2009.

Increases in deposits for 2010 can be primarily attributed to the Company’s utilization of callable brokered deposits at favorable market rates and promotional activity to acquire non-interest bearing deposits.

Non-Interest Income

The following table sets forth information by category of non-interest income for the Company for the three months ended September 30, 2010 and September 30, 2009, respectively:

	September 30,		September 30,
Three Months Ended:	2010		2009
Trust department income	$	400	$	369
Service charges on deposit accounts		537		546
Merchant transaction income		1,597		1,564
Brokerage fee income		98		93
Other fee income		378		398
Bank-owned life insurance income		132		132
Other operating income		248		14
Realized gains (losses) on securities, net		248		27
Total Non-Interest Income	$	3,638	$	3,143

Total non-interest income increased $495 or 15.7% to $3,638 for the three months ended September 30, 2010, compared with $3,143 for the same period in 2009. Trust department income increased $31 or 8.4% due to an increase in the market value of trust assets and new business. Brokerage fee income increased $5 or 5.4% mostly due to the volume of investor activity. Other fee income decreased $20 or 5.0% mainly due to a reduction in income on letters of credit and loan service fee income offset by increased debit card discounts related to the increased number of accounts. Other operating income increased $234 largely due to gains on the sale of low yielding long-term fixed rate real estate loans. Realized gains (losses) on securities, net, increased $221,000 as a result of the sale of securities from our equity portfolio.

The following table sets forth information by category of non-interest income for the Company for the nine months ended September 30, 2010 and September 30, 2009, respectively:

	September 30,		September 30,
Nine Months Ended:	2010		2009
Trust department income	$	1,117	$	1,054
Service charges on deposit accounts		1,632		1,366
Merchant transaction income		3,666		3,613
Brokerage fee income		260		289
Other fee income		1,141		1,016
Bank-owned life insurance income		384		343
Other operating income		481		302
Realized gains (losses) on securities, net		541		341
Total Non-Interest Income	$	9,222	$	8,324

Total non-interest income increased $898 or 10.8% to $9,222 for the nine months ended September 30, 2010, compared with $8,324 for the same period in 2009. Trust department income increased $63 or 6.0% due to an increase in the market value of trust assets and new business. Service charges on deposit accounts increased $266 or 19.5% primarily due to the increased number of accounts and increased service charge activity. Brokerage fee income decreased $29 or 10.0% mostly due to a lower volume of investor activity. Other fee income increased $125 or 12.3% mainly from increased debit card discounts related to the increased number of accounts. Bank-owned life insurance income increased $41 or 12.0% from increased balances acquired in the merger. Other operating income increased $179 or 59.3% largely due to gains on the sale of low yielding long-term fixed rate real estate loans. Realized gains (losses) on securities, net, increased $200 as a result of the sale of securities from our equity portfolio.

Non-Interest Expenses

The following table sets forth information by category of non-interest expenses for the Company for the three months ended September 30, 2010 and September 30, 2009, respectively:

	September 30,		September 30,
Three Months Ended:	2010		2009
Salaries and employee benefits	$	3,177	$	3,224
Expense of premises and fixed assets		888		827
Merchant transaction expenses		1,089		1,061
Merger related costs		-		-
FDIC insurance assessments		256		127
Other operating expenses		1,791		1,798
Total Non-Interest Expenses	$	7,201	$	7,037

Total non-interest expenses increased $164 or 2.3% to $7,201 for the three months ended September 30, 2010 compared with $7,037 for the same period of 2009. Expense of premises and fixed assets increased $61 or 7.4% largely due to information technology system upgrades along with increased utilities expense. FDIC insurance assessments increased $129 or 101.6% in 2010.

The following table sets forth information by category of non-interest expenses for the Company for the nine months ended September 30, 2010 and September 30, 2009, respectively:

	September 30,		September 30,
Nine Months Ended:	2010		2009
Salaries and employee benefits	$	9,442	$	8,951
Expense of premises and fixed assets		2,673		2,435
Merchant transaction expenses		2,539		2,523
Merger related costs		-		1,550
FDIC insurance assessments		892		571
Other operating expenses		5,497		5,063
Total Non-Interest Expenses	$	21,043	$	21,093

Total non-interest expenses decreased $50 or 0.2% to $21,043 for the nine months ended September 30, 2010 compared with $21,093 for the same period of 2009. Salaries and employee benefits expense increased $491 or 5.5% mainly due to increased salaries resulting from additional employees as a result of the Merger. Expense of premises and fixed assets increased $238 or 9.8% mostly due to information technology system upgrades along with additional depreciation as a result of the Merger. There were no merger related costs in 2010 compared to 2009, in which the Company incurred. Merger related costs of $1,550, which consisted of computer and equipment upgrades of $606, investment banking, valuation services, legal and accounting fees of $429, severance payments of $450 and stay bonuses of $65. FDIC insurance assessments increased $321 or 56.2% in 2010. Other operating expenses increased $434 or 8.6% mostly from amortization of core deposit intangible expense of $258 and increased professional services of $147.

Income Taxes

Applicable income taxes increased $20 or 2.5% for the three months ended September 30, 2010 due to overall higher taxable income. Also, applicable income taxes increased $1,052 or 73.4% during the first nine months of 2010 primarily due to the effect of $1,550 of costs associated with the Merger recorded during the first nine months of 2009, along with overall higher income.

Loan Portfolio

Details regarding the Company’s loan portfolio on September 30, 2010 and December 31, 2009 are as follows:

	September 30,		December 31,
As of:	2010		2009
Commercial secured by real estate	$	182,760	$	171,995
Residential real estate		333,297		331,008
Commercial loans		32,742		30,743
Credit card and related plans		3,259		3,365
Installment and other		58,381		59,986
Obligations of states & political subdivisions		10,114		6,873
Loans, net of unearned income		620,553		603,970
Less: Allowance for loan losses		6,500		6,300
Loans, net	$	614,053	$	597,670

There were no purchased loans in 2009 or as of September 30, 2010 other than loan participations with local banks. Originations of new loans are primarily in loans secured by real estate with an emphasis on commercial loans.

commercial mortgage loans, secured by properties located in Northeastern Pennsylvania and subject to conservative underwriting standards.

The mortgage loan portfolio continues to be the largest component of the loan portfolio, representing 83.2% and 83.3% of total loans at September 30, 2010 and December 31, 2009, respectively. However, recent economic conditions and recessionary concerns have resulted in lower levels of loan demand. Accordingly, we expect that loan growth may be slower than historically expected.

Loan Quality

The lending activities of the Company are guided by the comprehensive lending policy established by the Board of Directors. Loans must meet criteria which include consideration of the character, capacity and capital of the borrower, collateral provided for the loan, and prevailing economic conditions. Due to the consistent application of conservative underwriting standards, the Company’s loan quality has remained strong during the current general economic downturn. The Company has not engaged in any sub-prime credit lending and is therefore, not subject to the credit risks associated with such loans.

Regardless of credit standards, there is risk of loss inherent in every loan portfolio. The allowance for loan losses is an amount that management believes will be adequate to absorb probable losses on existing loans that may become uncollectible, based on evaluations of the collectibility of the loans. The evaluations take into consideration such factors as change in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, industry experience, collateral value and current economic conditions that may affect the borrower’s ability to pay. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgment of information available to them at the time of their examination.

The allowance for loan losses is increased by periodic charges against earnings as a provision for loan losses, and decreased periodically by charge-offs of loans (or parts of loans) management has determined to be uncollectible, net of actual recoveries on loans previously charged-off.

The allowance for loan loss as a percentage of loans was 1.05% at September 30, 2010, compared to 1.04% at December 31, 2009 and 1.05% at September 30, 2009. The Company has provided for anticipated loan losses through the allowance for possible loan losses and a credit fair value adjustment on loans purchased. As a percentage of adjusted loans this amounted to 1.68% at September 30, 2010 compared to 1.98% at December 31, 2009 and 2.10% at September 30, 2009. The evaluation of credit fair value adjustment on purchased loans was made in accordance with current accounting standards for business combinations.

Provision for Loan Losses

The provision for loan losses represents management’s determination of the amount necessary to bring the allowance for loan losses to a level that management considers adequate to reflect the risk of future losses inherent in the Company’s loan portfolio.

The provision for loan losses increased $516 from $342 for the three months ended September 30, 2009 to $858 for the three months ended September 30, 2010, based on management’s ongoing valuation of the loan portfolio. Loans charged off totaled $864 and recoveries were $6 for the three months ended September 30, 2010. In the same period of 2009, loans charged off totaled $96 and recoveries were $4. For the nine months ended September 30, 2010, the provision for loan losses was $1,723, an increase of $150 from $1,573 in the first nine months of 2009. Loans charged-off totaled $1,537 and recoveries were $14 for the nine months ended September 30, 2010. In the same period of 2009, loans charged off totaled $555 and recoveries were $7. The allowance for loan losses at September 30, 2010 was $6,500 or 1.05% of total loans compared to $6,300 or 1.04% of total loans at December 31, 2009 and $6,300 or 1.05% of total loans at September 30, 2009.

The Company believes that the judgments used in establishing the allowance for loan losses are based on reliable information. In assessing the sufficiency of the allowance for loan losses, management considers how well prior

estimates have related to actual experience. The Company continually monitors the risk elements, historical rates and other data used in establishing the allowance on a periodic basis. The quarterly provision for loan losses charged to operating expense is that amount which is sufficient to bring the balance of the allowance for loan losses to an adequate level to absorb anticipated losses. Based on this ongoing evaluation, management determines the provision necessary to maintain an appropriate allowance.

Although management uses available information to establish the appropriate level of the allowance for loan losses, future additions or reductions to the allowance may be necessary, based on estimates that are susceptible to change, as a result of changes in economic conditions and other factors. As a result, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect the Company’s operating results. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.

There are also no particular risk elements in the local economy that put a group or category of loans at increased risk, however, the Company has increased its portfolio of commercial loans, which typically bear a higher risk. These loans are typically secured by real estate to minimize this risk. At September 30, 2010 management believes the loan loss reserve is adequate to manage the risk inherent in the loan portfolio due to today’s economic environment.

The process of determining the adequacy of the allowance is necessarily judgmental and subject to changes in external conditions. Accordingly, there can be no assurance that existing levels of the allowance will ultimately prove adequate to cover actual loan losses.

During 2009, as the local economy began to experience the negative impact of the nation’s economic downturn, the Company was prompted to increase the provision for loan losses substantially in 2009 in the amount of $2,260 compared to $861 in 2008. The Company has continued to apply a conservative approach in evaluating probable loan losses thereby providing $1,723 for the nine months ended September 30, 2010 compared to $1,573 for the prior year period. The amount and number of charge-offs and foreclosures has increased due to the slowing local economy as indicated in the following tables:

	September 30,			December 31,			September 30,
As of:	2010			2009			2009
Provision for loan losses	$	1,723		$	2,260		$	1,573
Allowance for loan losses to non-performing loans		133.44	%		269.35	%		202.51	%
Non-performing loans to period end loans		0.78	%		0.39	%		0.52	%
Ratio of charged-off loans to average loans		0.25	%		0.23	%		0.10	%
Ratio of foreclosed loans to average loans		0.19	%		0.21	%		0.13	%

	September 30,				December 31,				September 30,
As of:	2010				2009				2009
	Amount		(#	)	Amount		(#	)	Amount		(#	)
Charge-offs	$	1,537	80		$	1,300	75		$	555	53
Foreclosures	$	1,183	6		$	1,145	7		$	724	4

There were no troubled debt restructurings or concessions given to customers during the three and nine months ended September 30, 2010 and 2009.

The Bank’s process for determining an appropriate level for the allowance for loan losses (“ALLL”) is based on a comprehensive, well documented and consistently applied analysis of its loan portfolio. This analysis considers all significant factors that affect the collectibility of the portfolio and supports the credit losses estimated by this process. Our ALLL methodology includes procedures for a review by a party who is independent of the Bank’s credit approval.

The Bank follows its systematic methodology in accordance with the FFIEC Interagency Policy Statements, as amended, and GAAP in assessing the adequacy of the allowance account. Under GAAP, the adequacy of the allowance account is determined based on the provisions of FASB ASC 310 for loans specifically identified to be individually evaluated for impairment and the requirements of FASB ASC 450 for large groups of smaller balance homogeneous loans to be collectively evaluated for impairment. Loans are identified by the Bank’s rating system, past due reports, watch list and subjectivity to economic factors and are then collectively evaluated for impairment with others utilizing standard criteria. Consideration is given to current local economic conditions which at this time the Company classifies as recessionary.

Our historical analysis of loss factors, which utilizes a rolling twenty quarters, was changed in the third quarter of 2010 to assign greater weight to the most recent rolling four quarters to better reflect deterioration in local economic conditions. The Bank’s loan portfolio is concentrated in real estate with over 80% of the portfolio secured by real estate mainly in the Pennsylvania counties in which we operate and, therefore, we also took into account the decline in real estate sales and new construction in our market area and the drop in real estate values within the market area. Management believes the allowance for loan losses was adequate at $6,500 as of September 30, 2010 considering the increased emphasis on the local economic conditions.

Non-Performing Assets

The following table sets forth information regarding non-accrual loans and loans past due 90 days or more and still accruing interest:

	September 30,			December 31,			September 30,
As of:	2010			2009			2009
Non-accrual loans
Secured by real estate	$	3,756		$	1,945		$	1,752
Commercial loans		1,044			199			1,164
Consumer loans		71			195			195
Total non-performing loans	$	4,871		$	2,339		$	3,111
Other real estate owned		925			405			65
Total non-performing assets	$	5,796		$	2,744		$	3,176

Loans past due 90 days or more and accruing:
Secured by real estate	$	834		$	1,456		$	1,509
Guaranteed student loans		194			218			283
Credit card loans		17			9			19
Commercial loans		2			-			7
Consumer loans		48			14			13
Total loans past due 90 days or more and accruing	$	1,095		$	1,697		$	1,831

Non-performing loans to period end loans		0.78	%		0.39	%		0.52	%
Total loans past due 90 days or more and accruing
to period end loans		0.18	%		0.28	%		0.31	%
Non-performing assets to period end assets		0.64	%		0.31	%		0.36	%

Loans are generally placed on a non-accrual status when principal or interest is past due 90 days and when payment in full is not anticipated. When a loan is placed on non-accrual status, all interest previously accrued but not collected is charged against current income. Loans are returned to accrual status when past due interest is collected and the collection of future principal and interest is probable.

During the second quarter of 2008, the Company was notified that The Education Resources Institute, Inc. (TERI), a guarantor of a portion of our student loan portfolio, had filed for reorganization under Chapter 11 of the Federal Bankruptcy Act. At September 30, 2010, the Company had $7.4 million of TERI loans out of a total student loan portfolio of $16.9 million. The Company does not anticipate that TERI’s bankruptcy filing will significantly impact the Company’s financial statements. These loans are placed on non-accrual status when they become more than 90 days past due. At September 30, 2010 there was $58 of such loans placed on non-accrual status.

Loans on which the accrual of interest has been discontinued or reduced amounted to $4,871 or 0.78% of loans at September 30, 2010, representing an increase of $1,760 from $3,111 or 0.52% of loans at September 30, 2009 and an increase of $2,532 from $2,339 or 0.39% of loans at December 31, 2009. If interest on those loans had been accrued, such income would have been $338 and $394 for the nine months ended September 30, 2010 and September 30, 2009, respectively. Interest income on those loans, which is recorded only when received, amounted to $111 and $35 for the nine months ended September 30, 2010 and September 30, 2009, respectively. There are no commitments to lend additional funds to individuals whose loans are in non-accrual status.

Management’s process for evaluating the adequacy of the allowance for loan losses includes reviewing each month’s loan committee reports which list all loans that do not meet certain internally developed criteria as to collateral adequacy, payment performance, economic conditions and overall credit risk. These reports also address the current status and actions in process on each listed loan. From this information, adjustments are made to the allowance for loan losses. Such adjustments include both specific loss allocation amounts and general provisions by loan category based on present and past collection experience, nature and volume of the loan portfolio, overall portfolio quality, and current economic conditions that may affect the borrower’s ability to pay.

As of September 30, 2010, the Company had total impaired loans of $5,073. Management performed an evaluation of expected future cash flows, including the anticipated cash flow from the sale of collateral, and compared that to the carrying amount of the impaired loans. Based on these evaluations, the Company has determined that a reserve of $1,298 is required against impaired loans at September 30, 2010.

Most of the Company’s lending activity is with customers located in the Company’s geographic market area and repayment thereof is affected by economic conditions in this market area.

The Company has seen an increase in the ratio of non-performing assets to period end assets which is 0.64% at September 30, 2010 and 0.36% at September 30, 2009, as well as an increase in the ratio of net charge-offs to average loans which is 0.25% for the nine months ended September 30, 2010 compared to 0.10% for the nine months ended September 30, 2009. For other real estate owned, management obtains independent appraisals for significant properties and makes an adequate provision for loan loss adjustment.

The allowance for loan losses allocated to real estate mortgages has remained constant for the period of December 31, 2009 to September 30, 2010, at $1.2 million because the Company views the allocation as being applicable to residential real estate loans. The residential real estate mortgage portfolio at December 31, 2009 totaled $331 million which represented 54.8% of the loan portfolio. The September 30, 2010 residential real estate mortgage portfolio totaled $333.3 million which represented 53.7% of the loan portfolio. The mortgages acquired in the merger with Old Forge Bank have a credit fair value adjustment which would mitigate increasing the allocation to an amount greater than $1.2 million. Also the Bank has historically maintained low delinquency ratios overall, and has incurred minimal losses on the sale of foreclosed residential real estate. Although the overall residential mortgage portfolio has not increased substantially, the dollar amount of non-performing residential mortgages has increased materially. Our non-performing loans by category as of September 30, 2010 and December 31, 2009 are as follows:

	September 30,				December 31,
	2010				2009
Residential real estate	$	3,148	64.6	%	$	1,274	54.5	%
Commercial real estate		608	12.5	%		671	28.7	%
Commercial and industrial		1,044	21.4	%		199	8.5	%
Consumer		71	1.5	%		195	8.3	%
	$	4,871	100.0	%	$	2,339	100.0	%

Our non-performing loans increased from $2.3 million at December 31, 2009 to $4.9 million at September 30, 2010. As of September 30, 2010, non-performing loans were comprised of 40 loans of which 16 loans were in excess of $100,000 in size and the remainder of which were less than $100,000 each. As of December 31, 2009, our non-performing loans were comprised of 36 loans of which 11 loans were in excess of $100,000 in size and the remainder of which was less than $100,000 each. The increase in the non-performing loans can be attributed to the following factors: (1) the addition of a large land development credit (2) the deteriorating economic conditions locally and regionally (3) the widely depressed housing and real estate construction market and (4) the increase in

loans attributed to the merger with Old Forge Bank. Non-performing loans of $4.9 million at September 30, 2010 represent 0.78% of total loans, an increase from $2.3 million or 0.39% of total loans at December 31, 2009.

The decrease in asset quality has been addressed by maintaining an adequate loss allowance. As of September 30, 2010, the total of the allowance for loan losses of $6,500 and the credit fair value applicable to the merger of $3,997 totaled $10,497 and represented 1.68% of adjusted loans. The level of loan loss coverage reflects management’s conservative view of the local economic conditions and an appropriate increase in the allowance for loan losses. As a result of the economic conditions in our market area and the increase in nonperforming loans, management has undertaken the following actions beginning in 2009:

§	Hired a former bank examiner in February 2010 to perform loan reviews on a full time basis and to enhance our allowance for loan loss methodology for implementation in the third quarter of 2010 which did not have any appreciable impact on the required level on loan loss allowance;

§	Contracted with a credit professional in March 2010 to assess the soundness of the small business underwriting function as well as the appropriateness of the Company’s established methodology for determining the allowance for loan losses; and

§	Adjusted the credit policy in 2009 to lower the maximum loan-to-value ratios on commercial real estate loans and certain consumer loans

Loan Loss Experience

The following tables present the Company’s loan loss experience during the periods indicated:

	September 30,			September 30,
Three Months Ended:	2010			2009
Balance at beginning of period	$	6,500		$	6,050
Charge-offs:
Residential real estate mortgages		49			41
Commercial real estate and all others		676			-
Credit card and related plans		29			8
Installment loans		110			47
Total charge-offs		864			96
Recoveries:
Residential real estate mortgages		-			-
Commercial real estate and all others		1			-
Credit card and related plans		-			-
Installment loans		5			4
Total recoveries		6			4
Net charge-offs (recoveries)		858			92
Provision charged to operations		858			342
Balance at End of Period	$	6,500		$	6,300
Ratio of net charge-offs (recoveries )to average loans outstanding		0.14	%		0.02	%

	September 30,			September 30,
Nine Months Ended:	2010			2009
Balance at beginning of period	$	6,300		$	5,275
Charge-offs:
Residential real estate mortgages		61			161
Commercial real estate and all others		1,092			188
Credit card and related plans		67			45
Installment loans		317			161
Total charge-offs		1,537			555
Recoveries:
Residential real estate mortgages		1			-
Commercial real estate and all others		1			-
Credit card and related plans		1			1
Installment loans		11			6
Total recoveries		14			7
Net charge-offs (recoveries)		1,523			548
Provision charged to operations		1,723			1,573
Balance at End of Period	$	6,500		$	6,300
Ratio of net charge-offs (recoveries) to average loans outstanding		0.25	%		0.10	%

The allowance for loan losses at September 30, 2010 was $6,500 or 1.05% of total loans compared to $6,300 or 1.04% of total loans at December 31, 2009 and $6,300 or 1.05% of total loans at September 30, 2009.

The allowance for loan losses is allocated as follows:

As of:	September 30, 2010					December 31, 2009					September 30, 2009
	Amount		%		*	Amount		%		*	Amount		%		*
Residential real estate mortgages	$	1,200	53	%		$	1,200	55	%		$	1,200	55	%
Commercial real estate and all others		4,200	35	%			4,000	33	%			4,200	33	%
Credit card and related plans		350	1	%			350	1	%			350	1	%
Personal installment loans		750	11	%			750	11	%			550	11	%
Total	$	6,500	100	%		$	6,300	100	%		$	6,300	100	%

* Percent of loans in each category to total loans

Liquidity

The objective of liquidity management is to maintain a balance between sources and uses of funds in such a way that the cash requirements of customers for loans and deposit withdrawals are met in the most economical manner. Management monitors its liquidity position continuously in relation to trends of loans and deposits for short-term as well as long-term requirements. Liquid assets are monitored on a daily basis to assure maximum utilization. Management also manages its liquidity requirements by maintaining an adequate level of readily marketable assets and access to short-term funding sources. Management does not foresee any adverse trends in liquidity.

The Company remains in a highly liquid condition both in the short and long term. Sources of liquidity include the Company’s U.S. Agency bond portfolios, additional deposits, earnings, overnight loans to and from other companies (Federal Funds) and lines of credit at the Federal Reserve Bank and the Federal Home Loan Bank (FHLB). The Company is not a party to any commitments, guarantees or obligations that could materially affect its liquidity.

The Company offers collateralized repurchase agreements, which have a one day maturity, as an alternative deposit option for its customers. The repurchase agreements are accounted for as a collateralized borrowing with a one day maturity and are collateralized by U.S. Agency securities. The Company also has long-term debt outstanding to the

FHLB, which was used to purchase a Freddie Mac pool of residential mortgages. At September 30, 2010 the Company had $232,256 of available borrowing capacity with the FHLB, a Borrower-In-Custody (BIC) line of credit of $19,444 with the Federal Reserve Bank of Philadelphia, available borrowing capacity at the Discount Window of $35,693, an overnight Federal funds line of credit of $19,000 with PNC Bank and an overnight Federal funds line of credit of $5,000 with Wells Fargo.

The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders. The Company’s primary source of income is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to the Company is generally restricted under Pennsylvania law to the retained earnings of the Bank.

Commitments and Contingent Liabilities

In the normal course of business, there are outstanding commitments and contingent liabilities, created under prevailing terms and collateral requirements such as commitments to extend credit, financial guarantees and letters of credit, which are not reflected in the accompanying Financial Statements. The Company does not anticipate any losses as a result of these transactions. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Balance Sheets.

The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have expiration dates of one year or less or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

At September 30, 2010 the Bank had executed a purchase agreement in the amount of $690 for land in Scranton, Pennsylvania, to be used for construction of a new branch facility. The Bank is awaiting regulatory approval for the establishment of this new branch office.

Related Parties

The Company does not have any material transactions involving related persons or entities, other than traditional banking transactions, which are made on the same terms and conditions as those prevailing at the time for comparable transactions with unrelated parties. At September 30, 2010, the Bank has issued standby letters of credit for the accounts of related parties in the amount of $7,785.

Capital Resources

A strong capital position is important to the continued profitability of the Company and promotes depositor and investor confidence. The Company’s capital provides a basis for future growth and expansion and also provides additional protection against unexpected losses.

Additional sources of capital would come from retained earnings from the operations of the Company and from the sale of additional shares of common stock. Management has no plans to offer additional shares of common stock at this time.

The Company’s total risk-based capital ratio was 16.72% at September 30, 2010. The Company’s risk-based capital ratio is more than the 10.00% ratio that Federal regulators use as the “well capitalized” threshold under the Federal prompt corrective action regulations. This is the current criteria which the FDIC uses in determining the lowest insurance rate for deposit insurance. The Company’s risk-based capital ratio is more than double the 8.00% minimum threshold, which determines whether a company is “adequately capitalized”. Under these rules, the Company could significantly increase its assets and still comply with these capital requirements without the necessity of increasing its equity capital.

Non-GAAP Financial Measures

Certain financial measures for 2009 contained in this Form 10-Q exclude costs related to the Company’s acquisition of Old Forge Bank on April 1, 2009. Financial measures which exclude the above referenced items have not been determined in accordance with GAAP and are therefore non-GAAP financial measures. Management of the Company believes that investors’ understanding of the Company’s performance is enhanced by disclosing these non-GAAP financial measures as a reasonable basis for comparison of the Company’s ongoing results of operations. These non-GAAP measures should not be considered a substitute for GAAP-basis measures and results. Our non-GAAP measures may not be comparable to non-GAAP measures of other companies. The Non-GAAP Reconciliation Schedule provides a disclosure of these non-GAAP financial measures to the most closely analogous measure determined in accordance with GAAP.

Merger costs of $1,550 in the nine months ended September 30, 2009, respectively, related to the acquisition of Old Forge Bank consist primarily of investment banking costs, system conversion costs, valuation services, legal and accounting fees and severance payments.

NON-GAAP RECONCILIATION SCHEDULE

(unaudited)

(in thousands)

The following tables present the reconciliation of non-GAAP financial measures to reported GAAP financial measures.

Core Earnings Calculation

	Three Months Ended
	September 30,
	2010			2009			Change
Net interest income after provision for loan losses	$	7,439		$	7,801		$	(362	)
Non-interest income		3,638			3,143			495
Non-interest expense		(7,201	)		(7,037	)		(164	)
Income tax (provision) benefit		(832	)		(812	)		(20	)
Net income		3,044			3,095			(51	)

Adjustments
Non-interest expense
Merger related costs		-			-			-
Total Adjustments pre-tax		-			-			-
Income tax provision (benefit)		-			-			-
After tax adjustments to GAAP		-			-			-
Adjusted net income	$	3,044		$	3,095		$	(51	)

Return on Average Assets		1.37	%		1.44	%
Return on Average Equity		9.94	%		10.82	%
Dividend Payout Ratio		45.16	%		44.68	%

	Nine Months Ended
	September 30,
	2010			2009			Change
Net interest income after provision for loan losses	$	23,348		$	20,608		$	2,740
Non-interest income		9,222			8,324			898
Non-interest expense		(21,043	)		(21,093	)		50
Income tax benefit (provision)		(2,486	)		(1,434	)		(1,052	)
Net income		9,041			6,405			2,636

Adjustments
Non-interest expense
Merger related costs		-			1,550			(1,550	)
Total Adjustments pre-tax		-			1,550			(1,550	)
Income tax provision (benefit)1		-			527			(527	)
After tax adjustments to GAAP		-			1,023			(1,023	)
Adjusted net income	$	9,041		$	7,428		$	1,613

Return on Average Assets		1.36	%		1.27	%
Return on Average Equity		9.99	%		9.78	%
Dividend Payout Ratio		45.65	%		49.22	%

Return on average equity (ROE) and return on average assets (ROA) for the nine months ended September 30, 2010 was 9.99% and 1.36%, respectively. ROE was 8.43% (9.78% excluding the Merger costs) and ROA was 1.09% (1.27% excluding the Merger costs) for the same period last year. The dividend payout ratio was 45.65% for the nine months ended September 30, 2010 and 57.01% (49.22% excluding the Merger costs) for the same period last year.

Allowance for Loan Losses and Credit Fair Value Adjustment

The Company has provided for anticipated loan losses through the allowance for loan losses and a credit fair value adjustment on purchased loans, as shown below:

	September 30,		December 31,		September 30,
	2010		2009		2009
Loans, net of unearned income	$	620,553	$	603,970	$	597,564
Credit fair value adjustment on purchased loans		3,997		5,795		6,358
Total adjusted loans	$	624,550	$	609,765	$	603,922

	September 30,			December 31,			September 30,
	2010			2009			2009
Allowance for loan losses	$	6,500		$	6,300		$	6,300
Credit fair value adjustment on purchased loans		3,997			5,795			6,358
Total allowance	$	10,497		$	12,095		$	12,658

Total allowance to adjusted loans		1.68	%		1.98	%		2.10	%

Management believes that the above information is useful to investors in evaluating the Company’s results of operations and financial condition.

_______________________

1 Income tax effect calculation is 34% except for the portion of the merger costs that are non-deductible.

PART I. FINANCIAL INFORMATION, Item 3 —

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company currently does not enter into derivative financial instruments, which include futures, forwards, interest rate swaps, option contracts and other financial instruments with similar characteristics. However, the Company is party to traditional 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, financial guarantees and letters of credit. These traditional instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party up to a stipulated amount and with specified terms and conditions.

Commitments to extend credit and standby letters of credit are not recorded as an asset or liability by the Company until the instrument is exercised.

The Company’s exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. Management realizes certain risks are inherent and that the goal is to identify and minimize the risks. Tools used by management include the standard GAP report and an interest rate shock simulation report. The Company has no market risk sensitive instruments held for trading purposes. It appears the Company’s market risk is reasonable at this time.

For a discussion of the Company’s asset and liability management policies, as well as the potential impact of interest rate changes upon the market value of the Company’s financial instruments, see Item 7A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. Management, as part of its regular practices, performs periodic reviews of the impact of interest rate changes upon net interest income and market value of the Company’s portfolio equity. Based on, among other factors, such reviews, management believes that there have been no material changes in the market risk of the Company’s asset and liability position since December 31, 2009.

PART I. FINANCIAL INFORMATION, Item 4 —

CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our Chief Executive Officer and Finance Division Head, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) under the Securities Exchange Act of 1934. Based upon this evaluation, our Chief Executive Officer and our Finance Division Head concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

The Company continually assesses the adequacy of its internal control over financial reporting and enhances its controls in response to internal control assessments, and internal and external audit and regulatory recommendations. No change in internal control over financial reporting during the quarter ended September 30, 2010 have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Management maintains a comprehensive system of controls intended to ensure that transactions are executed in accordance with management's authorization, assets are safeguarded, and financial records are reliable. Management also takes steps to see that information and communication flows are effective and to monitor performance, including performance of internal control procedures.

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 due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PART II. OTHER INFORMATION

Item 1 — Legal Proceedings

None.

Item 1A — Risk Factors

Except as set forth below, there are no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, which was filed with the Securities and Exchange Commission (SEC) on March 12, 2010. Please refer to that section for disclosures regarding the risks and uncertainties related to the company’s business.

Credit Risk

Our emphasis on residential mortgage and commercial real estate loans in the Northeast Pennsylvania market area exposes us to a risk of loss.

At September 30, 2010, $333.3 million, or 53.7%, of our loan portfolio consisted of residential mortgage loans and $182.8 million, or 29.5%, of our loan portfolio consisted of commercial real estate loans. A significant majority of these loans are made to borrowers or secured by properties located in Northeastern Pennsylvania. As a result of this concentration, a sustained downturn in the local economy could significantly increase non-performing loans, which would hurt our profits. Future declines in real estate values in the Northeastern Pennsylvania area could also cause some of our mortgage and commercial real estate loans to be inadequately collateralized, which would expose us to a greater risk of loss if we seek to recover on defaulted loans by selling the real estate collateral.

Operational Risk

We may experience increased lending and deposit risk as a result of our acquisition of Old Forge Bank.

On April 1, 2009, we completed our acquisition of Old Forge Bank in a cash and stock transaction valued at approximately $55.5 million. There are inherent risks in the acquisition of any merger candidate as to the loans and deposits acquired in the merger. There may be greater losses in the loan portfolio that were identified at the merger date. Furthermore, deposit customers might leave the Bank for any number of personal or business reasons. Management monitors our asset quality and deposit base on an ongoing basis. The fair value adjustments applicable to the merger are reviewed annually for appropriateness based upon the actual results compared to the merger date. As such, the market rate adjustment and the credit fair value adjustment are evaluated to ensure that the amortizations and accretions are reasonable.

Risks Regarding Our Common Stock

There may be a limited market for our common stock, which may adversely affect our stock price.

Although our common stock is traded on the Over-the-Counter Bulletin Board, the shares might not be actively traded. If an active trading market for our common stock does not exist, you may not be able to sell all of your shares of common stock on short notice, and the sale of a large number of shares at one time could temporarily depress the market price. There also may be a wide spread between the bid and ask price for our common stock. When there is a wide spread between the bid and ask price, the price at which you may be able to sell our common stock may be significantly lower than the price at which you could buy it at that time.

A significant percentage of our common stock is held by our directors and executive officers, which could enable insiders to prevent a merger or other transaction that may provide stockholders a premium for their shares.

At September 30, 2010, our directors and executive officers beneficially owned 473,642, or 14.5%, of our outstanding shares. If these individuals were to act together, they could have a significant influence over the outcome of any shareholder vote

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3 — Defaults Upon Senior Securities

None.

Item 4 — Removed and Reserved

Item 5 — Other Information

None.

Item 6 — Exhibits

31 Rule 13a-14(a) / 15-d-4(a) Certifications

32 Section 1350 Certifications

SIGNATURES

Pursuant to the requirements 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.

PENSECO FINANCIAL SERVICES CORPORATION


/s/ Craig W. Best
Craig W. Best
President and CEO
(Principal Executive Officer)

Dated: November 8, 2010

/s/ Patrick Scanlon
Patrick Scanlon
Senior Vice President, Finance Division Head
(Principal Financial Officer)

Dated: November 8, 2010

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