Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words believes, anticipates, contemplates, expects, and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected. Those risks and uncertainties include changes in interest rates, risks associated with the effect of opening a new branch, the ability to control costs and expenses, demand for real estate and general economic conditions. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Note 2 to the Company's consolidated financial statements for the year ended
December 31, 2007 (incorporated by reference in Item 8 of the Form 10-K) lists significant accounting policies used in the development and presentation of its consolidated financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, accounting for stock options, the valuation of deferred tax assets and the determination of other-than-temporary impairment losses on securities. Please refer to the discussion of the allowance for loan losses calculation under "Non-performing Assets and Allowance for Loan Losses" in the "Changes in Financial Condition" section.

The deferred income taxes reflect temporary differences in the recognition of the revenue and expenses for tax reporting and financial statement purposes, principally because certain items are recognized in different periods for financial reporting and tax return purposes. Although realization is not assured, the Company believes that it is more likely than not that all deferred tax assets will be realized.

In estimating other-than-temporary impairment losses on securities, the Company considers 1) the length of time and extent to which the fair value has been less than cost 2) the financial condition of the issuer and 3) the intent and ability of the Company to hold the security to allow for a recovery to fair value. The Company believes that the unrealized losses at September 30, 2008 and December 31, 2007 represent temporary impairment of the securities, and the Company has the intent and ability to hold until recovery, excluding an other-than-temporary impairment charge of $27,000 taken for 1,000 shares of Wachovia Common Stock as of September 30, 2008 recorded in net realized gains (losses) on sale of securities in Other Income.

Emergency Economic Stabilization Act of 2008

In response to recent unprecedented market turmoil, the Emergency Economic Stabilization Act ("EESA") was enacted on October 3, 2008. EESA authorizes the Secretary of the Treasury to purchase up to $700 billion in troubled assets from financial institutions under the Troubled Asset Relief Program or TARP. Troubled assets include residential or commercial mortgages and related instruments originated prior to March 14, 2008 and any other financial instrument that the Secretary determines, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, the purchase of which is necessary to promote financial stability. If the Secretary exercises his authority under TARP, EESA directs the Secretary of Treasury to establish a program to guarantee troubled assets originated or issued prior to March 14, 2008. The Secretary is authorized to purchase up to $250 billion in troubled assets immediately and up to $350 billion upon certification by the President that such authority is needed. The Secretary's authority will be increased to $700 billion if the President submits a written report to Congress detailing the Secretary's plans to use such authority unless Congress passes a joint resolution disapproving such amount within 15 days after receipt of the report. The Secretary's authority under TARP expires on December 31, 2009 unless the Secretary certifies to

Institutions selling assets under TARP will be required to issue warrants for common or preferred stock or senior debt to the Secretary. If the Secretary purchases troubled assets directly from an institution without a bidding process and acquires a meaningful equity or debt position in the institution as a result or acquires more than $300 million in troubled assets from an institution regardless of method, the institution will be required to meet certain standards for executive compensation and corporate governance, including a prohibition against incentives to take unnecessary and excessive risks, recovery of bonuses paid to senior executives based on materially inaccurate earnings or other statements and a prohibition against agreements for the payment of golden parachutes. Institutions that sell more than $300 million in assets under TARP auctions will not be entitled to a tax deduction for compensation in excess of $500,000 paid to its chief executive or chief financial official or any of its other three most highly compensated officers. In addition, any severance paid to such officers for involuntary termination or termination in connection with a bankruptcy or receivership will be subject to the golden parachute rules under the Internal Revenue Code.

EESA increases the maximum deposit insurance amount up to $250,000 until December 31, 2009 and removes the statutory limits on the FDIC's ability to borrow from the Treasury during this period. The FDIC may not take the temporary increase in deposit insurance coverage into account when setting assessments. EESA allows financial institutions to treat any loss on the preferred stock of the Federal National Mortgage Association or Federal Home Loan Mortgage Corporation as an ordinary loss for tax purposes. This provision is effective October 3, 2008.

Pursuant to his authority under EESA, the Secretary of the Treasury has created the TARP Capital Purchase Plan under which the Treasury Department will invest up to $250 billion in senior preferred stock of U.S. banks and savings associations or their holding companies. Qualifying financial institutions may issue senior preferred stock with a value equal to not less than 1% of risk-weighted assets and not more than the lesser of $25 billion or 3% of risk-weighted assets. The senior preferred stock will pay dividends at the rate of 5% per annum until the fifth anniversary of the investment and thereafter at the rate of 9% per annum. The senior preferred stock may not be redeemed for three years except with the proceeds from an offering of common stock or preferred stock qualifying as Tier 1 capital in an amount equal to not less than 25% of the amount of the senior preferred. After three years, the senior preferred may be redeemed at any time in whole or in part by the financial institution. No dividends may be paid on common stock unless dividends have been paid on the senior preferred stock. Until the third anniversary of the issuance of the senior preferred, the consent of the U.S. Treasury will be required for any increase in the dividends on the common stock or for any stock repurchases unless the senior preferred has been redeemed in its entirety or the Treasury has transferred the senior preferred to third parties. The senior preferred will not have voting rights other than the right to vote as a class on the issuance of any preferred stock ranking senior, any change in its terms or any merger, exchange or similar transaction that would adversely affect its rights. The senior preferred will also have the right to elect two directors if dividends have not been paid for six periods. The senior preferred will be freely transferable and participating institutions will be required to file a shelf registration statement covering the senior preferred. The issuing institution must grant the Treasury piggyback registration rights. Prior to issuance, the financial institution and its senior executive officers must modify or terminate all benefit plans and arrangements to comply with EESA. Senior executives must also waive any claims against the Department of Treasury.

In connection with the issuance of the senior preferred, participating institutions must issue to the Secretary immediately exercisable 10-year warrants to purchase common stock with an aggregate market price equal to 15% of the amount of senior preferred. The exercise price of the warrants will equal the market price of the common stock on the date of the investment. The Secretary may only exercise or transfer one-half of the warrants prior to the earlier of December 31, 2009 or the date the issuing financial institution has received proceeds equal to the senior preferred investment form one or more offerings of common or preferred stock qualifying as Tier 1 capital. The Secretary will not exercise voting rights with respect to any shares of common stock acquired through exercise of the warrants. The financial institution must file a shelf registration statement covering the warrants and underlying common stock as soon as practicable after issuance and grant piggyback registration rights. The number of warrants will be reduced by one-half if the financial institution raises capital equal to the amount of the senior preferred through one or more offerings of common stock or preferred stock qualifying a Tier 1 capital. If the financial institution does not have sufficient authorized shares of common stock available to satisfy the warrants or their issuance otherwise requires shareholder approval, the financial institution must call a meeting of shareholders for that purpose as soon as practicable after the date of investment. The exercise price of the warrants will be reduced by 15% for each six months that lapse before shareholder approval subject to a maximum reduction of 45%.

The Company has a filing deadline of November 14, 2008 to participate in the Capital Purchase Plan (CPP). The Company is currently evaluating the impact of participating or not participating in the CPP.

Changes in Financial Condition

General

Total assets as of September 30, 2008 were $498.6 million compared to $480.6 million as of December 31, 2007, an increase of $18.0 million. The increase reflects a $4.3 million increase in securities available for sale and a $9.9 million increase in loans receivable, funded by an increase in borrowings.

Securities

The fair value of securities available for sale as of September 30, 2008 was $128.3 million compared to $124 million as of December 31, 2007. The Company purchased $38.1 million of securities using the proceeds from $31.5 million of securities called, maturities and principal reductions and from borrowings.

The carrying value of the Company's securities portfolio (Available-For-Sale and Held-to-Maturity) consisted of the following:

                                   September 30, 2008             December 31, 2007
  (dollars in thousands)        Amount     % of portfolio      Amount     % of portfolio

US Government agencies         $  37,036             28.7 %   $  41,508             33.4 %
States and political
subdivisions                      22,968             17.8        22,622             18.1
Corporate securities               5,194              4.0         4,994              4.0
Mortgage-backed securities        62,457             48.5        54,082             43.3
Equity securities                  1,338              1.0         1,486              1.2
Total                          $ 128,993            100.0 %   $ 124,692            100.0 %

The Company recorded a $27,000 other than temporary impairment charge on 1,000 shares of Wachovia Common Stock. The Company has no common or preferred stock in Fannie Mae or Freddie Mac.

Loans Receivable

Loans receivable totaled $341.2 million compared to $331.3 million as of December 31, 2007. Residential real estate loans decreased $2.5 million due to the sale of $14.4 million of 30 year fixed rate residential mortgages. The loans were sold for interest rate risk management to shorten the average life of the mortgage loan portfolio. Commercial real estate loans increased $18.3 million during the period, reflecting new activity and the completion of $5.2 million of construction projects. The activity was principally centered in the Pike and Monroe County, Pennsylvania market area.

Set forth below is selected data relating to the composition of the loan portfolio at the dates indicated:

Types of loans
(dollars in thousands)                    September 30, 2008      December 31, 2007

Real Estate-Residential                  $    127,430     37.3 % $    129,888    39.2 %
Commercial                                    151,917     44.5        133,593    40.2
Construction                                   15,976      4.7         20,404     6.2
Commercial, financial and agricultural         29,120      8.5         29,159     8.8
Consumer loans to individuals                  17,011      5.0         18,526     5.6
Total loans                                   341,454    100.0 %      331,570   100.0 %

Deferred fees (net)                              (237 )                  (274 )
                                              341,217                 331,296
Allowance for loan losses                      (4,331 )                (4,081 )
Net loans receivable                     $    336,886            $    327,215

Allowance for Loan Losses and Non-performing Assets



Following is a summary of changes in the allowance for loan losses for the
periods indicated:



                                     Three Months Ended       Nine Months Ended
                                       September 30,            September 30,
(dollars in thousands)                2008         2007        2008        2007

Balance, beginning                 $    4,237    $  3,900   $    4,081    $ 3,828
Provision for loan losses                 130          90          315        195
Charge-offs                               (45 )       (16 )       (116 )      (83 )
Recoveries                                  9           5           51         39
Net charge-offs                           (36 )       (11 )        (65 )      (44 )
Balance, ending                    $    4,331    $  3,979   $    4,331    $ 3,979

Allowance to total loans                 1.27 %      1.21 %       1.27 %     1.21 %
Net charge-offs to average loans
(annualized)                              .04 %       .01 %        .03 %      .02 %

The allowance for loan losses totaled $4,331,000 as of September 30, 2008 and represented 1.27% of total loans compared to $4,081,000 at year end, and $3,979,000 as of September 30, 2007. The Company had net charge-offs for the nine months ended September 30, 2008 of $65,000 compared to $44,000 in the comparable period in 2007. The Company's loan review process assesses the adequacy of the allowance for loan losses on a quarterly basis. The process includes an analysis of the risks inherent in the loan portfolio. It includes an analysis of impaired loans and a historical review of credit losses by loan type. Other factors considered include: concentration of credit in specific industries; economic and industry conditions; trends in delinquencies and loan classifications, large dollar exposures and loan growth. Management considers the allowance adequate at September 30, 2008 based on the Company's criteria. However, there can be no assurance that the allowance for loan losses will be adequate to cover significant losses, if any; that might be incurred in the future.

As of September 30, 2008, non-performing loans totaled $2,268,000, which is .66% of total loans compared to $163,000, or .05% of total loans at December 31, 2007. The increase was principally due to a commercial real estate loan in Monroe County with collateral consisting of several parcels of real estate. The loan, currently on non-accrual, was previously restructured with a reduced interest rate to improve the borrower's cash flow. The recorded investment in this impaired loan is $1,969,000 with a specific allowance reserve of $307,000. The Company acquired a property with a deed in lieu of foreclosure with an initial carrying value of $1,200,000. During the third quarter, the Company had a write down on the property to "as is" value of $660,000. The property consists of undeveloped residential building lots in Monroe County, PA. The Company has retained an engineering firm to complete the permit process with the municipality and plans to market the property upon completion of the permitting.

(dollars in thousands)                        September 30, 2008        December 31, 2007
Loans accounted for on a non accrual basis:
Commercial and all other                      $                 -      $                 -
Real Estate                                                 2,251                      109
Consumer                                                        -                        2
Total                                                       2,251                      111

Accruing loans which are contractually
past due 90 days or more                                       17                       52
Total non-performing loans                                  2,268                      163
Foreclosed real estate                                        660                        -
Total non-performing assets                   $             2,928      $               163
Allowance for loan losses                     $             4,331      $             4,081

Coverage of non-performing loans                              1.9 x                   25.0 x
Non-performing loans to total loans                           .66 %                    .05 %
Non-performing assets to total assets                         .59 %                    .03 %

Deposits

Total deposits as of September 30, 2008 were $360.6 million decreasing from $370.0 million as of December 31, 2007 primarily due to the decrease in time deposits greater than $100,000.

Time deposits greater than $100,000 decreased $28.5 million due to the scheduled maturities of school districts and various large commercial CDs. A portion of these funds remained on deposit in money market and interest-bearing demand accounts. The Company expects to bid on school district time deposits in the fourth quarter of 2008.

The following table sets forth deposit balances as of the dates indicated

(dollars in thousands)           September 30, 2008     December 31, 2007

Non-interest bearing demand     $             63,474   $            60,061
Interest bearing demand                       39,172                32,426
Money Market Deposit Accounts                 65,717                57,970
Savings                                       45,456                42,962
Time deposits <$100,000                      113,000               114,318
Time deposits >$100,000                       33,738                62,263

Total                           $            360,557   $           370,000

Borrowings

Short-term borrowings as of September 30, 2008 totaled $33.6 million compared to $26.7 million as of December 31, 2007. The increase in short-term borrowings were principally used to offset the decrease in time deposits greater than $100,000.

(dollars in thousands)

                                           September 30, 2008       December 31, 2007
Securities sold under agreements to
repurchase                                $             17,454     $            24,885
FHLB Short-term borrowings                              16,000                       -
Federal Funds Purchased                                      -                     800
U.S. Treasury demand notes                                 121                   1,001
                                          $             33,575     $            26,686

Other borrowings consisted of the following:

(dollars in thousands)

                                               September 30, 2008       December 31, 2007
Notes with the FHLB:
Fixed rate note due April 2008 at 4.17%       $                  -     $             5,000
Fixed rate note due September 2010 at 3.53%                  5,000                       -
Convertible note due January 2011 at 5.24%                   3,000                   3,000
Convertible note due August 2011 at 2.69%                   10,000                       -
Fixed rate note due September 2011 at 4.06%                  5,000                       -
Convertible note due October 2012 at 4.37%                   5,000                   5,000
Convertible note due May 2013 at 3.015%                      5,000                       -
Convertible note due January 2017 at 4.71%                  10,000                  10,000
                                              $             43,000     $            23,000

The convertible notes contain an option that allows the FHLB, at quarterly intervals to change the note to an adjustable-rate advance at three-month LIBOR plus 11 to 19 basis points. If the notes are converted, the option allows the Bank to put the funds back to the FHLB at no charge.

Off- Balance Sheet Arrangements

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.

The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

                                              September 30,     December 31,
                                                  2008              2007
Commitments to grant loans                   $        19,138   $       10,835
Unfunded commitments under lines of credit            35,904           34,146
Standby letters of credit                              2,065            2,348

                                             $        57,107   $       47,329

The increase in commitments to grant loans is principally due to a higher level of commercial real estate construction.

Stockholders' Equity and Capital Ratios

At September 30, 2008, total stockholders' equity totaled $56.1 million, compared to $55.8 million as of December 31, 2007. The net change in stockholders' equity was primarily due to $5,092,000 in net income, that was partially offset by $2,052,000 of cash dividends declared. The Company also repurchased $1,439,000 of common stock in the nine months ended September 30, 2008. In addition, accumulated other comprehensive income declined due to a decrease in fair value of securities in the available for sale portfolio, net of tax. Because of volatility in the credit markets, the Company's accumulated other comprehensive income could materially fluctuate for each interim and year-end period.

A comparison of the Company's regulatory capital ratios is as follows:

                             September 30, 2008     December 31, 2007
Tier 1 Capital
(To average assets)             11.39%                     11.38%
Tier 1 Capital
(To risk-weighted assets)       16.01%                     16.26%
Total Capital
(To risk-weighted assets)       17.36%                     17.60%

The minimum capital requirements imposed by the FDIC on the Bank for leverage, Tier 1 and Total Capital are 4%, 4% and 8%, respectively. The Company has similar capital requirements imposed by the Board of Governors of the Federal Reserve System (FRB). The Bank is also subject to more stringent Pennsylvania Department of Banking (PDB) guidelines. The Bank's capital ratios do not differ significantly from the Company's ratios. Although not adopted in regulation form, the PDB utilizes capital standards requiring a minimum of 6.5% leverage capital and 10% total capital. The Company and the Bank were in compliance with the FRB, FDIC and PDB capital requirements as of September 30, 2008 and December 31, 2007.

Liquidity

As of September 30, 2008, the Company had cash and cash equivalents of $9.8 million in the form of cash, due from banks, federal funds sold and short-term deposits with other institutions. In addition, the Company had total securities available for sale of $128.3 million which could be used for liquidity needs. This totals $138.1 million and represents 27.7% of total assets compared to $133.1 million and 27.7% of total assets as of December 31, 2007. The Company also monitors other liquidity measures, all of which were within the Company's policy

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