thirdqtr2007.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, 2007

Or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from_____________________ to ___________________

Commission file number 0-13222

CITIZENS FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)

            PENNSYLVANIA                               23-2265045
   (State or other jurisdiction of incorporation or organization)                                                                                                                                          (I.R.S. Employer Identification No.)


15 South Main Street
Mansfield, Pennsylvania 16933
(Address of principal executive offices)(Zip Code)

Registrant's telephone number, including area code: (570) 662-2121

Indicate by check mark whether the registrant (1) has filed all reports 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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  (See definition of “accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act)  Check one:

Large Accelerated File ____    Accelerated Filer ____    Non-accelerated Filer __X__


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

The number of shares outstanding of the Registrant's Common Stock, as of October 31, 2007, was 2,835,104 of Common Stock, par value $1.00.
 



 
Citizens Financial Services, Inc.
Form 10-Q

INDEX

   
PAGE
Part I
FINANCIAL INFORMATION
 
Item 1.
Financial Statements (unaudited):
 
 
Consolidated Balance Sheet as of September 30, 2007 and
December 31, 2006
1
 
Consolidated Statement of Income for the
Three Months and Nine Months Ended September 30, 2007 and 2006
2
 
Consolidated Statement of Comprehensive Income for the
Three Months and Nine Months Ended September 30, 2007 and 2006
3
 
Consolidated Statement of Cash Flows for the
Nine Months Ended September 30, 2007 and 2006
4
 
Notes to Consolidated Financial Statements
5-7
Item 2.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
8-24
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
25
Item 4.
Controls and Procedures
25
     
Part II
OTHER INFORMATION
 
Item 1.
Legal Proceedings
26
Item 1A.
Risk Factors
26
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
26
Item 3.
Defaults upon Senior Securities
26
Item 4.
Submission of Matters to a Vote of Security Holders
26
Item 5.
Other Information
27
Item 6.
Exhibits
28
 
Signatures
29




CITIZENS FINANCIAL SERVICES, INC.
 
 
   
 
 
CONSOLIDATED BALANCE SHEET
 
 
   
 
 
(UNAUDITED)
 
 
   
 
 
 
 
 
   
 
 
 
 
September 30
   
December 31
 
(in thousands except share data)
 
2007
   
2006
 
ASSETS:
 
 
   
 
 
Cash and due from banks:
 
 
   
 
 
  Noninterest-bearing
  $
10,468
    $
10,007
 
  Interest-bearing
   
13
     
8
 
Total cash and cash equivalents
   
10,481
     
10,015
 
Available-for-sale securities
   
117,787
     
109,743
 
Loans (net of allowance for loan losses:
               
  2007, $4,112 and 2006, $3,876)
   
415,328
     
410,897
 
Premises and equipment
   
12,627
     
12,892
 
Accrued interest receivable
   
2,784
     
2,458
 
Goodwill
   
8,605
     
8,605
 
Bank owned life insurance
   
8,293
     
8,047
 
Other assets
   
8,217
     
9,511
 
 
               
TOTAL ASSETS
  $
584,122
    $
572,168
 
 
               
LIABILITIES:
               
Deposits:
               
  Noninterest-bearing
  $
53,867
    $
48,509
 
  Interest-bearing
   
410,869
     
398,006
 
Total deposits
   
464,736
     
446,515
 
Borrowed funds
   
66,593
     
75,775
 
Accrued interest payable
   
2,029
     
2,287
 
Other liabilities
   
4,296
     
4,091
 
TOTAL LIABILITIES
   
537,654
     
528,668
 
STOCKHOLDERS' EQUITY:
               
Common stock
               
  $1.00 par value; authorized 10,000,000 shares;
               
  issued  3,020,537 shares in 2007 and 2,992,896 in 2006, respectively
   
3,021
     
2,993
 
Additional paid-in capital
   
12,511
     
11,933
 
Retained earnings
   
36,399
     
34,007
 
Accumulated other comprehensive loss
    (1,426 )     (1,737 )
Unearned restricted stock:  2,785 shares for 2007 and 0 shares for 2006
    (65 )    
-
 
Treasury stock, at cost:  185,433 shares for
               
  2007, and 172,954 shares for 2006
    (3,972 )     (3,696 )
TOTAL STOCKHOLDERS' EQUITY
   
46,468
     
43,500
 
TOTAL LIABILITIES AND
               
   STOCKHOLDERS' EQUITY
  $
584,122
    $
572,168
 
 
               
The accompanying notes are an integral part of these unaudited consolidated financial statements.
         


1

 

CITIZENS FINANCIAL SERVICES, INC.
 
 
   
 
   
 
   
 
 
CONSOLIDATED STATEMENT OF INCOME
 
 
   
 
   
 
   
 
 
(UNAUDITED)
 
 
   
 
   
 
   
 
 
 
 
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(in thousands, except per share data)
 
2007
   
2006
   
2007
   
2006
 
INTEREST INCOME:
 
 
   
 
   
 
   
 
 
Interest and fees on loans
  $
7,715
    $
7,226
    $
22,611
    $
20,639
 
Interest-bearing deposits with banks
   
4
     
-
     
4
     
-
 
Investment securities:
                               
    Taxable
   
1,130
     
851
     
3,201
     
2,549
 
    Nontaxable
   
242
     
232
     
691
     
679
 
    Dividends
   
88
     
74
     
257
     
223
 
TOTAL INTEREST INCOME
   
9,179
     
8,383
     
26,764
     
24,090
 
INTEREST EXPENSE:
                               
Deposits
   
3,366
     
3,067
     
10,106
     
8,390
 
Borrowed funds
   
928
     
849
     
2,660
     
2,388
 
TOTAL INTEREST EXPENSE
   
4,294
     
3,916
     
12,766
     
10,778
 
NET INTEREST INCOME
   
4,885
     
4,467
     
13,998
     
13,312
 
Provision for loan losses
   
60
     
105
     
225
     
225
 
NET INTEREST INCOME AFTER
                               
    PROVISION FOR LOAN LOSSES
   
4,825
     
4,362
     
13,773
     
13,087
 
NON-INTEREST INCOME:
                               
Service charges
   
809
     
827
     
2,369
     
2,342
 
Trust
   
123
     
135
     
387
     
372
 
Brokerage and Insurance
   
37
     
77
     
86
     
230
 
Investment securities gains
   
24
     
5
     
24
     
4
 
Gains on loans sold
   
18
     
11
     
82
     
24
 
Gains on sales of foreclosed properties
   
-
     
-
     
396
     
47
 
Earnings on bank owned life insurance
   
84
     
78
     
246
     
224
 
Other
   
83
     
80
     
306
     
293
 
TOTAL NON-INTEREST INCOME
   
1,178
     
1,213
     
3,896
     
3,536
 
NON-INTEREST EXPENSES:
                               
Salaries and employee benefits
   
2,130
     
2,055
     
6,256
     
6,078
 
Occupancy
   
268
     
261
     
877
     
845
 
Furniture and equipment
   
137
     
146
     
405
     
442
 
Professional fees
   
149
     
125
     
469
     
371
 
Amortization
   
36
     
36
     
108
     
216
 
Other
   
1,068
     
1,075
     
3,406
     
3,374
 
TOTAL NON-INTEREST EXPENSES
   
3,788
     
3,698
     
11,521
     
11,326
 
Income before provision for income taxes
   
2,215
     
1,877
     
6,148
     
5,297
 
Provision for income taxes
   
461
     
329
     
1,254
     
987
 
NET INCOME
  $
1,754
    $
1,548
    $
4,894
    $
4,310
 
                                 
Earnings Per Share
  $
0.62
    $
0.54
    $
1.72
    $
1.50
 
Cash Dividends Paid Per Share
  $
0.225
    $
0.215
    $
0.670
    $
0.640
 
 
                               
Weighted average number of shares outstanding
   
2,835,546
     
2,863,404
     
2,842,115
     
2,877,852
 
 
                               
The accompanying notes are an integral part of these unaudited consolidated financial statements.
                 


2

 

 
CITIZENS FINANCIAL SERVICES, INC.
 
 
 
 
 
 
 
 
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
 
 
 
 
 
 
 
 
(UNAUDITED)
 
 
 
 
 
 
 
 
 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
(in thousands)
 
2007
 
2006
 
2007
 
2006
Net income
 
 $   1,754
 
 $    1,548
 
 $  4,894
 
 $   4,310
Other comprehensive income:
 
 
 
 
 
 
 
 
      Unrealized losses on available for sale securities
    1,674
 
   2,035
 
       440
 
            796
 
      Change in Unrecognized Pension Costs
          55
 
           -
 
         55
 
                 -
 
      Less:   Reclassification adjustment for gains included in net
     income
        (24)
 
         (5)
 
       (24)
 
               (4)
 
Other comprehensive loss before tax
 
      1,705
 
       2,030
 
         471
 
          792
Income tax benefit related to other comprehensive income
 
         580
 
           690
 
         160
 
          269
Other comprehensive loss, net of tax
 
      1,125
 
       1,340
 
         311
 
          523
Comprehensive income
 
 $   2,879
 
 $    2,888
 
 $  5,205
 
 $   4,833
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
 
 
 
 
 

3

 

 
CITIZENS FINANCIAL SERVICES, INC.
           
CONSOLIDATED STATEMENT OF CASH FLOWS
           
(UNAUDITED)
 
Nine Months Ended
 
   
September 30,
 
(in thousands)
 
2007
   
2006
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
  Net income
  $
4,894
    $
4,310
 
  Adjustments to reconcile net income to net
               
   cash provided by operating activities:
               
    Provision for loan losses
   
225
     
225
 
    Depreciation and amortization
   
554
     
902
 
    Amortization and accretion of investment securities
   
115
     
312
 
    Deferred income taxes
   
28
      (73 )
    Investment securities gains, net
    (24 )     (4 )
    Realized gains on loans sold
    (82 )     (24 )
    Earnings on bank owned life insurance
    (246 )     (224 )
    Losses on premises and equipment
   
100
     
1
 
    Originations of loans held for sale
    (4,581 )     (1,847 )
    Proceeds from sales of loans held for sale
   
4,663
     
1,871
 
    Gains on sale of foreclosed assets held for sale
    (396 )     (47 )
    Decrease in accrued interest receivable
    (326 )     (243 )
    Decrease (increase) in accrued interest payable
    (258 )    
132
 
    Other, net
   
222
      (59 )
      Net cash provided by operating activities
   
4,888
     
5,232
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
  Available-for-sale securities:
               
    Proceeds from sales of available-for-sale securities
   
4,538
     
10,402
 
    Proceeds from maturity and principal repayments of securities
   
9,342
     
13,952
 
    Purchase of securities
    (21,598 )     (25,322 )
  Proceeds from redemption of Regulatory Stock
   
2,758
     
2,204
 
  Purchase of Regulatory Stock
    (2,316 )     (2,679 )
  Net increase in loans
    (4,604 )     (29,414 )
  Purchase of premises and equipment
    (418 )     (828 )
  Proceeds from sale of foreclosed assets held for sale
   
1,075
     
321
 
      Net cash used in investing activities
    (11,223 )     (31,364 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
  Net increase in deposits
   
18,222
     
18,360
 
  Proceeds from long-term borrowings
   
16,647
     
8,458
 
  Repayments of long-term borrowings
    (3,647 )     (4,719 )
  Net increase (decrease) in short-term borrowed funds
    (22,183 )    
7,882
 
  Purchase of Treasury Stock
    (360 )     (996 )
  Reissuance of Treasury Stock
   
13
     
-
 
  Vesting of Restricted Stock
   
7
     
-
 
  Dividends paid
    (1,898 )     (1,820 )
      Net cash provided by financing activities
   
6,801
     
27,165
 
                 
          Net increase in cash and cash equivalents
   
466
     
1,033
 
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
   
10,015
     
8,609
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $
10,481
    $
9,642
 
                 
Supplemental Disclosures of Cash Flow Information:
               
    Interest paid
  $
13,023
    $
10,613
 
                 
    Income taxes paid
  $
1,035
    $
1,170
 
                 
    Loans transferred to foreclosed property
  $
61
    $
463
 
                 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
 
4

 
CITIZENS FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1 - Basis of Presentation

Citizens Financial Service, Inc., (individually and collectively with its direct and indirect subsidiaries, the “Company”) is a Pennsylvania corporation organized as the holding company of its wholly owned subsidiary, First Citizens National Bank (the “Bank”), and its subsidiary, First Citizens Insurance Agency, Inc. (“First Citizens Insurance”).  All material inter-company balances and transactions have been eliminated in consolidation.

The accompanying consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”) and in conformity with U.S. generally accepted accounting principles.  Because this report is based on an interim period, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted.

In the opinion of management of the Company, the accompanying interim financial statements for the quarters ended September 30, 2007 and 2006 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition and the results of operations for the period.  In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. The financial performance reported for the Company for the nine-month period ended September 30, 2007 is not necessarily indicative of the results to be expected for the full year.  This information should be read in conjunction with the Company’s Annual Report on Form 10-K for the period ended December 31, 2006.

Note 2 - Earnings per Share

The following table sets forth the computation of earnings per share.  Earnings per share calculations give retroactive effect to stock dividends declared by the Company.  The Company has no dilutive securities.
 

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
 
   
 
   
 
   
 
 
Net income applicable to common stock
  $
1,754,000
    $
1,548,000
    $
4,894,000
    $
4,310,000
 
Weighted average common shares outstanding
   
2,835,546
     
2,863,404
     
2,842,115
     
2,877,852
 
 
                               
Earnings per share
  $
0.62
    $
0.54
    $
1.72
    $
1.50
 

Note 3 - Income Tax Expense

Income tax expense is less than the amount calculated using the statutory tax rate, primarily the result of tax-exempt income earned from state and municipal securities, bank owned life insurance, and loans and investments in tax credits.

Note 4 - Employee Benefit Plans

For a detailed disclosure on the Company's pension and employee benefits plans, please refer to Note 10 of the Company's Consolidated Financial Statements included in the 2006 Annual Report on Form 10-K.

5

 
Defined Benefit Plan

The following sets forth the components of net periodic benefit costs of the noncontributory defined benefit plan for the three months and nine months ended September 30, 2007 and 2006, respectively:


   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(in thousands)
 
2007
   
2006
   
2007
   
2006
 
                         
Service cost
  $
100
    $
105
    $
322
    $
283
 
Interest cost
   
97
     
98
     
311
     
264
 
Expected return on plan assets
    (112 )     (107 )     (358 )     (288 )
Net amortization and deferral
   
18
     
23
     
56
     
63
 
                                 
Net periodic benefit cost
  $
103
    $
119
    $
331
    $
322
 


 The Company expects to contribute $370,029 to its noncontributory defined benefit pension plan in 2007.  As of September 30, 2007, the Company has contributed $198,433.

Defined Contribution Plan

The Company also sponsors a defined contribution, 401(k) plan covering substantially all of its employees.  The Company contributes three percent of applicable salaries into the plan.  Contributions totaled $149,000 and $141,000 for the nine months ended September 30, 2007 and 2006, respectively.

Note 5 – Recent Accounting Pronouncements

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN 48 is an interpretation of FAS No. 109, Accounting for Income Taxes, and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. In addition, FIN No. 48 requires expanded disclosure with respect to the uncertainty in income taxes and is effective for fiscal years beginning after December 15, 2006.  The adoption of this standard is not expected to have a material effect on the Company’s financial position.

In September 2006, the FASB reached consensus on the guidance provided by Emerging Issues Task Force Issue 06-5(“EITF 06-5”), Accounting for Purchases of Life Insurance—Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance.  EITF 06-5 states that a policyholder should consider any additional amounts included in the contractual terms of the insurance policy other than the cash surrender value in determining the amount that could be realized under the insurance contract.  EITF 06-5 also states that a policyholder should determine the amount that could be realized under the life insurance contract assuming the surrender of an individual-life by individual-life policy (or certificate by certificate in a group policy). EITF 06-5 is effective for fiscal years beginning after December 15, 2006.  The Company is currently evaluating the impact the adoption of the EITF will have on the Company’s financial condition.
 
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”), Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements, providing guidance on quantifying financial statement misstatement and implementation when first applying this guidance.  Under SAB No. 108, companies should evaluate a misstatement based on its impact on the current year income statement, as well as the cumulative effect of correcting such misstatements that existed in prior years existing in the current year's ending balance sheet.  SAB 108 is effective for fiscal years ending after November 15, 2006. The adoption of this standard is not expected to have a material effect on the Company’s financial position.
 
6


In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10 (“EITF 06-10”), Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements. EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact the adoption of the EITF will have on the Company’s results of operations or financial condition.

In June 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-11 (“EITF 06-11”), Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. EITF 06-11 applies to share-based payment arrangements with dividend protection features that entitle employees to receive (a) dividends on equity-classified non-vested shares, (b) dividend equivalents on equity-classified non-vested share units, or (c) payments equal to the dividends paid on the underlying shares while an equity-classified share option is outstanding, when those dividends or dividend equivalents are charged to retained earnings under FAS No. 123R, Share-Based Payment, and result in an income tax deduction for the employer. A consensus was reached that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity-classified non-vested equity shares, non-vested equity share units, and outstanding equity share options should be recognized as an increase in additional paid-in capital.  EITF 06-11 is effective for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of the EITF will have on the Company’s financial condition.
 
7


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

Cautionary Statement
 
 
Forward-looking statements may prove inaccurate. We have made forward-looking statements in this document, and in documents that we incorporate by reference, that are subject to risks and uncertainties. Forward-looking statements include information concerning possible or assumed future results of operations of the Company, the Bank, First Citizens Insurance or the combined company. When we use such words as "believes," "expects,” "anticipates," or similar expressions, we are making forward-looking statements.  For a variety of reasons, actual results could differ materially from those contained in or implied by forward-looking statements.  The Company would like to caution readers that the following important factors, among others, may have affected and could in the future affect the Company’s actual results and could cause the Company’s actual results for subsequent periods to differ materially from those expressed in any forward looking statement:
 
·  
Interest rates could change more rapidly or more significantly than we expect.
·  
The economy could change significantly in an unexpected way, which would cause the demand for new loans and the ability of borrowers to repay outstanding loans to change in ways that our models do not anticipate.
·  
The stock and bond markets could suffer a significant disruption, which may have a negative effect on our financial condition and that of our borrowers, and on our ability to raise money by issuing new securities.
·  
It could take us longer than we anticipate implementing strategic initiatives designed to increase revenues or manage expenses, or we may be unable to implement those initiatives at all.
·  
Acquisitions and dispositions of assets could affect us in ways that management has not anticipated.
·  
We may become subject to new legal obligations or the resolution of litigation may have a negative effect on our financial condition.
·  
We may become subject to new and unanticipated accounting, tax, or regulatory practices, regulations or requirements, including the costs of compliance with such changes.
·  
We could experience greater loan delinquencies than anticipated, adversely affecting our earnings and financial condition.  We could also experience greater losses than expected due to the ever increasing volume of information theft and fraudulent scams impacting our customers and the banking industry.
·  
We could lose the services of some or all of our key personnel, which would negatively impact our business because of their business development skills, financial expertise, lending experience, technical expertise and market area knowledge.

         Except as required by applicable law and regulation, we assume no obligation to update or revise any forward-looking statements after the date on which they are made.

Introduction

The following is management's discussion and analysis of the significant changes in the results of operations, capital resources and liquidity presented in its accompanying consolidated financial statements for the Company, a bank holding company and its direct and indirect subsidiaries.  Our Company's consolidated financial condition and results of operations consist almost entirely of our wholly owned subsidiary’s (the Bank) financial conditions and results of operations. Management’s discussion and analysis should be read in conjunction with the preceding September 30, 2007 financial information. The results of operations for the three months and nine months ended September 30, 2007 and 2006 are not necessarily indicative of the results you may expect for the full year.

Our Company currently engages in the general business of banking throughout our service area of Potter, Tioga and Bradford counties in North Central Pennsylvania and Allegany, Steuben, Chemung and Tioga counties in Southern New York. We maintain our central office in Mansfield, Pennsylvania. Presently we operate 16 banking facilities.  In Pennsylvania, these offices are located in Mansfield, Blossburg, Ulysses, Genesee, Wellsboro, Troy, Sayre, Canton, Gillett, Millerton, LeRaysville, Towanda, the Wellsboro Weis Market store, and the Mansfield Wal-Mart Super Center.  In New York, we have a branch office in Wellsville, Allegany County.

8

 
Risk identification and management are essential elements for the successful management of the Company.  In the normal course of business, the Company is subject to various types of risk, including interest rate, credit, liquidity and regulatory risk.

Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the direction and frequency of changes in interest rates.  Interest rate risk results from various re-pricing frequencies and the maturity structure of the financial instruments owned by the Company.  The Company uses its asset/liability and funds management policy to control and manage interest rate risk.

Credit risk represents the possibility that a customer may not perform in accordance with contractual terms.  Credit risk results from loans with customers and the purchasing of securities.  The Company’s primary credit risk is in the loan portfolio.  The Company manages credit risk by adhering to an established credit policy and through a disciplined evaluation of the adequacy of the allowance for loan losses.  Also, the investment policy limits the amount of credit risk that may be taken in the investment portfolio.

Liquidity risk represents the inability to generate or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers and obligations to depositors.  The Company has established guidelines within its asset/liability and funds management policy to manage liquidity risk.  These guidelines include, among other things, contingent funding alternatives.

Regulatory risk represents the possibility that a change in law, regulations or regulatory policy may have a material effect on the business of the Company and its direct and indirect subsidiaries.  We cannot predict what legislation might be enacted or what regulations might be adopted, or if adopted, the effect thereof on our operations.

Readers should carefully review the risk factors described in other documents our Company files from time to time with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the year ended December 31, 2006, filed by our Company and any current reports on Form 8-K filed by us.

We face strong competition in the communities that we serve from other commercial banks, savings banks, and savings and loan associations, some of which are substantially larger institutions than our subsidiary. In addition, insurance companies, investment-counseling firms, and other business firms and individuals offer personal and corporate trust services. We also compete with credit unions, issuers of money market funds, securities brokerage firms, consumer finance companies, mortgage brokers and insurance companies. These entities are strong competitors for virtually all types of financial services.  The financial services industry continues to experience tremendous change to competitive barriers between bank and non-bank institutions. We must compete not only with traditional financial institutions, but in addition, with other business corporations that have begun to deliver competing financial services, and banking services that are easily accessible through the internet. Competition for banking services is based on price, nature of product, quality of service, and in the case of certain activities, convenience of location.

Trust and Investment Services

Our Investment and Trust Services Department is committed to helping our customers meet their financial goals.  The Trust Department offers professional trust administration, investment management services, estate planning and administration, and custody of securities.  We also help the members of our communities prepare for retirement by providing retirement plans for local employers and by managing individual IRA accounts.  Assets held by the Company in a fiduciary or agency capacity for its customers are not included in the consolidated financial statements since such items are not assets of the Company.  As of September 30, 2007 and December 31, 2006, the Trust Department had $93.7 million and $82.6 million of assets under management, respectively.

Our Investment Representatives offer full service brokerage services throughout the Bank’s market area, and appointments can be made at any Bank branch. The Investment Representatives provide financial planning and help our customers achieve their financial goals with their choice of mutual funds, annuities, health and life insurance.  These products are made available through our insurance subsidiary, First Citizens Insurance.

9


Results of Operations

Overview of the Income Statement

          The Company had net income of $4,894,000 for the first nine months of 2007 compared with earnings of $4,310,000 for last year’s comparable period, an increase of $584,000 or 13.5%. Earnings per share for the first nine months of 2007 were $1.72, compared to $1.50 last year representing a 14.7% increase.  Annualized return on assets and return on equity for the first nine months of 2007 was 1.13% and 14.08%, respectively, compared with 1.06% and 13.18% for last year’s comparable period.

Net income for the three months ended September 30, 2007 totaled $1,754,000 compared with $1,548,000 for the comparable period last year, an increase of $206,000 or 13.3%.  Earnings per share for the three months ended September 30, 2007 and 2006 were $.62 and $.54 per share, an increase of 14.8%, respectively. Annualized return on assets and return on equity for the quarter ended September 30, 2007 was 1.20% and 14.85%, respectively, compared with 1.12% and 14.03%, respectively, for last year’s comparable period.

Details of the reasons for these changes are discussed on the following pages.

Net Interest Income

Net interest income, the most significant component of earnings, is the amount by which interest income generated from interest-earning assets exceeds interest expense on interest-bearing liabilities.

For the three months ended September 30, 2007, net interest income was $4,885,000, which was $418,000 or 9.4% higher than the comparable period last year.  The provision for loan losses was $60,000 for the three months ended September 30, 2007 compared with $105,000 for the same period last year.  As such, net interest income after the provision for loan losses was $4,825,000 compared with $4,362,000 for the quarters ended September 30, 2007 and 2006, respectively.

Net interest income, for the nine months of 2007, was $13,998,000 compared to $13,312,000 for the same period in 2006.  For the first nine months of 2007, the provision for loan losses totaled $225,000, the same as the first nine months of 2006.  Consequently, net interest income after the provision for loan losses was $13,773,000 for the first nine months of 2007 compared to $13,087,000 for the first nine months of 2006, an increase of $686,000.

The following tables set forth the average balances of, and the interest earned or incurred on, each principal category of assets, liabilities and stockholders’ equity, the related rates, net interest income and rate “spread” created for the three months and the nine months ended September 30, 2007 and 2006:
 
10


 
 
 Three Months Ended
 
September 30, 2007
September 30, 2006
 
Average
 
Average
Average
 
Average
 
Balance (1)
Interest
Rate
Balance (1)
Interest
Rate
(dollars in thousands)
$
$
%
$
$
%
ASSETS
           
Short-term investments:
           
   Interest-bearing deposits at banks
            357
           4
4.45
                    2
               -
              -
Total short-term investments
            357
           4
4.45
                    2
               -
              -
Investment securities:
           
  Taxable
        99,153
     1,228
4.95
         82,846
         934
4.51
  Tax-exempt (3)
       24,439
       366
5.99
         23,483
         352
6.00
  Total investment securities
      123,592
     1,594
5.16
       106,329
      1,286
4.84
Loans:
           
  Residential mortgage loans
       210,158
    3,938
7.43
       212,368
     3,822
7.14
  Commercial & farm loans
      148,386
    3,000
8.02
       137,578
     2,672
7.71
  Loans to state & political subdivisions
       45,758
       700
6.07
          43,619
         653
5.94
  Other loans
        12,650
        301
9.41
           12,671
         288
9.05
  Loans, net of discount (2)(3)(4)
      416,952
    7,939
7.55
      406,236
     7,435
7.26
Total interest-earning assets
      540,901
    9,537
6.99
       512,567
      8,721
6.75
Cash and due from banks
         9,674
   
           9,453
   
Bank premises and equipment
        12,675
   
          12,382
   
Other assets
        18,937
 
 
          18,856
 
 
Total non-interest earning assets
        41,286
   
          40,691
   
Total assets
      582,187
 
 
      553,258
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
         
Interest-bearing liabilities:
           
  NOW accounts
      100,949
        571
       2.24
         86,397
         450
         2.07
  Savings accounts
       38,774
         35
       0.36
          39,561
           34
         0.34
  Money market accounts
       50,487
        461
       3.62
          46,199
         398
         3.42
  Certificates of deposit
     220,352
    2,299
       4.14
      220,048
      2,185
         3.94
Total interest-bearing deposits
      410,562
    3,366
       3.25
      392,205
     3,067
          3.10
Other borrowed funds
         68,111
       928
       5.40
         62,745
         849
         5.37
Total interest-bearing liabilities
     478,673
    4,294
       3.56
      454,950
      3,916
         3.42
Demand deposits
       50,373
   
         49,644
   
Other liabilities
         6,990
   
           4,763
   
Total non-interest-bearing liabilities
       57,363
 
 
         54,407
 
 
Stockholders' equity
         46,151
   
          43,901
   
Total liabilities & stockholders' equity
      582,187
 
 
      553,258
 
 
Net interest income
 
    5,243
 
 
     4,805
 
Net interest spread (5)
   
3.44%
   
3.34%
Net interest income as a percentage
           
  of average interest-earning assets
   
3.85%
   
3.72%
Ratio of interest-earning assets
           
  to interest-bearing liabilities
   
        1.13
   
           1.13
             
(1) Averages are based on daily averages.
           
(2) Includes loan origination and commitment fees.
         
(3) Tax exempt interest revenue is shown on a tax equivalent basis for proper comparison using
   
       a statutory federal income tax rate of 34%.
     
(4) Income on non-accrual loans is accounted for on a cash basis, and the loan balances are included in interest-earning assets.
(5) Interest rate spread represents the difference between the average rate earned on interest-earning assets
 
      and the average rate paid on interest-bearing liabilities.
         


11

 
 
 
Nine Months Ended
 
September 30, 2007
September 30, 2006
 
Average
 
Average
Average
 
Average
 
Balance (1)
Interest
Rate
Balance (1)
Interest
Rate
(dollars in thousands)
$
$
%
$
$
%
ASSETS
           
Short-term investments:
           
   Interest-bearing deposits at banks
             122
           4
4.05
                   11
              -
             1.70
Total short-term investments
             122
           4
4.05
                   11
              -
             1.70
Investment securities:
           
  Taxable
        95,491
    3,488
4.87
         84,688
    2,805
4.42
  Tax-exempt (3)
       23,225
    1,046
6.01
         23,065
     1,029
5.95
  Total investment securities
       118,716
    4,534
5.09
       107,753
    3,834
4.74
Loans:
           
  Residential mortgage loans
       211,249
   11,675
7.39
      207,480
   10,905
7.03
  Commercial & farm loans
      146,646
    8,692
7.92
       132,662
    7,566
7.63
  Loans to state & political subdivisions
        45,197
    2,045
6.05
         43,400
     1,936
5.96
  Other loans
        12,308
       855
9.29
          12,855
        856
8.90
  Loans, net of discount (2)(3)(4)
      415,400
  23,267
7.49
      396,397
   21,263
7.17
Total interest-earning assets
     534,238
  27,805
6.96
        504,161
  25,097
6.66
Cash and due from banks
         9,368
   
           8,993
   
Bank premises and equipment
        12,827
   
          12,280
   
Other assets
        18,984
 
 
           18,610
 
 
Total non-interest earning assets
         41,179
   
         39,883
   
Total assets
      575,417
 
 
      544,044
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
           
Interest-bearing liabilities:
           
  NOW accounts
       93,336
    1,495
       2.14
          84,514
      1,176
             1.86
  Savings accounts
       38,446
        101
       0.35
         39,526
          96
            0.32
  Money market accounts
         49,211
    1,338
       3.64
         45,056
     1,036
            3.07
  Certificates of deposit
     228,959
    7,172
       4.19
        214,381
    6,082
            3.79
Total interest-bearing deposits
     409,952
   10,106
       3.30
      383,477
    8,390
            2.93
Other borrowed funds
       64,494
    2,660
       5.51
         63,935
    2,388
            4.99
Total interest-bearing liabilities
     474,446
  12,766
       3.60
       447,412
   10,778
            3.22
Demand deposits
        49,103
   
         48,592
   
Other liabilities
         6,609
   
           4,665
   
Total non-interest-bearing liabilities
        55,712
 
 
         53,257
 
 
Stockholders' equity
       45,259
   
         43,375
   
Total liabilities & stockholders' equity
      575,417
 
 
      544,044
 
 
Net interest income
 
  15,039
 
 
    14,319
 
Net interest spread (5)
   
3.36%
   
3.44%
Net interest income as a percentage
           
  of average interest-earning assets
   
3.76%
   
3.80%
Ratio of interest-earning assets
           
  to interest-bearing liabilities
   
        1.13
   
              1.13
             
(1) Averages are based on daily averages.
           
(2) Includes loan origination and commitment fees.
           
(3) Tax exempt interest revenue is shown on a tax equivalent basis for proper comparison using
     
       a statutory federal income tax rate of 34%.
     
(4) Income on non-accrual loans is accounted for on a cash basis, and the loan balances are included in interest-earning assets.
(5) Interest rate spread represents the difference between the average rate earned on interest-earning assets
   
      and the average rate paid on interest-bearing liabilities.
         
 
 
12

 
Tax exempt revenue is shown on a tax-equivalent basis for proper comparison using a statutory, federal income tax rate of 34%.  For purposes of the comparison, as well as the discussion that follows, this presentation facilitates performance comparisons between taxable and tax-free assets by increasing the tax-free income by an amount equivalent to the Federal income taxes that would have been paid if this income were taxable at the Company’s 34% Federal statutory rate.  The following table represents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the three and nine months ended September 30, 2007 and 2006:
 
   
For the Three Months
   
For the Nine Months
 
   
Ended September 30,
   
Ended September 30,
 
In thousands:
 
2007
   
2006
   
2007
   
2006
 
                         
Total interest income
  $
9,179
    $
8,383
    $
26,764
    $
24,090
 
Total interest expense
   
4,294
     
3,916
     
12,766
     
10,778
 
                                 
Net interest income
   
4,885
     
4,467
     
13,998
     
13,312
 
Tax equivalent adjustment
   
358
     
338
     
1,041
     
1,007
 
                                 
Net interest income (fully taxable equivalent)
  $
5,243
    $
4,805
    $
15,039
    $
14,319
 


The following table shows the tax-equivalent effect of changes in volume and rate on interest income and expense for the three months and nine months ended September 30, 2007.

   
Three months ended September 30, 2007 vs. 2006 (1)
   
Nine months ended September 30, 2007 vs. 2006 (1)
 
   
Change in
   
Change
   
Total
   
Change in
   
Change
   
Total
 
 (in thoudsands)
 
Volume
   
in Rate
   
Change
   
Volume
   
in Rate
   
Change
 
Interest Income:
                                   
Short-term investments:
                                   
  Interest-bearing deposits at banks
  $
4
    $
-
    $
4
    $
4
    $
-
    $
4
 
Investment securities:
                                               
  Taxable
   
220
     
74
     
294
     
548
     
135
     
683
 
  Tax-exempt
   
14
     
-
     
14
     
7
     
10
     
17
 
Total investments
   
234
     
74
     
308
     
555
     
145
     
700
 
Loans:
                                               
  Residential mortgage loans
    (40 )    
156
     
116
     
192
     
578
     
770
 
  Commercial & farm loans
   
228
     
100
     
328
     
848
     
278
     
1,126
 
  Loans to state & political subdivisions
   
33
     
14
     
47
     
82
     
27
     
109
 
  Other loans
    (1 )    
14
     
13
      (37 )    
36
      (1 )
Total loans, net of discount
   
220
     
284
     
504
     
1,085
     
919
     
2,004
 
Total Interest Income
   
458
     
358
     
816
     
1,644
     
1,064
     
2,708
 
Interest Expense:
                                               
Interest-bearing deposits:
                                               
  NOW accounts
   
89
     
32
     
121
     
81
     
238
     
319
 
  Savings accounts
    (1 )    
2
     
1
      (2 )    
7
     
5
 
  Money Market accounts
   
43
     
20
     
63
     
78
     
224
     
302
 
  Certificates of deposit
   
3
     
111
     
114
     
332
     
758
     
1,090
 
Total interest-bearing deposits
   
134
     
165
     
299
     
489
     
1,227
     
1,716
 
Other borrowed funds
   
73
     
6
     
79
     
20
     
252
     
272
 
Total interest expense
   
207
     
171
     
378
     
509
     
1,479
     
1,988
 
Net interest income
  $
251
    $
187
    $
438
    $
1,135
    $ (415 )   $
720
 
                                                 
(1) The portion of the total change attributable to both volume and rate changes during the year has been allocated
         
to volume and rate components based upon the absolute dollar amount of the change in each component prior to allocation.
 
 
13

 
As can be seen from the preceding tables, our net interest spread improved from 3.34% for the three months ended September 30, 2006 to 3.44% for the same time period in 2007.  For the first nine months of 2007, our net interest spread was 3.36% compared with 3.44% for the first nine months of 2006, a decrease of 8 basis points.  From June 2004 to June 2006, the Federal Reserve increased the Federal Funds rate 425 basis points.  Since that period, we have experienced a flat to inverted interest rate yield curve.  This resulted in an increase in the rates paid on our shorter-term cost of funds.  We did not however see the same level of increase in longer-term rates on our interest earning assets.  As such, we experienced a compression in our net interest margin.
 
In August 2007, the Federal Reserve lowered the discount rate 50 basis points due primarily to a decrease in overall liquidity related to the sub-prime housing market.  On September 18, 2007, due to various economic factors, the Federal Reserve reduced the Federal Funds rate by 50 basis points.  For the quarter ended September 30, 2007, these events resulted in a slightly positive affect on the Company by decreasing our short-term cost of funds more than the decrease in interest income earned on shorter term interest earning assets.  As such, our net interest spread has improved compared to the same period last year. If the yield curve becomes more normal, we expect our interest margin to continue to improve. Management continues to review various pricing and investment strategies in an attempt to maintain or improve upon our current interest margin.  Low cost deposits continue to be our focus and are essential in improving the interest margin going forward.
 
For the three months ended September 30, 2007, tax equivalent net interest income increased from $4,805,000 in 2006 to $5,243,000.  The yield on interest-earning assets was 6.99% compared to 6.75% and the rate on interest-bearing liabilities was 3.56% compared to 3.42%.
 
Tax equivalent net interest income improved from $14,319,000 for the nine months ended September 30, 2006 to $15,040,000 for the same period in 2007.  This represents an increase of $721,000 on a tax equivalent basis.  The increase in interest-earning assets of $30.1 million generated an increase in interest income of $2,708,000, with $1,644,000 due to volume, and $1,064,000 of the increase attributable to a change in rate.  The yield on interest earning assets has increased 30 basis points going from 6.66% to 6.96%.  Interest-bearing liabilities increased $27.0 million resulting in an increase of $1,988,000 of interest expense predominately attributable to a change in rate.  Comparing the first nine months of 2007 with 2006, the average interest rate on interest-bearing liabilities increased 38 basis points, from 3.22% to 3.60%.
 
Provision For Loan Losses

For the three months ending September 30, 2007, we recorded $60,000 to the provision for loan losses compared to $105,000 recorded for the same time period last year.  For the nine month period ending September 30, 2007 we recorded $225,000 to the provision which is the same as was recorded last year through nine months.  Management's quarterly review of the allowance for loan losses is based on the following information: migration analysis of delinquent and non-accrual loans, impaired loans, estimated future losses on loans, recent review of large problem credits, local and national economic conditions, historical loss experience, OCC qualitative adjustments, actual and expected loan growth and peer comparisons (see also “Financial Condition – Allowance for Loan Losses”).
 
Non-interest Income

Non-interest income for the three months ended September 30, 2007, as detailed below, totaled $1,178,000, a decrease of $35,000 over the comparable period last year.  The main decrease is in brokerage and insurance revenues which decreased by $40,000 when compared to last year.  We continue the transition to a new broker-dealer.  As a result, our focus has moved from annuity products to fee based managed accounts that will allow us to further develop our relationship with our customers.  During the three months ended September 30, 2007, we recorded a $24,000 net gain on the sale of investment securities.  This compares to a net gain of $5,000 recorded during the third quarter of 2006.

Non-interest income increased $360,000 or 10.2%, for the first nine months of 2007 when compared to the same period in 2006.  Gains on sales of foreclosed properties increased by $349,000 due to a large pre-tax gain of $381,000 realized during the second quarter from the sale of a commercial property.  Trust income increased $15,000 or 4.0% due to our ongoing success in growing our trust assets under management.  Gains on the sale of investment securities increased by $20,000 due to the aforementioned sale.  Gains on loans sold also increased $58,000 due to an increased volume of sales of secondary mortgages compared to last year.  These increases were offset by a decrease in brokerage income of $144,000.  We continue to emphasize the successful transition to the new broker-dealer and anticipate continued improvement.

14

 
The following tables show the breakdown of non-interest income for the three months and nine months ended September 30, 2007 and 2006:


   
Three months ended September 30,
   
Change
 
(dollars in thousands) 
 
2007
   
2006
   
Amount
   
%
 
Service charges
  $
809
    $
827
    $ (18 )     (2.2 )
Trust
   
123
     
135
      (12 )     (8.9 )
Brokerage and Insurance
   
37
     
77
      (40 )     (51.9 )
Investment securities gains, net
   
24
     
5
     
19
     
380.0
 
Gains on loans sold
   
18
     
11
     
7
     
63.6
 
Earnings on bank owned life insurance
   
84
     
78
     
6
     
7.7
 
Other
   
83
     
80
     
3
     
3.8
 
Total
  $
1,178
    $
1,213
    $ (35 )     (2.9 )
 
                               
 
                               
 
                               
   
Nine months ended September 30,
   
Change
 
(dollars in thousands) 
 
2007
   
2006
   
Amount
   
%
 
Service charges
  $
2,369
    $
2,342
    $
27
     
1.2
 
Trust
   
387
     
372
     
15
     
4.0
 
Brokerage and Insurance
   
86
     
230
      (144 )     (62.6 )
Investment securities gains, net
   
24
     
4
     
20
     
500.0
 
Gains on loans sold
   
82
     
24
     
58
     
241.7
 
Gains on sales of foreclosed properties
   
396
     
47
     
349
     
742.6
 
Earnings on bank owned life insurance
   
246
     
224
     
22
     
9.8
 
Other
   
306
     
293
     
13
     
4.4
 
Total
  $
3,896
    $
3,536
    $
360
     
10.2
 

Non-interest Expense

Non-interest expenses, as detailed below, totaled $3,788,000 for the three months ended September 30, 2007 compared with $3,698,000 for the comparable period last year.  This is an increase of $90,000, or 2.4%.  Salaries and employee benefits have increased by $75,000, or 3.6%, primarily due to an increase in employee incentive accruals.  Professional fees increased $24,000 due to various consulting arrangements consistent with our strategic initiatives.

Total non-interest expense for the first nine months of 2007 increased $195,000 or 1.7%, compared to the same period in 2006.  The increase is primarily due to a $100,000 write-down of one of our bank properties.    The increase in salaries and employee benefits of $178,000 is due mainly to annual merit increases and an increase in employee incentive accruals.  Occupancy expense increased by $32,000 because of the depreciation and associated building maintenance to our new Wellsville branch.  Other professional fees have increased $98,000 over last year due to various consulting arrangements including an evaluation of our incentive and pension plans.  Furniture and equipment costs decreased due to decreased depreciation expense from assets becoming fully depreciated.  Amortization expense decreased $108,000 due to a core deposit intangible from a previous acquisition that became fully amortized in March 2006.  Without the $100,000 write-down, we would have increased total non-interest expense by only $95,000, or 0.8% over the first nine months of 2007. Management continues to examine ways to become a more efficient organization without sacrificing customer service.

15

 
The following tables reflect the breakdown of non-interest expense and professional fees for the three months and nine months ended September 30, 2007 and 2006:


   
Three months ended September 30,
   
Change
 
(dollars in thousands) 
 
2007
   
2006
   
Amount
   
%
 
Salaries and employee benefits
  $
2,130
    $
2,055
    $
75
     
3.6
 
Occupancy
   
268
     
261
     
7
     
2.7
 
Furniture and equipment
   
137
     
146
      (9 )     (6.2 )
Professional fees
   
149
     
125
     
24
     
19.2
 
Amortization
   
36
     
36
     
-
     
-
 
Other
   
1,068
     
1,075
      (7 )     (0.7 )
Total
  $
3,788
    $
3,698
    $
90
     
2.4
 
 
                               
   
Three months ended September 30,
   
Change
 
   
2007
   
2006
   
Amount
   
%
 
Other professional fees
  $
90
    $
68
    $
22
     
32.4
 
Legal fees
   
15
     
21
      (6 )     (28.6 )
Examinations and audits
   
44
     
36
     
8
     
22.2
 
Total
  $
149
    $
125
    $
24
     
19.2
 



   
Nine months ended September 30,
   
Change
 
(dollars in thousands) 
 
2007
   
2006
   
Amount
   
%
 
Salaries and employee benefits
  $
6,256
    $
6,078
    $
178
     
2.9
 
Occupancy
   
877
     
845
     
32
     
3.8
 
Furniture and equipment
   
405
     
442
      (37 )     (8.4 )
Professional fees
   
469
     
371
     
98
     
26.4
 
Amortization
   
108
     
216
      (108 )     (50.0 )
Other
   
3,406
     
3,374
     
32
     
0.9
 
Total
  $
11,521
    $
11,326
    $
195
     
1.7
 
 
                               
   
Nine months ended September 30,
   
Change
 
   
2007
   
2006
   
Amount
   
%
 
Other professional fees
  $
278
    $
215
    $
63
     
29.3
 
Legal fees
   
70
     
50
     
20
     
40.0
 
Examinations and audits
   
121
     
106
     
15
     
14.2
 
Total
  $
469
    $
371
    $
98
     
26.4
 

Provision For Income Taxes

The provision for income taxes was $461,000 for the three months ending September 30, 2007 compared to $329,000 last year.  The increase is due to the level of taxable income we have earned this year compared to last year.

The provision for income taxes was $1,254,000 for the nine month period ended September 30, 2007 compared to $987,000 for the same period in 2006.  Through management of our municipal loan and bond portfolios, the effective tax rate for 2007 is 20.35% compared with 18.47% for last year.

We are involved in three limited partnership agreements that established low-income housing projects in our market areas. As a result of these agreements, for tax purposes we have recognized $639,000 out of a total $913,000 of tax credits from one project in the Towanda area that began in October of 2000. We have recognized $221,000 out of a total $385,000 of tax credits on the second project in the Wellsboro market which was completed in November 2001.  In 2005, we entered into a third limited liability partnership for a low-income housing project for senior citizens in our Sayre market area.  Beginning in 2007, we have recognized $43,000 out of a total $574,000 of tax credits.  We anticipate recognizing $969,000 of tax credits over the next ten years.