10-Q

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 June 30, 2012

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 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 (§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 __X__ 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 ____                                                                                                   Smaller reporting company ____

(Do not check if a 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 number of outstanding shares of the Registrant’s Common Stock, as of August 1, 2012, was 2,917,540.

Citizens Financial Services, Inc.

Form 10-Q

INDEX

		PAGE
Part I	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited):
	Consolidated Balance Sheet as of June 30, 2012 and December 31, 2011	1
	Consolidated Statement of Income for the Three Months and Six             Months Ended June 30, 2012 and 2011	2
	Consolidated Statement of Comprehensive Income for the Three Months and Six months Ended June 30, 2012 and 2011	3
	Consolidated Statement of Cash Flows for the Six months Ended June 30, 2012 and 2011	4
	Notes to Consolidated Financial Statements	5-26
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27-50
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4.	Controls and Procedures	50
Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults Upon Senior Securities	51
Item 4.	Mine Safety Disclosures	51
Item 5.	Other Information	51
Item 6.	Exhibits	52
	Signatures	53

CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
	June 30	December 31
(in thousands except share data)	2012	2011
ASSETS:
Cash and due from banks:
Noninterest-bearing	$             12,525	$            9,960
Interest-bearing	5,243	20,472
Total cash and cash equivalents	17,768	30,432
Available-for-sale securities	323,131	318,823
Loans (net of allowance for loan losses:
2012, $6,650 and 2011, $6,487)	490,482	481,022
Premises and equipment	11,515	11,702
Accrued interest receivable	3,800	3,621
Goodwill	10,256	10,256
Bank owned life insurance	13,919	13,669
Other assets	10,479	9,042
TOTAL ASSETS	$           881,350	$        878,567
LIABILITIES:
Deposits:
Noninterest-bearing	$             86,218	$          85,605
Interest-bearing	652,549	648,388
Total deposits	738,767	733,993
Borrowed funds	47,066	53,882
Accrued interest payable	1,222	1,512
Other liabilities	7,754	7,712
TOTAL LIABILITIES	794,809	797,099
STOCKHOLDERS' EQUITY:
Preferred Stock
$1.00 par value; authorized 3,000,000 shares June 30, 2012 and December 31, 2011;
none issued in 2012 or 2011	-	-
Common stock
$1.00 par value; authorized 15,000,000 shares;  issued 3,132,866 at June 30, 2012 and
December 31, 2011	3,133	3,133
Additional paid-in capital	15,364	15,313
Retained earnings	68,813	63,337
Accumulated other comprehensive income	4,990	4,949
Treasury stock, at cost:  243,784 shares at June 30, 2012
and 230,203 shares at December 31, 2011	(5,759)	(5,264)
TOTAL STOCKHOLDERS' EQUITY	86,541	81,468
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY	$           881,350	$        878,567
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		Six Months Ended
	June 30,		June 30,
(in thousands, except share and per share data)	2012	2011	2012	2011
INTEREST INCOME:
Interest and fees on loans	$        7,439	$      7,463	$     14,904	$    14,858
Interest-bearing deposits with banks	1	20	6	42
Investment securities:
Taxable	1,237	1,176	2,434	2,348
Nontaxable	920	892	1,874	1,757
Dividends	16	14	32	29
TOTAL INTEREST INCOME	9,613	9,565	19,250	19,034
INTEREST EXPENSE:
Deposits	1,555	2,046	3,221	4,134
Borrowed funds	393	443	806	888
TOTAL INTEREST EXPENSE	1,948	2,489	4,027	5,022
NET INTEREST INCOME	7,665	7,076	15,223	14,012
Provision for loan losses	105	150	210	375
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES	7,560	6,926	15,013	13,637
NON-INTEREST INCOME:
Service charges	1,129	1,128	2,207	2,073
Trust	151	146	324	303
Brokerage and insurance	75	123	225	218
Gains on loans sold	131	34	185	75
Investment securities gains, net	213	114	321	234
Earnings on bank owned life insurance	126	124	250	245
Other	116	129	261	269
TOTAL NON-INTEREST INCOME	1,941	1,798	3,773	3,417
NON-INTEREST EXPENSES:
Salaries and employee benefits	2,668	2,518	5,421	5,033
Occupancy	314	329	624	719
Furniture and equipment	96	106	202	223
Professional fees	224	172	492	329
FDIC insurance	115	250	238	500
Pennsylvania shares tax	160	146	326	293
Other	1,000	1,189	2,118	2,393
TOTAL NON-INTEREST EXPENSES	4,577	4,710	9,421	9,490
Income before provision for income taxes	4,924	4,014	9,365	7,564
Provision for income taxes	1,171	867	2,163	1,587
NET INCOME	$        3,753	$      3,147	$       7,202	$      5,977
PER COMMON SHARE DATA:
Net Income - Basic	$          1.30	$        1.08	$          2.49	$        2.05
Net Income - Diluted	$          1.30	$        1.08	$          2.49	$        2.05
Cash Dividends Paid	$        0.300	$      0.265	$       0.595	$      0.525
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				Six Months Ended
	June 30,				June 30,
(in thousands)		2012		2011		2012		2011
Net income		$ 3,753		$ 3,147		$      7,202		$ 5,977
Other comprehensive income:
Increase in unrealized gains on available for sale securities	741		2,660		318		3,551
Income tax effect related to unrealized gains on available for sale securities	(252)		(905)		(108)		(1,208)
Decrease (increase) in unrealized loss on interest rate swap	45		(59)		66		1
Income tax effect related to unrealized loss on interest rate swap	(15)		20		(23)		-
Less:  Reclassification adjustment for gain included in net income	(213)		(114)		(321)		(234)
Income tax effect related to reclassification adjustment for gain included in net income	72		39		109		80
Other comprehensive income, net of tax		378		1,641		41		2,190
Comprehensive income		$ 4,131		$ 4,788		$      7,243		$ 8,167
The accompanying notes are an integral part of these unaudited consolidated financial statements.

3

CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)	Six Months Ended
	June 30,
(in thousands)	2012	2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$          7,202	$          5,977
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses	210	375
Depreciation and amortization	211	272
Amortization and accretion of investment securities, net	1,196	940
Deferred income taxes	28	192
Investment securities gains, net	(321)	(234)
Earnings on bank owned life insurance	(250)	(245)
Originations of loans held for sale	(14,241)	(5,316)
Proceeds from sales of loans held for sale	14,426	5,391
Realized gains on loans sold	(185)	(75)
Increase in accrued interest receivable	(179)	(262)
Decrease in accrued interest payable	(290)	(223)
Other, net	(269)	45
Net cash provided by operating activities	7,538	6,837
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities:
Proceeds from sales	16,654	7,821
Proceeds from maturity and principal repayments	68,914	32,063
Purchase of securities	(90,754)	(72,496)
Proceeds from redemption of regulatory stock	245	312
Purchase of regulatory stock	(1,405)	-
Net increase in loans	(9,679)	(3,925)
Purchase of premises and equipment	(117)	(65)
Purchase of land for potential future expansion	-	(545)
Proceeds from sale of foreclosed assets held for sale	345	371
Net cash used in investing activities	(15,797)	(36,464)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits	4,774	32,416
Proceeds from long-term borrowings	28	9
Repayments of long-term borrowings	(4,110)	(1,000)
Net (decrease) increase in short-term borrowed funds	(2,734)	403
Purchase of treasury and restricted stock	(637)	(360)
Dividends paid	(1,726)	(1,404)
Net cash (used in) provided by financing activities	(4,405)	30,064
Net (decrease) increase in cash and cash equivalents	(12,664)	437
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	30,432	43,995
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$        17,768	$        44,432
Supplemental Disclosures of Cash Flow Information:
Interest paid	$          4,317	$          5,245
Income taxes paid	$          2,095	$          1,300
Loans transferred to foreclosed property	$             123	$             490
Premises and equipment transferred to other assets	$                  -	$             282
Investments purchased and not settled included in other liabilities	$                  -	$          2,085
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 Services, 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 Community Bank (the “Bank”), and the Bank’s subsidiary, First Citizens Insurance Agency, Inc. (“First Citizens Insurance”). On June 29, 2012, the Bank completed the conversion from a national bank into a Pennsylvania state-chartered bank and trust company and changed its name from First Citizens National Bank to First Citizens Community Bank.

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.  Certain of the prior year amounts have been reclassified to conform with the current year presentation.  Such reclassifications had no effect on net income or stockholders’ equity.  All material inter-company balances and transactions have been eliminated in consolidation.

In the opinion of management of the Company, the accompanying interim financial statements for the periods ended June 30, 2012 and 2011 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 six month period ended June 30, 2012 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 year ended December 31, 2011.

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.

	Three months ended		Six months ended
	June 30,		June 30,
	2012	2011	2012	2011
Basic earnings per share computation:
Net income applicable to common stock	$3,753,000	$3,147,000	$7,202,000	$5,977,000
Weighted average common shares outstanding for basic earnings per share	2,886,012	2,915,708	2,890,849	2,916,526
Earnings per share - basic	$1.30	$1.08	$2.49	$2.05
Diluted earnings per share computation:
Net income applicable to common stock	$3,753,000	$3,147,000	$7,202,000	$5,977,000
Weighted average common shares outstanding for basic earnings per share	2,886,012	2,915,708	2,890,849	2,916,526
Add: Dilutive effects of restricted stock	1,409	-	624	-
Weighted average common shares outstanding for dilutive earnings per share	2,887,421	2,915,708	2,891,473	2,916,526
Earnings per share - dilutive	$1.30	$1.08	$2.49	$2.05

5

Restricted stock grants that were anti-dilutive were excluded from net income per share calculations. For the three months ended June 30, 2012 and 2011, 2,447 and 8,847 shares, respectively, related to the restricted stock program were excluded from the diluted earnings per share calculations since they were anti-dilutive. For the six months ended June 30, 2012 and 2011, 4,115 and 8,847 shares, respectively, related to the restricted stock program were excluded from the diluted earnings per share calculations since they were anti-dilutive.

Note 3 - Income Tax Expense

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

Note 4 – Investments

The amortized cost and fair value of investment securities at June 30, 2012 and December 31, 2011 were as follows (in thousands):

		Gross	Gross
	Amortized	Unrealized	Unrealized	Fair
June 30, 2012	Cost	Gains	Losses	Value
Available-for-sale securities:
U.S. agency securities	$    144,214	$               2,157	$                 (7)	$     146,364
Obligations of state and
political subdivisions	93,130	5,089	(72)	98,147
Corporate obligations	10,790	276	(20)	11,046
Mortgage-backed securities in
government sponsored entities	64,072	2,223	(101)	66,194
Equity securities in financial
institutions	911	469	-	1,380
Total available-for-sale securities	$    313,117	$             10,214	$             (200)	$     323,131
		Gross	Gross
	Amortized	Unrealized	Unrealized	Fair
December 31, 2011	Cost	Gains	Losses	Value
Available-for-sale securities:
U.S. Agency securities	$    166,534	$               2,087	$               (21)	$     168,600
Obligations of state and
political subdivisions	96,556	4,996	(5)	101,547
Corporate obligations	8,263	197	-	8,460
Mortgage-backed securities in
government sponsored entities	36,630	2,356	(12)	38,974
Equity securities in financial institutions	823	420	(1)	1,242
Total available-for-sale securities	$    308,806	$             10,056	$               (39)	$     318,823

The following table shows the Company’s gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time, that the individual securities have been in a continuous unrealized loss position, at June 30, 2012 and December 31, 2011 (in thousands). As of June 30, 2012, the Company owned 13 securities whose fair value was less than their cost basis.

6

June 30, 2012	Less than Twelve Months		Twelve Months or Greater		Total
		Gross		Gross		Gross
	Fair	Unrealized	Fair	Unrealized	Fair	Unrealized
	Value	Losses	Value	Losses	Value	Losses
U.S. Agency securities	$          4,010	$               (7)	$                  -	$                  -	$          4,010	$               (7)
Obligations of state and
political subdivisions	3,437	(72)	-	-	3,437	(72)
Corporate obligations	2,585	(20)	-	-	2,585	(20)
Mortgage-backed securities in
government sponsored entities	9,360	(101)	-	-	9,360	(101)
Total securities	$        19,392	$           (200)	$                  -	$                  -	$        19,392	$           (200)
December 31, 2011	Less than Twelve Months		Twelve Months or Greater		Total
		Gross		Gross		Gross
	Fair	Unrealized	Fair	Unrealized	Fair	Unrealized
	Value	Losses	Value	Losses	Value	Losses
U.S. Agency securities	$        10,018	$             (21)	$                  -	$                  -	$        10,018	$             (21)
Obligations of states and
political subdivisions	1,057	(3)	771	(2)	1,828	(5)
Mortgage-backed securities in
government sponsored entities	3,164	(12)	-	-	3,164	(12)
Equity securities in financial institutions	39	(1)	-	-	39	(1)
Total securities	$        14,278	$             (37)	$             771	$               (2)	$        15,049	$             (39)

As of June 30, 2012, the Company’s investment securities portfolio contained unrealized losses on agency securities issued or backed by the full faith and credit of the United States government or are generally viewed as having the implied guarantee of the U.S. government, obligations of states and political subdivisions, corporate obligations and  mortgage backed securities in government sponsored entities. For fixed maturity investments management considers whether the present value of cash flows expected to be collected are less than the security’s amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Company’s intent to sell the security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in market value, to determine whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, if the Company does not intend to sell the security, and it is more-likely-than-not that it will not be required to sell the security, before recovery of the security’s amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings. For equity securities where the fair value has been significantly below cost for one year, the Company’s policy is to recognize an impairment loss unless sufficient evidence is available that the decline is not other than temporary and a recovery period can be predicted.  The Company has concluded that any impairment of its investment securities portfolio outlined in the above table is not other than temporary and is the result of interest rate changes, sector credit rating changes, or company-specific rating changes that are not expected to result in the non-collection of principal and interest during the period.

Proceeds from sales of securities available-for-sale for the six months ended June 30, 2012 and 2011 were $16,654,000 and $7,821,000, respectively.  For the three months ended June 30, 2012 and 2011, there were sales of $5,418,000 and $4,632,000, respectively, of available-for-sale securities. The gross gains and losses were as follows (in thousands):

7

	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2012	2011	2012	2011
Gross gains	$           213	$                  114	$              321	$            263
Gross losses	-	-	-	(29)
Net gains	$           213	$                  114	$              321	$            234

Investment securities with an approximate carrying value of $174.1 million and $177.9 million at June 30, 2012 and December 31, 2011, respectively, were pledged to secure public funds and certain other deposits.

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.   The amortized cost and fair value of debt securities at June 30, 2012, by contractual maturity, are shown below (in thousands):

	Amortized
	Cost	Fair Value
Available-for-sale debt securities:
Due in one year or less	$      15,878	$         16,028
Due after one year through five years	83,752	85,499
Due after five years through ten years	47,862	49,081
Due after ten years	164,714	171,143
Total	$    312,206	$       321,751

Note 5 – Loans

The Company grants commercial, industrial, agricultural, residential, and consumer loans primarily to customers throughout North Central Pennsylvania and Southern New York.  Although the Company had a diversified loan portfolio at June 30, 2012 and December 31, 2011, a substantial portion of its debtors’ ability to honor their contracts is dependent on the economic conditions within these regions. The following table summarizes the primary segments of the loan portfolio as of June 30, 2012 and December 31, 2011 (in thousands):

June 30, 2012	Total Loans	Individually evaluated for impairment	Collectively evaluated for impairment
Real estate loans:
Residential	$                 181,409	$                        351	$                 181,058
Commercial and agricultural	189,705	7,475	182,230
Construction	10,328	-	10,328
Consumer	11,160	-	11,160
Other commercial and agricultural loans	47,067	457	46,610
State and political subdivision loans	57,463	-	57,463
Total	497,132	$                     8,283	$                 488,849
Allowance for loan losses	6,650
Net loans	$                 490,482

8

December 31, 2011	Total Loans	Individually evaluated for impairment	Collectively evaluated for impairment
Real estate loans:
Residential	$                 184,034	$                          94	$                 183,940
Commercial and agricultural	185,050	8,270	176,780
Construction	8,481	-	8,481
Consumer	10,746	-	10,746
Other commercial and agricultural loans	44,299	517	43,782
State and political subdivision loans	54,899	-	54,899
Total	487,509	$                     8,881	$                 478,628
Allowance for loan losses	6,487
Net loans	$                 481,022

The segments of the Bank’s loan portfolio are disaggregated into classes to a level that allows management to monitor risk and performance. Residential real estate mortgages consists primarily of 15 to 30 year first mortgages on residential real estate, while residential real estate home equities are consumer purpose installment loans or lines of credit secured by a mortgage which is often a second lien on residential real estate with terms of 15 years or less. Commercial real estate loans are business purpose loans secured by a mortgage on commercial real estate. Agricultural real estate loans are loans secured by a mortgage on real estate used in agriculture production. Construction real estate loans are loans secured by residential or commercial real estate used during the construction phase of residential and commercial projects. Consumer loans are typically unsecured or primarily secured by something other than real estate and overdraft lines of credit connected with customer deposit accounts. Other commercial loans are loans for commercial purposes primarily secured by non-real estate collateral. Other agricultural loans are loans for agricultural purposes primarily secured by non-real estate collateral. State and political subdivisions are loans for state and local municipalities for capital and operating expenses or tax free loans used to finance commercial development.

Management considers commercial loans, other agricultural loans, commercial real estate loans and agricultural real estate loans which are 90 days or more past due to be impaired. Management will also consider a loan impaired based on other factors it becomes aware of, including the customer’s results of operations and cash flows. These loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance.

The following table includes the recorded investment and unpaid principal balances for impaired financing receivables by class, with the associated allowance amount, if applicable (in thousands):

9

		Recorded	Recorded
	Unpaid	Investment	Investment	Total		Average	Interest
	Principal	With No	With	Recorded	Related	Recorded	Income
June 30, 2012	Balance	Allowance	Allowance	Investment	Allowance	Investment	Recognized
Real estate loans:
Residential mortgages	$      258	$          118	$          140	$          258	$          14	$            83	$               1
Home equity	93	18	75	93	15	93	2
Commercial	8,816	5,366	2,109	7,475	512	8,138	39
Agricultural	-	-	-	-	-	-	-
Construction	-	-	-	-	-	-	-
Consumer	-	-	-	-	-	-	-
Other commercial loans	504	28	429	457	21	468	-
Other agricultural loans	-	-	-	-	-	-	-
State and political
subdivision loans	-	-	-	-	-	-	-
Total	$   9,671	$       5,530	$       2,753	$       8,283	$        562	$       8,782	$             42
		Recorded	Recorded
	Unpaid	Investment	Investment	Total		Average	Interest
	Principal	With No	With	Recorded	Related	Recorded	Income
December 31, 2011	Balance	Allowance	Allowance	Investment	Allowance	Investment	Recognized
Real estate loans:
Residential mortgages	$           -	$               -	$               -	$               -	$             -	$               -	$                -
Home equity	94	36	58	94	13	36	1
Commercial	9,394	5,663	2,607	8,270	433	8,585	65
Agricultural	-	-	-	-	-	371	37
Construction	-	-	-	-	-	-	-
Consumer	-	-	-	-	-	-	-
Other commercial loans	574	30	487	517	48	501	-
Other agricultural loans	-	-	-	-	-	160	20
State and political
subdivision loans	-	-	-	-	-	-	-
Total	$ 10,062	$       5,729	$       3,152	$       8,881	$        494	$       9,653	$           123

Credit Quality Information

For commercial real estate, agricultural real estate, construction, commercial and other, other agricultural loans and state and political subdivision loans, management uses a nine point internal risk rating system to monitor the credit quality. The first five categories are considered not criticized and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The definitions of each rating are defined below:

·   Pass (Grades 1-5) – These loans are to customers with credit quality ranging from an acceptable to very high quality and are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.

·   Special Mention (Grade 6) – This loan grade is in accordance with regulatory guidance and includes loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

·   Substandard (Grade 7) – This loan grade is in accordance with regulatory guidance and includes loans that have a well-defined weakness based on objective evidence and be characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

·   Doubtful (Grade 8) – This loan grade is in accordance with regulatory guidance and includes loans that have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

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·   Loss (Grade 9) – This loan grade is in accordance with regulatory guidance and includes loans that are considered uncollectible, or of such value that continuance as an asset is not warranted.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay loan as agreed, the Bank’s loan rating process includes several layers of internal and external oversight. The Company’s loan officers are responsible for the timely and accurate risk rating of the loans in each of their portfolios at origination and on an ongoing basis under the supervision of management.  All commercial and agricultural loans are reviewed annually to ensure the appropriateness of the loan grade. In addition, the Bank engages an external consultant on at least an annual basis. The external consultant is engaged to 1) review a minimum of 60% of the dollar volume of the commercial loan portfolio on an annual basis, 2) review new loans originated in the last year, 3) review all relationships in aggregate over $500,000, 4) review all aggregate loan relationships over $100,000 which are over 90 days past due or classified Special Mention, Substandard, Doubtful, or Loss, and 5) such other loans which management or the consultant deems appropriate.

The following tables represent credit exposures by internally assigned grades as of June 30, 2012 and December 31, 2011 (in thousands):

June 30, 2012	Pass	Special Mention	Substandard	Doubtful	Loss	Ending Balance
Real estate loans:
Commercial	$          141,568	$         10,496	$                  18,739	$                75	$              -	$          170,878
Agricultural	16,219	623	1,985	-	-	18,827
Construction	10,328	-	-	-	-	10,328
Other commercial loans	36,982	1,806	1,016	16	-	39,820
Other agricultural loans	5,849	425	973	-	-	7,247
State and political
subdivision loans	56,335	-	1,128	-	-	57,463
Total	$          267,281	$         13,350	$                  23,841	$                91	$              -	$          304,563

December 31, 2011	Pass	Special Mention	Substandard	Doubtful	Loss	Ending Balance
Real estate loans:
Commercial	$          138,409	$         10,372	$                  17,045	$                   -	$              -	$          165,826
Agricultural	14,628	2,412	2,184	-	-	19,224
Construction	8,481	-	-	-	-	8,481
Other commercial loans	34,606	2,203	921	17	-	37,747
Other agricultural loans	4,509	809	1,234	-	-	6,552
State and political
subdivision loans	53,733	-	1,166	-	-	54,899
Total	$          254,366	$         15,796	$                  22,550	$                17	$              -	$          292,729

For residential real estate mortgages, home equities and consumer loans, credit quality is monitored based on whether the loan is performing or non-performing, which is typically based on the aging status of the loan and payment activity, unless a specific action, such as bankruptcy, repossession, death or significant delay in payment occurs to raise awareness of a possible credit event. Non-performing loans include those loans that are considered nonaccrual, described in more detail below and all loans past due 90 or more days. The following table presents the recorded investment in those loan classes based on payment activity as of June 30, 2012 and December 31, 2011 (in thousands):

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June 30, 2012	Performing	Non-performing	Total
Real estate loans:
Residential mortgages	$          104,600	$              558	$                105,158
Home equity	76,080	171	76,251
Consumer	11,160	-	11,160
Total	$          191,840	$              729	$                192,569
December 31, 2011	Performing	Non-performing	Total
Real estate loans:
Residential mortgages	$          102,238	$              473	$                102,711
Home equity	81,143	180	81,323
Consumer	10,746	-	10,746
Total	$          194,127	$              653	$                194,780

Age Analysis of Past Due Financing Receivables

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table includes an aging analysis of the recorded investment of past due financing receivables as of June 30, 2012 and December 31, 2011 (in thousands):

		30-59 Days	60-89 Days	90 Days	Total Past		Total Financing	90 Days and
June 30, 2012		Past Due	Past Due	Or Greater	Due	Current	Receivables	Accruing
Real estate loans:
Residential mortgages		$        164	$            9	$        455	$        628	$   104,530	$           105,158	$              57
Home equity		360	88	161	609	75,642	76,251	21
Commercial		717	104	2,063	2,884	167,994	170,878	180
Agricultural		-	-	-	-	18,827	18,827	-
Construction		-	-	-	-	10,328	10,328	-
Consumer		45	-	-	45	11,115	11,160	-
Other commercial loans		-	-	445	445	39,375	39,820	-
Other agricultural loans		100	-	-	100	7,147	7,247	-
State and political
subdivision loans		-	-	-	-	57,463	57,463	-
	Total	$     1,386	$        201	$     3,124	$     4,711	$   492,421	$           497,132	$            258
Loans considered non-accrual		$             -	$             -	$     2,866	$     2,866	$       5,537	$               8,403
Loans still accruing		1,386	201	258	1,845	486,884	488,729
	Total	$     1,386	$        201	$     3,124	$     4,711	$   492,421	$           497,132

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		30-59 Days	60-89 Days	90 Days	Total Past		Total Financing	90 Days and
December 31, 2011		Past Due	Past Due	Or Greater	Due	Current	Receivables	Accruing
Real estate loans:
Residential mortgages		$        428	$          91	$        398	$        917	$   101,794	$          102,711	$             60
Home equity		339	-	180	519	80,804	81,323	39
Commercial		319	412	2,794	3,525	162,301	165,826	176
Agricultural		143	-		143	19,081	19,224	-
Construction		-	-	-	-	8,481	8,481	-
Consumer		86	7	-	93	10,653	10,746	-
Other commercial loans		9	-	503	512	37,235	37,747	-
Other agricultural loans		-	-	-	-	6,552	6,552	-
State and political
subdivision loans		-	-	-	-	54,899	54,899	-
	Total	$     1,324	$        510	$     3,875	$     5,709	$   481,800	$          487,509	$           275
Loans considered non-accrual		$             -	$             -	$     3,600	$     3,600	$       5,565	$              9,165
Loans still accruing		1,324	510	275	2,109	476,235	478,344
	Total	$     1,324	$        510	$     3,875	$     5,709	$   481,800	$           487,509

Nonaccrual Loans

Loans are considered for non-accrual status upon reaching 90 days delinquency, although the Company may be receiving partial payments of interest and partial repayments of principal on such loans or if full payment of principal and interest is not expected. Additionally, if management is made aware of other information including bankruptcy, repossession, death, or legal proceedings, the loan may be placed on non-accrual status. If a loan is 90 days or more past due and is well secured and in the process of collection, it may still be considered accruing.

The following table reflects the financing receivables on nonaccrual status as of June 30, 2012 and December 31, 2011, respectively. The balances are presented by class of financing receivable (in thousands):

	June 30, 2012	December 31, 2011
Real estate loans:
Residential mortgages	$                501	$                   413
Home equity	150	141
Commercial	7,295	8,094
Agricultural	-	-
Construction	-	-
Consumer	-	-
Other commercial loans	457	517
Other agricultural loans	-	-
State and political subdivision	-	-
	$             8,403	$                9,165

Troubled Debt Restructurings

In situations where, for economic or legal reasons related to a borrower's financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a Troubled Debt Restructuring (TDR). Management strives to identify borrowers in financial difficulty early and work with them to modify more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring by calculating the present value of the revised loan terms and comparing this balance to the Company’s investment in the loan prior to the restructuring. As these loans are individually evaluated, they are excluded from pooled portfolios when calculating the allowance for loan and lease losses and a separate allocation within the allowance for loan and lease losses is provided. Management continually evaluates loans that are considered TDR’s, including payment history under the modified loan terms, the borrower’s ability to continue to repay the loan based on continued evaluation of their operating results and cash flows from operations.  Based on this evaluation management would no longer consider a loan to be a TDR when the relevant facts support such a conclusion.

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Loan modifications that are considered TDR’s completed during the three months and six months ended June 30, 2012 and 2011 were as follows (dollars in thousands):

	For the Three Months Ended June 30, 2012
	Number of contracts		Pre-modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	Interest Modification	Term Modification	Interest Modification	Term Modification	Interest Modification	Term Modification
Real estate loans:
Residential mortgage	1	1	$                       48	$                71	$              48	$              71
Total	1	1	$                       48	$                71	$              48	$              71

	For the Six Months Ended June 30, 2012
	Number of contracts		Pre-modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	Interest  Modification	Term Modification	Interest Modification	Term Modification	Interest Modification	Term Modification
Real estate loans:
Residential mortgage	1	1	$                       48	$                 71	$               48	$                 71
Commercial	-	2	-	98	-	98
Total	1	3	$                       48	$              169	$               48	$             169

	For the Three Months Ended June 30, 2011
	Number of contracts		Pre-modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	Interest Modification	Term Modification	Interest Modification	Term Modification	Interest Modification	Term Modification
Real estate loans:
Commercial	-	-	$                          -	$                  -	$                  -	$                  -
Total	-	-	$                          -	$                  -	$                  -	$                  -

	For the Six Months Ended June 30, 2011
	Number of contracts		Pre-modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	Interest Modification	Term Modification	Interest Modification	Term Modification	Interest Modification	Term Modification
Real estate loans:
Commercial	5	-	$                  5,912	$                  -	$          5,912	$                  -
Total	5	-	$                  5,912	$                  -	$          5,912	$                  -

Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-accrual loan. Recidivism occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a higher risk of loss than do new origination loans. Loan modifications considered TDR’s made during the twelve months ended June 30, 2012, that defaulted during the three and six month periods ended June 30, 2012 were as follows (dollars in thousands):

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	For the Three Months Ended				For the Six Months Ended
	June 30, 2012		June 30, 2011		June 30, 2012		June 30, 2011
	Number of contracts	Recorded investment	Number of contracts	Recorded investment	Number of contracts	Recorded investment	Number of contracts	Recorded investment
Real estate loans:
Commercial	-	$              -	-	$              -	1	$               48	-	$               -
Total recidivism	-	$              -	-	$              -	1	$               48	-	$               -

Allowance for Loan Losses

The following table segregates the allowance for loan losses (ALLL) into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of June 30, 2012 and December 31, 2011, respectively (in thousands):

	June 30, 2012			December 31, 2011
	Individually evaluated for impairment	Collectively evaluated for impairment	Total	Individually evaluated for impairment	Collectively evaluated for impairment	Total
Real estate loans:
Residential	$                 29	$               758	$         786	$                 13	$               792	$     805
Commercial and agricultural	512	3,893	4,405	433	3,699	4,132
Construction	-	19	19	-	15	15
Consumer	-	108	108	-	111	111
Other commercial and agricultural loans	21	663	685	48	626	674
State and political
subdivision loans	-	246	246	-	235	235
Unallocated	-	401	401	-	515	515
Total	$               562	$            6,088	$      6,650	$               494	$            5,993	$  6,487

The following tables roll forward the balance of the ALLL by portfolio segment for the three and six month periods ended June 30, 2012 and 2011, respectively (in thousands):

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	Balance at March 31, 2012	Charge-offs	Recoveries	Provision	Balance at June 30, 2012
Real estate loans:
Residential	$         753	$              -	$              -	$         33	$         786
Commercial and agricultural	4,336	-	6	63	4,405
Construction	16	-	-	3	19
Consumer	96	(16)	7	21	108
Other commercial and agricultural loans	671	-	3	11	685
State and political
subdivision loans	245	-	-	1	246
Unallocated	428	-	-	(27)	401
Total	$      6,545	$          (16)	$           16	$       105	$      6,650
	Balance at December 31, 2011	Charge-offs	Recoveries	Provision	Balance at June 30, 2012
Real estate loans:
Residential	$         805	$          (49)	$              -	$         30	$         786
Commercial and agricultural	4,132	(2)	6	269	4,405
Construction	15	-	-	4	19
Consumer	111	(24)	16	5	108
Other commercial and agricultural loans	674	-	6	5	685
State and political
subdivision loans	235	-	-	11	246
Unallocated	515	-	-	(114)	401
Total	$      6,487	$          (75)	$           28	$       210	$      6,650
	Balance at March 31, 2011	Charge-offs	Recoveries	Provision	Balance at June 30, 2011
Real estate loans:
Residential	$         921	$          (41)	$              -	$     (202)	$         678
Commercial and agricultural	3,698	(12)	-	226	3,912
Construction	13	-	-	-	13
Consumer	87	(17)	12	27	109
Other commercial and agricultural loans	901	-	3	(192)	712
State and political
subdivision loans	139	-	-	(20)	119
Unallocated	309	-	-	311	620
Total	$      6,068	$          (70)	$           15	$       150	$      6,163
	Balance at December 31, 2010	Charge-offs	Recoveries	Provision	Balance at June 30, 2011
Real estate loans:
Residential	$         969	$        (101)	$              -	$     (190)	$         678
Commercial and agricultural	3,380	(29)	-	561	3,912
Construction	22	-	-	(9)	13
Consumer	108	(33)	29	5	109
Other commercial and agricultural loans	983	-	7	(278)	712
State and political
subdivision loans	137	-	-	(18)	119
Unallocated	316	-	-	304	620
Total	$      5,915	$        (163)	$           36	$       375	$      6,163

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The Company allocates the ALLL based on the factors described below, which conform to the Company’s loan classification policy and credit quality measurements. In reviewing risk within the Bank’s loan portfolio, management has determined there to be several different risk categories within the loan portfolio. The ALLL consists of amounts applicable to: (i) residential real estate loans; (ii) residential real estate home equity loans; (iii) commercial real estate loans; (iv) agricultural real estate loans; (v) real estate construction loans; (vi) commercial and other loans; (vii) consumer loans; (viii) other agricultural loans and (ix) state and political subdivision loans. Factors considered in this process include general loan terms, collateral, and availability of historical data to support the analysis. Historical loss percentages are calculated and used as the basis for calculating allowance allocations. Certain qualitative factors are evaluated to determine additional inherent risks in the loan portfolio, which are not necessarily reflected in the historical loss percentages. These factors are then added to the historical allocation percentage to get the adjusted factor to be applied to non classified loans. The following qualitative factors are analyzed:

·   Level of and trends in delinquencies, impaired/classified loans

Change in volume and severity of past due loans

Volume of non-accrual loans

Volume and severity of classified, adversely or graded loans;

·   Level of and trends in charge-offs and recoveries;

·   Trends in volume, terms and nature of the loan portfolio;

·   Effects of any changes in risk selection and underwriting standards and any other changes in lending and recovery policies, procedures and practices;

·   Changes in the quality of the Bank’s loan review system;

·   Experience, ability and depth of lending management and other relevant staff;

·   National, state, regional and local economic trends and business conditions

General economic conditions

Unemployment rates

Inflation / CPI

Changes in values of underlying collateral for collateral-dependent loans;

·   Industry conditions including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses; and

·   Existence and effect of any credit concentrations, and changes in the level of such concentrations.

The Company also maintains an unallocated allowance to account for any factors or conditions that may cause a potential loss but are not specifically addressed in the process described above. The Company analyzes its loan portfolio each quarter to determine the appropriateness of its allowance for loan losses.

Loans determined to be TDR’s are impaired and for purposes of estimating the ALLL must be individually evaluated for impairment. In calculating the impairment, the Company calculates the present value utilizing an analysis of discounted cash flows. If the present value calculated is below the recorded investment of the loan, an impairment is recognized by a charge to the provision for loan and lease losses and a credit to the ALLL.

We continually review the model utilized in calculating the required allowance. During the second quarter of 2011, management made a determination that special mention and substandard loans should have additional qualitative adjustments applied to them in comparison to pass graded loans. The following factors experienced changes during the first six months of 2012:

·   The qualitative factor for changes in values of underlying collateral was decreased for residential and commercial real estate loans due to the fact that the impact from the serious flooding experienced in our primary market in the third quarter of 2011 was not as severe as originally expected.

·   The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were increased for commercial real estate due to the increase in the Company’s internal watch list for commercial real estate loans since December 31, 2011.

·   The qualitative factors for changes in industry conditions were increased for agricultural real estate and other agricultural loans due to decreases in milk prices from December 31, 2011 to June 30, 2012.

17

During the second quarter of 2012, there were no significant changes in any qualitative factor. As a result, the change in the allocation of the allowance from March 31, 2012, is mainly attributable to the changes in the loan portfolio balances since that date.

Note 6 – Federal Home Loan Bank Stock

The Bank is a member of the FHLB of Pittsburgh and as such, is required to maintain a minimum investment in stock of the FHLB that varies with the level of advances outstanding with the FHLB. As of June 30, 2012 and December 31, 2011, the Bank holds $4,187,000 and $3,027,000, respectively. The stock is bought from and sold to the FHLB based upon its $100 par value.  The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated for by management.  The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) The significance of the decline in net assets of the FHLB as compared to the capital stock amount and the length of time this situation has persisted (b) Commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance (c) The impact of legislative and regulatory changes on the customer base of the FHLB and (d) The liquidity position of the FHLB.

The FHLB has incurred a significant cumulative loss in regards to comprehensive income in the three years ended December 31, 2011 and had suspended the payment of dividends; however, due to improved results in 2011 and 2010 over 2009, a dividend was paid in the first and second quarters of 2012.  The cumulative losses were primarily attributable to impairment of investment securities associated with the distressed economic conditions during 2008 and 2009.  Management evaluated the stock and concluded that the stock was not impaired for the periods presented herein.  Management considered that the FHLB’s regulatory capital ratios have improved in the most recent quarters, liquidity appears adequate, new shares of FHLB stock continue to exchange hands at the $100 par value and the FHLB has repurchased shares of excess capital stock from its members through the second quarter of 2012 and has reinstituted the dividend in 2012.

Note 7 - Employee Benefit Plans

For additional detailed disclosure on the Company's pension and employee benefits plans, please refer to Note 11 of the Company's Consolidated Financial Statements included in the 2011 Annual Report on Form 10-K.

Noncontributory Defined Benefit Pension Plan

The Bank sponsors a noncontributory defined benefit pension plan (“Pension Plan”) covering substantially all employees and officers.  The Bank’s funding policy is to make annual contributions, if needed, based upon the funding formula developed by the plan’s actuary.

Any employee with a hire date of January 1, 2007 or later is not eligible to participate in the Pension Plan. In lieu of the Pension Plan, employees with a hire date of January 1, 2007 or later are eligible to receive, after meeting certain length of service requirements, an annual discretionary 401(k) plan contribution from the Bank equal to a percentage of an employee’s base compensation.  The contribution amount, if any, is placed in a separate account within the 401(k) plan and is subject to a vesting requirement.

For employees who are eligible to participate in the Pension Plan, the Pension Plan requires benefits to be paid to eligible employees based primarily upon age and compensation rates during employment.  Upon retirement or other termination of employment, employees can elect either an annuity benefit or a lump sum distribution of vested benefits in the Pension Plan.

The following sets forth the components of net periodic benefit costs of the Pension Plan for the three and six months ended June 30, 2012 and 2011, respectively (in thousands):

18

	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2012	2011	2012	2011
Service cost	$               54	$      71	$             167	$             185
Interest cost	35	87	174	226
Expected return on plan assets	(80)	(130)	(286)	(336)
Net amortization and deferral	52	10	68	26
Net periodic benefit cost	$               61	$      38	$             123	$             101

The Company expects to contribute $750,000 to the Pension Plan in 2012.

Defined Contribution Plan

The Company sponsors a voluntary 401(k) savings plan which eligible employees can elect to contribute up to the maximum amount allowable not to exceed the limits of IRS Code Sections 401(k).  Under the plan, the Company also makes required contributions on behalf of the eligible employees.  The Company’s contributions vest immediately.  Contributions by the Company totaled $132,000 and $124,000 for the six months ended June 30, 2012 and 2011, respectively. For the three months ended June 30, 2012 and 2011, contributions by the Company totaled $80,000 and $74,000, respectively.

Directors’ Deferred Compensation Plan

The Company’s directors may elect to defer all or portions of their fees until their retirement or termination from service.  Amounts deferred under the plan earn interest based upon the highest current rate offered to certificate of deposit customers.  Amounts deferred under the plan are not guaranteed and represent a general liability of the Company.  At June 30, 2012 and December 31, 2011, an obligation of $996,000 and $1,030,000, respectively, was included in other liabilities for this plan in the consolidated balance sheet. Amounts included in interest expense on the deferred amounts totaled $8,000 and $12,000 for the six months ended June 30, 2012 and 2011, respectively.

Restricted Stock Plan

The Company maintains a Restricted Stock Plan (the “Plan”) whereby employees and non-employee corporate directors are eligible to receive awards of restricted stock based upon performance related requirements.  Awards granted under the Plan are in the form of the Company’s common stock and are subject to certain vesting requirements including continuous employment or service with the Company.  A total of 100,000 shares of the Company’s common stock have been authorized under the Plan.  The Plan assists the Company in attracting, retaining and motivating employees to make substantial contributions to the success of the Company and to increase the emphasis on the use of equity as a key component of compensation.

For the six months ended June 30, 2012 and 2011, 3,808 and 3,968 shares of restricted stock were awarded and 5,222 and 5,502 shares vested, respectively.  Compensation cost related to restricted stock is recognized based on the market price of the stock at the grant date over the vesting period. Compensation expense related to restricted stock was $66,000 and $73,000 for the six months ended June 30, 2012 and 2011, respectively. For the three months ended June 30, 2012 and 2011, compensation expense totaled $33,000 and $36,000, respectively.

Supplemental Executive Retirement Plan

The Company maintains a non-qualified supplemental executive retirement plan (“SERP”) for certain executives to compensate those executive participants in the Company’s noncontributory defined benefit pension plan whose benefits are limited by compensation limitations under current tax law. At June 30, 2012 and December 31, 2011, an obligation of $855,000 and $778,000, respectively, was included in other liabilities for this plan in the consolidated balance sheet.  Expenses related to this plan totaled $47,000 and $31,000 for the six months ended June 30, 2012 and 2011, respectively. For the three months ended June 30, 2012 and 2011, expenses totaled $24,000 and $16,000, respectively.

19

Note 8 – Fair Value Measurements

The Company established a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by this hierarchy are as follows:

Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

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

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company's creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s monthly and/or quarterly valuation process

Financial Instruments Recorded at Fair Value on a Recurring Basis

The fair values of securities available for sale are determined by quoted prices in active markets, when available, and classified as Level I. If quoted market prices are not available, the fair value is determined by a matrix pricing, which is a mathematical technique, widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities and classified as Level II. The fair values 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. In cases where significant credit valuation adjustments are incorporated into the estimation of fair value, reported amounts are classified as Level III inputs.

Currently, we use an interest rate swap, which is a derivative, to manage our interest rate risk related to the trust preferred security. The valuation of this instrument is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative and classified as Level II. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including LIBOR rate curves. We also obtain dealer quotations for these derivatives for comparative purposes to assess the reasonableness of the model valuations.

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The following tables present the assets and liabilities reported on the consolidated balance sheet at their fair value on a recurring basis as of June 30, 2012 and December 31, 2011 by level within the fair value hierarchy (in thousands). Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	June 30, 2012
	Level I	Level II	Level III	Total
Fair value measurements on a recurring basis:
Assets
Securities available for sale:
U.S. Agency securities	$                -	$             146,364	$                    -	$             146,364
Obligations of state and
political subdivisions	-	98,147	-	98,147
Corporate obligations	-	11,046	-	11,046
Mortgage-backed securities in
government sponsored entities	-	66,194	-	66,194
Equity securities in financial
institutions	1,380	-	-	1,380
Liabilities
Trust Preferred Interest Rate Swap	-	(283)	-	(283)

	December 31, 2011
	Level I	Level II	Level III	Total
Fair value measurements on a recurring basis:
Assets
Securities available for sale:
U.S. Agency securities	$                -	$             168,600	$                    -	$             168,600
Obligations of state and
political subdivisions	-	101,547	-	101,547
Corporate obligations	-	8,460	-	8,460
Mortgage-backed securities in
government sponsored entities	-	38,974	-	38,974
Equity securities in financial
institutions	1,242	-	-	1,242
Liabilities
Trust Preferred Interest Rate Swap	-	(348)	-	(348)

Financial Instruments Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period.

Impaired Loans- Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. The fair value of impaired loans is estimated using one of several methods, including collateral value, liquidation value and discounted cash flows. For those loans valued utilizing collateral value or liquidation value consideration is given to the time since an appraisal was performed, selling costs including legal fees and the length of time it will take to sell the collateral. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Collateral values are estimated using Level II inputs based on observable market data or Level III inputs based on customized discounting criteria. For a majority of impaired real estate related loans, the Company obtains a current external appraisal. Other valuation techniques are used as well, including internal valuations, comparable property analysis and contractual sales information.

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Non-Financial Assets and Non-Financial Liabilities Recorded at Fair Value

The Corporation has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Certain non-financial assets measured at fair value on a non-recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. Non-financial assets measured at fair value on a non-recurring basis during 2012 and 2011 include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for possible loan losses and certain foreclosed assets which, subsequent to their initial recognition, were remeasured at fair value through a write-down included in other non-interest expense. The fair value of a foreclosed asset is estimated using Level III inputs based on customized discounting criteria. The criteria utilized includes an external appraisal, length of time since the appraisal was obtained, selling costs including legal fees and the length of time it will take to sell the collateral.

Assets measured at fair value on a nonrecurring basis as of June 30, 2012 and December 31, 2011 are included in the table below (in thousands):

	June 30, 2012
	Level 1	Level II	Level III	Total
Impaired Loans	$                -	$                         -	$            7,721	$                 7,721
Other real estate owned	-	-	742	742
	December 31, 2011
	Level 1	Level II	Level III	Total
Impaired Loans	$                -	$                         -	$            8,387	$                 8,387
Other real estate owned	-	-	860	860

The following table provides a listing of the significant unobservable inputs used in the fair value measurement process for items valued utilizing level III techniques.

Quantitative Information about Level 3 Fair Value Measurements
	Fair Value at June 30, 2012	Valuation Technique(s)	Unobservable input	Range
Impaired Loans	$      5,295	Discounted Cash Flows	Probability of Default	0%
			Change in interest rates	0-7%
	2,426	Appraised Collateral Values	Discount for time since appraisal	0-20%
			Selling costs	0%-10%
			Holding period	0 - 18 months
Other real estate owned	742	Appraised Collateral Values	Discount for time since appraisal	0-20%
			Selling costs	6%-10%
			Holding period	0 - 18 months

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The fair values of the Company’s financial instruments are as follows (in thousands):

	Carrying
June 30, 2012	Amount	Fair Value	Level I	Level II	Level III	Total
Financial assets:
Cash and due from banks	$    17,768	$    17,768	$    17,768	$              -	$              -	$    17,768
Available-for-sale securities	323,131	323,131	1,380	321,751	-	323,131
Net loans	490,482	539,268	-	-	539,268	539,268
Bank owned life insurance	13,919	13,919	13,919	-	-	13,919
Regulatory stock	4,461	4,461	4,461	-	-	4,461
Accrued interest receivable	3,800	3,800	3,800	-	-	3,800
Financial liabilities:
Deposits	$  738,767	$  744,787	$  446,307	$              -	$  298,480	$  744,787
Borrowed funds	47,066	44,909	-	44,909	-	44,909
Trust preferred interest rate swap	283	283	-	283	-	283
Accrued interest payable	1,222	1,222	1,222	-	-	1,222

	Carrying
December 31, 2011	Amount	Fair Value
Financial assets:
Cash and cash equivalents	$    30,432	$    30,432
Available-for-sale securities	318,823	318,823
Net loans	481,022	527,724
Bank owned life insurance	13,669	13,669
Regulatory stock	3,301	3,301
Accrued interest receivable	3,621	3,621
Financial liabilities:
Deposits	$  733,993	$  740,839
Borrowed funds	53,882	51,437
Trust preferred interest rate swap	348	348
Accrued interest payable	1,512	1,512

Fair value is determined, based on relevant market information and information about the financial instrument.  These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.  Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the estimates.

Fair values have been determined by the Company using historical data, as generally provided in the Company’s regulatory reports, and an estimation methodology suitable for each category of financial instruments. The Company’s fair value estimates, methods and assumptions are set forth below for the Company’s other financial instruments.

Cash and Cash Equivalents:

The carrying amounts for cash and due from banks approximate fair value because they have original maturities of 90 days or less and do not present unanticipated credit concerns.

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Accrued Interest Receivable and Payable:

The carrying amounts for accrued interest receivable and payable approximate fair value because they are generally received or paid in 90 days or less and do not present unanticipated credit concerns.

Available-For-Sale Securities:

The fair values of available-for-sale securities are based on quoted market prices as of the balance sheet date.  For certain instruments, fair value is estimated by obtaining quotes from independent dealers.

Loans:

Fair values are estimated for portfolios of loans with similar financial characteristics.  The fair value of performing loans has been estimated by discounting expected future cash flows. The discount rate used in these calculations is derived from the Treasury yield curve adjusted for credit quality, operating expense and prepayment option price, and is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Company’s historical experience with repayments for each loan classification, modified as required by an estimate of the effect of current economic and lending conditions.

Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information.

Bank Owned Life Insurance:

The carrying value of bank owned life insurance approximates fair value based on applicable redemption provisions.

Regulatory Stock:

The carrying value of regulatory stock approximates fair value based on applicable redemption provisions.

Deposits:

The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings and NOW accounts, and money market accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

The deposits’ fair value estimates do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market, commonly referred to as the core deposit intangible.

Borrowed Funds:

Rates available to the Company for borrowed funds with similar terms and remaining maturities are used to estimate the fair value of borrowed funds.

Trust Preferred Interest Rate Swap:

The fair value of the trust preferred interest rate swap is based on a pricing model that utilizes a yield curve and information contained in the swap agreement.

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Note 9 – Recent Accounting Pronouncements

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820):  Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.  The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs.  Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements.  The amendments in this Update are to be applied prospectively.  For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011.  For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2011.  Early application by public entities is not permitted. The Company has provided the necessary disclosures in Note 8.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220):  Presentation of Comprehensive Income.  The amendments in this Update improve the comparability, clarity, consistency, and transparency of financial reporting and increase the prominence of items reported in other comprehensive income.  To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. GAAP and IFRS, the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated.  The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income.  All entities that report items of comprehensive income, in any period presented, will be affected by the changes in this Update.  For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter.  The amendments in this Update should be applied retrospectively, and early adoption is permitted. The Company has provided the necessary disclosure in the Consolidated Statement of Comprehensive Income.

In September 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other Topics (Topic 350), Testing Goodwill for Impairment.  The objective of this update is to simplify how entities, both public and nonpublic, test goodwill for impairment.  The amendments in the Update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350.  The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent.  Under the amendments in this Update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount.  The amendments in this Update apply to all entities, both public and nonpublic, that have goodwill reported in their financial statements and are effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.  This ASU did not have a significant impact on the Company’s financial statements.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210):  Disclosures about Offsetting Assets and Liabilities.  The amendments in this Update affect all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement.  The requirements amend the disclosure requirements on offsetting in Section 210-20-50.  This information will enable users of an entity's financial statements to evaluate the effect or potential effect of netting arrangements on an entity's financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this Update.  An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods.  An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented.  The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

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In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220):  Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.  In order to defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in this Update supersede certain pending paragraphs in Update 2011-05.  Entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before Update 2011-05.  All other requirements in Update 2011-05 are not affected by this Update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. Nonpublic entities should begin applying these requirements for fiscal years ending after December 15, 2012, and interim and annual periods thereafter.  The Company has provided the necessary disclosure in the Consolidated Statement of Comprehensive Income. 

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

Forward-Looking Statements

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 Citizens Financial Services, Inc., First Citizens Community Bank, First Citizens Insurance Agency, Inc. or the combined Company. When we use words such 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 to implement strategic initiatives designed to increase revenues or manage expenses, or we may not be able 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.

·   Exploration and drilling of the natural gas reserves in the Marcellus Shale in our market area may be affected by federal, state and local laws and regulations such as restrictions on production, permitting, changes in taxes and environmental protection, which could negatively impact our customers and, as a result, negatively impact our loan and deposit volume and loan quality.

·   Similarly, customers dependent on the exploration and drilling of the natural gas reserves may be dependent on the market price of natural gas.  As a result, decreases in the market price of natural gas could also negatively impact our customers.

Additional factors that may affect our results are discussed under “Part II – Item 1A – Risk Factors” in this report and in the Company’s 2011 Annual Report on Form 10-K under “Item 1.A/ Risk Factors.”  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 the accompanying consolidated financial statements for the Company.  Our Company's consolidated financial condition and results of operations consist almost entirely of the Bank’s financial condition and results of operations. Management’s discussion and analysis should be read in conjunction with the preceding financial statements presented under Part I.  The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of the results you may expect for the full year.

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The 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 main office in Mansfield, Pennsylvania. Presently we operate 19 banking facilities, 17 of which operate as bank branches.  In Pennsylvania, we have branch offices located in Mansfield, Blossburg, Ulysses, Genesee, Wellsboro, Troy, Sayre, Canton, Gillett, Millerton, LeRaysville, Towanda, Rome, the Wellsboro Weis Market store and the Mansfield Wal-Mart Super Center. We also have a loan production office in Lock Haven, Pennsylvania. In New York, we have a branch office in Wellsville, Allegany County.

Risk Management

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, reputational 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.

Reputational risk, or the risk to our business, earnings, liquidity, and capital from negative public opinion, could result from our actual or alleged conduct in a variety of areas, including legal and regulatory compliance, lending practices, corporate governance, litigation, ethical issues, or inadequate protection of customer information. We expend significant resources to comply with regulatory requirements. Failure to comply could result in reputational harm or significant legal or remedial costs. Damage to our reputation could adversely affect our ability to retain and attract new customers, and adversely impact our earnings and liquidity.

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 subsidiary.  We cannot predict what legislation might be enacted or what regulations might be adopted, or if adopted, the effect thereof on our operations.

Competition

The banking industry in the Bank’s service area continues to be extremely competitive, both among commercial banks and with financial service providers such as consumer finance companies, thrifts, investment firms, mutual funds, insurance companies, credit unions and internet entities.  The increased competition has resulted from changes in the legal and regulatory guidelines as well as from economic conditions, specifically, the additional wealth resulting from the exploration of the Marcellus Shale in our primary market and the limited loan growth opportunities in our primary market and surrounding areas.  Mortgage banking firms, financial companies, financial affiliates of industrial companies, brokerage firms, retirement fund management firms and even government agencies provide additional competition for loans and other financial services.  The Bank is generally competitive with all competing financial institutions in its service area with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans.

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Trust and Investment Services; Oil and Gas Services

Our Investment and Trust Services Department offers professional trust administration, investment management services, estate planning and administration, and custody of securities.  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.  Revenues and fees of the Trust Department are reflected in the Company’s financial statements.  As of June 30, 2012 and December 31, 2011, the Trust Department had $100.7 and $94.7 million of assets under management, respectively.  The $6.0 million increase is a result of $2.6 million of net additions of trust assets, with the remaining increase attributable to fluctuations in the stock market since December 31, 2011.

Our Investment Representatives offer full service brokerage services and financial planning throughout the Bank’s market area.  Products such as mutual funds, annuities, health and life insurance are made available through our insurance subsidiary, First Citizens Insurance.  The assets associated with these products are not included in the consolidated financial statements since such items are not assets of the Company. Assets owned and invested by customers of the Bank through the Bank’s Investment Representatives increased from $78.1 million at December 31, 2011 to $88.5 million at June 30, 2012. Fee income from the sale of these products is reflected in the Company’s financial statements as a component of non-interest income in the Consolidated Statement of Income.

In addition to the trust and investment services offered, we have created an oil and gas division, which serves as a network of experts to assist our customers through various oil and gas specific leasing matters from lease negotiations to establishing a successful approach to personal wealth management.  We have partnered with a professional firm to provide mineral management expertise and services to customers in our market who have been impacted by the Marcellus Shale exploration and drilling activities. Through this relationship, we are able to assist customers with the negotiation of lease payments and royalty percentages, protect their property, resolve leasing issues, account for and ensure the accuracy of royalty checks, distribute revenue to satisfy investment objectives and provide customized reports outlining payment and distribution information.

Results of Operations

Overview of the Income Statement

The Company had net income of $7,202,000 for the first six months of 2012 compared to earnings of $5,977,000 for last year’s comparable period, an increase of $1,225,000 or 20.5%. Earnings per share for the first six months of 2012 were $2.49, compared to $2.05 last year, representing a 21.5% increase.  Annualized return on assets and return on equity for the six months of 2012 were 1.63% and 18.25%, respectively, compared with 1.44% and 17.22% for last year’s comparable period.

Net income for the three months ended June 30, 2012 was $3,753,000 compared to earnings of $3,147,000 in the comparable 2011 period, an increase of $606,000 or 19.3%. Earnings per share for the three months ended June 30, 2012 and 2011 were $1.30 and $1.08 per share, respectively.  Annualized return on assets and return on equity for the quarter ended June 30, 2012 was 1.69% and 18.72%, respectively, compared with 1.50% and 17.85% for the same 2011 period.

Net Interest Income

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

Net interest income for the first six months of 2012 was $15,223,000, an increase of $1,211,000, or 8.6%, compared to the same period in 2011.  For the first six months of 2012, the provision for loan losses totaled $210,000, a decrease of $165,000 over the comparable period in 2011.  Consequently, net interest income after the provision for loan losses was $15,013,000 compared to $13,637,000 during the first six months of 2011.

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For the three months ended June 30, 2012, net interest income was $7,665,000 compared to $7,076,000, an increase of $589,000, or 8.3% over the comparable period in 2011. The provision for loan losses this quarter was $105,000 compared to $150,000 for last year’s second quarter.  Consequently, net interest income after the provision for loan losses was $7,560,000 for the quarter ended June 30, 2012 compared to $6,926,000 in 2011.

The following table sets forth the average balances of, and the interest earned or incurred on, for each principal category of assets, liabilities and stockholders’ equity, the related rates, net interest income and interest rate spread created for the six months and three months ended June 30, 2012 and 2011 on a tax equivalent basis (dollars in thousands):

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	Analysis of Average Balances and Interest Rates (1)
	Six Months Ended
	June 30, 2012			June 30, 2011
	Average		Average	Average		Average
	Balance (1)	Interest	Rate	Balance (1)	Interest	Rate
	$	$	%	$	$	%
ASSETS
Short-term investments:
Interest-bearing deposits at banks	2,467	6	0.53	30,142	42	0.28
Total short-term investments	2,467	6	0.53	30,142	42	0.28
Investment securities:
Taxable	236,403	2,466	2.09	194,115	2,377	2.45
Tax-exempt (3)	94,355	2,839	6.02	86,387	2,663	6.17
Total investment securities	330,758	5,305	3.21	280,502	5,040	3.59
Loans:
Residential mortgage loans	194,017	6,237	6.46	187,859	6,427	6.90
Commercial & farm loans	233,403	7,318	6.31	222,084	7,069	6.42
Loans to state & political subdivisions	55,888	1,320	4.75	49,990	1,312	5.29
Other loans	10,334	434	8.45	10,845	458	8.52
Loans, net of discount (2)(3)(4)	493,642	15,309	6.24	470,778	15,266	6.54
Total interest-earning assets	826,867	20,620	5.02	781,422	20,348	5.25
Cash and due from banks	12,361			9,871
Bank premises and equipment	11,621			12,392
Other assets	30,894			28,246
Total non-interest earning assets	54,876			50,509
Total assets	881,743			831,931
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts	200,140	410	0.41	185,502	488	0.53
Savings accounts	82,886	81	0.20	67,528	101	0.30
Money market accounts	69,486	153	0.44	53,661	140	0.53
Certificates of deposit	296,759	2,577	1.75	315,179	3,405	2.18
Total interest-bearing deposits	649,271	3,221	1.00	621,870	4,134	1.34
Other borrowed funds	58,097	806	2.79	56,648	888	3.16
Total interest-bearing liabilities	707,368	4,027	1.14	678,518	5,022	1.49
Demand deposits	85,494			76,892
Other liabilities	9,940			7,083
Total non-interest-bearing liabilities	95,434			83,975
Stockholders' equity	78,941			69,438
Total liabilities & stockholders' equity	881,743			831,931
Net interest income		16,593			15,326
Net interest spread (5)			3.88%			3.76%
Net interest income as a percentage
of average interest-earning assets			4.04%			3.96%
Ratio of interest-earning assets
to interest-bearing liabilities			1.17			1.15
(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.

31

	Analysis of Average Balances and Interest Rates (1)
	Three Months Ended
	June 30, 2012			June 30, 2011
	Average		Average	Average		Average
	Balance (1)	Interest	Rate	Balance (1)	Interest	Rate
	$	$	%	$	$	%
ASSETS
Short-term investments:
Interest-bearing deposits at banks	2,151	1	0.24	27,068	20	0.30
Total short-term investments	2,151	1	0.24	27,068	20	0.30
Investment securities:
Taxable	241,739	1,253	2.08	203,176	1,191	2.34
Tax-exempt (3)	92,864	1,395	6.00	88,055	1,352	6.14
Total investment securities	334,603	2,648	3.17	291,231	2,543	3.49
Loans:
Residential mortgage loans	194,215	3,086	6.39	186,843	3,183	6.83
Commercial & farm loans	236,130	3,678	6.26	222,659	3,583	6.45
Loans to state & political subdivisions	56,302	663	4.74	51,296	674	5.27
Other loans	10,374	216	8.37	10,748	228	8.51
Loans, net of discount (2)(3)(4)	497,021	7,643	6.18	471,546	7,668	6.52
Total interest-earning assets	833,775	10,292	4.96	789,845	10,231	5.20
Cash and due from banks	10,114			9,898
Bank premises and equipment	11,575			12,317
Other assets	30,659			28,521
Total non-interest earning assets	52,348			50,736
Total assets	886,123			840,581
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts	202,737	208	0.41	189,369	250	0.53
Savings accounts	84,242	41	0.20	69,970	53	0.30
Money market accounts	70,757	74	0.42	54,326	69	0.51
Certificates of deposit	295,160	1,232	1.68	314,062	1,674	2.14
Total interest-bearing deposits	652,896	1,555	0.96	627,727	2,046	1.31
Other borrowed funds	57,632	393	2.74	56,097	443	3.17
Total interest-bearing liabilities	710,528	1,948	1.10	683,824	2,489	1.46
Demand deposits	86,373			79,348
Other liabilities	9,035			6,864
Total non-interest-bearing liabilities	95,408			86,212
Stockholders' equity	80,187			70,545
Total liabilities & stockholders' equity	886,123			840,581
Net interest income		8,344			7,742
Net interest spread (5)			3.86%			3.74%
Net interest income as a percentage
of average interest-earning assets			4.03%			3.93%
Ratio of interest-earning assets
to interest-bearing liabilities			1.17			1.16
(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.

32

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 periods ending June 30, 2012 and 2011(in thousands):

	For the Three Months		For the Six Months
	Ended June 30		Ended June 30
	2012	2011	2012	2011
Interest and dividend income from investment securities
and interest bearing deposits at banks (non-tax adjusted)	$             2,174	$              2,102	$        4,346	$     4,176
Tax equivalent adjustment	475	461	965	906
Interest and dividend income from investment securities
and interest bearing deposits at banks (tax equivalent basis)	$             2,649	$              2,563	$        5,311	$     5,082
Interest and fees on loans (non-tax adjusted)	$             7,439	$              7,463	$      14,904	$   14,858
Tax equivalent adjustment	204	205	405	408
Interest and fees on loans (tax equivalent basis)	$             7,643	$              7,668	$      15,309	$   15,266
Total interest income	$             9,613	$              9,565	$      19,250	$   19,034
Total interest expense	1,948	2,489	4,027	5,022
Net interest income	7,665	7,076	15,223	14,012
Total tax equivalent adjustment	679	666	1,370	1,314
Net interest income (tax equivalent basis)	$             8,344	$              7,742	$      16,593	$   15,326

The following table shows the tax-equivalent effect of changes in volume and rate on interest income and expense (in thousands):

33

	Three months ended June 30, 2012 vs. 2011 (1)			Six months ended June 30, 2012 vs. 2011 (1)
	Change in	Change	Total	Change in	Change	Total
	Volume	in Rate	Change	Volume	in Rate	Change
Interest Income:
Short-term investments:
Interest-bearing deposits at banks	$                 (14)	$        (5)	$      (19)	$         (56)	$       20	$      (36)
Investment securities:
Taxable	210	(148)	62	280	(191)	89
Tax-exempt	73	(30)	43	237	(61)	176
Total investments	283	(178)	105	517	(252)	265
Loans:
Residential mortgage loans	113	(210)	(97)	244	(434)	(190)
Commercial & farm loans	202	(107)	95	371	(122)	249
Loans to state & political subdivisions	61	(72)	(11)	31	(23)	8
Other loans	(8)	(4)	(12)	(20)	(4)	(24)
Total loans, net of discount	368	(393)	(25)	626	(583)	43
Total Interest Income	637	(576)	61	1,087	(815)	272
Interest Expense:
Interest-bearing deposits:
NOW accounts	16	(58)	(42)	44	(122)	(78)
Savings accounts	9	(21)	(12)	38	(58)	(20)
Money Market accounts	18	(13)	5	28	(15)	13
Certificates of deposit	(114)	(328)	(442)	(181)	(647)	(828)
Total interest-bearing deposits	(71)	(420)	(491)	(71)	(842)	(913)
Other borrowed funds	11	(61)	(50)	26	(108)	(82)
Total interest expense	(60)	(481)	(541)	(45)	(950)	(995)
Net interest income	$                  697	$      (95)	$     602	$      1,132	$     135	$  1,267
(1) The portion of the total change attributable to both volume and rate changes, which can not be separated, has been allocated proportionally to the change due to volume and the change due to rate prior to allocation.

Tax equivalent net interest income increased from $15.3 million for the 2011 six month period to $16.6 million in the 2012 six month period, an increase of $1.3 million. The tax equivalent net interest margin increased from 3.96% for the first six months of 2011 to 4.04% in 2012.

Total tax equivalent interest income for the 2012 six month period increased $272,000 as compared to the 2011 six month period. This increase was primarily a result of a increase of $1,087,000 due to an increase in average balance of interest earning assets of $45.4 million for the comparable periods. The increase was offset by a decrease of $815,0000 due to change in rate, as the yield on interest earning assets decreased from 5.25% to 5.02% or 23 basis points for the comparable periods.

Tax equivalent investment income for the six months ended June 30, 2012 increased $265,000 over the same period last year.  The average balance of total investment securities for the six months ended June 30, 2012 increased by $50.3 million from June 30, 2011, as a result of investing excess cash from increased deposit levels, and leveraging of overnight borrowings to purchase additional securities at higher interest rates than the overnight borrowings rate.

·   The average balance of taxable securities increased by $42.3 million while tax-exempt securities increased by $8.0 million, which had the effect of increasing interest income by $280,000 and $237,000, respectively, due to volume.

·   This increase was offset by a decrease in the yield on investment securities of 38 basis points from 3.59% to 3.21%, which corresponds to a decrease in interest income of $252,000. The majority of this decrease is attributable to the change in yield on taxable securities, which experienced a decrease of 36 basis points from 2.45% to 2.09%. The yield on investments declined due to the amount of purchases we made in the current low interest rate environment as a result of our increased deposit levels and limited loan growth opportunities. For a discussion of the Company’s current investment strategy, see the “Financial Condition – Investments”.

34

The purchase of tax-exempt securities, along with municipal loans and investment tax credits, allows us to manage our effective tax rate as well as the overall yield on our interest earning assets.

Total loan interest income increased $43,000 for the six months ended June 30, 2012 compared to the same period last year.

·   The average balance of commercial and agricultural loans increased $11.3 million from a year ago as we grow this segment of the loan portfolio utilizing disciplined underwriting standards, while meeting the needs of our customers. This had a positive impact of $371,000 on total interest income due to volume, which was offset by a decrease of $122,000 due to rate.

·   Interest income on residential mortgage loans decreased $190,000 of which $434,000 was due to rate, partially offset by an increase of $244,000 as a result of volume. The average balance increased $6.1 million due to the Company’s 2011 fourth quarter decision to not sell certain conforming rate loans that historically it has sold for interest rate risk management purposes, due to decline in the volume of non-conforming residential real estate loans and the interest rate environment for investments at that time.

Total interest expense decreased $995,000 for the six months ended June 30, 2012 compared with last year.  This decrease is primarily due to a change in rate, accounting for a $950,000 decrease in our interest expense.  The average interest rate on interest-bearing liabilities decreased 35 basis points, from 1.49% to 1.14%. The continued low interest rate environment prompted by the Federal Reserve and current economic conditions had the effect of decreasing our short-term borrowing costs as well as rates on all deposit products. While the Company’s rates on deposit products are below historical averages they are competitive with rates paid by other institutions in the marketplace. (see also “Financial Condition – Deposits”).

·   Interest expense on certificates of deposits decreased $828,000 over the same period last year. There was a decrease in the average rate on certificates of deposit from 2.18% to 1.75% resulting in a decrease in interest expense of $647,000. Additionally, the average balance of certificates of deposit decreased $18.4 million causing a decrease in interest expense of $181,000.

Tax equivalent net interest income for the three months ended June 30, 2012 was $8,344,000 which compares to $7,742,000 for the same period last year.  This represents an increase of $602,000 or 7.8%.

Total tax equivalent interest income was $10,292,000 for the 2012 three month period ended June 30, 2012, compared with $10,231,000 for the comparable period last year, an increase of $61,000:

·   Of this amount, $576,000 was a result of a decrease of 24 basis points on our yield on interest earning assets from 5.20% to 4.96%. This decrease was offset by an increase of $637,000, which was due to an increase in volume as a result of a $43.9 million increase in interest earning assets.

·   Total investment income increased by $105,000 compared to same period last year.  This was predominantly due to a $43.4 million increase in the average balance of investment securities, which resulted in additional income of $283,000, offset by a 32 point decrease in rate on investments from 3.49% to 3.17%, which equates to $178,000.

·   Total loan interest income decreased $25,000 compared to last year. This was predominantly due to a decrease in rate of 34 points from 6.52% to 6.18% offset by a change in volume as a result of a $25.5 million increase in average loans outstanding.

Total interest expense decreased $541,000 for the three months ended June 30, 2012 compared with last year as a result of a decrease in the average rate on interest-bearing liabilities of 36 basis points from 1.46% to 1.10% accounting for a $481,000 decrease in interest expense. Additionally, due to a $18.9 million decrease in the average balance of certificates of deposit, there was a $60,000 decrease in interest expense.

35

Provision for Loan Losses

For the six month period ending June 30, 2012, we recorded a provision for loan losses of $210,000, which represents a decrease of $165,000 from the $375,000 provision recorded in the corresponding six months of last year. The provision was lower in 2012 than 2011 due to the improvement in non-performing assets that has occurred since June 30, 2011. (see “Financial Condition – Allowance for Loan Losses and Credit Quality Risk”).

For the three months ending June 30, 2012, we recorded a provision of $105,000 compared to $150,000 in 2011.

Non-interest Income

The following table shows the breakdown of non-interest income for the three and six months ended June 30, 2012 and 2011 (in thousands):

	Six months ended June 30,		Change
	2012	2011	Amount	%
Service charges	$                 2,207	$               2,073	$                134	6.5
Trust	324	303	21	6.9
Brokerage and insurance	225	218	7	3.2
Gains on loans sold	185	75	110	146.7
Investment securities gains, net	321	234	87	37.2
Earnings on bank owned life insurance	250	245	5	2.0
Other	261	269	(8)	(3.0)
Total	$                 3,773	$               3,417	$                356	10.4
	Three months ended June 30,		Change
	2012	2011	Amount	%
Service charges	$                 1,129	$               1,128	$                    1	0.1
Trust	151	146	5	3.4
Brokerage and insurance	75	123	(48)	(39.0)
Gains on loans sold	131	34	97	285.3
Investment securities gains, net	213	114	99	86.8
Earnings on bank owned life insurance	126	124	2	1.6
Other	116	129	(13)	(10.1)
Total	$                 1,941	$               1,798	$                143	8.0

Non-interest income for the six months ended June 30, 2012 totaled $3,876,000, an increase of $459,000 when compared to the same period in 2011. During the first six months of 2012, investment security gains amounted to $321,000 compared to gains of $234,000 last year. We sold four agency securities for gains totaling $50,000, U.S. treasuries for a gain of $95,000, four mortgage backed securities in government sponsored entities for gains totaling $118,000, and a portion of a financial institution equity holding for a gain of $58,000 due to favorable market conditions. In 2011, we sold two municipal bonds at a gain of $1,000, eleven mortgage backed securities in government sponsored entities for gains totaling $171,000 and a portion of a financial institution equity holding for a gain of $48,000.

For the first six months of 2012, account service charges totaled $2,207,000, an increase of $134,000 or 6.5%, when compared to the same period in 2011. There was an increase of $70,000 attributable to customers’ usage of their debit cards which continues to become a larger percentage of service charge income as the Company is encouraging its customers to use their debit cards for making purchases by providing a deposit product that rewards customers for their usage. ATM income increased $39,000 as a result of an increase in the Bank’s fees and increased activity associated with non-customers use of the Bank’s ATMs. Part of the increased usage by non-customers is associated with an influx of workers working for companies’ associated with the exploration of the Marcellus Shale, who have not established permanent residency in the Company’s primary market. Finally, there was a $18,000 increase attributable to fees charged to customers for non-sufficient funds. Management continues to monitor regulatory changes associated with the Dodd-Frank Act to determine the level of impact that these regulations will have on the fees that the Company realizes.

36

Gains on loans sold increased $110,000, or 146.7% for the six months ended June 30, 2012 to $185,000. The increase is due to the significant refinancing activity of secondary market loans, as a result of the historically low interest rate environment.

For the three month period ended June 30, 2012, the increases experienced in gains on loans sold and investment securities gains are consistent with the year to date increases described above. The decrease in brokerage revenue in the second quarter is attributable to significant volatility in the stock market.

Non-interest Expense

The following tables reflect the breakdown of non-interest expense for the three and six months ended June 30, 2012 and 2011 (in thousands):

	Six months ended
	June 30,		Change
	2012	2011	Amount	%
Salaries and employee benefits	$                 5,421	$               5,033	$                 388	7.7
Occupancy	624	719	(95)	(13.2)
Furniture and equipment	202	223	(21)	(9.4)
Professional fees	492	329	163	49.5
FDIC insurance	238	500	(262)	(52.4)
Pennsylvania shares tax	326	293	33	11.3
ORE expenses (income)	(3)	216	(219)	(101.4)
Other	2,121	2,177	(56)	(2.6)
Total	$                 9,421	$               9,490	$                 (69)	(0.7)
	Three months ended
	June 30,		Change
	2012	2011	Amount	%
Salaries and employee benefits	$                 2,668	$               2,518	$                 150	6.0
Occupancy	314	329	(15)	(4.6)
Furniture and equipment	96	106	(10)	(9.4)
Professional fees	224	172	52	30.2
FDIC insurance	115	250	(135)	(54.0)
Pennsylvania shares tax	160	146	14	9.6
ORE expenses (income)	(76)	60	(136)	(226.7)
Other	1,076	1,129	(53)	(4.7)
Total	$                 4,577	$               4,710	$               (133)	(2.8)

Non-interest expenses increased $34,000 for the six months ended June 30, 2012 compared to the same period in 2011. Salaries and employee benefits increased $388,000 or 7.7%. Merit increases effective the beginning of 2012 and a slight increase in full time equivalent employees as part of implementing the Bank’s strategic plan accounted for an increase of approximately $223,000. Other increases included an increase of $24,000 for expenses related to providing employee’s insurance and a $108,000 increase related to profit sharing expense.

Occupancy expenses decreased as a result of milder winter weather conditions in 2012. ORE expenses decreased as a result of selling certain properties late in 2011 and in 2012. FDIC insurance decreased $262,000 in 2012 primarily due to changes in the FDIC assessment base and the assessment formula implemented in the second quarter of 2011. Professional fees increased by $163,000 primarily due to the Bank’s charter conversion from a nationally chartered bank to a state chartered bank that was completed in the second quarter. ORE expenses decreased by $136,000 for the six months of 2012 versus 2011 as a result of selling several properties in 2012 for gains of $103,000 compared to sales in 2011 at a loss of $43,000.

37

For the three months ended, June 30, 2012, salaries and employee benefits increased by $150,000 due to the reasons described above, which include merit increases, increased headcount and profit sharing expenses. For the reason mentioned above, FDIC insurance decreased $135,000. ORE expenses decreased by $136,000 as a result of having fewer properties to maintain and as a result of selling properties for a gain of $92,000 for the 2012 period versus a loss $8,000 for the comparable 2011 period.

Provision for Income Taxes

The provision for income taxes was $2,163,000 for the six month period ended June 30, 2012 compared to $1,587,000 for the same period in 2011.  The increase is primarily attributable to an increase in income before provision for income taxes of $1,801,000. Through management of our municipal loan and bond portfolios, management is focused on minimizing our effective tax rate.  Our effective tax rate was 23.1% and 21.0% for the first six months of 2012 and 2011, respectively, compared to the statutory rate of 34%.

For the three-months ended June 30, 2012, the provision for income taxes was $1,171,000 compared to $867,000 for the same period in 2011. The increase is primarily attributable to an increase in income before provision for income taxes of $910,000. Our effective tax rate was 23.8% and 21.6% for the three months ended June 30, 2012 and 2011, respectively, compared to the statutory rate of 34%.

We have invested in four limited partnership agreements that established low-income housing projects in our market areas. We anticipate recognizing an aggregate of $1.7 million of tax credits over the next eleven years, with an additional $29,000 to be recognized during 2012.

Financial Condition

Total assets were $881.4 million at June 30, 2012, an increase of $2.8 million, or 0.3% from $878.6 million at December 31, 2011.  Investment securities increased 1.4% to $323.1 million and net loans increased 2.0% to $490.5 million at June 30, 2012.  Total deposits increased $4.8 million or 0.7% to $738.8 million since year-end 2011. Borrowed funds have decreased $6.8 million to $47.1 million compared with $53.9 million at year-end.

Cash and Cash Equivalents

Cash and cash equivalents totaled $17.8 million at June 30, 2012 compared to $30.4 million at December 31, 2011, a decrease of $12.6 million.The decrease in cash is due to the Company’s decision as discussed in more detail below to purchase additional investments in the first quarter of 2012 and loan growth. Management actively measures and evaluates its liquidity through our Asset – Liability committee and believes its liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, Federal Home Loan Bank financing, federal funds lines with correspondent banks, brokered certificates of deposit and the portion of the investment and loan portfolios that mature within one year.  Management expects that these sources of funds will permit us to meet cash obligations and off-balance sheet commitments as they come due.

Investments

The following table shows the composition of the investment portfolio as of June 30, 2012 and December 31, 2011 (dollars in thousands):

38

	June 30, 2012		December 31, 2011
	Amount	%	Amount	%
Available-for-sale:
U. S. Agency securities	$              146,364	45.3	$        168,600	52.9
Obligations of state & political
subdivisions	98,147	30.4	101,547	31.9
Corporate obligations	11,046	3.4	8,460	2.7
Mortgage-backed securities in
government sponsored entities	66,194	20.5	38,974	12.2
Equity securities in financial
institutions	1,380	0.4	1,242	0.3
Total	$              323,131	100.0	$        318,823	100.0

	June 30, 2012/
	December 31, 2011
	Change
	Amount	%
Available-for-sale:
U. S. Agency securities	$               (22,236)	(13.2)
Obligations of state & political
subdivisions	(3,400)	(3.3)
Corporate obligations	2,586	30.6
Mortgage-backed securities in
government sponsored entities	27,220	69.8
Equity securities in financial
institutions	138	11.1
Total	$                  4,308	1.4

Our investment portfolio increased by $4.3 million or 1.4% from December 31, 2011 to June 30, 2012.  During 2012, we purchased approximately $44.4 million of U.S. agency obligations, $3.9 million of U.S. Treasury notes, $35.4 million of mortgage backed securities in government sponsored entities, $4.3 million of state and local obligations and $2.6 million of corporate obligations, which helped offset the $6.6 million of principal repayments and $62.5 million of calls and maturities that occurred during the six month period. We also sold $16.7 million of various securities at a gain of $321,000. Excluding our short-term investments consisting of monies held primarily at the Federal Reserve for liquidity purposes, our investment portfolio for the six month period ending June 30, 2012 yielded 3.21% compared to 3.59% for the same period in 2011 on a tax equivalent basis.

Due to the Federal Reserve announcement that rates would likely remain extremely low through late 2014, the Company’s investment strategy changed slightly in the first half of 2012. The previous strategy employed by the Company had resulted in a relatively short duration in the investment portfolio. As a result of the Federal Reserve’s commitment to a low rate policy, the Company implemented a strategy to increase portfolio duration through the purchase of certain mortgage backed securities and longer term agencies to provide additional interest income. This strategy maintained a defensive posture to future rising rates by selecting securities that had limited extension risk.  By increasing duration with defensive securities the Bank was able to increase interest income with minimal additional interest rate risk. In addition, due to the expected cash flows in the final three quarters of 2012, and the Federal Reserve’s commitment to low rates, in the 2012 first quarter the Company purchased certain investment securities utilizing overnight borrowings, which were repaid in the second quarter as other investment securities matured or were called. We believe this strategy while having a positive impact on 2012 earnings; it will also enable us to reinvest cash flows in the next two to five years with anticipated improved investment opportunities.

Management continues to monitor the earnings performance and the liquidity of the investment portfolio on a regular basis.  Through active balance sheet management and analysis of the securities portfolio, the Company believes it maintains sufficient liquidity to satisfy depositor requirements and various credit needs of its customers.

39

Loans

The following table shows the composition of the loan portfolio as of June 30, 2012 and December 31, 2011 (dollars in thousands):

	June 30,		December 31,
	2012		2011
	Amount	%	Amount	%
Real estate:
Residential	$          181,409	36.5	$         184,034	37.7
Commercial	170,878	34.4	165,826	34.0
Agricultural	18,827	3.8	19,224	3.9
Construction	10,328	2.1	8,481	1.7
Consumer	11,160	2.2	10,746	2.2
Commercial and other loans	47,067	9.5	44,299	9.1
State & political subdivision loans	57,463	11.5	54,899	11.4
Total loans	497,132	100.0	487,509	100.0
Less allowance for loan losses	6,650		6,487
Net loans	$          490,482		$         481,022

	June 30, 2012/
	December 31, 2011
	Change
	Amount	%
Real estate:
Residential	$            (2,625)	(1.4)
Commercial	5,052	3.0
Agricultural	(397)	(2.1)
Construction	1,847	21.8
Consumer	414	3.9
Commercial and other loans	2,768	6.2
State & political subdivision loans	2,564	4.7
Total loans	$              9,623	2.0

The Company’s lending is focused in the north central Pennsylvania market and the southern tier of New York.  The composition of our loan portfolio consists principally of retail lending, which includes single-family residential mortgages and other consumer lending, and commercial lending primarily to locally owned small businesses.  New loans are generated primarily from direct loans to our existing customer base, with new customers generated by referrals from real estate brokers, building contractors, attorneys, accountants and existing customers.

Total loans increased approximately $9.6 million or 2.0% during the first six months of 2012. Commercial real estate, construction, consumer, commercial and other loans and state and political subdivision loans have increased $5.1 million, $1.8 million, $414,000,  $2.8 million and $2.6 million, respectively.  Residential and agricultural real estate decreased $2.6 million and $397,000, respectively.

While activity related to the Marcellus Shale natural gas exploration has slowed in the first six months of 2012, we continue to recognize the opportunities created by this activity, but pursue these opportunities prudently and cautiously. The growth in commercial real estate lending and other commercial loans reflects the Company’s focus on commercial lending as a means to increase loan growth and obtain deposits from farmers and small businesses throughout our market area. The increase in state and political subdivision loans is the result of several relationships in Bradford County. We work closely with local municipalities and school districts to meet their needs that otherwise would be provided by the municipal bond market.  Commercial real estate and other commercial loan demand is subject to significant competitive pressures, the local economy which is currently being impacted significantly by the Marcellus Shale gas exploration area, the yield curve and the strength of the overall regional and national economy.

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During the first six months of 2012, we continued to experience lower demand for non-conforming residential real estate. Factors impacting this decline include demand for conforming rate loans and recessionary pressures outside of the local Marcellus Shale gas region. Loan demand for conforming mortgages, which the Company generally sells on the secondary market, has increased as qualified customers continue to take advantage of the low interest rate environment. Through the first six months of 2012, we have sold $14.2 million of loans in the secondary market compared to $5.3 million through the same period last year. The Company recognizes fee income for servicing these sold loans, which is included in non-interest income in the Consolidated Statement of Income.  Management continues to look for ways to ensure that our customers chose the Company for their mortgage needs. This includes partnering with a third party to provide access to government supported loan programs sponsored by the Federal Housing Administration and the U.S. Department of Veteran Affairs and to implement technologies, which make it easier and more efficient for customers to obtain a mortgage.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level which in management’s judgment is adequate to absorb probable future loan losses inherent in the loan portfolio.  The provision for loan losses is charged against current income.  Loans deemed not collectable are charged-off against the allowance while subsequent recoveries increase the allowance.  The following table presents an analysis of the allowance for loan losses and non-performing loans and assets as of and for the six months ended June 30, 2012 and for the years ended December 31, 2011, 2010, 2009 and 2008 (dollars in thousands):

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	June 30	December 31,
	2012	2011	2010	2009	2008
Balance
at beginning of period	$          6,487	$          5,915	$          4,888	$          4,378	$          4,197
Charge-offs:
Real estate:
Residential	49	101	147	76	31
Commercial	2	29	53	236	36
Agricultural	-	-	-	1	20
Consumer	24	71	35	80	44
Commercial and other loans	-	6	173	153	115
Total loans charged-off	75	207	408	546	246
Recoveries:
Real estate:
Residential	-	-	4	1	6
Commercial	6	15	11	1	-
Agricultural	-	-	-	-	20
Consumer	16	57	45	52	19
Commercial and other loans	6	32	120	77	52
Total loans recovered	28	104	180	131	97
Net loans charged-off	47	103	228	415	149
Provision charged to expense	210	675	1,255	925	330
Balance at end of period	$          6,650	$          6,487	$          5,915	$          4,888	$          4,378
Loans outstanding at end of period	$      497,132	$      487,509	$      473,517	$      456,384	$      432,814
Average loans outstanding, net	$      493,642	$      474,972	$      468,620	$      442,921	$      423,382
Non-performing assets:
Non-accruing loans	$          8,403	$          9,165	$        11,853	$          5,871	$          2,202
Accrual loans - 90 days or more past due	258	275	692	884	383
Total non-performing loans	$          8,661	$          9,440	$        12,545	$          6,755	$          2,585
Foreclosed assets held for sale	742	860	693	302	591
Total non-performing assets	$          9,403	$        10,300	$        13,238	$          7,057	$          3,176
Annualized net charge-offs to average loans	0.02%	0.02%	0.05%	0.09%	0.04%
Allowance to total loans	1.34%	1.33%	1.25%	1.07%	1.01%
Allowance to total non-performing loans	76.78%	68.72%	47.15%	72.36%	169.36%
Non-performing loans as a percent of loans
net of unearned income	1.74%	1.94%	2.65%	1.48%	0.60%
Non-performing assets as a percent of loans
net of unearned income	1.89%	2.11%	2.80%	1.55%	0.73%

The Company utilizes a disciplined and thorough loan review process based upon our internal loan policy approved by the Company’s Board of Directors.  The purpose of the review is to assess loan quality, analyze delinquencies, identify problem loans, evaluate potential charge-offs and recoveries, and assess general overall economic conditions in the markets served.  An external independent loan review is performed on our commercial portfolio semi-annually. The external consultant is engaged to 1) review a minimum of 60% of the dollar volume of the commercial loan portfolio (commercial and agricultural real estate, commercial and other loans and state and political subdivision loans) on an annual basis, 2) review a sample of new commercial/agricultural loans originated in the last year, 3) review all relationships in aggregate over $500,000, 4) review all aggregate loan relationships over $100,000 which are over 90 days past due or classified Special Mention, Substandard, Doubtful, or Loss, and 5) such other loans which management or the consultant deems appropriate. As part of this review, our underwriting process and loan grading system is evaluated.

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Management believes it uses the best information available to make such determinations and that the allowance for loan losses is adequate as of June 30, 2012.  However, future adjustments could be required if circumstances differ substantially from assumptions and estimates used in making the initial determination.  A prolonged downturn in the economy, continued high unemployment rates, significant changes in the value of collateral and delays in receiving financial information from borrowers could result in increased levels of non-performing assets, charge-offs, loan loss provisions and reduction in income. Additionally, bank regulatory agencies periodically examine the Bank’s allowance for loan losses.  The banking agencies could require the recognition of additions to the allowance for loan losses based upon their judgment of information available to them at the time of their examination.

On a monthly basis, problem loans are identified and updated primarily using internally prepared past due reports.  Based on data surrounding the collection process of each identified loan, the loan may be added or deleted from the monthly watch list.  The watch list includes loans graded special mention, substandard, doubtful, and loss, as well as additional loans that management may chose to include.  Watch list loans are continually monitored going forward until satisfactory conditions exist that allow management to upgrade and remove the loan.  In certain cases, loans may be placed on non-accrual status or charged-off based upon management’s evaluation of the borrower’s ability to pay.  All commercial loans, which include commercial real estate, agricultural real estate, state and political subdivision loans and other commercial loans, on non-accrual are evaluated quarterly for impairment.

The adequacy of the allowance for loan losses is subject to a formal, quarterly analysis by management of the Company.  In order to better analyze the risks associated with the loan portfolio, the entire portfolio is divided into several categories.  As stated above, loans on non-accrual status are specifically reviewed for impairment and given a specific reserve, if appropriate.  Loans evaluated and not found to be impaired are included with other performing loans, by category, by their respective homogenous pools.  Three year average historical loss factors are calculated for each pool and applied to the performing portion of the loan category. The historical loss factors for both reviewed and homogeneous pools are adjusted based upon the following qualitative factors:

·   Level of and trends in delinquencies, impaired/classified loans

Change in volume and severity of past due loans

Volume of non-accrual loans

Volume and severity of classified, adversely or graded loans

·   Level of and trends in charge-offs and recoveries

·   Trends in volume, terms and nature of the loan portfolio

·   Effects of any changes in risk selection and underwriting standards and any other changes in lending and recovery policies, procedures and practices

·   Changes in the quality of the Bank’s loan review system

·   Experience, ability and depth of lending management and other relevant staff

·   National, state, regional and local economic trends and business conditions

General economic conditions

Unemployment rates

Inflation / CPI

Changes in values of underlying collateral for collateral-dependent loans

·   Industry conditions including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses.

·   Existence and effect of any credit concentrations, and changes in the level of such concentrations

The balance in the allowance for loan losses was $6,650,000 or 1.34% of total loans as of June 30, 2012 as compared to $6,487,000 or 1.33% of loans as of December 31, 2011.  The $163,000 increase is a result of a $210,000 provision for the first six months less net charge-offs of $47,000.  Gross charge-offs for the first six months of 2012 were $75,000. Gross charge-offs for all of 2011 were $207,000. The following table shows the distribution of the allowance for loan losses and the percentage of loans compared to total loans by loan category (dollars in thousands) as of June 30, 2012 and December 31, 2011, 2010, 2009 and 2008:

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	June 30		December 31
	2012		2011		2010		2009		2008
	Amount	%	Amount	%	Amount	%	Amount	%	Amount	%
Real estate loans:
Residential	$    786	36.5	$    805	37.7	$    969	39.1	$    801	42.7	$    694	46.0
Commercial, agricultural	4,405	38.2	4,132	37.9	3,380	36.2	2,864	33.6	2,303	28.8
Construction	19	2.1	15	1.7	22	2.1	20	1.2	5	2.6
Consumer	108	2.2	111	2.2	108	2.4	131	2.6	449	2.7
Commercial and other loans	685	9.5	674	9.1	983	10.0	918	9.7	807	8.8
State & political subdivision loans	246	11.5	235	11.4	137	10.2	93	10.2	19	11.1
Unallocated	401	N/A	515	N/A	316	N/A	61	N/A	101	N/A
Total allowance for loan losses	$ 6,650	100.0	$ 6,487	100.0	$ 5,915	100.0	$ 4,888	100.0	$ 4,378	100.0

As a result of previous loss experiences and other the risk factors utilized in determining the allowance, the Bank’s allocation of the allowance does not directly correspond to the actual balances of the loan portfolio. While commercial and agricultural real estate total 38.2% of the loan portfolio, 66.2% of the allowance is assigned to this segment of the loan portfolio as these loans have more inherent risks than residential real estate or loans to state and political subdivisions.

The following table identifies amounts of loans contractually past due 30 to 90 days and non-performing loans by loan category, as well as the change from December 31, 2011 to June 30, 2012 in non-performing loans(dollars in thousands). Non-performing loans include those loans that are contractually past due 90 days or more and non-accrual loans. Interest does not accrue on non-accrual loans.  Subsequent cash payments received are applied to the outstanding principal balance or recorded as interest income, depending upon management's assessment of its ultimate ability to collect principal and interest.

	June 30, 2012				December 31, 2011
		Non-Performing Loans				Non-Performing Loans
	30 - 90 Days Past Due	90 Days Past Due Accruing	Non- accrual	Total Non-Performing	30 - 90 Days Past Due	90 Days Past Due Accruing	Non- accrual	Total Non-Performing
Real estate:
Residential	$       621	$             78	$    651	$          729	$        859	$             99	$      554	$         653
Commercial	821	180	7,295	7,475	731	176	8,094	8,270
Agricultural	-	-	-	-	143	-	-	-
Construction	-	-	-	-	-	-	-	-
Consumer	46	-	-	-	93	-	-	-
Commercial and other loans	100	-	457	457	8	-	517	517
Total nonperforming loans	$    1,588	$           258	$ 8,403	$       8,661	$     1,834	$           275	$   9,165	$      9,440

	Change in Non-Performing Loans
	June 30, 2012/ December 31, 2011
	Amount	%
Real estate:
Residential	$          76	11.6
Commercial	(795)	(9.6)
Agricultural	-	N/A
Construction	-	N/A
Consumer	-	N/A
Commercial and other loans	(60)	(11.6)
Total nonperforming loans	$       (779)	(8.3)

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For the six month period ending June 30, 2012, we recorded a provision for loan losses of $210,000, which compares to $375,000 for the same time period in 2011.  The decrease is attributable to the decrease in non-performing loans in comparison to year end. Non-performing loans decreased $779,000 or 8.3%, from December 31, 2011 to June 30, 2012. Approximately 83.6% of the Bank’s non-performing loans are associated with the following three customer relationships:

·   A commercial customer with a total loan relationship of $5.1 million secured by 165 residential properties and one commercial building is considered non-accrual as of June 30, 2012. In the first quarter of 2011, the Company and borrower entered into a forbearance agreement to restructure the debt. The loan remained current throughout 2011 and 2012. Management continues to monitor the financial condition of this borrower and has received the 2011 financial statements and tax returns, which continue to show weakness. As a result of the loan being considered non-accrual and payments being made on the loans through June 30, 2012, there is no specific reserve allocation as of June 30, 2012.

·   A commercial customer with a relationship of approximately $969,000 is considered non-accrual as of June 30, 2012. $669,000 of the relationship is subject to USDA guarantees. The current economic conditions related to the timber industry have significantly impacted the cash flows from the customer’s activities. Management reviewed the collateral and guarantees and determined that a specific reserve allocation of $116,000 was required as of June 30, 2012 based on the appraised value of collateral.

·   A commercial customer with a relationship of approximately $966,000 is considered non-accrual as of June 30, 2012. The current recessionary economic conditions have significantly impacted the cash flows from the customer’s activities. Management reviewed the collateral and determined that a specific reserve allocation of $252,000 was required as of June 30, 2012 based on the appraised value of collateral. The customer has indicated a willingness to provide additional collateral in order to borrow additional funds to complete the project associated with this loan, which management is currently evaluating.

Management of the Bank believes that the allowance for loan losses is adequate, which is based on the following factors:

·   While non-performing loans are still higher than the Company’s historical levels, 58.8% of this balance is associated with one customer, whose debt is current through July 31, 2012.

·   Net and gross charge-offs continue to be low in relation to the size of the Bank’s loan portfolio and compared to our peer group.

·   We have not experienced the significant decrease in the collateral values of local residential, commercial or agricultural real estate loan portfolios as seen in other parts of the country. Additionally, our market area is predominately centered in the Marcellus Shale natural gas exploration and drilling area. These natural gas exploration and drilling activities have significantly impacted the overall interest in real estate in our market area due to the related lease and royalty revenues associated with it.  The natural gas activities have had a positive impact on the value of local real estate.

Bank Owned Life Insurance

The Company purchased bank owned life insurance to offset future employee benefit costs.  As of June 30, 2012, the cash surrender value of this life insurance is $13,919,000, which has resulted in income recognized in the first six months ended June 30, 2012 of $250,000 compared to $245,000 for the same period in 2011. The use of life insurance policies provides the Bank with an asset that will generate earnings to partially offset the current costs of benefits, and eventually (at the death of the individuals) provides partial recovery of cash outflows associated with the benefits.

Premises and Equipment

Premises and equipment decreased approximately $187,000 from $11.7 million at December 31, 2011 to $11.5 million at June 30, 2012. This occurred primarily as a result of depreciation for 2012 of $304,000 offset by purchases totaling approximately $117,000.

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Deposits

The following table shows the composition of deposits as of June 30, 2012 and December 31, 2011 (dollars in thousands):

	June 30		December 31,
	2012		2011
	Amount	%	Amount	%
Non-interest-bearing deposits	$                86,218	11.7	$          85,605	11.6
NOW accounts	204,703	27.7	200,897	27.4
Savings deposits	84,470	11.4	79,659	10.8
Money market deposit accounts	70,916	9.6	67,223	9.2
Certificates of deposit	292,460	39.6	300,609	41.0
Total	$              738,767	100.0	$        733,993	100.0

	June 30,  2012/
	December 31, 2011
	Change
	Amount	%
Non-interest-bearing deposits	$                     613	0.7
NOW accounts	3,806	1.9
Savings deposits	4,811	6.0
Money market deposit accounts	3,693	5.5
Certificates of deposit	(8,149)	(2.7)
Total	$                  4,774	0.7

Deposits increased $4.8 million or 0.7%, since December 31, 2011. The increase in deposits is due to several reasons. Our market continues to be positivel impacted by the Marcellus Shale gas exploration activities and we have developed products specifically targeting customers that have benefited from this activity.  Furthermore, our customers appear to be reluctant to invest in other financial markets again due to concerns over the United States’ credit rating (which was downgraded by Standard & Poor’s), the European sovereign debt crisis, and continued high unemployment in the United States, among other economic indicators which have contributed to increased volatility in the capital markets and diminished expectations for the economy. Additionally, the current interest rate environment limits the options in which our customers can invest while maintaining a similar risk profile to depositing funds with the Company. We believe that our historical financial performance, reputation as a strong, local community bank, acquisitions of local competitors from institutions outside of our general market area and our focus on developing relationships with the local municipalities has positioned the Company as a leading financial institution within our service area with the ability to meet our customers’ needs and expectations.

As of June 30, 2012, non-interest-bearing deposits, NOW accounts, savings accounts and money market deposit accounts, have all increased by $613,000, $3.8 million, $4.8 million, and $3.7 million, respectively, from December 31, 2011. Certificates of deposit have decreased $8.1 million since December 31, 2011, due to the low rate environment for certificates of deposits and the transfer of customer funds to more liquid interest bearing accounts. The Bank currently does not have any outstanding brokered certificates of deposit.

Borrowed Funds

Borrowed funds decreased $6.8 million during the first six months of 2012. The majority of this decrease is the result of $4.0 million of FHLB advances maturing during the first six months. The Bank’s current strategy for borrowings is to consider replacing any maturities with five to ten year borrowings due to the current interest rate environment, while considering loan and investment opportunities. Loan maturities in the second quarter of 2012 were not replaced due to excess cash on hand and limited investment and loan opportunities. The Company's daily cash requirements or short-term investments are primarily met by using the financial instruments available through the Federal Home Loan Bank of Pittsburgh.

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In December 2003, the Company formed a special purpose entity; Citizens Financial Statutory Trust I (“the Entity”), to issue $7,500,000 of floating rate obligated mandatory redeemable securities as part of a pooled offering.  The rate is determined quarterly based on the 3 month LIBOR plus 2.80%.  The Entity may redeem them, in whole or in part, at face value at any time.  The Company borrowed the proceeds of the issuance from the Entity in December 2003 in the form of a $7,500,000 note payable, which is included within “Borrowed Funds” in the liabilities section of the Company’s balance sheet. Under current accounting rules, the Company’s minority interest in the Entity was recorded at the initial investment amount and is included in the other assets section of the balance sheet.  The Entity is not consolidated as part of the Company’s consolidated financial statements.

In December, 2008, the Company entered into an interest rate swap agreement to convert the above mentioned floating-rate debt to fixed rate debt on a notional amount of $7.5 million. The interest rate swap instrument involves an agreement to receive a floating rate and pay a fixed rate, at specified intervals, calculated on the agreed-upon notional amount. The differentials paid or received on interest rate swap agreements are recognized as adjustments to interest expense in the period. The interest rate swap agreement was entered into on December 17, 2008 and expires December 17, 2013.  The fair value of the interest rate swap at June 30, 2012 was a liability of $283,000 and is included within other liabilities on the Consolidated Balance Sheet.

Stockholder’s Equity

We evaluate stockholders’ equity in relation to total assets and the risks associated with those assets.  The greater the capital resource, the more likely a corporation will meet its cash obligations and absorb unforeseen losses.  For these reasons, capital adequacy has been, and will continue to be, of paramount importance.

Total stockholders’ equity was $86.5 million at June 30, 2012 compared to $81.5 million at December 31, 2011, an increase of $5.0 million or 6.2%.  Excluding accumulated other comprehensive income, stockholder’s equity increased $5.0 million, or 6.6%.  In the first six months of 2012, the Company had net income of $7.2 million and paid dividends of $1.7 million, representing a dividend payout ratio of 24.0%.  The Company purchased 13,581 shares of treasury stock at a weighted average cost of $36.47 per share and 3,808 shares awarded as part of the restricted stock plan at a weighted average cost of $37.10.

All of the Company’s investment securities are classified as available-for-sale, making this portion of the Company’s balance sheet more sensitive to the changing market value of investments.  Accumulated other comprehensive income increased $41,000 from December 31, 2011 as a result of market value fluctuations.

The Company has also complied with standards of being well capitalized mandated by the banking regulators.  The Company’s primary regulators have established “risk-based” capital requirements designed to measure capital adequacy.  Risk-based capital ratios reflect the relative risks associated with various assets entities hold in their portfolios.  A weight category of 0% (lowest risk assets), 20%, 50%, or 100% (highest risk assets), is assigned to each asset on the balance sheet. The Company’s computed risk-based capital ratios are as follows (dollars in thousands):

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	June 30		December 31,
	2012		2011
Total capital (to risk-weighted assets)	Amount	Ratio	Amount	Ratio
Company	$              87,384	16.98%	$        82,050	16.23%
For capital adequacy purposes	41,164	8.00%	40,432	8.00%
To be well capitalized	51,455	10.00%	50,540	10.00%
Tier I capital (to risk-weighted assets)
Company	$              80,736	15.69%	$        75,541	14.94%
For capital adequacy purposes	20,582	4.00%	20,216	4.00%
To be well capitalized	30,873	6.00%	30,324	6.00%
Tier I capital (to average assets)
Company	$              80,736	9.20%	$        75,541	8.83%
For capital adequacy purposes	35,114	4.00%	34,223	4.00%
To be well capitalized	43,892	5.00%	42,779	5.00%

The Bank’s computed risk-based capital ratios are as follows (dollars in thousands):

	June 30		December 31,
	2012		2011
Total capital (to risk-weighted assets)	Amount	Ratio	Amount	Ratio
Bank	$              82,837	16.14%	$        77,051	15.29%
For capital adequacy purposes	41,048	8.00%	40,326	8.00%
To be well capitalized	51,310	10.00%	50,408	10.00%
Tier I capital (to risk-weighted assets)
Bank	$              76,387	14.89%	$        70,729	14.03%
For capital adequacy purposes	20,524	4.00%	20,163	4.00%
To be well capitalized	30,786	6.00%	30,245	6.00%
Tier I capital (to average assets)
Bank	$              76,387	8.72%	$        70,729	8.28%
For capital adequacy purposes	35,059	4.00%	34,166	4.00%
To be well capitalized	43,823	5.00%	42,708	5.00%

Off Balance Sheet Activities

Some financial instruments, such as loan commitments, credit lines, and letters of credit are issued to meet customer financing needs.  The contractual amount of financial instruments with off-balance sheet risk was as follows at June 30, 2012 (in thousands):

Commitments to extend credit	$92,406
Standby letters of credit	2,996
	$95,402

We also offer limited overdraft protection as a non-contractual courtesy which is available to demand deposit accounts in good standing for personal. Effective in the third quarter of 2010, overdraft charges as a result of ATM withdrawals and one time point of sale (non-recurring) transactions require prior approval of the customer. The non-contractual amount of financial instruments with off-balance sheet risk at June 30, 2012 was $12,534,000.  The Company reserves the right to discontinue this service without prior notice.

Liquidity

Liquidity is a measure of the Company's ability to efficiently meet normal cash flow requirements of both borrowers and depositors.  To maintain proper liquidity, we use funds management policies along with our investment policies to assure we can meet our financial obligations to depositors, credit customers and stockholders.  Liquidity is needed to meet depositors' withdrawal demands, extend credit to meet borrowers' needs, provide funds for normal operating expenses and cash dividends, and to fund other capital expenditures.

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Cash generated by operating activities, investing activities and financing activities influences liquidity management. Our Company's historical activity in this area can be seen in the Consolidated Statement of Cash Flows.  The most important source of funds is the deposits that are primarily core.  Repayment of principal on outstanding loans and cash flows created from the investment portfolio also a factor in liquidity management.  Other sources of funding include brokered certificates of deposit and the sale of loans or investments, if needed.

The Company's use of funds is shown in the investing activity section of the Consolidated Statement of Cash Flows, where the net loan activity is presented.  Other significant uses of funds include purchasing stock from the Federal Home Loan Bank (FHLB) of Pittsburgh, as well as capital expenditures.  Capital expenditures, including those for potential future branches during the first six months of 2012 were $117,000, compared to $610,000 during the same time period in 2011.  The acquisition of land in Lock Haven for possible future expansion accounted for most of the expenditure in 2011.

Short-term debt from the FHLB supplements the Bank’s availability of funds.  The Bank achieves liquidity primarily from temporary or short-term investments in the Federal Reserve and the FHLB.  The Bank has a maximum borrowing capacity at the FHLB of approximately $239.0 million, of which $31.0 million was outstanding at June 30, 2012. Additionally, we have a Federal funds line totaling $10.0 million from a third party bank at market rates.  This line is not drawn upon. We also have borrower in custody line with the Federal Reserve Bank of approximately $14.1 million, which also is not drawn upon as of June 30, 2012.

Citizens Financial is a separate legal entity from the Bank and must provide for its own liquidity.  In addition to its operating expenses, Citizens Financial is responsible for paying any dividends declared to its shareholders.  Citizens Financial also has repurchased shares of its common stock.  Citizens Financial’s primary source of income is dividends received from the Bank.  Both federal and state laws impose restrictions on the ability of the Bank to pay dividends. In particular, the Bank may not, as a state-chartered bank which is a member of the  Federal Reserve System, declare a dividend without approval of the Federal Reserve, unless the dividend to be declared by the Bank’s Board of Directors does not exceed the total of:  (i) the Bank’s net profits for the current year to date, plus (ii) its retained net profits for the preceding two current years, less any required transfers to surplus.  The Federal Reserve Board and the FDIC have formal and informal policies which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings, with some exceptions.  The Prompt Corrective Action Rules, described above, further limit the ability of banks to pay dividends, because banks which are not classified as well capitalized or adequately capitalized may not pay dividends and no dividend may be paid which would make the Bank undercapitalized after the dividend.  At June 30, 2012, Citizens Financial had liquid assets of $3.2 million.

Interest Rate and Market Risk Management

The objective of interest rate sensitivity management is to maintain an appropriate balance between the stable growth of income and the risks associated with maximizing income through interest sensitivity imbalances and the market value risk of assets and liabilities.

Because of the nature of our operations, we are not subject to foreign currency exchange or commodity price risk and, since our Company has no trading portfolio, it is not subject to trading risk.

Currently, our Company has equity securities that represent only .4% of our investment portfolio and, therefore, equity risk is not significant.

The primary components of interest-sensitive assets include adjustable-rate loans and investments, loan repayments, investment maturities and money market investments.  The primary components of interest-sensitive liabilities include maturing certificates of deposit, IRA certificates of deposit and short-term borrowings.  Savings deposits, NOW accounts and money market investor accounts are considered core deposits and are not short-term interest sensitive (except for the top-tier money market investor accounts which are paid current market interest rates).

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Gap analysis, one of the methods used by us to analyze interest rate risk, does not necessarily show the precise impact of specific interest rate movements on our Company's net interest income because the re-pricing of certain assets and liabilities is discretionary and is subject to competitive and other pressures.  In addition, assets and liabilities within the same period may, in fact, be repaid at different times and at different rate levels.  We have not experienced the kind of earnings volatility that might be indicated from gap analysis.

Our Company currently uses a computer simulation model to better measure the impact of interest rate changes on net interest income. We use the model as part of our risk management process that will effectively identify, measure, and monitor our Company's risk exposure.

We use numerous interest rate simulations employing a variety of assumptions to evaluate our interest rate risk exposure.  Various analysis performed in the second quarter ranging from a decrease in interest rates of 100 to an increase in interest rates of 500 would have a minor impact on our Company's anticipated net interest income over the next twelve to twenty-four months.

Item 3-Quantitative and Qualitative Disclosure about Market Risk

In the normal course of conducting business activities, the Company is exposed to market risk, principally interest rate risk, through the operations of its banking subsidiary.  Interest rate risk arises from market driven fluctuations in interest rates that affect cash flows, income, expense and values of financial instruments and was discussed previously in this Form 10-Q.  Management and a committee of the Board of Directors manage interest rate risk (see also “Interest Rate and Market Risk Management”).

No material changes in market risk strategy occurred during the current period.  A detailed discussion of market risk is provided in the SEC Form 10-K for the period ended December 31, 2011.

Item 4-Control and Procedures

(a) Disclosure Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”).  Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the SEC (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes to Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the three months ended June 30, 2012 that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

Management is not aware of any litigation that would have a material adverse effect on the consolidated financial position of the Company.  Any pending proceedings are ordinary, routine litigation incidental to the business of the Company and its subsidiary.  In addition, no material proceedings are pending or are known to be threatened or contemplated against the Company and its subsidiary by government authorities.

Item 1A – Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1.A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011, which could materially affect our business, financial condition or future results. At June 30, 2012 the risk factors of the Company have not changed materially from those reported in our Annual Report on Form 10-K.  However, the risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

ISSUER PURCHASES OF EQUITY SECURITIES
Period	Total Number of Shares (or units Purchased)	Average Price Paid per Share (or Unit)	Total Number of Shares (or  Units) Purchased as Part of Publicly Announced Plans of Programs	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1) (2)
4/1/12 to 4/30/12	-	$0.00	-	150,385
5/1/12 to 5/31/12	11,351	$36.53	11,351	139,034
6/1/12 to 6/30/12	-	$0.00	-	139,034
Total	11,351	$36.53	11,351	139,034

(1)   On January 7, 2006, the Company announced that the Board of Directors authorized the Company to repurchase up to 140,000 shares.  This repurchase program was completed on May 10, 2012 at a total cost of $3.7 million, or $26.19 per share.

(2)   On January 17, 2012, the Company announced that the Board of Directors authorized the Company to repurchase up to an additional 140,000 shares.  The repurchases will be conducted through open-market purchases or privately negotiated transactions and will be made from time to time depending on market conditions and other factors.  No time limit was placed on the duration of the share repurchase program.  Any repurchased shares will be held as treasury stock and will be available for general corporate purposes.

Item 3 - Defaults Upon Senior Securities

Not applicable.

Item 4 – Mine Safety Disclosure

Not applicable.

Item 5 - Other Information

None

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Item 6 - Exhibits

(a)  The following documents are filed as a part of this report:

3.1	Articles of Incorporation of Citizens Financial Services, Inc., as amended (1)
3.2	Bylaws of Citizens Financial Services, Inc.(2)
4.1	Instrument defining the rights of security holders.(3)
4.2	No long term debt instrument issued by the Company exceeds 10% of consolidated assets or is registered.  In accordance with paragraph 4(iii) of Item 601(b) of Regulation S-K, the Company will furnish the Securities and Exchange Commission copies of long-term debt instruments and related agreements upon request.
10.1	*Amended and Restated Executive Employment Agreement between Citizens Financial Services, Inc., First Citizens Community Bank and Randall E. Black
10.2	*Form of Award Agreements for Citizens Financial Services, Inc. 2006 Restricted Stock Plan
10.3	*Change in Control Agreement, between First Citizens Community Bank, Citizens Financial Services, Inc. (as guarantor) and Terry B. Osborne
10.4	*Change in Control Agreement, between First Citizens Community Bank, Citizens Financial Services, Inc. (as guarantor) and Mickey L. Jones
10.5	*First Citizens Community Bank Annual Incentive Plan
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
101 **	The following materials from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) The Consolidated Balance Sheet (unaudited), (ii) the Consolidated Statement of Income (unaudited), (iii) the Consolidated Statement of Comprehensive Income (unaudited), (iv) the Consolidated Statement of Cash Flows (unaudited) and (v) related notes (unaudited).

_________________________________________________________________________________

(1) Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, as filed with the Commission on May 12, 2010.

(2) Incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, as filed with the Commission on December 24, 2009.

(3) Incorporated by reference to Exhibit 4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, as filed with the Commission on March 14, 2006.

* Management contract or compensatory plan, contract or arrangement

** Furnished, not filed.

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the undersigned Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	Citizens Financial Services, Inc.
August 9, 2012	By:	/s/ Randall E. Black
		Randall E. Black
		President and Chief Executive Officer (Principal Executive Officer)

August 9, 2012	By:	/s/ Mickey L. Jones
		Mickey L. Jones
		Chief Financial Officer (Principal Accounting Officer)

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EX-10.1

EXHIBIT 10.1

AMENDMENT TO THE EMPLOYMENT AGREEMENT

BY AND BETWEEN RANDALL E. BLACK, CITIZENS FINANCIAL SERVICES, INC.

AND FIRST CITIZENS NATIONAL BANK

WHEREAS, Randall E. Black entered into an amended and restated employment agreement with First Citizens National Bank (the “Bank”) and Citizens Financial Service, Inc.(the “Company”) dated December 31, 2008, which was subsequently amended on March 1, 2010 (the “Employment Agreement”); and

WHEREAS, the Boards of Directors of the Bank and Company resolved to amend the Employment Agreement effective June 29, 2012 to reflect the Bank’s new name and effective as of the date hereof, to accelerate Mr. Black’s outstanding restricted stock awards in the event the Bank or the Company terminated his employment without Cause (as defined in his Employment Agreement).

NOW, THEREFORE, the Employment Agreement is amended as follows:

Effective as of June 29, 2012, all references in the change in control agreement to First Citizens National Bank shall be replaced with First Citizens Community Bank.

Effective as of June 19, 2012, Section 13(b) of the Employment Agreement shall be amended by adding the following sentence to the end of the paragraph:

“Notwithstanding the foregoing, in the event the Executive’s employment is terminated pursuant to this Section 13(b), all outstanding restricted stock awards granted to the Executive under the 2006 Restricted Stock Plan will vest as of the Executive’s termination date.”

IN WITNESS WHEREOF, this Amendment is executed by the parties to the Employment Agreement on June 19, 2012.

FIRST CITIZENS NATIONAL BANK
By:	/s/ R. Lowell Coolidge
	R. Lowell Coolidge
	Chairman of the Board of Directors

CITIZENS FINANCIAL SERVICES, INC.
By:	/s/ R. Lowell Coolidge
	R. Lowell Coolidge
	Chairman of the Board of Directors

ATTEST:	EXECUTIVE
By:  /s/ Gina Marie Boor
By:  Gina Marie Boor	By:	/s/ Randall E. Black
		Randall E. Black
		Executive

AMENDMENT TO THE EMPLOYMENT AGREEMENT

BY AND BETWEEN RANDALL E. BLACK, CITIZENS FINANCIAL SERVICES, INC.

AND FIRST CITIZENS NATIONAL BANK

WHEREAS, Randall E. Black entered into an amended and restated employment agreement with Citizens Financial Service, Inc.(the “Company”) and First Citizens National Bank (the “Bank”) effective December 31, 2008 (the “Employment Agreement”); and

WHEREAS, the Boards of Directors of the Company and Bank resolved to amend the Employment Agreement effective March 1, 2010, to clarify the terms of Mr. Black’s health insurance coverage in the event of a change in control.

NOW, THEREFORE, Mr. Black, the Bank and the Company hereby agree to amend the Employment Agreement as follows:

Effective March 1, 2010, Sections 13(b) and 13(c) of the Employment Agreement shall be amended to extend Mr. Black’s insurance coverage in the event of a change in control from one (1) year to eighteen (18) months by replacing the reference to “one (1) year” of continued health, life and long-term disability insurance coverage with “eighteen (18) months”.

IN WITNESS WHEREOF, the parties have duly executed and delivered this Amendment to the Employment Agreement as of March 16, 2010.

	CITIZENS FINANCIAL SERVICES, INC.
ATTEST:
By : /s/ Gina Marie Boor	By:	/s/ R. Lowell Coolidge
By:  Gina Marie Boor		R. Lowell Coolidge
		Chairman of the Board of Directors

	FIRST CITIZENS NATIONAL BANK
ATTEST:
By:  /s/ Gina Marie Boor	By:	/s/ R. Lowell Coolidge
By:  Gina Marie Boor		R. Lowell Coolidge
		Chairman of the Board of Directors

ATTEST:	EXECUTIVE
By: /s/ Gina Marie Boor
By: Gina Marie Boor	By:	/s/ Randall E. Black
		Randall E. Black
		Executive

AMENDED & RESTATED

EXECUTIVE EMPLOYMENT AGREEMENT

THIS AGREEMENT between Citizens Financial Services, Inc. (the “Corporation”) and First Citizens National Bank (the “Bank”) and Randall E. Black (the “Executive”) is hereby amended and restated in its entirety effective December 31, 2008.  This Agreement was originally executed on April 20, 2004 (the “Effective Date”) and was subsequently amended and restated on December 16, 2005 and September 19, 2006, respectively.

WHEREAS, the Bank is a subsidiary of the Corporation; and

WHEREAS, any reference to “Corporation” shall mean Corporation or Bank;

WHEREAS, the Corporation and Bank desire to continue to employ the Executive as President and Chief Executive Officer under the terms and conditions set forth herein; and

WHEREAS, the Executive desires to continue to serve the Corporation and Bank in an executive capacity under the terms and conditions set forth in this Agreement;

WHEREAS, the Executive and the Boards of Directors of the Corporation and the Bank desire to enter into this amended and restated Agreement to bring this Agreement into compliance with Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) and the regulations and guidance issued with respect to 409A of the Code.

NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, and intending to be legally bound hereby, the parties agree as follows:

1.           TERM OF EMPLOYMENT.

(a)           General.  The initial term of this Agreement commenced on the Effective Date and continued through April 20, 2007.  This Agreement has been and shall continue to be renewed automatically on June 1st of each year for successive terms of three years each, unless either party notifies the other party at least 90 (ninety) days prior to such date of such party's determination not to renew this Agreement beyond the then existing term. It is the intention of the parties that this Agreement be "Evergreen" unless (i) either party gives written notice to the other party of his or its intention not to renew this Agreement as provided above or (ii) this Agreement is terminated pursuant to Section 12 hereof. Each reference herein to "the term of this Agreement" shall include the initial term and any renewal term.  Except in the event Executive retires pursuant to the then current retirement policy, at the end of the term of the Agreement, Executive, if requested, shall submit his resignation for any Board of Director or similar position he may hold at the Bank, Corporation, or its subsidiaries or affiliates.

2.           POSITION AND DUTIES.  The Executive shall serve as the President and Chief Executive Officer of the Corporation and Bank, reporting only to the Board of Directors of the Corporation and Bank and shall have supervision and control over, and responsibility for, the general management and operation of the Corporation and Bank, and shall have such other powers and duties as may from time to time be prescribed by the Board of Directors of the Corporation and Bank

3.           ENGAGEMENT IN OTHER EMPLOYMENT.  The Executive will devote his full attention, time and energies to the business of Corporation, Bank and any of their subsidiaries or affiliates. The Executive shall neither engage in any business or commercial activities, duties or pursuits which compete with the business or commercial activities of the Corporation, Bank or any of their subsidiaries or affiliates, nor serve as a director or officer or in any other capacity in a company which competes with the Corporation, Bank or any of their subsidiaries or affiliates.  The Executive may continue his activities as disclosed to the Corporation and Bank to date in Connelly Real Estate Inc., subject to any future review for compliance with any regulatory requirements.

4.           COMPENSATION/ANNUAL DIRECT SALARY.  As compensation for services rendered the Corporation and Bank under this Agreement, the Executive shall be entitled to receive from the Corporation or Bank an annual direct salary of two hundred and ten thousand dollars ($210,000) per year (the “Annual Direct Salary” and as may be increased in the future), payable in such intervals, consistent with the Bank’s payroll policy prorated for any partial employment period.  The Annual Direct Salary shall be reviewed annually no later than December 31st of the then calendar year and shall be subject to such annual change, but not reduced below the Annual Direct Salary in effect at the time of such review without the Executive’s written consent, as may be set by the Board of Directors of the Corporation and Bank taking into account the position and duties of the Executive and the performance of the Corporation and Bank under the Executive’s leadership.

5.           FRINGE BENEFITS, VACATION, EXPENSES, AND PERQUISITES.

(a)           Employee Benefit Plans.  The Executive shall be entitled to participate in or receive benefits under all Bank employment benefit plans including, but not limited to, the management incentive plan, any pension plan, profit-sharing plan, savings plan, or life insurance plan which the Executive’s current grandfather status provides Executive with a death benefit equal to three times Annual Direct Salary, but not to exceed the group life insurance policy limits, and the group long term disability insurance plan as made available by the Bank to its employees subject to and on a basis consistent with terms, conditions and overall administration of such plans and arrangements, including without limitation the eligibility requirements of such plans or arrangements.  In addition, during the term of this Agreement, the Bank shall continue the Executive’s participation  in the Bank’s Supplemental Executive Retirement Plan or, in the event the  Bank terminates such plan, provide Executive with the same benefit through an individual agreement.

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(b)           Vacation, Holidays, Sick Days and Personal Days.  The Executive shall be entitled to twenty (20) paid vacation days in each calendar year.  The Executive shall also be entitled to all paid holidays, sick days and personal days given by the Corporation and/or the Bank to its employees.  In addition, irrespective of any change in policy by the Corporation and/or the Bank, the Executive shall be entitled to carry vacation days, sick days, and personal days over for an additional one full year.

(c)           Business Expenses.  During the term of his employment hereunder, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by him, which are properly accounted for, in accordance with the policies and procedures established by the Board of Directors of the Corporation and/or the Bank for its senior executive officers.

(d)           Automobile.  The Executive shall be provided with a company-owned or leased vehicle which may include at Executive’s option a sport utility vehicle or truck reasonably acceptable to Executive and Bank during the term of this Agreement.  The vehicle will be replaced no less than every third year.  The vehicle is to be used for Corporation or Bank business and/or business development, and as properly documented as required by applicable Internal Revenue guidelines by Executive for personal business.

(e)           Club Memberships.  The Corporation shall provide payment of annual dues and monthly business development expenses for the Executive in connection with a club membership in the market area.  Any other contributions (assessments) associated with the club membership are the sole responsibility of the Executive and are to be paid by the Executive.

(f)           Professional Memberships and Continuing Education.  The Corporation and/or Bank shall pay all fees and expenses associated with the Executive’s professional memberships and continuing education related to the Executive’s status as a Public Accountant.

(g)           Additional Life Insurance.  The Executive has acquired an individual level term thirty (30) year policy (“Term Life Insurance”) with a death benefit of $600,000.00.    The Bank shall annually pay Executive $3,000.00 on or within two weeks of the day the annual premium is due,  provided that the Executive is an employee pursuant to the terms of this Agreement or as it may be amended or as otherwise provided pursuant to Sections 13(b), 13(c) or 14(c).  This amount is to reimburse Executive for the Term Life Insurance Premium and to provide Executive with funds to pay any applicable federal, state and local taxes owed due to the receipt of the Term Life Insurance premium, and is in lieu of performing an annual gross-up calculation.

6.         INDEMNIFICATION.  The Corporation will indemnify the Executive as required under Pennsylvania and federal law, with respect to any threatened, pending or completed legal or regulatory action, suit or proceeding brought against him by reason of the fact that he is or was a director, officer, employee or agent of the Corporation.

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7.           LIABILITY INSURANCE.  The Bank and/or the Corporation shall use its best effortsto obtain insurance coverage for the Executive under an insurance policy covering officers and directors of the Bank and Corporation against lawsuits, arbitrations or other legal or regulatory proceedings; however, nothing herein shall be construed to require the Bank and/or the Corporation to obtain such insurance, if the Board of Directors of the Bank and/or the Corporation determine that such coverage cannot be obtained at a reasonable price.

8.           RESIDENCE.  Irrespective of any existing or future policies of the Corporation or Bank, Executive shall not be required to change his place of residence while employed as President and Chief Executive officer of the Corporation and Bank.

9.           UNAUTHORIZED DISCLOSURE. During the term of this Agreement, or at any later time, the Executive shall not, without the written consent of the Board of Directors of the Corporation or Bank or a person authorized thereby, knowingly disclose to any person, other than an employee of the Corporation or Bank or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of his duties as an executive of the Corporation or Bank, any confidential information, trade secrets, or know how, obtained by him while in the employ of the Corporation or Bank.  Confidential information, trade secrets, or know how includes:

·   any services, products, improvements, formulas, projects, proposals, designs or styles, processes, customers, (including, but not limited to, customers of Corporation, Bank or any of their affiliates or subsidiaries on whom the Executive called or with whom he became acquainted during the term of his employment),

·   methods of business or any business practices, research, product or business plans, customer lists, markets, software, developments, inventions, technology, drawings, engineering, marketing, distribution and sales methods and systems, finances, sales and profit figures, and

·   other business information of Corporation, Bank or any of their subsidiaries or affiliates, the disclosure of which could be or will be materially damaging to the Corporation, Bank or any of their subsidiaries or affiliates.

Provided, however, that confidential information, trade secrets or know how shall not include:

·   any information known generally to the public (other than as a result of unauthorized disclosure by the Executive or any person with the assistance, consent or direction of the Executive), or

·   any information of a type not otherwise considered confidential by persons engaged in the same business or a business similar to that conducted by the Corporation or Bank or any information that must be disclosed as required by law.

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10.        RETURN OF COMPANY PROPERTY AND DOCUMENTS.  The Executive agrees that, at the time of termination of his employment, regardless of the reason for termination, he, as soon as practical, will deliver to Corporation or Bank, any and all company property, including, but not limited to, keys, security codes or passes, mobile telephones, pagers, computers, devices, confidential information (as defined in this Agreement), records, data, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, software programs, equipment, other documents or property, or reproductions of any of the aforementioned items developed or obtained by the Executive during the course of his employment.

11.           RESTRICTIVE COVENANT.

(a)            Non-competition and Non-solicitation. The Executive hereby acknowledges and recognizes the highly competitive nature of the business of Corporation and Bank and accordingly agrees that, for the applicable period and the applicable circumstances set forth in Section 11(c) hereof, Executive shall not:

(i)           be engaged, directly or indirectly, either for his own account or as agent, consultant, employee, partner, officer, director, proprietor, investor (except as an investor owning less than 5% of the stock of a publicly owned company) or otherwise of any person, firm, corporation or enterprise engaged in (1) the banking or financial services industry (including bank holding company), or (2) any other activity in which Corporation, Bank or any of their subsidiaries or affiliates are engaged during the term of this Agreement, in any county in which, a branch, or office of Corporation or any of its subsidiaries is located,  or within a fifty (50) mile radius of any branch, or office of Corporation or any of its subsidiaries, any of the foregoing which existed on the date of termination of the Executive’s employment, which radius includes areas located outside of the Commonwealth of Pennsylvania (the “Non-Competition Area”); or

(ii)           provide financial or other assistance to any person, firm, corporation, or enterprise engaged in (1) the banking or financial services industry (including bank holding company), or (2) any other activity in which Corporation, Bank or any of their subsidiaries or affiliates are engaged during the term of this Agreement in the Non-Competition Area; or

(iii)           directly or indirectly contact, solicit or induce any person, firm, corporation or other entity who or which is a customer or referral source of Corporation, Bank or any of their subsidiaries or affiliates during the term of Executive’s employment or at the date of termination of Executive’s employment, to become a client, customer or referral service of any other person, firm, corporation or other entity provided that such other person, firm, corporation or other entity competes in any way with the Corporation, Bank or any of their subsidiaries or affiliates; or

5

(iv)           directly or indirectly solicit, induce or encourage any employee of Corporation, Bank or any of their subsidiaries or affiliates, who is employed during the term of Executive’s employment or at the date of termination of Executive’s employment, to leave the employ of Corporation, Bank or any of their subsidiaries or affiliates or to seek, obtain or accept employment with any person or entity other than Corporation, Bank or any of their subsidiaries or affiliates, provided, however, the furnishing of a written reference, requested by an employee,  shall not itself be a violation of this restrictive covenant.

(b)           Amendment of Restrictive Covenant.  It is expressly understood and agreed that, although Executive, Corporation and Bank consider the restrictions contained in Section 11(a) reasonable for the purpose of preserving for Corporation, Bank and any of their subsidiaries or affiliates, their good will and other proprietary rights, if a final judicial determination is made by a court having jurisdiction that the time or territory or any other restriction contained in Section 11(a) is an unreasonable or otherwise unenforceable restriction against the Executive, the provisions of Section 11(a) shall not be rendered void, but shall be deemed amended to apply as to such maximum time and territory and to such other extent as such court may judicially determine or indicate to be reasonable.

(c)           Period of Restrictive Covenant.  The provisions of this Section 11 shall be applicable, commencing on the Effective Date this Agreement is entered and ending:

(i)           one (1) year after the effective date of termination of employment by Corporation and/or Bank with Cause.

(ii)           two (2) years after the effective date of termination of employment by Corporation and/or Bank without Cause, or resignation by Executive with or without Good Reason; and

(iii)           three (3) years if Executive’s employment terminates following a Change of Control and the payments in Section 14(c) hereof are triggered, provided however in all events that the Restrictive Covenant shall continue, and

(iv)           during such period of time that the Executive receives any disability payment pursuant to any disability benefit or policy provided or funded by the Corporation or the Bank whether pursuant to this agreement or a plan or arrangement provided to other Corporation or Bank employees.

(d)           Exception to Non-competition.  In the event that Executive’s employment is terminated by Corporation and/or Bank for Cause, or by Executive without Good Reason, the Executive may during the applicable period of Restrictive Covenant engage in the practice of Public Accounting.  However, the Executive shall comply and shall be subject to Section 11(a)(ii) and (iii) with regard to services other than accounting services offered by any entity in which he is a partner, shareholder, owner, officer, or employee.

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(e)           Breach of Restrictive Covenant.  It is expressly understood and agreed that if the Executive violates or breaches any provisions of this Section 11, then the provisions of this Section 11 shall apply to the Executive for an additional one (1) year following the date of such violation or breach.

(f)           Enforcement of Restrictive Covenant and Unauthorized Disclosure.  Executive acknowledges that his breach of any of the restrictions set forth in this Agreement in Sections 9, 10 and 11 will result in irreparable injury which is not compensable in damages or other legal remedies, and Bank and Corporation may seek to obtain injunctive relief against the breach, or threatened breach of this Agreement, and/or specific performance and damages, as well as other legal and equitable remedies including attorney’s fees which may be available and to which Bank and Corporation may be entitled.  The right to equitable relief shall include, without limitation, the right to both preliminary and permanent injunctions against any breach or threatened breach and specific performance for the provisions of this Agreement, and in such case, the Employee shall raise no objection, and hereby waives any objection, to the form of relief prayed for in any such proceeding.  Employer shall not be required to post a bond or similar assurance should Employer bring any action for equitable relief in order to enforce this Agreement.

12. TERMINATION.

(a)           Death.  Notwithstanding any other provisions of this Agreement, this Agreement shall terminate automatically upon the Executive’s death and the Executive’s rights under this Agreement shall cease as of the date of such termination.

(b)           Disability.  Notwithstanding any other provisions of this Agreement, if, as a result of physical or mental injury or impairment, Executive is unable to perform all of the essential job functions of his position on a full time basis, with or without a reasonable accommodation, and without posing a direct threat to himself and others, for a period in excess of one (1) month, not to exceed six (6) months, all obligations of Bank and Corporation to pay Executive an Annual Direct Salary as set forth in Section 4 of this Agreement are suspended provided, however, in the event Executive does not have sufficient time off or sick leave to cover this period,  the Bank shall pay  his Annual Direct Salary until the end of the 6th month after the determination by the Board of Directors, in its reasonable discretion, that the Executive is disabled.  Any paid time off, sick leave, or short term disability pay Executive may be entitled to receive, pursuant to an established disability plan or program of the Bank and/or Corporation shall be considered part of the compensation Executive shall receive while disabled and shall not be in addition to the compensation received by Executive under this provision of the Agreement.  Executive agrees that should he remain unable to perform all of the essential functions of his position on a full time basis, with or without a reasonable accommodation and without posing a direct threat to himself or others, after six (6) months, the Bank and/or Corporation will suffer an undue hardship by continuing Executive in his position. Upon this event, all compensation and employment obligations of the Bank and Corporation under this Agreement shall cease  and this Agreement shall terminate.  In such event, the time period for the Restrictive Covenant set forth in Section 11(c)(vi) shall control.

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(c)           Cause.  Notwithstanding any other provisions of this Agreement, the Bank and/or Corporation may terminate the Executive’s employment hereunder for “Cause.” As used in this Agreement, the Bank and/or Corporation shall have “Cause” to terminate the Executive’s employment hereunder upon:  (i) the willful failure by the Executive to substantially perform his duties hereunder (other than a failure resulting from the Executive’s incapacity because of physical or mental illness, as provided in Section 12(b) hereof), after notice from the Corporation or Bank and a failure to cure such violation within thirty (30) days of said notice; (ii) the willful engaging by the Executive in misconduct injurious to the Corporation or Bank; (iii) the willful violation by the Executive of the provisions of Sections 3, 8, 9 or 11 hereof, after notice from the Corporation or Bank and a failure to cure such violation within thirty (30) days of said notice; (iv) the dishonesty or gross negligence of the Executive in the performance of his duties; (v) the breach of Executive’s fiduciary duty involving personal profit; (vi) the material violation of any law, rule or regulation governing banks or bank officers or any final cease and desist order issued by a bank regulatory authority; (vii) conduct on the part of Executive which brings public discredit to the Corporation or Bank; (viii) unlawful discrimination by the Executive, including harassment against Corporation or Bank’s employees, customers, business associates, contractors, or visitors; (ix) theft or abuse by Executive of the Corporation or Bank’s property or the property of Corporation or Bank’s customers, employees, contractors, vendors, or business associates; (x) failure of the Executive to follow the good faith lawful instructions of the Board of Directors of Corporation or Bank with respect to its operations, after notice from the Corporation or Bank and a failure to cure such violation within thirty (30) days of said notice; (xi) the direction or recommendation of a state or federal bank regulatory authority to remove the Executive’s position with Corporation and/or Bank as identified herein;  (xii) any final removal or prohibition order to which the Executive is subject, by a federal banking agency pursuant to Sections 8(e) and 8(g) of the Federal Deposit Insurance Act; (xiii) the Executive’s conviction of or plea of guilty or nolo contendere to a felony,  crime of falsehood or a crime involving moral turpitude, or the actual incarceration of Executive; (xiv) any act of fraud, misappropriation or personal dishonesty; (xv) insubordination; (xvi) misrepresentation of a material fact, or omission of information necessary to make the information supplied not materially misleading, in an application or other information provided by the Executive to the Corporation or any representative of the Corporation in connection with the Executive’s employment with Corporation; (xvii) the existence of any material conflict between the interests of Corporation and the Executive that is not disclosed in writing by the Executive to the Corporation and approved in writing by the Board of Directors of Corporation; or (xviii) the Executive takes action that is clearly contrary to the best interest of the Corporation.

(d)           Termination by Executive.  The Executive may terminate his employment hereunder if (i) as a result of physical or mental injury or impairment, Executive is unable to perform all of the essential job functions of his position on a full time basis, with or without a reasonable accommodation, and without posing a direct threat to himself and others, or (ii) for Good Reason.  The term “Good Reason” shall mean (1) any assignment to the Executive, without his consent, of any duties other than those contemplated by, or any limitation of the powers of the Executive not contemplated by Section 2 hereof; or (2) any removal of the Executive from any of the positions indicated in Section 2 hereof, except as a result of his regulatory removal and/or in connection with termination of the Executive’s employment for Cause; or (3) failure of the Bank to comply with Sections 2 or 4 hereof, provided such alleged breach is not a result of his regulatory removal and/or in connection with termination of the Executive’s employment For Cause,   all after notice from the Executive to the Corporation and Bank that such action or limitation of the Bank or Corporation constitutes Good Reason and the failure to cure such situation within thirty (30) days of said notice, or if said situation cannot be cured within thirty (30) days, within a reasonable time thereafter if a diligent effort is being made by the Corporation and/or the Bank to cure such situation.

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13.           PAYMENTS UPON TERMINATION ABSENT A CHANGE IN CONTROL.

(a)           If the Executive’s employment is terminated by the Executive because of his health as described in Section 12 (d)(i) hereof, or if the Executive’s employment is terminated by the Bank or Corporation because of Executive’s disability or for Cause (as defined herein), the Corporation shall pay the Executive his full Annual Direct Salary through the date of termination at the rate in effect at the time of termination and the Corporation and Bank shall have no further obligation to the Executive under this Agreement.

(b)           If the Executive’s employment is terminated by the Corporation or Bank other than pursuant to Sections 12(a) (Death); 12(b) (Disability); or 12(c) (Cause) hereof, then the Corporation shall promptly pay the Executive a lump sum amount equal to and no greater than two (2) times the Executive’s Annual Direct Salary as defined in Section 4, minus applicable taxes and withholdings.  In addition, for a period of one (1) year from the date of termination of employment, or until Executive secures substantially similar benefits through other employment, whichever shall first occur, Executive shall receive a continuation of health care and life insurance described in Section 5(a), payments for Executive’s individual life insurance policy as set forth in Section 5(g) in effect with respect to Executive during the one (1) year prior to his termination of employment.  In addition the Corporation shall continue for a period of one (1) year from the date of termination of employment, or until Executive secures substantially similar benefits through other employment, whichever shall first occur Executive’s long term disability coverage to the extent Executive remains eligible under the Corporation’s long term disability plan.  In the event of a break in service and Executive becomes employed within one year of termination of employment without his new employer offering substantially similar long term disability coverage and Executive would be eligible for the Corporation’s long term disability coverage but for not being an employee of the Corporation, the Corporation shall pay Executive a dollar amount equal to the cost to the Executive of obtaining such benefits in effect with respect to Executive during one (1) year prior to his termination of employment, (or substantially similar benefits) for the remainder of the one year period, not to exceed 125% of the cost to the Corporation of providing long term disability coverage under its group long term policy.  If Corporation cannot provide such benefits under the terms of the plans or contracts, Corporation shall pay to Executive, a dollar amount equal to the cost to the Executive of obtaining such benefits (or substantially similar benefits), not to exceed 125% of the cost to the Corporation of obtaining such benefits (or substantially similar benefits).  However, in the event the payment described herein, when added to all other amounts or benefits provided to or on behalf of the Executive in connection with his termination of employment, would result in the imposition of an excise tax under Code Section 4999, such payments shall be retroactively (if necessary) reduced to the extent necessary to avoid such excise tax imposition.  Upon written notice to Executive, together with calculations of Corporation’s independent auditors, Executive shall remit to Corporation the amount of the reduction, plus such interest, as may be necessary to avoid the imposition of such excise tax.  Notwithstanding the foregoing or any other provision of this contract to the contrary, if any portion of the amount herein payable to the Executive is determined to be non-deductible pursuant to the regulations promulgated under Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), the Corporation shall be required only to pay to Executive the amount determined to be deductible under Section 280G.

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(c)           If the Executive shall terminate his employment for Good Reason, pursuant to Section 12(d)(ii)(1), (2), or (3), then the Corporation shall promptly pay the Executive a lump sum amount equal to and no greater than two (2) times the Executive’s Annual Direct Salary as defined in Section 4, minus applicable taxes and withholdings.  In addition, for a period of one (1) year from the date of termination of employment, or until Executive secures substantially similar benefits through other employment, whichever shall first occur, Executive shall receive a continuation of health care and life insurance described in Section 5(a), payments for Executive’s individual life insurance policy as set forth in Section 5(g)  in effect with respect to Executive during the one (1) year prior to his termination of employment.  In addition the Corporation shall continue for a period of one (1) year from the date of termination of employment, or until Executive secures substantially similar benefits through other employment, whichever shall first occur Executive’s long term disability coverage to the extent Executive remains eligible under the Corporation’s long term disability plan.  In the event of a break in service and Executive becomes employed within one year of termination of employment without his new employer offering substantially similar long term disability coverage and Executive would be eligible for the Corporation’s long term disability coverage but for not being an employee of the Corporation, the Corporation shall pay Executive a dollar amount equal to the cost to the Executive of obtaining such benefits in effect with respect to Executive during one (1) year prior to his termination of employment, (or substantially similar benefits) for the remainder of the one year period, not to exceed 125% of the cost to the Corporation of providing long term disability coverage under its group long term policy.  If Corporation cannot provide such benefits under the terms of the plans or contracts, Corporation shall pay to Executive, a dollar amount equal to the cost to the Executive of obtaining such benefits (or substantially similar benefits), not to exceed 125% of the cost to the Corporation of obtaining such benefits (or substantially similar benefits).  However, in the event the payment described herein, when added to all other amounts or benefits provided to or on behalf of the Executive in connection with his termination of employment, would result in the imposition of an excise tax under Code Section 4999, such payments shall be retroactively (if necessary) reduced to the extent necessary to avoid such excise tax imposition.  Upon written notice to Executive, together with calculations of Corporation’s independent auditors, Executive shall remit to Corporation the amount of the reduction, plus such interest, as may be necessary to avoid the imposition of such excise tax.  Notwithstanding the foregoing or any other provision of this contract to the contrary, if any portion of the amount herein payable to the Executive is determined to be non-deductible pursuant to the regulations promulgated under Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), the Corporation shall be required only to pay to Executive the amount determined to be deductible under Section 280G.

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(d)           The parties to this Agreement intend for the payments hereunder to satisfy the short-term deferral exception under Section 409A of the Code or, in the case of continued insurance coverage, not constitute deferred compensation (since such amounts are not taxable to Executive).  However, notwithstanding anything to the contrary in this Agreement, to the extent payments do not meet the short-term deferral exception of Section 409A of the Code and, in the event Executive is a “Specified Employee” (as defined herein) no payment shall be made to Executive under this Agreement prior to the first day of the seventh month following the event of termination in excess of the “permitted amount” under Section 409A of the Code.  For these purposes the “permitted amount” shall be an amount that does not exceed two times the lesser of: (A) the sum of Executive’s annualized compensation based upon the annual rate of pay for services provided to the Company for the calendar year preceding the year in which Executive has an event of termination, or (B) the maximum amount that may be taken into account under a tax-qualified plan pursuant to Section 401(a)(17) of the Code for the calendar year in which occurs the Event of Termination.  The payment of the “permitted amount” shall be made within sixty (60) days of the occurrence of the event of termination.  Any payment in excess of the permitted amount shall be made to Executive on the first day of the seventh month following the event of termination.  “Specified Employee” shall be interpreted to comply with Section 409A of the Code and shall mean a key employee within the meaning of Section 416(i) of the Code (without regard to Section 5 thereof), but an individual shall be a “Specified Employee” only if the Corporation is a publicly-traded institution or the subsidiary of a publicly-traded holding company.

14.           PAYMENTS UPON TERMINATION FOLLOWING A CHANGE IN CONTROL.

(a)           If a Change in Control (as defined herein) shall occur and if, between the Date of the Change in Control (as defined herein) and one (1) year after the Date of Change in Control (as defined herein), there shall be:

(i)           any involuntary termination of Executive’s employment (other than for the reasons set forth in Sections 12(a), (b) or (c) of this Agreement); or

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(ii)           any failure by the acquiring person or entity to offer employment to Executive as of the Date of Change in Control (as defined herein), in a position having equivalent responsibilities, title, authority, except reporting authority, compensation and benefits as Executive received immediately prior to the Change in Control (as defined herein); or

(iii)           any reduction in Executive’s title, responsibilities, except reporting responsibilities, or authority, including such title, responsibilities or authority as such may be increased from time to time during the term of this Agreement; or

(iv)           the assignment to Executive of duties inconsistent with Executive’s office on the date of the Change in Control or as the same may be increased from time to time after the Change in Control; or

(v)           any reassignment of Executive to a location greater than fifty (50) miles from the location of Executive’s office on the date of the Change in Control; or

(vi)           any reduction in Executive’s Annual Direct Salary in effect on the date of the Change in Control or as the same may be increased from time to time after the Change in Control; or

(vii)           any failure to provide Executive with benefits at least as favorable as those enjoyed by Executive under any of Corporation or Bank’s retirement or pension, life insurance described in Section 5(a), payments for Executive’s individual life insurance policy as set forth in Section 5(g), medical, health and accident, disability or other employee benefit plans in which Executive participated at the time of the Change in Control, or the taking of any action that would materially reduce any of such benefits in effect at the time of the Change in Control, then at the option of Executive, exercisable by Executive within sixty (60)  days of the occurrence of any of the foregoing events, Executive may resign from employment with Corporation and Bank (or, if involuntarily terminated, give notice of intention to collect benefits under this Agreement) by delivering a notice in writing (the “Notice of Termination”) to Corporation and Bank and the provisions of Section 14 (c) of this Agreement shall apply.

(b)           During the period of time between the execution of an agreement to effect a Change in Control (as defined herein) and the Date of the Change in Control (as defined herein), Executive’s employment may only be terminated for Cause (as defined herein). If, during that period of time, Executive’s employment is terminated for Cause (as defined herein), then all rights of Executive under this Agreement shall cease as of the effective date of such termination.  If, during that period of time, Executive’s employment is terminated other than for Cause (as defined herein), then Executive may give notice of intention to collect benefits under this Agreement by delivering a notice in writing (“Notice of Termination”) to Corporation and Bank and the provisions of Section 14(c) of this Agreement shall apply.

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(c)           In the event that Executive delivers a Notice of Termination (as defined in Section 14(a) of this Agreement) to Corporation and Bank, following the Change in Control, Executive shall be entitled to receive a lump sum amount equal to his two and ninety-nine hundredths (2.99) times the Executive’s then current Annual Direct Salary as defined in Section 4.

In addition, for a period of one (1) year from the date of termination of employment, or until Executive secures substantially similar benefits through other employment, whichever shall first occur, Executive shall receive a continuation of health care and life insurance described in Section 5(a), payments for Executive’s individual life insurance policy as set forth in Section 5(g)  in effect with respect to Executive during the one (1) year prior to his termination of employment.  In addition the Corporation shall continue for a period of one (1) year from the date of termination of employment, or until Executive secures substantially similar benefits through other employment, whichever shall first occur Executive’s long term disability coverage to the extent Executive remains eligible under the Corporation’s long term disability plan.  In the event of a break in service and Executive becomes employed within one year of termination of employment without his new employer offering substantially similar long term disability coverage and Executive would be eligible for the Corporation’s long term disability coverage but for not being an employee of the Corporation, the Corporation shall pay Executive a dollar amount equal to the cost to the Executive of obtaining such benefits in effect with respect to Executive during one (1) year prior to his termination of employment, (or substantially similar benefits) for the remainder of the one year period, not to exceed 125% of the cost to the Corporation of providing long term disability coverage under its group long term policy.  If Corporation cannot provide such benefits under the terms of the plans or contracts, Corporation shall pay to Executive, a dollar amount equal to the cost to the Executive of obtaining such benefits (or substantially similar benefits), not to exceed 125% of the cost to the Corporation of obtaining such benefits (or substantially similar benefits). However, in the event the payment described herein, when added to all other amounts or benefits provided to or on behalf of the Executive in connection with his termination of employment, would result in the imposition of an excise tax under Code Section 4999, such payments shall be retroactively (if necessary) reduced to the extent necessary to avoid such excise tax imposition.  Upon written notice to Executive, together with calculations of Corporation’s independent auditors, Executive shall remit to Corporation the amount of the reduction, plus such interest, as may be necessary to avoid the imposition of such excise tax. Notwithstanding the foregoing or any other provision of this contract to the contrary, if any portion of the amount herein payable to the Executive is determined to be non-deductible pursuant to the regulations promulgated under Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), the Corporation shall be required only to pay to Executive the amount determined to be deductible under Section 280G.

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(d)           The parties to this Agreement intend for the payments hereunder to satisfy the short-term deferral exception under Section 409A of the Code or, in the case of continued insurance coverage, not constitute deferred compensation (since such amounts are not taxable to Executive).  However, notwithstanding anything to the contrary in this Agreement, to the extent payments do not meet the short-term deferral exception of Section 409A of the Code and, in the event Executive is a “Specified Employee” (as defined herein) no payment shall be made to Executive under this Agreement prior to the first day of the seventh month following the event of termination in excess of the “permitted amount” under Section 409A of the Code.  For these purposes the “permitted amount” shall be an amount that does not exceed two times the lesser of: (A) the sum of Executive’s annualized compensation based upon the annual rate of pay for services provided to the Company for the calendar year preceding the year in which Executive has an event of termination, or (B) the maximum amount that may be taken into account under a tax-qualified plan pursuant to Section 401(a)(17) of the Code for the calendar year in which occurs the Event of Termination.  The payment of the “permitted amount” shall be made within sixty (60) days of the occurrence of the event of termination.  Any payment in excess of the permitted amount shall be made to Executive on the first day of the seventh month following the event of termination.  “Specified Employee” shall be interpreted to comply with Section 409A of the Code and shall mean a key employee within the meaning of Section 416(i) of the Code (without regard to Section 5 thereof), but an individual shall be a “Specified Employee” only if the Corporation is a publicly-traded institution or the subsidiary of a publicly-traded holding company.

15.           DEFINITION OF CHANGE IN CONTROL.  For purposes of this Agreement, the term “Change in Control” shall mean:  A change in control (other than one occurring by reason of an acquisition of the Corporation or Bank by Executive) of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A and any successor rule or regulation promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”) if Corporation or Bank were subject to the Exchange Act reporting requirements; provided that, without limiting the foregoing, such a change in control shall be deemed to have occurred if the Board of Directors certifies that one of the following has occurred:

(a)           any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than the Corporation or Bank or any “person” who on the date hereof is a director or officer of the Corporation or Bank is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation or Bank representing fifty percent (50%) or more of the combined voting power of the Corporation’s or Bank’s then outstanding securities, or

(b)           during any period of one (1) year during the term of Executive’s employment under this Agreement, individuals who at the beginning of such period constitute the Board of Directors of the Corporation or Bank cease for any reason to constitute at least a majority thereof, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least two-thirds of the directors then in office who were directors at the beginning of the period;

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(c)           a merger, consolidation or business combination with the Corporation and/or Bank occurs.

(d)           Notwithstanding any other provision in this section, in the event that Executive is determined to be a key employee as that term is defined by Section 409A of the IRC no payment shall be made until one day following six months from the date of separation from service as that term is defined by Section 409A of the IRC.

16.           DEFINITION OF DATE OF CHANGE IN CONTROL.  For purposes of this Agreement, the Date of Change in Control shall mean:

(a)           the first date on which a single person and/or entity, or group of affiliated persons and/or entities, acquire the beneficial ownership of fifty percent (50%) or more of the Corporation’s voting securities, or more than fifty percent (50%) of the total fair market value of the Corporation, or

(b)           the date of the closing of an Agreement, transferring all or substantially all of the Bank or Corporation’s assets, or

(c)           the date on which a merger, consolidation or business combination is consummated, as applicable, or

(d)           the date on which individuals who formerly constituted a majority of the Board of Directors of the Bank or Corporation under Section 15(b) hereof and the replacement Directors otherwise approved under Section 15(b), ceased to be a majority within a one year period.

17.           DAMAGES FOR BREACH OF CONTRACT.  In the event of a breach of this Agreement by either the Corporation, Bank or the Executive resulting in damages to another party to this Agreement, that party may recover from the party breaching the Agreement, only those damages as set forth herein.  In no event shall any party be entitled to the recovery of attorney’s fees or costs except as provided in Sections 11(f) and 18.

18.           ARBITRATION.  Corporation, Bank and Executive recognize that in the event a dispute should arise between them concerning the interpretation or implementation of this Agreement, lengthy and expensive litigation will not afford a practical resolution of the issues within a reasonable period of time. Consequently, with the exception of the Unauthorized Disclosure Provisions of Section 9, and the Restrictive Covenant provisions in Section 11 which the Corporation or Bank may seek to enforce in any court of competent jurisdiction, each party agrees that all disputes, disagreements and questions of interpretation concerning this Agreement are to be submitted for resolution, in Williamsport, Pennsylvania, to the American Arbitration Association (the “Association”) in accordance with the Association’s National Rules for the Resolution of Employment Disputes or other applicable rules then in effect (“Rules”). Corporation, Bank or Executive may initiate an arbitration proceeding at any time by giving notice to the other in accordance with the Rules.  Corporation, Bank and Executive may, as a matter or right, mutually agree on the appointment of a particular arbitrator from the Association’s pool. The arbitrator shall not be bound by the rules of evidence and procedure of the courts of the Commonwealth of Pennsylvania but shall be bound by the substantive law applicable to this Agreement.  The arbitration proceeding and all filing, testimony, documents, and information, relating to or presented during the evaluation proceeding, shall be disclosed exclusively for the purpose of facilitating the arbitration process and for no other purpose and shall be deemed to be information subject to the confidentiality provisions of this Agreement.  The decision of the arbitrator, absent fraud, duress, incompetence or gross and obvious error of fact, shall be final and binding upon the parties and shall be enforceable in courts of proper jurisdiction.  Following written notice of a request for arbitration, Corporation, Bank and Executive shall be entitled to an injunction restraining all further proceedings in any pending or subsequently filed litigation concerning this Agreement, except as otherwise provided herein.  The Arbitrator or the Court, (which ever is applicable) may award the prevailing party in a dispute reasonable counsel fees not to exceed $25,000.

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19.           NOTICE. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when hand-delivered or mailed by United States certified mail, return receipt requested, postage prepaid, addressed as follows:

If to the Executive:                               Randall E. Black

22 Double R Lane

Liberty, PA  16930

with a copy to:                                      Ann Pepperman, Esquire

McNerney, Page, Vanderlin & Hall

433 Market Street

P.O. Box 7

Williamsport, PA  17703

If to the Bank:                                        R. Lowell Coolidge, Chairman

15 South Main Street

Mansfield, PA 16933

with a copy to:                                      Eric S. Kracov, Esquire

Kilpatrick Stockton LLP

Suite 900 607 14th Street NW

Washington, DC 20005

If to the Corporation:                           R. Lowell Coolidge, Chairman

15 South Main Street

Mansfield, PA  16933

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with a copy to:                                      Eric S. Kracov, Esquire

Kilpatrick Stockton LLP

Suite 900 607 14th Street NW

Washington, DC 20005

or to such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.

20.           SUCCESSORS.  This Agreement shall inure to the benefit of and be binding upon the Executive, his personal representatives, heirs or assigns and to the Bank and/or the Corporation and any of their successors or assigns.

21.           SEVERABILITY.  If any provision of this Agreement is declared unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect.

22.           AMENDMENT.  This Agreement may be amended or canceled only by mutual agreement of the parties in writing.

23.           PAYMENT OF MONEY DUE DECEASED EXECUTIVE.  In the event of Executive’s death, any monies that may be due him from the Corporation or Bank under this Agreement as of the date of death, shall be paid to the person designated by him in writing for this purpose, or in the absence of any such designation, to his estate.

24.           LAW GOVERNING.  This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania.

25.ENTIRE AGREEMENT.  This Agreement supersedes any and all agreements, either oral or in writing, between the parties with respect to the employment of the Executive by the Corporation and Bank, and this Agreement contains all the covenants and agreements between the parties with respect to the subject matter of this Agreement.

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IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have caused this amended and restated Agreement to be duly executed in their respective names and, in the case of the Corporation and Bank, by its authorized representatives the day and year above mentioned.

	FIRST CITIZENS NATIONAL BANK
ATTEST:
By:  /s/ Gina Marie Boor	By:	/s/ R. Lowell Coolidge
By:  Gina Marie Boor		R. Lowell Coolidge
		Chairman of the Board

	CITIZENS FINANCIAL SERVICES, INC.
ATTEST:
By:  /s/ Gina Marie Boor	By:	/s/ R. Lowell Coolidge
By:  Gina Marie Boor		R. Lowell Coolidge
		Chairman of the BoarD

WITNESS:	EXECUTIVE
By: /s/ Gina Marie Boor
By: Gina Marie Boor	By:	/s/ Randall E. Black
		Randall E. Black
		Executive

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EX-10.2

EXHIBIT 10.2

RESTRICTED STOCK AWARD AGREEMENT

CITIZENS FINANCIAL SERVICES, INC.

2006 RESTRICTED STOCK PLAN

Citizen Financial Services, Inc. (the “Corporation”) provides this Award Agreement (the “Agreement”) to (the “Participant”), effective as of  (the “Grant Date”), the date the Compensation/Human Resources Committee of the Board of Directors (the “Committee”) awarded the Participant a Restricted Stock Award pursuant to the Citizens Financial Services, Inc. 2006 Restricted Stock Plan (the “Plan”), subject to the terms and conditions of the Plan and this Agreement:

1. Number of Shares Subject

to Your Restricted Stock Award: shares of the Corporation’s Common Stock (the “Shares”), subject to adjustment as may be necessary pursuant to the terms of the Plan.

2.           Vesting.The restrictions imposed under Section 2 of the attached Terms and Conditions will expire in the following percentages and on the following dates, unless sooner vested according to Section 3 of the attached Terms and Conditions or otherwise in the discretion of the Committee, provided the Participant is then still employed by or in service with the Corporation or any of its affiliates:

Portion of Shares Vested Number of Shares Vesting   Vesting Date

IN WITNESS WHEREOF, Citizens Financial Services, Inc., acting by and through the Committee, has executed this Agreement.

CITIZENS FINANCIAL SERVICES, INC.

By:  

       On behalf of the Committee

Accepted by Participant:

(signature)

___________________________

Date

TERMS AND CONDITIONS

1. Grant of Shares.  The Grant Date and number of Shares underlying your Restricted Stock Award are stated on page 1 of this Agreement.  Capitalized terms used in this Agreement and not otherwise defined shall have the meanings assigned to such terms by the Plan.

2. Restrictions.The unvested shares of Common Stock underlying your Restricted Stock Award (“Restricted Shares”) are subject to the following restrictions until they expire or terminate.

(a)   Restricted Shares are subject to the vesting schedule set forth on page 1 of the Award Agreement.

(b)   Restricted Shares may not be sold, transferred, exchanged, assigned, pledged, hypothecated or otherwise encumbered.

(c)   If your employment or service with the Corporation or any affiliate terminates for any reason other than as set forth in Section 3 below, you will forfeit all rights, title and interest in and to the unvested Restricted Shares as of your termination date.

3. Expiration and Termination of Restrictions.  Unless the Committee determines otherwise pursuant to Article 6 of the Plan, the restrictions imposed under Section 2 above will expire on the earliest to occur of the following (the period prior to such expiration is referred to below as the “Restricted Period”):

(a)   As to the portion(s) of the Restricted Shares specified on page 1 of this Award Agreement, on the respective date(s) specified on page 1; provided you remain employed by or in service to the Corporation or an affiliate; or

(b)   Termination of your employment or service by reason of death or disability (as defined under the Corporation’s group long-term disability policy, pursuant to Section 6.2 of the Plan);

(c)   Upon a Change in Control; or

(d)   Upon your Retirement.

4. Delivery of Shares.Once the Restricted Shares vest, the Corporation will distribute the Shares (and accumulated dividends and earnings, if any) in accordance with your instructions.

5. Voting and Dividend Rights.As beneficial owner of the Restricted Shares, you have full voting and dividend rights with respect to the Restricted Shares during and after the Restricted Period.  If you forfeit your rights under this Agreement in accordance with Section 2, you will no longer have any rights as a shareholder with respect to the Restricted Shares or be entitled to receive dividends on the Restricted Shares.

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6. Changes in Capital Structure.In the event of a corporate event or transaction involving the Corporation (including any stock dividend, stock split, or reverse stock split, your Restricted Stock Awards will automatically be adjusted accordingly.  If there is another type of change in the number or kind of outstanding shares of the Corporation’s common stock, the Board shall have discretion to adjust outstanding Restricted Stock Awards accordingly.    Upon liquidation or dissolution of the Corporation, a merger or consolidation in which the Corporation is not the surviving entity, or a sale or all or substantially all of the Corporation’s assets, each outstanding Restricted Stock Award will terminate, unless the other entity assumes the Restricted Stock Awards or substitutes its own awards in connection with the transaction.

7. No Right of Continued Employment.  Nothing in this Award Agreement will interfere with or limit in any way the Corporation’s or any affiliate’s right to terminate your employment or service at any time.

8. Payment of Taxes.  You may elect to be taxed upon your Restricted Stock Award at the time of grant under Section 83(b) of the Internal Revenue Code of 1986, as amended, within 30 days of the Grant Date.  If you do not make this election, you will be taxed upon vesting of your Restricted Stock Award.  At that time, the Corporation may require you to remit an amount sufficient to satisfy any and all federal, state and local (if any) tax withholding requirements and employment taxes (i.e., FICA and FUTA).  The Committee may also permit you to satisfy your tax withholding obligations by having the Corporation withhold Shares due to you under the Plan with a fair market value sufficient to satisfy the withholding taxes.  Note:  Outside Directors of the Corporation are self-employed and not subject to tax withholding.

9. Plan Controls.The terms of the Plan are incorporated into and made a part of this Agreement.  In the event of any actual or alleged conflict between the provisions of the Plan and the provisions of this Agreement, the provisions of the Plan shall control.

10. Severability.If any provision of this Agreement is deemed to be invalid, illegal or unenforceable, the other provisions of the Agreement will be construed and enforced as if the invalid, illegal or unenforceable provision was never included in the Agreement.

11. Notice.Notices and communications under this Agreement must be in writing and either personally delivered or sent by registered or certified United States mail, return receipt requested, postage prepaid.  Notices to the Corporation must be addressed to:

Citizens Financial Services, Inc.

15 South Main Street

Mansfield, PA  16933

Attn:       Compensation/Human Resource Committee

of the Board of Directors

c/o Human Resources Department

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or any other address that the Corporation designates in a written notice to you.  The Corporation will direct notices to you at your address as then currently on file with the Corporation, or at any other address that you provide in a written notice to the Corporation.

12. Successors.  This Award Certificate will be binding upon any successor to the Corporation, in accordance with the terms of this Award Certificate and the Plan

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EX-10.3

EXHIBIT 10.3

AMENDMENT TO THE CHANGE IN CONTROL AGREEMENT

BY AND BETWEEN TERRY B. OSBORNE, CITIZENS FINANCIAL SERVICES, INC.

AND FIRST CITIZENS NATIONAL BANK

WHEREAS, Terry B. Osborne entered into a change in control agreement with First Citizens National Bank (the “Bank”) and Citizens Financial Service, Inc.(the “Company”); and

WHEREAS, the Boards of Directors of the Bank and Company resolved to amend the change in control agreement effective June 29, 2012 to reflect the Bank’s new name.

NOW, THEREFORE, the change in control agreement is amended as follows:

Effective as of June 29, 2012, all references in the change in control agreement to First Citizens National Bank shall be replaced with First Citizens Community Bank.

IN WITNESS WHEREOF, this Amendment is executed by the parties to the change in control agreement on June 19, 2012.

FIRST CITIZENS NATIONAL BANK
By:	/s/ R. Lowell Coolidge
	R. Lowell Coolidge
	Chairman of the Board of Directors

CITIZENS FINANCIAL SERVICES, iNC.
By:	/s/ R. Lowell Coolidge
	R. Lowell Coolidge
	Chairman of the Board of Directors

EXECUTIVE
By:	/s/ Terry B. Osborne
	Terry B. Osborne
	Executive

ATTEST:

By: /s/ Gina Marie Boor

By: Gina Marie Boor

FORM OF

CHANGE IN CONTROL AGREEMENT

This AGREEMENT (“Agreement”) is hereby entered into as of January 19, 2010,by and between FIRST CITIZENS NATIONAL BANK (the “Bank”), Terry B. Osborne (“Executive”), and CITIZENS FINANCIAL SERVICES, INC. (the “Company”), the holding company of the Bank, as guarantor.

WHEREAS, the Bank recognizes the importance of Executive to the Bank’s operations and wishes to protect Executive’s position with the Bank in the event of a change in control of the Bank or the Company for the period provided for in this Agreement; and

WHEREAS, Executive and the Board of Directors of the Bank (the “Board of Directors”) desire to enter into an agreement setting forth the terms and conditions of payments due to Executive in the event of a Change in Control and the related rights and obligations of each of the parties.

NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, it is hereby agreed as follows:

1.  Term of Agreement.

The initial term of this Agreement shall commence on the Effective Date and continue through January 19, 2013. This Agreement shall renew automatically on January 19 of each year for successive terms of three years each, unless either party notifies the other party at least 90 (ninety) days prior to such date of such party’s determination not to renew this Agreement beyond the then existing term. It is the intention of the parties that this Agreement be “Evergreen” unless (i) either party gives written notice to the other party of his or its intention not to renew this Agreement as provided above or (ii) this Agreement is terminated by the Company for Cause or due to the Executive’s death, termination of employment due to disability, or executive’s voluntary termination of employment prior to a Change in Control. Each reference herein to “the term of this Agreement” shall include the initial term and any renewal term.

2.  Change in Control.

(a) If a Change in Control (as defined herein) shall occur and if, between the Date of the Change in Control (as defined herein) and one (1) year after the Date of Change in Control (as defined herein), there shall be:

(i) any involuntary termination of Executive’s employment (other than for death, disability or Cause (as defined herein)); or

(ii) any failure by the acquiring person or entity to offer employment to Executive as of the Date of Change in Control (as defined herein), in a position having equivalent responsibilities, title, authority, except reporting authority, compensation and benefits as Executive received immediately prior to the Change in Control (as defined herein); or

(iii) any reduction in Executive’s title, responsibilities, except reporting responsibilities, or authority, including such title, responsibilities or authority as such may be increased from time to time during the term of this Agreement; or

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(iv) the assignment to Executive of duties inconsistent with Executive’s office on the date of the Change in Control or as the same may be increased from time to time after the Change in Control; or

(v) any reassignment of Executive to a location greater than fifty (50) miles from the location of Executive’s office on the date of the Change in Control; or

(vi) any reduction in Executive’s annual direct salary in effect on the date of the Change in Control or as the same may be increased from time to time after the Change in Control; or

(vii) any failure to provide Executive with benefits at least as favorable as those enjoyed by Executive under any of Company or Bank’s retirement or pension, life insurance plans, medical, health and accident, disability or other employee benefit plans in which Executive participated at the time of the Change in Control, or the taking of any action that would materially reduce any of such benefits in effect at the time of the Change in Control, then at the option of Executive, exercisable by Executive within sixty (60) days of the occurrence of any of the foregoing events, Executive may resign from employment with Company and Bank (or, if involuntarily terminated, give notice of intention to collect benefits under this Agreement) by delivering a notice in writing (the “Notice of Termination”) to Company and Bank and the provisions of Section 2(c) of this Agreement shall apply.

(b) During the period of time between the execution of an agreement to effect a Change in Control (as defined herein) and the Date of the Change in Control (as defined herein), Executive’s employment may only be terminated for Cause (as defined herein). If, during that period of time, Executive’s employment is terminated for Cause (as defined herein), then all rights of Executive under this Agreement shall cease as of the effective date of such termination. If, during that period of time, Executive’s employment is terminated other than for Cause (as defined herein), then Executive may give notice of intention to collect benefits under this Agreement by delivering a notice in writing (“Notice of Termination”) to Company and Bank and the provisions of Section 2(c) of this Agreement shall apply.

(c) In the event that Executive delivers a Notice of Termination (as defined in Section 2(a) of this Agreement) to Company and Bank, following the Change in Control, Executive shall be entitled to receive a lump sum amount equal to one time the Executive’s then current base salary.

In addition, for a period of eighteen (18) months from the date of termination of employment, or until Executive secures substantially similar benefits through other employment, whichever shall first occur, Executive shall receive a continuation of health care insurance under the same terms and conditions the Executive received coverage prior to his termination of employment. In addition the Company shall continue for a period of eighteen (18) months from the date of termination of employment, or until Executive secures substantially similar benefits through other employment, whichever shall first occur Executive’s long term disability coverage to the extent Executive remains eligible under the Company’s long term disability plan. In the event of a break in service and Executive becomes employed within eighteen (18) months of termination of employment without his new employer offering substantially similar long term disability coverage and Executive would be eligible for the Company’s long term disability coverage but for not being an employee of the Company, the Company shall pay Executive a dollar amount equal to the cost to the Executive of obtaining such benefits in effect with respect to Executive during one (1) year prior to his termination of employment, (or substantially similar benefits) for the remainder of the one year period, not to exceed 125% of the cost to the Company of providing long term disability coverage under its group long term policy. If Company cannot provide such benefits under the terms of the plans or contracts, Company shall pay to Executive, a dollar amount equal to the cost to the Executive of obtaining such benefits (or substantially similar benefits), not to exceed 125% of the cost to the Company of obtaining such benefits (or substantially similar benefits). However, in the event the payment described herein, when added to all other amounts or benefits provided to or on behalf of the Executive in connection with his termination of employment, would result in the imposition of an excise tax under Code Section 4999, such payments shall be retroactively (if necessary) reduced to the extent necessary to avoid such excise tax imposition. Upon written notice to Executive, together with calculations of Company’s independent auditors, Executive shall remit to Company the amount of the reduction, plus such interest, as may be necessary to avoid the imposition of such excise tax. Notwithstanding the foregoing or any other provision of this contract to the contrary, if any portion of the amount herein payable to the Executive is determined to be non-deductible pursuant to the regulations promulgated under Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), the Company shall be required only to pay to Executive the amount determined to be deductible under Section 280G.

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(d) The parties to this Agreement intend for the payments hereunder to satisfy the short-term deferral exception under Section 409A of the Code or, in the case of continued insurance coverage, not constitute deferred compensation (since such amounts are not taxable to Executive). However, notwithstanding anything to the contrary in this Agreement, to the extent payments do not meet the short-term deferral exception of Section 409A of the Code and, in the event Executive is a “Specified Employee” (as defined herein) no payment shall be made to Executive under this Agreement prior to the first day of the seventh month following the event of termination in excess of the “permitted amount” under Section 409A of the Code. For these purposes the “permitted amount” shall be an amount that does not exceed two times the lesser of: (A) the sum of Executive’s annualized compensation based upon the annual rate of pay for services provided to the Company for the calendar year preceding the year in which Executive has an event of termination, or (B) the maximum amount that may be taken into account under a tax-qualified plan pursuant to Section 401(a)(17) of the Code for the calendar year in which occurs the Event of Termination. The payment of the “permitted amount” shall be made within sixty (60) days of the occurrence of the event of termination. Any payment in excess of the permitted amount shall be made to Executive on the first day of the seventh month following the event of termination. “Specified Employee” shall be interpreted to comply with Section 409A of the Code and shall mean a key employee within the meaning of Section 416(i) of the Code (without regard to Section 5 thereof), but an individual shall be a “Specified Employee” only if the Company is a publicly-traded institution or the subsidiary of a publicly-traded holding company.

3.  Definition of Cause.

For purposes of this Agreement, “Cause” shall mean: (i) the willful failure by the Executive to substantially perform his duties hereunder (other than a failure resulting from the Executive’s incapacity because of physical or mental illness), after notice from the Company or Bank and a failure to cure such violation within thirty (30) days of said notice; (ii) the willful engaging by the Executive in misconduct injurious to the Company or Bank; (iii) the dishonesty or gross negligence of the Executive in the performance of his duties; (iv) the breach of Executive’s fiduciary duty involving personal profit; (v) the material violation of any law, rule or regulation governing banks or bank officers or any final cease and desist order issued by a bank regulatory authority; (vi) conduct on the part of Executive which brings public discredit to the Company or Bank; (vii) unlawful discrimination by the Executive, including harassment against Company or Bank’s employees, customers, business associates, contractors, or visitors; (viii) theft or abuse by Executive of the Company or Bank’s property or the property of Company or Bank’s customers, employees, contractors, vendors, or business associates; (ix) failure of the Executive to follow the good faith lawful instructions of the Board of Directors of Company or Bank with respect to its operations, after notice from the Company or Bank and a failure to cure such violation within thirty (30) days of said notice; (x) the direction or recommendation of a state or federal bank regulatory authority to remove the Executive’s position with Company and/or Bank as identified herein; (xi) any final removal or prohibition order to which the Executive is subject, by a federal banking agency pursuant to Sections 8(e) and 8(g) of the Federal Deposit Insurance Act; (xii) the Executive’s conviction of or plea of guilty or nolo contendere to a felony, crime of falsehood or a crime involving moral turpitude, or the actual incarceration of Executive; (xiii) any act of fraud, misappropriation or personal dishonesty; (xiv) insubordination; (xv) misrepresentation of a material fact, or omission of information necessary to make the information supplied not materially misleading, in an application or other information provided by the Executive to the Company or any representative of the Company in connection with the Executive’s employment with Company; (xvi) the existence of any material conflict between the interests of Company and the Executive that is not disclosed in writing by the Executive to the Company and approved in writing by the Board of Directors of Company; or (xvii) the Executive takes action that is clearly contrary to the best interest of the Company.

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4.  Change in Control Definitions.

(a) For purposes of this Agreement, the term Change in Control shall mean: A change in control (other than one occurring by reason of an acquisition of the Company or Bank by Executive) of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A and any successor rule or regulation promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”) if Company or Bank were subject to the Exchange Act reporting requirements; provided that, without limiting the foregoing, such a change in control shall be deemed to have occurred if the Board of Directors certifies that one of the following has occurred:

(i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than the Company or Bank or any “person” who on the date hereof is a director or officer of the Company or Bank is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company or Bank representing fifty percent (50%) or more of the combined voting power of the Company’s or Bank’s then outstanding securities, or

(ii) during any period of one (1) year during the term of Executive’s employment under this Agreement, individuals who at the beginning of such period constitute the Board of Directors of the Company or Bank cease for any reason to constitute at least a majority thereof, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least two-thirds of the directors then in office who were directors at the beginning of the period;

(iii) a merger, consolidation or business combination with the Company and/or Bank occurs.

(iv) Notwithstanding any other provision in this section, in the event that Executive is determined to be a key employee as that term is defined by Section 409A of the IRC no payment shall be made until one day following six months from the date of separation from service as that term is defined by Section 409A of the IRC.

(b) For purposes of this Agreement, the Date of Change in Control shall mean:

(i) the first date on which a single person and/or entity, or group of affiliated persons and/or entities, acquire the beneficial ownership of fifty percent (50%) or more of the Company’s voting securities, or more than fifty percent (50%) of the total fair market value of the Company, or

(ii) the date of the closing of an Agreement, transferring all or substantially all of the Bank or Company’s assets, or

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(iii) the date on which a merger, consolidation or business combination is consummated, as applicable, or

(iv) the date on which individuals who formerly constituted a majority of the Board of Directors of the Bank or Company under Section 4(a)(ii) hereof and the replacement Directors otherwise approved under Section 4(a)(ii), ceased to be a majority within a one year period.

5.  Source of Payments.

The Bank shall make all payments provided for under this Agreement. The Company, however, unconditionally guarantees all amounts and benefits due to Executive and, if the Bank does not timely pay or provide such amounts and benefits, the Company shall pay or provide such amounts and benefits.

6.  Effect on Prior Agreements and Existing Benefit Plans.

This Agreement contains the entire understanding between the parties hereto and supersedes any prior agreement between the Bank and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to Executive without reference to this Agreement. Nothing in this Agreement shall confer upon Executive the right to continue in the employ of the Bank or shall impose on the Bank any obligation to employ or retain Executive in its employ for any period.

7.  No Attachment.

(a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to execution, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void and of no effect.

(b) This Agreement shall be binding upon, and inure to the benefit of, Executive, the Bank and their respective successors and assigns.

8.  Modification and Waiver.

(a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto.

(b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived.

9.  Severability.

If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect.

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10.  Headings for Reference Only.

The headings of sections and paragraphs are included in this Agreement solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. In addition, references to the masculine in this Agreement shall apply to both the masculine and the feminine.

11.  Governing Law.

Except to the extent preempted by federal law, the validity, interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the Commonwealth of Pennsylvania, without regard to principles of conflicts of law of that state.

12.  Arbitration.

Company, Bank and Executive recognize that in the event a dispute should arise between them concerning the interpretation or implementation of this Agreement, lengthy and expensive litigation will not afford a practical resolution of the issues within a reasonable period of time. Therefore, each party agrees that all disputes, disagreements and questions of interpretation concerning this Agreement are to be submitted for resolution, in Williamsport, Pennsylvania, to the American Arbitration Association (the “Association”) in accordance with the Association’s National Rules for the Resolution of Employment Disputes or other applicable rules then in effect (“Rules”). Company, Bank or Executive may initiate an arbitration proceeding at any time by giving notice to the other in accordance with the Rules. Company, Bank and Executive may, as a matter or right, mutually agree on the appointment of a particular arbitrator from the Association’s pool. The arbitrator shall not be bound by the rules of evidence and procedure of the courts of the Commonwealth of Pennsylvania but shall be bound by the substantive law applicable to this Agreement. The arbitration proceeding and all filing, testimony, documents, and information, relating to or presented during the evaluation proceeding, shall be disclosed exclusively for the purpose of facilitating the arbitration process and for no other purpose and shall be deemed to be information subject to the confidentiality provisions of this Agreement. The decision of the arbitrator, absent fraud, duress, incompetence or gross and obvious error of fact, shall be final and binding upon the parties and shall be enforceable in courts of proper jurisdiction. Following written notice of a request for arbitration, Company, Bank and Executive shall be entitled to an injunction restraining all further proceedings in any pending or subsequently filed litigation concerning this Agreement, except as otherwise provided herein. The Arbitrator or the Court, (which ever is applicable) may award the prevailing party in a dispute reasonable counsel fees not to exceed $25,000.

13.  Payment of Legal Fees.

All reasonable legal fees and expenses paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Bank, only if Executive is successful in arbitration.

14.  Indemnification.

The Company or the Bank shall provide Executive (and Executive’s heirs, executors and administrators) with coverage under a standard directors’ and officers’ liability insurance policy at its expense and shall indemnify Executive (and Executive’s heirs, executors and administrators) to the fullest extent permitted under applicable law against all expenses and liabilities reasonably incurred in connection with or arising out of any action, suit or proceeding in which Executive may be involved by reason of having been a director or officer of the Company or the Bank (whether or not Executive continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs, attorneys’ fees and the costs of reasonable settlements.

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15.  Successors to the Bank and the Company.

The Bank and the Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all of the business or assets of the Bank or the Company, expressly and unconditionally to assume and agree to perform the Bank’s and the Company’s obligations under this Agreement, in the same manner and to the same extent that the Bank and the Company would be required to perform if no such succession or assignment had taken place.

16.  Miscellaneous.

In the event any of the foregoing provisions of this Section 16 are in conflict with the terms of this Agreement, this Section 16 shall prevail.

(a) Any payments made to Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. §1828(k) and FDIC regulation 12 C.F.R. Part 359, Golden Parachute and Indemnification Payments.

(d) The parties to this Agreement intend for the payments hereunder to satisfy the short-term deferral exception under Section 409A of the Code or, in the case of continued insurance coverage, not constitute deferred compensation (since such amounts are not taxable to Executive). However, notwithstanding anything to the contrary in this Agreement, to the extent payments do not meet the short-term deferral exception of Section 409A of the Code and, in the event Executive is a “Specified Employee” (as defined herein) no payment shall be made to Executive under this Agreement prior to the first day of the seventh month following the event of termination in excess of the “permitted amount” under Section 409A of the Code. For these purposes the “permitted amount” shall be an amount that does not exceed two times the lesser of: (A) the sum of Executive’s annualized compensation based upon the annual rate of pay for services provided to the Company for the calendar year preceding the year in which Executive has an event of termination, or (B) the maximum amount that may be taken into account under a tax-qualified plan pursuant to Section 401(a)(17) of the Code for the calendar year in which occurs the Event of Termination. The payment of the “permitted amount” shall be made within sixty (60) days of the occurrence of the event of termination. Any payment in excess of the permitted amount shall be made to Executive on the first day of the seventh month following the event of termination. “Specified Employee” shall be interpreted to comply with Section 409A of the Code and shall mean a key employee within the meaning of Section 416(i) of the Code, but an individual shall be a “Specified Employee” only if the Company is a publicly-traded institution or the subsidiary of a publicly-traded holding company.

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SIGNATURES

IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the date first set forth above.

	FIRST CITIZENS NATIONAL BANK
ATTEST:	By:	/s/ Randall E. Black
By: /s/ Robert W. Chappell		Randall E. Black
By: Robert W. Chappell		For the Entire Board of Directors
Corporate Secretary

	CITIZENS FINANCIAL SERVICES, iNC. (Guarantor)
ATTEST:	By:	/s/ Randall E. Blacl
By: /s/ Robert W. Chappell		Randall E. Black
By: Robert W. Chappell		For the Entire Board of Directors
Corporate Secretary

	EXECUTIVE
WITNESS:	By:	/s/ Terry B. Osborne
By: /s/ Robert W. Chappell		Terry B. Osborne
By: Robert W. Chappell		Executive
Corporate Secretary

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EX-10.4

EXHIBIT 10.4

AMENDMENT TO THE CHANGE IN CONTROL AGREEMENT

BY AND BETWEEN MICKEY L. JONES, CITIZENS FINANCIAL SERVICES, INC.

AND FIRST CITIZENS NATIONAL BANK

WHEREAS, Mickey L. Jones entered into a change in control agreement with First Citizens National Bank (the “Bank”) and Citizens Financial Service, Inc.(the “Company”); and

WHEREAS, the Boards of Directors of the Bank and Company resolved to amend the change in control agreement effective June 29, 2012 to reflect the Bank’s new name.

NOW, THEREFORE, the change in control agreement is amended as follows:

Effective as of June 29, 2012, all references in the change in control agreement to First Citizens National Bank shall be replaced with First Citizens Community Bank.

IN WITNESS WHEREOF, this Amendment is executed by the parties to the change in control agreement on June 19, 2012.

FIRST CITIZENS NATIONAL BANK
By:	/s/ R. Lowell Coolidge
	R. Lowell Coolidge
	Chairman of the Board of Directors

CITIZENS FINANCIAL SERVICES, iNC.
By:	/s/ R. Lowell Coolidge
	R. Lowell Coolidge
	Chairman of the Board of Directors

EXECUTIVE
By:	/s/ Mickey L. Jones
	Mickey L. Jones
	Executive

 ATTEST:

By:  /s/ Gina Marie Boor

By:  Gina Marie Boor

FORM OF

CHANGE IN CONTROL AGREEMENT

This AGREEMENT (“Agreement”) is hereby entered into as of January 19, 2010,by and between FIRST CITIZENS NATIONAL BANK (the “Bank”), Mickey L. Jones (“Executive”), and CITIZENS FINANCIAL SERVICES, INC. (the “Company”), the holding company of the Bank, as guarantor.

WHEREAS, the Bank recognizes the importance of Executive to the Bank’s operations and wishes to protect Executive’s position with the Bank in the event of a change in control of the Bank or the Company for the period provided for in this Agreement; and

WHEREAS, Executive and the Board of Directors of the Bank (the “Board of Directors”) desire to enter into an agreement setting forth the terms and conditions of payments due to Executive in the event of a Change in Control and the related rights and obligations of each of the parties.

NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, it is hereby agreed as follows:

1.  Term of Agreement.

The initial term of this Agreement shall commence on the Effective Date and continue through January 19, 2013.  This Agreement shall renew automatically on January 19 of each year for successive terms of three years each, unless either party notifies the other party at least 90 (ninety) days prior to such date of such party’s determination not to renew this Agreement beyond the then existing term. It is the intention of the parties that this Agreement be “Evergreen” unless (i) either party gives written notice to the other party of his or its intention not to renew this Agreement as provided above or (ii) this Agreement is terminated by the Company for Cause or due to the Executive’s death, termination of employment due to disability, or executive’s voluntary termination of employment prior to a Change in Control. Each reference herein to “the term of this Agreement” shall include the initial term and any renewal term.

2.  Change in Control.

(a)           If a Change in Control (as defined herein) shall occur and if, between the Date of the Change in Control (as defined herein) and one (1) year after the Date of Change in Control (as defined herein), there shall be:

(i)           any involuntary termination of Executive’s employment (other than for death, disability or Cause (as defined herein)); or

(ii)           any failure by the acquiring person or entity to offer employment to Executive as of the Date of Change in Control (as defined herein), in a position having equivalent responsibilities, title, authority, except reporting authority, compensation and benefits as Executive received immediately prior to the Change in Control (as defined herein); or

(iii)           any reduction in Executive’s title, responsibilities, except reporting responsibilities, or authority, including such title, responsibilities or authority as such may be increased from time to time during the term of this Agreement; or

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(iv)           the assignment to Executive of duties inconsistent with Executive’s office on the date of the Change in Control or as the same may be increased from time to time after the Change in Control; or

(v)           any reassignment of Executive to a location greater than fifty (50) miles from the location of Executive’s office on the date of the Change in Control; or

(vi)           any reduction in Executive’s annual direct salary in effect on the date of the Change in Control or as the same may be increased from time to time after the Change in Control; or

(vii)           any failure to provide Executive with benefits at least as favorable as those enjoyed by Executive under any of Company or Bank’s retirement or pension, life insurance plans, medical, health and accident, disability or other employee benefit plans in which Executive participated at the time of the Change in Control, or the taking of any action that would materially reduce any of such benefits in effect at the time of the Change in Control, then at the option of Executive, exercisable by Executive within sixty (60)  days of the occurrence of any of the foregoing events, Executive may resign from employment with Company and Bank (or, if involuntarily terminated, give notice of intention to collect benefits under this Agreement) by delivering a notice in writing (the “Notice of Termination”) to Company and Bank and the provisions of Section 2(c) of this Agreement shall apply.

(b)           During the period of time between the execution of an agreement to effect a Change in Control (as defined herein) and the Date of the Change in Control (as defined herein), Executive’s employment may only be terminated for Cause (as defined herein). If, during that period of time, Executive’s employment is terminated for Cause (as defined herein), then all rights of Executive under this Agreement shall cease as of the effective date of such termination.  If, during that period of time, Executive’s employment is terminated other than for Cause (as defined herein), then Executive may give notice of intention to collect benefits under this Agreement by delivering a notice in writing (“Notice of Termination”) to Company and Bank and the provisions of Section 2(c) of this Agreement shall apply.

(c)           In the event that Executive delivers a Notice of Termination (as defined in Section 2(a) of this Agreement) to Company and Bank, following the Change in Control, Executive shall be entitled to receive a lump sum amount equal to one time the Executive’s then current base salary.

In addition, for a period of eighteen (18) months from the date of termination of employment, or until Executive secures substantially similar benefits through other employment, whichever shall first occur, Executive shall receive a continuation of health care insurance under the same terms and conditions the Executive received coverage prior to his termination of employment.  In addition the Company shall continue for a period of eighteen (18) months from the date of termination of employment, or until Executive secures substantially similar benefits through other employment, whichever shall first occur Executive’s long term disability coverage to the extent Executive remains eligible under the Company’s long term disability plan.  In the event of a break in service and Executive becomes employed within eighteen (18) months of termination of employment without his new employer offering substantially similar long term disability coverage and Executive would be eligible for the Company’s long term disability coverage but for not being an employee of the Company, the Company shall pay Executive a dollar amount equal to the cost to the Executive of obtaining such benefits in effect with respect to Executive during one (1) year prior to his termination of employment, (or substantially similar benefits) for the remainder of the one year period, not to exceed 125% of the cost to the Company of providing long term disability coverage under its group long term policy.  If Company cannot provide such benefits under the terms of the plans or contracts, Company shall pay to Executive, a dollar amount equal to the cost to the Executive of obtaining such benefits (or substantially similar benefits), not to exceed 125% of the cost to the Company of obtaining such benefits (or substantially similar benefits).  However, in the event the payment described herein, when added to all other amounts or benefits provided to or on behalf of the Executive in connection with his termination of employment, would result in the imposition of an excise tax under Code Section 4999, such payments shall be retroactively (if necessary) reduced to the extent necessary to avoid such excise tax imposition.  Upon written notice to Executive, together with calculations of Company’s independent auditors, Executive shall remit to Company the amount of the reduction, plus such interest, as may be necessary to avoid the imposition of such excise tax. Notwithstanding the foregoing or any other provision of this contract to the contrary, if any portion of the amount herein payable to the Executive is determined to be non-deductible pursuant to the regulations promulgated under Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), the Company shall be required only to pay to Executive the amount determined to be deductible under Section 280G.

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(d)           The parties to this Agreement intend for the payments hereunder to satisfy the short-term deferral exception under Section 409A of the Code or, in the case of continued insurance coverage, not constitute deferred compensation (since such amounts are not taxable to Executive).  However, notwithstanding anything to the contrary in this Agreement, to the extent payments do not meet the short-term deferral exception of Section 409A of the Code and, in the event Executive is a “Specified Employee” (as defined herein) no payment shall be made to Executive under this Agreement prior to the first day of the seventh month following the event of termination in excess of the “permitted amount” under Section 409A of the Code.  For these purposes the “permitted amount” shall be an amount that does not exceed two times the lesser of: (A) the sum of Executive’s annualized compensation based upon the annual rate of pay for services provided to the Company for the calendar year preceding the year in which Executive has an event of termination, or (B) the maximum amount that may be taken into account under a tax-qualified plan pursuant to Section 401(a)(17) of the Code for the calendar year in which occurs the Event of Termination.  The payment of the “permitted amount” shall be made within sixty (60) days of the occurrence of the event of termination.  Any payment in excess of the permitted amount shall be made to Executive on the first day of the seventh month following the event of termination.  “Specified Employee” shall be interpreted to comply with Section 409A of the Code and shall mean a key employee within the meaning of Section 416(i) of the Code (without regard to Section 5 thereof), but an individual shall be a “Specified Employee” only if the Company is a publicly-traded institution or the subsidiary of a publicly-traded holding company.

3.  Definition of Cause.

For purposes of this Agreement, “Cause” shall mean: (i) the willful failure by the Executive to substantially perform his duties hereunder (other than a failure resulting from the Executive’s incapacity because of physical or mental illness), after notice from the Company or Bank and a failure to cure such violation within thirty (30) days of said notice; (ii) the willful engaging by the Executive in misconduct injurious to the Company or Bank; (iii) the dishonesty or gross negligence of the Executive in the performance of his duties; (iv) the breach of Executive’s fiduciary duty involving personal profit; (v) the material violation of any law, rule or regulation governing banks or bank officers or any final cease and desist order issued by a bank regulatory authority; (vi) conduct on the part of Executive which brings public discredit to the Company or Bank; (vii) unlawful discrimination by the Executive, including harassment against Company or Bank’s employees, customers, business associates, contractors, or visitors; (viii) theft or abuse by Executive of the Company or Bank’s property or the property of Company or Bank’s customers, employees, contractors, vendors, or business associates; (ix) failure of the Executive to follow the good faith lawful instructions of the Board of Directors of Company or Bank with respect to its operations, after notice from the Company or Bank and a failure to cure such violation within thirty (30) days of said notice; (x) the direction or recommendation of a state or federal bank regulatory authority to remove the Executive’s position with Company and/or Bank as identified herein;  (xi) any final removal or prohibition order to which the Executive is subject, by a federal banking agency pursuant to Sections 8(e) and 8(g) of the Federal Deposit Insurance Act; (xii) the Executive’s conviction of or plea of guilty or nolo contendere to a felony,  crime of falsehood or a crime involving moral turpitude, or the actual incarceration of Executive; (xiii) any act of fraud, misappropriation or personal dishonesty; (xiv) insubordination; (xv) misrepresentation of a material fact, or omission of information necessary to make the information supplied not materially misleading, in an application or other information provided by the Executive to the Company or any representative of the Company in connection with the Executive’s employment with Company; (xvi) the existence of any material conflict between the interests of Company and the Executive that is not disclosed in writing by the Executive to the Company and approved in writing by the Board of Directors of Company; or (xvii) the Executive takes action that is clearly contrary to the best interest of the Company.

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4.  Change in Control Definitions.

(a)           For purposes of this Agreement, the term Change in Control shall mean:  A change in control (other than one occurring by reason of an acquisition of the Company or Bank by Executive) of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A and any successor rule or regulation promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”) if Company or Bank were subject to the Exchange Act reporting requirements; provided that, without limiting the foregoing, such a change in control shall be deemed to have occurred if the Board of Directors certifies that one of the following has occurred:

(i)           any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than the Company or Bank or any “person” who on the date hereof is a director or officer of the Company or Bank is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company or Bank representing fifty percent (50%) or more of the combined voting power of the Company’s or Bank’s then outstanding securities, or

(ii)           during any period of one (1) year during the term of Executive’s employment under this Agreement, individuals who at the beginning of such period constitute the Board of Directors of the Company or Bank cease for any reason to constitute at least a majority thereof, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least two-thirds of the directors then in office who were directors at the beginning of the period;

(iii)           a merger, consolidation or business combination with the Company and/or Bank occurs.

(iv)           Notwithstanding any other provision in this section, in the event that Executive is determined to be a key employee as that term is defined by Section 409A of the IRC no payment shall be made until one day following six months from the date of separation from service as that term is defined by Section 409A of the IRC.

(b)           For purposes of this Agreement, the Date of Change in Control shall mean:

(i)           the first date on which a single person and/or entity, or group of affiliated persons and/or entities, acquire the beneficial ownership of fifty percent (50%) or more of the Company’s voting securities, or more than fifty percent (50%) of the total fair market value of the Company, or

(ii)           the date of the closing of an Agreement, transferring all or substantially all of the Bank or Company’s assets, or

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(iii)           the date on which a merger, consolidation or business combination is consummated, as applicable, or

(iv)           the date on which individuals who formerly constituted a majority of the Board of Directors of the Bank or Company under Section 4(a)(ii) hereof and the replacement Directors otherwise approved under Section 4(a)(ii), ceased to be a majority within a one year period.

5.  Source of Payments.

The Bank shall make all payments provided for under this Agreement.  The Company, however, unconditionally guarantees all amounts and benefits due to Executive and, if the Bank does not timely pay or provide such amounts and benefits, the Company shall pay or provide such amounts and benefits.

6.  Effect on Prior Agreements and Existing Benefit Plans.

This Agreement contains the entire understanding between the parties hereto and supersedes any prior agreement between the Bank and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to Executive of a kind elsewhere provided.  No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to Executive without reference to this Agreement.  Nothing in this Agreement shall confer upon Executive the right to continue in the employ of the Bank or shall impose on the Bank any obligation to employ or retain Executive in its employ for any period.

7.  No Attachment.

(a)           Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to execution, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void and of no effect.

(b)           This Agreement shall be binding upon, and inure to the benefit of, Executive, the Bank and their respective successors and assigns.

8.  Modification and Waiver.

(a)           This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto.

(b)           No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel.  No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived.

9.  Severability.

If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect.

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10.  Headings for Reference Only.

The headings of sections and paragraphs are included in this Agreement solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement.  In addition, references to the masculine in this Agreement shall apply to both the masculine and the feminine.

11.  Governing Law.

Except to the extent preempted by federal law, the validity, interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the Commonwealth of Pennsylvania, without regard to principles of conflicts of law of that state.

12.  Arbitration.

Company, Bank and Executive recognize that in the event a dispute should arise between them concerning the interpretation or implementation of this Agreement, lengthy and expensive litigation will not afford a practical resolution of the issues within a reasonable period of time. Therefore, each party agrees that all disputes, disagreements and questions of interpretation concerning this Agreement are to be submitted for resolution, in Williamsport, Pennsylvania, to the American Arbitration Association (the “Association”) in accordance with the Association’s National Rules for the Resolution of Employment Disputes or other applicable rules then in effect (“Rules”). Company, Bank or Executive may initiate an arbitration proceeding at any time by giving notice to the other in accordance with the Rules.  Company, Bank and Executive may, as a matter or right, mutually agree on the appointment of a particular arbitrator from the Association’s pool. The arbitrator shall not be bound by the rules of evidence and procedure of the courts of the Commonwealth of Pennsylvania but shall be bound by the substantive law applicable to this Agreement.  The arbitration proceeding and all filing, testimony, documents, and information, relating to or presented during the evaluation proceeding, shall be disclosed exclusively for the purpose of facilitating the arbitration process and for no other purpose and shall be deemed to be information subject to the confidentiality provisions of this Agreement.  The decision of the arbitrator, absent fraud, duress, incompetence or gross and obvious error of fact, shall be final and binding upon the parties and shall be enforceable in courts of proper jurisdiction.  Following written notice of a request for arbitration, Company, Bank and Executive shall be entitled to an injunction restraining all further proceedings in any pending or subsequently filed litigation concerning this Agreement, except as otherwise provided herein.  The Arbitrator or the Court, (which ever is applicable) may award the prevailing party in a dispute reasonable counsel fees not to exceed $25,000.

13.  Payment of Legal Fees.

All reasonable legal fees and expenses paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Bank, only if Executive is successful in arbitration.

14.  Indemnification.

The Company or the Bank shall provide Executive (and Executive’s heirs, executors and administrators) with coverage under a standard directors’ and officers’ liability insurance policy at its expense and shall indemnify Executive (and Executive’s heirs, executors and administrators) to the fullest extent permitted under applicable law against all expenses and liabilities reasonably incurred in connection with or arising out of any action, suit or proceeding in which Executive may be involved by reason of having been a director or officer of the Company or the Bank (whether or not Executive continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs, attorneys’ fees and the costs of reasonable settlements.

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15.  Successors to the Bank and the Company.

The Bank and the Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all of the business or assets of the Bank or the Company, expressly and unconditionally to assume and agree to perform the Bank’s and the Company’s obligations under this Agreement, in the same manner and to the same extent that the Bank and the Company would be required to perform if no such succession or assignment had taken place.

16.  Miscellaneous.

In the event any of the foregoing provisions of this Section 16 are in conflict with the terms of this Agreement, this Section 16 shall prevail.

(a)           Any payments made to Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. §1828(k) and FDIC regulation 12 C.F.R. Part 359, Golden Parachute and Indemnification Payments.

(d)           The parties to this Agreement intend for the payments hereunder to satisfy the short-term deferral exception under Section 409A of the Code or, in the case of continued insurance coverage, not constitute deferred compensation (since such amounts are not taxable to Executive).  However, notwithstanding anything to the contrary in this Agreement, to the extent payments do not meet the short-term deferral exception of Section 409A of the Code and, in the event Executive is a “Specified Employee” (as defined herein) no payment shall be made to Executive under this Agreement prior to the first day of the seventh month following the event of termination in excess of the “permitted amount” under Section 409A of the Code.  For these purposes the “permitted amount” shall be an amount that does not exceed two times the lesser of: (A) the sum of Executive’s annualized compensation based upon the annual rate of pay for services provided to the Company for the calendar year preceding the year in which Executive has an event of termination, or (B) the maximum amount that may be taken into account under a tax-qualified plan pursuant to Section 401(a)(17) of the Code for the calendar year in which occurs the Event of Termination.  The payment of the “permitted amount” shall be made within sixty (60) days of the occurrence of the event of termination.  Any payment in excess of the permitted amount shall be made to Executive on the first day of the seventh month following the event of termination.  “Specified Employee” shall be interpreted to comply with Section 409A of the Code and shall mean a key employee within the meaning of Section 416(i) of the Code, but an individual shall be a “Specified Employee” only if the Company is a publicly-traded institution or the subsidiary of a publicly-traded holding company.

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SIGNATURES

IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the date first set forth above.

	FIRST CITIZENS NATIONAL BANK
ATTEST:	By:	/s/ Randall E. Black
By:  /s/ Robert W. Chappell		Randall E. Black
By:  Robert W. Chappell		For the Entire Board of Directors
Corporate Secretary

	CITIZENS FINANCIAL SERVICES, iNC. (Guarantor)
ATTEST:	By:	/s/ Randall E. Blacl
By:  /s/ Robert W. Chappell		Randall E. Black
By:  Robert W. Chappell		For the Entire Board of Directors
Corporate Secretary

	EXECUTIVE
WITNESS:	By:	/s/ Mickey L. Jones
By: /s/ Robert W. Chappell		Mickey L. Jones
By:  Robert W. Chappell		Executive
Corporate Secretary

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EX-10.5

EXHBIT 10.5

FIRST CITIZENS COMMUNITY BANK

ANNUAL INCENTIVE PLAN

(as amended and restated effective January 1, 2012)

I.           Introduction and Objectives

The Annual Incentive Plan (“AIP” or the “Plan”) is designed to recognize and reward participants for their collective and individual contributions to the success of First Citizens Community Bank (the “Bank”) and Citizens Financial Services, Inc. (the “Company”) collectively referred to herein as the “Employer”.  The Plan focuses on performance measures that are critical to the Bank’s growth and profitability.

The objectives of the AIP are to:

Ÿ Reward results, not effort.

Ÿ Align the Employer’s strategic plan, budget, and shareholder interests with participant performance.

Ÿ Motivate and reward participants for achieving /exceeding performance goals.

Ÿ Align incentive pay with performance.

Ÿ Enable the Employer to attract and retain talent needed to drive the success of the Bank and the Company.

Ÿ Encourage teamwork across the Bank and the Company.

II.           Performance Period/Plan Year

The performance period and the Plan operate on a calendar year basis (January 1st - December 31st).

III.           Incentive Award Opportunity

A. The Company’s Compensation/Human Resource Committee (the “Committee”), in consultation with executive management, determines each participant’s Incentive Award Opportunity under the Plan.  Notwithstanding the foregoing, the Company’s named executive officers (as noted in the Company’s annual proxy statement) do not participate in the determination of their annual Incentive Award Opportunities.  As noted in Section III (B) of this Plan, Incentive Award Opportunities are shown as a percentage of “base salary” as such term is defined in Section II (C) of this Plan.  Actual awards vary based on Company, Bank, Departmental/Branch and individual performance (see Section IV – Performance Measures) and range from 0% of base salary (not achieving minimal performance) to 50% of base salary (achieving exceptional performance).   

B. The following table sets forth the Incentive Award Opportunities for the various positions at the Bank and the Company level. These incentive targets are reviewed annually by the Committee to ensure the awards remain competitive.  The Committee determines the competitiveness of the Incentive Award Opportunities based on industry standards.  As noted in Section III (A) above, Incentive Award Opportunities are illustrated as a percentage of a participant’s “base salary” (as defined in paragraph C below).

	Incentive Award Opportunities
Position	Minimum	Target	Maximum
CEO/President	0.0%	25.0%	50.0%
Executive Management:
Chief Operating Officer/        Chief Financial Officer	0.0%	20.0%	40.0%
Senior Credit Officer	0.0%	15.0%	30.0%
Senior Management    (as determined by the Committee)	0.0%	10.0%	25.0%
Regional Manager/Branch Administrator	0.0%	7.5%	15.0%
Senior Business Development Officers    (“BDO”)	0.0%	10.0%	20.0%
BDO	0.0%	7.5%	15.0%
Junior BDO	0.0%	6.0%	12.0%
Mid-level Management:
Corporate Managers	0.0%	5.0%	10.0%
Branch Managers	0.0%	5.0%	10.0%
Staff:
Corporate Staff	0.0%	4.0%	8.0%
Branch Staff	0.0%	4.0%	8.0%
Internal Auditor	0.0%	4.0%	8.0%

C. Exclusively for purposes of this Plan, “base salary” is defined as the compensation earned by a participant during the Plan Year for services rendered to the Employer, excluding the following items:

Profit sharing contributions

Other discretionary incentive compensation (such as leadership awards and service awards)

Cash payments received for waiving Employer-paid health insurance

Cell phone allowances

Fringe benefits

IV.           Performance Measures

There are three (3) categories in which performance is measured under the Plan: Company/Bank performance, Branch/ Departmental performance and Individual performance.  The Committee takes into consideration the budget, strategic plan and other relevant items when setting the specific performance measures set forth in Section IV (D) of this Plan.  The Committee will review each of the performance categories when determining an Incentive Award payout under this Plan.

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A. Corporate/Bank Performance Measures:   The Company/Bank goals focus on Return on Equity (ROE), Return on Assets (ROA), Earnings Per Share (EPS) Growth, Total Shareholder Return, Efficiency Ratio, Credit Quality and Bank and Regulatory Ratings (CAMEL rating and SOX compliance).  These goals are core measures of profitability and efficiency of Bank and Company resources.  The Committee generally analyzes these performance measures based on three-year averages as compared to its peer group.  The Committee will review the Bank’s peer group on an annual basis.  The current peer group is set forth on Appendix A to this Plan.  When determining whether the Corporate/Bank Performance Measures have been realized, the Compensation Committee will review public peer data compiled by the President/Chief Executive Officer and Chief Operating Officer/Chief Financial Officer of the Bank.

B. Branch/Department Performance Measures:   The Branch/Department goals vary, however they include, but are not limited to: deposit growth, asset quality and loan production.   Executive Management works with the Committee on an annual basis to determine the specific Branch and Department performance measures.

C. Individual Performance Measures:   Ten percent (10%) of each participant’s Incentive Award Opportunity is based on his or her individual performance.  The Committee uses each participant’s annual employee performance rating to measure individual performance under the Plan.  As noted below, a “distinguished” performance rating will result in 100% credit for the Individual Performance component of a participant’s Incentive Award and a rating below “competent” will result in zero credit for the Individual Performance component of a participant’s Incentive Award.

Unacceptable                                                        0%

Need Improvement                                              0%

Competent             80%

Commendable                                                      90%

Distinguished                                                      100%

Notwithstanding the foregoing, if a Participant does not receive a “Competent” rating, the Participant will not be eligible for an Incentive Award under the Plan.

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D.    The following table sets forth the weighting of the Performance Measures for 2012.

Position	Company/Bank Measures	Department/ Branch Measures	Individual Measures
CEO/President	80%	10%	10%
Executive Management:
Chief Operating Officer/    Chief Financial Officer	70%	20%	10%
Senior Credit Officer	60%	30%	10%
Senior Management    (as determined by the     Committee, excluding Information Systems Manager)	50%	40%	10%
Information Systems Manager	60%	30%	10%
Regional Manager/Branch Administrator	30%	60%	10%
Senior BDO / BDO / Junior BDO	30%	60%	10%
Mid-level Management:
Corporate Managers	40%	50%	10%
Branch Managers	30%	60%	10%
Staff:
Corporate Staff	40%	50%	10%
Branch Staff	30%	60%	10%
Internal Auditor	35%	55%	10%

The specific performance measures and the weighting for each measure are reviewedannually by the Committee in order to reflect the Employer’s strategic priorities andfinancial objectives.  Notwithstanding the foregoing, the Committee may elect, in its solediscretion, to amend or modify these measures at any time (see Section VI (D) of this Plan).

V.           Determining Payouts and the Distribution of Incentive Awards

A. Each participant is given a performance scorecard for the Plan Year.  The scorecard sets forth each participant’s Company/Bank performance goals, Branch or Departmental performance goals (as applicable) and the participant’s performance review rating for the applicable Plan year.  The Company/Bank performance goals and the Branch/Department performance goals are established prior to the commencement of the applicable Performance Period.  The President/Chief Executive Officer and Chief Operating Officer/Chief Financial Officer of the Company evaluate the achievement of the Bank/Company performance goals and review the results with the Committee.  The President/Chief Executive Officer and Chief Operating Officer/Chief Financial Officer use the peer group set forth in Appendix A when evaluating the Employer’s achievement of certain Company/Bank performance measures.   Executive Management, in consultation with Senior Management, evaluate the achievement of the Department/Branch Performance goals and reviews the results with the Committee.  Upon review of the satisfaction of the performance measures, the Chief Operating Officer/Chief Financial Officer completes a scorecard for each of the Plan participants and provides the scorecard to the Committee for review.  The Committee, in its sole discretion, determines the payments made under this Plan in light of the results on the scorecards and the overall financial performance of the Bank and the Company.

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Generally, Incentive Awards are distributed before the end of the first quarter following the applicable Plan Year.  Awards are calculated based on each participant’s base salary (as defined in Section III (D) of this Plan) as of December 31st for the applicable Plan Year.  Incentive Awards are considered taxable income to participants in the year distributed and are subject to tax withholding for required income and other applicable taxes.

B. Awards may be paid out in cash or Company common stock (“Restricted Stock”) at the discretion of the Committee.    However, the President/Chief Executive Officer and members of Executive and Senior Management, as well as Regional Manager/Branch Administrator and Business Development Officers will receive their Incentive Award payouts (if any) as follows:

President/Chief Executive Officer:   Of the first 30% of an Incentive Award Opportunity, 70% will be distributed in cash and 30% in Restricted Stock. Any Incentive Award Opportunity over 30% will be distributed 50% in cash and 50% in Restricted Stock.

Chief Operating Officer/Chief Financial Officer:  Of the first 25% of an Incentive Award Opportunity, 70% will be distributed in cash and 30% in Restricted Stock. Any Incentive Award Opportunity over 25% will be distributed 50% in cash and 50% in Restricted Stock.

Chief Credit Officer:                                           Of the first 20% of an Incentive Award Opportunity, 70% will be distributed in cash and 30% in Restricted Stock. Any Incentive Award Opportunity over 20% will be distributed 50% in cash and 50% in Restricted Stock.

Senior Management/Regional Manager/Branch Administrator/Business Development Officers:  Of the first 15% of an Incentive Award Opportunity, 70% will be distributed in cash and 30% in Restricted Stock. Any Incentive Award Opportunity over 15% will be distributed 50% in cash and 50% in Restricted Stock.

Senior Business Development Officers:  Of the first 20% of an Incentive Award Opportunity, 70% will be distributed in cash and 30% in Restricted Stock. Any Incentive Award Opportunity over 20% will be distributed 50% in cash and 50% in Restricted Stock.

All other Participants shall receive their Incentive Award (if any) in cash, unless otherwise determined by the Committee.  Restricted Stock awarded under this Plan vests ratably over a three-year period commencing on the first anniversary date of the award.

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All shares of Restricted Stock distributed from this Plan come from the Company’s 2006 Restricted Stock Plan which was approved by Company shareholders.

VI           Terms and Conditions

A.           Eligibility

All employees, other than temporary employees, couriers, interns and those employees in the Investment and Trust Divisions compensated on a commission basis, are eligible to participate in the Plan.

B.           Effective Date

This Plan was originally effective as of January 1, 2010.  The Plan was amended and restated in its entirety effective January 1, 2012.

C.           Program Administration

The Program is authorized by the Committee and administered by Executive                                                                                                                                Management.

D.           Program Changes or Discontinuance

We have developed the Plan based on existing business, market and economic conditions; current services; and staff assignments.  If changes occur that affect these conditions, services, assignments, or forecasts, we may add to, amend, modify or discontinue any of the terms or conditions of the plan at any time.

The Committee may, in its sole discretion, waive, change or amend the Plan as it deems appropriate and at any time.

E.           Promotions and Transfers

If a participant changes his/her role or is promoted during the Plan year such that the incentive award opportunity changes, he/she will be eligible for the new position’s incentive award opportunity on a pro rata basis (i.e. the award will be prorated based on the number of months employed in the respective positions.)

F.           Termination of Employment

Unless otherwise noted in this Plan, a participant must be employed by the Bank or the Company on the date an Incentive Award is paid in order to be eligible to receive the award.  (See exceptions for death and retirement below.)

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G.           Death, Retirement or a Change in Control

In the event of a participant’s death, the Employer will pay to the participant’s estate an Incentive Award earned for the Plan Year in which the participant dies.  Said award will be determined based on the participant’s base salary earned as of his or her date of death.  In addition, if a participant dies prior to the distribution of an Incentive Award from a prior Plan Year, the participant’s estate will receive the award that the participant would have received had the participant been employed as of the date of distribution of the Incentive Award payout.

If a participant retires upon the attainment of Normal Retirement Age or Early Retirement Age (as defined in the Bank’s tax-qualified retirement plan), the participant will receive an Incentive Award earned for the Plan Year in which he or she retires. Said award will be determined based on the participant’s base salary earned as of his or her retirement date.  In addition, if the participant retires prior to the distribution of an Incentive Award from a prior Plan Year, the participant will receive the award that the participant would have received had the participant been employed as of the date of distribution of the Incentive Award payout.

In the event of a Change in Control (as defined herein), participants will receive a pro-rated payout based on the period of active employment with the Employer.  For purposes of this Plan, the term “Change in Control” shall mean:  a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A and any successor rule or regulation promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”) if Company or Bank were subject to the Exchange Act reporting requirements; provided that, without limiting the foregoing, such a Change in Control shall be deemed to have occurred if the Board of Directors certifies that one of the following has occurred: (a)any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than the Company or Bank or any “person” who on the date hereof is a director or officer of the Company or Bank is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company or Bank representing fifty percent (50%) or more of the combined voting power of the Company’s or Bank’s then outstanding securities, or (b) a merger, consolidation or business combination with the Company and/or Bank occurs. Notwithstanding any other provision in this Plan, in the event a participant is determined to be a key employee as that term is defined by Section 409A of the Internal Revenue Code no payment shall be made until one day following six months from the date of separation from service as that term is defined by Section 409A of the Internal Revenue Code.

See Section V for a discussion on the timing of distributions in the event death or retirement.  In the event of a Change in Control, Incentive Awards will be distributed within ten (10) business days of the date of the Change in Control.

VII.           Ethics and Interpretation

7

If there is any ambiguity as to the meaning of any terms or provisions of this Plan or any questions as to the correct interpretation of any information contained therein, the Employer’s interpretation expressed by Executive Management and/or Committee will be final and binding.

The altering, inflating, and/or inappropriate manipulation of performance/financial results or any other infraction of recognized ethical business standards, will subject the employee to disciplinary action up to and including termination of employment.  In addition, any incentive compensation as provided by the Plan to which the participant would otherwise be entitled will be revoked.

Participants who have willfully engaged in any activity injurious to the Bank or the Company, will upon termination of service forfeit any incentive award earned during the award period in which the termination occurred.

VIII.           Miscellaneous

The Plan will not be deemed to give any participant the right to be retained in the employ of the Bank or the Company, nor will the Plan interfere with the right of the Bank or the Company to discharge any participant at any time.

In the absence of an authorized, written employment contract, the relationship between employees and the Bank and the Company is one of at-will employment.  The Plan does not alter the relationship.

This Plan and the transactions and payments hereunder shall, in all respect, be governed by, and construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania.

Each provision in this Plan is severable, and if any provision is held to be invalid, illegal, or unenforceable, the validity, legality and enforceability of the remaining provisions shall not, in any way, be affected or impaired thereby.

8

APPENDIX A

Bank	Location	State
Adams County National Bank	Gettysburg	PA
Chemung Canal Trust Company	Elmira	NY
Citizens and Northern	Wellsboro	PA
CNB Bank	Clearfield	PA
Elmira Savings Bank	Elmira	NY
First Keystone National Bank	Berwick	PA
F&M Trust	Chambersburg	PA
VIST Financial	Wyomissing	PA
Orrstown Bank	Shippensburg	PA
Jersey Shore State Bank	Williamsport	PA
Penn Security Bank & Trust	Scranton	PA
Peoples Neighborhood Bank	Hallstead	PA
QNB Bank	Quakertown	PA
3rd Federal Bank	Newtown	PA
AmeriServ Financial	Johnstown	PA
Ephrata National Bank	Ephrata	PA
Mid Penn Bank	Millersburg	PA
First Columbia Bank & Trust Company	Bloomsburg	PA
Dime Bank	Honesdale	PA
First National Community Bank	Dunmore	PA
Fidelity Bank	Dunmore	PA
Citizens Financial Services, Inc.	Mansfield	PA

9

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer

I, Randall E. Black, certify that:

1.    I have reviewed this Form 10-Q of Citizens Financial Services, Inc.;

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

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

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

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

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

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.    The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 9, 2012	By:	/s/ Randall E. Black
		By:  Randall E. Black President and Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer

I, Mickey L. Jones, certify that:

1.    I have reviewed this Form 10-Q of Citizens Financial Services, Inc.;

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

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

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

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

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

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.    The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  August 9, 2012	By:	/s/ Mickey L. Jones
		By:  Mickey L. Jones Chief Financial Officer (Principal Accounting Officer)

EX-32.1

EXHIBIT 32.1

Section 1350 Certification

of Chief Executive Officer and

Chief Financial Officer

In connection with the Quarterly Report of Citizens Financial Services, Inc. (the "Company") on Form 10-Q (the "Report") for the period ending June 30, 2012 as filed with the Securities and Exchange Commission, the undersigned certify, pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

2.   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report.

Date:  August 9, 2012	By:	/s/ Randall E. Black
		By:  Randall E. Black
		President and Chief Executive Officer (Principal Executive Officer)

Date:  August 9, 2012	By:	/s/ Mickey L. Jones
		By:  Mickey L. Jones
		Chief Financial Officer (Principal Accounting Officer)

XML

Recent Accounting Pronouncements (Details)	6 Months Ended
	Jun. 30, 2012
Recent Accounting Pronouncements [Abstract]
Percentage more likely than not, minimum (in hundredths)	50.00%

XML

Loans, Credit Quality Indicator (Details) (USD $)			6 Months Ended
	Jun. 30, 2012	Dec. 31, 2011	Jun. 30, 2012 Minimum [Member]	Jun. 30, 2012 Real estate loans [Member] Residential mortgages [Member]	Dec. 31, 2011 Real estate loans [Member] Residential mortgages [Member]	Jun. 30, 2012 Real estate loans [Member] Home equity [Member]	Dec. 31, 2011 Real estate loans [Member] Home equity [Member]	Jun. 30, 2012 Consumer [Member]	Dec. 31, 2011 Consumer [Member]	Jun. 30, 2012 Pass [Member]	Dec. 31, 2011 Pass [Member]	Jun. 30, 2012 Pass [Member] Real estate loans [Member] Commercial [Member]	Dec. 31, 2011 Pass [Member] Real estate loans [Member] Commercial [Member]	Jun. 30, 2012 Pass [Member] Real estate loans [Member] Agricultural [Member]	Dec. 31, 2011 Pass [Member] Real estate loans [Member] Agricultural [Member]	Jun. 30, 2012 Pass [Member] Real estate loans [Member] Construction [Member]	Dec. 31, 2011 Pass [Member] Real estate loans [Member] Construction [Member]	Jun. 30, 2012 Pass [Member] Other commercial [Member]	Dec. 31, 2011 Pass [Member] Other commercial [Member]	Jun. 30, 2012 Pass [Member] State and political subdivision loans [Member]	Dec. 31, 2011 Pass [Member] State and political subdivision loans [Member]	Jun. 30, 2012 Pass [Member] Other agricultural loans [Member]	Dec. 31, 2011 Pass [Member] Other agricultural loans [Member]	Jun. 30, 2012 Special Mention [Member]	Dec. 31, 2011 Special Mention [Member]	Jun. 30, 2012 Special Mention [Member] Real estate loans [Member] Commercial [Member]	Dec. 31, 2011 Special Mention [Member] Real estate loans [Member] Commercial [Member]	Jun. 30, 2012 Special Mention [Member] Real estate loans [Member] Agricultural [Member]	Dec. 31, 2011 Special Mention [Member] Real estate loans [Member] Agricultural [Member]	Jun. 30, 2012 Special Mention [Member] Real estate loans [Member] Construction [Member]	Dec. 31, 2011 Special Mention [Member] Real estate loans [Member] Construction [Member]	Jun. 30, 2012 Special Mention [Member] Other commercial [Member]	Dec. 31, 2011 Special Mention [Member] Other commercial [Member]	Jun. 30, 2012 Special Mention [Member] State and political subdivision loans [Member]	Dec. 31, 2011 Special Mention [Member] State and political subdivision loans [Member]	Jun. 30, 2012 Special Mention [Member] Other agricultural loans [Member]	Dec. 31, 2011 Special Mention [Member] Other agricultural loans [Member]	Jun. 30, 2012 Substandard [Member]	Dec. 31, 2011 Substandard [Member]	Jun. 30, 2012 Substandard [Member] Real estate loans [Member] Commercial [Member]	Dec. 31, 2011 Substandard [Member] Real estate loans [Member] Commercial [Member]	Jun. 30, 2012 Substandard [Member] Real estate loans [Member] Agricultural [Member]	Dec. 31, 2011 Substandard [Member] Real estate loans [Member] Agricultural [Member]	Jun. 30, 2012 Substandard [Member] Real estate loans [Member] Construction [Member]	Dec. 31, 2011 Substandard [Member] Real estate loans [Member] Construction [Member]	Jun. 30, 2012 Substandard [Member] Other commercial [Member]	Dec. 31, 2011 Substandard [Member] Other commercial [Member]	Jun. 30, 2012 Substandard [Member] State and political subdivision loans [Member]	Dec. 31, 2011 Substandard [Member] State and political subdivision loans [Member]	Jun. 30, 2012 Substandard [Member] Other agricultural loans [Member]	Dec. 31, 2011 Substandard [Member] Other agricultural loans [Member]	Jun. 30, 2012 Doubtful [Member]	Dec. 31, 2011 Doubtful [Member]	Jun. 30, 2012 Doubtful [Member] Real estate loans [Member] Commercial [Member]	Dec. 31, 2011 Doubtful [Member] Real estate loans [Member] Commercial [Member]	Jun. 30, 2012 Doubtful [Member] Real estate loans [Member] Agricultural [Member]	Dec. 31, 2011 Doubtful [Member] Real estate loans [Member] Agricultural [Member]	Jun. 30, 2012 Doubtful [Member] Real estate loans [Member] Construction [Member]	Dec. 31, 2011 Doubtful [Member] Real estate loans [Member] Construction [Member]	Jun. 30, 2012 Doubtful [Member] Other commercial [Member]	Dec. 31, 2011 Doubtful [Member] Other commercial [Member]	Jun. 30, 2012 Doubtful [Member] State and political subdivision loans [Member]	Dec. 31, 2011 Doubtful [Member] State and political subdivision loans [Member]	Jun. 30, 2012 Doubtful [Member] Other agricultural loans [Member]	Dec. 31, 2011 Doubtful [Member] Other agricultural loans [Member]	Jun. 30, 2012 Loss [Member]	Dec. 31, 2011 Loss [Member]	Jun. 30, 2012 Loss [Member] Real estate loans [Member] Commercial [Member]	Dec. 31, 2011 Loss [Member] Real estate loans [Member] Commercial [Member]	Jun. 30, 2012 Loss [Member] Real estate loans [Member] Agricultural [Member]	Dec. 31, 2011 Loss [Member] Real estate loans [Member] Agricultural [Member]	Jun. 30, 2012 Loss [Member] Real estate loans [Member] Construction [Member]	Dec. 31, 2011 Loss [Member] Real estate loans [Member] Construction [Member]	Jun. 30, 2012 Loss [Member] Other commercial [Member]	Dec. 31, 2011 Loss [Member] Other commercial [Member]	Jun. 30, 2012 Loss [Member] State and political subdivision loans [Member]	Dec. 31, 2011 Loss [Member] State and political subdivision loans [Member]	Jun. 30, 2012 Loss [Member] Other agricultural loans [Member]	Dec. 31, 2011 Loss [Member] Other agricultural loans [Member]	Jun. 30, 2012 Performing [Member]	Dec. 31, 2011 Performing [Member]	Jun. 30, 2012 Performing [Member] Real estate loans [Member] Residential mortgages [Member]	Dec. 31, 2011 Performing [Member] Real estate loans [Member] Residential mortgages [Member]	Jun. 30, 2012 Performing [Member] Real estate loans [Member] Home equity [Member]	Dec. 31, 2011 Performing [Member] Real estate loans [Member] Home equity [Member]	Jun. 30, 2012 Performing [Member] Consumer [Member]	Dec. 31, 2011 Performing [Member] Consumer [Member]	Jun. 30, 2012 Nonperforming [Member]	Dec. 31, 2011 Nonperforming [Member]	Jun. 30, 2012 Nonperforming [Member] Real estate loans [Member] Residential mortgages [Member]	Dec. 31, 2011 Nonperforming [Member] Real estate loans [Member] Residential mortgages [Member]	Jun. 30, 2012 Nonperforming [Member] Real estate loans [Member] Home equity [Member]	Dec. 31, 2011 Nonperforming [Member] Real estate loans [Member] Home equity [Member]	Jun. 30, 2012 Nonperforming [Member] Consumer [Member]	Dec. 31, 2011 Nonperforming [Member] Consumer [Member]	Jun. 30, 2012 Internally Assigned Grade [Member]	Dec. 31, 2011 Internally Assigned Grade [Member]	Jun. 30, 2012 Internally Assigned Grade [Member] Real estate loans [Member] Commercial [Member]	Dec. 31, 2011 Internally Assigned Grade [Member] Real estate loans [Member] Commercial [Member]	Jun. 30, 2012 Internally Assigned Grade [Member] Real estate loans [Member] Agricultural [Member]	Dec. 31, 2011 Internally Assigned Grade [Member] Real estate loans [Member] Agricultural [Member]	Jun. 30, 2012 Internally Assigned Grade [Member] Real estate loans [Member] Construction [Member]	Dec. 31, 2011 Internally Assigned Grade [Member] Real estate loans [Member] Construction [Member]	Jun. 30, 2012 Internally Assigned Grade [Member] Other commercial [Member]	Dec. 31, 2011 Internally Assigned Grade [Member] Other commercial [Member]	Jun. 30, 2012 Internally Assigned Grade [Member] State and political subdivision loans [Member]	Dec. 31, 2011 Internally Assigned Grade [Member] State and political subdivision loans [Member]	Jun. 30, 2012 Internally Assigned Grade [Member] Other agricultural loans [Member]	Dec. 31, 2011 Internally Assigned Grade [Member] Other agricultural loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Percentage of dollar volume of commercial loan portfolio to be reviewed, minimum (in hundredths)			60.00%
Amount over which all relationships to be reviewed, minimum			$ 500,000
Amount which is 90 days past due to be reviewed for all aggregate loan relationships, minimum			100,000
Financing Receivable by credit exposure [Abstract]
Total	192,569,000	194,780,000		105,158,000	102,711,000	76,251,000	81,323,000	11,160,000	10,746,000	267,281,000	254,366,000	141,568,000	138,409,000	16,219,000	14,628,000	10,328,000	8,481,000	36,982,000	34,606,000	56,335,000	53,733,000	5,849,000	4,509,000	13,350,000	15,796,000	10,496,000	10,372,000	623,000	2,412,000	0	0	1,806,000	2,203,000	0	0	425,000	809,000	23,841,000	22,550,000	18,739,000	17,045,000	1,985,000	2,184,000	0	0	1,016,000	921,000	1,128,000	1,166,000	973,000	1,234,000	91,000	17,000	75,000	0	0	0	0	0	16,000	17,000	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	191,840,000	194,127,000	104,600,000	102,238,000	76,080,000	81,143,000	11,160,000	10,746,000	729,000	653,000	558,000	473,000	171,000	180,000	0	0	304,563,000	292,729,000	170,878,000	165,826,000	18,827,000	19,224,000	10,328,000	8,481,000	39,820,000	37,747,000	57,463,000	54,899,000	7,247,000	6,552,000
Recorded investment based on payment activity [Abstract]
Total	$ 192,569,000	$ 194,780,000		$ 105,158,000	$ 102,711,000	$ 76,251,000	$ 81,323,000	$ 11,160,000	$ 10,746,000	$ 267,281,000	$ 254,366,000	$ 141,568,000	$ 138,409,000	$ 16,219,000	$ 14,628,000	$ 10,328,000	$ 8,481,000	$ 36,982,000	$ 34,606,000	$ 56,335,000	$ 53,733,000	$ 5,849,000	$ 4,509,000	$ 13,350,000	$ 15,796,000	$ 10,496,000	$ 10,372,000	$ 623,000	$ 2,412,000	$ 0	$ 0	$ 1,806,000	$ 2,203,000	$ 0	$ 0	$ 425,000	$ 809,000	$ 23,841,000	$ 22,550,000	$ 18,739,000	$ 17,045,000	$ 1,985,000	$ 2,184,000	$ 0	$ 0	$ 1,016,000	$ 921,000	$ 1,128,000	$ 1,166,000	$ 973,000	$ 1,234,000	$ 91,000	$ 17,000	$ 75,000	$ 0	$ 0	$ 0	$ 0	$ 0	$ 16,000	$ 17,000	$ 0	$ 0	$ 0	$ 0	$ 0	$ 0	$ 0	$ 0	$ 0	$ 0	$ 0	$ 0	$ 0	$ 0	$ 0	$ 0	$ 0	$ 0	$ 191,840,000	$ 194,127,000	$ 104,600,000	$ 102,238,000	$ 76,080,000	$ 81,143,000	$ 11,160,000	$ 10,746,000	$ 729,000	$ 653,000	$ 558,000	$ 473,000	$ 171,000	$ 180,000	$ 0	$ 0	$ 304,563,000	$ 292,729,000	$ 170,878,000	$ 165,826,000	$ 18,827,000	$ 19,224,000	$ 10,328,000	$ 8,481,000	$ 39,820,000	$ 37,747,000	$ 57,463,000	$ 54,899,000	$ 7,247,000	$ 6,552,000

XML

Income Tax Expense

6 Months Ended

Jun. 30, 2012

Income Tax Expense [Abstract]

Income Tax Expense

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

XML

Employee Benefit Plans (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011
Components of net periodic benefit cost [Abstract]
Obligation included in other liabilities	$ 7,754,000		$ 7,754,000		$ 7,712,000
Employer contribution to defined contribution plan	80,000	74,000	132,000	124,000
Restricted Stock Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares authorized under restricted stock plan (in shares)	100,000		100,000
Restricted stock awarded (in shares)			3,808	3,968
Restricted stock vested (in shares)			5,222	5,502
Share-based compensation expense	33,000	36,000	66,000	73,000
Director [Member]
Deferred Compensation Arrangement with Individual, Postretirement Benefits [Line Items]
Deferred compensation liability	996,000		996,000		1,030,000
Deferred interest expense			8,000	12,000
Pension Plan [Member]
Components of net periodic benefit cost [Abstract]
Service cost	54,000	71,000	167,000	185,000
Interest cost	35,000	87,000	174,000	226,000
Expected return on plan assets	(80,000)	(130,000)	(286,000)	(336,000)
Net amortization and deferral	52,000	10,000	68,000	26,000
Net periodic benefit cost	61,000	38,000	123,000	101,000
Expected employer contribution to pension plan	750,000		750,000
Supplemental Executive Retirement Plans [Member]
Components of net periodic benefit cost [Abstract]
Obligation included in other liabilities	855,000		855,000		778,000
Cost recognized	$ 24,000	$ 16,000	$ 47,000	$ 31,000

XML

Federal Home Loan Bank Stock (Details) (USD $)	Jun. 30, 2012	Dec. 31, 2011
Federal Home Loan Bank Stock [Abstract]
Federal home loan bank stock	$ 4,187,000	$ 3,027,000
FHLB Stock, at par value (in dollars per share)	$ 100

XML

Fair Value Measurements (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Securities available for sale [Abstract]
Securities available for sale	$ 323,131	$ 318,823
Liabilities [Abstract]
Trust Preferred Interest Rate Swap	(283)
Fair value assets and liabilities measured on non-recurring basis [Abstract]
Impaired Loans	8,283	8,881
Nonrecurring [Member] | Level I [Member]
Fair value assets and liabilities measured on non-recurring basis [Abstract]
Impaired Loans	0	0
Other real estate owned	0	0
Nonrecurring [Member] | Level II [Member]
Fair value assets and liabilities measured on non-recurring basis [Abstract]
Impaired Loans	0	0
Other real estate owned	0	0
Nonrecurring [Member] | Level III [Member]
Fair value assets and liabilities measured on non-recurring basis [Abstract]
Impaired Loans	7,721	8,387
Other real estate owned	742	860
Nonrecurring [Member] | Fair Value [Member]
Fair value assets and liabilities measured on non-recurring basis [Abstract]
Impaired Loans	7,721	8,387
Other real estate owned	742	860
U.S. Agency securities [Member]
Securities available for sale [Abstract]
Securities available for sale	146,364	168,600
U.S. Agency securities [Member] | Recurring [Member]
Securities available for sale [Abstract]
Securities available for sale	146,364	168,600
U.S. Agency securities [Member] | Recurring [Member] | Level I [Member]
Securities available for sale [Abstract]
Securities available for sale	0	0
U.S. Agency securities [Member] | Recurring [Member] | Level II [Member]
Securities available for sale [Abstract]
Securities available for sale	146,364	168,600
U.S. Agency securities [Member] | Recurring [Member] | Level III [Member]
Securities available for sale [Abstract]
Securities available for sale	0	0
Obligations of state and political subdivisions [Member]
Securities available for sale [Abstract]
Securities available for sale	98,147	101,547
Obligations of state and political subdivisions [Member] | Recurring [Member]
Securities available for sale [Abstract]
Securities available for sale	98,147	101,547
Obligations of state and political subdivisions [Member] | Recurring [Member] | Level I [Member]
Securities available for sale [Abstract]
Securities available for sale	0	0
Obligations of state and political subdivisions [Member] | Recurring [Member] | Level II [Member]
Securities available for sale [Abstract]
Securities available for sale	98,147	101,547
Obligations of state and political subdivisions [Member] | Recurring [Member] | Level III [Member]
Securities available for sale [Abstract]
Securities available for sale	0	0
Corporate obligations [Member]
Securities available for sale [Abstract]
Securities available for sale	11,046	8,460
Corporate obligations [Member] | Recurring [Member]
Securities available for sale [Abstract]
Securities available for sale	11,046	8,460
Corporate obligations [Member] | Recurring [Member] | Level I [Member]
Securities available for sale [Abstract]
Securities available for sale	0	0
Corporate obligations [Member] | Recurring [Member] | Level II [Member]
Securities available for sale [Abstract]
Securities available for sale	11,046	8,460
Corporate obligations [Member] | Recurring [Member] | Level III [Member]
Securities available for sale [Abstract]
Securities available for sale	0	0
Mortgage-backed securities in government sponsored entities [Member]
Securities available for sale [Abstract]
Securities available for sale	66,194	38,974
Mortgage-backed securities in government sponsored entities [Member] | Recurring [Member]
Securities available for sale [Abstract]
Securities available for sale	66,194	38,974
Mortgage-backed securities in government sponsored entities [Member] | Recurring [Member] | Level I [Member]
Securities available for sale [Abstract]
Securities available for sale	0	0
Mortgage-backed securities in government sponsored entities [Member] | Recurring [Member] | Level II [Member]
Securities available for sale [Abstract]
Securities available for sale	66,194	38,974
Mortgage-backed securities in government sponsored entities [Member] | Recurring [Member] | Level III [Member]
Securities available for sale [Abstract]
Securities available for sale	0	0
Equity securities in financial institutions [Member]
Securities available for sale [Abstract]
Securities available for sale	1,380	1,242
Equity securities in financial institutions [Member] | Recurring [Member]
Securities available for sale [Abstract]
Securities available for sale	1,380	1,242
Equity securities in financial institutions [Member] | Recurring [Member] | Level I [Member]
Securities available for sale [Abstract]
Securities available for sale	1,380	1,242
Equity securities in financial institutions [Member] | Recurring [Member] | Level II [Member]
Securities available for sale [Abstract]
Securities available for sale	0	0
Equity securities in financial institutions [Member] | Recurring [Member] | Level III [Member]
Securities available for sale [Abstract]
Securities available for sale	0	0
Trust Preferred Interest Rate Swap [Member] | Recurring [Member]
Liabilities [Abstract]
Trust Preferred Interest Rate Swap	(283)	(348)
Trust Preferred Interest Rate Swap [Member] | Recurring [Member] | Level I [Member]
Liabilities [Abstract]
Trust Preferred Interest Rate Swap	0	0
Trust Preferred Interest Rate Swap [Member] | Recurring [Member] | Level II [Member]
Liabilities [Abstract]
Trust Preferred Interest Rate Swap	(283)	(348)
Trust Preferred Interest Rate Swap [Member] | Recurring [Member] | Level III [Member]
Liabilities [Abstract]
Trust Preferred Interest Rate Swap	$ 0	$ 0

XML

Fair Value Measurements, Quantitative Information (Details) (USD $) In Thousands, unless otherwise specified			6 Months Ended
	Jun. 30, 2012	Dec. 31, 2011	Jun. 30, 2012 Impaired Loans [Member] Discounted Cash Flows [Member]	Jun. 30, 2012 Impaired Loans [Member] Discounted Cash Flows [Member] Maximum [Member]	Jun. 30, 2012 Impaired Loans [Member] Discounted Cash Flows [Member] Minimum [Member]	Jun. 30, 2012 Impaired Loans [Member] Appraised Collateral Values [Member]	Jun. 30, 2012 Impaired Loans [Member] Appraised Collateral Values [Member] Maximum [Member]	Jun. 30, 2012 Impaired Loans [Member] Appraised Collateral Values [Member] Minimum [Member]	Jun. 30, 2012 Other real estate owned [Member] Appraised Collateral Values [Member]	Jun. 30, 2012 Other real estate owned [Member] Appraised Collateral Values [Member] Maximum [Member]	Jun. 30, 2012 Other real estate owned [Member] Appraised Collateral Values [Member] Minimum [Member]
Fair Value Inputs [Abstract]
Impaired Loans	$ 8,283	$ 8,881	$ 5,295			$ 2,426
Other real estate owned									$ 742
Valuation Technique(s)			Discounted Cash Flows			Appraised Collateral Values			Appraised Collateral Values
Probability of Default (in hundredths)			0.00%
Change in interest rates (in hundredths)				7.00%	0.00%
Discount for time since appraisal (in hundredths)							20.00%	0.00%		20.00%	0.00%
Selling costs (in hundredths)							10.00%	0.00%		10.00%	6.00%
Holding period							18 months	0 months		18 months	0 months

XML

Earnings per Share

6 Months Ended

Jun. 30, 2012

Earnings per Share [Abstract]

Earnings per Share

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.

	Three months ended				Six months ended
	June 30,				June 30,
	2012		2011		2012		2011
Basic earnings per share computation;
Net income applicable to common stock	$	3,753,000	$	3,147,000	$	7,202,000	$	5,977,000
Weighted average common shares outstanding for basic earnings per share		2,886,012		2,915,708		2,890,849		2,916,526
Earnings per share - basic	$	1.30	$	1.08	$	2.49	$	2.05
Diluted earnings per share computation
Net income applicable to common stock	$	3,753,000	$	3,147,000	$	7,202,000	$	5,977,000
Weighted average common shares outstanding for basic earnings per share		2,886,012		2,915,708		2,890,849		2,916,526
Add: Dilutive effects of restricted stock		1,409		-		624		-
Weighted average common shares outstanding for dilutive earnings per share		2,887,421		2,915,708		2,891,473		2,916,526
Earnings per share - dilutive	$	1.30	$	1.08	$	2.49	$	2.05

Restricted stock grants that were anti-dilutive were excluded from net income per share calculations. For the three months ended June 30, 2012 and 2011, 2,447 and 8,847 shares, respectively, related to the restricted stock program were excluded from the diluted earnings per share calculations since they were anti-dilutive. For the six months ended June 30, 2012 and 2011, 4,115 and 8,847 shares, respectively, related to the restricted stock program were excluded from the diluted earnings per share calculations since they were anti-dilutive.

XML

Fair Value Measurements, By Balance Sheet Grouping (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2012	Dec. 31, 2011
Financial Assets [Abstract]
Cash and due from banks	$ 17,768
Available-for-sale securities	323,131	318,823
Net loans	539,268
Bank owned life insurance	13,919
Regulatory stock	4,461
Accrued interest receivable	3,800
Financial Liabilities [Abstract]
Deposits	744,787
Borrowed funds	44,909
Trust preferred interest rate swap	283
Accrued interest payable	1,222
Consideration period for recognition of cash and due from banks	90 days
Consideration period for recognition of accrued interest receivable and payable	90 days
Carrying Amount [Member]
Financial Assets [Abstract]
Cash and due from banks	17,768	30,432
Available-for-sale securities	323,131	318,823
Net loans	490,482	481,022
Bank owned life insurance	13,919	13,669
Regulatory stock	4,461	3,301
Accrued interest receivable	3,800	3,621
Financial Liabilities [Abstract]
Deposits	738,767	733,993
Borrowed funds	47,066	53,882
Trust preferred interest rate swap	283	348
Accrued interest payable	1,222	1,512
Fair Value [Member]
Financial Assets [Abstract]
Cash and due from banks	17,768	30,432
Available-for-sale securities	323,131	318,823
Net loans	539,268	527,724
Bank owned life insurance	13,919	13,669
Regulatory stock	4,461	3,301
Accrued interest receivable	3,800	3,621
Financial Liabilities [Abstract]
Deposits	744,787	740,839
Borrowed funds	44,909	51,437
Trust preferred interest rate swap	283	348
Accrued interest payable	1,222	1,512
Level I [Member]
Financial Assets [Abstract]
Cash and due from banks	17,768
Available-for-sale securities	1,380
Net loans	0
Bank owned life insurance	13,919
Regulatory stock	4,461
Accrued interest receivable	3,800
Financial Liabilities [Abstract]
Deposits	446,307
Borrowed funds	0
Trust preferred interest rate swap	0
Accrued interest payable	1,222
Level II [Member]
Financial Assets [Abstract]
Cash and due from banks	0
Available-for-sale securities	321,751
Net loans	0
Bank owned life insurance	0
Regulatory stock	0
Accrued interest receivable	0
Financial Liabilities [Abstract]
Deposits	0
Borrowed funds	44,909
Trust preferred interest rate swap	283
Accrued interest payable	0
Level III [Member]
Financial Assets [Abstract]
Cash and due from banks	0
Available-for-sale securities	0
Net loans	539,268
Bank owned life insurance	0
Regulatory stock	0
Accrued interest receivable	0
Financial Liabilities [Abstract]
Deposits	298,480
Borrowed funds	0
Trust preferred interest rate swap	0
Accrued interest payable	$ 0

XML

CONSOLIDATED BALANCE SHEET (UNAUDITED) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Cash and due from banks:
Noninterest-bearing	$ 12,525	$ 9,960
Interest-bearing	5,243	20,472
Total cash and cash equivalents	17,768	30,432
Available-for-sale securities	323,131	318,823
Loans (net of allowance for loan losses: 2012, $6,650 and 2011, $6,487)	490,482	481,022
Premises and equipment	11,515	11,702
Accrued interest receivable	3,800	3,621
Goodwill	10,256	10,256
Bank owned life insurance	13,919	13,669
Other assets	10,479	9,042
TOTAL ASSETS	881,350	878,567
Deposits:
Noninterest-bearing	86,218	85,605
Interest-bearing	652,549	648,388
Total deposits	738,767	733,993
Borrowed funds	47,066	53,882
Accrued interest payable	1,222	1,512
Other liabilities	7,754	7,712
TOTAL LIABILITIES	794,809	797,099
STOCKHOLDERS' EQUITY:
Preferred Stock $1.00 par value; authorized 3,000,000 shares June 30, 2012 and December 31, 2011; none issued in 2012 or 2011	0	0
Common stock $1.00 par value; authorized 15,000,000 shares; issued 3,132,866 at June 30, 2012 and December 31, 2011	3,133	3,133
Additional paid-in capital	15,364	15,313
Retained earnings	68,813	63,337
Accumulated other comprehensive income	4,990	4,949
Treasury stock, at cost: 243,784 shares at June 30, 2012 and 230,203 shares at December 31, 2011	(5,759)	(5,264)
TOTAL STOCKHOLDERS' EQUITY	86,541	81,468
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 881,350	$ 878,567

XML

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (USD $)	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$ 7,202,000	$ 5,977,000
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	210,000	375,000
Depreciation and amortization	211,000	272,000
Amortization and accretion of investment securities, net	1,196,000	940,000
Deferred income taxes	28,000	192,000
Investment securities gains, net	(321,000)	(234,000)
Earnings on bank owned life insurance	(250,000)	(245,000)
Originations of loans held for sale	(14,241,000)	(5,316,000)
Proceeds from sales of loans held for sale	14,426,000	5,391,000
Realized gains on loans sold	(185,000)	(75,000)
Increase in accrued interest receivable	(179,000)	(262,000)
Decrease in accrued interest payable	(290,000)	(223,000)
Other, net	(269,000)	45,000
Net cash provided by operating activities	7,538,000	6,837,000
Available-for-sale securities:
Proceeds from sales	16,654,000	7,821,000
Proceeds from maturity and principal repayments	68,914,000	32,063,000
Purchase of securities	(90,754,000)	(72,496,000)
Proceeds from redemption of regulatory stock	245,000	312,000
Purchase of regulatory stock	(1,405,000)	0
Net (increase) decrease in loans	(9,679,000)	(3,925,000)
Purchase of premises and equipment	(117,000)	(65,000)
Purchase of land for potential future expansion	0	(545,000)
Proceeds from sale of foreclosed assets held for sale	345,000	371,000
Net cash used in investing activities	(15,797,000)	(36,464,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits	4,774,000	32,416,000
Proceeds from long-term borrowings	28,000	9,000
Repayments of long-term borrowings	(4,110,000)	(1,000,000)
Net increase in short-term borrowed funds	(2,734,000)	403,000
Purchase of treasury and restricted stock	(637,000)	(360,000)
Dividends paid	(1,726,000)	(1,404,000)
Net cash provided by financing activities	(4,405,000)	30,064,000
Net (decrease) increase in cash and cash equivalents	(12,664,000)	437,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	30,432,000	43,995,000
CASH AND CASH EQUIVALENTS AT END OF PERIOD	17,768,000	44,432,000
Supplemental Disclosures of Cash Flow Information:
Interest paid	4,317,000	5,245,000
Income taxes paid	2,095,000	1,300,000
Loans transferred to foreclosed property	123,000	490,000
Premises and equipment transferred to other assets	0	282,000
Investments purchased and not settled included in other liabilities	$ 0	$ 2,085,000

XML

Investments (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011
Available for sale securities amortized cost unrealized losses and fair value [Abstract]
Amortized Cost	$ 313,117,000		$ 313,117,000		$ 308,806,000
Gross Unrealized Gains	10,214,000		10,214,000		10,056,000
Gross Unrealized Losses	(200,000)		(200,000)		(39,000)
Fair Value	323,131,000		323,131,000		318,823,000
Number of securities owned by the entity, the fair value of which is less than cost	13		13
Available-for-sale securities, fair value and unrealized loss [Abstract]
Total securities, Less than Twelve Months, Fair Value	19,392,000		19,392,000		14,278,000
Total securities, Less than Twelve Months, Gross Unrealized Losses	(200,000)		(200,000)		(37,000)
Total securities, Twelve Months or Greater, Fair Value	0		0		771,000
Total securities, Twelve Months or Greater, Gross Unrealized Losses	0		0		(2,000)
Total securities, Fair Value	19,392,000		19,392,000		15,049,000
Total securities, Gross Unrealized Losses	(200,000)		(200,000)		(39,000)
Proceeds from sale of securities available-for-sale	5,418,000	4,632,000	16,654,000	7,821,000
Realized investment gains (losses) [Abstract]
Gross gains	213,000	114,000	321,000	263,000
Gross losses	0	0		(29,000)
Net gains	213,000	114,000	321,000	234,000
Investment securities pledged to secure public funds and certain other deposits	174,100,000		174,100,000		177,900,000
Amortized Cost [Abstract]
Due in one year or less	15,878,000		15,878,000
Due after one year through five years	83,752,000		83,752,000
Due after five years through ten years	47,862,000		47,862,000
Due after ten years	164,714,000		164,714,000
Total	312,206,000		312,206,000
Fair Value [Abstract]
Due in one year or less	16,028,000		16,028,000
Due after one year through five years	85,499,000		85,499,000
Due after five years through ten years	49,081,000		49,081,000
Due after ten years	171,143,000		171,143,000
Total	321,751,000		321,751,000
U.S. Agency securities [Member]
Available for sale securities amortized cost unrealized losses and fair value [Abstract]
Amortized Cost	144,214,000		144,214,000		166,534,000
Gross Unrealized Gains	2,157,000		2,157,000		2,087,000
Gross Unrealized Losses	(7,000)		(7,000)		(21,000)
Fair Value	146,364,000		146,364,000		168,600,000
Available-for-sale securities, fair value and unrealized loss [Abstract]
Total securities, Less than Twelve Months, Fair Value	4,010,000		4,010,000		10,018,000
Total securities, Less than Twelve Months, Gross Unrealized Losses	(7,000)		(7,000)		(21,000)
Total securities, Twelve Months or Greater, Fair Value	0		0		0
Total securities, Twelve Months or Greater, Gross Unrealized Losses	0		0		0
Total securities, Fair Value	4,010,000		4,010,000		10,018,000
Total securities, Gross Unrealized Losses	(7,000)		(7,000)		(21,000)
Obligations of state and political subdivisions [Member]
Available for sale securities amortized cost unrealized losses and fair value [Abstract]
Amortized Cost	93,130,000		93,130,000		96,556,000
Gross Unrealized Gains	5,089,000		5,089,000		4,996,000
Gross Unrealized Losses	(72,000)		(72,000)		(5,000)
Fair Value	98,147,000		98,147,000		101,547,000
Available-for-sale securities, fair value and unrealized loss [Abstract]
Total securities, Less than Twelve Months, Fair Value	3,437,000		3,437,000		1,057,000
Total securities, Less than Twelve Months, Gross Unrealized Losses	(72,000)		(72,000)		(3,000)
Total securities, Twelve Months or Greater, Fair Value	0		0		771,000
Total securities, Twelve Months or Greater, Gross Unrealized Losses	0		0		(2,000)
Total securities, Fair Value	3,437,000		3,437,000		1,828,000
Total securities, Gross Unrealized Losses	(72,000)		(72,000)		(5,000)
Corporate obligations [Member]
Available for sale securities amortized cost unrealized losses and fair value [Abstract]
Amortized Cost	10,790,000		10,790,000		8,263,000
Gross Unrealized Gains	276,000		276,000		197,000
Gross Unrealized Losses	(20,000)		(20,000)		0
Fair Value	11,046,000		11,046,000		8,460,000
Available-for-sale securities, fair value and unrealized loss [Abstract]
Total securities, Less than Twelve Months, Fair Value	2,585,000		2,585,000
Total securities, Less than Twelve Months, Gross Unrealized Losses	(20,000)		(20,000)
Total securities, Twelve Months or Greater, Fair Value	0		0
Total securities, Twelve Months or Greater, Gross Unrealized Losses	0		0
Total securities, Fair Value	2,585,000		2,585,000
Total securities, Gross Unrealized Losses	(20,000)		(20,000)
Mortgage-backed securities in government sponsored entities [Member]
Available for sale securities amortized cost unrealized losses and fair value [Abstract]
Amortized Cost	64,072,000		64,072,000		36,630,000
Gross Unrealized Gains	2,223,000		2,223,000		2,356,000
Gross Unrealized Losses	(101,000)		(101,000)		(12,000)
Fair Value	66,194,000		66,194,000		38,974,000
Available-for-sale securities, fair value and unrealized loss [Abstract]
Total securities, Less than Twelve Months, Fair Value	9,360,000		9,360,000		3,164,000
Total securities, Less than Twelve Months, Gross Unrealized Losses	(101,000)		(101,000)		(12,000)
Total securities, Twelve Months or Greater, Fair Value	0		0		0
Total securities, Twelve Months or Greater, Gross Unrealized Losses	0		0		0
Total securities, Fair Value	9,360,000		9,360,000		3,164,000
Total securities, Gross Unrealized Losses	(101,000)		(101,000)		(12,000)
Equity securities in financial institutions [Member]
Available for sale securities amortized cost unrealized losses and fair value [Abstract]
Amortized Cost	911,000		911,000		823,000
Gross Unrealized Gains	469,000		469,000		420,000
Gross Unrealized Losses	0		0		(1,000)
Fair Value	1,380,000		1,380,000		1,242,000
Available-for-sale securities, fair value and unrealized loss [Abstract]
Total securities, Less than Twelve Months, Fair Value					39,000
Total securities, Less than Twelve Months, Gross Unrealized Losses					(1,000)
Total securities, Twelve Months or Greater, Fair Value					0
Total securities, Twelve Months or Greater, Gross Unrealized Losses					0
Total securities, Fair Value					39,000
Total securities, Gross Unrealized Losses					$ (1,000)

XML

Loans, Schedule of Impaired Financing Receivable (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2012	Dec. 31, 2011
Impaired Financing Receivable [Abstract]
Unpaid Principal Balance	$ 9,671	$ 10,062
Recorded Investment With No Allowance	5,530	5,729
Recorded Investment With Allowance	2,753	3,152
Total Recorded Investment	8,283	8,881
Related Allowance	562	494
Average Recorded Investment	8,782	9,653
Interest Income Recognized	42	123
Real estate loans [Member] | Residential mortgages [Member]
Impaired Financing Receivable [Abstract]
Unpaid Principal Balance	258	0
Recorded Investment With No Allowance	118	0
Recorded Investment With Allowance	140	0
Total Recorded Investment	258	0
Related Allowance	14	0
Average Recorded Investment	83	0
Interest Income Recognized	1	0
Real estate loans [Member] | Home equity [Member]
Impaired Financing Receivable [Abstract]
Unpaid Principal Balance	93	94
Recorded Investment With No Allowance	18	36
Recorded Investment With Allowance	75	58
Total Recorded Investment	93	94
Related Allowance	15	13
Average Recorded Investment	93	36
Interest Income Recognized	2	1
Real estate loans [Member] | Commercial [Member]
Impaired Financing Receivable [Abstract]
Unpaid Principal Balance	8,816	9,394
Recorded Investment With No Allowance	5,366	5,663
Recorded Investment With Allowance	2,109	2,607
Total Recorded Investment	7,475	8,270
Related Allowance	512	433
Average Recorded Investment	8,138	8,585
Interest Income Recognized	39	65
Real estate loans [Member] | Agricultural [Member]
Impaired Financing Receivable [Abstract]
Unpaid Principal Balance	0	0
Recorded Investment With No Allowance	0	0
Recorded Investment With Allowance	0	0
Total Recorded Investment	0	0
Related Allowance	0	0
Average Recorded Investment	0	371
Interest Income Recognized	0	37
Real estate loans [Member] | Construction [Member]
Impaired Financing Receivable [Abstract]
Unpaid Principal Balance	0	0
Recorded Investment With No Allowance	0	0
Recorded Investment With Allowance	0	0
Total Recorded Investment	0	0
Related Allowance	0	0
Average Recorded Investment	0	0
Interest Income Recognized	0	0
Consumer [Member]
Impaired Financing Receivable [Abstract]
Unpaid Principal Balance	0	0
Recorded Investment With No Allowance	0	0
Recorded Investment With Allowance	0	0
Total Recorded Investment	0	0
Related Allowance	0	0
Average Recorded Investment	0	0
Interest Income Recognized	0	0
Other commercial [Member]
Impaired Financing Receivable [Abstract]
Unpaid Principal Balance	504	574
Recorded Investment With No Allowance	28	30
Recorded Investment With Allowance	429	487
Total Recorded Investment	457	517
Related Allowance	21	48
Average Recorded Investment	468	501
Interest Income Recognized	0	0
Other agricultural loans [Member]
Impaired Financing Receivable [Abstract]
Unpaid Principal Balance	0	0
Recorded Investment With No Allowance	0	0
Recorded Investment With Allowance	0	0
Total Recorded Investment	0	0
Related Allowance	0	0
Average Recorded Investment	0	160
Interest Income Recognized	0	20
State and political subdivision loans [Member]
Impaired Financing Receivable [Abstract]
Unpaid Principal Balance	0	0
Recorded Investment With No Allowance	0	0
Recorded Investment With Allowance	0	0
Total Recorded Investment	0	0
Related Allowance	0	0
Average Recorded Investment	0	0
Interest Income Recognized	$ 0	$ 0

XML

Basis of Presentation

6 Months Ended

Jun. 30, 2012

Basis of Presentation [Abstract]

Basis of Presentation

Note 1 - Basis of Presentation

Citizens Financial Services, 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 Community Bank (the "Bank") and the Bank's subsidiary, First Citizens Insurance Agency, Inc. ("First Citizens Insurance").  On June 29, 2012, the Bank completed the conversion from a national bank into a Pennsylvania state-chartered bank and trust company and changed its name from First Citizens National Bank to First Citizens Community Bank.

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.  Certain of the prior year amounts have been reclassified to conform with the current year presentation.  Such reclassifications had no effect on net income or stockholders' equity.  All material inter-company balances and transactions have been eliminated in consolidation.

In the opinion of management of the Company, the accompanying interim financial statements for the periods ended June 30, 2012 and 2011 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 six month period ended June 30, 2012 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 year ended December 31, 2011.

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CONSOLIDATED BALANCE SHEET (UNAUDITED) (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
ASSETS:
Loans, allowance for loan losses	$ 6,650	$ 6,487
STOCKHOLDERS' EQUITY:
Preferred Stock , par value (in dollars per share)	$ 1.00	$ 1.00
Preferred Stock , authorized (in shares)	3,000,000	3,000,000
Preferred Stock , issued (in shares)	0	0
Common Stock, par value (in dollars per share)	$ 1.00	$ 1.00
Common Stock, authorized (in shares)	15,000,000	15,000,000
Common Stock, issued (in shares)	3,132,866	3,132,866
Treasury stock, shares (in shares)	243,784	230,203

XML

Investments (Tables)

6 Months Ended

Jun. 30, 2012

Investments [Abstract]

Summary of amortized cost and fair value of investment securities

The amortized cost and fair value of investment securities at June 30, 2012 and December 31, 2011 were as follows (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
June 30, 2012	Cost		Gains		Losses			Value
Available-for-sale securities:
U.S. agency securities	$	144,214	$	2,157	$	(7	)	$	146,364
Obligations of state and political subdivisions		93,130		5,089		(72	)		98,147
Corporate obligations		10,790		276		(20	)		11,046
Mortgage-backed securities in government sponsored entities		64,072		2,223		(101	)		66,194
Equity securities in financial institutions		911		469		-			1,380
Total available-for-sale securities	$	313,117	$	10,214	$	(200	)	$	323,131

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
December 31, 2011	Cost		Gains		Losses			Value
Available-for-sale securities:
U.S. Agency securities	$	166,534	$	2,087	$	(21	)	$	168,600
Obligations of state and  political subdivisions		96,556		4,996		(5	)		101,547
Corporate obligations		8,263		197		-			8,460
Mortgage-backed securities in  government sponsored entities		36,630		2,356		(12	)		38,974
Equity securities in financial institutions		823		420		(1	)		1,242
Total available-for-sale securities	$	308,806	$	10,056	$	(39	)	$	318,823

Unrealized losses and fair value of investments

The following table shows the Company's gross unrealized losses and fair value of the Company's investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time, that the individual securities have been in a continuous unrealized loss position, at June 30, 2012 and December 31, 2011 (in thousands). As of June 30, 2012, the Company owned 13 securities whose fair value was less than their cost basis.

June 30, 2012	Less than Twelve Months					Twelve Months or Greater				Total
			Gross					Gross				Gross
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Losses			Value		Losses		Value		Losses
U.S. Agency securities	$	4,010	$	(7	)	$	-	$	-	$	4,010	$	(7	)
Obligations of state and political subdivisions		3,437		(72	)		-		-		3,437		(72	)
Corporate obligations		2,585		(20	)		-		-		2,585		(20	)
Mortgage-backed securities in government sponsored entities		9,360		(101	)		-		-		9,360		(101	)
Total securities	$	19,392	$	(200	)	$	-	$	-	$	19,392	$	(200	)

December 31, 2011	Less than Twelve Months					Twelve Months or Greater					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. Agency securities	$	10,018	$	(21	)	$	-	$	-		$	10,018	$	(21	)
Obligations of states and  political subdivisions		1,057		(3	)		771		(2	)		1,828		(5	)
Mortgage-backed securities in  government sponsored entities		3,164		(12	)		-		-			3,164		(12	)
Equity securities in financial institutions		39		(1	)		-		-			39		(1	)
Total securities	$	14,278	$	(37	)	$	771	$	(2	)	$	15,049	$	(39	)

Gross gains and losses of available-for-sale securities

Proceeds from sales of securities available-for-sale for the six months ended June 30, 2012 and 2011 were $16,654,000 and $7,821,000, respectively.  For the three months ended June 30, 2012 and 2011, there were sales of $5,418,000 and $4,632,000, respectively, of available-for-sale securities. The gross gains and losses were as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
Gross gains	$	213	$	114	$	321	$	263
Gross losses		-		-				(29	)
Net gains	$	213	$	114	$	321	$	234

Summary of amortized cost and fair value of debt securities by contractual maturity

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.   The amortized cost and fair value of debt securities at June 30, 2012, by contractual maturity, are shown below (in thousands):

	Amortized
	Cost		Fair Value
Available-for-sale debt securities:
Due in one year or less	$	15,878	$	16,028
Due after one year through five years		83,752		85,499
Due after five years through ten years		47,862		49,081
Due after ten years		164,714		171,143
Total	$	312,206	$	321,751

XML

Document and Entity Information	6 Months Ended
	Jun. 30, 2012	Jul. 01, 2012
Document and Entity Information [Abstract]
Entity Registrant Name	CITIZENS FINANCIAL SERVICES INC
Entity Central Index Key	0000739421
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		2,917,540
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q2
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2012

XML

Loans (Tables)

6 Months Ended

Jun. 30, 2012

Loans [Abstract]

Summary of loan portfolio and allowance for loan losses

The Company grants commercial, industrial, agricultural, residential, and consumer loans primarily to customers throughout North Central Pennsylvania and Southern New York.  Although the Company had a diversified loan portfolio at June 30, 2012 and December 31, 2011, a substantial portion of its debtors' ability to honor their contracts is dependent on the economic conditions within these regions. The following table summarizes the primary segments of the loan portfolio as of June 30, 2012 and December 31, 2011 (in thousands):

June 30, 2012	Total Loans		Individually evaluated for impairment		Collectively evaluated for impairment
Real estate loans:
Residential	$	181,409	$	351	$	181,058
Commercial and agricultural		189,705		7,475		182,230
Construction		10,328		-		10,328
Consumer		11,160		-		11,160
Other commercial and agricultural loans		47,067		457		46,610
State and political subdivision loans		57,463		-		57,463
Total		497,132	$	8,283	$	488,849
Allowance for loan losses		6,650
Net loans	$	490,482

December 31, 2011	Total Loans		Individually evaluated for impairment		Collectively evaluated for impairment
Real estate loans:
Residential	$	184,034	$	94	$	183,940
Commercial and agricultural		185,050		8,270		176,780
Construction		8,481		-		8,481
Consumer		10,746		-		10,746
Other commercial and agricultrual loans		44,299		517		43,782
State and political subdivision loans		54,899		-		54,899
Total		487,509	$	8,881	$	478,628
Allowance for loan losses		6,487
Net loans	$	481,022

Impaired financing receivables with associated allowance amount

			Recorded		Recorded
	Unpaid		Investment		Investment		Total				Average		Interest
	Principal		With No		With		Recorded		Related		Recorded		Income
June 30, 2012	Balance		Allowance		Allowance		Investment		Allowance		Investment		Recognized
Real estate loans:
Residential mortgages	$	258	$	118	$	140	$	258	$	14	$	83	$	1
Home equity		93		18		75		93		15		93		2
Commercial		8,816		5,366		2,109		7,475		512		8,138		39
Agricultural		-		-		-		-		-		-		-
Construction		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-
Other commercial loans		504		28		429		457		21		468		-
Other agricultural Loans		-		-		-		-		-		-		-
State and political subdivision loans		-		-		-		-		-		-		-
Total	$	9,671	$	5,530	$	2,753	$	8,283	$	562	$	8,782	$	42

			Recorded		Recorded
	Unpaid		Investment		Investment		Total				Average		Interest
	Principal		With No		With		Recorded		Related		Recorded		Income
December 31, 2011	Balance		Allowance		Allowance		Investment		Allowance		Investment		Recognized
Real estate loans:
Residential mortgages	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Home equity		94		36		58		94		13		36		1
Commercial		9,394		5,663		2,607		8,270		433		8,585		65
Agricultural		-		-		-		-		-		371		37
Construction		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-
Other commercial loans		574		30		487		517		48		501		-
Other agricultural Loans		-		-		-		-		-		160		20
State and political subdivision loans		-		-		-		-		-		-		-
Total	$	10,062	$	5,729	$	3,152	$	8,881	$	494	$	9,653	$	123

Summary of financing receivable credit exposures by internally assigned grades

The following tables represent credit exposures by internally assigned grades as of June 30, 2012 and December 31, 2011 (in thousands):

June 30, 2012	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	141,568	$	10,496	$	18,739	$	75	$	-	$	170,878
Agricultural		16,219		623		1,985		-		-		18,827
Construction		10,328		-		-		-		-		10,328
Other commercial loans		36,982		1,806		1,016		16		-		39,820
Other agricultural loans		5,849		425		973		-		-		7,247
State and political subdivision loans		56,335		-		1,128		-		-		57,463
Total	$	267,281	$	13,350	$	23,841	$	91	$	-	$	304,563

December 31, 2011	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	138,409	$	10,372	$	17,045	$	-	$	-	$	165,826
Agricultural		14,628		2,412		2,184		-		-		19,224
Construction		8,481		-		-		-		-		8,481
Other commercial loans		34,606		2,203		921		17		-		37,747
Other agricultural loans		4,509		809		1,234		-		-		6,552
State and political  subdivision loans		53,733		-		1,166		-		-		54,899
Total	$	254,366	$	15,796	$	22,550	$	17	$	-	$	292,729

For residential real estate mortgages, home equities and consumer loans, credit quality is monitored based on whether the loan is performing or non-performing, which is typically based on the aging status of the loan and payment activity, unless a specific action, such as bankruptcy, repossession, death or significant delay in payment occurs to raise awareness of a possible credit event. Non-performing loans include those loans that are considered nonaccrual, described in more detail below and all loans past due 90 or more days. The following table presents the recorded investment in those loan classes based on payment activity as of June 30, 2012 and December 31, 2011 (in thousands):

June 30, 2012	Performing		Non-performing		Total
Real estate loans:
Residential mortgages	$	104,600	$	558	$	105,158
Home equity		76,080		171		76,251
Consumer		11,160		-		11,160
Total	$	191,840	$	729	$	192,569

December 31, 2011	Performing		Non-performing		Total
Real estate loans:
Residential mortgages	$	102,238	$	473	$	102,711
Home equity		81,143		180		81,323
Consumer		10,746		-		10,746
Total	$	194,127	$	653	$	194,780

Age analysis of past due financing receivables

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table includes an aging analysis of the recorded investment of past due financing receivables as of June 30, 2012 and December 31, 2011 (in thousands):

	30-59 Days		60-89 Days		90 Days		Total Past				Total Financing		90 Days and
June 30, 2012	Past Due		Past Due		Or Greater		Due		Current		Receivables		Accruing
Real estate loans:
Residential mortgages	$	164	$	9	$	455	$	628	$	104,530	$	105,158	$	57
Home equity		360		88		161		609		75,642		76,251		21
Commercial		717		104		2,063		2,884		167,994		170,878		180
Agricultural		-		-		-		-		18,827		18,827		-
Construction		-		-		-		-		10,328		10,328		-
Consumer		45		-		-		45		11,115		11,160		-
Other commercial loans		-		-		445		445		39,375		39,820		-
Other agricultural loans		100		-		-		100		7,147		7,247		-
State and political  subdivision loans		-		-		-		-		57,463		57,463		-
Total	$	1,386	$	201	$	3,124	$	4,711	$	492,421	$	497,132	$	258
Loans considered non-accrual	$	-	$	-	$	2,866	$	2,866	$	5,537	$	8,403
Loans still accruing		1,386		201		258		1,845		486,884		488,729
Total	$	1,386	$	201	$	3,124	$	4,711	$	492,421	$	497,132

	30-59 Days		60-89 Days		90 Days		Total Past				Total Financing		90 Days and
December 31, 2011	Past Due		Past Due		Or Greater		Due		Current		Receivables		Accruing
Real estate loans:
Residential mortgages	$	428	$	91	$	398	$	917	$	101,794	$	102,711	$	60
Home equity		339		-		180		519		80,804		81,323		39
Commercial		319		412		2,794		3,525		162,301		165,826		176
Agricultural		143		-		-		143		19,081		19,224		-
Construction		-		-		-		-		8,481		8,481		-
Consumer		86		7		-		93		10,653		10,746		-
Other commercial loans		9		-		503		512		37,235		37,747		-
Other agricultural loans		-		-		-		-		6,552		6,552		-
State and political subdivision loans		-		-		-		-		54,899		54,899		-
Total	$	1,324	$	510	$	3,875	$	5,709	$	481,800	$	487,509	$	275
Loans considered non-accrual	$	-	$	-	$	3,600	$	3,600	$	5,565	$	9,165
Loans still accruing		1,324		510		275		2,109		476,235		478,344
Total	$	1,324	$	510	$	3,875	$	5,709	$	481,800	$	487,509

Summary of financing receivables on nonaccrual status

The following table reflects the financing receivables on nonaccrual status as of June 30, 2012 and December 31, 2011, respectively. The balances are presented by class of financing receivable (in thousands):

	June 30, 2012		December 31, 2011
Real estate loans:
Residential mortgages	$	501	$	413
Home equity		150		141
Commercial		7,295		8,094
Agricultural		-		-
Construction		-		-
Consumer		-		-
Other commercial loans		457		517
Other agricultural		-		-
State and political subdivision		-		-
	$	8,403	$	9,165

Summary of troubled debt restructurings on financing receivables

Loan modifications that are considered TDR's completed during the three months and six months ended June 30, 2012 and 2011 were as follows (dollars in thousands):

	For the Three Months Ended June 30, 2012
	Number of contracts				Pre-modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Residential mortgage		1		1	$	48	$	71	$	48	$	71
Total		1		1	$	48	$	71	$	48	$	71

	For the Six Months Ended June 30, 2012
	Number of contracts				Pre-modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Residential mortgage		1	1		$	48	$	71	$	48	$	71
Commercial		-		2		-		98		-		98
Total		1		3	$	48	$	169	$	48	$	169

For the Three Months Ended June 30, 2011

Number of contracts

Pre-modification Outstanding Recorded Investment

Post-Modification Outstanding Recorded Investment

Interest Modification

Term Modification

Interest Modification

Term Modification

Interest Modification

Term Modification

Real estate loans:

Commercial

-

-

$

-

$

-

$

-

$

-

Total

-

-

$

-

$

-

$

-

$

-

	For the Six Months Ended June 30, 2011
	Number of contracts				Pre-modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Commercial		5		-	$	5,912	$	-	$	5,912	$	-
Total		5		-	$	5,912	$	-	$	5,912	$	-

Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-accrual loan. Recidivism occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a higher risk of loss than do new origination loans. Loan modifications considered TDR's made during the twelve months ended June 30, 2012, that defaulted during the three and six month periods ended June 30, 2012 were as follows (dollars in thousands):

	Number of contracts		Recorded investment
Real estate loans:
Residential mortgage		1	$	71
Commercial		1		48
Total recidivism		2	$	119

Allowance for loan losses by impairment method

The following table segregates the allowance for loan losses (ALLL) into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of June 30, 2012 and December 31, 2011, respectively (in thousands):

	June 30, 2012						December 31, 2011
	Individually evaluated for impairment		Collectively evaluated for impairment		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
Real estate loans:
Residential	$	29	$	758	$	786	$	13	$	792	$	805
Commercial and agricultural		512		3,893		4,405		433		3,699		4,132
Construction		-		19		19		-		15		15
Consumer		-		108		108		-		111		111
Other commercial and agricultral		21		663		685		48		626		674
State and political subdivision loans		-		246		246		-		235		235
Unallocated		-		401		401		-		515		515
Total	$	562	$	6,088	$	6,650	$	494	$	5,993	$	6,487

Roll forward of allowance for loan losses by portfolio segment

The following tables roll forward the balance of the ALLL by portfolio segment for the three and six month periods ended June 30, 2012 and 2011, respectively (in thousands):

	Balance at March 31, 2012		Charge-offs			Recoveries		Provision			Balance at June 30, 2012
Real estate loans:
Residential	$	753	$	-		$	-	$	33		$	786
Commercial and agricultural		4,336		-			6		63			4,405
Construction		16		-			-		3			19
Consumer		96		(16	)		7		21			108
Other commercial and agricultrual loans		671		-			3		11			685
State and political  subdivision loans		245		-			-		1			246
Unallocated		428		-			-		(27	)		401
Total	$	6,545	$	(16	)	$	16	$	105		$	6,650

	Balance at December 31, 2011		Charge-offs			Recoveries		Provision			Balance at June 30, 2012
Real estate loans:
Residential	$	805	$	(49	)	$	-	$	30		$	786
Commercial and agricultural		4,132		(2	)		6		269			4,405
Construction		15		-			-		4			19
Consumer		111		(24	)		16		5			108
Other commercial and agricultrual loans		674		-			6		5			685
State and political  subdivision loans		235		-			-		11			246
Unallocated		515		-			-		(114	)		401
Total	$	6,487	$	(75	)	$	28	$	210		$	6,650

	Balance at March 31, 2011		Charge-offs			Recoveries		Provision			Balance at June 30, 2011
Real estate loans:
Residential	$	921	$	(41	)	$	-	$	(202	)	$	678
Commercial and agricultural		3,698		(12	)		-		226			3,912
Construction		13		-			-		-			13
Consumer		87		(17	)		12		27			109
Other commercial and agricultrual loans		901		-			3		(192	)		712
State and political  subdivision loans		139		-			-		(20	)		119
Unallocated		309		-			-		311			620
Total	$	6,068	$	(70	)	$	15	$	150		$	6,163

	Balance at December 31, 2010		Charge-offs			Recoveries		Provision			Balance at June 30, 2011
Real estate loans:
Residential	$	969	$	(101	)	$	-	$	(190	)	$	678
Commercial and agricultural		3,380		(29	)		-		561			3,912
Construction		22		-			-		(9	)		13
Consumer		108		(33	)		29		5			109
Other commercial and agricultrual loans		983		-			7		(278	)		712
State and political  subdivision loans		137		-			-		(18	)		119
Unallocated		316		-			-		304			620
Total	$	5,915	$	(163	)	$	36	$	375		$	6,163

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CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
INTEREST INCOME:
Interest and fees on loans	$ 7,439	$ 7,463	$ 14,904	$ 14,858
Interest-bearing deposits with banks	1	20	6	42
Investment securities:
Taxable	1,237	1,176	2,434	2,348
Nontaxable	920	892	1,874	1,757
Dividends	16	14	32	29
TOTAL INTEREST INCOME	9,613	9,565	19,250	19,034
INTEREST EXPENSE:
Deposits	1,555	2,046	3,221	4,134
Borrowed funds	393	443	806	888
TOTAL INTEREST EXPENSE	1,948	2,489	4,027	5,022
NET INTEREST INCOME	7,665	7,076	15,223	14,012
Provision for loan losses	105	150	210	375
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	7,560	6,926	15,013	13,637
NON-INTEREST INCOME:
Service charges	1,129	1,128	2,207	2,073
Trust	151	146	324	303
Brokerage and insurance	75	123	225	218
Gains on loans sold	131	34	185	75
Investment securities gains, net	213	114	321	234
Earnings on bank owned life insurance	126	124	250	245
Other	116	129	261	269
TOTAL NON-INTEREST INCOME	1,941	1,798	3,773	3,417
NON-INTEREST EXPENSES:
Salaries and employee benefits	2,668	2,518	5,421	5,033
Occupancy	314	329	624	719
Furniture and equipment	96	106	202	223
Professional fees	224	172	492	329
FDIC insurance	115	250	238	500
Pennsylvania shares tax	160	146	326	293
Other	1,000	1,189	2,118	2,393
TOTAL NON-INTEREST EXPENSES	4,577	4,710	9,421	9,490
Income before provision for income taxes	4,924	4,014	9,365	7,564
Provision for income taxes	1,171	867	2,163	1,587
NET INCOME	$ 3,753	$ 3,147	$ 7,202	$ 5,977
PER COMMON SHARE DATA:
Net Income - Basic (in dollars per share)	$ 1.30	$ 1.08	$ 2.49	$ 2.05
Net Income - Diluted (in dollars per share)	$ 1.30	$ 1.08	$ 2.49	$ 2.05
Cash Dividends Paid (in dollars per share)	$ 0.300	$ 0.265	$ 0.595	$ 0.525

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Federal Home Loan Bank Stock

6 Months Ended

Jun. 30, 2012

Federal Home Loan Bank Stock [Abstract]

Federal Home Loan Bank Stock

Note 6 - Federal Home Loan Bank Stock

The Bank is a member of the FHLB of Pittsburgh and as such, is required to maintain a minimum investment in stock of the FHLB that varies with the level of advances outstanding with the FHLB. As of June 30, 2012 and December 31, 2011, the Bank holds $4,187,000 and $3,027,000, respectively. The stock is bought from and sold to the FHLB based upon its $100 par value.  The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated for by management.  The stock's value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) The significance of the decline in net assets of the FHLB as compared to the capital stock amount and the length of time this situation has persisted (b) Commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance (c) The impact of legislative and regulatory changes on the customer base of the FHLB and (d) The liquidity position of the FHLB.

The FHLB has incurred a significant cumulative loss in regards to comprehensive income in the three years ended December 31, 2011 and had suspended the payment of dividends; however, due to improved results in 2011 and 2010 over 2009, a dividend was paid in the first and second quarters of 2012.  The cumulative losses were primarily attributable to impairment of investment securities associated with the distressed economic conditions during 2008 and 2009.  Management evaluated the stock and concluded that the stock was not impaired for the periods presented herein.  Management considered that the FHLB's regulatory capital ratios have improved in the most recent quarters, liquidity appears adequate, new shares of FHLB stock continue to exchange hands at the $100 par value and the FHLB has repurchased shares of excess capital stock from its members through the second quarter of 2012 and has reinstituted the dividend in 2012.

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Loans

6 Months Ended

Jun. 30, 2012

Loans [Abstract]

Loans

Note 5 - Loans

The Company grants commercial, industrial, agricultural, residential, and consumer loans primarily to customers throughout North Central Pennsylvania and Southern New York.  Although the Company had a diversified loan portfolio at June 30, 2012 and December 31, 2011, a substantial portion of its debtors' ability to honor their contracts is dependent on the economic conditions within these regions. The following table summarizes the primary segments of the loan portfolio as of June 30, 2012 and December 31, 2011 (in thousands):

June 30, 2012	Total Loans		Individually evaluated for impairment		Collectively evaluated for impairment
Real estate loans:
Residential	$	181,409	$	351	$	181,058
Commercial and agricultural		189,705		7,475		182,230
Construction		10,328		-		10,328
Consumer		11,160		-		11,160
Other commercial and agricultural loans		47,067		457		46,610
State and political subdivision loans		57,463		-		57,463
Total		497,132	$	8,283	$	488,849
Allowance for loan losses		6,650
Net loans	$	490,482

December 31, 2011	Total Loans		Individually evaluated for impairment		Collectively evaluated for impairment
Real estate loans:
Residential	$	184,034	$	94	$	183,940
Commercial and agricultural		185,050		8,270		176,780
Construction		8,481		-		8,481
Consumer		10,746		-		10,746
Other commercial and agricultrual loans		44,299		517		43,782
State and political subdivision loans		54,899		-		54,899
Total		487,509	$	8,881	$	478,628
Allowance for loan losses		6,487
Net loans	$	481,022

The segments of the Bank's loan portfolio are disaggregated into classes to a level that allows management to monitor risk and performance. Residential real estate mortgages consists primarily of 15 to 30 year first mortgages on residential real estate, while residential real estate home equities are consumer purpose installment loans or lines of credit secured by a mortgage which is often a second lien on residential real estate with terms of 15 years or less. Commercial real estate loans are business purpose loans secured by a mortgage on commercial real estate. Agricultural real estate loans are loans secured by a mortgage on real estate used in agriculture production. Construction real estate loans are loans secured by residential or commercial real estate used during the construction phase of residential and commercial projects. Consumer loans are typically unsecured or primarily secured by something other than real estate and overdraft lines of credit connected with customer deposit accounts. Other commerical loans are loans for commercial purposes primarily secured by non-real estate collateral. Other agricultural loans are loans for agricultural purposes primarily secured by non-real estate collateral. State and political subdivisions are loans for state and local municipalities for capital and operating expenses or tax free loans used to finance commercial development.

Management considers commercial loans, other agricultural loans, commercial real estate loans and agricultural real estate loans which are 90 days or more past due to be impaired. Management will also consider a loan impaired based on other factors it becomes aware of, including the customer's results of operations and cash flows. These loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance.

The following table includes the recorded investment and unpaid principal balances for impaired financing receivables by class, with the associated allowance amount, if applicable (in thousands):

			Recorded		Recorded
	Unpaid		Investment		Investment		Total				Average		Interest
	Principal		With No		With		Recorded		Related		Recorded		Income
June 30, 2012	Balance		Allowance		Allowance		Investment		Allowance		Investment		Recognized
Real estate loans:
Residential mortgages	$	258	$	118	$	140	$	258	$	14	$	83	$	1
Home equity		93		18		75		93		15		93		2
Commercial		8,816		5,366		2,109		7,475		512		8,138		39
Agricultural		-		-		-		-		-		-		-
Construction		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-
Other commercial loans		504		28		429		457		21		468		-
Other agricultural Loans		-		-		-		-		-		-		-
State and political subdivision loans		-		-		-		-		-		-		-
Total	$	9,671	$	5,530	$	2,753	$	8,283	$	562	$	8,782	$	42

			Recorded		Recorded
	Unpaid		Investment		Investment		Total				Average		Interest
	Principal		With No		With		Recorded		Related		Recorded		Income
December 31, 2011	Balance		Allowance		Allowance		Investment		Allowance		Investment		Recognized
Real estate loans:
Residential mortgages	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Home equity		94		36		58		94		13		36		1
Commercial		9,394		5,663		2,607		8,270		433		8,585		65
Agricultural		-		-		-		-		-		371		37
Construction		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-
Other commercial loans		574		30		487		517		48		501		-
Other agricultural Loans		-		-		-		-		-		160		20
State and political subdivision loans		-		-		-		-		-		-		-
Total	$	10,062	$	5,729	$	3,152	$	8,881	$	494	$	9,653	$	123

Credit Quality Information

For commercial real estate, agricultural real estate, construction, commercial and other, other agricultural and state and political subdivision loans, management uses a nine point internal risk rating system to monitor the credit quality. The first five categories are considered not criticized and are aggregated as "Pass" rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The definitions of each rating are defined below:

· Pass (Grades 1-5) - These loans are to customers with credit quality ranging from an acceptable to very high quality and are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.

· Special Mention (Grade 6) - This loan grade is in accordance with regulatory guidance and includes loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

· Substandard (Grade 7) - This loan grade is in accordance with regulatory guidance and includes loans that have a well-defined weakness based on objective evidence and be characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

· Doubtful (Grade 8) - This loan grade is in accordance with regulatory guidance and includes loans that have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

· Loss (Grade 9) - This loan grade is in accordance with regulatory guidance and includes loans that are considered uncollectible, or of such value that continuance as an asset is not warranted.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay loan as agreed, the Bank's loan rating process includes several layers of internal and external oversight. The Company's loan officers are responsible for the timely and accurate risk rating of the loans in each of their portfolios at origination and on an ongoing basis under the supervision of management.  All commercial and agricultural loans are reviewed annually to ensure the appropriateness of the loan grade. In addition, the Bank engages an external consultant on at least an annual basis. The external consultant is engaged to 1) review a minimum of 60% of the dollar volume of the commercial loan portfolio on an annual basis, 2) review new loans originated in the last year, 3) review all relationships in aggregate over $500,000, 4) review all aggregate loan relationships over $100,000 which are over 90 days past due, classified Special Mention, Substandard, Doubtful, or Loss, and 5) such other loans which management or the consultant deems appropriate.

The following tables represent credit exposures by internally assigned grades as of June 30, 2012 and December 31, 2011 (in thousands):

June 30, 2012	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	141,568	$	10,496	$	18,739	$	75	$	-	$	170,878
Agricultural		16,219		623		1,985		-		-		18,827
Construction		10,328		-		-		-		-		10,328
Other commercial loans		36,982		1,806		1,016		16		-		39,820
Other agricultural loans		5,849		425		973		-		-		7,247
State and political subdivision loans		56,335		-		1,128		-		-		57,463
Total	$	267,281	$	13,350	$	23,841	$	91	$	-	$	304,563

December 31, 2011	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	138,409	$	10,372	$	17,045	$	-	$	-	$	165,826
Agricultural		14,628		2,412		2,184		-		-		19,224
Construction		8,481		-		-		-		-		8,481
Other commercial loans		34,606		2,203		921		17		-		37,747
Other agricultural loans		4,509		809		1,234		-		-		6,552
State and political  subdivision loans		53,733		-		1,166		-		-		54,899
Total	$	254,366	$	15,796	$	22,550	$	17	$	-	$	292,729

For residential real estate mortgages, home equities and consumer loans, credit quality is monitored based on whether the loan is performing or non-performing, which is typically based on the aging status of the loan and payment activity, unless a specific action, such as bankruptcy, repossession, death or significant delay in payment occurs to raise awareness of a possible credit event. Non-performing loans include those loans that are considered nonaccrual, described in more detail below and all loans past due 90 or more days. The following table presents the recorded investment in those loan classes based on payment activity as of June 30, 2012 and December 31, 2011 (in thousands):

June 30, 2012	Performing		Non-performing		Total
Real estate loans:
Residential mortgages	$	104,600	$	558	$	105,158
Home equity		76,080		171		76,251
Consumer		11,160		-		11,160
Total	$	191,840	$	729	$	192,569

December 31, 2011	Performing		Non-performing		Total
Real estate loans:
Residential mortgages	$	102,238	$	473	$	102,711
Home equity		81,143		180		81,323
Consumer		10,746		-		10,746
Total	$	194,127	$	653	$	194,780

Age Analysis of Past Due Financing Receivables

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table includes an aging analysis of the recorded investment of past due financing receivables as of June 30, 2012 and December 31, 2011 (in thousands):

	30-59 Days		60-89 Days		90 Days		Total Past				Total Financing		90 Days and
June 30, 2012	Past Due		Past Due		Or Greater		Due		Current		Receivables		Accruing
Real estate loans:
Residential mortgages	$	164	$	9	$	455	$	628	$	104,530	$	105,158	$	57
Home equity		360		88		161		609		75,642		76,251		21
Commercial		717		104		2,063		2,884		167,994		170,878		180
Agricultural		-		-		-		-		18,827		18,827		-
Construction		-		-		-		-		10,328		10,328		-
Consumer		45		-		-		45		11,115		11,160		-
Other commercial loans		-		-		445		445		39,375		39,820		-
Other agricultural loans		100		-		-		100		7,147		7,247		-
State and political  subdivision loans		-		-		-		-		57,463		57,463		-
Total	$	1,386	$	201	$	3,124	$	4,711	$	492,421	$	497,132	$	258
Loans considered non-accrual	$	-	$	-	$	2,866	$	2,866	$	5,537	$	8,403
Loans still accruing		1,386		201		258		1,845		486,884		488,729
Total	$	1,386	$	201	$	3,124	$	4,711	$	492,421	$	497,132

	30-59 Days		60-89 Days		90 Days		Total Past				Total Financing		90 Days and
December 31, 2011	Past Due		Past Due		Or Greater		Due		Current		Receivables		Accruing
Real estate loans:
Residential mortgages	$	428	$	91	$	398	$	917	$	101,794	$	102,711	$	60
Home equity		339		-		180		519		80,804		81,323		39
Commercial		319		412		2,794		3,525		162,301		165,826		176
Agricultural		143		-		-		143		19,081		19,224		-
Construction		-		-		-		-		8,481		8,481		-
Consumer		86		7		-		93		10,653		10,746		-
Other commercial loans		9		-		503		512		37,235		37,747		-
Other agricultural loans		-		-		-		-		6,552		6,552		-
State and political subdivision loans		-		-		-		-		54,899		54,899		-
Total	$	1,324	$	510	$	3,875	$	5,709	$	481,800	$	487,509	$	275
Loans considered non-accrual	$	-	$	-	$	3,600	$	3,600	$	5,565	$	9,165
Loans still accruing		1,324		510		275		2,109		476,235		478,344
Total	$	1,324	$	510	$	3,875	$	5,709	$	481,800	$	487,509

Nonaccrual Loans

Loans are considered for non-accrual status upon reaching 90 days delinquency, although the Company may be receiving partial payments of interest and partial repayments of principal on such loans or if full payment of principal and interest is not expected. Additionally, if management is made aware of other information including bankruptcy, repossession, death, or legal proceedings, the loan may be placed on non-accrual status. If a loan is 90 days or more past due and is well secured and in the process of collection, it may still be considered accruing.

The following table reflects the financing receivables on nonaccrual status as of June 30, 2012 and December 31, 2011, respectively. The balances are presented by class of financing receivable (in thousands):

	June 30, 2012		December 31, 2011
Real estate loans:
Residential mortgages	$	501	$	413
Home equity		150		141
Commercial		7,295		8,094
Agricultural		-		-
Construction		-		-
Consumer		-		-
Other commercial loans		457		517
Other agricultural		-		-
State and political subdivision		-		-
	$	8,403	$	9,165

Troubled Debt Restructurings

In situations where, for economic or legal reasons related to a borrower's financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a Troubled Debt Restructuring (TDR). Management strives to identify borrowers in financial difficulty early and work with them to modify more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring by calculating the present value of the revised loan terms and comparing this balance to the Company's investment in the loan prior to the restructuring. As these loans are individually evaluated, they are excluded from pooled portfolios when calculating the allowance for loan and lease losses and a separate allocation within the allowance for loan and lease losses is provided. Management continually evaluates loans that are considered TDR's, including payment history under the modified loan terms, the borrower's ability to continue to repay the loan based on continued evaluation of their operating results and cash flows from operations.  Based on this evaluation management would no longer consider a loan to be a TDR when the relevant facts support such a conclusion.

Loan modifications that are considered TDR's completed during the three months and six months ended June 30, 2012 and 2011 were as follows (dollars in thousands):

	For the Three Months Ended June 30, 2012
	Number of contracts				Pre-modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Residential mortgage		1		1	$	48	$	71	$	48	$	71
Total		1		1	$	48	$	71	$	48	$	71

	For the Six Months Ended June 30, 2012
	Number of contracts				Pre-modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Residential mortgage		1	1		$	48	$	71	$	48	$	71
Commercial		-		2		-		98		-		98
Total		1		3	$	48	$	169	$	48	$	169

For the Three Months Ended June 30, 2011

Number of contracts

Pre-modification Outstanding Recorded Investment

Post-Modification Outstanding Recorded Investment

Interest Modification

Term Modification

Interest Modification

Term Modification

Interest Modification

Term Modification

Real estate loans:

Commercial

-

-

$

-

$

-

$

-

$

-

Total

-

-

$

-

$

-

$

-

$

-

	For the Six Months Ended June 30, 2011
	Number of contracts				Pre-modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Commercial		5		-	$	5,912	$	-	$	5,912	$	-
Total		5		-	$	5,912	$	-	$	5,912	$	-

Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-accrual loan. Recidivism occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a higher risk of loss than do new origination loans. Loan modifications considered TDR's made during the twelve months ended June 30, 2012, that defaulted during the three and six month periods ended June 30, 2012 were as follows (dollars in thousands):

	Number of contracts		Recorded investment
Real estate loans:
Residential mortgage		1	$	71
Commercial		1		48
Total recidivism		2	$	119

Allowance for Loan Losses

The following table segregates the allowance for loan losses (ALLL) into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of June 30, 2012 and December 31, 2011, respectively (in thousands):

	June 30, 2012						December 31, 2011
	Individually evaluated for impairment		Collectively evaluated for impairment		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
Real estate loans:
Residential	$	29	$	758	$	786	$	13	$	792	$	805
Commercial and agricultural		512		3,893		4,405		433		3,699		4,132
Construction		-		19		19		-		15		15
Consumer		-		108		108		-		111		111
Other commercial and agricultral		21		663		685		48		626		674
State and political subdivision loans		-		246		246		-		235		235
Unallocated		-		401		401		-		515		515
Total	$	562	$	6,088	$	6,650	$	494	$	5,993	$	6,487

The following tables roll forward the balance of the ALLL by portfolio segment for the three and six month periods ended June 30, 2012 and 2011, respectively (in thousands):

	Balance at March 31, 2012		Charge-offs			Recoveries		Provision			Balance at June 30, 2012
Real estate loans:
Residential	$	753	$	-		$	-	$	33		$	786
Commercial and agricultural		4,336		-			6		63			4,405
Construction		16		-			-		3			19
Consumer		96		(16	)		7		21			108
Other commercial and agricultrual loans		671		-			3		11			685
State and political  subdivision loans		245		-			-		1			246
Unallocated		428		-			-		(27	)		401
Total	$	6,545	$	(16	)	$	16	$	105		$	6,650

	Balance at December 31, 2011		Charge-offs			Recoveries		Provision			Balance at June 30, 2012
Real estate loans:
Residential	$	805	$	(49	)	$	-	$	30		$	786
Commercial and agricultural		4,132		(2	)		6		269			4,405
Construction		15		-			-		4			19
Consumer		111		(24	)		16		5			108
Other commercial and agricultrual loans		674		-			6		5			685
State and political  subdivision loans		235		-			-		11			246
Unallocated		515		-			-		(114	)		401
Total	$	6,487	$	(75	)	$	28	$	210		$	6,650

	Balance at March 31, 2011		Charge-offs			Recoveries		Provision			Balance at June 30, 2011
Real estate loans:
Residential	$	921	$	(41	)	$	-	$	(202	)	$	678
Commercial and agricultural		3,698		(12	)		-		226			3,912
Construction		13		-			-		-			13
Consumer		87		(17	)		12		27			109
Other commercial and agricultrual loans		901		-			3		(192	)		712
State and political  subdivision loans		139		-			-		(20	)		119
Unallocated		309		-			-		311			620
Total	$	6,068	$	(70	)	$	15	$	150		$	6,163

	Balance at December 31, 2010		Charge-offs			Recoveries		Provision			Balance at June 30, 2011
Real estate loans:
Residential	$	969	$	(101	)	$	-	$	(190	)	$	678
Commercial and agricultural		3,380		(29	)		-		561			3,912
Construction		22		-			-		(9	)		13
Consumer		108		(33	)		29		5			109
Other commercial and agricultrual loans		983		-			7		(278	)		712
State and political  subdivision loans		137		-			-		(18	)		119
Unallocated		316		-			-		304			620
Total	$	5,915	$	(163	)	$	36	$	375		$	6,163

The Company allocates the ALLL based on the factors described below, which conform to the Company's loan classification policy and credit quality measurements. In reviewing risk within the Bank's loan portfolio, management has determined there to be several different risk categories within the loan portfolio. The ALLL consists of amounts applicable to: (i) residential real estate loans; (ii) residential real estate home equity loans; (iii) commercial real estate loans; (iv) agricultural real estate loans; (v) real estate construction loans; (vi) commercial and other loans; (vii) consumer loans; (viii) other agricultural loans and (ix) state and political subdivision loans. Factors considered in this process include general loan terms, collateral, and availability of historical data to support the analysis. Historical loss percentages are calculated and used as the basis for calculating allowance allocations. Certain qualitative factors are evaluated to determine additional inherent risks in the loan portfolio, which are not necessarily reflected in the historical loss percentages. These factors are then added to the historical allocation percentage to get the adjusted factor to be applied to non classified loans. The following qualitative factors are analyzed:

· Level of and trends in delinquencies, impaired/classified loans

§ Change in volume and severity of past due loans

§ Volume of non-accrual loans

§ Volume and severity of classified, adversely or graded loans;

· Level of and trends in charge-offs and recoveries;

· Trends in volume, terms and nature of the loan portfolio;

· Effects of any changes in risk selection and underwriting standards and any other changes in lending and recovery policies, procedures and practices;

· Changes in the quality of the Bank's loan review system;

· Experience, ability and depth of lending management and other relevant staff;

· National, state, regional and local economic trends and business conditions

§ General economic conditions

§ Unemployment rates

§ Inflation / CPI

§ Changes in values of underlying collateral for collateral-dependent loans;

· Industry conditions including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses; and

· Existence and effect of any credit concentrations, and changes in the level of such concentrations.

The Company also maintains an unallocated allowance to account for any factors or conditions that may cause a potential loss but are not specifically addressed in the process described above. The Company analyzes its loan portfolio each quarter to determine the appropriateness of its allowance for loan losses.

Loans determined to be TDR's are impaired and for purposes of estimating the ALLL must be individually evaluated for impairment. In calculating the impairment, the Company calculates the present value utilizing an analysis of discounted cash flows. If the present value calculated is below the recorded investment of the loan, an impairment is recognized by a charge to the provision for loan and lease losses and a credit to the ALLL.

We continually review the model utilized in calculating the required allowance. During the second quarter of 2011, management made a determination that special mention and substandard loans should have additional qualitative adjustments applied to them in comparison to pass graded loans. The following factors experienced changes during the first six months of 2012:

· The qualitative factor for changes in values of underlying collateral was decreased for residential and commercial real estate loans due to the fact that the impact from the serious flooding experienced in our primary market in the third quarter of 2011 was not as severe as originally expected.

· The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were increased for commercial real estate due to the increase in the Company's internal watch list for commercial real estate loans since December 31, 2011.

· The qualitative factors for changes in industry conditions were increased for agricultural real estate and other agricultural loans due to decreases in milk prices from December 31, 2011 to June 30, 2012.

During the second quarter of 2012, there were no significant changes in any qualitative factor. As a result, the change in the allocation of the allowance from March 31, 2012, is mainly attributable to the changes in the loan portfolio balances since that date.

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Loans (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011
Segments of loan portfolio and allowance for loan losses [Abstract]
Total Loans	$ 497,132		$ 497,132		$ 487,509
Loans, allowance for loan losses	6,650		6,650		6,487
Net loans	490,482		490,482		481,022
Individually evaluated for impairment	8,283		8,283		8,881
Collectively evaluated for impairment	488,849		488,849		478,628
Summary of allowance for loan losses into amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment [Abstract]
Individually evaluated for impairment	562		562		494
Collectively evaluated for impairment	6,088		6,088		5,993
Total	6,650	6,163	6,650	6,163
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Balance	6,545	6,068	6,487	5,915
Charge-offs	(16)	(70)	(75)	(163)
Recoveries	16	15	28	36
Provision	105	150	210	375
Balance	6,650	6,163	6,650	6,163
Minimum [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Period of past due after which loans to be impaired, minimum			90 days
Residential [Member] | First Mortgage [Member] | Minimum [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Period of mortgage on real estate			15 years
Residential [Member] | First Mortgage [Member] | Maximum [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Period of mortgage on real estate			30 years
Home equity [Member] | Second Mortgage [Member] | Maximum [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Period of mortgage on real estate			15 years
Real estate loans [Member] | Residential [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Total Loans	181,409		181,409		184,034
Individually evaluated for impairment	351		351		94
Collectively evaluated for impairment	181,058		181,058		183,940
Summary of allowance for loan losses into amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment [Abstract]
Individually evaluated for impairment	29		29		13
Collectively evaluated for impairment	758		758		792
Total	786	678	786	678
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Balance	753	921	805	969
Charge-offs	0	(41)	(49)	(101)
Recoveries	0	0	0	0
Provision	33	(202)	30	(190)
Balance	786	678	786	678
Real estate loans [Member] | Commercial and agricultural [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Total Loans	189,705		189,705		185,050
Individually evaluated for impairment	7,475		7,475		8,270
Collectively evaluated for impairment	182,230		182,230		176,780
Summary of allowance for loan losses into amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment [Abstract]
Individually evaluated for impairment	512		512		433
Collectively evaluated for impairment	3,893		3,893		3,699
Total	4,405	3,912	4,405	3,912
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Balance	4,336	3,698	4,132	3,380
Charge-offs	0	(12)	(2)	(29)
Recoveries	6	0	6	0
Provision	63	226	269	561
Balance	4,405	3,912	4,405	3,912
Real estate loans [Member] | Residential mortgages [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Total Loans	105,158		105,158		102,711
Real estate loans [Member] | Home equity [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Total Loans	76,251		76,251		81,323
Real estate loans [Member] | Commercial [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Total Loans	170,878		170,878		165,826
Real estate loans [Member] | Agricultural [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Total Loans	18,827		18,827		19,224
Real estate loans [Member] | Construction [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Total Loans	10,328		10,328		8,481
Individually evaluated for impairment	0		0		0
Collectively evaluated for impairment	10,328		10,328		8,481
Summary of allowance for loan losses into amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment [Abstract]
Individually evaluated for impairment	0		0		0
Collectively evaluated for impairment	19		19		15
Total	19	13	19	13
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Balance	16	13	15	22
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Provision	3	0	4	(9)
Balance	19	13	19	13
Other commercial and agricultural loans [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Total Loans	47,067		47,067		44,299
Individually evaluated for impairment	457		457		517
Collectively evaluated for impairment	46,610		46,610		43,782
Summary of allowance for loan losses into amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment [Abstract]
Individually evaluated for impairment	21		21		48
Collectively evaluated for impairment	663		663		626
Total	685	712	685	712
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Balance	671	901	674	983
Charge-offs	0	0	0	0
Recoveries	3	3	6	7
Provision	11	(192)	5	(278)
Balance	685	712	685	712
Consumer [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Total Loans	11,160		11,160		10,746
Individually evaluated for impairment	0		0		0
Collectively evaluated for impairment	11,160		11,160		10,746
Summary of allowance for loan losses into amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment [Abstract]
Individually evaluated for impairment	0		0		0
Collectively evaluated for impairment	108		108		111
Total	108	109	108	109
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Balance	96	87	111	108
Charge-offs	(16)	(17)	(24)	(33)
Recoveries	7	12	16	29
Provision	21	27	5	5
Balance	108	109	108	109
Other commercial [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Total Loans	39,820		39,820		37,747
State and political subdivision loans [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Total Loans	57,463		57,463		54,899
Individually evaluated for impairment	0		0		0
Collectively evaluated for impairment	57,463		57,463		54,899
Summary of allowance for loan losses into amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment [Abstract]
Individually evaluated for impairment	0		0		0
Collectively evaluated for impairment	246		246		235
Total	246	119	246	119
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Balance	245	139	235	137
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Provision	1	(20)	11	(18)
Balance	246	119	246	119
Other agricultural loans [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Total Loans	7,247		7,247		6,552
Unallocated [Member]
Summary of allowance for loan losses into amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment [Abstract]
Individually evaluated for impairment	0		0		0
Collectively evaluated for impairment	401		401		515
Total	401	620	401	620
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Balance	428	309	515	316
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Provision	(27)	311	(114)	304
Balance	$ 401	$ 620	$ 401	$ 620

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Employee Benefit Plans (Tables)

6 Months Ended

Jun. 30, 2012

Employee Benefit Plans

Components of net periodic benefit costs

The following sets forth the components of net periodic benefit costs of the Pension Plan for the three and six months ended June 30, 2012 and 2011, respectively (in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Service cost	$	54		$	71		$	167		$	185
Interest cost		35			87			174			226
Expected return on plan assets		(80	)		(130	)		(286	)		(336	)
Net amortization and deferral		52			10			68			26
Net periodic benefit cost	$	61		$	38		$	123		$	101

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Recent Accounting Pronouncements

6 Months Ended

Jun. 30, 2012

Recent Accounting Pronouncements [Abstract]

Recent Accounting Pronouncements

Note 9 - Recent Accounting Pronouncements

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820):  Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.  The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs.  Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements.  The amendments in this Update are to be applied prospectively.  For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011.  For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2011.  Early application by public entities is not permitted. The Company has provided the necessary disclosures in Note 8.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220):  Presentation of Comprehensive Income.  The amendments in this Update improve the comparability, clarity, consistency, and transparency of financial reporting and increase the prominence of items reported in other comprehensive income.  To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. GAAP and IFRS, the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity was eliminated.  The amendments require that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income.  All entities that report items of comprehensive income, in any period presented, will be affected by the changes in this Update.  For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter.  The amendments in this Update should be applied retrospectively, and early adoption is permitted. The Company has provided the necessary disclosure in the Consolidated Statement of Comprehensive Income.

In September 2011, the FASB issued ASU 2011-08, Intangibles - Goodwill and Other Topics (Topic 350), Testing Goodwill for Impairment.  The objective of this update is to simplify how entities, both public and nonpublic, test goodwill for impairment.  The amendments in the Update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350.  The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent.  Under the amendments in this Update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount.  The amendments in this Update apply to all entities, both public and nonpublic, that have goodwill reported in their financial statements and are effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity's financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.  This ASU did not have a significant impact on the Company's financial statements.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210):  Disclosures about Offsetting Assets and Liabilities.  The amendments in this Update affect all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement.  The requirements amend the disclosure requirements on offsetting in Section 210-20-50.  This information will enable users of an entity's financial statements to evaluate the effect or potential effect of netting arrangements on an entity's financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this Update.  An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods.  An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented.  The Company is currently evaluating the impact the adoption of the standard will have on the Company's financial position or results of operations.

In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220):  Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.  In order to defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in this Update supersede certain pending paragraphs in Update 2011-05.  Entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before Update 2011-05.  All other requirements in Update 2011-05 are not affected by this Update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. Nonpublic entities should begin applying these requirements for fiscal years ending after December 15, 2012, and interim and annual periods thereafter.  The Company has provided the necessary disclosure in the Consolidated Statement of Comprehensive Income. 

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Employee Benefit Plans

6 Months Ended

Jun. 30, 2012

Employee Benefit Plans

Employee Benefit Plans

Note 7 - Employee Benefit Plans

For additional detailed disclosure on the Company's pension and employee benefits plans, please refer to Note 11 of the Company's Consolidated Financial Statements included in the 2011 Annual Report on Form 10-K.

Noncontributory Defined Benefit Pension Plan

The Bank sponsors a noncontributory defined benefit pension plan ("Pension Plan") covering substantially all employees and officers.  The Bank's funding policy is to make annual contributions, if needed, based upon the funding formula developed by the plan's actuary.

Any employee with a hire date of January 1, 2007 or later is not eligible to participate in the Pension Plan. In lieu of the Pension Plan, employees with a hire date of January 1, 2007 or later are eligible to receive, after meeting certain length of service requirements, an annual discretionary 401(k) plan contribution from the Bank equal to a percentage of an employee's base compensation.  The contribution amount, if any, is placed in a separate account within the 401(k) plan and is subject to a vesting requirement.

For employees who are eligible to participate in the Pension Plan, the Pension Plan requires benefits to be paid to eligible employees based primarily upon age and compensation rates during employment.  Upon retirement or other termination of employment, employees can elect either an annuity benefit or a lump sum distribution of vested benefits in the Pension Plan.

The following sets forth the components of net periodic benefit costs of the Pension Plan for the three and six months ended June 30, 2012 and 2011, respectively (in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Service cost	$	54		$	71		$	167		$	185
Interest cost		35			87			174			226
Expected return on plan assets		(80	)		(130	)		(286	)		(336	)
Net amortization and deferral		52			10			68			26
Net periodic benefit cost	$	61		$	38		$	123		$	101

The Company expects to contributed $750,000 to the Pension Plan in 2012.

Defined Contribution Plan

The Company sponsors a voluntary 401(k) savings plan which eligible employees can elect to contribute up to the maximum amount allowable not to exceed the limits of IRS Code Sections 401(k).  Under the plan, the Company also makes required contributions on behalf of the eligible employees.  The Company's contributions vest immediately.  Contributions by the Company totaled $132,000 and $124,000 for the six months ended June 30, 2012 and 2011, respectively. For the three months ended June 30, 2012 and 2011, contributions by the Company totaled $80,000 and $74,000, repectively

Directors' Deferred Compensation Plan

The Company's directors may elect to defer all or portions of their fees until their retirement or termination from service.  Amounts deferred under the plan earn interest based upon the highest current rate offered to certificate of deposit customers.  Amounts deferred under the plan are not guaranteed and represent a general liability of the Company.  At June 30, 2012 and December 31, 2011, an obligation of $996,000 and $1,030,000, respectively, was included in other liabilities for the plan in the consolidated balance sheet. Amounts included in interest expense on the deferred amounts totaled $8,000 and $12,000 for the six months ended June 30, 2012 and 2011, respectively.

Restricted Stock Plan

The Company maintains a Restricted Stock Plan (the "Plan") whereby employees and non-employee corporate directors are eligible to receive awards of restricted stock based upon performance related requirements.  Awards granted under the Plan are in the form of the Company's common stock and are subject to certain vesting requirements including continuous employment or service with the Company.  A total of 100,000 shares of the Company's common stock have been authorized under the Plan.  The Plan assists the Company in attracting, retaining and motivating employees to make substantial contributions to the success of the Company and to increase the emphasis on the use of equity as a key component of compensation.

For the six months ended June 30, 2012 and 2011, 3,808 and 3,968 shares of restricted stock were awarded and 5,222 and 5,502 shares vested, respectively.  Compensation cost related to restricted stock is recognized based on the market price of the stock at the grant date over the vesting period. Compensation expense related to restricted stock was $66,000 and $73,000 for the six months ended June 30, 2012 and 2011, respectively. For the three months ended June 30, 2012 and 2011, compensation expense totaled $33,000 and $36,000, respectively.

Supplemental Executive Retirement Plan

The Company maintains a non-qualified supplemental executive retirement plan ("SERP") for certain executives to compensate those executive participants in the Company's noncontributory defined benefit pension plan whose benefits are limited by compensation limitations under current tax law. At June 30, 2012 and December 31, 2011, an obligation of $855,000 and $778,000, respectively, was included in other liabilities for this plan in the consolidated balance sheet.  Expenses related to this plan totaled $47,000 and $31,000 for the six months ended June 30, 2012 and 2011, respectively. For the three months ended June 30, 2012 and 2011, expenses totaled $24,000 and $16,000, respectively.

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Fair Value Measurements

6 Months Ended

Jun. 30, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

Note 8 - Fair Value Measurements

The Company established a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by this hierarchy are as follows:

Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

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

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company's creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company's valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company's monthly and/or quarterly valuation process

Financial Instruments Recorded at Fair Value on a Recurring Basis

The fair values of securities available for sale are determined by quoted prices in active markets, when available, and classified as Level I. If quoted market prices are not available, the fair value is determined by a matrix pricing, which is a mathematical technique, widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities and classified as Level II. The fair values 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. In cases where significant credit valuation adjustments are incorporated into the estimation of fair value, reported amounts are classified as Level III inputs.

Currently, we use an interest rate swap, which is a derivative, to manage our interest rate risk related to the trust preferred security. The valuation of this instrument is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative and classified as Level II. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including LIBOR rate curves. We also obtain dealer quotations for these derivatives for comparative purposes to assess the reasonableness of the model valuations.

The following tables present the assets and liabilities reported on the consolidated balance sheet at their fair value on a recurring basis as of June 30, 2012 and December 31, 2011 by level within the fair value hierarchy (in thousands). Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	June 30, 2012
	Level I		Level II			Level III		Total
Fair value measurements on a recurring basis:
Assets
Securities available for sale:
U.S. Agency securities	$	-	$	146,364		$	-	$	146,364
Obligations of state and political subdivisions		-		98,147			-		98,147
Corporate obligations		-		11,046			-		11,046
Mortgage-backed securities in government sponsored entities		-		66,194			-		66,194
Equity securities in financial institutions		1,380		-			-		1,380
Liabilities
Trust Preferred Interest Rate Swap		-		(283	)		-		(283	)

	December 31, 2011
	Level I		Level II			Level III		Total
Fair value measurements on a recurring basis:
Assets
Securities available for sale:
U.S. Agency securities	$	-	$	168,600		$	-	$	168,600
Obligations of state and political subdivisions		-		101,547			-		101,547
Corporate obligations		-		8,460			-		8,460
Mortgage-backed securities in government sponsored entities		-		38,974			-		38,974
Equity securities in financial institutions		1,242		-			-		1,242
Liabilities
Trust Preferred Interest Rate Swap		-		(348	)		-		(348	)

Financial Instruments Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period.

Impaired Loans- Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. The fair value of impaired loans is estimated using one of several methods, including collateral value, liquidation value and discounted cash flows. For those loans valued utilizing collateral value or liquidation value consideration is given to the time since an appraisal was performed, selling costs including legal fees and the length of time it will take to sell the collateral. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Collateral values are estimated using Level II inputs based on observable market data or Level III inputs based on customized discounting criteria. For a majority of impaired real estate related loans, the Company obtains a current external appraisal. Other valuation techniques are used as well, including internal valuations, comparable property analysis and contractual sales information.

Non-Financial Assets and Non-Financial Liabilities Recorded at Fair Value

The Corporation has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Certain non-financial assets measured at fair value on a non-recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. Non-financial assets measured at fair value on a non-recurring basis during 2012 and 2011 include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for possible loan losses and certain foreclosed assets which, subsequent to their initial recognition, were remeasured at fair value through a write-down included in other non-interest expense. The fair value of a foreclosed asset is estimated using Level III inputs based on customized discounting criteria. The criteria utilized includes an external appraisal, length of time since the appraisal was obtained, selling costs including legal fees and the length of time it will take to sell the collateral.

Assets measured at fair value on a nonrecurring basis as of June 30, 2012 and December 31, 2011 are included in the table below (in thousands):

	June 30, 2012
	Level 1		Level II		Level III		Total
Impaired Loans	$	-	$	-	$	7,721	$	7,721
Other real estate owned		-		-		742		742

	December 31, 2011
	Level 1		Level II		Level III		Total
Impaired Loans	$	-	$	-	$	8,387	$	8,387
Other real estate owned		-		-		860		860

The following table provides a listing of the significant unobservable inputs used in the fair value measurement process for items valued utilizing level III techniques.

Quantitative Information about Level 3 Fair Value Measurements
	Fair Value at June 30, 2012		Valuation Technique(s)	Unobservable input	Range
Impaired Loans	$	5,295	Discounted Cash Flows	Probability of Default		0	%
				Change in interest rates		0-7	%
		2,426	Appraised Collateral Values	Discount for time since appraisal		0-20	%
				Selling costs		0%-10	%
				Holding period	0 - 18 months
Other real estate owned		742	Appraised Collateral Values	Discount for time since appraisal		0-20	%
				Selling costs		6%-10	%
				Holding period	0 - 18 months

The fair values of the Company's financial instruments are as follows (in thousands):

	Carrying
June 30, 2012	Amount		Fair Value		Level I		Level II		Level III		Total
Financial assets:
Cash and due from banks	$	17,768	$	17,768	$	17,768	$	-	$	-	$	17,768
Available-for-sale securities		323,131		323,131		1,380		321,751		-		323,131
Net loans		490,482		539,268		-		-		539,268		539,268
Bank owned life insurance		13,919		13,919		13,919		-		-		13,919
Regulatory stock		4,461		4,461		4,461		-		-		4,461
Accrued interest receivable		3,800		3,800		3,800		-		-		3,800
Financial liabilities:
Deposits	$	738,767	$	744,787	$	446,307	$	-	$	298,480	$	744,787
Borrowed funds		47,066		44,909		-		44,909		-		44,909
Trust preferred interest rate swap		283		283		-		283		-		283
Accrued interest payable		1,222		1,222		1,222		-		-		1,222

	Carrying
December 31, 2011	Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	30,432	$	30,432
Available-for-sale securities		318,823		318,823
Net loans		481,022		527,724
Bank owned life insurance		13,669		13,669
Regulatory stock		3,301		3,301
Accrued interest receivable		3,621		3,621
Financial liabilities:
Deposits	$	733,993	$	740,839
Borrowed funds		53,882		51,437
Trust preferred interest rate swap		348		348
Accrued interest payable		1,512		1,512

Fair value is determined, based on relevant market information and information about the financial instrument.  These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument.  Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the estimates.

Fair values have been determined by the Company using historical data, as generally provided in the Company's regulatory reports, and an estimation methodology suitable for each category of financial instruments. The Company's fair value estimates, methods and assumptions are set forth below for the Company's other financial instruments.

Cash and Cash Equivalents:

The carrying amounts for cash and due from banks approximate fair value because they have original maturities of 90 days or less and do not present unanticipated credit concerns.

Accrued Interest Receivable and Payable:

The carrying amounts for accrued interest receivable and payable approximate fair value because they are generally received or paid in 90 days or less and do not present unanticipated credit concerns.

Available-For-Sale Securities:

The fair values of available-for-sale securities are based on quoted market prices as of the balance sheet date.  For certain instruments, fair value is estimated by obtaining quotes from independent dealers.

Loans:

Fair values are estimated for portfolios of loans with similar financial characteristics.  The fair value of performing loans has been estimated by discounting expected future cash flows. The discount rate used in these calculations is derived from the Treasury yield curve adjusted for credit quality, operating expense and prepayment option price, and is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Company's historical experience with repayments for each loan classification, modified as required by an estimate of the effect of current economic and lending conditions.

Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information.

Bank Owned Life Insurance:

The carrying value of bank owned life insurance approximates fair value based on applicable redemption provisions.

Regulatory Stock:

The carrying value of regulatory stock approximates fair value based on applicable redemption provisions.

Deposits:

The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings and NOW accounts, and money market accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

The deposits' fair value estimates do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market, commonly referred to as the core deposit intangible.

Borrowed Funds:

Rates available to the Company for borrowed funds with similar terms and remaining maturities are used to estimate the fair value of borrowed funds.

Trust Preferred Interest Rate Swap:

The fair value of the trust preferred interest rate swap is based on a pricing model that utilizes a yield curve and information contained in the swap agreement.

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Earnings per Share (Tables)

6 Months Ended

Jun. 30, 2012

Earnings per Share [Abstract]

Computation of 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.

	Three months ended				Six months ended
	June 30,				June 30,
	2012		2011		2012		2011
Basic earnings per share computation;
Net income applicable to common stock	$	3,753,000	$	3,147,000	$	7,202,000	$	5,977,000
Weighted average common shares outstanding for basic earnings per share		2,886,012		2,915,708		2,890,849		2,916,526
Earnings per share - basic	$	1.30	$	1.08	$	2.49	$	2.05
Diluted earnings per share computation
Net income applicable to common stock	$	3,753,000	$	3,147,000	$	7,202,000	$	5,977,000
Weighted average common shares outstanding for basic earnings per share		2,886,012		2,915,708		2,890,849		2,916,526
Add: Dilutive effects of restricted stock		1,409		-		624		-
Weighted average common shares outstanding for dilutive earnings per share		2,887,421		2,915,708		2,891,473		2,916,526
Earnings per share - dilutive	$	1.30	$	1.08	$	2.49	$	2.05

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Earnings per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Basic earnings per share computation [Abstract]
Net income applicable to common stock	$ 3,753	$ 3,147	$ 7,202	$ 5,977
Weighted average common shares outstanding (in shares)	2,886,012	2,915,708	2,890,849	2,916,526
Earnings per share - basis (in dollars per share)	$ 1.30	$ 1.08	$ 2.49	$ 2.05
Diluted earnings per share computation [Abstract]
Net income applicable to common stock	$ 3,753	$ 3,147	$ 7,202	$ 5,977
Weighted average common shares outstanding for basic earnings per share (in shares)	2,886,012	2,915,708	2,890,849	2,916,526
Add: Dilutive effects of restricted stock	1,409	0	624	0
Weighted average common shares outstanding for dilutive earnings per share (in shares)	2,887,421	2,915,708	2,891,473	2,916,526
Earnings per share - dilutive (in dollars per share)	$ 1.30	$ 1.08	$ 2.49	$ 2.05
Antidilutive restricted stock excluded from net income per share calculations (in shares)	2,447	8,847	4,115	8,847

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Loans, Past Due (Details) (USD $) In Thousands, unless otherwise specified			6 Months Ended
	Jun. 30, 2012	Dec. 31, 2011	Jun. 30, 2012 Minimum [Member]	Jun. 30, 2012 Loans considered non-accrual [Member]	Dec. 31, 2011 Loans considered non-accrual [Member]	Jun. 30, 2012 Loans still accruing [Member]	Dec. 31, 2011 Loans still accruing [Member]	Jun. 30, 2012 Real estate loans [Member] Residential [Member]	Dec. 31, 2011 Real estate loans [Member] Residential [Member]	Jun. 30, 2012 Real estate loans [Member] Commercial and agricultural [Member]	Dec. 31, 2011 Real estate loans [Member] Commercial and agricultural [Member]	Jun. 30, 2012 Real estate loans [Member] Residential mortgages [Member]	Dec. 31, 2011 Real estate loans [Member] Residential mortgages [Member]	Jun. 30, 2012 Real estate loans [Member] Home equity [Member]	Dec. 31, 2011 Real estate loans [Member] Home equity [Member]	Jun. 30, 2012 Real estate loans [Member] Commercial [Member]	Dec. 31, 2011 Real estate loans [Member] Commercial [Member]	Jun. 30, 2012 Real estate loans [Member] Agricultural [Member]	Dec. 31, 2011 Real estate loans [Member] Agricultural [Member]	Jun. 30, 2012 Real estate loans [Member] Construction [Member]	Dec. 31, 2011 Real estate loans [Member] Construction [Member]	Jun. 30, 2012 Commercial and other loans [Member]	Dec. 31, 2011 Commercial and other loans [Member]	Jun. 30, 2012 Consumer [Member]	Dec. 31, 2011 Consumer [Member]	Jun. 30, 2012 Other commercial [Member]	Dec. 31, 2011 Other commercial [Member]	Jun. 30, 2012 Other agricultural loans [Member]	Dec. 31, 2011 Other agricultural loans [Member]	Jun. 30, 2012 State and political subdivision loans [Member]	Dec. 31, 2011 State and political subdivision loans [Member]
Recorded investment of past due [Abstract]
30 to 59 Days Past Due	$ 1,386	$ 1,324		$ 0	$ 0	$ 1,386	$ 1,324					$ 164	$ 428	$ 360	$ 339	$ 717	$ 319	$ 0	$ 143	$ 0	$ 0			$ 45	$ 86	$ 0	$ 9	$ 100	$ 0	$ 0	$ 0
60 to 89 Days Past Due	201	510		0	0	201	510					9	91	88	0	104	412	0	0	0	0			0	7	0	0	0	0	0	0
90 Days Or Greater	3,124	3,875		2,866	3,600	258	275					455	398	161	180	2,063	2,794	0	0	0	0			0	0	445	503	0	0	0	0
Total Past Due	4,711	5,709		2,866	3,600	1,845	2,109					628	917	609	519	2,884	3,525	0	143	0	0			45	93	445	512	100	0	0	0
Current	492,421	481,800		5,537	5,565	486,884	476,235					104,530	101,794	75,642	80,804	167,994	162,301	18,827	19,081	10,328	8,481			11,115	10,653	39,375	37,235	7,147	6,552	57,463	54,899
Total Financing Receivable	497,132	487,509		8,403	9,165	488,729	478,344	181,409	184,034	189,705	185,050	105,158	102,711	76,251	81,323	170,878	165,826	18,827	19,224	10,328	8,481	47,067	44,299	11,160	10,746	39,820	37,747	7,247	6,552	57,463	54,899
90 Days and Accruing	258	275										57	60	21	39	180	176	0	0	0	0			0	0	0	0	0	0	0	0
Period of past due after which loans considered as non accrual			90 days
Financing receivables on nonaccrual status [Abstract]
Financing receivable nonaccrual status	$ 8,403	$ 9,165										$ 501	$ 413	$ 150	$ 141	$ 7,295	$ 8,094	$ 0	$ 0	$ 0	$ 0			$ 0	$ 0	$ 457	$ 517	$ 0	$ 0	$ 0	$ 0

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CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED) [Abstract]
Net income	$ 3,753	$ 3,147	$ 7,202	$ 5,977
Other comprehensive income:
Increase in unrealized gains on available for sale securities	741	2,660	318	3,551
Income tax effect related to unrealized gains on available for sale securities	(252)	(905)	(108)	(1,208)
Decrease (increase) in unrealized loss on interest rate swap	45	(59)	66	1
Income tax effect related to unrealized loss on interest rate swap	(15)	20	(23)	0
Less: Reclassification adjustment for gain included in net income	(213)	(114)	(321)	(234)
Income tax effect related to reclassification adjustment for gain included in net income	72	39	109	80
Other comprehensive income, net of tax	378	1,641	41	2,190
Comprehensive income	$ 4,131	$ 4,788	$ 7,243	$ 8,167

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Investments

6 Months Ended

Jun. 30, 2012

Investments [Abstract]

Investments

Note 4 - Investments

The amortized cost and fair value of investment securities at June 30, 2012 and December 31, 2011 were as follows (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
June 30, 2012	Cost		Gains		Losses			Value
Available-for-sale securities:
U.S. agency securities	$	144,214	$	2,157	$	(7	)	$	146,364
Obligations of state and political subdivisions		93,130		5,089		(72	)		98,147
Corporate obligations		10,790		276		(20	)		11,046
Mortgage-backed securities in government sponsored entities		64,072		2,223		(101	)		66,194
Equity securities in financial institutions		911		469		-			1,380
Total available-for-sale securities	$	313,117	$	10,214	$	(200	)	$	323,131

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
December 31, 2011	Cost		Gains		Losses			Value
Available-for-sale securities:
U.S. Agency securities	$	166,534	$	2,087	$	(21	)	$	168,600
Obligations of state and  political subdivisions		96,556		4,996		(5	)		101,547
Corporate obligations		8,263		197		-			8,460
Mortgage-backed securities in  government sponsored entities		36,630		2,356		(12	)		38,974
Equity securities in financial institutions		823		420		(1	)		1,242
Total available-for-sale securities	$	308,806	$	10,056	$	(39	)	$	318,823

The following table shows the Company's gross unrealized losses and fair value of the Company's investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time, that the individual securities have been in a continuous unrealized loss position, at June 30, 2012 and December 31, 2011 (in thousands). As of June 30, 2012, the Company owned 13 securities whose fair value was less than their cost basis.

June 30, 2012	Less than Twelve Months					Twelve Months or Greater				Total
			Gross					Gross				Gross
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Losses			Value		Losses		Value		Losses
U.S. Agency securities	$	4,010	$	(7	)	$	-	$	-	$	4,010	$	(7	)
Obligations of state and political subdivisions		3,437		(72	)		-		-		3,437		(72	)
Corporate obligations		2,585		(20	)		-		-		2,585		(20	)
Mortgage-backed securities in government sponsored entities		9,360		(101	)		-		-		9,360		(101	)
Total securities	$	19,392	$	(200	)	$	-	$	-	$	19,392	$	(200	)

December 31, 2011	Less than Twelve Months					Twelve Months or Greater					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. Agency securities	$	10,018	$	(21	)	$	-	$	-		$	10,018	$	(21	)
Obligations of states and  political subdivisions		1,057		(3	)		771		(2	)		1,828		(5	)
Mortgage-backed securities in  government sponsored entities		3,164		(12	)		-		-			3,164		(12	)
Equity securities in financial institutions		39		(1	)		-		-			39		(1	)
Total securities	$	14,278	$	(37	)	$	771	$	(2	)	$	15,049	$	(39	)

As of June 30, 2012, the Company's investment securities portfolio contained unrealized losses on agency securities issued or backed by the full faith and credit of the United States government or are generally viewed as having the implied guarantee of the U.S. government, obligations of states and political subdivisions, corporate obligations and  mortgage backed securities in government sponsored entities. For fixed maturity investments management considers whether the present value of cash flows expected to be collected are less than the security's amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Company's intent to sell the security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in market value, to determine whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, if the Company does not intend to sell the security, and it is more-likely-than-not that it will not be required to sell the security, before recovery of the security's amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings. For equity securities where the fair value has been significantly below cost for one year, the Company's policy is to recognize an impairment loss unless sufficient evidence is available that the decline is not other than temporary and a recovery period can be predicted.  The Company has concluded that any impairment of its investment securities portfolio outlined in the above table is not other than temporary and is the result of interest rate changes, sector credit rating changes, or company-specific rating changes that are not expected to result in the non-collection of principal and interest during the period.

Proceeds from sales of securities available-for-sale for the six months ended June 30, 2012 and 2011 were $16,654,000 and $7,821,000, respectively.  For the three months ended June 30, 2012 and 2011, there were sales of $5,418,000 and $4,632,000, respectively, of available-for-sale securities. The gross gains and losses were as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
Gross gains	$	213	$	114	$	321	$	263
Gross losses		-		-				(29	)
Net gains	$	213	$	114	$	321	$	234

Investment securities with an approximate carrying value of $174.1 million and $177.9 million at June 30, 2012 and December 31, 2011, respectively, were pledged to secure public funds and certain other deposits.

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.   The amortized cost and fair value of debt securities at June 30, 2012, by contractual maturity, are shown below (in thousands):

	Amortized
	Cost		Fair Value
Available-for-sale debt securities:
Due in one year or less	$	15,878	$	16,028
Due after one year through five years		83,752		85,499
Due after five years through ten years		47,862		49,081
Due after ten years		164,714		171,143
Total	$	312,206	$	321,751

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Loans, Trouble Debt Restructuring (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Financing receivable modifications [Abstract]
Number of contracts			1
Recidivism receivables [Abstract]
Total recidivism, Number of contracts	1		1
Total recidivism, Recorded investment	$ 48		$ 48
Interest Modification [Member]
Financing receivable modifications [Abstract]
Number of contracts	1	0	1	5
Pre-modification Outstanding Recorded Investment	48	0	48	5,912
Post-Modification Outstanding Recorded Investment	48	0	48	5,912
Term Modification [Member]
Financing receivable modifications [Abstract]
Number of contracts	1	0	3	0
Pre-modification Outstanding Recorded Investment	71	0	169	0
Post-Modification Outstanding Recorded Investment	71	0	169	0
Real estate loans [Member] | Residential [Member] | Interest Modification [Member]
Financing receivable modifications [Abstract]
Number of contracts	1		1
Pre-modification Outstanding Recorded Investment	48		48
Post-Modification Outstanding Recorded Investment	48		48
Real estate loans [Member] | Residential [Member] | Term Modification [Member]
Financing receivable modifications [Abstract]
Number of contracts	1
Pre-modification Outstanding Recorded Investment	71		71
Post-Modification Outstanding Recorded Investment	71		71
Real estate loans [Member] | Commercial [Member]
Recidivism receivables [Abstract]
Total recidivism, Number of contracts	1		1
Total recidivism, Recorded investment	48		48
Real estate loans [Member] | Commercial [Member] | Interest Modification [Member]
Financing receivable modifications [Abstract]
Number of contracts		0	0	5
Pre-modification Outstanding Recorded Investment		0	0	5,912
Post-Modification Outstanding Recorded Investment		0	0	5,912
Real estate loans [Member] | Commercial [Member] | Term Modification [Member]
Financing receivable modifications [Abstract]
Number of contracts		0	2	0
Pre-modification Outstanding Recorded Investment		0	98	0
Post-Modification Outstanding Recorded Investment		$ 0	$ 98	$ 0

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Fair Value Measurements (Tables)

6 Months Ended

Jun. 30, 2012

Fair Value Measurements [Abstract]

Summary of assets and liabilities measured at fair value on a recurring basis

The following tables present the assets and liabilities reported on the consolidated balance sheet at their fair value on a recurring basis as of June 30, 2012 and December 31, 2011 by level within the fair value hierarchy (in thousands). Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	June 30, 2012
	Level I		Level II			Level III		Total
Fair value measurements on a recurring basis:
Assets
Securities available for sale:
U.S. Agency securities	$	-	$	146,364		$	-	$	146,364
Obligations of state and political subdivisions		-		98,147			-		98,147
Corporate obligations		-		11,046			-		11,046
Mortgage-backed securities in government sponsored entities		-		66,194			-		66,194
Equity securities in financial institutions		1,380		-			-		1,380
Liabilities
Trust Preferred Interest Rate Swap		-		(283	)		-		(283	)

	December 31, 2011
	Level I		Level II			Level III		Total
Fair value measurements on a recurring basis:
Assets
Securities available for sale:
U.S. Agency securities	$	-	$	168,600		$	-	$	168,600
Obligations of state and political subdivisions		-		101,547			-		101,547
Corporate obligations		-		8,460			-		8,460
Mortgage-backed securities in government sponsored entities		-		38,974			-		38,974
Equity securities in financial institutions		1,242		-			-		1,242
Liabilities
Trust Preferred Interest Rate Swap		-		(348	)		-		(348	)

Summary of assets measured at fair value on non-recurring basis

Assets measured at fair value on a nonrecurring basis as of June 30, 2012 and December 31, 2011 are included in the table below (in thousands):

	June 30, 2012
	Level 1		Level II		Level III		Total
Impaired Loans	$	-	$	-	$	7,721	$	7,721
Other real estate owned		-		-		742		742

	December 31, 2011
	Level 1		Level II		Level III		Total
Impaired Loans	$	-	$	-	$	8,387	$	8,387
Other real estate owned		-		-		860		860

Significant unobservable inputs used in the fair value measurement process

The following table provides a listing of the significant unobservable inputs used in the fair value measurement process for items valued utilizing level III techniques.

Quantitative Information about Level 3 Fair Value Measurements
	Fair Value at June 30, 2012		Valuation Technique(s)	Unobservable input	Range
Impaired Loans	$	5,295	Discounted Cash Flows	Probability of Default		0	%
				Change in interest rates		0-7	%
		2,426	Appraised Collateral Values	Discount for time since appraisal		0-20	%
				Selling costs		0%-10	%
				Holding period	0 - 18 months
Other real estate owned		742	Appraised Collateral Values	Discount for time since appraisal		0-20	%
				Selling costs		6%-10	%
				Holding period	0 - 18 months

Fair and carrying values of the financial instruments

The fair values of the Company's financial instruments are as follows (in thousands):

	Carrying
June 30, 2012	Amount		Fair Value		Level I		Level II		Level III		Total
Financial assets:
Cash and due from banks	$	17,768	$	17,768	$	17,768	$	-	$	-	$	17,768
Available-for-sale securities		323,131		323,131		1,380		321,751		-		323,131
Net loans		490,482		539,268		-		-		539,268		539,268
Bank owned life insurance		13,919		13,919		13,919		-		-		13,919
Regulatory stock		4,461		4,461		4,461		-		-		4,461
Accrued interest receivable		3,800		3,800		3,800		-		-		3,800
Financial liabilities:
Deposits	$	738,767	$	744,787	$	446,307	$	-	$	298,480	$	744,787
Borrowed funds		47,066		44,909		-		44,909		-		44,909
Trust preferred interest rate swap		283		283		-		283		-		283
Accrued interest payable		1,222		1,222		1,222		-		-		1,222

	Carrying
December 31, 2011	Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	30,432	$	30,432
Available-for-sale securities		318,823		318,823
Net loans		481,022		527,724
Bank owned life insurance		13,669		13,669
Regulatory stock		3,301		3,301
Accrued interest receivable		3,621		3,621
Financial liabilities:
Deposits	$	733,993	$	740,839
Borrowed funds		53,882		51,437
Trust preferred interest rate swap		348		348
Accrued interest payable		1,512		1,512