INDEX

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Consolidated Balance Sheets

(Amounts in thousands, except per share data)

The accompanying notes are an integral part of these financial statements

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Note 2 – Comprehensive Income

The components of other comprehensive income (loss) are as follows:

Note 3 – Guarantees

The Corporation does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit.  Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.  Generally, all letters of credit, when issued have expiration dates within one year.  The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers.  The Bank, generally, holds collateral and/or personal guarantees supporting these commitments.  The Bank had $7.6 million standby letters of credit of as of June 30, 2005 and $5.9 million as of December 31, 2004. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees.

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Note 4 – Stock Based Compensation

The Corporation has elected to follow the disclosure requirements of FASB Statement No. 123, “Accounting for Stock-Based Compensation.”  Accordingly, no compensation expense for the plans has been recognized in the financial statements of the Corporation.  Had compensation cost for the plans been recognized in accordance with Statement No. 123, the Corporation’s net income and per share amounts would have been reduced to the following pro-forma amounts.

Note 5 – Pensions

The components of pension expense for the periods presented are as follows:

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Note 6 – Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123 (R), “Share-Based Payment.”  Statement No. 123(R) revised Statement No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance.  Statement No. 123(R) will require compensation costs related to share-based payment transactions to be recognized in the financial statements (with limited exceptions).  The amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued.  Compensation cost will be recognized over the period that an employee provides services in exchange for the award.

This statement was to be effective July 1, 2005. However, in April 2005, the SEC issued guidance that delayed the implementation date to the beginning of the next fiscal year that begins after June 15, 2005. Accordingly, the Corporation will apply this statement for the first quarter of 2006.  The impact to the Corporation will be dependent upon the nature and quantity of stock-based compensation granted in future periods.

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB No. 107”), “Share-Based Payment”, providing guidance on option valuation  methods, the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS No. 123(R), and the disclosures in MD&A subsequent to the adoption. The Company will provide SAB No.107 required disclosures upon adoption of SFAS No. 123(R) in the first quarter of 2006.

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Management’s Discussion and Analysis of

Results of Operations and Financial Condition

For the Three and Six Month Periods

Ended June 30, 2005 and 2004

Part 1, Item 2

Forward Looking Statements

Certain statements appearing herein which are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements refer to a future period or periods, reflecting management’s current views as to likely future developments, and use words such as “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” or similar terms.  Because forward-looking statements involve certain risks, uncertainties and other factors over which the Corporation has no direct control, actual results could differ materially from those contemplated in such statements.  These factors include (but are not limited to) the following: general economic conditions, changes in interest rates, changes in the Corporation’s cost of funds, changes in government monetary policy, changes in government regulation and taxation of financial institutions, changes in the rate of inflation, changes in technology, the intensification of competition within the Corporation’s market area, and other similar factors.

Critical Accounting Policies

Management has identified critical accounting policies for the Corporation to include Allowance for Loan Losses, Mortgage Servicing Rights, Financial Derivatives, Temporary Investment Impairment and Stock-based Compensation. There were no new critical accounting policies adopted during the interim period nor were there any changes to the critical accounting policies disclosed in the 2004 Annual Report on Form 10-K in regards to application or related judgements and estimates used.  Please refer to Item 7 on pages 9 - 12 of the Corporation’s 2004 Annual Report on Form 10-K for a more detailed disclosure of the critical accounting policies.

Results of Operations

Summary

The Corporation reported net income for the first six months of 2005 of $2.8 million, an 18.8% increase over prior year income of $2.4 million.   For the second quarter of 2005, net income was $1.5 million, compared to $1.1 million for the second quarter of 2004.  Diluted earnings per share for the first six months of 2005 were $.84 versus $.71 in 2004.  On a year-to-date basis, the Corporation increased net interest income by $644 thousand and reduced its provision for loan losses by $294 thousand.

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Other key performance ratios as of, or for the six months ended June 30 are listed below:

A more detailed discussion of the operating results for the three and six months ended June 30, 2005, follows:

Net Interest Income

Comparison of three and six months ending June 30, 2005 to the three and six months ending June 30, 2004:

Net interest income for the second quarter grew 13.1% to $4.4 million from $3.9 million in the second quarter of 2004.  Interest income on loans increased by $823 thousand to $5.6 million during the second quarter and was the primary factor responsible for the $1.2 million increase in total interest income.  The increase in loan interest was caused by an increase in short-term interest rates and to a lesser extent, an increase in average loans outstanding. Investment income also benefited from the increasing rate environment and increased $339 thousand in the second quarter of 2005.

Interest expense was $2.8 million for the second quarter of 2005 versus $2.1 million in 2004.   Money Market accounts and Repos were responsible for $579 thousand of the $684 thousand increase in interest expense. The increase in interest expense on these accounts was due primarily to the increase in short-term interest rates from 2004 to 2005.  Interest expense on both short and long-term borrowings decreased as the average outstanding balances of these accounts was lower in 2005 than in 2004.

Net interest income for the first six months of 2005 was $8.5 million, a $644 increase from $7.8 million reported in 2004. Interest income increased $1.8 million (14.8%) during 2005 to $13.8 million. The increase was driven by an increase from interest on loans of $1.1 million and an increase on interest from investments of $549 thousand.  The growth in loan interest was the result of an increase in both average loan balances outstanding and short-term interest rates. The increase in investment interest was due primarily to rate increases and to a lesser extent, an increase in average investment balances outstanding. Income on interest bearing deposits and fed funds sold increased $78 thousand from the previous year, primarily the result of increases to the federal funds rate over the past year.

Interest expense was $5.3 million for the first six months of 2005, an increase of $1.1 million (27.1%) from interest expense in 2004 of $4.2 million.  Overall, interest expense on deposit accounts increased $919 thousand from 2004.  Interest expense on deposits (primarily Money Market Deposit Accounts) and securities sold under agreements to repurchase (Repos) increased $1.3 million. This increase was partially offset by a decrease in interest expense on borrowings from the Federal Home Loan Bank of Pittsburgh.  The increase in deposit and Repo interest expense is due primarily to an increase in short-term interest rates. The decrease in interest expense on other borrowings is due primarily to a decrease in average outstanding balances on both short and long-term borrowings.

Starting in mid-year 2004, the Federal Reserve began to increase short-term interest rates and it increased the federal funds rate nine times between June 30, 2004 and June 30, 2005. As a result the federal funds rate increased from 1.00% in 2004 to 3.25% on June 30, 2005.  The prime rate also increased from 4.00% to 6.25%. As short-term rates increased, longer-term rates held steady or fell and as

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a result the U.S. Treasury yield curve was relatively flat during this period.  The rate increases helped increase the yield on earning assets from 4.98% in 2004 to 5.44% in 2005.  Likewise, the cost of interest-bearing liabilities also increased from 1.75% to 2.38%.  Therefore, the Bank’s interest spread decreased from 3.23% to 3.06% from 2004 to 2005. However, the net interest margin increased to 3.44% in 2005 from 3.31% in 2004.

Provision for loan losses

The Bank recorded a provision for loan losses of $80 thousand during the second quarter of 2005  compared to $240 thousand in the second quarter of 2004.  A nonrecurring loan recovery ($266 thousand) of a previously charged off commercial credit during the second quarter of 2005 resulted in a net loan recovery position of $237 thousand for the quarter.  Net loans charged-off for the second quarter of 2004 were $13,000.

The Bank was in a net loan recovery position on a year-to-date basis for both 2005 and 2004.  Net loans recovered were $183 thousand in 2005 and $308 thousand in 2004. Due to a nonrecurring recovery of a previously charged off commercial credit ($266 thousand) in 2005 and an improvement in the nonperforming asset ratio, the Corporation charged $186 thousand against earnings  as a provision for loan losses during the first six months of 2005 versus $480 thousand for the same period in 2004. For more information concerning nonperforming loans, refer to the Loan Quality discussion.

Noninterest Income

Comparison of the three and six months ending June 30, 2005 to the three and six months ending June 30, 2004:

For the second quarter of 2005, noninterest income before securities gains, was $1.6 million. This is unchanged from $1.6 million in the second quarter of 2004.  Investment and trust service fees increased 11% quarter over quarter, from $654 thousand in 2004 to $726 thousand in 2005. Loan and deposit fees and service charges decreased slightly from $825 thousand to $802 thousand.  Fees from mortgage banking activities were only $12 thousand during the second quarter of 2005, versus $266 thousand in the second quarter of 2004.  This decrease is primarily the result of an impairment charge of $95 thousand on mortgage servicing rights recorded in the second quarter of 2005.  During the same quarter in 2004, $135 thousand of previously recorded impairment charges were reversed.  In total, these mortgage servicing transactions accounted for a $230 thousand negative swing in mortgage banking fees quarter-over-quarter.  Losses of $268 thousand on the Bank’s investment in a joint venture were reflected in other income in the second quarter of 2004.  Losses from this joint venture were not as significant in the second quarter of 2005; consequently, other income improved by $185 thousand during the second quarter of 2005. Securities gains were $64 thousand for the second quarter of 2005 compared with $19 thousand last year.

Noninterest income, excluding securities gains, was $2.9 million for the first six months of 2005. This is $398 thousand less than the $3.3 million recorded in 2004.  Investment and trust service fees increased by approximately 9% year-to-year, primarily due to an increase in assets under management. Other fees, primarily loan and deposit fees and service charges remained virtually unchanged from 2004 to 2005. However, the mix of loan fees changed between years as commercial lending volume increased and mortgage lending volume decreased from 2004 to 2005. As a result, commercial loan fees greatly outpaced mortgage fees, while the results were reversed in 2004.  Income from mortgage banking activities fell by $260 thousand from 2004 to 2005.  This decrease was the result of a decline in gains on

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the sale of mortgages of $177 thousand and a net increase of  $105 thousand on mortgage servicing amortization and impairment charges.  In addition, the Bank recorded  losses of $302 thousand from its investment in a mortgage banking joint venture in the first quarter of 2005.  The Bank also recorded lossess from this investment of  $268 thousand in 2004.  This investment is accounted for using the equity method of accounting.  During the first quarter of 2005, the mortgage banking company ceased operations.  Negotiations continue between the investors with regard to final disposition of the company’s assets.  Security gains were $219 thousand in 2005 and $124 thousand in 2004. Of the securities gains in 2005, $56 thousand was the result of a merger that required a cash settlement.

Noninterest Expense

Comparison of the three and six months ending June 30, 2005 to the three and six months ending June 30, 2004:

Comparing the second quarter of 2005 to the second quarter of 2004, noninterest expense increased $209 thousand (5.2%) from $4.0 million to $4.2 million.  Salaries and benefits decreased by $47 thousand quarter-over-quarter.  Direct salary expense decreased during the quarter, but was partially offset by increases in benefit expenses, primarily pension expense.  Advertising expenses were $303 thousand for the second quarter, $86 thousand higher than the second quarter of 2004.  The increase is due primarily to the timing and nature of advertising campaigns.  Legal and professional fees, primarily audit and accounting service fees related to Sarbanes-Oxley implementation, increased to $235 thousand in the second quarter of 2005 from $157 thousand in the prior year quarter.  The real estate loss described below was a second quarter 2005 event and was responsible for most of the increase in the other expense category.

On a year-to-date basis, noninterest expense was $8.4 million, up $518 thousand (6.5%) from $7.9 million reported in 2004.   Salaries and benefits were $4.5 million, an increase of  $309 thousand year-over-year, and accounted for the most of the increase in noninterest expense in 2005.  Increases in salary expense ($53 thousand), health insurance ($91 thousand) and pension costs ($145 thousand) accounted for most of the increase in salaries and benefits in 2005. Included in the health insurance and pension costs was a one-time charge totaling $130 thousand for a severance agreement that was recorded in the first quarter of 2005.  Legal and professional fees represent the other largest increase to noninterest expense in 2005. These fees have increased $164 thousand (61.2%) from $268 thousand in 2004 to $432 thousand in 2005.  Approximately $130 thousand of additional expenses have been incurred in 2005 for compliance with Sarbanes-Oxley Section 404.  Data processing costs have decreased $85 thousand year-over-year as the result of a first quarter credit provided by the Bank’s core system processor as an incentive to renew its contract for three years.  The Bank also recorded a loss of $57 thousand from the sale of real estate that was previously used as a banking facility.  All other noninterest expense categories remained fairly constant from 2004 to 2005.

The Corporation recorded income tax expense of $87 thousand for the first six months of 2005 versus $420 thousand during the same period in 2004.  During the first quarter of 2005, the Corporation reversed income tax expense when it became apparent that an accrual for additional taxes was no longer warranted. This reversal is expected to be a non-recurring event and is responsible for the lower than normal income tax expense.  Income tax expense for the second quarter of 2005 was $317 thousand versus $169 thousand for the second quarter of 2004. The increase in income tax expense quarter over quarter is due to a 37% increase in pre-tax income quarter over quarter. All taxable income for the Corporation is taxed at a rate of 34%.

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Financial Condition

Total assets reached $589.2 million at June 30, 2005.  This is $25.9 million (4.6%) greater than total assets of $563.3 million at December 31, 2004.  Total cash and cash equivalents, primarily noninterest bearing cash due from banks, increased $2.3 million from December 31, 2004.  Investment securities increased slightly from the prior year-end. Loans held-for-sale decreased by $5.8 million to $910 thousand at June 30, 2005. This total is comprised of $563 thousand of loans funded by the Bank for loans produced by its joint venture mortgage banking company and $347 thousand of loans originated by the Bank.  Because the joint venture company discontinued operations in the first quarter of 2005, loan production ended.  As a result, there has been a substantial decrease in loans held-for-sale. These loans are expected to be sold prior to the end of the third quarter.  The loan portfolio exhibited good growth during the first six months of 2005, increasing $29.5 million (8.5%) during the period. Total loans were $377.5 million at June 30, 2005 compared to $348.0 at December 31, 2004.  Commercial loan activity was the driver of loan growth during the period, up $32.1 million. This growth came from a nice increase in local lending business, supplemented with purchased commercial loan participations. The Bank is pleased with the growth in commercial loans as it reflects positively on the initiative put in place by Management to generate commercial loan growth.   Mortgage loans decreased $6.5 million during the first six months of the year as new mortgage origination activity slowed and the Bank decided to reduce the amount of fixed rate mortgages it holds.  Consumer loan balances are up with home equity lending and indirect automobile lending increasing slightly.

Total deposits grew to $420.6 million at June 30, 2005, an increase of $20.7 (5.2%) from December 31, 2004. Nearly all deposit categories have increased since 2004 year-end.  Noninterest bearing demand deposits have shown nice growth, increasing $5.7 million.  The Bank has also experienced strong growth in its Money market accounts.  These accounts were $99.4 million at June 30, 2005, up $18.9 million (23.6%) from $80.4 million at December 31, 2004.  This growth was achieved by the addition of new accounts and increased balances in existing accounts. The money market product has become a very attractive product for customers as short-term interest rates continued to rise during 2005.  Securities sold under agreements to repurchase (Repos) have increased $11.7 million (27.8%) since year-end 2004. As of June 30, 2005, Repos totaled $53.5 million. Short-term borrowings have decreased since the Bank is no longer funding loans held-for-sale that were originated by the joint venture mortgage banking company. Long term debt increased slightly as the Bank took a new advance from the Federal Home Loan Bank of Pittsburgh to match fund a commercial loan.

Total shareholders’ equity recorded a net increase of $512 thousand to $55.2 million at June 30, 2005 from $54.6 million at December 31, 2004.  The increase in retained earnings more than offset the decrease in other comprehensive income, primarily unrealized losses on securities. The Corporation declared a dividend of $1.6 million and repurchased 5,000 shares of its common stock to be held as Treasury shares during the year.

Capital adequacy is currently defined by regulatory agencies through the use of several minimum required ratios.  At June 30, 2005, the Corporation was well capitalized as defined by the banking regulatory agencies.  The Corporation’s total risk-based, Tier 1 risk-based and Tier 1 leverage ratios at June 30, 2005 were 14.07%, 12.79% and 9.16%, respectively.

Loan Quality

Nonperforming loans continued to decrease from $942 thousand at year-end 2004 to $727 thousand at June 30, 2005.   The nonperforming loans to total loans ratio also fell from .27% to .19% over the same period.  Included in nonperforming loans at June 30, 2005 were nonaccrual loans totaling $292

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thousand and loans past due 90 days or more totaling $435 thousand compared with $355 thousand and $587 thousand, respectively, at December 31, 2004.  The Corporation held no foreclosed real estate on June 30, 2005 or December 31, 2004. The Bank was in a net loan recovery position for the first six months of both 2005 and 2004.  Net loans recovered for 2005 total $183 thousand and $308 thousand for 2004. The net loan recoveries produced a ratio of net recoveries to average loans of .03% for the six months ended June 30, 2005 and .06% for the six months ended June 30, 2004.

The allowance for loan losses was $5.3 million at June 30, 2005, up from $4.9 million at December 31, 2004.  The allowance as a percentage of total loans increased to 1.39% at June 30, 2005 from 1.31% at prior year-end.  The allowance provided coverage for nonperforming loans at a rate of approximately 7.2 times at June 30, 2005.

Economy:

The Corporation has identified Franklin and Cumberland Counties as its primary market areas. These counties have an unemployment rate of 3.5% and 3.7%, respectively according to data released by the Pennsylvania Department of Labor and Industry.  These unemployment rates compare very favorably to the state unemployment rate of 4.7% and Franklin County had the lowest unemployment rate in the state in June 2005.  The local economy is not overly dependent on any one industry or business.

The Corporation continues to watch the actions of the Federal Reserve Open Market Committee as it contemplates additional short-term rate increases.  Short-term rates have increased nine times since June 2004. Many economists believe rates will continue to rise throughout the remainder of the year. An increase in short-term interest rates effects both the assets and liabilities of the Corporation that are sensitive to interest rate changes.

Liquidity

The Corporation’s liquidity ratio (net cash, short-term and marketable assets divided by net deposits and short-term liabilities) was 27% at June 30, 2005 compared with 30% at December 31, 2004.  The Corporation has the ability to borrow funds from the Federal Home Loan Bank of Pittsburgh (FHLB), if necessary, to enhance its liquidity position.  At June 30, 2005, the funding available to the Corporation from FHLB was $167.6 million. In addition to the funding available through FHLB, the Corporation also has unpledged and available-for-sale investment securities with a market value at June 30, 2005 of  $53.7 million.  These securities could be used for liquidity purposes.  Management believes that liquidity is adequate to meet the needs of the Corporation and monitors its future needs on a regular basis.

Off Balance Sheet Commitments

The Corporation’s financial statements do not reflect various commitments that are made in the normal course of business, which may involve some liquidity risk.  These commitments consist mainly of unfunded loans and letters of credit made under the same standards as on-balance sheet instruments.  Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk to the Corporation.  Unused commitments and standby letters of credit totaled $102.8 million and $96.3 million, respectively, at June 30, 2005 and December 31, 2004.

The Corporation has entered into various contractual obligations to make future payments.  These obligations include time deposits, long-term debt and operating leases.  At June 30, 2005, the total of these obligations did not change significantly from what was reported at December 31, 2004.

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PART I, Item 3

Quantitative and Qualitative Disclosures about Market Risk

There were no material changes in the Corporation’s exposure to market risk during the quarter ended June 30, 2005. For more information on market risk refer to the Corporation’s 2004 Annual Report on Form 10-K.

PART I, Item 4

Controls and Procedures

Evaluation of Controls and Procedures

The Corporation is required to maintain controls and procedures designed to ensure that information required to be disclosed in the reports that the company files or submits under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

The Corporation, under the direction of its Chief Executive Officer and its Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures pursuant to SEC Rule 13a-15(b). Based upon that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective as of June 30, 2005.

Changes in Internal Controls

The Corporation’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.  The Corporation’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

The Corporation, under the direction of its Chief Executive Officer and its Chief Financial Officer, conducted an evaluation of the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2004.  Management’s assessment identified a material weakness in the Corporation’s internal control over financial reporting because of ineffective controls related to the review of computations and methodology pertaining to a limited number of complex, non-routine transactions which could potentially aggregate to material misstatements in financial reporting.

In order to address the material weakness described above, the Corporation has developed and is in the process of completing the implementation of procedures to ensure that those complex, non-routine transactions identified in management’s evaluation of internal control over financial reporting have a sufficient level of review to ensure that the risk of misstatement is minimized.

There were no changes during the second quarter of 2005 in the Company’s internal control over financial reporting, other than those previously mentioned, which materially affected, or which are reasonably likely to affect, the Company’s internal control over financial reporting.

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SIGNATURES

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

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