**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





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


THE
      SECURITIES EXCHANGE ACT OF 1934





**For
      the Quarterly Period Ended September 30, 2006**





OR





o TRANSITION PERIOD PURSUANT TO SECTION 13 OR 15(d) OF


THE
      SECURITIES EXCHANGE ACT OF 1934 [ NO FEE REQUIRED ]





For
      the
      Transition Period from _________to_________








Commission
      File Number: 001-31896








**THE
      WILBER CORPORATION**


(Exact
      Name of the Registrant as Specified in its Charter)





**New
                York**
            **15-6018501**(State
                or Other Jurisdiction of Incorporation or Organization)
            (I.R.S.
                Employer Identification Number)





**245
      Main Street, Oneonta, NY 13820**


(Address
      of Principal Executive Offices) (Zip Code)





**607
      432-1700**


(Registrant’s
      Telephone Number Including Area Code)





Securities
      Registered Pursuant to Section 12(b) of the Act:


**Common
      Stock, $0.01 par value per share**


(Title
      of
      Class)





Securities
      Registered Pursuant to Section 12(g) of the Act:


**None**











Indicate
      by check mark whether registrant (1) has filed all reports required to be filed
      by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.


Yes ý No o





Indicate
      by check mark whether the registrant is a large accelerated filer, accelerated
      filer, or a non-accelerated filer. See definition of “Large accelerated filer
      and accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one).




Large
                accelerated filero
            Accelerated
                filerý
            Non-accelerated
                filero








Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes o No ý





As
      of
      November 2, 2006, there were issued and outstanding 10,569,182 shares of the
      Registrant’s Common Stock.














**THE
      WILBER CORPORATION**


**FORM
      10-Q**


**INDEX**








**PART
      I - FINANCIAL INFORMATION**








FORWARD-LOOKING
                STATEMENTSITEM
                1:
            Interim
                Financial Statements (Unaudited)Consolidated
                Statements of ConditionConsolidated
                Statements of IncomeConsolidated
                Statements of Changes in Shareholders’ Equity and Comprehensive
                IncomeConsolidated
                Statements of Cash FlowsNotes
                to Interim Unaudited Consolidated Financial StatementsITEM
                2:
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                OperationsA.
            GeneralB.
            Financial
                Condition and Performance OverviewC.
            Comparison
                of Financial Condition at September 30, 2006 and December 31,
                2005D.
            Comparison
                of Results of Operations for the Three Months Ended September 30,
                2006 and
                2005E.
            Comparison
                of Results of Operations for the Nine Months Ended September 30,
                2006 and
                2005F.
            LiquidityG.
            Capital
                Resources and DividendsITEM
                3:
            Quantitative
                and Qualitative Disclosures about Market RiskITEM
                4:
            Controls
                and Procedures**PART
                II - OTHER INFORMATION**ITEM
                1:
            Legal
                ProceedingsITEM
                1A:
            Risk
                FactorsITEM
                2:
            Unregistered
                Sales of Equity Securities and Use of ProceedsITEM
                3:
            Defaults
                Upon Senior SecuritiesITEM
                4:
            Submission
                of Matters to a Vote of Security HoldersITEM
                5:
            Other
                InformationITEM
                6:
            ExhibitsSignature
                PageIndex
                to Exhibits


1








FORWARD-LOOKING
      STATEMENTS








When
      we
      use words or phrases like "will probably result," "we expect," "will continue,"
      "we anticipate," "estimate," "project," "should cause," or similar expressions
      in this report or in any press releases, public announcements, filings with
      the
      Securities and Exchange Commission (the "SEC") or other disclosures, we are
      making "forward-looking statements" as described in the Private Securities
      Litigation Reform Act of 1995. In addition, certain information we provide,
      such
      as analysis of the adequacy of our allowance for loan losses or an analysis
      of
      the interest rate sensitivity of our assets and liabilities, is always based
      on
      predictions of the future. From time to time, we may also publish other
      forward-looking statements about anticipated financial performance, business
      prospects, and similar matters.





The
      Private Securities Litigation Reform Act of 1995 provides a safe harbor for
      forward-looking statements. We want you to know that a variety of future events
      and uncertainties could cause our actual results and experience to differ
      materially from what we anticipate when we make our forward-looking statements.
      Factors that could cause future results to vary from current management
      expectations include, but are not limited to, general economic conditions,
      legislative and regulatory changes, monetary and fiscal policies of the Federal
      government, changes in tax policies, tax rates and regulations of Federal,
      state
      and local tax authorities, changes in consumer preferences, changes in interest
      rates, deposit flows, cost of funds, demand for loan products, demand for
      financial services, competition, changes in the quality or composition of the
      Company’s loan and investment portfolios, changes in accounting principles,
      policies or guidelines and other economic, competitive, governmental and
      technological factors affecting the Company’s operations, markets, products,
      services and fees.





Please
      do
      not rely unduly on any forward-looking statements, which are valid only as
      of
      the date made. Many factors, including those described above, could affect
      our
      financial performance and could cause our actual results or circumstances for
      future periods to differ materially from what we anticipate or project. We
      have
      no obligation to update any forward-looking statements to reflect future events
      which occur after the statements are made, and we specifically disclaim such
      obligation.





*Index*
 2


ITEM
      1 :
      Interim Financial Statements (Unaudited)


***The
                Wilber Corporation******Consolidated
                Statements of Condition (Unaudited)*****September
                30,**
            
            **December
                31,*****dollars
                in thousands except share and per share data***
            **2006**
            
            **2005****Assets**Cash
                and Due from Banks
            
            **$**
            **11,913**
            
            $
            12,817Time
                Deposits with Other Banks
            
            
            **1,800**
            
            
            2,700Federal
                Funds Sold
            
            
            **18,500**
            
            
            2,900Total
                Cash and Cash Equivalents
            
            
            **32,213**
            
            
            18,417SecuritiesTrading,
                at Fair Value
            
            
            **1,576**
            
            
            1,542Available-for-Sale,
                at Fair Value
            
            
            **223,938**
            
            
            240,350Held-to-Maturity,
                Fair Value of $61,728 at September 30, 2006,and
                $53,837 at December 31, 2005
            
            
            **62,762**
            
            
            54,939Loans
            
            
            **404,465**
            
            
            403,665Allowance
                for Loan Losses
            
            
            **(6,524**
            **)**
            
            (6,640
            )Loans,
                Net
            
            
            **397,941**
            
            
            397,025Premises
                and Equipment, Net
            
            
            **5,885**
            
            
            6,430Bank
                Owned Life Insurance
            
            
            **15,956**
            
            
            15,530Goodwill
            
            
            **4,518**
            
            
            4,518Intangible
                Assets, Net
            
            
            **564**
            
            
            698Other
                Assets
            
            
            **13,409**
            
            
            13,279Total
                Assets
            
            **$**
            **758,762**
            
            $
            752,728**Liabilities
                and Shareholders’ Equity**Deposits:Demand
            
            **$**
            **72,758**
            
            $
            72,986Savings,
                NOW and Money Market Deposit Accounts
            
            
            **241,301**
            
            
            244,484Certificates
                of Deposit (Over $100M)
            
            
            **89,792**
            
            
            78,147Certificates
                of Deposit (Under $100M)
            
            
            **187,652**
            
            
            183,716Other
                Deposits
            
            
            **25,851**
            
            
            25,625Total
                Deposits
            
            
            **617,354**
            
            
            604,958Short-Term
                Borrowings
            
            
            **23,992**
            
            
            19,357Long-Term
                Borrowings
            
            
            **46,724**
            
            
            52,472Other
                Liabilities
            
            
            **7,667**
            
            
            8,224Total
                Liabilities
            
            
            **695,737**
            
            
            685,011Shareholders’
                Equity:Common
                Stock, $.01 Par Value, 16,000,000 Shares Authorized,and
                13,961,664 Shares Issued at September 30, 2006,and
                December 31, 2005
            
            
            **140**
            
            
            140Additional
                Paid in Capital
            
            
            **4,224**
            
            
            4,224Retained
                Earnings
            
            
            **88,727**
            
            
            86,900Accumulated
                Other Comprehensive Loss
            
            
            **(2,360**
            **)**
            
            (2,409
            )Treasury
                Stock at Cost, 3,392,482 Shares at September 30, 2006,and
                2,815,727 Shares at December 31, 2005
            
            
            **(27,706**
            **)**
            
            (21,138
            )Total
                Shareholders’ Equity
            
            
            **63,025**
            
            
            67,717Total
                Liabilities and Shareholders’ Equity
            
            **$**
            **758,762**
            
            $
            752,728*See
                accompanying notes to interim unaudited consolidated financial
                statements.*





*Index*
 3





***The
                Wilber Corporation******Consolidated
                Statements of Income (Unaudited)***
            
            **Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,*****dollars
                in thousands except share and per share data***
            **2006**
            
            **2005**
            
            **2006**
            
            **2005****Interest
                and Dividend Income**Interest
                and Fees on Loans
            
            **$**
            **7,763**
            
            $
            7,002
            
            **$**
            **22,544**
            
            $
            20,430Interest
                and Dividends on Securities:U.S.
                Government and Agency Obligations
            
            
            **2,326**
            
            
            2,216
            
            
            **7,194**
            
            
            6,805State
                and Municipal Obligations
            
            
            **631**
            
            
            625
            
            
            **1,820**
            
            
            1,966Other
            
            
            **63**
            
            
            54
            
            
            **183**
            
            
            154Interest
                on Federal Funds Sold and Time Deposits
            
            
            **151**
            
            
            253
            
            
            **309**
            
            
            555Total
                Interest and Dividend Income
            
            
            **10,934**
            
            
            10,150
            
            
            **32,050**
            
            
            29,910**Interest
                Expense**Interest
                on Deposits:Savings,
                NOW and Money Market Deposit Accounts
            
            
            **1,060**
            
            
            751
            
            
            **2,818**
            
            
            2,036Certificates
                of Deposit (Over $100M)
            
            
            **967**
            
            
            593
            
            
            **2,697**
            
            
            1,775Certificates
                of Deposit (Under $100M)
            
            
            **1,804**
            
            
            1,488
            
            
            **5,152**
            
            
            4,207Other
                Deposits
            
            
            **234**
            
            
            193
            
            
            **685**
            
            
            567Interest
                on Short-Term Borrowings
            
            
            **157**
            
            
            169
            
            
            **490**
            
            
            433Interest
                on Long-Term Borrowings
            
            
            **469**
            
            
            541
            
            
            **1,457**
            
            
            1,785Total
                Interest Expense
            
            
            **4,691**
            
            
            3,735
            
            
            **13,299**
            
            
            10,803**Net
                Interest Income**
            
            
            **6,243**
            
            
            6,415
            
            
            **18,751**
            
            
            19,107Provision
                for Loan Losses
            
            
            **420**
            
            
            300
            
            
            **1,260**
            
            
            780Net
                Interest Income After Provision for Loan Losses
            
            
            **5,823**
            
            
            6,115
            
            
            **17,491**
            
            
            18,327**Non-Interest
                Income**Trust
                Fees
            
            
            **344**
            
            
            404
            
            
            **1,095**
            
            
            1,095Service
                Charges on Deposit Accounts
            
            
            **414**
            
            
            380
            
            
            **1,227**
            
            
            1,196Commission
                Income
            
            
            **98**
            
            
            90
            
            
            **415**
            
            
            402Investment
                Security Gains, Net
            
            
            **75**
            
            
            71
            
            
            **385**
            
            
            463Increase
                in Cash Surrender Value of Bank Owned Life Insurance
            
            
            **153**
            
            
            141
            
            
            **426**
            
            
            413Other
                Service Fees
            
            
            **69**
            
            
            135
            
            
            **266**
            
            
            355Other
                Income
            
            
            **222**
            
            
            182
            
            
            **562**
            
            
            413Total
                Non-Interest Income
            
            
            **1,375**
            
            
            1,403
            
            
            **4,376**
            
            
            4,337**Non-Interest
                Expense**Salaries
            
            
            **2,459**
            
            
            2,470
            
            
            **7,172**
            
            
            7,032Employee
                Benefits
            
            
            **586**
            
            
            639
            
            
            **2,024**
            
            
            1,973Occupancy
                Expense of Bank Premises
            
            
            **588**
            
            
            401
            
            
            **1,443**
            
            
            1,249Furniture
                and Equipment Expense
            
            
            **200**
            
            
            191
            
            
            **581**
            
            
            552Computer
                Service Fees
            
            
            **228**
            
            
            160
            
            
            **625**
            
            
            474Advertising
                and Marketing
            
            
            **147**
            
            
            120
            
            
            **376**
            
            
            365Professional
                Fees
            
            
            **148**
            
            
            185
            
            
            **674**
            
            
            511Other
                Miscellaneous Expenses
            
            
            **713**
            
            
            670
            
            
            **2,519**
            
            
            2,147Total
                Non-Interest Expense
            
            
            **5,069**
            
            
            4,836
            
            
            **15,414**
            
            
            14,303Income
                Before Taxes
            
            
            **2,129**
            
            
            2,682
            
            
            **6,453**
            
            
            8,361Income
                Taxes
            
            
            **(485**
            **)**
            
            (700
            )
            
            **(1,502**
            **)**
            
            (2,210
            )**Net
                Income**
            
            **$**
            **1,644**
            
            $
            1,982
            
            **$**
            **4,951**
            
            $
            6,151Weighted
                Average Shares Outstanding
            
            
            **10,579,399**
            
            
            11,163,092
            
            
            **10,895,268**
            
            
            11,173,409Basic
                Earnings Per Share
            
            **$**
            **0.15**
            
            $
            0.18
            
            **$**
            **0.45**
            
            $
            0.55*See
                accompanying notes to interim unaudited consolidated financial
                statements.*








*Index*
 4


***The
                Wilber Corporation******Consolidated
                Statements of Changes in Shareholders' Equity and Comprehensive Income
                (Unaudited)*****Accumulated****Additional**
            
            
            
            **Other****Common**
            
            **Paid
                in**
            
            **Retained**
            
            **Comprehensive**
            
            **Treasury*****dollars
                in thousands except share and per share data***
            
            **Stock**
            
            **Capital**
            
            **Earnings**
            
            **Income
                (Loss)**
            
            **Stock**
            
            **Total**Balance
                at December 31, 2004
            
            $
            140
            
            $
            4,224
            
            $
            83,402
            
            $
            396
            
            
            ($20,557
            )
            $
            67,605Comprehensive
                Income:Net
                Income
            
            
            -
            
            
            -
            
            
            6,151
            
            
            -
            
            
            -
            
            
            6,151Change
                in Net Unrealized Gain (Loss)on
                Securities, Net of Taxes
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,923
            )
            
            -
            
            
            (1,923
            )Total
                Comprehensive Loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,228Cash
                Dividends ($.285 per share)
            
            
            -
            
            
            -
            
            
            (3,186
            )
            
            -
            
            
            -
            
            
            (3,186
            )Purchase
                of Treasury Stock (31,500 shares)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (388
            )
            
            (388
            )Balance
                at September 30, 2005
            
            $
            140
            
            $
            4,224
            
            $
            86,367
            
            
            ($1,527
            )
            
            ($20,945
            )
            $
            68,259Balance
                December 31, 2005
            
            $
            140
            
            $
            4,224
            
            $
            86,900
            
            
            ($2,409
            )
            
            ($21,138
            )
            $
            67,717Comprehensive
                Income:Net
                Income
            
            
            -
            
            
            -
            
            
            **4,951**
            
            
            -
            
            
            -
            
            
            **4,951**Change
                in Net Unrealized Losson
                Securities, Net of Taxes
            
            
            -
            
            
            -
            
            
            -
            
            
            **49**
            
            
            -
            
            
            **49**Total
                Comprehensive Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            **5,000**Cash
                Dividends ($.285 per share)
            
            
            -
            
            
            -
            
            
            **(3,124**
            **)**
            
            -
            
            
            -
            
            
            **(3,124**
            **)**Purchase
                of Treasury Stock (576,755 shares)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            **(6,568**
            **)**
            
            **(6,568**
            **)****Balance
                September 30, 2006**
            
            **$**
            **140**
            
            **$**
            **4,224**
            
            **$**
            **88,727**
            
            
            **($2,360**
            **)**
            
            **($27,706**
            **)**
            **$**
            **63,025***See
                accompanying notes to interim unaudited consolidated financial
                statements.*

















*Index*
 5


***The
                Wilber Corporation******Consolidated
                Statements of Cash Flows (Unaudited)*****Nine
                Months Ended****September
                30,*****dollars
                in thousands***
            **2006**
            
            **2005****Cash
                Flows from Operating Activities:**Net
                Income
            
            **$**
            **4,951**
            
            $
            6,151Adjustments
                to Reconcile Net Income to Net CashProvided
                by Operating Activities:Provision
                for Loan Losses
            
            
            **1,260**
            
            
            780Depreciation
                and Amortization
            
            
            **844**
            
            
            829Net
                Loss on Disposal / Impairment of Fixed Assets
            
            
            **290**
            
            
            0Net
                Amortization of Premiums and Accretion of Discounts on
                Investments
            
            
            **505**
            
            
            799Available-for-Sale
                Investment Security Gains, net
            
            
            **(271**
            **)**
            
            (369
            )Increase
                in Cash Surrender Value of Bank Owned Life Insurance
            
            
            **(426**
            **)**
            
            (413
            )Net
                Decrease in Trading Securities
            
            
            **80**
            
            
            68Net
                Gains on Trading Securities
            
            
            **(114**
            **)**
            
            (94
            )Increase
                in Other Assets
            
            
            **(185**
            **)**
            
            (1,037
            )Decrease
                in Other Liabilities
            
            
            **(696**
            **)**
            
            (658
            )Net
                Cash Provided by Operating Activities
            
            
            **6,238**
            
            
            6,056**Cash
                Flows from Investing Activities:**Net
                Cash Acquired from Acquisition of a Branch
            
            
            **0**
            
            
            22,521Proceeds
                from Maturities of Held-to-Maturity Investment Securities
            
            
            **5,734**
            
            
            7,152Purchases
                of Held-to-Maturity Investment Securities
            
            
            **(13,661**
            **)**
            
            (1,749
            )Proceeds
                from Maturities of Available-for-Sale Investment
                Securities
            
            
            **26,185**
            
            
            51,254Proceeds
                from Sales of Available-for-Sale Investment Securities
            
            
            **3,057**
            
            
            9,945Purchases
                of Available-for-Sale Investment Securities
            
            
            **(12,877**
            **)**
            
            (57,500
            )Net
                Increase in Loans
            
            
            **(2,176**
            **)**
            
            (142
            )Purchase
                of Premises and Equipment
            
            
            **(335**
            **)**
            
            (642
            )Proceeds
                from Sale of Premises and Equipment
            
            
            **40**
            
            
            0Net
                Cash Provided by Investing Activities
            
            
            **5,967**
            
            
            30,839**Cash
                Flows from Financing Activities:**Net
                Decrease in Demand Deposits, Savings, NOW,Money
                Market and Other Deposits
            
            
            **(3,185**
            **)**
            
            (454
            )Net
                Increase (Decrease) in Certificates of Deposit
            
            
            **15,581**
            
            
            (9,355
            )Net
                Increase (Decrease) in Short-Term Borrowings
            
            
            **4,635**
            
            
            (8,872
            )Increase
                in Long-Term Borrowings
            
            
            **0**
            
            
            16,900Repayment
                of Long-Term Borrowings
            
            
            **(5,748**
            **)**
            
            (25,228
            )Purchase
                of Treasury Stock
            
            
            **(6,568**
            **)**
            
            (388
            )Cash
                Dividends Paid
            
            
            **(3,124**
            **)**
            
            (3,186
            )Net
                Cash Provided by (Used in) Financing Activities
            
            
            **1,591**
            
            
            (30,583
            )Net
                Increase in Cash and Cash Equivalents
            
            
            **13,796**
            
            
            6,312Cash
                and Cash Equivalents at Beginning of Period
            
            
            **18,417**
            
            
            20,539Cash
                and Cash Equivalents at End of Period
            
            **$**
            **32,213**
            
            $
            26,851





*Index*
 6








***The
                Wilber Corporation******Consolidated
                Statements of Cash Flows (Unaudited),
                continued*****Nine
                Months Ended****September
                30,*****dollars
                in thousands***
            **2006**
            
            **2005****Supplemental
                Disclosures of Cash Flow Information:**Cash
                Paid during Period for:Interest
            
            **$**
            **13,200**
            
            **$**
            **10,834**Income
                Taxes
            
            **$**
            **2,727**
            
            **$**
            **3,085**Non
                Cash Investing Activities:Change
                in Unrealized Gain (Loss) on Securities
            
            **$**
            **83**
            
            
            **($3,150**
            **)**Fair
                Value of Assets Acquired
            
            **$**
            **0**
            
            **$**
            **8,119**Fair
                Value of Liabilities Assumed
            
            **$**
            **0**
            
            **$**
            **32,967***See
                accompanying notes to interim unaudited consolidated financial
                statements.*























*Index*
 7


The
      Wilber Corporation


Notes
      to
      Unaudited Consolidated Interim Financial Statements





***Note
      1. Basis of Presentation***





The
      accompanying unaudited consolidated interim financial statements include the
      accounts of The Wilber Corporation (the "Company"), its wholly owned subsidiary
      Wilber National Bank (the "Bank") and the Bank's subsidiaries. All significant
      intercompany accounts and transactions have been eliminated in consolidation.
      The accompanying unaudited consolidated interim financial statements have been
      prepared in accordance with accounting principles generally accepted in the
      United States of America ("GAAP") for interim financial information and with
      the
      instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
      do
      not include all of the information and footnotes required by GAAP for complete
      financial statements.





The
      preparation of financial statements in conformity with GAAP required management
      to make estimates and assumptions that affect the reported amounts of assets
      and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements, and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those estimates.
      In the opinion of management, the unaudited consolidated interim financial
      statements include all necessary adjustments, consisting of normal recurring
      accruals, necessary for a fair presentation for the periods presented. The
      results for the periods presented are not necessarily indicative of results
      to
      be expected for the entire fiscal year or any other interim period.





The
      data
      in the consolidated balance sheet for December 31, 2005 was derived from the
      Company's 2005 Annual Report on Form 10-K. The Annual Report on Form 10-K
      includes the Company's audited consolidated statements of condition as of
      December 31, 2005 and 2004, and the consolidated statements of income,
      consolidated statements of cash flows, consolidated statements of shareholders’
equity and comprehensive income for each of the years in the three-year period
      ended December 31, 2005. That data, along with the unaudited interim financial
      information presented in the consolidated statements of condition as of
      September 30, 2006, the statements of income for the three and nine-month
      periods ended September 30, 2006 and 2005, and the statements of changes in
      shareholders' equity and comprehensive income and cash flows for the nine-month
      periods ended September 30, 2006 and 2005 should be read in conjunction with
      the
      2005 consolidated financial statements, including the notes
      thereto.





Amounts
      in prior period’s consolidated financial statements are reclassified when
      necessary to conform to the current period's presentation.





***Note
      2. Earnings Per Share***





Basic
      earnings per share (EPS) is calculated by dividing net income available to
      common shareholders by the weighted average number of common shares outstanding
      during the period. Entities with complex capital structures must also present
      diluted EPS, which reflects the potential dilution that could occur if
      securities or other contracts to issue common stock were exercised or converted
      into common shares. The Company does not have a complex capital structure and,
      accordingly, has presented only basic EPS.





***Note
      3. Guarantees***





Stand-by
      letters of credit are conditional commitments issued by the Bank to guarantee
      the performance of a customer to a third party. Those guarantees are primarily
      issued to support public and private borrowing arrangements, including bond
      financing and similar transactions. The credit risk involved in issuing letters
      of credit is essentially the same as that involved in extending loan facilities
      to customers. Since some of the letters of credit are expected to expire without
      being drawn upon, the total commitment amounts do not necessarily represent
      future cash requirements.





The
      estimated fair value of the Company's stand-by letters of credit was $14
      thousand and $12 thousand at September 30, 2006 and December 31, 2005,
      respectively. The estimated fair value of stand-by letters of credit at their
      inception is equal to the fee that is charged to the customer by the Company.
      Generally, the Company’s stand-by letters of credit have a term of one year. In
      determining the fair values disclosed above, the fees were reduced on a
      straight-line basis from the inception of each stand-by letter of credit to
      the
      respective dates above.


*Index*
 8


***Note
      4. Employee Benefit Plans***





Effective
      February 28, 2006, the Company's defined benefit pension plan was frozen. Under
      the frozen plan, no future benefits will be accrued for plan participants,
      nor
      will any new participants be enrolled in the plan. This plan is sponsored by
      the
      Company's bank subsidiary. Prior to being frozen, the plan covered employees
      who
      had attained the age of 21 and completed one year of service. Although the
      plan
      was frozen, the Company maintains the responsibility for funding the plan.
      The
      Company's funding practice is to contribute at least the minimum amount annually
      to meet minimum funding requirements. An annual minimum contribution is not
      required in 2006 because the plan is more than 100% funded. Plan assets consist
      primarily of marketable fixed income securities and common stocks. Plan benefits
      are based on years of service and the employee’s average compensation during the
      five highest consecutive years of the last ten years of employment.





The
      Components of Net Periodic Benefit Cost (Benefit), based on a September 30,
      2005
      measurement date and the subsequent curtailment date of February 28, 2006,
      are:





**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,*****dollars
                in thousands***
            **2006**
            
            **2005**
            
            **2006**
            
            **2005**Service
                Cost
            
            **$**
            **103**
            
            $
            171
            
            **$**
            **314**
            
            $
            510Interest
                Cost
            
            
            **235**
            
            
            231
            
            
            **672**
            
            
            693Expected
                Return on Plan Assets
            
            
            **(347**
            **)**
            
            (312
            )
            
            **(1,024**
            **)**
            
            (933
            )Net
                Amortization
            
            
            **35**
            
            
            54
            
            
            **84**
            
            
            159Curtailment
                Expense
            
            
            **0**
            
            
            0
            
            
            **190**
            
            
            0**$**
            **26**
            
            $
            144
            
            **$**
            **236**
            
            $
            429





***Note
      5. Other Comprehensive Income***





The
      following is a summary of changes in other comprehensive income for the periods





**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,*****dollars
                in thousands***
            **2006**
            
            **2005**
            
            **2006**
            
            **2005**Unrealized
                Holding Gains (Losses) Arising During the Period Net of
                Tax(Pre-tax
                Amount of $4,502, ($2,045), $354, and ($2,781))
            
            **$**
            **2,747**
            
            
            ($1,247
            )
            **$**
            **214**
            
            
            ($1,700
            )Reclassification
                Adjustment for (Gains) Realized in Net Income During the
                Period,Net
                of Tax (Pre-tax Amount of $0, ($1), ($271) and ($369))
            
            
            **0**
            
            
            (1
            )
            
            **(165**
            **)**
            
            (223
            )Other
                Comprehensive Income (Loss), Net of Tax of $1,753, ($796),
                $34,and
                ($1,227)
            
            **$**
            **2,747**
            
            
            ($1,248
            )
            **$**
            **49**
            
            
            ($1,923
            )





***Note
      6. Loss on Disposal / Impairment of Fixed Assets***





At
      the
      end of the second quarter of 2006, our immediate market area experienced
      flooding due to torrential rains. As a result of the flood, two of our branch
      buildings, located in Sidney, NY and Walton, NY, our main office facility,
      and
      our former insurance sales office in Walton, NY, and the contents of each
      office, were damaged or destroyed by floodwaters. Therefore, as of September
      30,
      2006, a loss of $328 thousand on the disposal and impairment of these assets
      was
      recorded. The furniture, fixtures and equipment that were components of these
      branches had a carrying value of $90 thousand and a related loss of $90 thousand
      was recorded. The buildings had a combined carrying amount of $592 thousand
      and
      a loss of $238 thousand was recorded. This loss is included on the Consolidated
      Statement of Income for the nine months ended September 30, 2006 as a component
      of Other Miscellaneous Expenses.





During
      the three-month period ended September 30, 2006, we were advised by our property
      and casualty insurance carrier that we would be receiving an insurance
      settlement for the flood-related losses incurred on our former insurance sales
      office facility. Accordingly, during the three-month period ended September
      30,
      2006, we recorded a $59 thousand recovery in Other Miscellaneous Expenses to
      offset an equal amount of expense recorded in the same quarter due to the
      impairment and disposal of fixed assets at this facility and related clean-up
      costs.


*Index*
 9


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





A.
      General





The
      primary objectives of this quarterly report are to provide: (i) an overview
      of
      the material changes in our financial condition, including liquidity and capital
      resources, at September 30, 2006, as compared to December 31, 2005; (ii) a
      comparison of our results of operations for the three-month period ended
      September 30, 2006, as compared to the three-month period ended September 30,
      2005; and (iii) a comparison of our results of operations for the nine-month
      period ended September 30, 2006, as compared to the nine-month period ended
      September 30, 2005.





Our
      financial performance is heavily dependent upon net interest income, which
      is
      the difference between the interest income earned on our loans and investment
      securities less the interest paid on our deposits and borrowings. Results of
      operations are also affected by the provision for loan losses, fees collected
      for trust services, service charges on deposit accounts, insurance commission
      income, investment securities gains (losses), the increase in the cash surrender
      value on bank owned life insurance, other service fees, and other income. Our
      non-interest expenses primarily consist of salaries, employee benefits,
      occupancy expense, furniture and equipment expense, computer service fees,
      advertising and marketing expense, professional fees and other miscellaneous
      expenses. Results of operations are also influenced by general economic and
      competitive conditions (particularly changes in interest rates), government
      policies, changes in Federal or State tax law, and the actions of our regulatory
      authorities.





*Critical
      Accounting Policies.* Our
      management considers the accounting policy relating to the allowance for loan
      losses to be a critical accounting policy given the uncertainty in evaluating
      the level of the allowance required to cover credit losses inherent in the
      loan
      portfolio and the material effect that such judgments can have on the results
      of
      operations. While management’s September 30, 2006 evaluation of the allowance
      for loan losses indicated that the allowance was adequate, under adversely
      different conditions or assumptions, the allowance would need to be increased.
      For example, if historical loan loss experience significantly worsened or if
      current economic conditions significantly deteriorated, additional provisions
      for loan losses would be required to increase the allowance, which would
      negatively affect earnings. In addition, the assumptions and estimates used
      in
      our internal reviews of non-performing loans and potential problem loans had
      a
      significant impact on the overall analysis of the adequacy of the allowance
      for
      loan losses. While we have concluded that the September 30, 2006 evaluation
      of
      collateral values was reasonable under the circumstances, if collateral
      valuations were significantly lowered on certain categories of loans, our
      allowance for loan losses would also require additional provisions for loan
      losses.





*Recent
      Accounting Pronouncements* .
      On
      September 13, 2006, the Securities and Exchange Commission (the “SEC”) issued
      Staff Accounting Bulletin (“SAB”) No. 108 expressing the SEC staff’s views
      regarding the process of quantifying financial statement misstatements. This
      SAB
      addresses the diversity in practice regarding quantifying financial statement
      misstatements and the build up of improper amounts on the balance sheet. The
      built up misstatements, while not considered material in the individual years
      in
      which the misstatements were built up, may be considered material in a
      subsequent year if a Company were to correct those misstatements through current
      period earning. Initial application of SAB No. 108 allows registrants to elect
      not to restate prior periods but to reflect the initial application in their
      annual financial statements covering the first fiscal year ending after November
      15, 2006. The cumulative effect of the initial application should be reported
      in
      the carrying amounts of assets and liabilities as of the beginning of that
      fiscal year, and the offsetting adjustment, net of tax, should be made to the
      opening balance of retained earnings for that year. Registrants will need to
      disclose the nature and amount of each item, when and how each error being
      corrected arose, and the fact that the errors were previously considered
      immaterial. The Company is currently evaluating the impact this will have on
      its
      financial statements and will adopt SAB No. 108 in its annual report on Form
      10-K for the year ending December 31, 2006.





In
      September 2006, the Financial Accounting Standards Board (the “FASB”) issued
      Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for
      Defined Benefit Pension and Other Postretirement Plans - an Amendment of FASB
      Statements No. 87, 88, 106 and 132(R)” (SFAS 158). This statement requires
      balance sheet recognition of the overfunded or underfunded status of pension
      and
      postretirement benefit plans. Under SFAS 158, actuarial gains and losses, prior
      service costs or credits, and any remaining transition assets or obligations
      that have not been recognized under previous accounting standards must be
      recognized in Accumulated Other Comprehensive Income/(Loss), net of tax effects,
      until they are amortized as a component of net periodic benefit cost. In
      addition, the


*Index*
 10


measurement
      date, the date at which plan assets and the benefit obligation are measured,
      is
      required to be the company’s fiscal year end. Presently, we use a September 30
      measurement date for our pension and postretirement benefit plans. SFAS 158
      is
      effective for publicly held companies for fiscal years ending after December
      15,
      2006, except for the measurement date provisions, which are effective for fiscal
      years ending after December 15, 2008. On February 28, 2006 we froze our defined
      benefit pension plan and revalued our plan’s actuarial calculations. Based on
      our plan’s actuarial calculations as of the February 28, 2006 remeasurement
      date, the adoption of SFAS 158 would decrease total assets by approximately
      $1.192 million with a corresponding increase, net of tax, of accumulated other
      comprehensive loss. The adoption of SFAS 158 will not affect our results of
      operations. By the time of adoption at December 31, 2006, plan performance
      and
      actuarial assumptions could have an impact on the actual amounts recorded.





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157, “Fair Value Measurements” which is effective for fiscal years beginning
      after November 15, 2007 and for interim periods within those years. This
      statement defines fair value, establishes a framework for measuring fair value,
      and expands the related disclosure requirements. We are currently evaluating
      the
      potential impact of this statement.





In
      June
      2006, the FASB issued FASB Interpretation No. 48, “ *Accounting
      for Uncertainty in Income Taxes - An Interpretation of FASB Statement No
      109* ”
(“FIN
      48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
      in an enterprise’s financial statements in accordance with FASB Statement No
      109, “ *Accounting
      for Income Taxes* ”
FIN
      48
      also prescribes a recognition threshold and measurement attribute for the
      financial statement recognition and measurement of a tax position taken or
      expected to be taken in a tax return. In addition, FIN 48 provides guidance
      on
      derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure and transition. The provisions of FIN 48 are effective
      for
      fiscal years beginning after December 15, 2006. The provisions of FIN 48 are
      to
      be applied to all tax positions upon initial adoption of this standard. Tax
      positions must meet the more-likely-than-not recognition threshold at the
      effective date in order for the related tax benefits to be recognized or
      continue to be recognized upon adoption of FIN 48. The Company has not yet
      determined the potential financial statement impact of adopting FIN
      48.





In
      March
      2006, the FASB issued Statement of Financial Accounting Standards No. 156,
      “ *Accounting
      for Servicing of Financial Assets - an amendment of FASB Statement No
      140* ”,
      which
      is effective for fiscal years beginning after September 15, 2006. This statement
      was issued to simplify the accounting for servicing rights and to reduce the
      volatility that results from using different measurement attributes. The
      adoption of SFAS 156 is not expected to have a material effect on our
      consolidated financial position, results of operations, or cash
      flows.





In
      February 2006, the FASB issued Statement of Financial Accounting Standards
      No
      155, “ *Accounting
      for Certain Hybrid Financial Instruments* ”,
      which
      eliminates the exemption from applying SFAS 133 to interests in securitized
      financial assets so that similar instruments are accounted for similarly
      regardless of the form of the instruments. SFAS 155 also allows the election
      of
      fair value measurement at acquisition, at issuance, or when a previously
      recognized financial instrument is subject to a remeasurement event. Adoption
      is
      effective for all financial instruments acquired or issued after the beginning
      of the first fiscal year that begins after September 15, 2006. Early adoption
      is
      permitted. The adoption of SFAS 155 is not expected to have a material effect
      on
      our consolidated financial position, results of operations, or cash
      flows.








B.
      Financial Condition and Performance Overview





Between
      December 31, 2005 and September 30, 2006, we experienced modest growth in total
      assets, total gross loans and total deposits. Total assets increased only $6.034
      million or 0.8% between the periods, while total loans and total deposits
      increased by $800 thousand or 0.2% and $12.396 million or 2.0%, respectively.
      We
      attribute our modest growth to a weak central New York economy and a lack of
      population growth in our immediate market area.





Although
      our total assets did not grow significantly between the periods, the composition
      of our consolidated statement of condition did change. In particular, we
      increased our federal funds sold holdings between the periods, providing us
      with
      improved liquidity. We also experienced a shift in our mix of deposits. As
      short-term interest rates increased throughout the period, depositors began
      to
      seek out higher rate deposit accounts. Hence, we experienced a decrease in
      our
      low-cost savings and NOW


*Index*
 11


account
      balances, and an increase in our high-cost money market and certificates of
      deposit.





Our
      asset
      quality improved in some respects and deteriorated in others between the
      periods. In particular, the level of our non-performing assets decreased from
      $4.938 million or 0.66% of total assets at December 31, 2005 to $2.138 million
      or 0.28% of total assets at September 30, 2006. Conversely, the level of
      potential problem loans increased from $7.897 million at December 31, 2005
      to
      $14.358 million at September 30, 2006. The level of delinquent loans remained
      relatively stable between the periods.





Our
      net
      income and earnings per share decreased between comparable three and nine-month
      periods. Net income and earnings per share for the nine-month period ended
      September 30, 2006 were $4.951 million and $0.45, respectively, as compared
      to
      net income and earnings per share of $6.151 million and $0.55, respectively,
      for
      the nine-month period ended September 30, 2005. Similarly, for the three-month
      period ended September 30, 2006, net income and earnings per share were $1.644
      million and $0.15, respectively. This compares to net income of $1.982 million
      and earnings per share of $0.18 in the three-month period ended September 30,
      2005. The decrease in earnings between comparable three and nine-month periods
      was due to several factors, including an increase in the provision for loan
      losses, a decrease in net interest income, and a significant increase in
      non-interest expense. Throughout 2006 the yield curve remained very flat to
      inverted. This interest rate environment made it very difficult for us to
      maintain or improve net interest income, particularly when earning assets were
      not growing significantly. The provision for loan losses was increased during
      2006, principally because the level of potential problem loans increased. And
      finally, non-interest expense increased due to several factors, including losses
      incurred due to a regional flood in the second quarter of 2006, an increase
      in
      professional fees, and the conversion of our core processing computer
      system.





The
      following tables set forth in this quarterly report provide readers with
      supplementary information, which is not directly obtainable from the interim
      unaudited financial statements provided in PART I, Item 1 of this quarterly
      report. These tables are to be read in conjunction with our management
      discussion and analysis narrative regarding the financial condition, results
      of
      operations, liquidity and capital resources contained within this
      report.





Asset
      and
      Yield Summary Table:





The
      following tables set forth the total dollar amount and resultant yields of
      interest income from average earning assets, as well as the interest expense
      on
      average interest bearing liabilities for the periods stated. No tax equivalent
      adjustments were made. Average balances are daily averages.


*Index*
 12





**For
                the Three Months Ended September 30,****2006**
            
            **2005**Average
              Outstanding
              Balance
            
            Interest
              Earned
              /Paid
            
            Yield
                /
              Rate
            
            Average
              Outstanding
              Balance
            
            Interest
              Earned
                /
              Paid
            
            Yield
                /
              Rate(Dollars
                in thousands)**Earning
                Assets:**Federal
                funds sold
            
            $
            9,226
            
            $
            122
            
            
            5.25
            %
            $
            15,311
            
            $
            132
            
            
            3.42
            %Interest
                bearing deposits
            
            
            3,114
            
            
            29
            
            
            3.69
            %
            
            9,767
            
            
            121
            
            
            4.92
            %Securities
                (1)
            
            
            286,606
            
            
            3,020
            
            
            4.18
            %
            
            291,090
            
            
            2,895
            
            
            3.95
            %Loans
            
            
            405,904
            
            
            7,763
            
            
            7.59
            %
            
            398,129
            
            
            7,002
            
            
            6.98
            %Total
                earning assets
            
            
            704,850
            
            
            10,934
            
            
            6.15
            %
            
            714,297
            
            
            10,150
            
            
            5.64
            %Non-earning
                assets
            
            
            41,187
            
            
            
            
            
            
            
            
            42,538Total
                assets
            
            $
            746,037
            
            
            
            
            
            
            
            $
            756,835**Liabilities:**Savings
                accounts
            
            $
            86,789
            
            $
            139
            
            
            0.64
            %
            $
            99,622
            
            $
            169
            
            
            0.67
            %Money
                market accounts
            
            
            68,782
            
            
            675
            
            
            3.89
            %
            
            44,428
            
            
            307
            
            
            2.74
            %NOW
                accounts
            
            
            86,006
            
            
            246
            
            
            1.13
            %
            
            109,962
            
            
            275
            
            
            0.99
            %Time
                & other deposit accounts
            
            
            299,538
            
            
            3,005
            
            
            3.98
            %
            
            275,676
            
            
            2,275
            
            
            3.27
            %Borrowings
            
            
            65,553
            
            
            626
            
            
            3.79
            %
            
            80,700
            
            
            709
            
            
            3.49
            %Total
                interest bearing liabilities
            
            
            606,668
            
            
            4,691
            
            
            3.07
            %
            
            610,388
            
            
            3,735
            
            
            2.43
            %Non-interest
                bearing deposits
            
            
            75,878
            
            
            
            
            
            
            
            
            73,058Other
                non-interest bearing liabilities
            
            
            2,980
            
            
            
            
            
            
            
            
            5,241Total
                liabilities
            
            
            685,526
            
            
            
            
            
            
            
            
            688,687Shareholders'
                equity
            
            
            60,511
            
            
            
            
            
            
            
            
            68,148Total
                liabilities and shareholders' equity
            
            $
            746,037
            
            
            
            
            
            
            
            $
            756,835Net
                interest income
            
            
            
            
            $
            6,243
            
            
            
            
            
            
            
            $
            6,415Net
                interest rate spread (2)
            
            
            
            
            
            
            
            
            3.08
            %
            
            
            
            
            
            
            
            3.21
            %Net
                earning assets
            
            $
            98,182
            
            
            
            
            
            
            
            $
            103,909Net
                interest margin (3)
            
            
            
            
            
            
            
            
            3.51
            %
            
            
            
            
            
            
            
            3.56
            %Ratio
                of earning assets to interest bearing liabilities
            
            
            116.18
            %
            
            
            
            
            
            
            
            117.02
            %(1)
                Securities are shown at average amortized cost with net unrealized
                gains
                or losses on securities available-for-sale included as a component
                of
                non-earning assets.(2)
                Net interest rate spread represents the difference between the weighted
                average yield on interest-earning assets and the weighted average
                cost of
                interest-bearing liabilities.(3)
                The net interest margin, also known as the net yield on average
                interest-earning assets, represents net interest income as a percentage
                of
                average interest-earning
                assets.


*Index*
 13





**For
                the Nine Months Ended September 30,****2006**
            
            **2005**Average
              Outstanding
              Balance
            
            Interest
              Earned
              /Paid
            
            Yield
                /
              Rate
            
            Average
              Outstanding
              Balance
            
            Interest
              Earned
              /Paid
            
            Yield
                /
              Rate(Dollars
                in thousands)**Earning
                Assets:**Federal
                funds sold
            
            $
            6,267
            
            $
            235
            
            
            5.01
            %
            $
            8,428
            
            $
            199
            
            
            3.16
            %Interest
                bearing deposits
            
            
            2,770
            
            
            74
            
            
            3.57
            %
            
            9,792
            
            
            356
            
            
            4.86
            %Securities
                (1)
            
            
            294,876
            
            
            9,197
            
            
            4.17
            %
            
            298,770
            
            
            8,925
            
            
            3.99
            %Loans
            
            
            402,307
            
            
            22,544
            
            
            7.49
            %
            
            398,351
            
            
            20,430
            
            
            6.86
            %Total
                earning assets
            
            
            706,220
            
            
            32,050
            
            
            6.07
            %
            
            715,341
            
            
            29,910
            
            
            5.59
            %Non-earning
                assets
            
            
            41,659
            
            
            
            
            
            
            
            
            41,773Total
                assets
            
            $
            747,879
            
            
            
            
            
            
            
            $
            757,114**Liabilities:**Savings
                accounts
            
            $
            89,114
            
            $
            419
            
            
            0.63
            %
            $
            99,005
            
            $
            482
            
            
            0.65
            %Money
                market accounts
            
            
            59,891
            
            
            1,610
            
            
            3.59
            %
            
            39,245
            
            
            700
            
            
            2.38
            %NOW
                accounts
            
            
            92,223
            
            
            789
            
            
            1.14
            %
            
            116,632
            
            
            854
            
            
            0.98
            %Time
                & other deposit accounts
            
            
            298,961
            
            
            8,534
            
            
            3.82
            %
            
            277,117
            
            
            6,549
            
            
            3.16
            %Borrowings
            
            
            68,514
            
            
            1,947
            
            
            3.80
            %
            
            83,936
            
            
            2,218
            
            
            3.53
            %Total
                interest bearing liabilities
            
            
            608,703
            
            
            13,299
            
            
            2.92
            %
            
            615,935
            
            
            10,803
            
            
            2.34
            %Non-interest
                bearing deposits
            
            
            71,340
            
            
            
            
            
            
            
            
            67,009Other
                non-interest bearing liabilities
            
            
            3,616
            
            
            
            
            
            
            
            
            6,051Total
                liabilities
            
            
            683,659
            
            
            
            
            
            
            
            
            688,995Shareholders'
                equity
            
            
            64,220
            
            
            
            
            
            
            
            
            68,119Total
                liabilities and shareholders' equity
            
            $
            747,879
            
            
            
            
            
            
            
            $
            757,114Net
                interest income
            
            
            
            
            $
            18,751
            
            
            
            
            
            
            
            $
            19,107Net
                interest rate spread (2)
            
            
            
            
            
            
            
            
            3.15
            %
            
            
            
            
            
            
            
            3.25
            %Net
                earning assets
            
            $
            97,517
            
            
            
            
            
            
            
            $
            99,406Net
                interest margin (3)
            
            
            
            
            
            
            
            
            3.55
            %
            
            
            
            
            
            
            
            3.57
            %Ratio
                of earning assets to interest bearing liabilities
            
            
            116.02
            %
            
            
            
            
            
            
            
            116.14
            %(1)
                Securities are shown at average amortized cost with net unrealized
                gains
                or losses on securities available-for-sale included as a component
                of
                non-earning assets.(2)
                Net interest rate spread represents the difference between the weighted
                average yield on interest-earning assets and the weighted average
                cost of
                interest-bearing liabilities.(3)
                The net interest margin, also known as the net yield on average
                interest-earning assets, represents net interest income as a percentage
                of
                average interest-earning assets.





*Index*
 14


Table
      of
      Non-performing Assets:





The
      following table sets forth information regarding non-performing loans and assets
      as of the periods indicated.








*Dollars
                in Thousands*
            
            At
                September 30,
              2006
            
            At
                December 31,
              2005Loans
                in Non-Accrual Status:Residential
                real estate (1)
            
            $
            387
            
            $
            327Commercial
                real estate
            
            
            1,199
            
            
            2,287Commercial
                (2)
            
            
            400
            
            
            1,191Consumer
            
            
            3
            
            
            61Total
                non-accruing loans
            
            
            1,989
            
            
            3,866Loans
                Contractually Past Due 90 Days or More and Still Accruing
                Interest
            
            
            129
            
            
            181Troubled
                Debt Restructured Loans
            
            
            0
            
            
            871Total
                non-performing loans
            
            
            2,118
            
            
            4,918Other
                real estate owned
            
            
            20
            
            
            20Total
                non-performing assets
            
            $
            2,138
            
            $
            4,938Total
                non-performing assets as a percentage of total assets
            
            
            0.28
            %
            
            0.66
            %Total
                non-performing loans as a percentage of total loans
            
            
            0.52
            %
            
            1.22
            %(1)
                Includes loans secured by 1-4 family dwellings, 5+ family residential
                dwellings, home equity loans and residential construction
                loans.(2)
                Includes commercial and industrial loans, agricultural loans and
                obligations (other than securities and leases) of states and political
                subdivisions in the United States.





*Index*
 15


Analysis
      of the Allowance for Loan Losses Table:





The
      following table sets forth changes in the allowance for loan losses for the
      periods indicated:





**Three
                months ended September 30,**
            
            **Nine
                months ended September 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**(Dollars
                in thousands)
            
            (Dollars
                in thousands)Balance
                at beginning of period
            
            $
            6,241
            
            $
            6,368
            
            $
            6,640
            
            $
            6,250Charge
                offs:Residential
                real estate (1)
            
            
            0
            
            
            0
            
            
            47
            
            
            18Commercial
                real estate
            
            
            1
            
            
            0
            
            
            2
            
            
            0Commercial
                (2)
            
            
            3
            
            
            0
            
            
            1,015
            
            
            28Consumer
            
            
            213
            
            
            128
            
            
            612
            
            
            597Total
                charge offs
            
            
            217
            
            
            128
            
            
            1,676
            
            
            643Recoveries:Residential
                real estate (1)
            
            
            12
            
            
            2
            
            
            28
            
            
            38Commercial
                real estate
            
            
            0
            
            
            0
            
            
            0
            
            
            0Commercial
                (2)
            
            
            14
            
            
            1
            
            
            49
            
            
            29Consumer
            
            
            54
            
            
            54
            
            
            223
            
            
            143Total
                recoveries
            
            
            80
            
            
            57
            
            
            300
            
            
            210Net
                charge-offs
            
            
            137
            
            
            71
            
            
            1,376
            
            
            433Provision
                for loan losses
            
            
            420
            
            
            300
            
            
            1,260
            
            
            780Balance
                at end of period
            
            $
            6,524
            
            $
            6,597
            
            $
            6,524
            
            $
            6,597Ratio
                of net charge-offs during the period to average
              loans
                outstanding during the period (annualized)
            
            
            0.13
            %
            
            0.07
            %
            
            0.46
            %
            
            0.15
            %Allowance
                for loan losses to total loans
            
            
            1.61
            %
            
            1.66
            %
            
            1.61
            %
            
            1.66
            %Allowance
                for loan losses to non-performing loans
            
            
            308
            %
            
            146
            %
            
            308
            %
            
            146
            %(1)
                Includes loans secured by 1-4 family dwellings, 5+ family residential
                dwellings, home equity loans and residential construction
                loans.(2)
                Includes commercial and industrial loans, agricultural loans and
                obligations (other than securities and leases) of states and political
                subdivisions in the United States.








*Index*
 16


C.
      Comparison of Financial Condition at September 30, 2006, and December 31,
      2005





*Overview.* Our
      financial condition changed modestly between December 31, 2005 and September
      30,
      2006. Total assets and total loans increased by less than 1.0% between the
      periods. Specifically, total assets increased $6.034 million or 0.8%, while
      total loans increased $800 thousand or 0.2%. Between December 31, 2005 and
      September 30, 2006 our available-for-sale investment securities portfolio
      decreased significantly due to amortizing principal payments and maturities.
      The
      substantial majority of these proceeds were reinvested in short-term (overnight)
      federal funds deposits. Between December 31, 2005 and September 30, 2006, the
      Federal Open Market Committee raised the Federal Funds target rate 1.00%. This
      prompted us to retain more of our investment funds in overnight, liquid federal
      funds sold. Our federal funds sold position increased from $2.900 million at
      December 31, 2005 to $18.500 million at September 30, 2006, a $15.600 million
      increase; while our available-for-sale investment securities portfolio decreased
      from $240.350 million at December 31, 2005 to $223.938 million at September
      30,
      2005, a $16.412 million decrease.





Total
      deposits increased modestly between the periods from $604.958 million at
      December 31, 2005 to $617.354 million at September 30, 2006, a $12.396 million
      or 2.0% increase. The growth in deposits was principally due to an increase
      in
      certificates of deposit. As short-term interest rates increased between the
      periods, depositors transferred funds from interest bearing and non-interest
      bearing non-maturity savings, NOW and demand deposit accounts to higher yielding
      certificates of deposit. In addition, we more aggressively pursued municipal
      customer relationships, including certificates of deposit.





Shareholders’
      equity decreased $4.692 million or 6.9% between December 31, 2005 and September
      30, 2006. Specifically, total shareholders’ equity decreased from $67.717
      million at December 31, 2005 to $63.025 million at September 30, 2006. During
      the nine-month period ended September 30, 2006, we repurchased 576,755 shares
      of
      our common stock. Of these, 536,155 shares were purchased pursuant to a
      self-tender offer consummated during the second quarter. The shares were
      purchased in conjunction with a strategic initiative to reduce the number of
      shares outstanding and shareholders’ equity to improve future earnings per share
      and return on equity for our shareholders.




*Asset
      Quality.* We use
      several measures to determine the overall credit quality of our loan portfolio.
      These include the level of delinquent loans (those 30 or more days delinquent,
      excluding non-performing loans), the level of non-performing loans, the level
      of
      potential problem loans, and the dollar amount and type of loan charge-offs
      we
      experience. Between December 31, 2005, and September 30, 2006, the level of
      non-performing and delinquent loans declined (an improvement), while potential
      problem loans increased. Net charge-offs increased during the nine-month period
      ended September 30, 2006 as compared to the nine-month period ended September
      30, 2005.





Total
      non-performing loans, including non-accruing loans, loans 90 days or more past
      due and still accruing interest, and troubled debt restructured loans decreased
      $2.800 million between December 31, 2005 and September 30, 2006, from $4.918
      million to $2.118 million. During the first quarter of 2006, a $1.646 million
      commercial real estate loan in non-accrual status was paid-off in full by a
      related party of the borrower. In addition, during the first quarter of 2006,
      an
      $871 thousand loan, previously recorded as a troubled debt restructured loan,
      was removed from troubled debt status. At September 30, 2006, the loan was
      performing and yielding a market rate. And finally, during the first quarter,
      we
      charged-off a $746 thousand loan to one of our large commercial borrowers,
      which
      was previously on non-accrual status. This decrease in non-performing loans
      was
      offset by the addition of eleven (11) loans with small balances and one
      commercial real estate loan with a $417 thousand balance being placed on
      non-accrual status during the first three quarters of 2006.





Net
      loan
      charge-offs increased significantly during the first three quarters of 2006
      to
      $1.376 million, due principally to a $981 thousand charge-off for loans made
      to
      one of our large commercial borrowers, including the $746 thousand net
      charge-off discussed above. By comparison, during the first three quarters
      of
      2005 we recorded net charge-offs of $433 thousand. Net charge-offs for the
      third
      quarter of 2006 totaled $137 thousand, as compared to $71 thousand for the
      third
      quarter of 2005, a $66 thousand increase.





Potential
      problem loans are loans which are currently performing, but where information
      about possible credit problems exists. The amount of potential problem loans
      may
      vary significantly from quarter to quarter due to our significant volume of
      commercial loans with balances in excess of $1.0 million. Between December
      31,
      2005 and September 30, 2006, potential problem loans increased $6.461 million,
      from $7.897 million at December 31, 2005 to $14.358 million at September 30,
      2006. The increase in


*Index*
 17


potential
      problem loans from the period ended December 31, 2005 to the period ended
      September 30, 2006, was primarily due to a decline in the financial condition
      of
      seven (7) large commercial borrowers during 2006 with combined total loan
      balances of $6.594 million.





At
      September 30, 2006, loans that were 30 or more days delinquent (excluding
      non-performing loans) totaled $1.922 or 0.48% of loans outstanding. By
      comparison, at December 31, 2005, we had $2.062 million or 0.51% of loans
      outstanding in this same category. The level of delinquent loans has remained
      low and within reasonable industry standards throughout 2006.





The
      allowance for loan losses at September 30, 2006 was $6.524 million or 1.61%
      of
      gross loans outstanding. This compares to $6.640 million or 1.64% of loans
      outstanding at December 31, 2005. During the nine-month period ended September
      30, 2006, net charge-offs on loans totaled $1.376 million. This compares to
      $433
      thousand in net charge-offs during the nine-month period ended September 30,
      2005, a $943 thousand increase.  During
      the first quarter of 2006, we recorded a $981 thousand charge-off on two loans
      to one of our large commercial borrowers. Prior to the first quarter of 2006,
      we
      allocated $826 thousand in the allowance for loan losses for the potential
      losses on these loans due to the weakened financial condition of the borrower.
      During the first quarter of 2006, we determined that a significant portion
      of
      the gross loans outstanding to this borrower were non-collectible and
      charged-off $981 thousand to the allowance for loan losses. We recorded $1.260
      thousand in the provision for loan losses during the nine-month period ended
      September 30, 2006. This compares to $780 thousand in nine-month period ended
      September 30, 2005, a $480 thousand increase. The increase was principally
      due
      to a significant increase in potential problem loans during 2006. Management
      and
      the Board of Directors deemed the allowance for loan losses as adequate at
      September 30, 2006 and December 31, 2005.





The
      credit quality of the investment securities portfolios, both available-for-sale
      and held-to-maturity, remained strong. At September 30, 2006, 99.8% of the
      securities held in the Company’s bond portfolio were rated “A” or better by
      Moody’s credit rating service; 95.7% were rated AAA. By comparison, at December
      31, 2005, 99.8% were rated “A” or better and 95.1% were rated AAA.








D.
      Comparison of Results of Operations for the Three Months Ended September 30,
      2006 and 2005





*Overview.* During
      the third quarter of 2006, net income and earnings per share were $1.644 million
      and $0.15, respectively. This compares to net income of $1.982 million and
      earnings per share of $0.18 during the third quarter of 2005. The decrease
      in
      net income was due to decreases in net interest income and non-interest income
      and increases in the provision for loan losses and non-interest expense. Net
      interest income decreased from $6.415 million in the third quarter of 2005
      to
      $6.243 million in the third quarter of 2006, a $172 thousand or 2.7% decrease.
      An unfavorable interest rate environment and a decrease in earning assets
      between comparable quarters were the primary reasons net interest income
      decreased. Non-interest income decreased from $1.403 million in the three-month
      period ended September 30, 2005 to $1.375 million for the three month period
      ended September 30, 2006, a $28 thousand or 2.0% decrease. Decreases in trust
      and other service fees between comparable periods were partially offset by
      improvements in other components of non-interest income. During the third
      quarter of 2006, we recorded $420 thousand in the provision for loan losses.
      This compares to $300 thousand in the third quarter of 2005, a $120 thousand
      or
      40.0% increase. A substantial increase in potential problem loans and an
      increase in net charge-offs were the primary reasons the provision for loan
      losses increased between periods. Non-interest expense increased to $5.069
      million in the third quarter of 2006, as compared to $4.836 million in the
      third
      quarter of 2005, a $233 thousand or 4.8% increase. Income taxes decreased from
      $700 thousand in the third quarter of 2005 to $485 thousand in the third quarter
      of 2006, a $215 thousand or 30.7% decrease, due to the decrease in income before
      taxes.





The
      decrease in net income resulted in a decrease in both our return on average
      assets and return on average shareholders’ equity. More specifically, during the
      third quarter of 2006 our return on average assets and return on average equity
      were 0.87% and 10.78%, respectively, as compared to 1.04% and 11.54% during
      the
      third quarter of 2005.




*Net
      Interest Income.* Net
      interest income is our most significant source of revenue. During the third
      quarter of 2006 and third quarter of 2005, net interest income comprised 82%
      of
      our net revenue (net interest income plus non-interest income). In the
      three-month period ended September 30, 2006, our net interest income was $6.243
      million. By comparison, for the three-month period ended September
      30,


*Index*
 18


2005,
      our
      net interest income was $6.415 million. The $172 thousand or 2.7% decrease
      in
      net interest income was principally due to a significant increase in the cost
      of
      our interest bearing liabilities (principally deposit funding) offset by
      increases in interest income on earning assets (principally loans).





In
      June
      2006 the Federal Open Market Committee raised the target Federal funds rate
      to
      5.25%. This was the seventeenth consecutive 25 basis point increase in the
      target Federal funds rate over a 2-year period. These actions caused the
      Treasury yield curve to become very flat to inverted, an interest rate
      environment which generally makes it difficult for us to maintain or improve
      net
      interest margin because a portion of our net interest margin has historically
      been derived from mismatching long-term earning assets with short-term interest
      bearing liabilities. Although the Federal Open Market Committee did not raise
      the target Federal funds rate at either its August or September 2006 meetings,
      the yield curve remained very flat (to inverted) throughout the third quarter
      of
      2006, thus providing us with limited opportunity to improve net interest
      income.





Between
      comparable quarterly periods, total interest and dividend income increased
      $784
      thousand or 7.7%, from $10.150 million for the three-month period ended
      September 30, 2005 to $10.934 million for the three-month period ended September
      30, 2006. Between the quarterly periods, the weighted average yield on the
      loan
      portfolio increased 61 basis points, from 6.98% in the third quarter of 2005
      to
      7.59% in the third quarter of 2006. Between the periods, the prime rate, the
      primary index rate for our variable rate loans, increased significantly, which
      drove the increase in our loan yields. In addition, the average volume of loans
      outstanding increased from $398.129 million in the three-month period ended
      September 30, 2005 to $405.904 million in the three-month period ended September
      30, 2006. The increase in loan yields and the average volume of loans
      outstanding contributed $761 thousand of additional interest income between
      comparable quarterly periods.





Interest
      expense increased $956 thousand or 25.6% for the quarterly period ended
      September 30, 2006, versus the quarterly period ended September 30, 2005.
      Between the comparable quarterly periods interest rates increased. This prompted
      us, as well as our competitors, to raise the interest rate paid on
      interest-bearing deposit accounts, particularly the more interest-sensitive
      deposit accounts, such as money market accounts and time accounts. Between
      the
      periods we recorded a $751 thousand net increase in the cost of interest bearing
      deposit liabilities due to increase in interest rates. In addition, due to
      the
      higher interest rates, our customers increased the amount of deposits held
      in
      money market and time accounts. The combination of higher interest rates and
      increased deposit levels increased the interest expense recorded on money market
      accounts from $307 thousand during the third quarter of 2005 to $675 thousand
      during the third quarter of 2006, a $368 thousand increase. Similarly, the
      interest expense recorded on time and other deposit accounts increased from
      $2.275 million during the third quarter of 2005 to $3.005 million during the
      third quarter of 2006, a $730 thousand increase.





This
      flat
      yield curve that has persisted for several quarters has eliminated wholesale
      leverage opportunities and reduced the economic benefit of borrowing funds
      throughout the period, causing us to reduce borrowings and, in turn, our earning
      assets. Wholesale leverage is a term which describes a transaction where we
      borrow monies at the Federal Home Loan Bank of New York or other wholesale
      source to purchase earning assets (typically investment securities) that yield
      a
      rate of interest that exceeds our borrowing cost. During the third quarter
      of
      2006 our total borrowings averaged $65.553 million. This compares to average
      borrowings of $80.700 million during the third quarter of 2005, a $15.147
      million or 18.8% decrease between the periods. Similarly, during the third
      quarter of 2005, our average earning assets decreased $9.447 million or 1.3%.
      Average earning assets were $714.297 million during the third quarter of 2005,
      which compares to $704.850 million during the third quarter of 2006. The
      decrease in average borrowings, offset by an increase in borrowing rates,
      resulted in a net decrease in interest expense on borrowings of $83 thousand
      between the periods.





*Rate
      and Volume Analysis:* The
      purpose of a rate volume analysis is to identify the dollar amount of change
      in
      net interest income due to changes in interest rates versus changes in the
      volume of earning assets and interest bearing liabilities.





Rate
      and
      Volume Table:





The
      following table presents changes in interest income and interest expense
      attributable to changes in volume (change in average balance multiplied by
      prior
      year rate), changes in rate (change in rate multiplied by prior year volume),
      and the net change in net interest income. The net change attributable to the
      combined impact of volume and rate has been allocated to each in proportion
      to
      the absolute dollar amount of change. The table has not been adjusted for
      tax-exempt interest.


*Index*
 19





**For
                the Three Months Ended September 30,**
            
            **For
                the Nine Months Ended September 30,****2006
                vs. 2005**
            
            **2006
                vs. 2005****Rate**
            
            **Volume**
            
            **Total**
            
            **Rate**
            
            **Volume**
            
            **Total****(In
                thousands)****Earning
                assets:**Federal
                Funds Sold
            
            $
            55
            
            
            ($65
            )
            
            ($10
            )
            $
            96
            
            
            ($60
            )
            $
            36Interest
                Bearing Deposits
            
            
            (24
            )
            
            (68
            )
            
            (92
            )
            
            (75
            )
            
            (207
            )
            
            (282
            )Securities
            
            
            170
            
            
            (45
            )
            
            125
            
            
            389
            
            
            (117
            )
            
            272Loans
            
            
            622
            
            
            139
            
            
            761
            
            
            1,909
            
            
            205
            
            
            2,114Total
                earning assets
            
            
            823
            
            
            (39
            )
            
            784
            
            
            2,319
            
            
            (179
            )
            
            2,140**Interest
                bearing liabilities:**Savings
                accounts
            
            
            (9
            )
            
            (21
            )
            
            (30
            )
            
            (15
            )
            
            (48
            )
            
            (63
            )Money
                market accounts
            
            
            160
            
            
            208
            
            
            368
            
            
            449
            
            
            461
            
            
            910NOW
                accounts
            
            
            36
            
            
            (65
            )
            
            (29
            )
            
            128
            
            
            (193
            )
            
            (65
            )Time
                & other deposit accounts
            
            
            506
            
            
            224
            
            
            730
            
            
            1,422
            
            
            563
            
            
            1,985Borrowings
            
            
            58
            
            
            (141
            )
            
            (83
            )
            
            158
            
            
            (429
            )
            
            (271
            )Total
                interest bearing liabilities
            
            
            751
            
            
            205
            
            
            956
            
            
            2,142
            
            
            354
            
            
            2,496Change
                in net interest income
            
            $
            72
            
            
            ($244
            )
            
            ($172
            )
            $
            177
            
            
            ($533
            )
            
            ($356
            )





Net
      interest income for the three-month period ended September 30, 2006 was $6.243
      million. This compares to $6.415 million for the three-month period ended
      September 30, 2005, a $172 thousand or 2.7% decrease between comparable periods.
      Although the net decrease in interest income between comparable periods was
      not
      significant, several components of interest income and interest expense changed
      significantly between the periods due to both rate and volume factors.





Interest
      income increased $784 thousand between the periods due principally to an
      increase in the rate on earning assets. As interest rates rose between the
      periods our yield on Federal funds sold, securities, and loans all increased.
      On
      a combined basis, the rate improvement on these three categories of earning
      assets contributed an additional $847 thousand of interest income between
      comparable periods. This was offset by a $24 thousand decrease in interest
      income on interest bearing deposits due to rate between the periods. Between
      September 30, 2005 and September 30, 2006, $6.499 million of long term
      high-yield certificates of deposit matured, which decreased the average rate
      earned on interest bearing deposits. The $823 thousand net improvement in
      interest income on earning assets due to a change in rate between the periods
      was offset by a $39 thousand reduction in interest income due to a decrease
      in
      the average volume of earning assets. Between comparable quarters, the average
      volume of Federal funds sold, interest bearing deposits, and securities all
      decreased, while the average volume of loans increased. The increase in the
      average volume of loans between periods contributed an additional $139 thousand
      of interest income, while the reduction in the average volume of Federal funds
      sold, interest bearing deposits and securities combined to decrease interest
      income by $178 thousand.





The
      $784
      thousand increase in interest income was offset by a $956 thousand increase
      in
      the cost of interest bearing liabilities, $751 thousand due to the increase
      in
      rate and $205 thousand due to the increase in the volume of interest bearing
      liabilities. The interest expense recorded on our most interest-sensitive
      liabilities, including time and other deposit accounts and money market
      accounts, increased due to both an increase in volume and an increase in rate.
      Specifically, interest expense on time and other deposit accounts and interest
      expense on money market accounts increased $730 thousand and $368 thousand,
      respectively, over the comparable periods. Between comparable periods, we raised
      the interest rates paid on certificates of deposit to remain competitive within
      our market. This drove up the cost of time and other deposit accounts, resulting
      in a $506 thousand increase in interest expense due to rate. The remaining
      increase in interest expense on time and other deposit accounts between the
      periods totaling $224 thousand was due to an increase in volume as depositors
      transferred their monies from low-rate interest bearing deposit or demand
      deposit accounts to higher-yield certificates of deposit. Money market accounts
      experienced similar results. As interest rates increased between the periods,
      we
      raised the interest rates paid on our money market deposits, which increased
      interest expense $160 thousand on a comparable period basis. The higher interest
      rates attracted additional deposits, which


*Index*
 20


resulted
      in an increase in interest expense due to volume of $208 thousand. The average
      cost of our money market deposit accounts increased from 2.74% for the
      three-month period ended September 30, 2005 to 3.89% for the three-month period
      ended September 30, 2006, while the average volume of money market deposit
      accounts increased from $44.428 million to $68.782 million over the same
      periods.





As
      short-term interest rates increased rapidly between the periods, we modestly
      increased the interest rate on our NOW account deposits. This caused some of
      our
      customers with NOW account deposits to either move their monies to another
      institution or transfer their NOW account funds to a higher-rate deposit
      account. This decreased the average volume of NOW accounts between the periods
      from $109.962 million in the third quarter of 2005 to $86.006 million in the
      third quarter of 2006. The decrease in the average volume of NOW account
      deposits reduced interest expense by $65 thousand between comparable periods.
      This improvement was offset, however, by a $36 thousand increase in interest
      expense on NOW account deposits due to a 14 basis point increase in the average
      rate paid between the periods.





Between
      the periods, and in spite of rising interest rates, we modestly reduced the
      average rate paid on savings accounts from 0.67% for the three-month period
      ended September 30, 2005 to 0.64% for the three-month period ended September
      30,
      2006. The low interest rate being offered on savings accounts caused depositors
      to reduce their savings deposits and decreased the average volume of savings
      deposits between the periods. The interest expense recorded on savings accounts
      decreased $30 thousand between the periods, $21 thousand due to a decrease
      in
      average volume and $9 thousand due to a decrease in rate.





The
      interest expense on borrowings decreased $83 thousand between comparable
      quarters due principally to the repayment of borrowed funds. Between the
      comparable periods, the average volume of borrowings decreased by $15.147
      million resulting in a $141 thousand decrease in interest expense due to changes
      in volume. This was offset by a $58 thousand increase in interest expense on
      borrowings between comparable periods due to higher interest rates.





*Provision
      for Loan Losses.* We
      recorded a provision for loan losses of $420 thousand for the three- month
      period ended September 30, 2006, as compared to $300 thousand for the
      three-month period ended September 30, 2005, a $120 thousand increase. The
      increase in the provision for loan losses between comparable periods was due
      to
      an increase in net charge-offs and a significant increase in potential problem
      loans. Potential problem loans are loans which are currently performing, but
      where information about possible credit problems exists. During the first
      quarter of 2006, we downgraded the credit risk rating on some of our large
      commercial loans. Since then, the level of potential problem loans has remained
      relatively high, as compared to our historical levels. At September 30, 2006,
      the level of potential problem loans was $14.358 million. This compares to
      $7.897 million at December 31, 2005. Although the level of non-performing loans
      and the level of delinquent loans all low, we deemed it necessary to record
      $420
      thousand in the provision for loan losses due to an increase in net charge-offs
      and a significant increase in potential problem loans between the
      periods.





*Non-Interest
      Income.* Non-interest
      income is comprised of trust fees, service charges on deposit accounts,
      commissions income, investment security gains / (losses), income on bank-owned
      life insurance, other service fees, and other income. Non-interest income
      decreased from $1.403 million in the three-month period ended September 30,
      2005
      to $1.375 million in the three-month period ended September 30, 2006, a $28
      thousand or 2.0% decrease. The net decrease in non-interest income on a
      comparable quarter basis was due to net decreases in trust and other service
      fees totaling $126 thousand, offset by increases in service charges on deposit
      accounts, commission income, investment security gains, bank-owned life
      insurance income and other income totaling $98 thousand.





In
      the
      third quarter of 2006, we recorded trust fees totaling $344 thousand. This
      compares to $404 thousand in the third quarter of 2005, a $60 thousand decrease.
      The decrease was due to a significant reduction in account closing fees between
      comparable periods. During the third quarter of 2005, we recorded $76 thousand
      in account closing and estate settlement fees, $69 thousand, of which, was
      due
      to the closing of a large estate. This compares to $13 thousand of account
      closing fees in the third quarter of 2006.





Other
      service fees are comprised of numerous types of fee income including merchant
      credit card processing fees, residential mortgage commissions, official check
      and check cashing fees, travelers’ check sales, wire transfer fees, letter of
      credit fees, and other miscellaneous service charges, commissions and fees.
      Other service fees decreased $66 thousand or 48.9% between the third
      quarter


*Index*
 21


of
      2005
      and the third quarter of 2006. The decrease in other service fees between the
      periods was principally due to the decrease in residential mortgage commissions.
      We originate residential mortgages, as an agent for a large regional bank based
      in the Southeast. The number of residential mortgages we have originated on
      their behalf between the periods has decreased due to a general rise in mortgage
      interest rates and a slowing housing market.





Non-interest
      income due to service charges on deposit accounts increased $34 thousand or
      8.9%
      between comparable periods, from $380 thousand in the third quarter of 2005
      to
      $414 thousand in the third quarter of 2006. Most of the increase was
      attributable to an increase in our ATM fees between comparable
      periods.





Other
      income increased $40 thousand or 22.0% between comparable periods, from $182
      thousand in the three-month period ended September 30, 2005 to $222 thousand
      in
      the three-month period ended September 30, 2006. During the third quarter of
      2006, we sold a parcel of land and a house adjacent to one of our branch offices
      and recorded a gain on the sale of the premises totaling $38
      thousand.





Commission
      income, investment security gains, and bank-owned life insurance income all
      increased modestly between comparable periods, combining for an additional
      $24
      thousand increase in non-interest income.





*Non-Interest
      Expense.* Non-interest
      expense is comprised of salaries, employee benefits, occupancy expense,
      furniture and equipment expense, computer service fees, advertising and
      marketing expense, professional fees, and other miscellaneous expense. Total
      non-interest expense increased $233 thousand or 4.8% on a comparable quarter
      basis, from $4.836 million in the third quarter of 2005 to $5.069 million in
      the
      third quarter of 2006. Increases in occupancy expenses, furniture and equipment
      expense, computer service fees, advertising and marketing and other
      miscellaneous expenses totaling $334 thousand, were offset by decreases in
      salaries expense, employee benefits and professional fees $101
      thousand.





Salaries
      expense decreased $11 thousand or 0.4% between the quarterly periods, from
      $2.470 million during the third quarter of 2005 to $2.459 million during the
      third quarter of 2006. The decrease between periods was due to both increases
      and decreases in various components of salaries expense. In particular, base
      salaries and overtime increased $78 thousand between the periods due to a slight
      increase in staff and general increases in base salary amounts. Conversely,
      due
      to weaker sales results, we recorded a $69 thousand decrease in commission
      and
      incentive pay between comparable quarters. And finally, the salaries expense
      related to the Company’s executive deferred compensation plan decreased $20
      thousand between the periods, from $75 thousand during the third quarter of
      2005
      to $55 thousand during the third quarter of 2006.





During
      the third quarter of 2006, employee benefits expense decreased $53 thousand
      or
      8.3%, from $639 thousand during the third quarter of 2005 to $586 thousand
      during the third quarter of 2006. During the first quarter of 2006 we froze
      the
      Company’s defined benefit pension plan and began making employer contributions
      to our 401k retirement plan. Due to this change, we recorded a $15 thousand
      net
      decrease in retirement benefits expense during the third quarter of 2006.
      Retirement benefits expense totaled $143 thousand in the third quarter of 2005.
      This compares to $128 thousand in the third quarter of 2006. We currently
      sponsor a partially self-insured group health insurance plan. The expense
      recorded in the plan from period to period is principally driven by claims
      experience. Due to a decrease in participant claims, we recorded only $177
      thousand of group health insurance expense during the third quarter of 2006.
      This compares to $207 thousand in the third quarter of 2005, a $30 thousand
      decrease. Other benefits expense also decreased $32 thousand between comparable
      quarters, principally due to a reduction in supplemental executive retirement
      plan expenses.





On
      a
      combined basis, occupancy of bank premises and furniture and equipment expense
      increased from $592 thousand in the third quarter of 2005 to $788 thousand
      in
      the third quarter of 2006, a $196 thousand or 33.1% increase between the
      comparable quarters. At the end of the second quarter of 2006, our market area
      was effected by flooding due to torrential rains. This caused three of our
      branch offices and a former insurance sales office (which we still owned) to
      flood. During the third quarter of 2006, we incurred significant costs to clean
      each facility and dehumidify the air to prevent the spread of mold. In addition,
      due to their uninhabitable condition, we closed two of our branch offices and
      moved banking services to two “bank-in-a-box” trailers that we acquired pursuant
      to a 6-month operating lease arrangement. These additional costs are the
      principal reason occupancy expense of bank premises increased significantly
      between periods.


*Index*
 22





Computer
      service fees increased $68 thousand or 42.5% in the third quarter of 2006,
      from
      $160 thousand in the third quarter of 2005 to $228 thousand in the third quarter
      of 2006. During the third quarter of 2005, we converted our proprietary core
      computer operating system to a system more widely used throughout the banking
      industry. To operate the new system we entered into various software licensing
      agreements and maintenance contracts with several hardware and software computer
      system vendors resulting in an increase in computer service fees.





During
      the third quarter of 2006, we incurred $148 thousand of professional fees,
      as  compared
      to $185 thousand during the third quarter of 2005, a $37 thousand or 20.0%
      decrease. During 2005 we engaged a consultant to assist us in our Sarbanes-Oxley
      Act (Section 404) compliance efforts. Most of the expense related to this effort
      was incurred in the third quarter of 2005, resulting in $79 thousand of
      additional expense in the third quarter of 2005 versus the third quarter of
      2006. Conversely, during 2006 we engaged a regional accounting firm to assist
      us
      in our internal audit function. During the third quarter of 2006, we recorded
      $39 thousand of additional expense related to this engagement.





Other
      miscellaneous expenses include directors’ fees, fidelity insurance, the Bank’s
      Office of the Comptroller of the Currency’s assessment, FDIC premiums and
      assessments, bad debt collection expenses, correspondent bank services, service
      expenses related to the Bank’s accounts receivable financing services,
      charitable donations and customer relations, other losses, dues and memberships,
      office supplies, postage and shipping, subscriptions, telephone expense,
      employee travel and entertainment, software amortization, intangible asset
      amortization expense, OREO expenses, minority interest expense, stock exchange
      listing fees and several other miscellaneous expenses. During the third quarter
      of 2006, other miscellaneous expenses increased $43 thousand or 6.4%, from
      $670
      thousand in the third quarter of 2005 to $713 thousand in the third quarter
      of
      2006.





The
      following table itemizes the individual components of other miscellaneous
      expenses that increased or (decreased) by more than $10 thousand between
      comparable periods.





Table
      of
      Other Miscellaneous Expenses:


**For
                  the Three Months Ended September 30,**Description
                  of Other Miscellaneous Expense
              
              2006
              
              
              2005
              
              Increase
                  / (Decrease)dollars
                  in thousandsOffice
                  supplies
              
              
              79
              
              
              66
              
              
              13Software
                  amortization
              
              
              59
              
              
              47
              
              
              12Mang
                  - Wilber LLC insurance agency
                miscellaenous
                  expenses
              
              
              16
              
              
              0
              
              
              16All
                  other miscellaneous expense items, net
              
              
              559
              
              
              557
              
              
              2Total
                  Other Miscellaneous Expense
              
              $
              713
              
              $
              670
              
              $
              43


*Income
      Taxes.* Income
      tax expense decreased from $700 thousand during the three-month period ended
      September 30, 2005, to $485 thousand during the three month period ended
      September 30, 2006. The decrease in income tax expense was primarily due to
      a
      decreased amount of pre-tax income. ** Our
      effective tax rate decreased between periods, from 26.1% in the three-month
      period ended September 30, 2005, to 22.8% in the three month period ended
      September 30, 2006 due to a greater percentage of our pre-tax income being
      generated from tax-exempt securities and bank-owned life insurance.





E.
      Comparison of Results of Operations for the Nine Months Ended September 30,
      2006
      and 2005





*Overview.* Net
      income decreased $1.200 million or 19.5% between the nine-month period ended
      September 30, 2005 and the nine-month period ended September 30, 2006. Net
      income for the nine months ended September 30, 2006 was $4.951 million. This
      compares to $6.151 million for the nine months ended September 30, 2005.
      Similarly, earnings per share decreased $0.10, from $0.55 for the nine months
      ended September 30, 2005 to $0.45 for the nine months ended September 30, 2006.
      The decrease in earnings was due to several factors, including a decrease in
      net
      interest income, an increase


*Index*
 23


in
      the
      provision for loan losses and non-interest expense, partially offset by an
      increase in non-interest income and a decrease in taxes. During the nine-month
      period ended September 30, 2005, we recorded $19.107 million of net interest
      income. This compares to $18.751 million in the nine-month period ended
      September 30, 2006, a $356 thousand or 1.9% decrease. During the first three
      quarters of 2006 the Treasury yield curve remained flat, and at times inverted,
      which greatly reduced our ability to earn interest spread by mismatching
      short-term funding with long-term loans and investment securities. In addition,
      during the first two quarters of the year, the Federal Open Market Committee
      raised the target Federal funds rate by 1.00%. This placed upward pressure
      on
      short-term funding rates and helped soften loan demand as banks raised their
      prime lending rates. The provision for loan losses increased $480 thousand,
      from
      $780 thousand in the first three quarters of 2005 to $1.260 million in the
      first
      three quarters of 2006, due principally to an increase in our potential problem
      loans. All categories of non-interest expense increased between comparable
      periods, resulting in a $1.111 million or 7.8% increase in this area. The
      increase was due to several factors including our market expansion efforts,
      flood-related losses and expenses incurred due to a regional flood in June
      2006,
      a core-processing computer system conversion completed in the third quarter
      of
      2005, the execution of a self-tender offer for the Company’s common stock in the
      second quarter of 2006, and the engagement of a regional accounting firm to
      assist us with our internal audit function.





The
      decrease in net income resulted in a decrease in both our return on average
      assets and return on average shareholders’ equity. More specifically, for the
      nine-month period ended September 30, 2006 our return on average assets and
      return on average equity were 0.89% and 10.31%, respectively, as compared to
      1.09% and 12.07% for the nine-month period ended September 30, 2005.




*Net
      Interest Income.* Net
      interest income is our most significant source of revenue. During the first
      three quarters of 2006 and 2005, net interest income comprised approximately
      81%
      of our net revenue (net interest income plus non-interest income). Between
      the
      nine-month period ended September 30, 2005 and the nine-month period ended
      September 30, 2006, net interest income decreased $356 thousand or 1.9%. This
      decrease was due to a significant increase in the cost of our interest bearing
      liabilities (principally deposit funding) offset, in part, by increases in
      interest income on earning assets (principally loans).





On
      June
      29, 2006 the Federal Open Market Committee raised the target Federal funds
      rate
      to 5.25%. This was the seventeenth consecutive 25 basis point increase in the
      target Federal funds rate over a 2-year period. These actions have caused the
      Treasury yield curve to become very flat, an interest rate environment which
      generally makes it difficult for us to maintain or improve net interest margin
      because a portion of our net interest margin has historically been derived
      from
      mismatching long-term earning assets with short-term interest bearing
      liabilities. Additionally, the higher interest rates have curbed the demand
      for
      new loans, which limit our ability to improve interest income. Average loans
      outstanding increased only modestly between the nine-month period ended
      September 30, 2005 and the nine-month period ended September 30, 2006.
      Specifically, average loans outstanding increased $3.956 million or 1.0% between
      the periods, from $398.351 million for the nine months ended September 30,
      2005
      to $402.307 million for the nine months ended September 30, 2006.





Between
      comparable periods, total interest and dividend income increased $2.140 million
      or 7.2%, from $29.910 million for the nine-month period ended September 30,
      2005, to $32.050 million for the nine-month period ended September 30, 2006.
      Between the comparable periods, the weighted average yield on the loan portfolio
      increased 63 basis points, from 6.86% to 7.49%. This contributed $1.909 million
      of additional interest income between comparable periods. Between the periods,
      the prime rate, the primary index rate for our variable rate loans, increased
      significantly, which drove the increase in our loan yields. Interest
      expense increased $2.496 million or 23.1% for the nine-month period ended
      September 30, 2006, versus the nine-month period ended September 30, 2005.
      Between the comparable periods there was a general increase in the level of
      interest rates. This prompted us, as well as our competitors, to raise the
      interest rate paid on interest-bearing deposit accounts, particularly the more
      interest-sensitive deposit accounts, such as money market accounts and time
      accounts. Between the periods we recorded a $1.984 million net increase in
      the
      cost of interest bearing deposit liabilities due to increase in interest rates.
      In addition, due to the higher interest rates, our customers increased the
      amount of deposits held in money market and time and other deposit accounts.
      The
      increased volume in these accounts contributed an additional $1.024 million
      of
      interest expense between comparable periods.





This
      flat
      yield curve that has persisted for several quarters has eliminated wholesale
      leverage opportunities and reduced the economic benefit of borrowing funds
      throughout the period, causing us to reduce borrowings and, in turn, our earning
      assets. During the nine-month period ended September 30,


*Index*
 24


2006
      our
      total borrowings averaged $68.514 million. This compares to average borrowings
      of $83.936 million during the nine-month period ended September 30, 2005, a
      $15.422 million or 18.4% decrease between the periods. The decrease in average
      borrowings, offset by an increase in borrowing rates, resulted in a net decrease
      in interest expense on borrowings of $271 thousand between the
      periods.





*Rate
      and Volume Analysis:* The
      purpose of a rate volume analysis is to identify the dollar amount of change
      in
      net interest income due to changes in interest rates versus changes in the
      volume of earning assets and interest bearing liabilities.





Net
      interest income for the nine-month period ended September 30, 2006 was $18.751
      million. This compares to $19.107 million for the nine-month period ended
      September 30, 2005, a $356 thousand or 1.9% decrease between comparable periods.
      Although the net decrease in interest income between comparable periods was
      not
      drastic, several components of interest income and interest expense changed
      significantly between the periods due to both rate and volume factors.





Interest
      income increased $2.140 million between the periods due principally to an
      increase in the rate on earning assets. As interest rates rose between the
      periods our yield on Federal funds sold, securities, and loans all increased.
      On
      a combined basis, the rate improvement on these three categories of earning
      assets contributed an additional $2.394 million of interest income between
      comparable periods. This was offset by a $75 thousand decrease in interest
      income on interest bearing deposits due to a change in rate between the periods.
      Between September 30, 2005 and September 30, 2006, $6.499 million of long term
      high-yield certificates of deposit matured, which decreased the average rate
      earned on interest bearing deposits. The $2.319 million net improvement in
      interest income on earning assets due to a change in rate between the periods
      was offset, in part, by a $179 thousand reduction in interest income due to
      a
      decrease in the average volume of earning assets. During the nine-month period
      ended September 30, 2005, our average earning assets were $715.341 million,
      which compares to $706.220 million during the nine-month period ended September
      30, 2006. The average volume of Federal funds sold, interest bearing deposits
      and securities decreased between the comparable periods, while the average
      volume of loans increased slightly. The decrease in the average volume of
      Federal funds sold, interest bearing deposits, and securities reduced interest
      income by $384 thousand between comparable periods. This was offset, in part,
      by
      a $205 thousand increase in interest income between comparable periods due
      to an
      increase in the average volume of loans outstanding.





The
      $2.140 million increase in interest income between comparable periods was offset
      by a $2.496 million increase in the cost of interest bearing liabilities, $2.142
      million due to the increase in rate and $354 thousand due to the increase in
      the
      volume of interest bearing liabilities. The interest expense recorded on our
      most interest-sensitive liabilities, including time and other deposits accounts
      and money market accounts, increased due to both an increase in volume and
      an
      increase in rate. Specifically, interest expense on time and other deposit
      accounts and interest expense on money market accounts increased $1.985 million
      and $910 thousand, respectively, over the comparable periods. Between the
      comparable periods, we raised the interest rates paid on our certificates of
      deposit to remain competitive within our market. This drove up the cost of
      time
      and other deposit accounts resulting in a $1.422 million increase in interest
      expense due to changes in rate. The remaining increase in interest expense
      on
      time and other deposit accounts between the periods totaling $563 thousand
      was
      due to an increase in volume as depositors transferred their monies from
      low-rate interest bearing deposit or demand deposit accounts to higher-yield
      certificates of deposit. Money market accounts experienced similar results.
      As
      interest rates increased between the periods, we raised the interest rates
      paid
      on our money market deposits, which increased interest expense $449 thousand
      on
      a comparable period basis. The higher interest rates attracted additional
      deposits, which resulted in an increase in interest expense due to a change
      in
      volume of $461 thousand. The average cost of our money market deposit accounts
      increased from 2.38% for the nine-month period ended September 30, 2005 to
      3.59%
      for the nine-month period ended September 30, 2006, while the average volume
      of
      money market deposit accounts increased from $39.245 million to $59.891 million
      over the same periods.





As
      short-term interest rates increased rapidly between the periods we only modestly
      increased the interest rate on our NOW account deposits. This caused some of
      our
      customers with NOW account deposits to either move their monies to another
      institution or transfer their NOW account funds to a higher-rate deposit
      account. This decreased the average volume of NOW accounts between the periods
      from $116.632 million in the nine-month period ended September 30, 2005 to
      $92.223 million in the nine-month period ended September 30, 2006. The decrease
      in the average volume of NOW account deposits reduced interest expense by $193
      thousand between comparable periods. This improvement was offset, however,
      by a
      $128 thousand increase in interest expense on NOW account deposits due to
      a


*Index*
 25


16
      basis
      point increase in the average rate paid between the periods.





In
      spite
      of rising interest rates between periods, we modestly reduced the average rate
      paid on our savings accounts from 0.65% for the nine-month period ended
      September 30, 2005 to 0.63% for the nine-month period ended September 30, 2006.
      The low interest rate being offered on savings accounts caused depositors to
      reduce their savings deposits and decreased the average volume of savings
      deposits between the periods. The interest expense recorded on savings accounts
      decreased $63 thousand between the periods, $48 thousand due to a decrease
      in
      average volume and $15 thousand due to a decrease in rate.





The
      interest expense on borrowings decreased $271 thousand between comparable
      nine-month periods due principally to the repayment of borrowed funds. Between
      the comparable periods, the average volume of borrowings decreased by $15.422
      million resulting in a $429 thousand decrease in interest expense due to changes
      in volume. This was offset, in part, by a $158 thousand increase in interest
      expense on borrowings between comparable periods due to higher interest
      rates.





*Provision
      for Loan Losses.* We
      recorded a provision for loan losses of $1.260 million for the nine-month period
      ended September 30, 2006, as compared to $780 thousand for the nine-month period
      ended September 30, 2005, a $480 thousand increase. The increase in the
      provision for loan losses between comparable periods was principally due to
      a
      significant increase in potential problem loans. During the first quarter of
      2006, we downgraded some of our large commercial credits, which increased the
      level of potential problem loans from $7.897 million or 2.0% of loans
      outstanding at December 31, 2005 to $15.264 million or 3.8% of loans outstanding
      at March 31, 2006. At September 30, 2006 this level remained high at $14.358
      million or 3.6% of loans outstanding. By comparison the level of potential
      problem loans at September 30, 2005 was $8.052 million or 2.0% of loans
      outstanding. Additional increases in the provision for loan losses were
      mitigated by a decrease in non-performing loans between December 31, 2005 and
      September 30, 2006 and a modest level of delinquency. Non-performing loans
      decreased from $4.918 million or 1.22% of loans outstanding at December 31,
      2005
      to $2.118 million or 0.52% of loans outstanding at September 30, 2006. Loans
      30
      to 89 days delinquent totaled $1.922 million or 0.48% of loans outstanding
      at
      September 30, 2006. This compares to $2.062 million or 0.51% of loans
      outstanding at December 31, 2005.





Although
      net charge-offs increased substantially on a comparable period basis, $1.376
      million for the nine months ended September 30, 2006 versus $433 thousand for
      the nine months ended September 30, 2005, the amount recorded in the provision
      for loan losses was not materially increased for this factor since the increase
      in net charge-offs was primarily due to a $981 thousand charge-off of one
      borrower’s loans with us, for which an allowance for loan losses had been
      previously allocated.





*Non-Interest
      Income.* Non-interest
      income is comprised of trust fees, service charges on deposit accounts,
      commissions income, investment security gains / (losses), income on bank-owned
      life insurance, other service fees, and other income. Non-interest income
      increased slightly from $4.337 million in the nine-month period ended September
      30, 2005 to $4.376 million in the nine-month period ended September 30, 2006,
      a
      $39 thousand or 0.9% increase. The net increase in non-interest income on a
      comparable period basis was due to net increases in service charges on deposit
      accounts, commission income, bank-owned life insurance income and other income,
      offset, in part, by a decrease in net investment security gains and other
      services fees. Trust fees were unchanged between comparable nine-month periods
      totaling $1.095 million in both periods.





During
      the nine-month period ended September 30, 2006, we recorded $1.227 million
      of
      service charges on deposit accounts. This compares to $1.196 million during
      the
      nine-month period ended September 30, 2005, a $31 thousand or 2.6% increase.
      During the third quarter of 2005 we reduced or eliminated select demand deposit
      and NOW account service charges to retain and attract new transaction accounts.
      The decrease in service fees on these accounts between comparable periods was
      offset by a $46 thousand increase in ATM fees between the comparable
      periods.





Our
      commission income is generated from the Bank’s insurance agency subsidiary, Mang
      - Wilber LLC. During the first three quarters of 2006, we recorded $415 thousand
      of commission income. This compares to $402 thousand during the first three
      quarters of 2005, a $13 thousand or 3.2% increase.





During
      the nine-month period ended September 30, 2006, we recognized investment
      securities gains of $385 thousand. This compares to $463 thousand during the
      nine-month period ended September 30, 2005, a $78 thousand or 16.8% decrease
      between the periods. The decrease in investment securities


*Index*
 26


gains
      between the periods was due to two factors: a $98 thousand decrease in gains
      on
      the sale and maturity of available-for-sale investment securities, offset by
      a
      $20 thousand increase in gains on trading securities. During the nine-month
      period ended September 30, 2005, we received proceeds from the sale and maturity
      of available-for-sale investment securities totaling $61.199 million. This
      generated net investment securities gains of $369 thousand. By comparison,
      during the nine-month period ended September 30, 2006, we received proceeds
      from
      the sale and maturity of available-for-sale investment securities totaling
      $29.242 million, which generated net investment securities gains of $271
      thousand. In the nine month period ended September 30, 2006 we recorded a net
      gain of $114 thousand on our trading securities portfolio. This compares to
      a
      $94 thousand net gain in the nine-month period ended September 30, 2005. Our
      trading securities portfolio consists of equity and debt securities held for
      the
      Company’s executive deferred compensation plan.





Bank-owned
      life insurance income increased only slightly between comparable periods.
      Specifically, bank-owned life insurance income increased $13 thousand or 3.1%,
      from $413 thousand in the nine-month period ended September 30, 2005 to $426
      thousand in the nine-month period ended September 30, 2006.





Other
      service fees are comprised of numerous types of fee income including merchant
      credit card processing fees, residential mortgage commissions, official check
      and check cashing fees, travelers’ check sales, wire transfer fees, letter of
      credit fees, and other miscellaneous service charges commissions and fees.
      Other
      service fees decreased $89 thousand or 25.1% between the nine-month period
      ended
      September 30, 2005 and the nine-month period ended September 30, 2006. The
      decrease in other service fees between the periods was principally due to the
      decrease in residential mortgage commissions. We originate residential mortgage
      loans as an agent for a super-regional bank located in the Southeastern United
      States. As the regional housing market slowed throughout the first three
      quarters of 2006, our mortgage originations declined. As a result, during the
      nine-month period ended September 30, 2005, we recorded $167 thousand of
      residential mortgage commissions, as compared to $99 thousand in nine-month
      period ended September 30, 2006, a $68 thousand or 40.7% decrease.





Other
      income is comprised of numerous types of fee income, including investment
      services, lease income, safe deposit box income, title insurance agency income,
      rental of bank real estate, and distributions from two insurance trusts, in
      which the Bank participates. Other income increased from $413 thousand in the
      nine-month period ended September 30, 2005 to $562 thousand in the nine-month
      period ended September 30, 2006, a $149 thousand or 36.1% increase. The increase
      between the periods was due to several factors. In the second quarter of 2006,
      we recorded $67 thousand of other income due to the unanticipated recovery
      on a
      defaulted investment security. Between comparable periods we recorded a $69
      thousand increase in investment services income due to increased investment
      sales. And finally, during the third quarter of 2006, we sold a small parcel
      of
      land and house adjacent to one of our branch offices generating a $38 thousand
      gain on the sale. These increases were offset, in part, by certain components
      of
      other income, including a $30 thousand decrease in rental income.





*Non-Interest
      Expense.* Non-interest
      expense is comprised of salaries, employee benefits, occupancy expense,
      furniture and equipment expense, computer service fees, advertising and
      marketing expense, professional fees, and other miscellaneous expense. Total
      non-interest expense increased $1.111 million or 7.8% on a comparable period
      basis, from $14.303 million in the nine-month period ended September 30, 2005
      to
      $15.414 million in the nine-month period ended September 30, 2006. Between
      comparable periods, all categories on non-interest expense
      increased.





Salaries
      expense increased $140 thousand or 2.0% between the comparable periods, from
      $7.032 million during the nine-month period ended September 30, 2005 to $7.172
      million during the nine-month period ended September 30, 2006. The increase
      between periods was due to both increases and decreases in various components
      of
      salaries expense. In particular, base salaries and overtime increased $295
      thousand or 4.6% between the periods, from $6.435 million for the nine months
      ended September 30, 2005 to $6.730 million for the nine months ended September
      30, 2006, due to an increase in staff and general increases in base salary
      amounts. Conversely, due to decreased loan originations and operating
      performance, we recorded a $118 thousand decrease in commission and incentive
      pay between comparable periods. And finally, the salaries expense related to
      the
      Company’s executive deferred compensation plan decreased $37 thousand between
      the periods, from $131 thousand in the nine months ended September 30, 2005
      to
      $94 thousand in the nine months ended September 30, 2006.





Employee
      benefits cost totaled $2.024 million for the nine-month period ended September
      30, 2006. This compares to $1.973 million for the nine-month period ended
      September 30, 2005. The net increase in


*Index*
 27


employee
      benefits expense between comparable periods totaling $51 thousand or 2.6% was
      due to several factors. In the first quarter of 2006, we froze our defined
      benefit pension plan and began making employer contributions to our 401k
      retirement plan. Due principally to the curtailment charge on the frozen defined
      benefit plan, we recorded a net increase in retirement benefits expense (defined
      benefit pension expense and 401k retirement expense) of $117 thousand between
      comparable periods. Retirement benefits expense increased from $430 thousand
      in
      the nine-month period ended September 30, 2005 to $547 thousand in the
      nine-month period ended September 30, 2006. F.I.C.A expense, group disability
      insurance, workers compensation and employee education expense each increased
      between comparable periods, combining for an additional $65 thousand of benefits
      expense. The increase in these costs was, in part, offset by a $95 thousand
      decrease in other benefits due to a reduction in the amount recorded to fund
      the
      Company’s supplemental executive retirement plan for two retired executives. In
      addition, our group health insurance expense decreased $39 thousand between
      comparable periods due to favorable claims experience.





Occupancy
      expense increased $194 thousand or 15.5% between comparable nine-month periods.
      Occupancy expense totaled $1.443 million for the nine-month period ended
      September 30, 2006, as compared to $1.249 million for the nine-month period
      ended September 30, 2005. In June 2006, our immediate market area was affected
      by a regional flood. This flood was the primary reason occupancy expense
      increased between comparable periods. In particular, this flood caused us to
      temporarily close our Walton and Sidney, New York branch offices; while a third
      office, our main office, was modestly damaged due to water intrusion. We
      incurred significant costs in the third quarter of 2006 to clean-up each of
      these offices. In addition, we entered into two lease agreements with a third
      party, to rent “bank-in-a-box” temporary banking facilities in the Walton and
      Sidney markets.





Computer
      service fees increased substantially between the nine-month period ended
      September 30, 2005 and the nine-month period ended September 30, 2006. The
      increase, totaling $151 thousand or 31.9%, can be primarily attributed to a
      core
      computer system conversion completed during the third quarter of 2005. We
      converted our proprietary core computer operating system to a system more widely
      used throughout the banking industry. To operate the new system we entered
      into
      various software licensing agreements and maintenance contracts with several
      hardware and software computer system vendors, resulting in an increase in
      computer service fees. Computer service fees were $625 thousand in the
      nine-month period ended September 30, 2006, as compared to $474 thousand in
      the
      nine-month period ended September 30, 2005. Furniture and equipment expense
      also
      increased $29 thousand or 5.3% between comparable periods. The increase was
      primarily due to an increase in expenditures on computer equipment related
      to
      the conversion.





Professional
      fees increased $163 thousand or 31.9% between comparable periods, from $511
      thousand for the nine months ended September 30, 2005 to $674 thousand for
      the
      nine months ended September 30, 2006. The increase in professional fees was
      due
      to a couple of significant factors. In April 2006 we announced a self-tender
      offer for the Company’s common stock. To complete the offer we recorded $82
      thousand of legal and other professional fees. In addition, in 2006 we engaged
      a
      regional accounting firm to perform our internal audit function. This increased
      professional fees $112 thousand over comparable periods. These increases were
      reduced by a $31 thousand net decrease in other components of legal and
      professional fees.





Other
      miscellaneous expenses include directors’ fees, fidelity insurance, the Bank’s
      OCC assessment, FDIC premiums and assessments, bad debt collection expenses,
      correspondent bank services, service expenses related to the Bank’s accounts
      receivable financing services, charitable donations and customer relations,
      other losses, dues and memberships, office supplies, postage and shipping,
      subscriptions, telephone expense, employee travel and entertainment, software
      amortization, intangible asset amortization expense, OREO expenses, minority
      interest expense, stock exchange listing fees, loss on disposal / impairment
      of
      fixed assets and several other miscellaneous expenses. During the nine-month
      period ended September 30, 2006, other miscellaneous expenses increased $372
      thousand or 17.3%, from $2.147 million in the nine months ended September 30,
      2005 to $2.519 million in the nine months ended September 30, 2006. The
      following table itemizes the individual components of other miscellaneous
      expenses that increased or (decreased) by more than $10 thousand between
      comparable periods.


*Index*
 28


Table
      of
      Other Miscellaneous Expenses:





**For
                  the Nine**
                **Months
                  Ended**
                **September
                  30,**Description
                  of Other Miscellaneous Expense
              
              2006
              
              2005
              
              Increase
                  / (Decrease)*dollars
                  in thousands*Directors
                  fees
              
              $
              203
              
              $
              134
              
              $
              69Collection
                  and non-filing expense
              
              
              149
              
              
              96
              
              
              53Correspondent
                  bank services
              
              
              98
              
              
              117
              
              
              (19
              )Customer
                  Relations
              
              
              40
              
              
              55
              
              
              (15
              )Accounts
                  receivable financing program services
              
              
              88
              
              
              78
              
              
              10Dues
                  and memberships
              
              
              41
              
              
              28
              
              
              13Postage
                  and shipping
              
              
              181
              
              
              213
              
              
              (32
              )Deferred
                  reserves for unfunded loan commitments
              
              
              (22
              )
              
              3
              
              
              (25
              )Travel
                  and entertainment
              
              
              150
              
              
              168
              
              
              (18
              )Check
                  printing
              
              
              (19
              )
              
              38
              
              
              (57
              )Software
                  amortization
              
              
              174
              
              
              125
              
              
              49Other
                  losses
              
              
              7
              
              
              25
              
              
              (18
              )Minority
                  interest for Mang - Wilber LLC
                insurance
                  agency subsidiary
              
              
              69
              
              
              86
              
              
              (17
              )Loss
                  on Disposal / Impairment of Fixed Assets
              
              
              337
              
              
              16
              
              
              321All
                  other miscellaneous expense items, net
              
              
              1,023
              
              
              965
              
              
              58Total
                  Other Miscellaneous Expense
              
              $
              2,519
              
              $
              2,147
              
              $
              372


In
      the
      second quarter of 2006 our market area experienced significant flooding due
      to
      torrential rains. Due to flood waters, two of our branch buildings, our main
      office facility, and a former insurance sales office (which we still owned)
      were
      damaged. In addition. all of the equipment in the two branch offices and the
      former insurance sales office were destroyed. As a result we recorded a $328
      thousand loss on the impairment of the buildings and disposal of the equipment
      in the nine-month period ended September 30, 2006.





*Income
      Taxes.* Income
      tax expense decreased from $2.210 million during the nine-month period ended
      September 30, 2005, to $1.502 million during the nine-month period ended
      September 30, 2006. The decrease in income tax expense was primarily due to
      a
      decreased amount of pre-tax income. ** Our
      effective tax rate decreased between periods, from 26.4% in the nine-month
      period ended September 30, 2005, to 23.3% in the nine-month period ended
      September 30, 2006 due to a greater percentage of our pre-tax income being
      generated from tax-exempt securities and bank-owned life insurance.








F.
      Liquidity





Liquidity
      describes our ability to meet financial obligations in the normal course of
      business. Liquidity is primarily needed to meet the borrowing and deposit
      withdrawal requirements of our customers and to fund our current and planned
      expenditures. We are committed to maintaining a strong liquidity position.
      Accordingly, we monitor our liquidity position on a daily basis through our
      daily funds management process. This includes:





· maintaining
      the appropriate levels of currency throughout our branch system to meet the
      daily cash needs of our customers,


· balancing
      our mandated deposit or “reserve” requirements at the Federal Reserve Bank of
      New York,


· maintaining
      adequate cash balances at our correspondent banks, and


· assuring
      that adequate levels of Federal funds sold, liquid assets, and borrowing
      resources are available to meet obligations including reasonably anticipated
      daily fluctuations.





In
      addition to the daily funds management process, we also monitor selected
      liquidity ratios monthly and


*Index*
 29


complete
      a liquidity assessment every 90 days to estimate current and future sources
      and
      uses of liquidity. The 90-day sources and uses assessment is reviewed by our
      Asset and Liability Committee (“ALCO”). The ALCO, based on this assessment and
      other data, determines our future funding or investment needs and strategies.
      The results of the 90-day sources and uses assessment are reported to the Board
      of Directors of the Bank quarterly. We were in compliance with all of our
      internal liquidity policy limits at December 31, 2005, and September 30, 2006.
      The following list represents the sources of funds available to meet our
      liquidity requirements. Our primary sources of funds are denoted by an asterisk
      (*).








**Source
                of Funding**•
                Currency*•
                Federal Reserve and Correspondent Bank Balances*•
                Federal Funds Sold*•
                Loan and Investment Principal and Interest Payments*•
                Investment Security Maturities and Calls*•
                Demand Deposits & NOW Accounts*•
                Savings & Money Market Deposits*•
                Certificates of Deposit and Other Time Deposits*•
                Repurchase Agreements*•
                FHLBNY Advances / Lines of Credit*•
                Sale of Available-for-Sale Investment Securities•
                Brokered Deposits•
                Correspondent Lines of Credit•
                Fed. Reserve Discount Window Borrowings•
                Sale of Loans•
                Proceeds from Issuance of Equity Securities•
                Branch Acquisition
              •
                Cash Surrender Value of Bank-Owned Life
                Insurance





Table
      of
      Liquidity Measures:





The
      following table summarizes several of our key liquidity measures for the periods
      stated:





Liquidity
                  Measure
                *Dollars
                  in Thousands*
              September
                  30,
                2006
              December
                  31,
                2005Cash
                  and Cash Equivalents
              $32,213
              $18,417Available
                  for Sale Investment Securities at
                Estimated
                  Fair Value less Securities
                pledged
                  for State and Municipal Deposits
                and
                  Borrowings
              $60,419
              $64,622Total
                  Loan to Total Asset Ratio
              53.3%
              53.6%FHLBNY
                  Remaining Borrowing Capacity
              $17,964
              $19,413Available
                  Unsecured Correspondent Bank Lines of Credit
              $15,000
              $10,000





Between
      December 31, 2005, and September 30, 2006, our overall liquidity position
      improved modestly. An increase in the level of cash and cash equivalents was
      offset by decreases in the level of unencumbered available-for-sale investment
      securities and our remaining FHLBNY borrowing capacity. Although our overall
      liquidity position improved modestly between December 31, 2005 and September
      30,
      2006, we experienced an increase in the volatility of our deposit funding.
      During the first-half of 2006, short-term interest rates increased. This caused
      our depositors, particularly our large depositors, to “shop” their deposits more
      intensively. To absorb the increased volatility in the deposit base, we
      increased our Federal funds sold position during the third quarter of 2006.
      At
      September 30, 2006, our Federal funds sold position was $18.500 million. This
      compares to $2.900 million at December 31, 2005.





The
      substantial majority of our unencumbered available-for-sale investment
      securities are highly liquid and could be sold immediately or pledged for
      borrowing purposes to meet our anticipated or unanticipated loan and other
      funding requirements. In addition, the anticipated principal repayments on
      existing loans and investment securities, as well as the anticipated deposit
      retention levels, continue to


*Index*
 30


provide
      us with an adequate amount of liquidity. In addition to the above table of
      liquidity measures, we anticipate receiving principal payments on our
      available-for-sale and held-to-maturity investment securities portfolio totaling
      approximately $61.116 million over the next twelve-month period. These proceeds
      can be used to fund net loan growth or support a decrease in deposit levels
      in
      future periods.





Our
      commitments to extend credit and stand-by letters of credit increased $3.341
      million between December 31, 2005, and September 30, 2006. At September 30,
      2006, commitments to extend credit and stand-by letters of credit were $89.004
      million, as compared to $85.663 million at December 31, 2005. Our experience
      indicates that draws on the commitments to extend credit and stand-by letters
      of
      credit do not fluctuate significantly from quarter to quarter, and therefore,
      are not expected to materially impact our liquidity prospectively.





We
      recognize that deposit flows and loan and investment prepayment activity are
      affected by the level of interest rates, the interest rates and products offered
      by competitors, and other factors. Based on our deposit retention experience,
      anticipated levels of regional economic activity, particularly moderate levels
      of loan demand within our primary market area, and current pricing strategies,
      we anticipate that we will have sufficient levels of liquidity to meet our
      current funding commitments for several quarters prospectively.








G.
      Capital Resources and Dividends





The
      maintenance of appropriate capital levels is a management priority. Overall
      capital adequacy is monitored on an ongoing basis by our management and reviewed
      quarterly by the Board of Directors. Our principal capital planning goal is
      to
      provide an adequate return to shareholders while retaining a sufficient capital
      base to provide for future expansion and comply with all regulatory
      standards.





At
      September 30, 2006, shareholders’ equity was $63.025 million. This represents a
      $4.692 million or 6.9% decrease in total shareholders’ equity of $67.717 million
      at December 31, 2005. The significant decrease in shareholders’ equity was
      primarily due to the execution of a self-tender offer for our common stock,
      and
      the resultant increase in treasury stock; offset, in part, by a $1.827 million
      increase in retained earnings. Our treasury stock balance increased $6.568
      million between the periods, from $21.138 million at December 31, 2005 to
      $27.706 million at September 30, 2006. Most of the increase was to due to the
      repurchase of shares of our common stock pursuant to the self-tender offer.
      Between December 31, 2005 and September 30, 2006 accumulated other comprehensive
      loss only changed slightly. Shareholders’ equity as a percentage of total assets
      was 9.0% at December 31, 2005 versus 8.3% at September 30, 2006.





The
      Company and the Bank are both subject to regulatory capital guidelines. Under
      these guidelines, as established by Federal bank regulators, to be adequately
      capitalized, the Company and the Bank must both maintain the minimum ratio
      of
      Tier 1 capital to risk-weighted assets of 4.0% and the minimum ratio of total
      capital to risk-weighted assets of 8.0%. Tier 1 capital is comprised of
      shareholders' equity, less intangible assets and accumulated other comprehensive
      income. Total capital, for this risk-based capital standard, includes Tier
      1
      capital plus the Company’s allowance for loan losses. Similarly, for the Bank to
      be considered “well capitalized,” it must maintain a Tier 1 capital to
      risk-weighted assets ratio of 6.0% and a total capital to risk-weighted assets
      ratio of 10.0%. The Company and the Bank exceeded all capital adequacy and
      well
      capitalized guidelines at September 30, 2006, and December 31, 2005. The
      Company’s Tier 1 capital to risk-weighted assets ratio and total capital to
      risk-weighted assets ratio at September 30, 2006, were 12.13% and 13.38%,
      respectively.




The
      principal source of funds for the payment of shareholder dividends by the
      Company has been dividends declared and paid to the Company by its subsidiary
      bank. There are various legal and regulatory limitations applicable to the
      payment of dividends to the Company by its subsidiaries as well as the payment
      of dividends by the Company to its shareholders. As of September 30, 2006,
      under
      this statutory limitation, the maximum amount that could have been paid by
      the
      Bank subsidiary to the Company, without special regulatory approval, was $2.887
      million. The ability of the Company and the Bank to pay dividends in the future
      is, and will continue to be, influenced by regulatory policies, capital
      guidelines and applicable laws.


*Index*
 31


**ITEM
      3:QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





Our
      business activities generate market risk. Market risk is the possibility that
      changes in future market conditions, including rates and prices, will reduce
      earnings and make the Company less valuable. We are primarily exposed to market
      risk through changes in interest rates. This risk is called interest rate risk
      and is an inherent component of risk for all banks. The risk occurs because
      we
      pay interest on deposits and borrowed funds at varying rates and terms, while
      receiving interest income on loans and investments with different rates and
      terms. As a result, our earnings and the imputed economic value of assets and
      liabilities are subject to potentially significant fluctuations as interest
      rates rise and fall. Our objective is to minimize the fluctuation in net
      interest margin and net interest income caused by anticipated and unanticipated
      changes in interest rates.





Ultimately,
      the Company’s Board of Directors is responsible for monitoring and managing
      market and interest rate risk. The Board accomplishes this objective by annually
      reviewing and approving an Asset and Liability Management Policy, which
      establishes broad risk limits and delegates responsibility to carry out asset
      and liability oversight and control to the Directors’ Loan and Investment
      Committee and management’s ALCO.





We
      manage
      a few different forms of interest rate risk. The first is mismatch risk, which
      involves the mismatch of maturities of fixed rate assets and liabilities. The
      second is basis risk. Basis risk is the risk associated with non-correlated
      changes in different interest rates. For example, we price many of our
      adjustable rate commercial loans (an asset) using the prime rate as a basis,
      while some of our deposit accounts (a liability) are tied to Treasury security
      yields. In a given timeframe, the prime rate might decrease 2% while a
      particular Treasury security might only decrease 1%. If this were to occur,
      our
      yield on prime based commercial loans would decrease by 2%, while the cost
      of
      deposits might only decrease by 1%, negatively affecting net interest income
      and
      net interest margin. The third risk is option risk. Option risk generally
      appears in the form of prepayment volatility on residential mortgages,
      commercial and commercial real estate loans, consumer loans, mortgage-backed
      securities, and callable agency or municipal investment securities. The Bank’s
      customers generally have alternative financing sources (or options) to refinance
      their existing debt obligations with other financial institutions. When interest
      rates decrease, many of these customers exercise this option and refinance
      at
      other institutions and prepay their loans with us, forcing us to reinvest the
      prepaid funds in lower yielding investments and loans. The same type of
      refinancing activity also accelerates principal payments on mortgage-backed
      securities held by the Bank. Municipal investment securities and agency
      securities are issued with specified call dates and call prices and are
      typically exercised by the issuer when interest rates on comparable maturity
      securities are lower than the current coupon rate on the security.





Measuring
      and managing interest rate risk is a dynamic process that the Bank’s management
      must continually perform to meet the objective of maintaining stable net
      interest income and net interest margin. This means that prior to setting the
      term or interest rate on loans or deposits, or before purchasing investment
      securities or borrowing funds, management must understand the impact that
      alternative interest rates will have on the Bank’s interest rate risk profile.
      This is accomplished through simulation modeling. Simulation modeling is the
      process of “shocking” the current balance sheet under a variety of interest rate
      scenarios and then measuring the impact of interest rate changes on both
      projected earnings and the economic value of the Bank’s equity. The estimates
      underlying the sensitivity analysis are based on numerous assumptions including,
      but not limited to: the nature and timing of interest rate changes, prepayments
      on loans and securities, deposit retention rates, pricing decisions on loans
      and
      deposits, and reinvestment/replacement rates on asset and liability cash flows.
      While assumptions are developed based on available information and current
      economic and local market conditions, management cannot make any assurances
      as
      to the ultimate accuracy of these assumptions, including competitive influences
      and customer behavior. Accordingly, actual results will differ from those
      predicted by simulation modeling.





The
      following table shows the projected changes in net interest income from a
      parallel shift in all market interest rates. The shift in interest rates is
      assumed to occur in monthly increments of 0.50% per month until the full shift
      is complete. In other words, we assume it will take 6 months for a 3.00% shift
      to take place. This is also known as a “ramped” interest rate shock. The
      projected changes in net interest income are totals for the 12-month period
      beginning October 1, 2006, and ending September 30, 2007, under ramped shock
      scenarios.


*Index*
 32


Interest
      Rate Sensitivity Table:




Interest
                Rates
            *Dollars
                in Thousands*Interest
              Rate
              Shock
                (1)
            Prime
              Rate
            Projected
                Annualized
              Net
              Interest
              Income
            Projected
              Dollar
              Change
              in
                Net
              Interest
              Income
            Projected
              Percentage
              Change
                in
              Net
              Interest
              Income
            Projected
              Change
                in
              Net
                Interest
              Income
                as a
              Percent
                of
              Total
              Shareholders'
              Equity3.00%
            11.25%
            $25,281
            $73
            0.29%
            0.11%2.00%
            10.25%
            24,992
            (217)
            -0.86%
            -0.34%1.00%
            9.25%
            25,092
            (117)
            -0.46%
            -0.19%No
                change
            8.25%
            25,209
            -
            -
            --1.00%
            7.25%
            24,930
            (279)
            -1.11%
            -0.44%-2.00%
            6.25%
            23,967
            (1,242)
            -4.93%
            -1.97%-3.00%
            5.25%
            23,048
            (2,161)
            -8.57%
            -3.43%




(1)
        Under
        a ramped interest rate shock, interest rates are modeled to change at a rate
        of
        0.50% per month.


Many
      assumptions are embedded within our interest rate risk model. These assumptions
      are approved by the Bank’s ALCO and are based upon both management’s experience
      and projections provided by investment securities companies. Assuming our
      prepayment and other assumptions are accurate and assuming we take reasonable
      actions to preserve net interest income, we project that net interest income
      would decrease $217 thousand or 0.34% of total shareholders’ equity in a +2.00%
      ramped interest rate shock and decline by $1.242 million or 1.97% of total
      shareholders’ equity in a -2.00% ramped interest rate shock. This is within our
      Asset and Liability Policy guideline, which limits the maximum projected
      decrease in net interest income in a +2.00% or -2.00% ramped interest rate
      shock
      to -5.0% of the Company’s total equity capital.





Our
      strategy for managing interest rate risk is impacted by general market
      conditions and customer demand. We try to limit the volume and term of
      fixed-rate assets and fixed-rate liabilities so that we can adjust the mix
      and
      pricing of assets and liabilities to mitigate net interest income volatility.
      We
      also purchase investments for the securities portfolio and structure borrowings
      from the FHLBNY to offset interest rate risk taken in the loan portfolio. We
      also offer adjustable rate loan and deposit products that change as interest
      rates change. At September 30, 2006, approximately 24% of our total assets
      were
      invested in adjustable rate loans and investments.





At
      September 30, 2006, the Treasury yield curve was very “flat.” This flat interest
      rate environment inhibits our ability to earn net interest income, since banks
      typically earn net interest income by procuring short-term deposits and
      borrowings and investing those proceeds in longer term loans and investments.
      This practice, which is sometimes referred to as mismatching assets and
      liabilities, typically allows banks to enhance their “interest spread,” which
      generates net interest income. If this flat interest rate environment persists,
      it may negatively impact our ability to increase net interest income for several
      quarters prospectively.








ITEM
      4 :  Controls
      and Procedures





Our
      management, including the Chief Executive Officer and Chief Financial Officer,
      evaluated the design and operational effectiveness of the Company’s disclosure
      controls and procedures (as defined in Rule 13(a)-15(e) and 15(d)-15(e) under
      the Securities Exchange Act of 1934, as amended) as of September 30, 2006.
      Based
      upon that evaluation, the Chief Executive Officer and Chief Financial Officer
      concluded that the Company’s disclosure controls and procedures were effective
      in ensuring that information required to be disclosed by the Company in reports
      that it files or submits under the Securities Exchange Act of 1934 are recorded,
      processed, summarized, and reported within the time periods specified in
      the


*Index*
 33


SEC’s
      rules and forms.





There
      were no changes made in the Company’s internal controls over financial reporting
      that occurred during the Company’s most recent fiscal quarter that have
      materially affected, or are reasonably likely to materially affect, the
      Company’s internal controls over financial reporting.








**PART
      II - OTHER INFORMATION**





ITEM
      1 :  Legal
      Proceedings





From
      time
      to time, the Company becomes subject to various legal claims which arise in
      the
      normal course of business. At September 30, 2006, the Company was not the
      subject of any material pending legal proceedings, other than ordinary routine
      litigation occurring in the normal course of its business. The various pending
      legal claims against the Company will not, in the opinion of management based
      upon consultation with legal counsel, result in any material liability to the
      Company and will not materially affect our financial position, results of
      operation, or cash flow.





Neither
      the Company, the Bank, nor any of the Bank’s subsidiaries have been subject to
      review by the Internal Revenue Service of any transactions that have been
      identified as abusive or that have a significant tax avoidance
      purpose.





ITEM
      1A: Risk
      Factors





During
      the third quarter of 2006 there were no material changes to the Company’s risk
      factors as disclosed in the Annual Report on Form 10-K, Item 1A, filed with
      the
      SEC on March 15, 2006.





ITEM
      2: Unregistered Sales of Equity Securities and Use of Proceeds





A.
      Not
      applicable.





B.
      Not
      applicable





C.
      Purchases of Equity Securities by Issuer and Affiliated Purchasers





On
      July
      26, 2005 we announced that the Company’s Board of Directors authorized
      management to purchase up to $1.5 million of the Company’s common stock under a
      stock repurchase program. At June 30, 2006 management’s remaining share
      repurchase authority was $1.308 million. During August 2006, we purchased an
      additional 20,000 shares at $10.11 per share (including $0.06 per share
      brokerage commission), which reduced management’s repurchase authority to $889
      thousand under the stock repurchase program.





All
      shares repurchased under the repurchase program are made in the open market
      or
      through private transactions and are limited to one transaction per week. All
      open market transactions are conducted exclusively through Merrill Lynch, a
      registered broker-dealer. Private purchases may be transacted directly with
      the
      seller and need not be transacted through Merrill Lynch. Each private
      transaction is individually subject to the approval of the Board of Directors
      of
      the Company. All stock purchases are effected in compliance with the laws of
      the
      State of New York, Rule 10b(18) of the Securities Exchange Act of 1934 and
      the
      rules and regulations thereunder, and the rules of the American Stock Exchange.





The
      following table summarizes the shares repurchased by the Company during the
      three-month period ended September 30, 2006:


*Index*
 34


Share
      Repurchases:





Period
                  
                  Total
                      Number of Shares Purchased
                  
                  Average
                      Price Paid per Share
                  
                  Total
                      Cost
                  
                  Remaining
                      Share Repurchase AuthorityStock
                      Repurchase Program:July
                      1 - July 31, 2006
                  
                  
                  0
                  
                  $
                  0.00
                  
                  $
                  0
                  
                  $
                  1,091,196August
                      1 - August 31, 2006 (1)
                  
                  
                  20,000
                  
                  
                  10.11
                  
                  
                  202,200
                  
                  
                  888,996September
                      1 - September 30, 2006
                  
                  
                  0
                  
                  $
                  0.00
                  
                  $
                  0
                  
                  
                  888.996Totals
                  
                  
                  20,000
                  
                  
                  10.11
                  
                  
                  202,200(1)
                      These shares were purchased under the Company's stock repurchase
                      plan
                      announced on July 26, 2005. The total cost includes a $0.06
                      per share
                      brokerage commissions paid by the Company.





During
      the three-month period ended September 30, 2006, the rights of holders of our
      registered securities were not modified; nor was any other class of security
      issued that could materially limit or qualify our registered
      securities.








ITEM
      3:  Defaults
      Upon Senior Securities





The
      Company did not default on any senior securities during the three-month period
      ended September 30, 2006.








ITEM
      4 :  Submission of Matters to a Vote of Security Holders





None.








ITEM
      5:  Other
      Information





None.








ITEM
      6:  Exhibits





See
      Exhibit Index to this Form 10-Q


*Index*
 35


**SIGNATURES**











Pursuant
      to the requirements of Section 13 or 15(d) 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.





THE
                  WILBER CORPORATIONBy:
              /s/
                  Douglas C. Gulotty
              
              Dated:
              11/07/2006Douglas
                  C. GulottyPresident
                  and Chief Executive OfficerBy:
              /s/
                  Joseph E. Sutaris
              
              Dated:
              11/07/2006Joseph
                  E. SutarisSecretary,
                  Treasurer and Chief Financial Officer


*Index*
 36


**EXHIBIT
      INDEX**








**No.**
            **Document**





31.1
            Certification
                of Chief Executive Officer Pursuant to 302 of the Sarbanes-Oxley
                Act of
                2002





31.2
            Certification
                of Chief Financial Officer Pursuant to 302 of the Sarbanes-Oxley
                Act of
                2002





32.1
            Certification
                of Chief Executive Officer Pursuant to 18 U.S.C.
                1350





32.2 Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. 1350








*Index*