**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





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


THE
      SECURITIES EXCHANGE ACT OF 1934





**For
      the Quarterly Period Ended June 30, 2007**





OR





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


THE
      SECURITIES EXCHANGE ACT OF 1934





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 x
      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 filer  o
            Accelerated
                filer  x
            Non-accelerated
                filer  o





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


Yes o  No
x





As
      of
      August 3, 2007, there were issued and outstanding 10,569,182 shares of the
      Registrant’s Common Stock.


Index




**THEWILBER
      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 Unaudited Consolidated Interim 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 June 30, 2007 and December 31,
                2006D.   Comparison
                of Results of Operations for the Three Months Ended June 30, 2007
                and
                2006E.   Comparison
                of Results of Operations for the Six Months Ended June 30, 2007 and
                2006F.   LiquidityG.   Capital
                Resources and DividendsITEM
                3:
            Quantitative
                and Qualitative Disclosures about Market RiskITEM
                4:
            Controls
                and ProceduresITEM
                4T:
            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
 Index


**PART
      I – FINANCIAL INFORMATION**








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, and 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 that occur after the statements are made,
      and we specifically disclaim such obligation.








2
 Index


ITEM
      1:  Interim Financial Statements(Unaudited)





***TheWilber
                  Corporation******Consolidated
                  Statements of Condition (Unaudited)*****June
                  30,**
              
              
              **December
                  31,*****dollars
                  in thousands except share and per share data***
              
              **2007**
              
              
              **2006****Assets**Cash
                  and Due from Banks
              
              **$**
              **10,941**
              
              
              $
              12,742Time
                  Deposits with Other Banks
              
              ****
              **801**
              
              
              
              800Federal
                  Funds Sold
              
              ****
              **14,349**
              
              
              
              12,317Total
                  Cash and Cash Equivalents
              
              ****
              **26,091**
              
              
              
              25,859SecuritiesTrading,
                  at Fair Value
              
              ****
              **1,554**
              
              
              
              1,625Available-for-Sale,
                  at Fair Value
              
              ****
              **216,096**
              
              
              
              228,959Held-to-Maturity,
                  Fair Value of $52,117 at June 30, 2007,and $61,310 at December 31,
                  2006
              
              ****
              **53,570**
              
              
              
              62,358Other
                  Investments
              
              ****
              **4,864**
              
              
              
              4,600Loans
                  Held for Sale
              
              ****
              **756**
              
              
              
              0Loans
              
              ****
              **429,217**
              
              
              
              405,832Allowance
                  for Loan Losses
              
              ****
              **(6,830**
              **)**
              
              
              (6,680
              )Loans,
                  Net
              
              ****
              **422,387**
              
              
              
              399,152Premises
                  and Equipment, Net
              
              ****
              **6,085**
              
              
              
              5,686Bank
                  Owned Life Insurance
              
              ****
              **15,485**
              
              
              
              16,108Goodwill
              
              ****
              **4,639**
              
              
              
              4,518Intangible
                  Assets, Net
              
              ****
              **455**
              
              
              
              520Other
                  Assets
              
              ****
              **15,349**
              
              
              
              12,596Total
                  Assets
              
              **$**
              **767,331**
              
              
              $
              761,981**Liabilities
                  and Shareholders’ Equity**Deposits:Demand
              
              **$**
              **76,097**
              
              
              $
              71,914Savings,
                  NOW and Money Market Deposit Accounts
              
              ****
              **248,583**
              
              
              
              243,249Certificates
                  of Deposit (Over $100M)
              
              ****
              **93,910**
              
              
              
              101,025Certificates
                  of Deposit (Under $100M)
              
              ****
              **192,095**
              
              
              
              188,386Other
                  Deposits
              
              ****
              **23,952**
              
              
              
              24,470Total
                  Deposits
              
              ****
              **634,637**
              
              
              
              629,044Short-Term
                  Borrowings
              
              ****
              **14,325**
              
              
              
              18,459Long-Term
                  Borrowings
              
              ****
              **45,646**
              
              
              
              42,204Other
                  Liabilities
              
              ****
              **7,831**
              
              
              
              8,942Total
                  Liabilities
              
              ****
              **702,439**
              
              
              
              698,649Shareholders’
                  Equity:Common
                        Stock, $.01 Par Value, 16,000,000 Shares Authorized, and
                        13,961,664 Shares
                        Issued at June 30, 2007, and December 31,
                        2006
              
              ****
              **140**
              
              
              
              140Additional
                  Paid in Capital
              
              ****
              **4,224**
              
              
              
              4,224Retained
                  Earnings
              
              ****
              **92,269**
              
              
              
              89,921Accumulated
                  Other Comprehensive Loss
              
              ****
              **(4,035**
              **)**
              
              
              (3,247
              )Treasury
                    Stock at Cost, 3,392,482 Shares at June 30, 2007 and December
                    31, 2006
              
              ****
              **(27,706**
              **)**
              
              
              (27,706
              )Total
                  Shareholders’ Equity
              
              ****
              **64,892**
              
              
              
              63,332Total
                  Liabilities and Shareholders’ Equity
              
              **$**
              **767,331**
              
              
              $
              761,981
 
 *See
                  accompanying notes to interim unaudited consolidated financial
                  statements.*


3
 Index


***TheWilber
                  Corporation******Consolidated
                  Statements of Income (Unaudited)***
              
              **Three
                  Months Ended**
              
              
              **Six
                  Months Ended****June
                  30,**
              
              
              **June
                  30,*****dollars
                  in thousands except share and per share data***
              
              **2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006****Interest
                  and Dividend Income**Interest
                  and Fees on Loans
              
              **$**
              **7,999**
              
              
              $
              7,471
              
              
              **$**
              **15,688**
              
              
              $
              14,781Interest
                  and Dividends on Securities:U.S.
                  Government and Agency Obligations
              
              ****
              **2,399**
              
              
              
              2,428
              
              
              ****
              **4,840**
              
              
              
              4,868State
                  and Municipal Obligations
              
              ****
              **621**
              
              
              
              592
              
              
              ****
              **1,268**
              
              
              
              1,189Other
              
              ****
              **101**
              
              
              
              60
              
              
              ****
              **202**
              
              
              
              120Interest
                  on Federal Funds Sold and Time Deposits
              
              ****
              **292**
              
              
              
              95
              
              
              ****
              **528**
              
              
              
              158Total
                  Interest and Dividend Income
              
              ****
              **11,412**
              
              
              
              10,646
              
              
              ****
              **22,526**
              
              
              
              21,116**Interest
                  Expense**Interest
                  on Deposits:Savings,
                  NOW and Money Market Deposit Accounts
              
              ****
              **1,285**
              
              
              
              885
              
              
              ****
              **2,501**
              
              
              
              1,758Certificates
                  of Deposit (Over $100M)
              
              ****
              **1,206**
              
              
              
              947
              
              
              ****
              **2,344**
              
              
              
              1,730Certificates
                  of Deposit (Under $100M)
              
              ****
              **1,947**
              
              
              
              1,710
              
              
              ****
              **3,822**
              
              
              
              3,348Other
                  Deposits
              
              ****
              **271**
              
              
              
              230
              
              
              ****
              **521**
              
              
              
              451Interest
                  on Short-Term Borrowings
              
              ****
              **127**
              
              
              
              133
              
              
              ****
              **307**
              
              
              
              333Interest
                  on Long-Term Borrowings
              
              ****
              **499**
              
              
              
              483
              
              
              ****
              **890**
              
              
              
              988Total
                  Interest Expense
              
              ****
              **5,335**
              
              
              
              4,388
              
              
              ****
              **10,385**
              
              
              
              8,608**Net
                  Interest Income**
              
              ****
              **6,077**
              
              
              
              6,258
              
              
              ****
              **12,141**
              
              
              
              12,508Provision
                  for Loan Losses
              
              ****
              **240**
              
              
              
              420
              
              
              ****
              **500**
              
              
              
              840Net
                  Interest Income After Provision for Loan Losses
              
              ****
              **5,837**
              
              
              
              5,838
              
              
              ****
              **11,641**
              
              
              
              11,668**Non-Interest
                  Income**Trust
                  Fees
              
              ****
              **400**
              
              
              
              362
              
              
              ****
              **780**
              
              
              
              751Service
                  Charges on Deposit Accounts
              
              ****
              **483**
              
              
              
              406
              
              
              ****
              **901**
              
              
              
              813Commissions
                  Income
              
              ****
              **144**
              
              
              
              131
              
              
              ****
              **290**
              
              
              
              317Investment
                  Security Gains, Net
              
              ****
              **79**
              
              
              
              17
              
              
              ****
              **126**
              
              
              
              310Net
                  Gain on Sale of Loans
              
              ****
              **78**
              
              
              
              0
              
              
              ****
              **110**
              
              
              
              0Increase
                  in Cash Surrender Value of Bank Owned Life Insurance
              
              ****
              **154**
              
              
              
              141
              
              
              ****
              **303**
              
              
              
              273Gain
                  on Life Insurance Coverage
              
              ****
              **615**
              
              
              
              0
              
              
              ****
              **615**
              
              
              
              0Other
                  Service Fees
              
              ****
              **42**
              
              
              
              94
              
              
              ****
              **123**
              
              
              
              197Gain
                  on Disposal of Fixed Assets and Other Real Estate
              
              ****
              **0**
              
              
              
              0
              
              
              ****
              **359**
              
              
              
              0Flood
                  Grants
              
              ****
              **200**
              
              
              
              0
              
              
              ****
              **232**
              
              
              
              0Other
                  Income
              
              ****
              **151**
              
              
              
              200
              
              
              ****
              **264**
              
              
              
              340Total
                  Non-Interest Income
              
              ****
              **2,346**
              
              
              
              1,351
              
              
              ****
              **4,103**
              
              
              
              3,001**Non
                  Interest Expense**Salaries
              
              ****
              **2,407**
              
              
              
              2,323
              
              
              ****
              **4,747**
              
              
              
              4,713Employee
                  Benefits
              
              ****
              **760**
              
              
              
              839
              
              
              ****
              **1,371**
              
              
              
              1,438Occupancy
                  Expense of Bank Premises
              
              ****
              **402**
              
              
              
              401
              
              
              ****
              **867**
              
              
              
              855Furniture
                  and Equipment Expense
              
              ****
              **202**
              
              
              
              197
              
              
              ****
              **412**
              
              
              
              381Computer
                  Service Fees
              
              ****
              **186**
              
              
              
              193
              
              
              ****
              **377**
              
              
              
              397Advertising
                  and Marketing
              
              ****
              **140**
              
              
              
              126
              
              
              ****
              **251**
              
              
              
              229Professional
                  Fees
              
              ****
              **255**
              
              
              
              294
              
              
              ****
              **523**
              
              
              
              526Loss
                  on Disposal / Impairment of Fixed Assets
              
              ****
              **0**
              
              
              
              320
              
              
              ****
              **0**
              
              
              
              320Other
                  Miscellaneous Expenses
              
              ****
              **869**
              
              
              
              801
              
              
              ****
              **1,637**
              
              
              
              1,486Total
                  Non Interest Expense
              
              ****
              **5,221**
              
              
              
              5,494
              
              
              ****
              **10,185**
              
              
              
              10,345Income
                  Before Taxes
              
              ****
              **2,962**
              
              
              
              1,695
              
              
              ****
              **5,559**
              
              
              
              4,324Income
                  Taxes
              
              ****
              **(555**
              **)**
              
              
              (341
              )
              
              ****
              **(1,203**
              **)**
              
              
              (1,017
              )**Net
                  Income**
              
              **$**
              **2,407**
              
              
              $
              1,354
              
              
              **$**
              **4,356**
              
              
              $
              3,307Weighted
                  Average Shares Outstanding
              
              ****
              **10,569,182**
              
              
              
              10,966,692
              
              
              ****
              **10,569,182**
              
              
              
              11,055,820Basic
                  Earnings Per Share
              
              **$**
              **0.23**
              
              
              $
              0.12
              
              
              **$**
              **0.41**
              
              
              $
              0.30
 
 *See
                  accompanying notes to interim unaudited consolidated financial
                  statements.*




4
 Index


***TheWilber
                  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**
              
              
              **Loss**
              
              
              **Stock**
              
              
              **Total**Balance
                  December 31, 2005
              
              $
              140
              
              
              $
              4,224
              
              
              $
              86,900
              
              
              $
              (2,409
              )
              
              $
              (21,138
              )
              
              $
              67,717Comprehensive
                  Income:Net
                  Income
              
              
              -
              
              
              
              -
              
              
              
              3,307
              
              
              
              -
              
              
              
              -
              
              
              
              3,307Change
                    in Net Unrealized Loss on Securities, Net of Taxes
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,698
              )
              
              
              -
              
              
              
              (2,698
              )Total
                  Comprehensive Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              609Cash
                  Dividends ($.095 per share)
              
              
              -
              
              
              
              -
              
              
              
              (2,118
              )
              
              
              -
              
              
              
              -
              
              
              
              (2,118
              )Purchase
                  of Treasury Stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (6,366
              )
              
              
              (6,366
              )Balance
                  June 30, 2006
              
              $
              140
              
              
              $
              4,224
              
              
              $
              88,089
              
              
              $
              (5,107
              )
              
              $
              (27,504
              )
              
              $
              59,842Balance
                  December 31, 2006
              
              $
              140
              
              
              $
              4,224
              
              
              $
              89,921
              
              
              $
              (3,247
              )
              
              $
              (27,706
              )
              
              $
              63,332Comprehensive
                  Income:Net
                  Income
              
              ****
              **-**
              
              
              ****
              **-**
              
              
              ****
              **4,356**
              
              
              ****
              **-**
              
              
              ****
              **-**
              
              
              ****
              **4,356**Change
                  in Net Unrealized Loss on Securities, Net of Taxes
              
              ****
              **-**
              
              
              ****
              **-**
              
              
              ****
              **-**
              
              
              ****
              **(827**
              **)**
              
              ****
              **-**
              
              
              ****
              **(827**
              **)**Change
                  in Pension Asset, Net of Tax
              
              ****
              **-**
              
              
              ****
              **-**
              
              
              ****
              **-**
              
              
              ****
              **39**
              
              
              ****
              **-**
              
              
              ****
              **39**Total
                  Comprehensive Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              ****
              **3,568**Cash
                  Dividends ($.095 per share)
              
              ****
              **-**
              
              
              ****
              **-**
              
              
              ****
              **(2,008**
              **)**
              
              ****
              **-**
              
              
              ****
              **-**
              
              
              ****
              **(2,008**
              **)****Balance
                  June 30, 2007**
              
              **$**
              **140**
              
              
              **$**
              **4,224**
              
              
              **$**
              **92,269**
              
              
              **$**
              **(4,035**
              **)**
              
              **$**
              **(27,706**
              **)**
              
              **$**
              **64,892**
 
 *See
                  accompanying notes to interim unaudited consolidated financial
                  statements.*




5
 Index


***TheWilber
                  Corporation******Consolidated
                  Statements of Cash Flows (Unaudited)*****Six
                  Months Ended****June
                  30,*****dollars
                  in thousands***
              
              **2007**
              
              
              **2006****Cash
                  Flows from Operating Activities:**Net
                  Income
              
              **$**
              **4,356**
              
              
              $
              3,307Adjustments
                  to Reconcile Net Income to Net CashProvided
                  by Operating Activities:Provision
                  for Loan Losses
              
              ****
              **500**
              
              
              
              840Depreciation
                  and Amortization
              
              ****
              **536**
              
              
              
              565Net
                  Amortization of Premiums and Accretion of Discounts on
                  Investments
              
              ****
              **254**
              
              
              
              349(Gain)
                  Loss on Disposal / Impairment of Fixed Assets, net
              
              ****
              **(352**
              **)**
              
              
              320(Gain)
                  on Life Insurance Coverage
              
              ****
              **(615**
              **)**
              
              
              0Available-for-Sale
                  Investment Security Gains, net
              
              ****
              **0**
              
              
              
              (271
              )Other
                  Real Estate Gains
              
              ****
              **(7**
              **)**
              
              
              0Increase
                  in Cash Surrender Value of Bank Owned Life Insurance
              
              ****
              **(303**
              **)**
              
              
              (273
              )Net
                  Decrease in Trading Securities
              
              ****
              **197**
              
              
              
              69Net
                  Gains on Trading Securities
              
              ****
              **(126**
              **)**
              
              
              (39
              )Increase
                  in Loans Held for Sale
              
              ****
              **(756**
              **)**
              
              
              0Increase
                  in Other Assets
              
              ****
              **(1,960**
              **)**
              
              
              (3,111
              )Decrease
                  in Other Liabilities
              
              ****
              **(1,324**
              **)**
              
              
              (1,435
              )Net
                  Cash Provided by Operating Activities
              
              ****
              **400**
              
              
              
              321**Cash
                  Flows from Investing Activities:**Net
                  Cash Paid for Provantage Funding Corporation
              
              ****
              **(165**
              **)**
              
              
              0Proceeds
                  from Maturities of Held-to-Maturity Investment Securities
              
              ****
              **8,732**
              
              
              
              3,954Purchases
                  of Held-to-Maturity Investment Securities
              
              ****
              **0**
              
              
              
              (4,954
              )Proceeds
                  from Maturities of Available-for-Sale Investment
                  Securities
              
              ****
              **26,457**
              
              
              
              17,045Proceeds
                  from Sales of Available-for-Sale Investment Securities
              
              ****
              **0**
              
              
              
              3,057Purchases
                  of Available-for-Sale Investment Securities
              
              ****
              **(15,126**
              **)**
              
              
              (13,705
              )Net
                  Increase in Other Investments
              
              ****
              **(264**
              **)**
              
              
              (424
              )Change
                  in Death Benefit Proceeds Receivable
              
              ****
              **1,541**
              
              
              
              0Net
                  Increase in Loans
              
              ****
              **(23,251**
              **)**
              
              
              (72
              )Purchase
                  of Premises and Equipment, Net of Disposals
              
              ****
              **(1,012**
              **)**
              
              
              (245
              )Proceeds
                  from Sale of Other Real Estate
              
              ****
              **27**
              
              
              
              0Net
                  Cash (Used by) Provided by Investing Activities
              
              ****
              **(3,061**
              **)**
              
              
              4,656**Cash
                  Flows from Financing Activities:**Net
                  Increase in Demand Deposits, Savings, NOW,Money
                  Market and Other Deposits
              
              ****
              **8,999**
              
              
              
              12,730Net
                  (Decrease) Increase in Certificates of Deposit
              
              ****
              **(3,406**
              **)**
              
              
              12,699Net
                  Decrease in Short-Term Borrowings
              
              ****
              **(4,134**
              **)**
              
              
              (6,586
              )Increase
                  in Long-Term Borrowings
              
              ****
              **20,000**
              
              
              
              0Repayment
                  of Long-Term Borrowings
              
              ****
              **(16,558**
              **)**
              
              
              (5,177
              )Purchase
                  of Treasury Stock
              
              ****
              **0**
              
              
              
              (6,366
              )Cash
                  Dividends Paid
              
              ****
              **(2,008**
              **)**
              
              
              (2,118
              )Net
                  Cash Provided by Financing Activities
              
              ****
              **2,893**
              
              
              
              5,182Net
                  Increase in Cash and Cash Equivalents
              
              ****
              **232**
              
              
              
              10,159Cash
                  and Cash Equivalents at Beginning of Period
              
              ****
              **25,859**
              
              
              
              18,417Cash
                  and Cash Equivalents at End of Period
              
              **$**
              **26,091**
              
              
              $
              28,576**Supplemental
                  Disclosures of Cash Flow Information:**Cash
                  Paid during Period for:Interest
              
              **$**
              **10,329**
              
              
              $
              8,564Income
                  Taxes
              
              **$**
              **2,210**
              
              
              $
              2,727Non
                  Cash Investing Activities:Change
                  in Unrealized Loss on Securities
              
              **$**
              **(1,334**
              **)**
              
              $
              (4,419
              )Transfer
                  of Loans to Other Real Estate
              
              **$**
              **(210**
              **)**
              
              $
              0Fair
                  Value of Assets Acquired
              
              **$**
              **609**
              
              
              $
              0Fair
                  Value of Liabilities Assumed
              
              **$**
              **444**
              
              
              $
              0
 
 *See
                  accompanying notes to interim unaudited consolidated financial
                  statements.*




6
 Index




TheWilber
      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
      subsidiaries Provantange Funding Corporation (“Provantage”), and Wilber National
      Bank (the "Bank"), and the Bank's wholly owned 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 statement of condition for December 31, 2006 was derived
      from the Company's 2006 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, 2006 and 2005, and the consolidated statements of income,
      consolidated statements of cash flows, and consolidated statements of
      shareholders’ equity and comprehensive income for each of the years in the
      three-year period ended December 31, 2006.  That data, along with the
      unaudited interim financial information presented in the consolidated statements
      of condition as of June 30, 2007, the statements of income for the three- and
      six-month periods ended June 30, 2007 and 2006, and the statements of changes
      in
      shareholders' equity and comprehensive income and cash flows for the six-month
      periods ended June 30, 2007 and 2006, should be read in conjunction with the
      2006 consolidated financial statements, including the notes
      thereto.





Amounts
      in prior periods’ 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”) are 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 written 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.  Stand-by letters of credit totaled $4,800,000 at June
      30, 2007 and $4,200,000 at December 31, 2006.





The
      estimated fair value of the Company’s stand-by letters of credit was $13,000 and
      $18,000 at June 30, 2007 and December 31, 2006, 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




7
 Index




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.




***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 mantains 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 2007 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, based on a measurement date as
        of the
        prior September 30, are:
  **Three
                    Months Ended**
                
                
                **Six
                    Months Ended****June
                    30,**
                
                
                **June
                    30,*****dollars
                    in thousands***
                
                **2007**
                
                
                **2006**
                
                
                **2007**
                
                
                **2006**Service
                    Cost
                
                **$**
                **34**
                
                
                $
                103
                
                
                **$**
                **68**
                
                
                $
                209Interest
                    Cost
                
                ****
                **225**
                
                
                
                234
                
                
                ****
                **450**
                
                
                
                445Expected
                    Return on Plan Assets
                
                ****
                **(331**
                **)**
                
                
                (347
                )
                
                ****
                **(662**
                **)**
                
                
                (681
                )Net
                    Amortization
                
                ****
                **33**
                
                
                
                34
                
                
                ****
                **65**
                
                
                
                53Curtailment
                    Expense
                
                ****
                **0**
                
                
                
                190
                
                
                ****
                **0**
                
                
                
                190**$**
                **(39**
                **)**
                
                $
                214
                
                
                **$**
                **(79**
                **)**
                
                $
                216
 
 The
        Company recorded $39,000, net of tax, as amortization of amounts previously
        recognized in accumulated other comp- rehensive income.







***Note
        5. Other Comprehensive Income***
 
 The
        following is a summary of changes in other comprehensive loss for the periods
        presented:
 
 **Three
                  Months Ended**
              
              
              **Six
                  Months Ended****June
                  30,**
              
              
              **June
                  30,*****dollars
                  in thousands***
              
              **2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Unrealized
                  Holding Losses Arising During the Period, Net of Tax(Pre-Tax
                  Amount of ($2,155), ($2,986), ($1,334), and ($4,148))
              
              **$**
              **(1,329**
              **)**
              
              $
              (1,823
              )
              
              **$**
              **(827**
              **)**
              
              $
              (2,533
              )Reclassification
                  Adjustment for Gains Realized in Net Income During the
                  Period,Net
                  of Tax  (Pre-Tax Amount of $0, ($74), $0, and
                  ($271))
              
              ****
              **0**
              
              
              
              (44
              )
              
              ****
              **0**
              
              
              
              (165
              )Change
                  in Pension Asset (Pre-Tax Amount of $33, $0, $66, and $0)
              
              ****
              **20**
              
              
              
              0
              
              
              ****
              **39**
              
              
              
              0Other
                  Comprehensive Loss
              
              **$**
              **(1,309**
              **)**
              
              **$**
              **(1,867**
              **)**
              
              **$**
              **(788**
              **)**
              
              **$**
              **(2,698**
              **)**





8
 Index




***Note
        6.  Income Taxes***
 
 Effective
        January 1, 2007, the Company adopted the provisions of Financial Accounting
        Standards Board issued Interpretation No. 48, “Accounting for Uncertainty in
        Income Taxes” (“FIN 48”).  There was no cumulative effect related to
        adopting FIN 48.
 
 As
        of
        January 1, 2007, the Company’s liability for unrecognized tax benefit totaled
        $52,000, which would impact the Company’s effective tax rate if recognized or
        reversed.  As a result of the expiration of the statute of
        limitations, it is reasonably possible that the unrecognized tax benefit
        will be
        reversed prior to December 31, 2007.
 
 The
        Company is currently open to audit by the Internal Revenue Service for the
        years
        ending December 31, 2003 through 2006. The Company’s New York State income tax
        return is open to audit for the years ending December 31, 2002 through 2006,
        and
        the Company is currently undergoing an examination by New York State for
        the tax
        years 2003 and 2004.
 
 The
        Company accounts for interest and penalties related to uncertain tax positions
        as part of its provision for federal and state income taxes. As of January
        1,
        2007, the Company had accrued $10,000 of interest related to uncertain tax
        positions.  As of June 30, 2007, the total amount of accrued interest
        was $12,000.






***Note
        7.  Impaired Loans***
 
 The
        following provides information on impaired loans for the periods
        presented:
 
 **June
                  30,**
              
              
              **December
                  31,*****dollars
                  in thousands***
              
              **2007**
              
              
              **2006**Impaired
                  Loans
              
              **$**
              **4,427**
              
              
              $
              1,896Allowance
                  for Impaired Loans
              
              ****
              **465**
              
              
              
              334Average
                  Recorded Investment in Impaired Loans (year to date)
              
              ****
              **4,328**
              
              
              
              1,597
 
 
 At
        June
        30, 2007, $4,366,000 of the impaired loans had a specific reserve allocation
        of
        $465,000 compared to $1,669,000 of total impaired loans at December 31, 2006
        with a related reserve of $334,000.
 
 The
        following table sets forth information with regard to non-performing
        loans:
 
 **June
                  30,**
              
              
              **December
                  31,*****dollars
                  in thousands***
              
              **2007**
              
              
              **2006**Loans
                  in Non-Accrual Status
              
              **$**
              **2,918**
              
              
              $
              2,347Loans
                  Contractually Past Due 90 Days or Moreand
                  Still Accruing Interest
              
              ****
              **37**
              
              
              
              182Troubled
                  Debt Restructured Loans
              
              ****
              **2,243**
              
              
              
              0Total
                  Non-Performing Loans
              
              **$**
              **5,198**
              
              
              $
              2,529
 
 The
        Company did not record any interest income related to non-accrual loans for
        the
        three- and six- month periods ended June 30, 2007.  Had the loans in
        non-accrual status performed in accordance with their original terms, additional
        interest income of $67,000 and $145,000, respectively, would have been recorded
        for the three- and six- month periods ended June 30, 2007.
 
 Had
        the
        troubled debt restructured loans performed in accordance with their original
        terms, the Company would have recorded interest income of  $59,000 and
        $117,000, respectively, for the three- and six-month periods ended June 30,
        2007.  Under the restructured terms, the Company recorded interest
        income of $61,000 and $122,000, respectively, for the three- and six-month
        periods ended June 30, 2007.




9
 Index




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





A.
General





The
      primary objective of this quarterly report is to provide: (i) an overview of
      the
      significant changes in our financial condition, including liquidity and capital
      resources, at June 30, 2007, as compared to December 31, 2006; (ii) a comparison
      of our results of operations for the three-month period ended June 30, 2007,
      as
      compared to the three-month period ended June 30, 2006, and (iii) a comparison
      of our results of operations for the six-month period ended June 30, 2007,
      as
      compared to the six-month period ended June 30, 2006.





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, investment securities gains and losses, the net gain on the
      sale of loans, service charges and penalty fees on deposit accounts, fees
      collected for trust and investment services, the net gain on the sale of loans,
      insurance commission income, 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 employee salaries, employee benefits,
      occupancy and equipment expense, advertising and marketing expense, computer
      service fees, 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
      June 30, 2007, 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 changed.  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.  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
      June 30, 2007, evaluation of collateral values was reasonable under the
      circumstances, if collateral valuations were significantly lowered, our
      allowance for loan losses would also require additional provisions for loan
      losses.





*Recent
      Accounting Pronouncements*.  In February 2007, the Financial
      Accounting Standards Board (“FASB”) issued Statement of Financial Accounting
      Standards No. 159, “The Fair Value Option for Financial Assets and Financial
      Liabilities” (“SFAS 159”).  SFAS 159 permits entities to choose to
      measure many financial instruments and certain other items at fair
      value.  The objective is to improve financial reporting by providing
      entities with the opportunity to mitigate volatility in reported earnings caused
      by measuring related assets and liabilities differently without having to apply
      complex hedge accounting provisions.  SFAS 159 is effective for fiscal
      years beginning after November 15, 2007.  Management has not completed
      an evaluation of the impact of this standard.  Although early adoption
      of SFAS 159 is permitted, the Company has elected not to adopt it for its fiscal
      year which began January 1, 2007.





In
      September 2006, FASB’s Emerging Issues Task Force (“EITF”) reached a consensus
      on EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement
      Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“EITF
      06-4”).  EITF 06-4 will require that the postretirement aspects of an
      endorsement-type split dollar life insurance arrangement be recognized as a
      liability by the employer and that the obligation is not effectively settled
      by
      the purchase of life insurance.  Companies adopting EITF 06-4 will be
      able to choose between retrospective application to all prior periods or
      treating the application of EITF 06-4 as a cumulative-effect adjustment to
      beginning retained earnings or to other components of equity or net assets
      in
      the statement of condition.  EITF 06-4 will be effective for fiscal
      years beginning after December 15, 2007.  We currently have sixteen
      split-dollar life insurance arrangements with current and former executives
      of
      the Bank that will be subject to EITF 06-4.  We are currently
      evaluating the potential impact of EITF 06-4.





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




10
 Index




value,
      and expands the related disclosure requirements.  We are currently
      evaluating the potential impact of this statement.




B.
FinancialCondition
      and Performance Overview





We
      experienced significant growth in loans between December 31, 2006 and June
      30,
      2007.  In particular, loans increased from $405.832 million at
      December 31, 2006 to $429.217 million at June 30, 2007, a $23.385 million or
      5.8
      % increase.  The significant increase in total loans resulted in only
      a slight increase in total assets between the periods due principally to
      decreases in available-for-sale and held-to-maturity investment
      securities.  Total assets increased from $761.981 million at December
      31, 2006 to $767.331 million at June 30, 2007, a $5.350 million or 0.7% increase
      between the periods.  We attribute the growth in total loans to our
      recent geographic market expansion and related loan origination
      efforts.





Between
      December 31, 2006 and June 30, 2007, we experienced decreases in both potential
      problem loans and in loans 30 to 89 days delinquent, while non-performing loans
      increased.  Potential problem loans are loans that are currently
      performing, but where known information about possible credit problems
      exists.  Potential problem loans decreased from $14.538 million or
      3.6% of total loans outstanding at December 31, 2006 to $8.291 million or 1.9%
      of total loans outstanding at June 30, 2007.  Similarly, the level of
      loans 30 to 89 days delinquent decreased from $4.393 million or 1.1% of total
      loans outstanding at December 31, 2006 to $2.532 million or 0.6% of total loans
      outstanding at June 30, 2007.  Conversely, non-performing loans
      increased from $2.529 million or 0.6% of total loans outstanding at December
      31,
      2006 to $5.198 million or 1.2% of total loans outstanding at June 30, 2007
      due
      primarily to the transfer of twelve loans from performing to non-performing
      status.  These loans were distributed among several borrowers and did
      not represent any single industry concentration.





At
      June
      30, 2007, the allowance for loan losses was $6.830 million or 1.59% of total
      loans outstanding.  This compares to $6.680 million or 1.65% of loans
      outstanding at December 31, 2006.  The allowance for loan losses as a
      percentage of total loans decreased slightly due principally to an increase
      in
      total loans outstanding between December 31, 2006 and June 30,
      2007.





Net
      income and earnings per share increased significantly between the six-month
      period ended June 30, 2007 and the six-month period ended June 30,
      2006.  Net income and earnings per share were $4.356 million and $0.41
      for the six-month period ended June 30, 2007, as compared to $3.307 million
      and
      $0.30 for the six-month period ended June 30, 2006.  Improved results
      for the three-month period ended June 30, 2007 versus the three-month period
      ended June 30, 2006 were similar to the improvements noted between the six-month
      periods ended June 30, 2007 and 2006.  Net income and earnings per
      share were $2.407 million and $0.23 for the three-month period ended June 30,
      2007, as compared to $1.354 million and $0.12 for the three-month period ended
      June 30, 2006.  The increase in net income between comparable periods
      was principally due to three unusual events:





*Death
      of Senior Executive*.  In May 2007, Steven A. Milavec, the
      Company’s Senior Vice President of Information Technology and Customer Support,
      passed away unexpectedly.  Due to the passing of Mr. Milavec and the
      related life insurance policies held by the Company covering Mr. Milavec, we
      recorded a $615 thousand (non-taxable) gain on life insurance proceeds during
      the second quarter of 2007.  This compares to no gains on life
      insurance proceeds during the first half of 2006.





*Regional
      Flooding*.  During the second quarter of 2006, our immediate
      market area was effected by flooding due to higher than normal
      rainfall.  Two of our branch offices, in Sidney, New York and Walton,
      New York, and their contents were damaged by floodwaters.  During the
      second quarter of 2006 we recorded a $320 thousand loss on the disposal /
      impairment of fixed assets due to flood-related damage to our branch offices
      and
      the destruction of their contents.  We did not carry flood insurance
      on these properties.  To compensate for the loss caused by these
      floods, we applied for several flood-recovery grants provided through various
      New York State agencies.  We were awarded flood-recovery grant monies
      totaling $245 thousand, $200 thousand of which was recorded in the second
      quarter of 2007.





*Gain
      on Sale of Branch Office*.  During the first quarter of 2007, we
      recognized a deferred gain on the sale of our Norwich Town branch office
      building (and related equipment) to the landowner and recorded a $352 thousand
      gain on the sale.  There were no similar transactions recorded in the
      six-month period ended June 30, 2006.





The
      following tables set forth in this quarterly financial report provide readers
      with supplementary information, which is not directly obtainable from the
      unaudited consolidated interim financial statements




11
 Index




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.  Average
      outstanding balances are daily averages.





**For
                the Three Months Ended June 30,****2007**
            
            
            
            **2006**Average
              Outstanding
              Balance
            
            
            Interest
              Earned
                /Paid
            
            
            Yield
                / Rate
            
            
            
            Average
              Outstanding
              Balance
            
            
            Interest
              Earned
                /Paid
            
            
            Yield
                / Rate(Dollars
                in thousands)**Earning
                Assets:**Federal
                funds sold
            
            $
            16,992
            
            
            $
            225
            
            
            
            5.31
            %
            
            
            $
            5,515
            
            
            $
            68
            
            
            
            4.95
            %Interest
                bearing deposits
            
            
            5,349
            
            
            
            67
            
            
            
            5.02
            %
            
            
            
            2,735
            
            
            
            27
            
            
            
            3.96
            %Securities
                (1)
            
            
            286,256
            
            
            
            3,121
            
            
            
            4.37
            %
            
            
            
            295,823
            
            
            
            3,080
            
            
            
            4.18
            %Loans
                (2)
            
            
            419,542
            
            
            
            7,999
            
            
            
            7.65
            %
            
            
            
            399,223
            
            
            
            7,471
            
            
            
            7.51
            %Total
                earning assets
            
            
            728,139
            
            
            
            11,412
            
            
            
            6.29
            %
            
            
            
            703,296
            
            
            
            10,646
            
            
            
            6.07
            %Non-earning
                assets
            
            
            41,123
            
            
            
            
            
            
            
            
            
            
            
            
            42,274Total
                assets
            
            $
            769,262
            
            
            
            
            
            
            
            
            
            
            
            $
            745,570**Liabilities:**Savings
                accounts
            
            $
            78,974
            
            
            $
            125
            
            
            
            0.63
            %
            
            
            $
            88,207
            
            
            $
            139
            
            
            
            0.63
            %Money
                market accounts
            
            
            91,859
            
            
            
            903
            
            
            
            3.94
            %
            
            
            
            57,595
            
            
            
            484
            
            
            
            3.37
            %NOW
                accounts
            
            
            78,230
            
            
            
            257
            
            
            
            1.32
            %
            
            
            
            93,753
            
            
            
            262
            
            
            
            1.12
            %Time
                & other deposit accounts
            
            
            318,288
            
            
            
            3,424
            
            
            
            4.31
            %
            
            
            
            303,803
            
            
            
            2,887
            
            
            
            3.81
            %Borrowings
            
            
            60,679
            
            
            
            626
            
            
            
            4.14
            %
            
            
            
            64,595
            
            
            
            616
            
            
            
            3.83
            %Total
                interest bearing liabilities
            
            
            628,030
            
            
            
            5,335
            
            
            
            3.41
            %
            
            
            
            607,953
            
            
            
            4,388
            
            
            
            2.89
            %Non-interest
                bearing deposits
            
            
            72,530
            
            
            
            
            
            
            
            
            
            
            
            
            69,776Other
                non-interest bearing liabilities
            
            
            3,974
            
            
            
            
            
            
            
            
            
            
            
            
            2,923Total
                liabilities
            
            
            704,534
            
            
            
            
            
            
            
            
            
            
            
            
            680,652Shareholders'
                equity
            
            
            64,728
            
            
            
            
            
            
            
            
            
            
            
            
            64,918Total
                liabilities and shareholders' equity
            
            $
            769,262
            
            
            
            
            
            
            
            
            
            
            
            $
            745,570Net
                interest income
            
            
            
            
            
            $
            6,077
            
            
            
            
            
            
            
            
            
            
            
            $
            6,258Net
                interest rate spread (3)
            
            
            
            
            
            
            
            
            
            
            2.88
            %
            
            
            
            
            
            
            
            
            
            
            
            3.18
            %Net
                earning assets
            
            $
            100,109
            
            
            
            
            
            
            
            
            
            
            
            $
            95,343Net
                interest margin (4)
            
            
            
            
            
            
            
            
            
            
            3.35
            %
            
            
            
            
            
            
            
            
            
            
            
            3.57
            %Net
                interest margin (tax-equivalent)
            
            
            
            
            
            
            
            
            
            
            3.63
            %
            
            
            
            
            
            
            
            
            
            
            
            3.84
            %Ratio
                of earning assets to interest bearing liabilities
            
            
            115.94
            %
            
            
            
            
            
            
            
            
            
            
            
            115.68
            %





(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)
                Average loans include loans held for sale, net deferred loan fees
                and
                costs, and non-accrual loans and excludes the allowance for loan
                losses.(3)
                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.(4)
                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.




12
 Index




**For
                the Six Months Ended June 30,****2007**
            
            
            
            **2006**Average
              Outstanding
              Balance
            
            
            Interest
              Earned
                /Paid
            
            
            Yield
                / Rate
            
            
            
            Average
              Outstanding
              Balance
            
            
            Interest
              Earned
                /Paid
            
            
            Yield
                / Rate(Dollars
                in thousands)**Earning
                Assets:**Federal
                funds sold
            
            $
            17,110
            
            
            $
            448
            
            
            
            5.28
            %
            
            
            $
            4,762
            
            
            $
            112
            
            
            
            4.74
            %Interest
                bearing deposits
            
            
            3,312
            
            
            
            80
            
            
            
            4.87
            %
            
            
            
            2,525
            
            
            
            46
            
            
            
            3.67
            %Securities
                (1)
            
            
            289,181
            
            
            
            6,310
            
            
            
            4.40
            %
            
            
            
            299,080
            
            
            
            6,177
            
            
            
            4.16
            %Loans
                (2)
            
            
            413,821
            
            
            
            15,688
            
            
            
            7.64
            %
            
            
            
            400,479
            
            
            
            14,781
            
            
            
            7.44
            %Total
                earning assets
            
            
            723,424
            
            
            
            22,526
            
            
            
            6.28
            %
            
            
            
            706,846
            
            
            
            21,116
            
            
            
            6.02
            %Non-earning
                assets
            
            
            40,447
            
            
            
            
            
            
            
            
            
            
            
            
            42,169Total
                assets
            
            $
            763,871
            
            
            
            
            
            
            
            
            
            
            
            $
            749,015**Liabilities:**Savings
                accounts
            
            $
            80,085
            
            
            $
            252
            
            
            
            0.63
            %
            
            
            $
            90,295
            
            
            $
            281
            
            
            
            0.63
            %Money
                market accounts
            
            
            89,305
            
            
            
            1,748
            
            
            
            3.95
            %
            
            
            
            55,371
            
            
            
            935
            
            
            
            3.41
            %NOW
                accounts
            
            
            79,249
            
            
            
            501
            
            
            
            1.27
            %
            
            
            
            95,383
            
            
            
            542
            
            
            
            1.15
            %Time
                & other deposit accounts
            
            
            315,394
            
            
            
            6,687
            
            
            
            4.28
            %
            
            
            
            298,669
            
            
            
            5,529
            
            
            
            3.73
            %Borrowings
            
            
            60,232
            
            
            
            1,197
            
            
            
            4.01
            %
            
            
            
            70,019
            
            
            
            1,321
            
            
            
            3.80
            %Total
                interest bearing liabilities
            
            
            624,265
            
            
            
            10,385
            
            
            
            3.35
            %
            
            
            
            609,737
            
            
            
            8,608
            
            
            
            2.85
            %Non-interest
                bearing deposits
            
            
            71,474
            
            
            
            
            
            
            
            
            
            
            
            
            69,057Other
                non-interest bearing liabilities
            
            
            4,327
            
            
            
            
            
            
            
            
            
            
            
            
            3,938Total
                liabilities
            
            
            700,066
            
            
            
            
            
            
            
            
            
            
            
            
            682,732Shareholders'
                equity
            
            
            63,805
            
            
            
            
            
            
            
            
            
            
            
            
            66,283Total
                liabilities and shareholders' equity
            
            $
            763,871
            
            
            
            
            
            
            
            
            
            
            
            $
            749,015Net
                interest income
            
            
            
            
            
            $
            12,141
            
            
            
            
            
            
            
            
            
            
            
            $
            12,508Net
                interest rate spread (3)
            
            
            
            
            
            
            
            
            
            
            2.93
            %
            
            
            
            
            
            
            
            
            
            
            
            3.17
            %Net
                earning assets
            
            $
            99,159
            
            
            
            
            
            
            
            
            
            
            
            $
            97,109Net
                interest margin (4)
            
            
            
            
            
            
            
            
            
            
            3.38
            %
            
            
            
            
            
            
            
            
            
            
            
            3.57
            %Net
                interest margin (tax-equivalent)
            
            
            
            
            
            
            
            
            
            
            3.66
            %
            
            
            
            
            
            
            
            
            
            
            
            3.83
            %Ratio
                of earning assets to interest bearing liabilities
            
            
            115.88
            %
            
            
            
            
            
            
            
            
            
            
            
            115.93
            %





(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)
                Average loans include loans held for sale, net deferred loan fees
                and
                costs, and non-accrual loans and excludes the allowance for loan
                losses.(3)
                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.(4)
                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.


13
 Index




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
                  June 30, 2007**
              
              
              **At
                  December 31, 2006**Loans
                  in Non-Accrual Status:Residential
                  real estate (1)
              
              $
              733
              
              
              $
              450Commercial
                  real estate
              
              
              1,890
              
              
              
              1,626Commercial
                  (2)
              
              
              294
              
              
              
              271Consumer
              
              
              1
              
              
              
              0Total
                  non-accruing loans
              
              
              2,918
              
              
              
              2,347Loans
                  Contractually Past Due 90 Days or More and Still Accruing
                  Interest
              
              
              37
              
              
              
              182Troubled
                  Debt Restructured Loans
              
              
              2,243
              
              
              
              0Total
                  non-performing loans
              
              
              5,198
              
              
              
              2,529Other
                  Real Estate Owned
              
              
              295
              
              
              
              103Total
                  non-performing assets
              
              $
              5,493
              
              
              $
              2,632Total
                  non-performing assets as a percentage of total assets
              
              
              0.72
              %
              
              
              0.35
              %Total
                  non-performing loans as a percentage of total loans
              
              
              1.21
              %
              
              
              0.62
              %(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.
 
 14
 Index
  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 June 30,**
              
              
              **Six
                  months ended June 30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**(Dollars
                  in thousands)
              
              
              (Dollars
                  in thousands)Balance
                  at beginning of period
              
              $
              6,718
              
              
              $
              5,976
              
              
              $
              6,680
              
              
              $
              6,640Charge-offs:Residential
                  real estate (1)
              
              
              94
              
              
              
              40
              
              
              
              97
              
              
              
              47Commercial
                  real estate
              
              
              115
              
              
              
              0
              
              
              
              120
              
              
              
              2Commercial
                  (2)
              
              
              7
              
              
              
              29
              
              
              
              105
              
              
              
              1,012Consumer
              
              
              157
              
              
              
              188
              
              
              
              376
              
              
              
              398Total
                  charge offs
              
              
              373
              
              
              
              257
              
              
              
              698
              
              
              
              1,459Recoveries:Residential
                  real estate (1)
              
              
              17
              
              
              
              15
              
              
              
              22
              
              
              
              16Commercial
                  real estate
              
              
              41
              
              
              
              0
              
              
              
              41
              
              
              
              0Commercial
                  (2)
              
              
              105
              
              
              
              23
              
              
              
              117
              
              
              
              36Consumer
              
              
              82
              
              
              
              64
              
              
              
              168
              
              
              
              168Total
                  recoveries
              
              
              245
              
              
              
              102
              
              
              
              348
              
              
              
              220Net
                  charge-offs
              
              
              128
              
              
              
              155
              
              
              
              350
              
              
              
              1,239Provision
                  for loan losses
              
              
              240
              
              
              
              420
              
              
              
              500
              
              
              
              840Balance
                  at end of period
              
              $
              6,830
              
              
              $
              6,241
              
              
              $
              6,830
              
              
              $
              6,241Ratio
                  of net charge-offs during the period to average loans outstanding
                  during
                  the period (annualized)
              
              
              0.12
              %
              
              
              0.16
              %
              
              
              0.17
              %
              
              
              0.62
              %Allowance
                  for loan losses to total loans
              
              
              1.59
              %
              
              
              1.55
              %
              
              
              1.59
              %
              
              
              1.55
              %Allowance
                  for loan losses to non-performing loans
              
              
              131
              %
              
              
              313
              %
              
              
              131
              %
              
              
              313
              %
 
 (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.


15
 Index




C.
Comparisonof
      Financial Condition at June 30, 2007 and December 31,
      2006





*Overview.*  During
      the first half of 2007, we experienced only modest growth in our total
      assets.  At June 30, 2007, total assets were $767.331
      million.  This compares to $761.981 million in total assets at
      December 31, 2006, a $5.350 million or 0.7% increase during the six-month period
      ended June 30, 2007.  Although total assets did not increase
      significantly between the periods, there were some moderate increases and
      decreases in certain categories of assets.  In particular, between
      December 31, 2006 and June 30, 2007 loans increased significantly, while the
      volume of available-for-sale and held-to-maturity investment securities
      declined.  Although the growth in loans in the first half of 2007 was
      consistent with our strategic objectives, it had a slight negative impact on
      our
      overall liquidity position.





Total
      liabilities increased slightly between December 31, 2006 and June 30,
      2007.  More specifically, total liabilities increased $3.790 million
      or 0.5% during the first half of 2007, from $698.649 million at December 31,
      2006 to $702.439 million at June 30, 2007.  Although total liabilities
      did not change significantly during the first half of 2007, we continued to
      experience a shift in the composition of deposits from low cost interest-bearing
      savings and NOW deposit accounts to higher cost money market deposit accounts
      and certificates of deposit.





Total
      shareholders’ equity increased $1.560 million or 2.5% between December 31, 2006
      and June 30, 2007.  A $2.348 million increase in retained earnings
      between the periods was offset in part by a $788 thousand net increase in
      accumulated other comprehensive loss.  Between the periods, the
      general level of interest rates increased.  This caused a decrease in
      the fair value of the available-for-sale investment securities, which, in turn,
      caused an increase in accumulated other comprehensive loss.




*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 impaired loans, the level of
      potential problem loans and the dollar amount and type of loan charge-offs
      we
      experience.  Between December 31, 2006 and June 30, 2007, the level of
      non-performing loans increased, while potential problem loans and delinquent
      loans decreased.





Total
      non-performing loans, including loans in non-accrual status, loans 90 days
      or
      more past due and still accruing interest, and troubled debt restructured loans,
      increased $2.669 million during the first half of 2007, from $2.529 million
      at
      December 31, 2006 to $5.198 million at June 30, 2007.  At June 30,
      2007, the total non-performing loans as a percentage of total loans outstanding
      was 1.21%.  This compares to 0.62% at December 31,
      2006.  During the first half of 2007, we restructured loans totaling
      $2.243 million for two commercial borrowers whose businesses were experiencing
      operating difficulties.  In addition, we transferred ten loans from
      performing status to non-accrual status during the first half of 2007, causing
      a
      $571 thousand net increase in non-accrual loans.





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.  During the
      first half of 2007, potential problem loans decreased $6.247 million, from
      $14.538 million at December 31, 2006 to $8.291 million at June 30,
      2007.  Potential problem loans as a percentage of total loans
      outstanding equaled 1.93% at June 30, 2007, versus 3.58% at December 31,
      2006.  The decrease in potential problem loans between December 31,
      2006 and June 30, 2007 was due to a combination of factors, including the
      removal of several loans from potential problem loan status due to the improved
      financial condition of the borrower, repayment of loans by the borrower, and,
      to
      a lesser extent, the transfer of potential problem loans to non-performing
      status or charge-offs of potential problem loans.





We
      recorded net loan charge-offs of $350 thousand during the six-month period
      ended
      June 30, 2007.  This compares to $1.239 million for the same six-moth
      period in 2006.  During the first quarter of 2006, we recorded $981
      thousand in charge-offs for loans to one of our large commercial borrowers
      due
      to the deterioration in the financial condition of the
      borrower.  There were no similarly large charge-offs in the first half
      of 2007.  Annualized net loan charge-offs as a percentage of average
      total loans outstanding was 0.17% for the six-month period ended June 30, 2007,
      versus 0.62% for the same period last year.





At
      June
      30, 2007, loans that were 30 or more days delinquent (excluding non-performing
      loans) totaled $2.532 million or 0.59% of loans outstanding.  By
      comparison, at December 31, 2006 we had $4.393 million or 1.08% of loans
      outstanding in this same category, a $1.861 million or 42.4%
      decrease.  The level of delinquent loans at June 30, 2007 was within
      management’s preferred target range of less than




16
 Index




1.0%
      of
      total loans outstanding.




The
      allowance for loan losses at June 30, 2007 was $6.830 million or 1.59% of total
      loans outstanding.  This compares to $6.680 million or 1.65% of loans
      outstanding at December 31, 2006.  During the first half of 2007, we
      recorded net charge-offs of $350 thousand.  This compares to $500
      thousand recorded in the provision for loan losses, resulting in a $150 thousand
      net increase in the allowance for loan losses between December 31, 2006 and
      June
      30, 2007.  Management and the Board of Directors deemed the allowance
      for loan losses as adequate at June 30, 2007 and December 31, 2006.





The
      credit quality of the available-for-sale and held-to-maturity investment
      securities portfolios remained strong during the quarter.  At June 30,
      2007, 99.4% of the securities held in the Company’s bond portfolio were rated
“A” or better by Moody’s credit rating service; 95.2% were rated
“AAA.”  By comparison, at December 31, 2006, 99.4% were rated “A” or
      better and 95.9% were rated “AAA.”








D.
Comparisonof
      Results of Operations for the Three Months Ended June
      30, 2007 and 2006





*Overview.*During
      the second quarter of 2007, our net income and earnings per share were $2.407
      million and $0.23, respectively.  This compares to net income and
      earnings per share of $1.354 million and $0.12 in the second quarter of 2006,
      resulting in a $1.053 million or $0.11 per share improvement period over
      period.  Return on average assets and return on average equity for the
      three-month period ended June 30, 2007 were 1.26% and 14.92%,
      respectively.  This compares to a return on average assets of 0.73%
      and a return on average equity of 8.37% for the three-month period ended June
      30, 2006.  This significant improvement in our operating results was
      due principally to two unusual events:





*Death
      of Senior Executive*.  During May 2007, Steven A. Milavec, our
      Senior Vice President of Information Technology and Customer Support, passed
      away unexpectedly.  We held several bank-owned life insurance policies
      covering Mr. Milavec under the Company’s split-dollar life insurance
      plan.  Due to Mr. Milavec’s death and the resulting insurance claim,
      we recorded a $615 thousand (non-taxable) gain on life insurance proceeds during
      the second quarter of 2007.





*Regional
      Flooding*.  During June 2006, our local market area was effected
      by flooding due to higher than normal rainfall.  These floods caused
      extensive damage to two of our branch buildings including related contents
      and
      equipment, causing us to record a $320 thousand impairment expense on our fixed
      assets during the second quarter of 2006.  Due to these floods, we
      applied for select flood-related grants provided by various New York State
      agencies.  In total, the New York State agencies awarded us $245
      thousand in flood-related grants, of which $200 thousand was recorded in the
      second quarter of 2007.  The combination of the $320 thousand
      impairment expense recorded in the second quarter of 2006 and the $200 thousand
      grant funding recorded in the second quarter of 2007 caused an improvement
      in
      income before tax totaling $520 thousand between comparable three-month
      periods.





*Net
      Interest Income.*  Net interest income is our most significant
      source of revenue.  During the second quarter of 2007, net interest
      income comprised 72% of our net revenue (net interest income plus non-interest
      income).  This compares to 82% in the second quarter of
      2006.  Net interest income was $6.258 million during the three months
      ended June 30, 2006, as compared to $6.077 million for the three months ended
      June 30, 2007, a $181 thousand or 2.9% decrease.  This decrease was
      principally due to the persistence of a flat to inverted yield curve throughout
      the second half of 2006 and the first half of 2007, which led 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).  Between comparable periods, our interest expense
      increased $947 thousand as depositors transferred their funds from low cost
      savings and NOW accounts to higher cost money market accounts and certificates
      of deposit.  During the same timeframe, earning asset yields increased
      only modestly as loan and investment securities rates increased
      slightly.





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 two-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 has not raised the target federal funds rate since its June
      2006 meeting, the yield curve has remained very flat to inverted, thus providing
      us with limited opportunity to improve net interest income.




17
 Index


Between
      comparable quarterly periods, total interest and dividend income increased
      $766
      thousand or 7.2%, from $10.646 million for the three-month period ended June
      30,
      2006 to $11.412 million for the three-month period ended June 30,
      2007.  Between the quarterly periods, the weighted average yield on
      all categories of earning assets, including federal funds sold, interest bearing
      deposits (at other banks), investment securities, and loans,
      increased.  Between the periods, maturing earning assets were replaced
      with new assets originated at higher rates of interest.  In addition,
      between June 30, 2006 and June 30, 2007, some variable rate earning assets
      re-priced at higher rates of interest as the index interest rate on these assets
      increased between periodic re-pricing dates.





The
      average yield on the securities portfolio increased 19 basis points between
      comparable quarters, from 4.18% in the second quarter of 2006 to 4.37% in the
      second quarter of 2007.  Similarly, the average yield on loans, our
      largest earning asset portfolio, increased 14 basis points between comparable
      quarters, from 7.51% in the second quarter of 2006 to 7.65% in the second
      quarter of 2007.  Although the prime rate did not increase between
      June 30, 2006 and June 30, 2007, a significant portion of our variable rate
      loan
      portfolio re-prices on a periodic basis, often on the anniversary date of the
      loan, causing a delayed effect on loan yields.  The increase in loan
      yields coupled with an increase in the average volume of loans outstanding
      caused a $528 thousand increase in interest income on loans between the
      periods.  The average volume of loans outstanding increased from
      $399.223 million in the three-month period ended June 30, 2006 to $419.542
      million in the three-month period ended June 30, 2007.





Between
      the comparable periods the average volume of federal funds sold increased
      $11.477 million, from $5.515 million for the three-month period ended June
      30,
      2006 to $16.992 million for the three-month period ended June 30,
      2007.  The increase in average federal funds sold, coupled with a
      slight increase in the federal funds rate, generated an additional $157 thousand
      of interest income between the second quarter of 2006 and the second quarter
      of
      2007.





Interest
      expense increased $947 thousand or 21.6% between the three-month period ended
      June 30, 2006 and the three-month period ended June 30, 2007.  We
      recorded total interest expense of $5.335 million for the three-month period
      ended June 30, 2007, as compared to $4.388 million for the three-month period
      ended June 30, 2006.  The increase in interest expense between the
      periods was due to two primary factors.  First, we recorded $903
      thousand of interest expense on our money market deposit accounts in the second
      quarter of 2007.  This compares to $484 thousand in the second quarter
      of 2006, a $419 thousand or 86.6% increase between the periods.  In
      2006, we raised the interest rate on our Wealth Management money market deposit
      account.  The account provided depositors with a 4.0% interest rate
      throughout 2006 and the first half of 2007 and was offered to remain competitive
      with other financial institutions in our market.  As expected, our
      existing deposit customers and new deposit customers transferred their funds
      into this account, raising the average balance in our money market deposit
      accounts from $57.595 million in the second quarter of 2006 to $91.859 million
      in the second quarter of 2007, a $34.264 million or 59.5%
      increase.  Second, between comparable periods, a significant portion
      of the certificate of deposit portfolio matured.  These funds were
      often reinvested in new certificates of deposit, generally at higher rates
      of
      interest.





*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.


18
 Index




**For
                the Three Months Ended June 30,**
            
            
            **For
                the Six Months Ended June 30,****2007
                vs. 2006**
            
            
            **2007
                vs. 2006****Rate**
            
            
            **Volume**
            
            
            **Total**
            
            
            **Rate**
            
            
            **Volume**
            
            
            **Total****(In
                thousands)****Earning
                Assets:**Federal
                funds sold
            
            $
            5
            
            
            $
            152
            
            
            $
            157
            
            
            $
            14
            
            
            $
            322
            
            
            $
            336Interest
                bearing deposits
            
            
            10
            
            
            
            30
            
            
            
            40
            
            
            
            18
            
            
            
            16
            
            
            
            34Securities
            
            
            142
            
            
            
            (101
            )
            
            
            41
            
            
            
            346
            
            
            
            (213
            )
            
            
            133Loans
            
            
            147
            
            
            
            381
            
            
            
            528
            
            
            
            407
            
            
            
            500
            
            
            
            907Total
                earning assets
            
            
            304
            
            
            
            462
            
            
            
            766
            
            
            
            785
            
            
            
            625
            
            
            
            1,410**Interest
                Bearing Liabilities:**Savings
                accounts
            
            
            0
            
            
            
            (14
            )
            
            
            (14
            )
            
            
            0
            
            
            
            (29
            )
            
            
            (29
            )Money
                market accounts
            
            
            93
            
            
            
            326
            
            
            
            419
            
            
            
            167
            
            
            
            646
            
            
            
            813NOW
                accounts
            
            
            42
            
            
            
            (47
            )
            
            
            (5
            )
            
            
            54
            
            
            
            (95
            )
            
            
            (41
            )Time
                & other deposit accounts
            
            
            370
            
            
            
            167
            
            
            
            537
            
            
            
            780
            
            
            
            378
            
            
            
            1,158Borrowings
            
            
            49
            
            
            
            (39
            )
            
            
            10
            
            
            
            68
            
            
            
            (192
            )
            
            
            (124
            )Total
                interest bearing liabilities
            
            
            554
            
            
            
            393
            
            
            
            947
            
            
            
            1,069
            
            
            
            708
            
            
            
            1,777Change
                in net interest income
            
            $
            (250
            )
            
            $
            69
            
            
            $
            (181
            )
            
            $
            (284
            )
            
            $
            (83
            )
            
            $
            (367
            )





Interest
      income increased $766 thousand between the three-month period ended June 30,
      2006 and the three-month period ended June 30, 2007, due to increases in both
      the rate and volume of earning assets.  As interest rates rose between
      the comparative three-month periods, the yield on all categories of earning
      assets increased, including federal funds sold, interest bearing deposits (at
      other banks), securities, and loans.  On a combined basis, the rate
      improvement on earning assets contributed an additional $304 thousand of
      interest income between comparable periods, while the increase in the volume
      of
      earning assets contributed $462 thousand of additional interest
      income.





Of
      the
      $766 thousand increase in interest income between the three-month period ended
      June 30, 2006 and the three-month period ended June 30, 2007, $528 thousand
      or
      68.9% of the total increase was due to an increase in the volume and rate on
      loans.  Between comparable periods, we increased the average volume of
      loans outstanding by $20.319 million due principally to loan growth in our
      newer
      markets.  In addition, between the comparable periods, existing
      variable rate loans re-priced at higher rates of interest, helping to increase
      the yield on loans by 14 basis points from 7.51% in the three-month period
      ended
      June 30, 2006 to 7.65% in the three-month period ended June 30,
      2007.





To
      help
      fund the loan growth between the periods, as well as to counteract the interest
      rate risk associated with originating and holding fixed rate loans, we reduced
      the size of our investment securities portfolio and increased our federal funds
      sold position.  During the second quarter of 2006, the average size of
      the investment securities portfolio was $295.823 million.  This
      compares to $286.256 million during the second quarter of 2007, a $9.567 million
      or 3.2% decrease.  The decrease in the volume of the investment
      securities portfolio between comparable three-month periods caused a $101
      thousand decrease in interest income on investments between the three-month
      periods.  This was offset by a $142 thousand increase in interest
      income on the investment securities portfolio due to rate.  The
      average federal funds sold position increased from $5.515 million in the second
      quarter of 2006 to $16.992 million in the second quarter of 2007, contributing
      $152 thousand of additional interest income between the periods.





The
      $766
      thousand increase in interest income between the three-month period ended June
      30, 2006 and the three-month period ended June 30, 2007 was offset by a $947
      thousand increase in the cost of interest bearing liabilities, $554 thousand
      of
      which was due to the increase in rate and $393 thousand of which was 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




19
 Index




$537
      thousand and $419 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 $370 thousand increase in interest expense due to
      rate.  The remaining increase in interest expense on time and other
      deposit accounts between the periods, totaling $167 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 short-term interest rates increased between the periods,
      we raised the interest rates paid on our money market deposits, which increased
      interest expense by $93 thousand on a comparable period basis.  The
      higher interest rates attracted additional deposits, which resulted in an
      increase in interest expense due to volume of $326 thousand.  The
      average cost of our money market deposit accounts increased from 3.37% for
      the
      three-month period ended June 30, 2006 to 3.94% for the three-month period
      ended
      June 30, 2007, while the average volume of money market deposit accounts
      increased from $57.595 million to $91.859 million over the same
      periods.




As
      short-term interest rates increased between the periods, we modestly increased
      the interest rate on our NOW account deposits.  The increase in
      short-term interest rates 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 $93.753 million in the second
      quarter of 2006 to $78.230 million in the second quarter of 2007.  The
      decrease in the average volume of NOW account deposits reduced interest expense
      by $47 thousand between comparable periods.  This improvement was
      offset, in part, by a $42 thousand increase in interest expense on NOW account
      deposits due to a 20 basis point increase in the average rate paid between
      the
      periods.





Between
      the comparable quarters, the weighted average rate paid on savings accounts
      remained the same.  For both the three-month periods ended June 30,
      2006 and June 30, 2007, the average rate paid on savings accounts was
      0.63%.  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 due to changes in volume decreased $14 thousand between
      the
      periods.





The
      interest expense on borrowings increased $10 thousand between the three-month
      period ended June 30, 2006 and the three-month period ended June 30,
      2007.  Between comparable periods, lower cost borrowings were replaced
      by higher-cost borrowings as they matured.  This increased borrowing
      costs from 3.83% in the second quarter of 2006 to 4.14% in the second quarter
      of
      2007, causing a $49 thousand increase in interest expense on borrowings due
      to
      rate.  This was offset, in part, by a $39 thousand decrease in
      interest expense on borrowings between comparable periods due to changes in
      volume.  Average borrowings outstanding during the second quarter of
      2006 were $64.595 million, as compared to $60.679 million during the second
      quarter of 2007, a $3.916 million or 6.1% decrease.





*Provision
      for Loan Losses.* We recorded a provision for loan losses of
      $240 thousand for the three- month period ended June 30, 2007.  This
      compares to $420 thousand for the three-month period ended June 30, 2006 and
      $260 thousand in the first quarter of 2007.  The provision for loan
      losses decreased because we experienced some modest improvement in the credit
      quality of our loan portfolio during the second quarter of 2007.  Net
      charge-offs, loans 30 to 89 days delinquent, and potential problem loans all
      decreased during the second quarter of 2007, while non-performing loans
      increased slightly.  At June 30, 2007, potential problem loans were
      $8.291 million.  This compares to $12.667 million at March 31, 2007, a
      $4.376 million decrease during the second quarter of 2007.  Loans 30
      to 89 days delinquent were $2.532 million at June 30, 2007, versus $2.787
      million at March 31, 2007.  Finally, net charge-offs for the three
      months ended June 30, 2007 were $128 thousand, as compared to $222 thousand
      for
      the three months ended March 31, 2007.  At June 30, 2007,
      non-performing loans totaled $5.198 million, a slight increase over total
      non-performing loans at March 31, 2007 of $5.061 million.  During the
      second quarter of 2006, we recorded $420 thousand in the provision for loan
      losses due principally to an increased level of potential problem
      loans.  Potential problem loans totaled $15.381 million at June 30,
      2006.





*Non-Interest
      Income.*Non-interest income is comprised of trust fees, service
      charges on deposit accounts, commissions income, net investment securities
      gains, net gain on sale of loans, income and gains on bank-owned life insurance,
      other service fees, gain on disposal of fixed assets and other real estate,
      flood grant income, and other income.  Non-interest income improved
      significantly in the three-month period ended June 30, 2007 as compared to
      the
      three-month period ended June 30, 2006.  In particular, total
      non-interest income increased from $1.351 million in the three-month period
      ended June




20
 Index




30,
      2006
      to $2.346 million in the three-month period ended June 30, 2007, a $995 thousand
      or 73.7% increase.  The significant increase in non-interest income
      between comparable three-month periods was principally due to a $615 thousand
      gain on life insurance coverage due the death in May, 2007 of Mr. Milavec,
      a
      senior executive, and the recording of New York State flood-grant proceeds
      during the quarter totaling $200 thousand.  In addition, between
      comparable periods we recorded increases in trust fees, service charges on
      deposit accounts, commission income, net gain on sale of loans, investment
      securities gains, and bank-owned life insurance income.  These
      improvements were offset, in part, by decreases in other service fees and other
      income.




Trust
      fees increased $38 thousand or 10.5% between the three-month period ended June
      30, 2006 and the three-month period ended June 30, 2007.  During the
      second quarter of 2006, we recorded $362 thousand in trust fees, as compared
      to
      $400 thousand in the second quarter of 2007.  During the second
      quarter of 2007, we recorded account termination and executor fees totaling
      $36
      thousand. By comparison, during the second quarter of 2006 we recorded account
      termination fees and executor fees totaling $18 thousand, an $18 thousand
      increase.  The remaining increase in trust fees between the periods,
      totaling $20 thousand, was due to a net increase in trust, custodial, investment
      management, and other account administration fees between the periods on new
      and
      existing accounts.





During
      the second quarter of 2007, we recorded $483 thousand of service charges on
      deposit accounts.  This compares to $406 thousand during the second
      quarter of 2006, a $77 thousand or 19.0% increase.  The net increase
      in service charges on deposit accounts was primarily due to an increase in
      ATM
      fees and penalty charges on checking accounts.  During the first
      quarter of 2007 we began offering our courtesy overdraft service to more of
      our
      checking account customers, causing an increase in the product’s usage and
      improving deposit service fees.





During
      the second quarter of 2007, we recognized net investment securities gains of
      $79
      thousand due to an increase in the value of our trading securities
      portfolio.  Our trading securities portfolio consists of equity and
      debt securities held by the Company’s executive deferred compensation
      plan.  By comparison, during the second quarter of 2006, we recorded
      $17 thousand in net investment securities gains due to a $57 thousand loss
      on
      our trading securities portfolio and a $74 thousand gain on the sale and
      maturity of available-for-sale investment securities.  During the
      second quarter of 2006, we received proceeds from the sale and maturity of
      available-for-sale investment securities totaling $9.582 million, generating
      $74
      thousand in net gains.





During
      the first quarter of 2007, we acquired Provantage, a New York State licensed
      mortgage banker, to gain a foothold in the New York State Capital District
      market and provide additional residential mortgage options to our
      borrowers.  Provantage sells a significant portion of its originated
      loans to third party financial institutions in the normal course of its
      business.  During the second quarter of 2007, we recorded a $78
      thousand net gain on the sale of these loans.  This compares to no
      loans sold during the second 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, U.S. government bond sales, certificate of deposit account registry
      service fees, and other miscellaneous service charges, commissions, and
      fees.  Other service fees decreased $52 thousand or 55.3% between the
      second quarter of 2006 and the second quarter of 2007.  The decrease
      in other service fees between the periods was principally due to the decrease
      in
      residential mortgage commissions.  During 2006 we originated
      residential mortgages as an agent for a large regional bank based in the
      Southeast.  In the first quarter of 2007, we acquired Provantage and
      terminated our agency relationship with the large regional bank, thereby
      reducing residential mortgage commissions.





Other
      income is comprised of numerous types of fee income, including investment
      services, lease income, safe deposit box income, title insurance agency income,
      and rental of foreclosed real estate.  Other income decreased from
      $200 thousand in the second quarter of 2006 to $151 thousand in the second
      quarter of 2007, a $49 thousand or 24.5% decrease.  In the second
      quarter of 2006, we received $67 thousand in proceeds for an unanticipated
      recovery on a defaulted investment security.  There were no similar
      transactions recorded in the second quarter of 2007.





*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, loss on disposal
      /
      impairment of fixed assets, and other miscellaneous expenses.  Total




21
 Index




non-interest
      expense decreased $273 thousand or 5.0% on a comparable quarter basis, from
      $5.494 million in the second quarter of 2006 to $5.221 million in the second
      quarter of 2007.  During the second quarter of 2006, we incurred a
      $320 thousand loss on the disposal / impairment of fixed assets due to a
      regional flood and the related damage to two of our branch offices and their
      contents.




Salaries
      expense increased $84 thousand or 3.6% between the quarterly periods, from
      $2.323 million during the second quarter of 2006 to $2.407 million during the
      second quarter of 2007.  The increase between the comparable periods
      was due principally to an $81 thousand increase in salaries expense related
      to
      the Company’s executive deferred compensation plan.  During the second
      quarter of 2007, we recorded a $57 thousand expense for the executive deferred
      compensation plan.  This compares to a $24 thousand credit recorded to
      salaries expense in the second quarter of 2006.  The remaining
      increase was due to a $3 thousand net increase in base salaries (less deferred
      amounts), overtime, employee incentive and commission expenses between the
      periods.





Employee
      benefits expense decreased significantly between the second quarter of 2006
      and
      the second quarter of 2007.  We recorded employee benefits expense of
      $760 thousand in the second quarter of 2007, as compared to $839 thousand in
      the
      second quarter of 2006, a $79 thousand or 9.4% decrease.  During the
      second quarter of 2007, we recorded a $39 thousand credit on the Company’s
      defined benefit retirement plan.  The plan was frozen in 2006, which
      required us to record a $190 thousand curtailment charge on the plan during
      the
      second quarter of 2006 (in addition to the plan’s quarterly expense totaling $24
      thousand).  Due to the curtailment of the plan in 2006 and strong
      investment performance on plan assets in recent years, we began recording a
      credit in employee benefits expense due to this plan in 2007.  The
      impact of these changes to the plan resulted in a $253 thousand net reduction
      in
      employee benefits expense between the three-month period ended June 30, 2006
      and
      the three-month period ended June 30, 2007.





The
      improvement in retirement plan benefit expense was offset, in part, by a
      significant increase in our group health insurance expenses between comparable
      quarters.  We maintain a partially self-insured health insurance
      plan.  During the second quarter of 2007 we experienced a significant
      increase in claims, requiring us to record $396 thousand in group health
      insurance expenses.  This compares to $215 thousand during the second
      quarter of 2006, a $181 thousand or 84.2% increase between comparable
      quarters.





On
      a
      combined basis, occupancy expense of Bank premises, furniture and fixture
      expense, computer service fees, and advertising and marketing expense increased
      $13 thousand or 1.4%, from $917 thousand in the second quarter of 2006 to $930
      thousand in the second quarter of 2007.  Between comparable periods we
      recorded slight increases in occupancy expense, furniture and fixture expense,
      and advertising and marketing expense totaling $20 thousand, offset in part
      by a
      $7 thousand decrease in computer service fees.





During
      the second quarter of 2007 we incurred $255 thousand of professional fees as
      compared to $294 thousand during the second quarter of 2006, a $39 thousand
      or
      13.3% decrease.  In the second quarter of 2006 we completed a
      self-tender offer to acquire the Company’s common stock.  To complete
      the offer, including preparing of SEC filings, we incurred $68 thousand of
      legal
      and other professional fees in the second quarter of 2006.  A similar
      transaction was not consummated in the second quarter of 2007, thereby reducing
      legal and professional fees period over period.





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, and several other miscellaneous
      expenses.  During the three-month period ended June 30, 2007, other
      miscellaneous expenses increased $68 thousand or 8.5%, from $801 thousand in
      the
      three-month period ended June 30, 2006 to $869 thousand in the three-month
      period ended June 30, 2007.  The following table itemizes the
      individual components of other miscellaneous expenses that increased (or
      decreased) significantly between comparable periods:


22
 Index








**For
                the Three Months Ended June 30,**Description
                of Other Miscellaneous Expense
            
            2007
            
            
            2006
            
            
            Increase
                / (Decrease)*dollars
                in thousands*Collection
                and non-filing expense
            
            $
            65
            
            
            $
            76
            
            
            $
            (11
            )Postage
                and shipping
            
            
            93
            
            
            
            66
            
            
            
            27Travel
                and entertainment
            
            
            65
            
            
            
            53
            
            
            
            12Software
                amortization
            
            
            41
            
            
            
            59
            
            
            
            (18
            )Intangible
                asset amortization expense
            
            
            30
            
            
            
            45
            
            
            
            (15
            )All
                other miscellaneous expense items, net
            
            
            575
            
            
            
            502
            
            
            
            73Total
                Other Miscellaneous Expense
            
            $
            869
            
            
            $
            801
            
            
            $
            68





*Income
      Taxes.*Income tax expense increased from $341 thousand during the
      three-month period ended June 30, 2006 to $555 thousand during the three-month
      period ended June 30, 2007.  The increase in income tax expense was
      primarily due to an increase in income before tax between the comparable
      periods.  Income before tax totaled $2.962 million in the second
      quarter of 2007, as compared to $1.695 million in the second quarter of
      2006.** Our effective tax rate decreased between periods, from
      20.1% in the three-month period ended June 30, 2006 to 18.7% in the three-month
      period ended June 30, 2007.  During the second quarter of 2007, we
      recorded a $615 thousand gain on life insurance coverage due to the death of
      a
      senior executive.  Life insurance policy death benefits are
      non-taxable, thereby reducing our effective tax rate for the second quarter
      of
      2007.








E.
Comparisonof
      Results of Operations for the Six Months Ended June
      30, 2007 and 2006





*Overview.*During
      the six-month period ended June 30 2007, our net income and earnings per share
      were $4.356 million and $0.41, respectively.  This compares to net
      income and earnings per share of $3.307 million and $0.30 in the in the
      six-month period ended June 30, 2006, resulting in a $1.049 million or $0.11
      per
      share improvement period over period.  Return on average assets and
      return on average equity for the six-month period ended June 30, 2007 were
      1.15%
      and 13.77%, respectively.  This compares to a return on average assets
      of 0.89% and a return on average equity of 10.06% for the six-month period
      ended
      June 30, 2006.





This
      significant improvement in our operating results for the six-month period ended
      June 30, 2007 versus the six-month period ended June 30, 2006 was principally
      due to three unusual events.  First, during the first quarter of 2007
      we recorded a $352 thousand gain on the disposal of fixed assets due to the
      recognition of a deferred gain on the sale of our Norwich Town branch building
      and contents to the landowner.  Second, in May 2007 Steven A. Milavec,
      a senior executive of the Company, unexpectedly passed
      away.  Accordingly, in the second quarter of 2007 we recorded a $615
      thousand (non-taxable) gain on life insurance coverage maintained by the Bank
      on
      Mr. Milavec.  And finally, due to a regional flood in the second
      quarter of 2006, we recorded a $320 thousand loss on disposal / impairment
      of
      fixed assets for two of our branch office buildings and their
      contents.  Due to the flood, we applied for various flood relief
      grants from various New York State agencies and were awarded $245 thousand
      of
      grant funding, $232 thousand of which was recorded in the six-month period
      ended
      June 30, 2007.





*Net
      Interest Income.*  Net interest income is our most significant
      source of revenue.  During the first six months of 2007, net interest
      income comprised 75% of our net revenue (net interest income plus non-interest
      income).  This compares to 81% in the first half of
      2006.  In the six-month period ended June 30, 2007, our net interest
      income was $12.141 million.  By comparison, for the six-month period
      ended June 30, 2006, our net interest income was $12.508 million.  The
      $367 thousand or 2.9% decrease in net interest income between comparable periods
      was principally 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).





The
      level
      of our net interest income is dependent on several factors including, but not
      limited to: our ability to attract and retain deposits, our ability to generate
      and retain loans, regional and local economic




23
 Index




conditions,
      regional competition, capital market conditions, the national interest rate
      environment, as well as our tolerance for risk.  Throughout 2006 and
      the first half of 2007, our net interest income has been impacted by all of
      these factors, the most significant of which has been the persistence of a
      flat
      to inverted yield curve.  A flat to inverted interest rate environment
      generally diminishes our ability 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.




Between
      comparable six-month periods, total interest and dividend income increased
      $1.410 million or 6.7%, from $21.116 million for the six-month period ended
      June
      30, 2006 to $22.526 million for the six-month period ended June 30,
      2007.  The weighted average yield on all categories of earning assets,
      including federal funds sold, interest bearing deposits (at other banks),
      investment securities, and loans, increased between the six-month periods ended
      June 30, 2006 and June 30, 2007.  Between the periods, maturing
      earning assets were replaced with new assets originated at higher rates of
      interest.  In addition, between comparable periods most variable rate
      earning assets re-priced at higher rates of interest due to an increase in
      the
      index interest rate between periodic re-pricing dates.





The
      average yield on loans, our largest earning asset portfolio, increased 20 basis
      points between comparable six-month periods, from 7.44% in the six-month period
      ended June 30, 2006 to 7.64% in the six-month period ended June 30,
      2007.  Although the prime rate did not increase between June 30, 2006
      and June 30, 2007, a significant portion of our variable rate loans re-priced
      at
      a higher rate of interest between the periods as they became subject to
      re-pricing on their anniversary date or other periodic basis.  The
      increase in loan yields coupled with an increase in the average volume of loans
      outstanding resulted in a $907 thousand increase in interest income on loans
      between the periods.  Interest income on loans totaled $14.781 million
      in the six-month period ended June 30, 2006, as compared to $15.688 million
      in
      the six-month period ended June 30, 2007.  The average volume of loans
      outstanding increased from $400.479 million in the six-month period ended June
      30, 2006 to $413.821 million in the six-month period ended June 30,
      2007.





The
      average yield on the securities portfolio increased 24 basis points between
      comparable six-month periods, from 4.16% in the six-month period ended June
      30,
      2006 to 4.40% in the six-month period ended June 30, 2007.  Between
      June 30, 2006 and June 30, 2007, the proceeds of maturing, sold, or called
      investment securities were reinvested in higher yield
      instruments.  Although this activity helped improve interest income
      between comparable six-month periods, it was offset, in part, by a reduction
      in
      the average volume of securities we maintained in our investment
      portfolio.  Between comparative six-month periods we maintained an
      increased level of federal funds sold to help manage interest rate and liquidity
      risk and were successful in increasing average loan volumes
      outstanding.  The 24 basis point increase in the average yield on the
      investment securities portfolio, offset by a reduction in the average
      outstanding balance of the portfolio, resulted in a net increase in interest
      income of $133 thousand between the six-month period ended June 30, 2006 and
      the
      six-month period ended June 30, 2007.  Interest income from securities
      increased from $6.177 million in the first half of 2006 to $6.310 million in
      the
      first half of 2007.





To
      manage
      interest rate and liquidity risk, we increased our average outstanding balance
      in federal funds sold between the six-month period ended June 30, 2006 and
      the
      six-month period ended June 30, 2007.  In particular, the average
      volume of federal funds sold increased $12.348 million, from $4.762 million
      for
      the six-month period ended June 30, 2006 to $17.110 million for the six-month
      period ended June 30, 2007.  In addition, the average yield on the
      federal fund sold portfolio increased 54 basis points between comparable periods
      due to four 25 basis point increases in the target federal funds rate during
      the
      first half of 2006.  The increase in the volume and the rate of
      federal funds sold resulted in a $336 thousand improvement in interest income
      on
      federal funds sold between comparable periods.  Interest income on
      federal funds sold was $112 thousand in the first half of 2006, as compared
      to
      $448 thousand in the first half of 2007.





Interest
      expense increased $1.777 million or 20.6% between the six-month period ended
      June 30, 2006 and the six-month period ended June 30, 2007.  We
      recorded total interest expense of $10.385 million for the six-month period
      ended June 30, 2007, as compared to $8.608 million for the six-month period
      ended June 30, 2006.  The increase in interest expense between the
      periods was due to two primary factors.  First, between comparable
      periods, a significant portion of the certificate of deposit portfolio
      matured.  These funds, along with funds from new depositors, were
      often reinvested in new certificates of deposit, generally at higher rates
      of
      interest. This increased interest expense on time and other deposit accounts
      from $5.529 million in the first half of 2006 to $6.687 million in the first
      half of 2007, a $1.158 million or 20.9% increase.  Second, we recorded
      $1.748 million of interest expense on our money market deposit accounts in
      the
      first half of 2007.  This compares to $935 thousand in the first half
      of 2006, an $813




24
 Index




thousand
      increase between the periods.  In 2006, we raised the interest rate on
      our Wealth Management money market deposit account.  The account
      provided depositors with a 4.0% interest rate throughout 2006 and the first
      half
      of 2007.  It was offered to remain competitive with other financial
      institutions in our market.  As expected, our existing deposit
      customers and new deposit customers transferred their funds into this account,
      raising the average outstanding balance in our money market deposit accounts
      from $55.371 million in the first half of 2006 to $89.305 million in the first
      half of 2007, a $33.934 million or 61.3% increase.




*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.





Interest
      income increased $1.410 million between the six-month period ended June 30,
      2006
      and the six-month period ended June 30, 2007, due to both an increase in the
      rate and volume of earning assets.  As interest rates rose between the
      periods, the yield on all categories of earning assets increased, including
      federal funds sold, interest bearing deposits (at other banks), securities,
      and
      loans.  On a combined basis, the rate improvement on earning assets
      contributed an additional $785 thousand of interest income between comparable
      periods, while the increase in the volume of earning assets contributed $625
      thousand of additional interest income.





Of
      the
      $1.410 million increase in interest income between the six-month period ended
      June 30, 2006 and the six-month period ended June 30, 2007, $907 thousand or
      64.3% of the total increase was due to an increase in interest income on
      loans.  Between comparable periods, the average volume of loans
      outstanding increased $13.342 million, due principally to loan growth in our
      newer markets.  The growth in the volume of loans between comparable
      periods contributed $500 thousand of the $907 thousand improvement in interest
      income on loans.  In addition, between the comparable periods,
      existing variable rate loans re-priced at higher rates of interest, helping
      to
      increase the yield on loans by 20 basis points from 7.44% in the six-month
      period ended June 30, 2006 to 7.64% in the six-month period ended June 30,
      2007.  The increase in the rate on loans between comparable periods
      contributed $407 thousand of the $907 thousand improvement in interest income
      on
      loans between comparable periods.





Due
      to
      the increasing interest rate risk associated with building the loan portfolio
      and a 100 basis point increase in the target federal funds rate during the
      first
      half of 2006, we increased our average outstanding balance in federal funds
      sold
      between comparable periods.  In the six-month period ended June 30,
      2006, we maintained an average federal funds sold position of $4.762
      million.  This compares to $17.110 million in the six-month period
      ended June 30, 2007.  The increase in the volume and rate on federal
      funds sold between the periods contributed additional interest income totaling
      $336 thousand, $322 thousand of which was due to volume and $14 thousand of
      which was due to rate.





Interest
      income on the securities portfolio increased $133 thousand between the six-month
      period ended June 30, 2006 and the six-month period ended June 30,
      2007.  To help fund the loan growth and an increased federal funds
      sold position between the periods, as well as counteract the interest rate
      risk
      associated with originating and holding fixed rate loans, we reduced the size
      of
      our investment securities portfolio between comparable
      periods.  During the six-month period ended June 30, 2006, the average
      outstanding balance of the investment securities was $299.080
      million.  This compares to $289.181 million during the six-month
      period ended June 30, 2007, a $9.899 million or 3.4% decrease.  The
      decrease in the average outstanding balance of investment securities between
      periods negatively impacted interest income by $213 thousand.  This
      was offset, however, by an increase in interest income on securities due to
      rate
      totaling $346 thousand.





The
      $1.410 million increase in interest income between the six-month period ended
      June 30, 2006 and the six-month period ended June 30, 2007 was offset by a
      $1.777 million increase in the cost of interest bearing liabilities, $1.069
      million of which was due to the increase in rate and $708 thousand of which
      was
      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.





Interest
      expense on time and other deposit accounts increased $1.158 million between
      the
      six-month period ended June 30, 2006 and the six-month period ended June 30,
      2007.  Between comparable periods, we raised the interest rates paid
      on certificates of deposit.  This was done to remain competitive with
      local bank competition and match market increases in short-term interest rates,
      particularly for jumbo certificates of deposit (over $100,000).  This
      action increased the cost of time and other deposit accounts,




25
 Index




resulting
      in a $780 thousand increase in interest expense due to rate.  The
      remaining increase in interest expense on time and other deposit accounts
      between the periods, totaling $378 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.





As
      short-term interest rates increased during the first half of 2006, we raised
      the
      interest rate to 4.0% on all tiers of our Wealth Management money market deposit
      account.  Although we believe this helped us retain existing
      depositors’ funds and attract new depositors, it caused a significant increase
      in interest expense on money market accounts.  Interest expense on
      money market deposit accounts increased $813 thousand between the six-month
      period ended June 30, 2006 and the six-month period ended June 30,
      2007.  The average rate paid on our money market deposit accounts
      increased from 3.41% for the six-month period ended June 30, 2006 to 3.95%
      for
      the six-month period ended June 30, 2007, while the average outstanding volume
      of money market deposit accounts increased from $55.371 million to $89.305
      million over the same periods.  Of the $813 thousand increase in
      interest expense on money market deposit accounts, $646 thousand was due to
      an
      increase in volume and $167 thousand was due to an increase in
      rate.





During
      the first half of 2006, short term interest rates increased
      significantly.  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 less liquid, higher-rate deposit account.  This
      decreased the average volume of NOW accounts between the periods from $95.383
      million in the first half of 2006 to $79.249 million in the first half of
      2007.  The decrease in the average volume of NOW account deposits
      reduced interest expense $95 thousand between comparable
      periods.  This improvement was offset, in part, by a $54 thousand
      increase in interest expense on NOW account deposits due to a 12 basis point
      increase in the average rate paid between the periods.





The
      weighted average rate paid on savings accounts was 0.63% for both the six-month
      period ended June 30, 2006 and the six-month period ended June 30,
      2007.  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 due to changes in volume decreased $29 thousand between
      comparable six-month periods.





The
      interest expense on borrowings decreased $124 thousand between the six-month
      period ended June 30, 2006 and the six-month period ended June 30,
      2007.  Between comparable periods, lower cost borrowings were replaced
      by higher-cost borrowings as they matured.  This increased borrowing
      costs from 3.80% in the first half of 2006 to 4.01% in the first half of 2007,
      causing a $68 thousand increase in interest expense on borrowings due to
      rate.  Due to the increased borrowing rates and the flat to inverted
      yield curve throughout the comparable periods, we reduced
      borrowings.  In particular, average outstanding borrowings decreased
      from $70.019 million in the first half of 2006 to $60.232 million in the first
      half of 2007.  The decrease in the average outstanding balance of
      borrowed funds reduced interest expense on borrowings $192 thousand between
      comparable periods due to volume.





*Provision
      for Loan Losses.* We recorded a provision for loan losses of
      $500 thousand for the six-month period ended June 30, 2007.  This
      compares to $840 thousand for the six-month period ended June 30,
      2006.  The $340 thousand or 40.5% decrease in the provision for loan
      losses between comparable six-month periods was principally due to a reduction
      in potential problem loans, delinquencies, and net charge-offs, offset by an
      increase in non-performing loans.  At June 30, 2006 we had identified
      $15.381 million in potential problem loans.  By comparison, at June
      30, 2007 potential problem loans totaled $8.291 million, a $7.090 million or
      46.1% decrease.  Net charge-offs for the six-month period ended June
      30, 2007 were $350 thousand, as compared to $1.239 million for the six-month
      period ended June 30, 2006.  Loans 30 to 89 days delinquent also
      decreased slightly between June 30, 2006 and June 30, 2007, from $2.954 million
      at June 30, 2006 to $2.532 million at June 30, 2007.  The improvements
      in potential problem loans, delinquent loans, and net charge-offs between the
      periods were counteracted, in part, by an increase in non-performing
      loans.  Non-performing loans totaled $1.993 million at June 30, 2006,
      as compared to $5.198 million at June 30, 2007.





*Non-Interest
      Income.*Non-interest income is comprised of trust fees, service
      charges on deposit accounts, commission income, net investment securities gains,
      net gain on sale of loans, income and gains on bank owned life insurance, other
      service fees, gain on disposal of fixed assets and other real estate, flood
      grant income, and other income.  Non-interest income improved
      significantly in the six-month period ended June 30, 2007 as compared to the
      six-month period ended June 30, 2006.  In particular, total
      non-interest income increased from $3.001 million in the six-month period ended
      June 30, 2006 to




26
 Index




$4.103
      million in the six-month period ended June 30, 2007, a $1.102 million or 36.7%
      increase.  The significant increase in non-interest income between
      comparable six-month periods was principally due to three unusual events: (i)
      a
      $615 thousand gain on life insurance coverage due the death of Mr. Milavec,
      (ii)
      the recording of New York State flood-grant proceeds during the first half
      of
      2007 totaling $232 thousand, and (iii) the recognition of a $352 thousand
      deferred gain on the sale of our Norwich Town branch building and related
      equipment to the site’s landowner.  In addition, between comparable
      periods we recorded increases in trust fees, service charges on deposit
      accounts, net gain on sale of loans, and bank-owned life insurance income
      totaling $257 thousand.  By comparison, we recorded decreases in
      commission income, investment securities gains (net), other services fees,
      and
      other income totaling $361 thousand.




Trust
      fees increased $29 thousand or 3.9% between the six-month period ended June
      30,
      2006 and the six-month period ended June 30, 2007.  During the first
      half of 2006, we recorded $751 thousand in trust fees, as compared to $780
      thousand in the first half of 2007.  During the first half of 2007, we
      recorded account termination and executor fees totaling $77 thousand. By
      comparison, during the first half of 2006 we recorded account termination fees
      and executor fees totaling $64 thousand, a $13 thousand increase.  The
      remaining increase in trust fees between the periods, totaling $16 thousand,
      was
      due to a net increase in trust, custodial, investment management, and other
      account administration fees between the periods on new and existing
      accounts.





During
      the first half of 2007, we recorded $901 thousand of service charges on deposit
      accounts.  This compares to $813 thousand during the first half of
      2006, an $88 thousand or 10.8% increase.  The net increase in service
      charges on deposit accounts was primarily due to an increase in penalty charges
      on checking accounts and ATM fees.  During the first quarter of 2007,
      we began offering our courtesy overdraft service to more of our checking account
      customers, causing an increase in the product’s usage and improving deposit
      service fees.  Penalty charges on checking accounts increased $70
      thousand between comparable six-month periods, from $407 thousand during the
      six-month period ended June 30, 2006 to $477 thousand during the six-month
      period ended June 30, 2007.





Our
      commission income is generated from the Bank’s insurance agency subsidiary, Mang
– Wilber LLC.  During the six-month period ended June 30, 2007, we
      recorded commission income totaling $290 thousand.  This compares to
      $317 thousand in commission income during the six-month period ended June 30,
      2006, a $27 thousand or 8.5% decrease.  Mang – Wilber, LLC owns
      two-thirds of a specialty-lines property and casualty agency located in Clifton
      Park, New York (Saratoga County).  This agency did not perform well in
      2007 as compared to 2006 and was largely responsible for the decrease in
      commission income period over period.





During
      the first half of 2007, we recognized net investment securities gains of $126
      thousand due to an increase in the value of our trading securities
      portfolio.  Our trading securities portfolio consists of equity and
      debt securities held by the Company’s executive deferred compensation
      plan.  By comparison, during the first half of 2006 we recorded $310
      thousand in net investment securities gains, a $184 thousand or 59.4% decrease
      period over period.  During the first half of 2006, we received
      proceeds from the sale and maturity of available-for-sale investment securities
      totaling $20.102 million, which generated $271 thousand in net gains in the
      period.  During that same period, our trading securities generated net
      gains of $39 thousand.





During
      the first quarter of 2007 we acquired Provantage, a New York State licensed
      mortgage banker, to gain a foothold in the New York State Capital District
      market and provide additional residential mortgage options to our
      borrowers.  Provantage sells a significant portion of its originated
      loans to third party financial institutions in the normal course of its
      business.  During the first half of 2007, we recorded a $110 thousand
      net gain on the sale of these loans.  This compares to no loans sold
      during the first half of 2006.





During
      the six-month period ended June 30, 2007, we recorded a $303 thousand increase
      in the cash surrender value of bank-owned life insurance.  This
      compares to $273 thousand during the six-month period ended June 30, 2006,
      a $30
      thousand or 11.0% increase.  Between the first half of 2006 and the
      first half of 2007, our insurance carriers raised their net crediting rates
      on
      bank-owned life insurance contracts due to a general increase in interest rates
      and a corresponding improvement in their investment portfolio
      yields.





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’




27
 Index




check
      sales, wire transfer fees, letter of credit fees, U.S. government bond sales,
      certificate of deposit account registry service fees, and other miscellaneous
      service charges, commissions, and fees.  Other service fees decreased
      $74 thousand or 37.6% between the first half of 2006 and the first half of
      2007.  The decrease in other service fees between the periods was
      principally due to the decrease in residential mortgage
      commissions.  During 2006 we originated residential mortgages as an
      agent for a large regional bank based in the Southeast.  In the first
      quarter of 2007, we acquired Provantage and terminated our agency relationship
      with the large regional bank.  This reduced residential mortgage
      commissions from $73 thousand in the first six months of 2006 to $19 thousand
      in
      the first six months of 2007, a $54 thousand decrease.




Other
      income is comprised of numerous types of fee income including investment
      services income, lease income, safe deposit box income, title insurance agency
      income, and income from the rental of foreclosed real estate.  Other
      income decreased from $340 thousand in the first half of 2006 to $264 thousand
      in the first half of 2007, a $76 thousand or 22.3% decrease.  In the
      second quarter of 2006 we received $67 thousand in proceeds for an unanticipated
      recovery on a defaulted investment security.  There were no similar
      transactions recorded in the second quarter of 2007.  In addition,
      investment services income decreased $48 thousand between comparable six-month
      periods.





*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, loss on disposal
      /
      impairment of fixed assets, and other miscellaneous expenses.  Total
      non-interest expense decreased $160 thousand or 1.6% on a comparable period
      basis, from $10.345 million in the first half of 2006 to $10.185 million in
      the
      first half of 2007.  During the first half of 2006, we incurred a $320
      thousand loss on the disposal / impairment of fixed assets due to a regional
      flood and the related damage to two of our branch offices and their
      contents.  In addition, between comparable six-month periods we
      recorded increases in salaries expense, occupancy expense, furniture and fixture
      expense, advertising and marketing expense, and other miscellaneous expenses
      totaling $250 thousand.  These increases were offset, in part, by
      decreases in employee benefits expense, computer service fees, and professional
      fees totaling $90 thousand.





Salaries
      expense increased $34 thousand or less than 1.0% between the comparable
      six-month periods, from $4.713 million during the six-month period ended June
      30, 2006 to $4.747 million during the six-month period ended June 30,
      2007.  The increase between the comparable periods was due principally
      to a $73 thousand increase in base salaries (less deferred amounts) and a $58
      thousand increase in executive deferred compensation plan expense, reduced,
      in
      part, by a $97 thousand decrease in employee incentive and commission
      expenses.





Employee
      benefits expense decreased modestly between the first half of 2006 and the
      first
      half of 2007.  We recorded employee benefits expense of $1.438 million
      in the six-month period ended June 30, 2006 as compared to $1.371 million in
      the
      six-month period ended June 30, 2007, a $67 thousand or 4.7%
      decrease.  During the first half of 2006 we recorded $210 thousand of
      expense on the Company’s defined benefit retirement plan.  In February
      2006, we froze the plan’s benefits and incurred a $190 thousand curtailment
      charge on the plan in addition to $26 thousand of normal plan
      expense.  By comparison, due to the curtailment of the plan in 2006
      and strong investment performance on plan assets in recent years, we recorded
      a
      $79 thousand credit on the plan in the first half of 2007.  The impact
      of freezing plan benefits and strong plan performance resulted in a $295
      thousand net reduction in employee benefits expense between the six-month period
      ended June 30, 2006 and the six-month period ended June 30, 2007.





The
      improvement in retirement plan benefit expense was offset, in part, by a
      significant increase in our group health insurance expenses between comparable
      quarters.  We maintain a partially self-insured health insurance
      plan.  During the first half of 2007 we experienced a significant
      increase in claims, requiring us to record $675 thousand in group health
      insurance expenses.  This compares to $431 thousand during the first
      half of 2006, a $244 thousand or 56.6% increase between comparable
      periods.





On
      a
      combined basis, occupancy expense of Bank premises, furniture and fixture
      expense, computer service fees, advertising and marketing expense, and
      professional fees increased $42 thousand or 1.8%, from $2.388 million in the
      first half of 2006 to $2.430 million in the first half of
      2007.  Between comparable periods we recorded slight increases in
      occupancy expense, furniture and fixture expense, and advertising and marketing
      expense totaling $65 thousand, offset in part by decreases in computer service
      fees and professional fees totaling $23 thousand.





28
 Index




Computer
      service fees decreased $20 thousand or 5.0% between comparable periods, from
      $397 thousand for the six-month period ended June 30, 2006 to $377 thousand
      for
      the six-month period ended June 30, 2007.  Between the periods, we
      engaged a new ATM network provider and successfully reduced ATM vendor fees
      by
      $25 thousand.





Marketing
      and advertising expenses increased from $229 thousand in the six-month period
      ended June 30, 2006 to $251 thousand in the six-month period ended June 30,
      2007, a $22 thousand increase.  During the fourth quarter of 2006, we
      engaged a marketing and advertising firm to assist us in improving the Company’s
      brand image.  The increase in marketing fees between the periods was
      principally due to the costs associated with this project.





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, and several other miscellaneous
      expenses.  During the six-month period ended June 30, 2007, other
      miscellaneous expenses increased $151 thousand or 10.2%, from $1.486 million
      in
      the six-month period ended June 30, 2006 to $1.637 million in the six-month
      period ended June 30, 2007.  The following table itemizes the
      individual components of other miscellaneous expenses that increased (or
      decreased) significantly between comparable periods:





**For
                the Six Months Ended June 30,**Description
                of Other Miscellaneous Expense
            
            2007
            
            
            2006
            
            
            Increase
                / (Decrease)*dollars
                in thousands*Directors'
                fees
            
            $
            138
            
            
            $
            152
            
            
            
            (14
            )Accounts
                receivable financing program services
            
            
            67
            
            
            
            88
            
            
            
            (21
            )Donations
            
            
            43
            
            
            
            27
            
            
            
            16Office
                supplies
            
            
            183
            
            
            
            149
            
            
            
            34Postage
                and shipping
            
            
            165
            
            
            
            129
            
            
            
            36Deferred
                reserves for unfunded loan commitments
            
            
            18
            
            
            
            (23
            )
            
            
            41Software
                amortization
            
            
            82
            
            
            
            116
            
            
            
            (34
            )Other
                losses
            
            
            39
            
            
            
            0
            
            
            
            39Intangible
                asset amortization expense
            
            
            68
            
            
            
            89
            
            
            
            (21
            )Minority
                interest for Mang - Wilber LLC insurance agency subsidiary
            
            
            48
            
            
            
            66
            
            
            
            (18
            )All
                other miscellaneous expense items, net
            
            
            786
            
            
            
            693
            
            
            
            93Total
                Other Miscellaneous Expense
            
            $
            1,637
            
            
            $
            1,486
            
            
            $
            151





*Income
      Taxes.*Income tax expense increased from $1.017 million during the
      six-month period ended June 30, 2006 to $1.203 million during the six-month
      period ended June 30, 2007.  The increase in income tax expense was
      primarily due to an increase in income before tax between the comparable
      periods.  Income before tax totaled $5.559 million in the first half
      of 2007, as compared to $4.324 million in the first half of 2006.**
      Our effective tax rate decreased between periods, from 23.5% in the six-month
      period ended June 30, 2006 to 21.6% in the six-month period ended June 30,
      2007.  During the second quarter of 2007, we recorded a $615 thousand
      gain on life insurance coverage due to the death of a senior
      executive.  Life insurance policy death benefits are non-taxable,
      thereby substantially reducing our effective tax rate for the second quarter
      of
      2007.




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, to fund loans to customers,
      and to fund our current and planned expenditures.  We are committed to
      maintaining




29
 Index




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 certain
      liquidity ratios and complete a liquidity assessment on a monthly
      basis.  The monthly evaluation report, known as the Liquidity
      Contingency Scorecard, is reviewed by the Asset and Liability Committee (“ALCO”)
      and the Bank’s Board of Directors.  The report provides management
      with various ratios and financial market data that are compared to limits
      established within the Bank’s Asset and Liability Management
      Policy.  It was designed to provide an early warning signal of a
      potential liquidity crisis.  Based on the limits established in our
      Asset and Liability Management Policy, we determined that at June 30, 2007,
      the
      Bank was in a “1B” liquidity position, the second strongest liquidity position
      based on management’s internal rating system.  This compares to a “1A”
liquidity position, the strongest liquidity position based on management’s
      internal rating system, at December 31, 2006.  The decrease in the
      Company’s liquidity position was principally due to a significant growth in
      loans during the first half of 2007.





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 and NOW Accounts*•
                Savings and 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•
                Federal Reserve Discount Window Borrowings•
                Sale of Loans•
                Proceeds from Issuance of Equity Securities•
                Branch Acquisition
              •
                Cash Surrender Value of Bank-Owned Life
                Insurance





We
      maintained adequate amounts of cash and cash equivalents at June 30, 2007 to
      meet anticipated short-term funding needs.  In addition, our ability
      to meet unanticipated funding needs was strong.  At June 30, 2007, we
      maintained $54.767 million of available-for-sale investment securities that
      could be pledged for borrowings or sold to meet unanticipated funding
      needs.  This compares to $72.240 million at December 31,
      2006.  Our FHLBNY borrowing capacity decreased between December 31,
      2006 and March 31, 2007, due principally to a decrease in the value of the
      residential mortgage collateral pledged by us as collateral for long-term
      borrowings at FHLBNY.  Our FHLBNY remaining borrowing capacity was
      $24.128 million at December 31, 2006, as compared to $13.871 million at June
      30,
      2007, a $10.257 million decrease.  In addition, at June 30, 2007 and
      December 31, 2006 we maintained a $15.000 million unsecured credit facility
      at a
      correspondent bank in the event we needed to borrow federal funds on an
      overnight basis.  And finally, at June 30, 2007 and December 31, 2006,
      our total loan to total asset ratios of 55.9% and 53.3%, respectively, were
      low
      relative to our comparative peer group of financial
      institutions.


30
 Index





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





Table
      of
      Liquidity Measures:





Liquidity
                Measure
            **June
                30, 2007**
            **December
                31, 2006***Dollars
                in Thousands*Cash
                and Cash Equivalents
            $26,091
            $25,859Available
                for Sale Investment Securities at Estimated Fair Value less Securities
                Pledged for State and Municipal Deposits and Borrowings
            $54,767
            $72,240Total
                Loan to Total Asset Ratio
            55.9%
            53.3%FHLBNY
                Remaining Borrowing Capacity
            $13,871
            $24,128Available
                Correspondent Bank Lines of Credit
            $15,000
            $15,000








Our
      commitments to extend credit and stand-by letters of credit decreased slightly
      between December 31, 2006 and June 30, 2007.  At June 30, 2007,
      commitments to extend credit and stand-by letters of credit were $88.181
      million, as compared to $88.510 million at December 31, 2006, a $329 thousand
      or
      less than 1.0% decrease between the periods.  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 significantly impact our liquidity prospectively.





We
      recognize that deposit flows and loan and investment prepayment activity are
      effected 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.     CapitalResources
      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 regularly 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.





Between
      December 31, 2006 and June 30, 2007 our total shareholders’ equity increased
      $1.560 million or 2.5%.  Total shareholders’ equity was $64.892
      million at June 30, 2007, as compared to $63.332 million at December 31,
      2006.  The increase in shareholders’ equity between the periods was
      due to an increase in retained earnings, reduced in part by an increase in
      accumulated other comprehensive loss.  During the first six months of
      2007, we earned $4.356 million in net income and declared and paid $2.008
      million in cash dividends to shareholders, resulting in a $2.348 million or
      2.6%
      increase in retained earnings.  In addition, due primarily to an
      increase in most interest rates between December 31, 2006 and June 30, 2007,
      we
      recorded a $788 thousand increase in accumulated other comprehensive loss during
      the first half of 2007.  At December 31, 2006, accumulated other
      comprehensive loss totaled $3.247 million.  This compares to $4.035
      million at June 30, 2007.





The
      Company and the Bank are both subject to regulatory capital
      guidelines.  Under these guidelines, as established by federal bank
      regulators, in order to be “adequately capitalized,” the Company and the Bank
      must both maintain a minimum ratio of tier 1 capital to risk-weighted assets
      of
      4.0% and a 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 exceeded all capital adequacy guidelines and the Bank exceeded all
      well
      capitalized guidelines at June 30, 2007 and December 31, 2006.  The
      Company’s tier 1 capital to risk-




31
 Index




weighted
      assets ratio and total capital to risk-weighted assets ratio at June 30, 2007
      were 12.22% and 13.47%, respectively.  This compares to 12.25% and
      13.50%, respectively, at December 31, 2006.




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 to
      the
      payment of dividends by the Company to its shareholders.  As of June
      30, 2007, under these statutory limitations, the maximum amount that could
      have
      been paid by the Bank subsidiary to the Company without special regulatory
      approval was approximately $4.542 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.





ITEM3:  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 Bank’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 (assets) using the prime rate as a basis, while some of our deposit
      accounts (liabilities) 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 loans, 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 by refinancing 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,




32
 Index




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 six
      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 twelve-month period beginning July 1, 2007 and ending
      June 30, 2008, under ramped shock scenarios.





Interest
      Rate Sensitivity Table:





Interest
                Rates
            
            
            Dollars
                in ThousandsInterest
                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
            %
            
            $
            24,178
            
            
            $
            (816
            )
            
            
            -3.26
            %
            
            
            -1.26
            %2.00
            %
            
            
            10.25
            %
            
            
            24,034
            
            
            
            (960
            )
            
            
            -3.84
            %
            
            
            -1.48
            %1.00
            %
            
            
            9.25
            %
            
            
            24,277
            
            
            
            (717
            )
            
            
            -2.87
            %
            
            
            -1.10
            %No
                change
            
            
            
            8.25
            %
            
            
            24,994
            
            
            
            -
            
            
            
            -
            
            
            
            --1.00
            %
            
            
            7.25
            %
            
            
            25,429
            
            
            
            435
            
            
            
            1.74
            %
            
            
            0.67
            %-2.00
            %
            
            
            6.25
            %
            
            
            24,868
            
            
            
            (126
            )
            
            
            -0.50
            %
            
            
            -0.19
            %-3.00
            %
            
            
            5.25
            %
            
            
            24,305
            
            
            
            (689
            )
            
            
            -2.76
            %
            
            
            -1.06
            %





(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 decline by $960 thousand or 1.48% of total shareholders’ equity in
      a +2.00% ramped interest rate shock and by $126 thousand or 0.19% 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.  But generally, 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.  Approximately
      25% of our total assets at June 30, 2007 were invested in adjustable rate loans
      and investments.





At
      June
      30, 2007, the Treasury yield curve was extremely flat.  This means
      short-term Treasury yields were approximately the same as long-term Treasury
      yields.  The six month Treasury bill yield was 4.95% at the end of
      June 30 2007, versus 5.04% for the ten year Treasury note.  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




33
 Index




quarters
      prospectively.




ITEM4:
      Controls and Procedures





We
      have
      established disclosure control procedures to ensure that material information
      related to the Company, its financial condition, or results of operation is
      made
      known to the officers that certify the Company’s financial reports and to other
      members of senior management and the Board of Directors.  These
      procedures have been formalized through the formation of a Management Disclosure
      Committee and the adoption of a Management Disclosure Committee Charter and
      related disclosure certification process.  The management disclosure
      committee is comprised of our senior management and meets at least quarterly
      to
      review periodic filings for full and proper disclosure of material
      information.





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 June 30,
      2007.  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 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.





It
      should
      be noted that any system of internal controls, regardless of design, can provide
      only reasonable, and not absolute, assurance that the objectives of the control
      system are met.  In addition, the design of any control system is
      based in part upon certain assumptions about the likelihood of future
      events.  Because of these and other inherent limitations of control
      systems, there can be no assurance that any design will succeed in achieving
      its
      stated goals under all potential future conditions, regardless of how
      remote.





ITEM4T:  Controls
      and Procedures





This
      item
      is not applicable as the Company is an accelerated filer.








**PART
      II – OTHER INFORMATION**





ITEM1:
      Legal Proceedings





From
      time
      to time, the Company becomes subject to various legal claims that arise in
      the
      normal course of business. At June 30, 2007, 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, 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 three-month period ended June 30, 2007, 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 13, 2007.





ITEM
      2: Unregistered Salesof Equity Securities and Use
      of
      Proceeds





A.
      Not
      applicable.





34
 Index




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 March 31, 2007, management’s remaining
      share repurchase authority under this program was $889
      thousand.  There were no shares purchased under this program during
      the three-month period ended June 30, 2007; therefore, management’s remaining
      share repurchase authority under this program remained at $889 thousand at
      June
      30, 2007.





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.





During
      the three-month period ended June 30, 2007, 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: DefaultsUpon Senior Securities





The
      Company did not default on any senior securities during the three-month period
      ended June 30, 2007.








ITEM
      4: Submissionof Matters to a Vote of Security
      Holders





On
      April
      27, 2007, the Company held its Annual Meeting of Shareholders.  On the
      record date for the Annual Meeting of Shareholders, March 12, 2007, 10,569,182
      shares of the Company’s common stock, par value $.01 per share, were issued and
      outstanding and eligible to be voted.  At the meeting, three proposals
      were voted upon, all of which were approved by the shareholders.  A
      total of 8,155,138 shares were voted at the meeting.  A summary of
      each proposal and the voting results are provided below:





Annual
      Meeting of Shareholders Voting Results:





Description
                of Matter
            For
            Withheld
                / Against
            Abstentions1.
                To fix the number of directors of the Company at ten
            8,116,324
            10,402
            28,4122.
                To elect the following three nominees to the Company's Board of
                DirectorsOlon
                T. Archer
            7,633,025
            522,113
            0Douglas
                C. Gulotty
            7,636,425
            518,713
            0Joseph
                P. Mirabito
            7,626,177
            528,961
            03.
                To ratify the appointment of KPMG LLP as our independent auditors
                for the
                fiscal year ending December 31, 2007
            8,108,718
            1,384
            45,036





ITEM
      5: OtherInformation





None.





ITEM
      6: Exhibits





See
      Exhibit Index to this Form 10-Q.


35
 Index


**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 CORPORATION


By:
              /s/
                  Douglas C. Gulotty
              
              Dated:
              August
                  3, 2007Douglas
                  C. GulottyPresident
                  and Chief Executive OfficerBy:
              /s/
                  Joseph E. Sutaris
              
              Dated:
              August
                  3, 2007Joseph
                  E. SutarisSecretary,
                  Treasurer, and Chief Financial Officer





36
 Index
  **EXHIBITINDEX**





**No.**
            **Document**31.1
            Certification
                of Chief Executive Officer Pursuant to 302 of the Sarbanes-Oxley
                Act of
                200231.2
            Certification
                of Chief Financial Officer Pursuant to 302 of the Sarbanes-Oxley
                Act of
                200232.1
            Certification
                of Chief Executive Officer Pursuant to 18 U.S.C. 135032.2
            Certification
                of Chief Financial Officer Pursuant to 18 U.S.C.
                1350




37