UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





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


THE
SECURITIES EXCHANGE ACT OF 1934





For
the Quarterly Period Ended June 30, 2008





OR





£ 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)





no
changes


(Former
name, former address and former fiscal year, if changed since last
report)





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, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.  (Check one).


Large
      accelerated filer £
            Accelerated
      filer SNon-accelerated
      filer £ (Do not
      check if a smaller reporting company)
            Smaller
      reporting company £








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


Yes £  No
S





As of
August 5, 2008, there were issued and outstanding 10,503,704 shares of the
Registrant’s Common Stock.







Index




THE
WILBER CORPORATION


FORM
10-Q


INDEX








PART
I – FINANCIAL INFORMATION





FORWARD-LOOKING
      STATEMENTSITEM
1:
            
            Interim
      Financial Statements (Unaudited)Consolidated
      Statements of ConditionConsolidated
      Statements of IncomeConsolidated
      Statements of Changes in Shareholders’ Equity and Comprehensive
      IncomeConsolidated
      Statements of Cash FlowsNotes
      to 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, 2008 and December 31,
    2007D.
            
            Comparison
      of Results of Operations for the Three Months Ended June 30, 2008 and
      2007E.
            
            Comparison
      of Results of Operations for the Six Months Ended June 30, 2008 and
      2007F.
            
            LiquidityG.
            
            Capital
      Resources and DividendsITEM
    3:
            
            Quantitative
      and Qualitative Disclosures about Market RiskITEM
4:
            
            Controls
      and ProceduresITEM
      4T:
            
            Controls
      and ProceduresPART
      II – OTHER INFORMATIONITEM
    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, or demand for financial services; competition; changes in the
quality or composition of the Wilber Corporation’s (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




ITEM1:  Interim Financial Statements (Unaudited)





The
Wilber Corporation


Consolidated
Statements of Condition (Unaudited)





June 30,
            
            
            December 31,in
      thousands except share and per share data
            
            2008
            
            
            2007AssetsCash
      and Due from Banks
            
            $
            13,828
            
            
            $
            11,897Time
      Deposits with Other Banks
            
            
            5,038
            
            
            
            0Federal
      Funds Sold
            
            
            12,904
            
            
            
            7,045Total
      Cash and Cash Equivalents
            
            
            31,770
            
            
            
            18,942SecuritiesTrading,
      at Fair Value
            
            
            1,596
            
            
            
            1,430Available-for-Sale,
      at Fair Value
            
            
            253,808
            
            
            
            237,274Held-to-Maturity,
      Fair Value of $49,061 at June 30, 2008, and $51,743 at December 31,
      2007
            
            
            48,923
            
            
            
            52,202Other
      Investments
            
            
            5,519
            
            
            
            4,782Loans
      Held for Sale
            
            
            305
            
            
            
            456Loans
            
            
            499,578
            
            
            
            445,105Allowance
      for Loan Losses
            
            
            (6,965
            )
            
            
            (6,977
            )Loans,
      Net
            
            
            492,613
            
            
            
            438,128Premises
      and Equipment, Net
            
            
            7,082
            
            
            
            6,312Bank
      Owned Life Insurance
            
            
            16,093
            
            
            
            15,785Goodwill
            
            
            4,619
            
            
            
            4,619Intangible
      Assets, Net
            
            
            159
            
            
            
            394Pension
      Asset
            
            
            5,166
            
            
            
            4,872Other
      Assets
            
            
            7,094
            
            
            
            8,484Total
      Assets
            
            $
            874,747
            
            
            $
            793,680Liabilities
      and Shareholders’ EquityDeposits:Demand
            
            $
            76,976
            
            
            $
            71,145Savings,
      NOW and Money Market Deposit Accounts
            
            
            300,976
            
            
            
            254,196Certificates
      of Deposit (Over $100M)
            
            
            131,395
            
            
            
            111,949Certificates
      of Deposit (Under $100M)
            
            
            194,124
            
            
            
            198,467Other
      Deposits
            
            
            22,961
            
            
            
            21,737Total
      Deposits
            
            
            726,432
            
            
            
            657,494Short-Term
      Borrowings
            
            
            12,968
            
            
            
            15,786Long-Term
      Borrowings
            
            
            56,110
            
            
            
            41,538Other
      Liabilities
            
            
            9,886
            
            
            
            9,463Total
      Liabilities
            
            
            805,396
            
            
            
            724,281Shareholders’
      Equity:Common
      Stock, $.01 Par Value, 16,000,000 Shares Authorized,and 13,961,664 Shares
      Issued at June 30, 2008and December 31, 2007
            
            
            140
            
            
            
            140Additional
      Paid in Capital
            
            
            4,224
            
            
            
            4,224Retained
      Earnings
            
            
            93,029
            
            
            
            93,618Accumulated
      Other Comprehensive Income (Loss)
            
            
            269
            
            
            
            (272
            )Treasury
      Stock at Cost, 3,457,960 Shares at June 30, 2008 and December 31,
      2007
            
            
            (28,311
            )
            
            
            (28,311
            )Total
      Shareholders’ Equity
            
            
            69,351
            
            
            
            69,399Total
      Liabilities and Shareholders’ Equity
            
            $
            874,747
            
            
            $
            793,680





See
accompanying notes to interim unaudited consolidated financial
statements.


3
 Index


The
Wilber Corporation


Consolidated
Statements of Income (Unaudited)





Three
      Months Ended
            
            
            Six
      Months EndedJune 30,
            
            
            June 30,in
      thousands except share and per share data
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Interest
      and Dividend IncomeInterest
      and Fees on Loans
            
            $
            7,735
            
            
            $
            7,999
            
            
            $
            15,649
            
            
            $
            15,688Interest
      and Dividends on Securities:U.S.
      Government and Agency Obligations
            
            
            2,699
            
            
            
            2,399
            
            
            
            5,200
            
            
            
            4,840State
      and Municipal Obligations
            
            
            596
            
            
            
            621
            
            
            
            1,204
            
            
            
            1,268Other
            
            
            96
            
            
            
            101
            
            
            
            197
            
            
            
            202Interest
      on Federal Funds Sold and Time Deposits
            
            
            172
            
            
            
            292
            
            
            
            448
            
            
            
            528Total
      Interest and Dividend Income
            
            
            11,298
            
            
            
            11,412
            
            
            
            22,698
            
            
            
            22,526Interest
      ExpenseInterest
      on Deposits:Savings,
      NOW and Money Market Deposit Accounts
            
            
            973
            
            
            
            1,285
            
            
            
            2,067
            
            
            
            2,501Certificates
      of Deposit (Over $100M)
            
            
            1,188
            
            
            
            1,206
            
            
            
            2,443
            
            
            
            2,344Certificates
      of Deposit (Under $100M)
            
            
            1,937
            
            
            
            1,947
            
            
            
            3,973
            
            
            
            3,822Other
      Deposits
            
            
            234
            
            
            
            271
            
            
            
            505
            
            
            
            521Interest
      on Short-Term Borrowings
            
            
            40
            
            
            
            127
            
            
            
            129
            
            
            
            307Interest
      on Long-Term Borrowings
            
            
            567
            
            
            
            499
            
            
            
            1,077
            
            
            
            890Total
      Interest Expense
            
            
            4,939
            
            
            
            5,335
            
            
            
            10,194
            
            
            
            10,385Net
      Interest Income
            
            
            6,359
            
            
            
            6,077
            
            
            
            12,504
            
            
            
            12,141Provision
      for Loan Losses
            
            
            175
            
            
            
            240
            
            
            
            400
            
            
            
            500Net
      Interest Income After Provision for Loan Losses
            
            
            6,184
            
            
            
            5,837
            
            
            
            12,104
            
            
            
            11,641Non
      Interest IncomeTrust
      Fees
            
            
            426
            
            
            
            400
            
            
            
            821
            
            
            
            780Service
      Charges on Deposit Accounts
            
            
            530
            
            
            
            483
            
            
            
            991
            
            
            
            901Commission
      Income
            
            
            153
            
            
            
            144
            
            
            
            246
            
            
            
            290Investment
      Security (Losses) Gains, Net
            
            
            (19
            )
            
            
            79
            
            
            
            164
            
            
            
            126Net
      Gain on Sale of Loans
            
            
            22
            
            
            
            78
            
            
            
            68
            
            
            
            110Increase
      in Cash Surrender Value of Bank Owned Life Insurance
            
            
            157
            
            
            
            154
            
            
            
            308
            
            
            
            303Gain
      on Life Insurance Coverage
            
            
            0
            
            
            
            615
            
            
            
            0
            
            
            
            615Other
      Service Fees
            
            
            43
            
            
            
            42
            
            
            
            107
            
            
            
            123Gain
      on Sale of Insurance Agency Subsidiary
            
            
            628
            
            
            
            0
            
            
            
            628
            
            
            
            0Net
      (Loss) Gain on Impairment/Sale of Fixed Assets
            
            
            (186
            )
            
            
            0
            
            
            
            (185
            )
            
            
            359Flood
      Grants
            
            
            0
            
            
            
            200
            
            
            
            0
            
            
            
            232Other
      Income
            
            
            163
            
            
            
            151
            
            
            
            300
            
            
            
            264Total
      Non Interest Income
            
            
            1,917
            
            
            
            2,346
            
            
            
            3,448
            
            
            
            4,103Non
      Interest ExpenseSalaries
            
            
            2,941
            
            
            
            2,407
            
            
            
            5,651
            
            
            
            4,747Employee
      Benefits
            
            
            643
            
            
            
            760
            
            
            
            1,293
            
            
            
            1,371Occupancy
      Expense of Bank Premises
            
            
            492
            
            
            
            402
            
            
            
            997
            
            
            
            867Furniture
      and Equipment Expense
            
            
            299
            
            
            
            202
            
            
            
            540
            
            
            
            412Computer
      Service Fees
            
            
            379
            
            
            
            186
            
            
            
            592
            
            
            
            377Advertising
      and Marketing
            
            
            163
            
            
            
            140
            
            
            
            355
            
            
            
            251Professional
      Fees
            
            
            216
            
            
            
            255
            
            
            
            467
            
            
            
            523Other
      Miscellaneous Expenses
            
            
            1,062
            
            
            
            869
            
            
            
            1,924
            
            
            
            1,637Total
      Non Interest Expense
            
            
            6,195
            
            
            
            5,221
            
            
            
            11,819
            
            
            
            10,185Income
      Before Taxes
            
            
            1,906
            
            
            
            2,962
            
            
            
            3,733
            
            
            
            5,559Income
      Taxes
            
            
            (499
            )
            
            
            (555
            )
            
            
            (888
            )
            
            
            (1,203
            )Net
      Income
            
            $
            1,407
            
            
            $
            2,407
            
            
            $
            2,845
            
            
            $
            4,356Weighted
      Average Shares Outstanding
            
            
            10,503,704
            
            
            
            10,569,182
            
            
            
            10,503,704
            
            
            
            10,569,182Basic
      Earnings Per Share
            
            $
            0.13
            
            
            $
            0.23
            
            
            $
            0.27
            
            
            $
            0.41





See
accompanying notes to interim unaudited consolidated financial
statements.


4
 Index


The
Wilber Corporation


Consolidated
Statements of Changes in Shareholders' Equity and Comprehensive Income
(Unaudited)





AccumulatedAdditional
            
            
            
            
            
            OtherCommon
            
            
            Paid
      in
            
            
            Retained
            
            
            Comprehensive
            
            
            Treasuryin
      thousands except per share data
            
            Stock
            
            
            Capital
            
            
            Earnings
            
            
            Income (Loss)
            
            
            Stock
            
            
            TotalBalance
      December 31, 2006
            
            $
            140
            
            
            $
            4,224
            
            
            $
            89,921
            
            
            $
            (3,247
            )
            
            $
            (27,706
            )
            
            $
            63,332Comprehensive
      Income:Net
      Income
            
            
            -
            
            
            
            -
            
            
            
            4,356
            
            
            
            -
            
            
            
            -
            
            
            
            4,356Change
      in Net Unrealized Losson Securities, Net of
      Taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (827
            )
            
            
            -
            
            
            
            (827
            )Change
      in Pension Asset, Net of Tax
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            39
            
            
            
            
            
            
            
            39Total
      Comprehensive Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,568Cash
      Dividends ($.095 per share)
            
            
            -
            
            
            
            -
            
            
            
            (2,008
            )
            
            
            -
            
            
            
            -
            
            
            
            (2,008
            )Balance
      June 30, 2007
            
            $
            140
            
            
            $
            4,224
            
            
            $
            92,269
            
            
            $
            (4,035
            )
            
            $
            (27,706
            )
            
            $
            64,892Balance
      December 31, 2007
            
            $
            140
            
            
            $
            4,224
            
            
            $
            93,618
            
            
            $
            (272
            )
            
            $
            (28,311
            )
            
            $
            69,399Comprehensive
      Income:Net
      Income
            
            
            -
            
            
            
            -
            
            
            
            2,845
            
            
            
            -
            
            
            
            -
            
            
            
            2,845Change
      in Net Unrealized Losson Securities, Net of
      Taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            541
            
            
            
            -
            
            
            
            541Effect
      of Change in Measurement Date of Defined BenefitPension
      Plan
            
            
            -
            
            
            
            -
            
            
            
            98
            
            
            
            -
            
            
            
            -
            
            
            
            98Adoption
      of EITF Issue No. 06-4, "Accounting for DeferredCompensation and
      Postretirement Benefit Aspects ofEndorsement Split-Dollar Life Insurance
      Agreements"
            
            
            -
            
            
            
            -
            
            
            
            (1,537
            )
            
            
            -
            
            
            
            -
            
            
            
            (1,537
            )Total
      Comprehensive Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,947Cash
      Dividends ($.095 per share)
            
            
            -
            
            
            
            -
            
            
            
            (1,995
            )
            
            
            -
            
            
            
            -
            
            
            
            (1,995
            )Balance
      June 30, 2008
            
            $
            140
            
            
            $
            4,224
            
            
            $
            93,029
            
            
            $
            269
            
            
            $
            (28,311
            )
            
            $
            69,351





See
accompanying notes to interim unaudited consolidated financial
statements.


5
 Index


The
      Wilber CorporationConsolidated
      Statements of Cash Flows (Unaudited)Six
      Months EndedJune
      30,dollars
      in thousands
            
            2008
            
            
            2007Cash
      Flows from Operating Activities:Net
      Income
            
            $
            2,845
            
            
            $
            4,356Adjustments
      to Reconcile Net Income to Net CashUsed by Operating
      Activities:Provision
      for Loan Losses
            
            
            400
            
            
            
            500Depreciation
      and Amortization
            
            
            749
            
            
            
            536Net
      Amortization of Premiums and Accretion of Discounts on
      Investments
            
            
            229
            
            
            
            254Net
      Loss (Gain) on Disposal of Fixed Assets
            
            
            185
            
            
            
            (352
            )Gain
      on Life Insurance Coverage
            
            
            0
            
            
            
            (615
            )Available-for-Sale
      Investment Security Gains, net
            
            
            (260
            )
            
            
            0Other
      Real Estate Losses (Gains)
            
            
            91
            
            
            
            (7
            )Increase
      in Cash Surrender Value of Bank Owned Life Insurance
            
            
            (308
            )
            
            
            (303
            )Net
      (Increase) Decrease in Trading Securities
            
            
            (262
            )
            
            
            197Net
      Losses (Gains) on Trading Securities
            
            
            96
            
            
            
            (126
            )Gain
      on Sale of Insurance Agency Subsidiary
            
            
            (628
            )
            
            
            0Net
      Gain on Sale of Mortgage Loans
            
            
            (68
            )
            
            
            (110
            )Originations
      of Mortgage Loans Held for Sale
            
            
            (3,910
            )
            
            
            (7,095
            )Proceeds
      from Sale of Mortgage Loans Held for Sale
            
            
            4,129
            
            
            
            6,449Increase
      in Other Assets
            
            
            (33
            )
            
            
            (1,960
            )Decrease
      in Other Liabilities
            
            
            (920
            )
            
            
            (1,324
            )Net
      Cash Provided by Operating Activities
            
            
            2,335
            
            
            
            400Cash
      Flows from Investing Activities:Net
      Cash Paid for Provantage Funding Corporation
            
            
            0
            
            
            
            (165
            )Proceeds
      from Maturities of Held-to-Maturity Investment Securities
            
            
            3,230
            
            
            
            8,732Proceeds
      from Maturities of Available-for-Sale Investment
Securities
            
            
            25,923
            
            
            
            26,457Proceeds
      from Sales of Available-for-Sale Investment Securities
            
            
            10,992
            
            
            
            0Purchases
      of Available-for-Sale Investment Securities
            
            
            (52,486
            )
            
            
            (15,126
            )Net
      Increase in Other Investments
            
            
            (737
            )
            
            
            (264
            )Change
      in Death Benefit Proceeds Receivable
            
            
            0
            
            
            
            1,541Net
      Increase in Loans
            
            
            (55,069
            )
            
            
            (23,251
            )Purchase
      of Premises and Equipment, Net of Disposals
            
            
            (1,403
            )
            
            
            (1,012
            )Proceeds
      from Sale of Premises and Equipment
            
            
            28
            
            
            
            0Proceeds
      from Sale of Insurance Agency Subsidiary
            
            
            1,250
            
            
            
            0Proceeds
      from Sale of Other Real Estate
            
            
            68
            
            
            
            27Net
      Cash Used by Investing Activities
            
            
            (68,204
            )
            
            
            (3,061
            )Cash
      Flows from Financing Activities:Net
      Increase in Demand Deposits, Savings, NOW,Money Market and Other
      Deposits
            
            
            53,835
            
            
            
            8,999Net
      Increase (Decrease) in Certificates of Deposit
            
            
            15,103
            
            
            
            (3,406
            )Net
      Decrease in Short-Term Borrowings
            
            
            (2,818
            )
            
            
            (4,134
            )Increase
      in Long-Term Borrowings
            
            
            16,000
            
            
            
            20,000Repayment
      of Long-Term Borrowings
            
            
            (1,428
            )
            
            
            (16,558
            )Cash
      Dividends Paid
            
            
            (1,995
            )
            
            
            (2,008
            )Net
      Cash Provided by Financing Activities
            
            
            78,697
            
            
            
            2,893Net
      Increase in Cash and Cash Equivalents
            
            
            12,828
            
            
            
            232Cash
      and Cash Equivalents at Beginning of Period
            
            
            18,942
            
            
            
            25,859Cash
      and Cash Equivalents at End of Period
            
            $
            31,770
            
            
            $
            26,091Supplemental
      Disclosures of Cash Flow Information:Cash
      Paid during Period for:Interest
            
            $
            9,988
            
            
            $
            10,329Income
      Taxes
            
            $
            2,025
            
            
            $
            2,210Non
      Cash Investing Activities:Change
      in Unrealized Gain (Loss) on Securities
            
            $
            883
            
            
            $
            (1,334
            )Transfer
      of Loans to Other Real Estate
            
            $
            70
            
            
            $
            210Fair
      Value of Assets Acquired
            
            $
            0
            
            
            $
            504Fair
      Value of Assets Disposed Of
            
            $
            630
            
            
            $
            0Goodwill
      and Identifiable Intangible Assets Recognized in Purchase
      Combination
            
            $
            0
            
            
            $
            105Fair
      Value of Liabilities Assumed
            
            $
            0
            
            
            $
            444





See
accompanying notes to interim unaudited consolidated financial
statements.


6
 Index




The
Wilber Corporation


Notes to
Unaudited Consolidated Interim Financial Statements





Note
      1.
            Basis
      of Presentation





The
accompanying unaudited consolidated interim financial statements include the
accounts of the Company, its wholly owned subsidiaries Provantange Funding
Corporation 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 balance sheet for December 31, 2007 was derived from the
Company's 2007 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, 2007 and 2006, 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, 2007.  That data, along with the
unaudited interim financial information presented in the consolidated statements
of condition as of June 30, 2008, the statements of income for the three- and
six-month periods ended June 30, 2008 and 2007, and the statements of changes in
shareholders' equity and comprehensive income and statements of cash flows for
the six month periods ended June 30, 2008 and 2007 should be read in conjunction
with the 2007 consolidated financial statements, including the notes
thereto.





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





Note
      2
            Earnings
      Per Share





Basic
earnings per share (EPS) 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.





The
estimated fair value of the Company’s stand-by letters of credit was $19,000 and
$16,000 at June 30, 2008 and December 31, 2007, respectively.  The
estimated fair value of stand-by letters of credit at their inception is equal
to the fee that is charged to the customer by the Company.  Generally,
the Company’s stand-by letters of credit have a term of one year.  In
determining the fair values disclosed above, the fees were reduced on a
straight-line basis from the inception of each stand-by letter of credit to the
respective dates above.


7
 Index


Note
      4.
            Employee
      Benefit Plans





Effective
February 28, 2006, the Company's defined benefit pension plan was
frozen.  Under the frozen plan, no future benefits will be accrued for
plan participants, nor will any new participants be enrolled in the
plan.  This plan is sponsored by the Company's bank
subsidiary.  Prior to being frozen, the plan covered employees who had
attained the age of 21 and completed one year of service. Although the plan was
frozen, the Company maintains the responsibility for funding the
plan.  The Company's funding practice is to contribute at least the
minimum amount annually to meet minimum funding requirements.  An
annual minimum contribution is not required in 2008 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, based on a measurement date as of the prior
December 31, are:





Three
      Months Ended
            
            
            Six
      Months EndedJune
      30,
            
            
            June
      30,dollars
      in thousands
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Service
      Cost
            
            $
            38
            
            
            $
            34
            
            
            $
            77
            
            
            $
            68Interest
      Cost
            
            
            227
            
            
            
            225
            
            
            
            454
            
            
            
            450Expected
      Return on Plan Assets
            
            
            (363
            )
            
            
            (331
            )
            
            
            (727
            )
            
            
            (662
            )Net
      Amortization
            
            
            0
            
            
            
            33
            
            
            
            0
            
            
            
            65$
            (98
            )
            
            $
            (39
            )
            
            $
            (196
            )
            
            $
            (79
            )








In the
first quarter of 2008, the Company recorded $98,000 as an increase to retained
earnings resulting from the change of the pension measurement date from
September 30 to December 31 as required by Statement of Financial Accounting
Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans" ("SFAS No. 158").





Note
5. Other Comprehensive Income






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





Three
      Months Ended
            
            
            Six
      Months EndedJune 30,
            
            
            June 30,dollars
      in thousands
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Unrealized
      Holding (Losses) Gains Arising During the Period, Net of Tax (Pre-tax
      Amount of ($2,056), ($2,155), $1,143 and($1,334))
            
            $
            (1,261
            )
            
            $
            (1,329
            )
            
            $
            700
            
            
            $
            (827
            )Reclassification
      Adjustment for Gains Realized in Net Income During the Period, Net of Tax
      (Pre-tax Amount of $0, $0, ($260) and $0)
            
            
            0
            
            
            
            0
            
            
            
            (159
            )
            
            
            0Change
      in Pension Asset (Pre-tax Amount of $0, $33, $0 and $66)
            
            
            0
            
            
            
            20
            
            
            
            0
            
            
            
            39Other
      Comprehensive Income
            
            $
            (1,261
            )
            
            $
            (1,309
            )
            
            $
            541
            
            
            $
            (788
            )


8
 Index




Note
6.  Fair Value Measurements





The
Company adopted Statement of Financial Accounting Standards No. 157, "Fair Value
Measurements" ("SFAS No. 157"), effective January 1, 2008.  SFAS No.
157 clarifies that fair value is an exit price, representing the amount that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants.  Under SFAS No. 157, fair
value measurements are not adjusted for transaction costs.  SFAS No.
157 establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value.  The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (level 1 measurements) and the lowest priority to
unobservable inputs (level 3 measurements).  The three levels of the
fair value hierarchy under SFAS No. 157 are described below:





Basis of
Fair Value Measurement





Level 1 -
Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities;





Level 2 -
Quoted prices for similar assets or liabilities in active markets, quoted prices
in markets that are not active, or inputs that are observable, either directly
or indirectly, for substantially the full term of the asset or
liability;





Level 3 -
Prices or valuation techniques that require inputs that are both significant to
the fair value measurement and unobservable (i.e., supported by little or no
market activity).





A
financial instrument's level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value
measurement.





The types
of instruments valued based on quoted market prices in active markets include
most U.S. government and agency securities, many other sovereign government
obligations, liquid mortgage products, active listed equities, and most money
market securities.  Such instruments are generally classified within
level 1 or level 2 of the fair value hierarchy.  As required by SFAS
No. 157, the Company does not adjust the quoted price for such
instruments.





The types
of instruments valued based on quoted prices in markets that are not active,
broker or dealer quotations, or alternative pricing sources with reasonable
levels of price transparency include most investment-grade and high-yield
corporate bonds; less liquid mortgage products; less liquid agency securities;
less liquid listed equities; state, municipal, and provincial obligations; and
certain physical commodities.  Such instruments are generally
classified within level 2 of the fair value hierarchy.





Level 3
is for positions that are not traded in active markets or are subject to
transfer restrictions, valuations are adjusted to reflect illiquidity and/or
non-transferability, and such adjustments are generally based on available
market evidence.  In the absence of such evidence, management's best
estimate will be used.  Management's best estimate consists of both
internal and external support on certain level 3
investments.  Subsequent to inception, management only changes level 3
inputs and assumptions when corroborated by evidence such as transactions in
similar instruments, completed or pending third-party transactions in the
underlying investment or comparable entities, subsequent rounds of financing,
recapitalizations and other transactions across the capital structure, offerings
in the equity or debt markets, and changes in financial ratios or cash
flows.  Currently, the Company has no assets or liabilities classified
as level 3.


9
 Index




Note
      6.
            Fair
      Value Measurements, Continued





The
following are the major categories of assets measured at fair value on a recurring basis
during the six months ended June 30, 2008, using quoted prices in active markets
for identical assets (Level 1), significant other observable inputs (Level 2),
and significant unobservable inputs (Level 3).





Level
      1
              Quoted
              Prices
      in
              Active
      Markets
              for
      Identical
            
            
            Level
      2
              Significant
              Other
              Observable
            
            
            Level
      3
              Significant
              Unobservable
            
            
            Total
      at
              June
      30,dollars
      in thousands
            
            Assets
            
            
            Inputs
            
            
            Inputs
            
            
            2008Trading
      Securities
            
            $
            1,596
            
            
            $
            0
            
            
            $
            0
            
            
            $
            1,596Available-for-Sale
      Securities
            
            
            0
            
            
            
            253,808
            
            
            
            0
            
            
            
            253,808Total
            
            $
            1,596
            
            
            $
            253,808
            
            
            $
            0
            
            
            $
            255,404





Fair
values for investments were based on quoted market prices, where available, as
provided by third-party vendors.  If quoted market prices were not
available, fair values provided by the vendors were based on quoted market
prices of comparable instruments in active markets and/or based on a matrix
pricing methodology which employs the Bond Market Association's standard
calculations for cash flow and price/yield analysis, or live benchmark bond
pricing, or terms/condition data available from major pricing
sources.  SFAS No. 157 requires disclosure of assets and liabilities
measured at fair value on a non-recurring basis.  As of June 30, 2008,
the Company did not have any assets or liabilities measured at fair value on a
non-recurring basis requiring disclosure.





Simultaneously
with the adoption of SFAS No. 157, the Company adopted Statement of Financial
Accounting Standards No. 159, "The Fair Value Option for Financial Assets and
Financial Liabilities" ("SFAS No. 159"), effective January 1,
2008.  SFAS No. 159 gives entities the option to measure eligible
financial assets, financial liabilities, and Company commitments at fair value
(i.e., the fair value option), on an instrument-by-instrument basis, that are
otherwise not permitted to be accounted for at fair value under other accounting
standards.  The election to use the fair value option is available
when an entity first recognizes a financial asset or financial liability or upon
entering into a Company commitment.  Subsequent changes in fair value
must be recorded in earnings.  Additionally, SFAS No. 159 allows for a
one-time election for existing positions upon adoption, with the transition
adjustment recorded to beginning retained earnings.  SFAS No. 159 does
not affect any existing accounting literature that requires certain assets and
liabilities to be carried at fair value and does not eliminate disclosure
requirements included in other accounting standards.  As of June 30,
2008, the Company has not elected the fair value option for any eligible
items.





In
accordance with Financial Accounting Standards Board Staff Position No. 157-2,
"Effective Date of FASB Statement No. 157," we have delayed the application of
SFAS No. 157 for non-financial assets, such as goodwill and real property held
for sale, and non-financial liabilities until January 1, 2009.





Note
      7.
            Sale
      of Subsidiary





In June
2008, the Company sold its membership interest in its former insurance agency
subsidiary, Mang-Wilber, LLC.  Total proceeds from the sale were
$1,258,000, of which $1,250,000 was received in cash in June
2008.  The Company recorded a $628,000 gain on sale of its insurance
agency subsidiary in non-interest income.


10
 Index




ITEM2: 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
material changes in our financial condition, including liquidity and capital
resources, at June 30, 2008 as compared to December 31, 2007; (ii) a comparison
of our results of operations for the three-month period ended June 30, 2008 as
compared to the three-month period ended June 30, 2007, and (iii) a comparison
of our results of operations for the six-month period ended June 30, 2008 as
compared to the six-month period ended June 30, 2007.





Our
financial performance is heavily dependent upon net interest income, which is
the difference between the interest and dividend 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, trust and investment service fees, service charges on deposit
accounts, commission income, net investment securities (losses) gains, the net
gain on sale of loans, increase in the cash surrender value on bank owned life
insurance, gain on life insurance, other service fees, gain on sale of
consolidated insurance agency subsidiary, net (loss) gain on impairment / sale
of fixed assets, flood grants, and other income.  Our non-interest
expenses consist of salaries, employee benefits, occupancy expense, furniture
and equipment expense, computer service fees, advertising and marketing,
professional fees, other miscellaneous expenses, and taxes.  Results
of operations are also influenced by general economic conditions (particularly
changes in interest rates and regional credit conditions), competitive
conditions, 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, 2008
evaluation of the allowance for loan losses indicated that the allowance was
adequate, under adversely different conditions or assumptions, the allowance
would need to be increased.  For example, if historical loan loss
experience significantly worsened or if current economic conditions
significantly deteriorated, additional provisions for loan losses would be
required to increase the allowance.  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, 2008, evaluation of collateral values was reasonable under the
circumstances, if collateral valuations were significantly lowered, our
allowance for loan losses would need to be increased.





Recent Accounting
Pronouncements.  In June 2008, the Financial Accounting
Standards Board (“FASB”) Emerging Issues Task Force (“EITF”) reached a consensus
on EITF Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature)
is Indexed to an Entity’s Own Stock” (“EITF 07-5”).  EITF 07-5 will be
effective for fiscal years beginning after December 15, 2008.  We are
currently evaluating the disclosure requirements under EITF 07-5.  We
do not expect EITF 07-5 to have a material impact on our financial condition or
results of operations.





In April
2008, FASB issued FASB Staff Position 142-3, “Determination of the Useful Life
of Intangible Assets” (“FSP 142-3”).  FSP 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other
Intangible Assets” (SFAS No. 142”).  The intent of FSP 142-3 is to
improve the consistency between the useful life of a recognized intangible asset
under SFAS No. 142 and the period of expected cash flows used to measure the
fair value of the asset under revised FASB SFAS No. 141, “Business Combinations”
(“SFAS No. 141(R)”) and other U.S. generally accepted accounting
principles.  FSP 142-3 will be effective for fiscal years and interim
periods within those fiscal years beginning after December 15,
2008.  We are currently evaluating the disclosure requirements under
FSP 142-3.  We do not expect FSP 142-3 to have a material impact on
our financial condition or results of operations.





In
December 2007, FASB issued SFAS 141(R).  SFAS 141(R) retains the
fundamental requirements of SFAS No. 141 that the acquisition method of
accounting (formerly the purchase method) be used for all business combinations,
that an acquirer be identified for each business combination, and that
intangible assets be identified and recognized separately from
goodwill.  SFAS 141(R) requires the acquiring entity


11
 Index


in a
business combination to recognize the assets acquired, the liabilities assumed,
and any non-controlling interest in the acquiree at the acquisition date,
measured at their fair values as of that date, with limited
exceptions.  Additionally, SFAS No 141(R) changes the requirements for
recognizing assets acquired and liabilities assumed arising from contingencies
and recognizing and measuring contingent consideration.  SFAS No
141(R) also enhances the disclosure requirements for business
combinations.  SFAS No 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008 and may
not be applied before that date.





In
December 2007, FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51,” (“SFAS
160”).  SFAS 160 amends Accounting Research Bulletin No. 51,
“Consolidated Financial Statements,” to establish accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary.  Among other things, SFAS 160
clarifies that a non-controlling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements and requires consolidated net income to be
reported at amounts that include the amounts attributable to both the parent and
the non-controlling interest.  SFAS 160 also amends SFAS 128,
“Earnings per Share,” so that earnings per share calculations in consolidated
financial statements will continue to be based on amounts attributable to the
parent.  SFAS 160 is effective for fiscal years and interim periods
within those fiscal years beginning on or after December 15, 2008 and is applied
prospectively as of the beginning of the fiscal year in which it is initially
applied except for the presentation and disclosure requirements, which are to be
applied retrospectively for all periods presented.  SFAS 160 is not
expected to have a material impact on our financial condition or results of
operations.





B.
Financial Condition and Performance Overview





During
the first six months of 2008, we substantially increased our total assets, total
deposits, and total loans.  In particular, during the first six-month
period ended June 30, 2008, our total assets increased $81.067 million or 10.2%,
from $793.680 million at December 31, 2007 to $874.747 million at June 30,
2008.  Although we did not acquire or purchase any new companies or
branches during the first half of 2008, total deposits increased significantly
during the period, from $657.494 million to $726.432 million, a $68.938 million
or 10.5% increase.  During the first half of 2008, the outstanding
balances in our certificates of deposit (over $100,000), NOW account, and money
market deposit account portfolios increased substantially.  A
significant portion of this growth in deposits was due to an increase in
municipal customer deposits, which, in turn, were invested into various types of
earning assets including loans, federal funds sold, interest bearing time
deposits with other banks, and available-for-sale investment
securities.  During the first six months of 2008 we continued to focus
our sales and marketing efforts on originating commercial real estate,
commercial and industrial, and residential mortgage loans in our newer, more
densely populated markets throughout central New York.  These efforts
helped increase total loans outstanding from $445.105 million at December 31,
2007 to $499.578 million at June 30, 2008, a $54.473 million or 12.2% increase
during the first six months of 2008.





The
overall credit quality of the loan portfolio improved modestly between December
31, 2007 and June 30, 2008.  Although total non-performing loans
increased slightly between the periods, we experienced improvements in potential
problem loans and delinquency.  Non-performing loans are loans that
are either (i) 90 or more days delinquent and still accruing interest, (ii)
non-accrual loans, or (iii) troubled debt restructured loans.  Total
non-performing loans were $6.388 million at June 30, 2008 as compared to $6.136
million at December 31, 2007, a $252 thousand or 4.1% increase.  The
level of non-performing loans to total loans outstanding at June 30, 2008 was
1.3%.  This compares to 1.4% of total loans outstanding at December
31, 2007.





Delinquent
loans, which are loans that are currently performing but where the borrower is
30 or more days late in making a scheduled payment, totaled $3.159 million or
0.6% of total loans outstanding at June 30, 2008.  At December 31,
2007, delinquent loans totaled $3.917 million or 0.9% of total loans
outstanding.  This represents a $761 thousand, or 19.4%, decrease
between the periods.  We consider these levels of delinquency to be
manageable and well within management’s target range of less than 2.0% of total
loans.





Potential
problem loans are loans that are currently performing, but where known
information about credit problems of the related borrowers cause management to
have doubts as to the ability of such borrowers to comply with the present loan
repayment terms and which may result in disclosure of such loans as
non-performing at some time in the future.  Potential problem loans
totaled $4.956 million or 1.0% of total


12
 Index


loans
outstanding at June 30, 2008.  By comparison, at December 31, 2007
potential problem loans totaled $6.325 million, or 1.4%, of total loans
outstanding.





The
allowance for loan losses decreased modestly between December 31, 2007 and June
30, 2008.  At June 30, 2008 the allowance for loan losses was $6.965
million, or 1.4%, of loans outstanding.  This compares to $6.977
million, or 1.6%, of loans outstanding at December 31, 2007, a $12 thousand or
0.2% decrease between the periods.  We recorded $412 thousand of net
charge-offs and $400 thousand in the provision for loan losses during the first
six months of 2008, resulting in a $12 thousand decrease in the allowance for
loan losses during the period.





Net
income and earnings per share were $1.407 million and $0.13, respectively, for
the three-month period ended June 30, 2008.  This compares to net
income and earnings per share of $2.407 million and $0.23, respectively, for the
three-month period ended June 30, 2007.





Similarly,
during the six-month period ended June 30, 2008 we recorded net income and
earnings per share of $2.845 million and $0.27, respectively, as compared to net
income and earnings per share of $4.356 million and $0.41, respectively, for the
six-month period ended June 30, 2007.





The
significant decreases in net income and earnings per share between comparable
three- and six-month periods were attributable to two primary factors: a
significant increase in total non-interest expense, and a decrease in total
non-interest income.  During 2006, we adopted a strategic plan to
accelerate the growth of the Company’s earning assets, particularly
loans.  To fulfill our growth objectives, we expanded into new
geographic markets and opened a loan production office in Cicero, New York
(Onondaga County) in the first quarter of 2008 and a full-service branch office
in Halfmoon, New York (Saratoga County) in the second quarter of
2008.  We also hired additional sales, branch, and operations
personnel to accommodate both the current and anticipated growth.





In
addition, during the six-month period ended June 30, 2008 we recorded $185
thousand in losses on the impairment and sale of fixed assets.  We
abandoned the development of a branch office in Dewitt, New York (Onondaga
County) and recorded a $178 thousand expense for site planning, architectural
design, and engineering studies in the second quarter of 2008.  By
comparison, during the six-month period ended June 30, 2007 we recognized a $352
thousand deferred gain on the sale of our Norwich Town branch facility (and
other equipment).





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





Asset and
Yield Summary Table:





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


13
 Index




For
      the Three Months Ended June 30,2008
            
            
            2007Average
              Outstanding
              Balance
            
            
            Interest
              Earned
      /Paid
            
            
            Yield
      / Rate
            
            
            Average
              Outstanding
              Balance
            
            
            Interest
              Earned
      /Paid
            
            
            Yield
      / Rate(Dollars
      in thousands)Earning
      Assets:Federal
      funds sold
            
            $
            18,776
            
            
            $
            100
            
            
            
            2.14
            %
            
            $
            16,992
            
            
            $
            225
            
            
            
            5.31
            %Interest
      bearing deposits
            
            
            10,872
            
            
            
            72
            
            
            
            2.66
            %
            
            
            5,349
            
            
            
            67
            
            
            
            5.02
            %Securities
      (1)
            
            
            308,171
            
            
            
            3,391
            
            
            
            4.43
            %
            
            
            286,256
            
            
            
            3,121
            
            
            
            4.37
            %Loans
      (2)
            
            
            474,612
            
            
            
            7,735
            
            
            
            6.55
            %
            
            
            420,666
            
            
            
            7,999
            
            
            
            7.63
            %Total
      earning assets
            
            
            812,431
            
            
            
            11,298
            
            
            
            5.59
            %
            
            
            729,263
            
            
            
            11,412
            
            
            
            6.28
            %Non-earning
      assets
            
            
            43,285
            
            
            
            
            
            
            
            
            
            
            
            39,999Total
      assets
            
            $
            855,716
            
            
            
            
            
            
            
            
            
            
            $
            769,262Liabilities:Savings
      accounts
            
            $
            70,034
            
            
            $
            70
            
            
            
            0.40
            %
            
            $
            78,974
            
            
            $
            125
            
            
            
            0.63
            %Money
      market accounts
            
            
            131,748
            
            
            
            630
            
            
            
            1.92
            %
            
            
            91,859
            
            
            
            903
            
            
            
            3.94
            %NOW
      accounts
            
            
            89,597
            
            
            
            273
            
            
            
            1.23
            %
            
            
            78,230
            
            
            
            257
            
            
            
            1.32
            %Time
      & other deposit accounts
            
            
            350,837
            
            
            
            3,359
            
            
            
            3.85
            %
            
            
            318,288
            
            
            
            3,424
            
            
            
            4.31
            %Borrowings
            
            
            61,979
            
            
            
            607
            
            
            
            3.94
            %
            
            
            60,679
            
            
            
            626
            
            
            
            4.14
            %Total
      interest bearing liabilities
            
            
            704,195
            
            
            
            4,939
            
            
            
            2.82
            %
            
            
            628,030
            
            
            
            5,335
            
            
            
            3.41
            %Non-interest
      bearing deposits
            
            
            74,434
            
            
            
            
            
            
            
            
            
            
            
            72,530Other
      non-interest bearing liabilities
            
            
            7,036
            
            
            
            
            
            
            
            
            
            
            
            3,974Total
      liabilities
            
            
            785,665
            
            
            
            
            
            
            
            
            
            
            
            704,534Shareholders'
      equity
            
            
            70,051
            
            
            
            
            
            
            
            
            
            
            
            64,728Total
      liabilities and shareholders' equity
            
            $
            855,716
            
            
            
            
            
            
            
            
            
            
            $
            769,262Net
      interest income
            
            
            
            
            
            $
            6,359
            
            
            
            
            
            
            
            
            
            
            $
            6,077Net
      interest rate spread (3)
            
            
            
            
            
            
            
            
            
            
            2.77
            %
            
            
            
            
            
            
            
            
            
            
            2.87
            %Net
      earning assets
            
            $
            108,236
            
            
            
            
            
            
            
            
            
            
            $
            101,233Net
      interest margin (4)
            
            
            
            
            
            
            
            
            
            
            3.15
            %
            
            
            
            
            
            
            
            
            
            
            3.34
            %Net
      interest margin (tax-equivalent)
            
            
            
            
            
            
            
            
            
            
            3.38
            %
            
            
            
            
            
            
            
            
            
            
            3.63
            %Ratio
      of earning assets to interest bearing liabilities
            
            
            115.37
            %
            
            
            
            
            
            
            
            
            
            
            116.12
            %





(1)
Securities include trading, available-for-sale, held-to-maturity, and other
investments.  They 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.


14
 Index




For
      the Six Months Ended June 30,2008
            
            
            2007Average
              Outstanding
              Balance
            
            
            Interest
              Earned
      /Paid
            
            
            Yield
      / Rate
            
            
            Average
              Outstanding
              Balance
            
            
            Interest
              Earned
      /Paid
            
            
            Yield
      / Rate(Dollars
      in thousands)Earning
      Assets:Federal
      funds sold
            
            $
            22,889
            
            
            $
            298
            
            
            
            2.62
            %
            
            $
            17,110
            
            
            $
            448
            
            
            
            5.28
            %Interest
      bearing deposits
            
            
            10,922
            
            
            
            150
            
            
            
            2.76
            %
            
            
            3,312
            
            
            
            80
            
            
            
            4.87
            %Securities
      (1)
            
            
            298,802
            
            
            
            6,601
            
            
            
            4.44
            %
            
            
            289,181
            
            
            
            6,310
            
            
            
            4.40
            %Loans
      (2)
            
            
            461,167
            
            
            
            15,649
            
            
            
            6.82
            %
            
            
            414,927
            
            
            
            15,688
            
            
            
            7.62
            %Total
      earning assets
            
            
            793,780
            
            
            
            22,698
            
            
            
            5.75
            %
            
            
            724,530
            
            
            
            22,526
            
            
            
            6.27
            %Non-earning
      assets
            
            
            43,332
            
            
            
            
            
            
            
            
            
            
            
            39,341Total
      assets
            
            $
            837,112
            
            
            
            
            
            
            
            
            
            
            $
            763,871Liabilities:Savings
      accounts
            
            $
            69,303
            
            
            $
            151
            
            
            
            0.44
            %
            
            $
            80,085
            
            
            $
            252
            
            
            
            0.63
            %Money
      market accounts
            
            
            123,836
            
            
            
            1,378
            
            
            
            2.24
            %
            
            
            89,305
            
            
            
            1,748
            
            
            
            3.95
            %NOW
      accounts
            
            
            85,845
            
            
            
            538
            
            
            
            1.26
            %
            
            
            79,249
            
            
            
            501
            
            
            
            1.27
            %Time
      & other deposit accounts
            
            
            346,646
            
            
            
            6,921
            
            
            
            4.02
            %
            
            
            315,394
            
            
            
            6,687
            
            
            
            4.28
            %Borrowings
            
            
            61,916
            
            
            
            1,206
            
            
            
            3.92
            %
            
            
            60,232
            
            
            
            1,197
            
            
            
            4.01
            %Total
      interest bearing liabilities
            
            
            687,546
            
            
            
            10,194
            
            
            
            2.98
            %
            
            
            624,265
            
            
            
            10,385
            
            
            
            3.35
            %Non-interest
      bearing deposits
            
            
            72,206
            
            
            
            
            
            
            
            
            
            
            
            71,474Other
      non-interest bearing liabilities
            
            
            7,473
            
            
            
            
            
            
            
            
            
            
            
            4,327Total
      liabilities
            
            
            767,225
            
            
            
            
            
            
            
            
            
            
            
            700,066Shareholders'
      equity
            
            
            69,887
            
            
            
            
            
            
            
            
            
            
            
            63,805Total
      liabilities and shareholders' equity
            
            $
            837,112
            
            
            
            
            
            
            
            
            
            
            $
            763,871Net
      interest income
            
            
            
            
            
            $
            12,504
            
            
            
            
            
            
            
            
            
            
            $
            12,141Net
      interest rate spread (3)
            
            
            
            
            
            
            
            
            
            
            2.77
            %
            
            
            
            
            
            
            
            
            
            
            2.92
            %Net
      earning assets
            
            $
            106,234
            
            
            
            
            
            
            
            
            
            
            $
            100,265Net
      interest margin (4)
            
            
            
            
            
            
            
            
            
            
            3.17
            %
            
            
            
            
            
            
            
            
            
            
            3.38
            %Net
      interest margin (tax-equivalent)
            
            
            
            
            
            
            
            
            
            
            3.41
            %
            
            
            
            
            
            
            
            
            
            
            3.65
            %Ratio
      of earning assets to interest bearing liabilities
            
            
            115.45
            %
            
            
            
            
            
            
            
            
            
            
            116.06
            %





(1)
Securities include trading, available-for-sale, held-to-maturity, and other
investments.  They 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.




15
 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, 2008
            
            
            At
      December 31, 2007Loans
      in non-accrual status:Residential
      real estate (1)
            
            $
            1,109
            
            
            $
            895Commercial
      real estate
            
            
            4,645
            
            
            
            4,341Commercial
      (2)
            
            
            406
            
            
            
            843Consumer
            
            
            21
            
            
            
            7Total
      non-accruing loans
            
            
            6,181
            
            
            
            6,086Loans
      contractually past due 90 days or more and still accruing
      interest
            
            
            207
            
            
            
            50Troubled
      debt restructured loans
            
            
            0
            
            
            
            0Total
      non-performing loans
            
            
            6,388
            
            
            
            6,136Other
      real estate owned
            
            
            158
            
            
            
            247Total
      non-performing assets
            
            $
            6,546
            
            
            $
            6,383Total
      non-performing assets as a percentage of total assets
            
            
            0.75
            %
            
            
            0.80
            %Total
      non-performing loans as a percentage of total loans
            
            
            1.28
            %
            
            
            1.38
            %




(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.


16
 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 30,2008
            
            
            2007
            
            
            2008
            
            
            2007(Dollars
      in thousands)
            
            
            (Dollars
      in thousands)Balance
      at beginning of period
            
            $
            6,965
            
            
            $
            6,718
            
            
            $
            6,977
            
            
            $
            6,680Charge-offs:Residential
      real estate (1)
            
            
            0
            
            
            
            94
            
            
            
            7
            
            
            
            97Commercial
      real estate
            
            
            9
            
            
            
            115
            
            
            
            88
            
            
            
            120Commercial
      (2)
            
            
            49
            
            
            
            7
            
            
            
            78
            
            
            
            105Consumer
            
            
            256
            
            
            
            157
            
            
            
            442
            
            
            
            376Total
      charge-offs
            
            
            314
            
            
            
            373
            
            
            
            615
            
            
            
            698Recoveries:Residential
      real estate (1)
            
            
            58
            
            
            
            17
            
            
            
            59
            
            
            
            22Commercial
      real estate
            
            
            43
            
            
            
            41
            
            
            
            43
            
            
            
            41Commercial
      (2)
            
            
            1
            
            
            
            105
            
            
            
            17
            
            
            
            117Consumer
            
            
            37
            
            
            
            82
            
            
            
            84
            
            
            
            168Total
      recoveries
            
            
            139
            
            
            
            245
            
            
            
            203
            
            
            
            348Net
      charge-offs
            
            
            175
            
            
            
            128
            
            
            
            412
            
            
            
            350Provision
      for loan losses
            
            
            175
            
            
            
            240
            
            
            
            400
            
            
            
            500Balance
      at end of period
            
            $
            6,965
            
            
            $
            6,830
            
            
            $
            6,965
            
            
            $
            6,830Ratio
      of net charge-offs during the period to average loans outstanding during
      the period (annualized)
            
            
            0.15
            %
            
            
            0.12
            %
            
            
            0.18
            %
            
            
            0.17
            %Allowance
      for loan losses to total loans
            
            
            1.39
            %
            
            
            1.59
            %
            
            
            1.39
            %
            
            
            1.59
            %Allowance
      for loan losses to non-performing loans
            
            
            109
            %
            
            
            131
            %
            
            
            109
            %
            
            
            131
            %





(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.


17
 Index




C.
Comparison of Financial Condition at June 30, 2008 and December 31,
2007





Overview.  Total
assets increased $81.067 million, or 10.2%, during the first six months of
2008.  As of June 30, 2008, total assets were $874.747
million.  This compares to $793.680 million in total assets at
December 31, 2007.   During the first six months of 2008 we
continued to focus our personnel, marketing, and operational resources on
increasing the outstanding balances in our commercial, residential, and consumer
loan portfolios.  Due to these efforts, approximately 67% of the
growth in total assets was recorded in the loan portfolio.  Between
December 31, 2007 and June 30, 2008, total loans increased from $445.105 million
to $499.578 million, a $54.473 million or 12.2% increase.  In
addition, we expanded our geographic market by opening a loan production office
in Cicero, New York (Onondaga County) in 2008.





The
growth in total assets was funded by increases in both total deposits and
long-term borrowings.  Throughout the first six months of 2008, the
outstanding balances in our interest-bearing, non-maturity deposit account
liabilities and certificates of deposit (over $100,000) increased rapidly due
principally to municipal deposit growth.  Total deposits increased
$68.938 million or 10.5% over the first six months of 2008, from $657.494
million at December 31, 2007 to $726.432 million at June 30, 2008.





Long-term
borrowings increased from $41.538 million at December 31, 2007 to $56.110
million at June 30, 2008, a $14.572 million or 35.1% increase.  During
the first half of 2008, we originated and held for our loan portfolio a pool of
15 to 30-year fixed rate residential mortgage loans, as well as several large
commercial real estate loans with a fixed rate of interest for up to 10
years.  To mitigate the interest rate risk associated with these
lending activities, we borrowed long-term funds at the Federal Home Loan Bank of
New York.





Total
shareholders’ equity decreased slightly during the first half of 2008, from
$69.399 million at December 31, 2007 to $69.351 million at June 30, 2008, a $48
thousand decrease.  Retained earnings decreased from $93.618 million
at December 31, 2007 to $93.029 million at June 30, 2008.  During the
period we recorded net income of $2.845 million and paid $1.995 million in cash
dividends to shareholders.  In addition, we recorded a $1.537 million
decrease to retained earnings in conjunction with the adoption of a new
accounting standard promulgated by the FASB, which required us to record the
post-retirement aspects of our executive split-dollar life insurance benefit
plan through retained earnings.  Finally, between December 31, 2007
and June 30, 2008 there was a slight decrease in the general level of interest
rates due to a slowing national economy.  This helped increase the
fair value of our available-for-sale investment securities portfolio, resulting
in a $541 thousand net change in accumulated other comprehensive income / (loss)
between December 31, 2007 and June 30, 2008.  Accumulated other
comprehensive income at June 30, 2008 was $269 thousand.  This
compares to an accumulated other comprehensive loss of $272 thousand at December
31, 2007.  Total shareholders’ equity to total assets was 7.93% at
June 30, 2008 as compared to 8.74% at December 31, 2007.




Asset Quality.  We
use several measures to determine the overall credit quality of our loan
portfolio.  These include the level of delinquent loans (those 30 or
more days delinquent, excluding non-performing loans), the level of
non-performing loans, the level of potential problem loans, and the dollar
amount and type of loan charge-offs we experience.  Between December
31, 2007 and June 30, 2008, non-performing loans increased, while potential
problem loans and delinquent loans decreased.





Total
non-performing loans, which include non-accruing loans, loans 90 days or more
past due and still accruing interest, and troubled debt restructured loans,
increased $252 thousand or 4.1% during the first half of 2008, from $6.136
million at December 31, 2007 to $6.388 million at June 30, 2008.  At
June 30, 2008, the total non-performing loans as a percentage of total loans
outstanding was 1.3%.  This compares to 1.4% at December 31,
2007.  Between December 31, 2007 and June 30, 2008, the level of
non-performing loans secured by 1-4 family residential properties and commercial
real estate increased, while the level of non-performing commercial and
industrial loans and loans secured by 5 or more family residential properties
decreased.





Potential
problem loans are loans that are currently performing, but where information
about possible credit problems exists.  The amount of our potential
problem loans may vary significantly from quarter to quarter due to the
significant volume of commercial loans with balances in excess of $1.0
million.  During the first six months of 2008, potential problem loans
decreased $1.369 million, from $6.325 million at December 31, 2007 to $4.956
million at June 30, 2008.  Potential problem loans as a percent of
total loans outstanding equaled 1.0% at June 30, 2008, versus 1.4% at December
31, 2007.  Between


18
 Index


December
31, 2007 and June 30, 2008, several large commercial loans were paid off by the
borrower.  In addition, certain loans identified in previous periods
as potential problem loans were moved to non-performing status.





We
recorded net loan charge-offs of $412 thousand during the six-month period ended
June 30, 2008.  This compares to $350 thousand for the same period
last year.  Annualized net loan charge-offs as a percent of average
total loans outstanding was 0.18% for the six-month period ended June 30, 2008,
versus 0.17% for the same period last year.  The increase in net
charge-offs between comparable six-month periods was principally due to an
increase in losses on consumer installment loans (secured by
automobiles).





At June
30, 2008, loans that were 30 or more days delinquent (excluding non-performing
loans) totaled $3.159 million or 0.6% of loans outstanding.  By
comparison, at December 31, 2007 we had $3.917 million or 0.9% of loans
outstanding in this same category, a $758 thousand or 19.4%
decrease.  We considered the level of delinquent loans at June 30,
2008 to be manageable and well within management’s targeted guideline of less
than 2.0% of loans outstanding.





The
allowance for loan losses at June 30, 2008 was $6.965 million or 1.4% of gross
loans outstanding.  This compares to $6.977 million or 1.6% of loans
outstanding at December 31, 2007.  During the six-month period ended
June 30, 2008, we recorded $400 thousand in the provision for loan losses versus
net charge-offs of $412 thousand, resulting in a $12 thousand net decrease in
the allowance for loan losses.  Both our management and Board of
Directors deemed the allowance for loan losses adequate at June 30, 2008 and
December 31, 2007.





The
credit quality of our debt securities is strong.  At June 30, 2008,
99.8% of the securities held in our available-for-sale and held-to-maturity
investment securities portfolios (excluding notes issued directly by the Bank to
local municipalities) were rated “A” or better by Moody’s credit rating
services; 89.1% were rated “AAA”.  This compares to 99.5% and 95.5%,
respectively, at December 31, 2007.  The decrease in “AAA” rated
investment securities was principally due to the downgrade of approximately
$10.6 million of insured municipal investment securities from “AAA” to “AA”
during the second quarter of 2008.





Obligations
of States and Political Subdivisions (Municipal Bonds) Credit Quality
Table:





The
following table summarizes the insured and uninsured status of the Bank’s
municipal securities portfolio (excluding notes issued directly by the Bank to
local municipalities) at June 30, 2008.  The values and percentages
presented are based on the par value of the municipal securities portfolio at
June 30, 2008.








Dollars
      in thousandsAAA
      (1)
            
            
            AA
            
            
            A
            
            
            BAA
            
            
            Not
      RatedUninsured
      / Un-Enhanced
            
            
            Insured
      / Enhanced
            
            
            Uninsured
      / Un-Enhanced
            
            
            Insured
      / Enhanced
            
            
            Un-Enhanced
            
            
            Enhanced
            
            
            Enhanced
            
            
            Un-Enhanced
            
            
            Total$
            7,915
            
            
            $
            13,820
            
            
            $
            9,010
            
            
            $
            13,220
            
            
            $
            1,270
            
            
            $
            6,680
            
            
            $
            480
            
            
            $
            445
            
            
            $
            52,84015.0
            %
            
            
            26.2
            %
            
            
            17.1
            %
            
            
            25.0
            %
            
            
            2.4
            %
            
            
            12.6
            %
            
            
            0.9
            %
            
            
            0.8
            %Total
      AAA
            
            
            $
            21,735
            
            
            Total
      AA
            
            
            $
            22,230
            
            
            Total
      A
            
            
            $
            7,95041.1
            %
            
            
            
            
            
            
            42.1
            %
            
            
            
            
            
            
            15.0
            %





(1)
Moody's ratings





We
purchase our municipal securities based on the underlying creditworthiness of
the issuing municipality and have not relied on the insurance enhancement
attached to the security.





D.
Comparison of Results of Operations for the Three Months Ended June 30, 2008 and
2007





Overview.There
was a significant decrease in our net income and earnings per share between
comparable three-month periods ended June 30, 2008 and 2007.  During
the second quarter of 2008, we recorded net income and earnings per share of
$1.407 million and $0.13, respectively.  This compares to $2.407
million in net income and earnings per share of $0.23 during the second quarter
of 2007.  The $1.000 million decrease in net income and the $0.10
decrease in earnings per share between


19
 Index


comparable
quarters were due principally to a significant decrease in non-interest income
and a significant increase in non-interest expense.  Total
non-interest income decreased from $2.346 million in the second quarter of 2007
to $1.917 million in the second quarter of 2008, a $429 thousand or 18.3%
decrease.  During the second quarter of 2008, we recorded $185
thousand in losses on the impairment / disposal of fixed assets.  In
comparison, during the second quarter of 2007 we recorded $200 thousand of
non-interest income from flood grants obtained in connection with flood-related
losses we incurred on two of our branch office facilities during
2006.





Total
non-interest expense for the three-month period ended June 30, 2008 was $6.195
million as compared to $5.221 million for the three-month period ended June 30,
2007, a $974 thousand or 18.7% increase between periods.  In the
second quarter of 2008, we incurred significant non-interest expenses due to our
market expansion plans, or, more specifically, the opening of a new branch
office and a loan production office.





The
increase in non-interest expense and decrease in non-interest income was offset,
in part, by a $282 thousand increase in net interest income, a $65 thousand
decrease in the provision for loan losses, and a $56 thousand decrease in income
taxes.  Between the second quarter of 2007 and the second quarter of
2008, we significantly reduced the interest rates paid on interest-bearing
deposit accounts and recorded a $396 thousand decrease in interest expense
between comparable periods.  In addition, to mitigate the decrease in
interest income due to falling interest rates, we significantly increased
earning assets, particularly loans, between the comparable periods.





The
provision for loan losses decreased $65 thousand between the second quarter of
2007 and the second quarter of 2008 due primarily to a decrease in the level of
delinquent loans and potential problem loans.  We recorded $175
thousand in the provision for loan losses during the second quarter of 2008, as
compared to $240 thousand in the second quarter of 2007.





The
decrease in net income resulted in a decrease in the both the return on average
assets and the return on average shareholders’ equity.  The return on
average assets was 0.66% in the second quarter of 2008 as compared to 1.26% in
the second quarter of 2007.  Similarly, the return on average
shareholders equity decreased from 14.92% in the second quarter of 2007 to 8.08%
in the second quarter of 2008.





Net Interest
Income.  Net interest income is our most significant source of
revenue.  During the second quarter of 2008, net interest income
comprised 77% of our net revenue (net interest income plus non-interest
income).  This compares to 72% in the second quarter of
2007.  For the three-month period ended June 30, 2008, our net
interest income was $6.359 million.  By comparison, for the
three-month period ended June 30, 2007, our net interest income was $6.077
million.  The $282 thousand or 4.6% increase in net interest income
between comparable periods was due, in large part, to a significant increase in
our earning asset balances.  During the second quarter of 2008,
average earning assets totaled $812.431 million.  This compares to
average earning assets of $729.263 million in the second quarter of 2007, an
$83.168 million or 11.4% increase between comparable quarters.





The yield
on our earning assets decreased 69 basis points between comparable three-month
periods, from 6.28% in the second quarter of 2007 to 5.59% in the second quarter
of 2008.  Between September 2007 and April 2008, the Federal Open
Market Committee lowered the target federal funds interest rate by 325 basis
points, from 5.25% to 2.00%, due to a slowing national economy.  These
actions reduced the yield on our federal funds sold, interest bearing deposits
(at other banks), and loans, which negatively affected interest
income.  Between these periods, however, we embarked on an aggressive
strategy to increase earning assets, particularly loans.  The increase
in the average outstanding volume of our earning assets due to these efforts
offset a substantial portion of the decrease in interest income caused by lower
earning asset yields.  We recorded $11.298 million of interest income
during the second quarter of 2008 as compared to $11.412 million in the second
quarter of 2007, a $114 thousand or 1.0% decrease.  The interest
income recorded on loans, our highest yielding and largest earning asset
portfolio, decreased by only $264 thousand, from $7.999 million in the second
quarter of 2007 to $7.735 million in the second quarter of 2008, despite a 108
basis point decrease in yield between the periods.  The average
outstanding balance of our loan portfolio was $474.612 million in the second
quarter of 2008 as compared to $420.666 million in the second quarter of 2007, a
$53.946 million or 12.8% increase.





Although
we lowered most of the interest rates offered on our deposit accounts as
interest rates declined, our net interest margin declined on a comparable
quarter basis.  During the second quarter of 2008, our tax-equivalent
net interest margin was 3.38%.  This compares to 3.63% in the second
quarter of 2007, a


20
 Index


25 basis
point decrease between comparable quarters.





We
recorded $4.939 million in total interest expense during the second quarter of
2008 as compared to $5.335 million in the second quarter of 2007, a $396
thousand or 7.4% decrease between the periods.  The significant
decrease in market interest rates between comparable periods allowed us to
reduce the average rate paid on all categories of our interest-bearing
liabilities, including money market deposit accounts.  During the
second quarter of 2007, we recorded $903 thousand of interest expense on our
money market deposit accounts at an average rate of 3.94%.  By
comparison, during the second quarter of 2008, we recorded only $630 thousand of
interest expense at an average rate of 1.92%.  The 202 basis point
decrease in the average rate on these deposit liabilities was principally due to
a significant reduction in the interest rate offered on our “Wealth Management”
money market deposit account.  During the second quarter of 2008, the
average rate paid on interest-bearing liabilities totaled 2.82%.  This
compares to 3.41% during the second quarter of 2007.  The reduction in
interest expense due to decreases in the average rate paid on interest-bearing
liabilities, totaling $1.056 million, was offset, in part, by a $660 thousand
increase in interest expense due to an increase in the average volume of
interest-bearing liabilities between comparable periods.





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





Rate and
Volume Table:





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




For
      the Three Months Ended June 30,
            
            
            For
      the Six Months Ended June 30,2008
      vs. 2007
            
            
            2008
      vs. 2007Rate
            
            
            Volume
            
            
            Total
            
            
            Rate
            
            
            Volume
            
            
            Total(Dollars
      in thousands)
            
            
            (Dollars
      in thousands)Earning
      assets:Federal
      funds sold
            
            $
            (146
            )
            
            $
            21
            
            
            $
            (125
            )
            
            $
            (271
            )
            
            $
            121
            
            
            $
            (150
            )Interest
      bearing deposits
            
            
            (42
            )
            
            
            47
            
            
            
            5
            
            
            
            (47
            )
            
            
            117
            
            
            
            70Securities
            
            
            36
            
            
            
            234
            
            
            
            270
            
            
            
            65
            
            
            
            226
            
            
            
            291Loans
            
            
            (1,230
            )
            
            
            966
            
            
            
            (264
            )
            
            
            (1,719
            )
            
            
            1,680
            
            
            
            (39
            )Total
      earning assets
            
            
            (1,382
            )
            
            
            1,268
            
            
            
            (114
            )
            
            
            (1,972
            )
            
            
            2,144
            
            
            
            172Interest-bearing
      liabilities:Savings
      accounts
            
            
            (42
            )
            
            
            (13
            )
            
            
            (55
            )
            
            
            (70
            )
            
            
            (31
            )
            
            
            (101
            )Money
      market accounts
            
            
            (571
            )
            
            
            298
            
            
            
            (273
            )
            
            
            (912
            )
            
            
            542
            
            
            
            (370
            )NOW
      accounts
            
            
            (20
            )
            
            
            36
            
            
            
            16
            
            
            
            (4
            )
            
            
            41
            
            
            
            37Time
      & other deposit accounts
            
            
            (391
            )
            
            
            326
            
            
            
            (65
            )
            
            
            (416
            )
            
            
            650
            
            
            
            234Borrowings
            
            
            (32
            )
            
            
            13
            
            
            
            (19
            )
            
            
            (26
            )
            
            
            35
            
            
            
            9Total
      interest bearing liabilities
            
            
            (1,056
            )
            
            
            660
            
            
            
            (396
            )
            
            
            (1,428
            )
            
            
            1,237
            
            
            
            (191
            )Change
      in net interest income
            
            $
            (326
            )
            
            $
            608
            
            
            $
            282
            
            
            $
            (544
            )
            
            $
            907
            
            
            $
            363








Net
interest income increased $282 thousand between the second quarter of 2007 and
the second quarter of 2008.  Between the periods, we recorded a $114
thousand decrease in interest income versus a $396 decrease in interest
expense.  The decrease in interest income between comparable quarters
was principally driven by a significant decrease in the yield on all categories
of earning assets except securities, offset, in part, by a significant increase
in the average outstanding balances for all categories of earning assets,
including a substantial increase in average loan balances
outstanding.  The decrease in interest expense was driven by a
reduction in the average interest paid on all categories of interest-bearing
liabilities, offset, in part, by an increase in the average volume in all
categories of interest-bearing


21
 Index


liabilities
except savings accounts.





Between
September 2007 and April 2008, the Federal Open Market Committee lowered the
federal funds target rate by 325 basis points due to a weakening national
economy.  The precipitous drop in the federal funds rate and other
market interest rates caused a significant reduction in both our
interest-earning asset yields and interest-bearing liability
costs.  Conversely, our strategy to increase the Company’s earning
assets contributed to increases in both interest income and interest expense due
to volume factors.  More specifically, interest income decreased $114
thousand between the three-month period ended June 30, 2007 and the three-month
period ended June 30, 2008 due to a significant decrease in the average yield on
earning assets, offset, in part, by a significant increase in the volume of
earning assets.  Between the second quarter of 2007 and the second
quarter of 2008, the volume of earning assets increased $83.168 million, which
contributed $1.268 million of additional interest income.  Over the
same period, the interest income generated on earning assets decreased $1.382
million due to rate factors.





Throughout
2007 and the first half of 2008, we focused our personnel and marketing
resources on increasing the outstanding balances in our loan portfolio with the
goal of increasing interest income.  Due to these efforts, we
increased the average outstanding balances in our loan portfolio from $420.666
million in the second quarter of 2007 to $474.612 million in the second quarter
of 2008.  The growth in the loan portfolio contributed $966 thousand
of additional interest income between comparable quarters.  This
improvement was offset, however, by a $1.230 million decrease in interest income
due to a decrease in the average yield on loans between comparable quarters as
market interest rates dropped.  Due to these two factors, the interest
income recorded on loans decreased $264 thousand between comparable
quarters.





Similar
to loans, we recorded a $125 thousand decrease in interest income on federal
funds sold between the second quarter of 2007 and the second quarter of
2008.  Although we slightly increased the average volume of federal
funds sold between comparable periods, which contributed $21 thousand of
incremental interest income, the increase in volume was offset by a $146
thousand decrease in interest income due to rate factors.





The
interest income recorded on our investment securities portfolio increased $270
thousand between the second quarter of 2007 and the second quarter of 2008, $234
thousand due to volume and $36 thousand due to rate.  As we increased
deposit liabilities and borrowings between comparable periods, we invested a
portion of these funds in investment securities.  Between the
comparable quarters, maturing investment securities were replaced by new
investment securities at higher effective yields.  Many of the
securities that matured and amortized between June 2007 and June 2008 were
initially purchased during 2003, 2004, and 2005, when investment securities
yields were at historical lows.





The
average outstanding balances in our interest-bearing deposits at other banks
increased from $5.349 million in the second quarter of 2007 to $10.872 million
in the second quarter of 2008.  Due to a decrease in short-term
interest rates between the periods, the average yield on this portfolio declined
from 5.02% in the second quarter of 2007 to 2.66% in the second quarter of
2008.  A $47 thousand increase in interest income due to an increase
in volume of the portfolio was offset, in part, by a $42 thousand decrease in
interest income due to rate.  These factors taken together resulted in
a $5 thousand increase in interest income on this portfolio between the
periods.





We
recorded $3.359 million in interest expense on time and other accounts during
the second quarter of 2008 as compared to $3.424 million in the second quarter
of 2007, a $65 thousand or 1.9% decrease in interest expense between the
periods.  Due primarily to an increase in municipal customer
certificates of deposit, the average outstanding balances in time and other
deposit accounts increased $32.549 million between the second quarter of 2007
and the second quarter of 2008.  This increase in the volume of time
and other deposit accounts increased interest expense $326 thousand between
comparable quarters.  As short-term interest rates dropped in late
2007 and the first half of 2008, we lowered the interest rates offered on new
and renewed certificates of deposit.  These rate factors caused
interest expense on time and other deposit accounts to decrease by $391 thousand
between comparable quarters.





Interest
expense on money market deposit accounts decreased $273 thousand between the
second quarter of 2007 and the second quarter of 2008.  As short-term
interest rates decreased between June 2007 and April 2008, we lowered the
interest rate paid on money market deposit accounts.  Although this
decreased interest expense on money market deposit accounts by $571 thousand
between the second quarter of 2007 and the second quarter of 2008, the decrease
was offset in part by a $298 thousand increase in interest expense on money
market deposit accounts due to volume.  The average
outstanding


22
 Index


balance
in money market accounts increased $39.889 million or 43.4% between comparable
quarters, from $91.859 million in the second quarter of 2007 to $131.748 million
in the second quarter of 2008.





In the
first quarter of 2008, we decreased the interest rates paid on statement savings
and passbook savings accounts.  The low interest rates offered on
these accounts caused a decrease in the average outstanding balances on these
accounts.  These factors resulted in a $55 thousand decrease in
interest expense between the second quarter of 2007 and the second quarter of
2008, $42 thousand due to rate and $13 thousand due to volume.





The
average rate paid on NOW accounts decreased from 1.32% in the second quarter of
2007 to 1.23% in the second quarter of 2008.  Despite the decrease in
the average rate paid on these accounts, the average outstanding balance in the
NOW account portfolio increased from $78.230 million in the second quarter of
2007 to $89.597 million in the second quarter of 2008, due principally to an
increase in municipal deposit accounts.  Between comparable periods,
interest expense on NOW accounts increased by $16 thousand.  The
increase in the volume of NOW accounts increased interest expense $36 thousand
between comparable periods, but was offset, in part, by a $20 thousand decrease
in interest expense due to a decrease in rate.





Between
the second quarter of 2007 and the second quarter of 2008, we secured long-term
borrowings to fund our long-term fixed-rate residential mortgage and commercial
real estate loans.  The interest rates on these new long-term
borrowings were generally less than the interest rates on maturing long-term
borrowings, which dropped our average cost of borrowings from 4.14% in the
second quarter of 2007 to 3.94% in the second quarter of
2008.  Interest expense on borrowings decreased $19 thousand between
comparable quarters.  An increase in the average volume of borrowings
increased interest expense by $13 thousand, while the decrease in the average
rate paid on borrowings decreased interest expense by $32 thousand.





Provision for Loan
Losses.We recorded $175 thousand in the provision for loan
losses for the three- month period ended June 30, 2008.  This compares
to $240 thousand for the three-month period ended June 30, 2007, a $65 thousand
decrease.  The provision for loan losses decreased principally because
we experienced a decrease in the level of potential problem loans and loans 30
to 89 days delinquent.  At June 30, 2008, potential problem loans were
$4.956 million.  This compares to $6.325 million at December 31,
2007.  Loans 30 to 89 days delinquent totaled $3.159 million at June
30, 2008, as compared to $3.917 million at December 31, 2007.  The
improvement in these credit factors was tempered by modest increases in
non-performing loans and net charge-offs.  Non-performing loans
totaled $6.388 million at June 30, 2008, as compared to $6.136 million at
December 31, 2007.  We recorded net charge-offs of $175 thousand in
the second quarter of 2008 as compared to $128 thousand in the second quarter of
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 on bank-owned life
insurance, gain on life insurance coverage, other service fees, gain on sale of
consolidated insurance agency subsidiary, net (loss) / gain on impairment and
sale of fixed assets, flood grants, and other income.  Non-interest
income decreased in the three-month period ended June 30, 2008 as compared to
the three-month period ended June 30, 2007.  Specifically, total
non-interest income decreased from $2.346 million in the second quarter of 2007
to $1.917 million in the second quarter of 2008, a $429 thousand or 18.3%
decrease.  The decrease in non-interest income between comparable
quarters was significantly influenced by four distinct events that in total were
responsible for $365 thousand or 85% of the decrease.





First,
during the second quarter of 2008 we sold our membership interest in Mang –
Wilber LLC, our insurance agency subsidiary, and recorded a $628 thousand gain
on the sale.  Second, during the second quarter of 2008 we abandoned
the development of a branch facility in Dewitt, New York and recorded a $178
thousand impairment charge for engineering, architectural, and site development
costs incurred during the pre-construction phase of the
project.  Third, during the second quarter of 2007 a senior executive
of the Company died unexpectedly.  Due to his death, we recorded a
$615 thousand (non-taxable) gain on bank-owned life insurance coverage during
the period.  Fourth and finally, during the second quarter of 2007 we
recorded $200 thousand of flood grant income, which was awarded to us in
conjunction with certain flood-related impairments we recorded on two of our
branch office facilities during 2006.





Other
categories of non-interest income that changed significantly between comparable
quarterly periods


23
 Index


include
trust fees, service charges on deposit accounts, net investment security
(losses) / gains, and the net gain on sale of loans.





Trust
fees increased $26 thousand or 6.5% between the three-month period ended June
30, 2007 and the three-month period ended June 30, 2008.  During the
second quarter of 2008, we recorded $426 thousand in trust fees as compared to
$400 thousand in the second quarter of 2007.  The increase between
comparable quarters was principally due to an increase in executor
fees.  During the second quarter of 2008, we recorded executor fees
totaling $36 thousand.  By comparison, during the second quarter of
2007 we recorded no executor fees.





During
the second quarter of 2008, we recorded $530 thousand in service charges on
deposit accounts.  This compares to $483 thousand during the second
quarter of 2007, a $47 thousand or 9.7% increase.  The net increase in
service charges on deposit accounts was primarily due to two factors: an
increase in penalty charges on checking accounts and an increase in deposit
service charges on business checking accounts.  During 2007 we began
offering our courtesy overdraft service to more of our checking account
customers, causing an increase in the product’s usage and increasing penalty
charges on checking accounts.  In March 2008 we increased the monthly
and per item fees across our business checking account product
line.





During
the second quarter of 2008, we recognized net investment securities losses of
$19 thousand due to a decrease 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 2007 we recognized
net investment securities gains of $79 thousand due to an increase in the value
of our trading securities portfolio.





During
the first quarter of 2007, we acquired Provantage Funding Corporation
(“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, in the normal course
of its business, sells a portion of its originated loans to third party
financial institutions.  These mortgages are recorded in loans held
for sale and sold to these third parties at a premium (less the costs to sell),
which is recorded as a component of net gain on sale of loans.  During
the second quarter of 2008, we recorded a $22 thousand net gain on the sale of
these loans.  This compares to $78 thousand during the second quarter
of 2007.  Although total residential mortgage loan originations
increased period over period, the net gain recorded on the sale of these loans
decreased because more of these loans were retained for our own loan
portfolio.





Non-Interest
Expense.  Non-interest expense is comprised of salaries,
employee benefits, occupancy expense, furniture and equipment expense, computer
service fees, advertising and marketing expense, professional fees, and other
miscellaneous expenses.  Total non-interest expense increased $974
thousand or 18.7% on a comparable quarter basis, from $5.221 million in the
second quarter of 2007 to $6.195 million in the second quarter of
2008.  The substantial increase in total non-interest expense between
comparable quarters was principally due to various market expansion, product
enhancement, and bank operating system enhancements.





Salaries
expense increased $534 thousand or 22.2% between comparable quarterly periods,
from $2.407 million in the second quarter of 2007 to $2.941 million in the
second quarter of 2008.  The increase in salaries expense between the
comparable periods was due primarily to an increase in base salaries,
commission, incentive, and overtime pay.  In the first quarter of 2008
we hired eight banking professionals from the Syracuse, New York marketplace to
staff our Cicero, New York (Onondaga County) loan representative office, and
during the second quarter of 2008 we opened a full-service branch office in
Halfmoon, New York (Saratoga County).  In addition, we recorded $156
thousand in salaries expense for Provantage during the second quarter of 2008 as
compared to $89 thousand in the second quarter of 2007, a $67 thousand increase
between the periods.  Finally, throughout 2007 and the first half of
2008, we hired additional sales and operations staff and provided merit pay
raises to existing staff.  The increase in base salaries, overtime,
incentive, and commission, pay totaling $611 thousand, was offset, in part, by a
$77 thousand decrease in executive deferred compensation pay between the
periods.





We
recorded employee benefits expense of $643 thousand in the second quarter of
2008 as compared to $760 thousand in the second quarter of 2007, a $117 thousand
or 15.4% decrease.  During the second quarter of 2008, we recorded
$270 thousand in group health insurance expense.  This compares to
$402 thousand in the second quarter of 2007, a $132 thousand
decrease.  In the second quarter of 2007 we experienced a significant
increase in claims on our partially self-insured health insurance
plan.  In


24
 Index


addition,
during the second quarter of 2008 we recorded a $98 thousand benefit on the
Company’s defined benefit retirement plan.  This compares to a $40
thousand benefit in the second quarter of 2007.  Our defined benefit
plan was frozen in 2006, and the plan assets have performed
well.  Finally, during the second quarter of 2008, our 401k plan
expense and unemployment insurance costs decreased by $65 thousand, from $172
thousand in the second quarter of 2007 to $107 thousand in the second quarter of
2008.  These improvements, totaling $255 thousand, were offset by
significant increases in FICA expense, group life insurance and group disability
expense, employee education expense, and other benefits.





On a
combined basis, occupancy expense of company premises and furniture and fixture
expense increased $187 thousand or 31.0%, from $604 thousand in the second
quarter of 2007 to $791 thousand in the second quarter of
2008.  During 2008 we began incurring a lease expense on two new
facilities, namely our representative loan office in Cicero, New York (Onondaga
County) and our full-service branch office facility in Halfmoon, New York
(Saratoga County).  In addition, during 2007 we made various
investments in our premises and equipment and assumed certain lease agreements
in connection with the Provantage. These endeavors increased depreciation
expense, equipment maintenance costs, building repairs, insurance cost, property
taxes, and rents by an aggregate $187 thousand between comparable
periods.





Computer
service fees increased $193 thousand or 103.8% between comparable quarters, from
$186 thousand in the second quarter of 2007 to $379 thousand in the second
quarter of 2008.  In the first quarter of 2008, we migrated our core
computer system from our main office location in Oneonta, New York to a service
bureau environment in Albany, New York to enhance our business continuity plan
and minimize disruption of customer service.  We also converted our
payroll system from proprietary software to a third party software
provider.  On a combined basis, these two computer system changes were
responsible for $180 thousand or 93.3% of the net increase in computer service
fees period over period, $163 thousand due to the core system migration and $17
thousand due to the payroll system.





Advertising
and marketing expenses increased $23 thousand or 16.4% between comparable
quarters, from $140 thousand in the second quarter of 2007 to $163 thousand in
the second quarter of 2008.  To support our market expansion efforts
into the Capital District of New York and the greater Syracuse market, we
engaged a professional public relations firm and purchased additional newspaper
and other advertising media spots during the second quarter of
2008.





Professional
fees decreased from $255 thousand in the second quarter of 2007 to $216 thousand
in the second quarter of 2008, a $39 thousand or 15.3% decrease.  We
recorded a $28 thousand decrease in external audit expenses and a $17 thousand
decrease in personnel placement fees between the three-month periods ended June
30, 2008 and 2007.





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 (expenses
related to real estate properties formerly pledged as collateral on loans that
we have acquired through foreclosure proceedings or acceptance of a deed in lieu
of foreclosure), minority interest expense, stock exchange listing fees, and
several other miscellaneous expenses.  During the three-month period
ended June 30 2008, other miscellaneous expenses increased $193 thousand or
22.2%, from $869 thousand in the three-month period ended June 30, 2007 to
$1.062 million in the three-month period ended June 30, 2008.  The
following table itemizes the individual components of other miscellaneous
expenses that increased (or decreased) significantly between comparable
periods:


25
 Index




For
      the Three Months Ended June 30,Description
      of Other Miscellaneous Expense
            
            2008
            
            
            2007
            
            
            Increase
      / (Decrease)Dollars
      in thousandsBad
      debt collection expenses
            
            $
            23
            
            
            $
            65
            
            
            $
            (42
            )Accounts
      receivable financing program services
            
            
            13
            
            
            
            34
            
            
            
            (21
            )Postage
      and shipping
            
            
            63
            
            
            
            93
            
            
            
            (30
            )Telephone
      and communications
            
            
            120
            
            
            
            52
            
            
            
            68Travel
      and entertainment
            
            
            94
            
            
            
            65
            
            
            
            29Software
      amortization
            
            
            70
            
            
            
            41
            
            
            
            29Other
      losses
            
            
            25
            
            
            
            (2
            )
            
            
            27Loss
      on disposal of other real estate
            
            
            100
            
            
            
            1
            
            
            
            99All
      other miscellaneous expense items, net
            
            
            554
            
            
            
            520
            
            
            
            34Total
      other miscellaneous expense
            
            $
            1,062
            
            
            $
            869
            
            
            $
            193








Income
Taxes.  Income tax expense decreased from $555 thousand during
the three-month period ended June 30, 2007 to $499 thousand during the
three-month period ended June 30, 2008.  The decrease in income tax
expense was primarily due to a decrease in income before tax, offset by an
increase in the effective tax rate.  The effective tax rate increased
between periods, from 18.7% in the three-month period ended June 30, 2007 to
26.2% in the three-month period ended June 30, 2008, due to a smaller proportion
of the Company’s income being derived from tax-exempt sources such as municipal
bonds and notes and bank-owned life insurance.  In addition, during
the second quarter of 2007 we recorded a $615 thousand gain on life insurance
coverage, which was non-taxable revenue.





E.
Comparison of Results of Operations for the Six Months Ended June 30, 2008 and
2007





Overview.  Net
income and earnings per share decreased significantly between the comparable
six-month periods ended June 30, 2008 and 2007.  During the first six
months of 2008, we recorded net income and earnings per share of $2.845 million
and $0.27, respectively.  This compares to $4.356 million in net
income and earnings per share of $0.41 during the first six months of
2007.  The $1.511 million decrease in net income and the $0.14
decrease in earnings per share between comparable periods were caused by a
significant decrease in non-interest income and a significant increase in
non-interest expense.  Total non-interest income decreased from $4.103
million in the first half of 2007 to $3.448 million in the first half of 2008, a
$655 thousand or 16.0% decrease.  The decrease in non-interest income
between comparable periods was significantly impacted by five distinct events,
two of which were recorded in the first half of 2008 and three of which were
recorded in the first half of 2007.





During
the first six months of 2008, as compared to the comparable period in 2007, we
recorded a significant increase in non-interest expense due principally to our
market expansion and asset growth strategy.  Salaries, occupancy
expense of bank premises, furniture and fixture expense, computer service fees,
advertising and marketing, and other miscellaneous expenses all increased, while
employee benefits expense and professional fees decreased.  Total
non-interest expense increased $1.634 million or 16.0% between comparable
six-month periods, from $10.185 million in the six-month period ended June 30,
2007 to $11.819 million in the six-month period ended June 30,
2008.





The
increase in non-interest expense and decrease in non-interest income was offset,
in part, by a $363 thousand increase in net interest income, a $100 thousand
decrease in the provision for loan losses, and a $315 thousand decrease in
income taxes.  Between the six months ended June 30, 2007 and the six
months ended June 30, 2008, we reduced the interest rates paid on
interest-bearing deposit accounts and recorded a $191 thousand decrease in
interest expense between comparable periods.  In addition, we
increased the average outstanding balances in all categories of earning assets,
particularly loans, between the comparable periods in order to mitigate the
decrease in interest income due to declining asset yields.


26
 Index


The
provision for loan losses decreased $100 thousand between the six-month period
ended June 30, 2007 and the six-month period ended June, 30 2008 due primarily
to a decrease in the level of delinquent loans and potential problem
loans.  We recorded $400 thousand in the provision for loan losses
during the first half of 2008 as compared to $500 thousand in the first half of
2007.





The
decrease in net income resulted in a decrease in both the return on average
assets and the return on average shareholders’ equity.  The return on
average assets was 0.68% in the first half of 2008 as compared to 1.15% in the
first half of 2007.  Similarly, the return on average shareholders’
equity decreased from 13.77% in the first half of 2007 to 8.19% in the first
half of 2008.





Net Interest
Income.  Net interest income is our most significant source of
revenue.  During the first half of 2008, net interest income comprised
78% of our net revenue (net interest income plus non-interest
income).  This compares to 75% in the first half of
2007.  In the six-month period ended June 30, 2008, our net interest
income was $12.504 million.  By comparison, for the six-month period
ended June 30, 2007, our net interest income was $12.141 million.  The
$363 thousand or 3.0% increase in net interest income between comparable periods
was due, in large part, to a significant increase in our earning asset
balances.  During the first half of 2008, average earning assets
totaled $793.780 million.  This compares to average earning assets of
$724.530 million in the first half of 2007, a $69.250 million or 9.6% increase
between the comparable quarters.





Although
we lowered most of the interest rates offered on our deposit accounts as
interest rates declined, our net interest margin declined on a comparable period
basis.  During the first half of 2008, our tax-equivalent net interest
margin was 3.41%.  This compares to 3.65% in the first half of 2007, a
24 basis point decrease between comparable periods.





The yield
on our earning assets decreased 52 basis points between comparable six-month
periods, from 6.27% in the first half of 2007 to 5.75% in the first half of
2008.  Between September 2007 and April 2008, the Federal Open Market
Committee lowered the target federal funds interest rate by 325 basis points,
from 5.25% to 2.00%, due to a slowing national economy.  These actions
reduced the yield on our federal funds sold, interest bearing deposits (at other
banks), and loans between comparable six-month periods.  To counteract
a decreasing net interest margin, we deployed a strategy to grow the total
assets of the Company and increased the average outstanding balances in all
categories of earning assets with a special emphasis on loans, our highest
yielding portfolio.  The increase in the average outstanding volume of
our earning assets due to these efforts offset the decrease in interest income
caused by lower earning asset yields.  We recorded $22.698 million of
interest income during the six-month period ended June 30, 2008 as compared to
$22.526 million in the six-month period ended June 30, 2007, a $172 thousand or
0.8% increase.  The interest income recorded on loans only decreased
$39 thousand or 0.2%, from $15.688 million in the first half of 2007 to $15.649
million in the first half of 2008, in spite of an 80 basis point decrease in
yield between the periods.  The average outstanding balance of our
loan portfolio was $461.167 million in the six-month period ended June 30, 2008
as compared to $414.927 million in the six-month period ended June 30, 2007, a
$46.240 million or 11.1% increase.





We
recorded $10.194 million in total interest expense during the six-month period
ended June 30, 2008 as compared to $10.385 million in the six-month period ended
June 30, 2007, a $191 thousand or 1.8% decrease between the
periods.  The significant decrease in market interest rates between
comparable periods allowed us to reduce the average rate paid on all categories
of our interest-bearing liabilities.  Between periods, however, the
average outstanding balance in savings accounts, the least expensive category of
interest-bearing deposits, decreased, while the average outstanding balances in
time accounts and money market accounts, our more expensive categories of
interest-bearing deposits, increased.  This change in the composition
of interest-bearing deposits reduced the potential cost savings of our deposit
rate actions between the periods.





Between
comparable six-month periods, the average rate paid on savings accounts
decreased from 0.63% in the first half of 2007 to 0.44% in the first half of
2008.  In addition, due to the low rate of interest offered on savings
accounts, the average outstanding balance in savings accounts declined from
$80.085 million in the first half of 2007 to $69.303 million in the first half
of 2008, a $10.782 million or 13.5% decrease.  Correspondingly,
interest expense on savings accounts decreased from $252 thousand in the
six-month period ended June 30, 2007 to $151 thousand in the six-month period
ended June 30, 2008.





The
average outstanding balances in NOW accounts, money market accounts, and time
and other deposit accounts all increased significantly between comparable
six-month periods.  On a combined basis, the average outstanding
balances in these interest-bearing deposit categories increased
$72.379


27
 Index


million
or 15.0% despite declining interest rates.





The
average rate paid on money market accounts decreased from 3.95% in the first
half of 2007 to 2.24% in the first half of 2008, but average outstanding
balances increased from $89.305 million to $123.836 million over these same
periods.  We recorded interest expense on money market accounts of
$1.378 million in the six-month period ended June 30, 2008 versus $1.748 million
in the six-month period ended June 30, 2007, a $370 thousand or 21.2% decrease
between periods.





Similarly,
the average rate paid on time and other deposit accounts decreased from 4.28% in
the first half of 2007 to 4.02% in the first half of 2008, but average
outstanding balances increased from $315.394 million to $346.646 million over
these same periods.  We recorded interest expense on time and other
deposit accounts of $6.921 million in the six-month period ended June 30, 2008
versus $6.687 million in the six-month period ended June 30, 2007, a $234
thousand or 3.5% increase between periods.





Between
the six-month period ended June 30, 2007 and the six-month period ended June 30,
2008, the average outstanding balance of NOW accounts increased $6.596 million
or 8.3%, but the average interest rate paid decreased by only 1 basis point,
from 1.27% in the first half of 2007 to 1.26% in the first half of
2008.  As a result of these changes, interest expense on NOW accounts
increased from $501 thousand in the six-month period ended June 30, 2007 to $538
thousand in the six-month period ended June 30, 2008, a $37 thousand or 7.4%
increase between comparable periods.  The increase in average
outstanding balances between the periods was principally due to an increase in
municipal deposits.





Rate and Volume
Analysis:Net interest income increased $363 thousand between
the six-month period ended June 30, 2007 and the six-month period ended June 30,
2008.  Between the periods, we recorded a $172 thousand increase in
interest income and a $191 thousand decrease in interest expense.  The
increase in interest income between the comparable six-month periods was
principally driven by a significant increase in the average outstanding balances
for all categories of earning assets, including a substantial increase in
average loan balances outstanding, offset, in part, by a decrease in the yield
on all categories of earning assets except securities.  The decrease
in interest expense was driven by a reduction in the average interest paid on
all categories of interest-bearing liabilities, offset, in part, by an increase
in the average volume in all categories of interest-bearing liabilities except
savings accounts.





Between
September 2007 and April 2008 there was a precipitous drop in the federal funds
rate and other market interest rates.  This helped drive a significant
reduction in both our earning asset yields and interest-bearing liability costs,
resulting in a $544 thousand decrease in net interest income due to rate
factors.  Conversely, our strategy to increase the Company’s earning
assets contributed to increases in both interest income and interest expense and
increased net interest income $907 thousand between comparable periods due to
volume factors.  More specifically, interest income increased $172
thousand between the six-month period ended June 30, 2007 and the six-month
period ended June 30, 2008 due to a significant increase in the volume of
earning assets, offset in part by a decrease in the average yield on earning
assets.  Between the first half of 2007 and the first half of 2008,
the volume of earning assets increased $69.250 million, which contributed $2.144
million of additional interest income.  Over the same comparable
periods, the interest income generated on earning assets decreased $1.972
million due to rate factors.





Throughout
2007 and the first half of 2008, we focused our personnel and marketing
resources on increasing the outstanding balances in our loan portfolio with the
goal of increasing interest income.  Due to these efforts, we
increased the average outstanding balances in our loan portfolio from $414.927
million in the first half of 2007 to $461.167 million in the first half of
2008.  The growth in the loan portfolio contributed $1.680 million of
additional interest income between comparable six-month periods.  This
improvement was offset, however, by a $1.719 million decrease in interest income
due to a decrease in the average yield on loans between comparable periods as
market interest rates dropped.  Due to these two factors, the interest
income recorded on loans decreased $39 thousand between comparable six-month
periods.





Similar
to loans, we recorded a $150 thousand decrease in interest income on federal
funds sold between the first half of 2007 and the first half of
2008.  Although we slightly increased the average volume of federal
funds sold between comparable periods, which contributed $121 thousand of
incremental interest income, it was offset by a $271 thousand decrease in
interest income due to rate factors.





The
interest income recorded on the investment securities portfolio increased $291
thousand between the first half of 2007 and the first half of 2008, $226
thousand due to volume and $65 thousand due to rate.


28
 Index


As we
increased deposit liabilities and borrowings between comparable periods, we
invested a portion of these funds in investment securities.  Between
the comparable six-month periods, maturing investment securities were replaced
by new investment securities at higher effective yields.  Many of the
securities that matured and amortized between June 2007 and June 2008 were
initially purchased during 2003, 2004, and 2005, when investment securities
yields were at historical lows.





The
average outstanding balances in our interest-bearing deposits at other banks
increased from $3.312 million in the first half of 2007 to $10.922 million in
the first half of 2008.  Due to a decrease in short-term interest
rates between the periods, the average yield on this portfolio declined from
4.87% in the first half of 2007 to 2.76% in the first half of
2008.  These factors resulted in a $70 thousand increase in interest
income on this portfolio between the periods.  A $117 thousand
increase in interest income due to an increase in volume of the portfolio was
offset, in part, by a $47 thousand decrease in interest income due to
rate.





We
recorded $6.921 million in interest expense on time and other accounts during
the six-month period ended June 30, 2008 as compared to $6.687 million in the
six-month period ended June 30, 2007, a $234 thousand or 3.5% increase in
interest expense between the periods.  Due primarily to an increase in
municipal customer certificates of deposit, the average outstanding balances in
time and other deposit accounts increased $31.252 million between the first half
of 2007 and the first half of 2008.  This increase in the volume of
time and other deposit accounts increased interest expense by $650 thousand
between comparable six-month periods.  As short-term interest rates
dropped in late 2007 and the first half of 2008, we lowered the interest rates
offered on new and renewed certificates of deposit.  These factors
decreased interest expense on time and other deposit accounts by $416 thousand
between comparable quarters.





Interest
expense on money market deposit accounts decreased $370 thousand between the
six-month periods ended June 30, 2007 and June 30, 2008.  As
short-term interest rates decreased between June 2007 and April 2008, we lowered
the interest rate paid on money market deposit accounts.  Although
this decreased interest expense on money market deposit accounts by $912
thousand between comparable six-month periods, it was offset, in part, by a $542
thousand increase in interest expense on money market deposit accounts due to
volume.





In the
first six months of 2008, we decreased the interest rates paid on our statement
savings and passbook savings accounts.  The low interest rates offered
on these accounts caused a decrease in the average outstanding
balances.  These factors resulted in a $101 thousand decrease in
interest expense between the first half of 2007 and the first half of 2008, $70
thousand due to rate and $31 thousand due to volume.





Between
the six-month period ended June 30, 2007 and the six-month period ended June 30,
2008, the average outstanding balances in NOW accounts increased $6.596 million
or 8.3%.  This growth in the volume of the portfolio increased
interest expense $41 thousand between comparable six-month
periods.  Due to a 1 basis point decrease in the average rate paid on
these deposits between comparable six-month periods, however, interest expense
on NOW accounts increased by only $37 thousand.  The decrease in
interest expense on this portfolio between comparable six-month periods due to
rate was $4 thousand.





Between
the second quarter of 2007 and the second quarter of 2008, we secured long-term
borrowings to fund our long-term fixed-rate residential mortgage and commercial
real estate loans.  The rates of interest on these new long-term
borrowings were generally slightly less than the rates of interest on maturing
long-term borrowings, which dropped our average cost on borrowings from 4.01% in
the first half of 2007 to 3.92% in the first half of 2008.  Interest
expense on borrowings, however, increased $9 thousand between comparable periods
due to an increase in the average volume of borrowings
outstanding.  More specifically, an increase in the average volume of
borrowings increased interest expense $35 thousand between comparable six-month
periods, while the decrease in the average rate paid on borrowings decreased
interest expense $26 thousand between comparable six-month periods.





Provision for Loan Losses.We
recorded $400 thousand in the provision for loan losses for the six- month
period ended June 30, 2008.  This compares to $500 thousand for the
six-month period ended June 30, 2007, a $100 thousand decrease.  The
provision for loan losses decreased principally because we experienced a
decrease in the level of potential problem loans and loans 30 to 89 days
delinquent.  At June 30, 2008, potential problem loans were $4.956
million.  This compares to $6.325 million at December 31,
2007.  Loans 30 to 89 days delinquent totaled $3.159 million at June
30, 2008 as


29
 Index


compared
to $3.917 million at December 31, 2007.  The improvement in these
credit factors was tempered by modest increases in non-performing loans and net
charge-offs.  Non-performing loans totaled $6.388 million at June 30,
2008 as compared to $6.136 million at December 31, 2007.  We recorded
net charge-offs of $412 thousand in the six-month period ended June 30, 2008 as
compared to $350 thousand in the six-month period ended 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 on bank-owned life
insurance, gain on life insurance coverage, other service fees, gain on sale of
insurance agency subsidiary, net (loss) gain on impairment / sale of fixed
assets, flood grants, and other income.  Non-interest income decreased
in the six-month period ended June 30, 2008 as compared to the six-month period
ended June 30, 2007.  Specifically, total non-interest income
decreased from $4.103 million in the six-month period ended June 30, 2007 to
$3.448 million in the six-month period ended June 30, 2008, a $655 thousand or
16.0% decrease.  The decrease in non-interest income between
comparable quarters was significantly influenced by five distinct events that in
total were responsible for a $749 thousand decrease in non-interest income
between comparable periods, offset, in part, by a $94 thousand net increase in
other categories of non-interest income.  In particular, during the
first half of 2008 we: (i) recorded a $628 thousand gain on the sale of our
membership interest in our former insurance agency subsidiary, Mang – Wilber
LLC, and (ii) expensed $178 thousand of pre-construction costs related to a
prospective branch site in Dewitt, New York (Onondaga County) that we
abandoned.  In comparison, during the first half of 2007 we recorded:
(i) a $615 thousand (non-taxable) gain on life insurance coverage due to the
unexpected death of a senior executive, (ii) $232 thousand in flood-recovery
grant income in connection with certain flood-related impairment charges we
incurred in 2006, and (iii) a $352 thousand deferred gain on the sale of our
Norwich Town branch office building and related equipment to the
landowner.





Categories
of non-interest income that changed significantly and were not directly impacted
by the above five distinct events include trust fees, service charges on deposit
accounts, commission income, net investment security (losses) gains, and the net
gain on sale of loans.





Trust
fees increased $41 thousand or 5.3% between the six-month period ended June 30,
2007 and the six-month period ended June 30, 2008.  During the first
half of 2008, we recorded $821 thousand in trust fees as compared to $780
thousand in the first half of 2007.  The increase between comparable
periods was principally due to an increase in executor and account termination
fees.  During the first half of 2008, we recorded executor and account
termination fees totaling $103 thousand.  By comparison, during the
first half of 2007 we recorded $74 thousand of executor and account termination
fees, a $29 thousand increase between comparable periods.





During
the six-month period ended June 30, 2008, we recorded $991 thousand in service
charges on deposit accounts.  This compares to $901 thousand during
the six-month period ended June 30, 2007, a $90 thousand or 10.0%
increase.  The net increase in service charges on deposit accounts was
primarily due to two factors: an increase in penalty charges on checking
accounts and an increase in deposit service charges on business checking
accounts.  During 2007 we began offering our courtesy overdraft
service to more of our checking account customers, causing an increase in the
product’s usage and increasing penalty charges on checking
accounts.  In March 2008 we increased the monthly and per item fees
across our business checking account product line.





Our
commission income was generated from the Bank’s former insurance agency
subsidiary, Mang – Wilber LLC.  During the first half of 2008 we
recorded $246 thousand in commission income as compared to $290 thousand during
first half of 2007.  The $44 thousand or 15.2% decrease period over
period was principally due to a decrease in commissions earned by our former
specialty-lines office located in Clifton Park, New York (Saratoga
County).  Due to the sale Mang – Wilber LLC, we do not anticipate
recording additional commission income during the last two quarters of
2008.





During
the first half of 2008, we recognized net investment securities gains totaling
$164 thousand.  By comparison, we recognized $126 thousand in net
investment securities gains during the first half of 2007.  The $38
thousand or 30.2% increase in net investment securities gain between comparable
periods was influenced by two principal factors, net gains recorded on the sale
of available-for-sale investment securities and changes in the value of our
trading securities.  During the six-month period ended June 30, 2008,
we received proceeds from the sale and maturity of available-for-sale investment
securities totaling $36.915 million, which generated $260 thousand in net gains
in the period.  During that same period, our trading securities
generated net losses of $96 thousand.  By comparison, during the
six-month period


30
 Index


ended
June 30, 2007, we did not record any gains or losses on the sale of
available-for-sale investment securities but recognized $126 thousand of net
investment securities gains 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.





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, in the normal course of its business, sells a
portion of its originated loans to third party financial
institutions.  These mortgages are recorded in loans held for sale and
sold to these third parties at a premium (less the costs to sell), which is
recorded as a component of net gain on sale of loans.  During the
first half of 2008, we recorded a $68 thousand net gain on the sale of these
loans.  This compares to $110 thousand during the first half of
2007.  Although total residential mortgage loan originations increased
period over period, the net gain recorded on the sale of these loans decreased
because more of these loans were retained for our own loan
portfolio.





Non-Interest
Expense.Non-interest expense is comprised of salaries,
employee benefits, occupancy expense, furniture and equipment expense, computer
service fees, advertising and marketing expense, professional fees, and other
miscellaneous expenses.  Total non-interest expense increased $1.634
million or 16.0% on a comparable period basis, from $10.185 million in the first
half of 2007 to $11.819 million in the first half of 2008.  The
substantial increase in total non-interest expense between comparable periods
was principally due to various market expansion, product enhancement, and bank
operating system enhancements.





Salaries
expense increased $904 thousand or 19.0% between comparable six-month periods,
from $4.747 million in the six-month period ended June 30, 2007 to $5.651
million in the six-month period ended June 30, 2008.  New staff
salaries and increases in the base salaries of existing staff, overtime,
incentive, and commission pay totaling $1.084 million was offset, in part, by a
$180 thousand decrease in executive deferred compensation pay between the
periods.  In the first quarter of 2008, we hired eight banking
professionals from the Syracuse, New York marketplace to staff our Cicero, New
York (Onondaga County) loan representative office and opened a full-service
branch office in Halfmoon, New York (Saratoga County) during the second quarter
of 2008.  In addition, we recorded $265 thousand of salaries expense
for Provantage in the first half of 2008 as compared to $131 thousand in the
first half of 2007, a $134 thousand increase between the
periods.  Finally, throughout 2007 and the first half of 2008, we
hired additional sales and operations staff and provided merit pay raises to
existing staff.





We
recorded an employee benefits expense of $1.293 million in the first half of
2008 as compared to $1.371 million in the first half of 2007, a $78 thousand or
5.7% decrease.  During the six-month period ended June 30, 2008, we
recorded $548 thousand in group health insurance expense.  This
compares to $682 thousand during the six-month period ended June 30, 2007, a
$134 thousand or 19.7% decrease between comparable periods.  In the
first half of 2007 we experienced a significant increase in claims on our
partially self-insured health insurance plan.  In addition, during the
first half of 2008 we recorded a $196 thousand benefit on the Company’s defined
benefit retirement plan.  This compares to a $79 thousand benefit in
the first half of 2007.  Our defined benefit plan was frozen in 2006,
and the plan assets have performed well.  Finally, during the first
half of 2008 our 401k plan expense decreased $42 thousand, from $247 thousand in
the first half of 2007 to $205 thousand in the first half of
2008.  These improvements, totaling $293 thousand, were offset by a
$52 thousand increase in FICA expense, a $14 thousand increase in group life and
group disability insurance, a $38 thousand increase in employee education
expense, a $14 thousand increase in unemployment insurance, and a $103 thousand
increase in other benefits.  In the first quarter of 2008 we adopted a
new accounting standard, EITF 06-4, “Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements.”  The new standard required us to annually record an
expense in other benefits for our executive split-dollar life insurance
plan.  In the first half of 2008 we recorded $61 thousand in other
benefits expense related to this plan as compared to no expense in the first
half of 2007.





On a
combined basis, occupancy expense of Company premises and furniture and fixture
expense increased $258 thousand or 20.2%, from $1.279 million in the second
quarter of 2007 to $1.537 million in the second quarter of
2008.  During 2008 we began incurring lease expenses on two new
facilities, namely our representative loan office in Cicero, New York (Onondaga
County) and our full-service branch office facility in Halfmoon, New York
(Saratoga County).  In addition, during 2007 we made various
investments in our premises and equipment and assumed certain lease agreements
in connection with the Provantage acquisition.  These endeavors
increased depreciation expense, equipment maintenance


31
 Index


costs,
building repairs, insurance costs, property taxes, and rents by an aggregate
$258 thousand between comparable periods.





Computer
service fees increased $215 thousand or 57.0% between comparable six-month
periods, from $377 thousand in the first half of 2007 to $592 thousand in the
first half of 2008.  In the first half of 2008 we migrated our core
computer system from our main office location in Oneonta, New York to a service
bureau environment in Albany, New York to enhance our business continuity plan
and minimize disruption of customer service.  We also converted our
payroll system from proprietary software to a third party software
provider.  On a combined basis, these two computer system changes were
responsible for $189 thousand or 87.9% of the net increase in computer service
fees period over period, $161 thousand due to the core system migration and $28
thousand due to the payroll system.





Advertising
and marketing expenses increased $104 thousand or 41.4% between comparable
six-month periods, from $251 thousand in the first half of 2007 to $355 thousand
in the first half of 2008.  To support our market expansion efforts
into the Capital District of New York and the greater Syracuse market, we
engaged a professional public relations firm and purchased additional newspaper
and other advertising media spots during the second quarter of
2008.





Professional
fees decreased from $523 thousand in the first half of 2007 to $467 thousand in
the first half of 2008, a $56 thousand or 10.7% decrease.  We recorded
a $66 thousand decrease in external audit expenses and a $15 thousand decrease
in personnel placement fees between the six-month periods ended June 30, 2008
and 2007.  These improvements were offset, in part, by a $16 thousand
fee we incurred in connection with the operation of our courtesy overdraft
program.





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, 2008, other
miscellaneous expenses increased by $287 thousand or 17.5%, from $1.637 million
in the six-month period ended June 30, 2007 to $1.924 million in the six-month
period ended June 30, 2008.  The following table itemizes the
individual components of other miscellaneous expenses that increased (or
decreased) significantly between comparable periods:


32
 Index




For
      the Six Months Ended June 30,Description
      of Other Miscellaneous Expense
            
            2008
            
            
            2007
            
            
            Increase
      / (Decrease)Dollars
      in thousandsBad
      debt collection expenses
            
            $
            44
            
            
            $
            107
            
            
            $
            (63
            )Fidelity
      insurance
            
            
            62
            
            
            
            42
            
            
            
            20Correspondent
      bank services
            
            
            75
            
            
            
            61
            
            
            
            14Accounts
      receivable financing program services
            
            
            31
            
            
            
            67
            
            
            
            (36
            )Donations
            
            
            62
            
            
            
            43
            
            
            
            19Dues
      and memberships
            
            
            67
            
            
            
            36
            
            
            
            31Postage
      and shipping
            
            
            125
            
            
            
            165
            
            
            
            (40
            )Telephone
      and communications
            
            
            214
            
            
            
            96
            
            
            
            118Travel
      and entertainment
            
            
            149
            
            
            
            102
            
            
            
            47Software
      amortization
            
            
            139
            
            
            
            82
            
            
            
            57Other
      losses
            
            
            82
            
            
            
            39
            
            
            
            43Loss
      on disposal of other real estate
            
            
            91
            
            
            
            1
            
            
            
            90All
      other miscellaneous expense items, net
            
            
            783
            
            
            
            796
            
            
            
            (13
            )Total
      other miscellaneous expense
            
            $
            1,924
            
            
            $
            1,637
            
            
            $
            287








Income
Taxes.Income tax expense decreased from $1.203 million during
the six-month period ended June 30, 2007 to $888 thousand during the six-month
period ended June 30, 2008.  The decrease in income tax expense was
primarily due to a decrease in income before tax, offset by an increase in the
effective tax rate.  The effective tax rate increased between periods,
from 21.6% in the six-month period ended June 30, 2007 to 23.8% in the six-month
period ended June 30, 2008, due to a smaller proportion of the Company’s income
being derived from tax-exempt sources such as municipal bonds and notes and
bank-owned life insurance.  In addition, during the first half of 2007
we recorded a $615 thousand gain on life insurance coverage, which was
non-taxable revenue.





F.
Liquidity





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





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


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


●
            maintaining
      adequate cash balances at our correspondent banks,
  and


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


33
 Index





The
following list represents the sources of funds available to meet our liquidity
requirements.  Our primary sources of funds are denoted by an asterisk
(*).




Sources
of Funding


•
            Currency*


•
            Federal
      Reserve and Correspondent Bank
Balances*


•
            Federal
      Funds Sold*


•
            Loan
      and Investment Principal and Interest
Payments*


•
            Investment
      Security Maturities and Calls*


•
            Demand
      Deposits & NOW Accounts*


•
            Savings
      & Money Market Deposits*


•
            Certificates
      of Deposit and Other Time Deposits*


•
            Repurchase
      Agreements*


•
            FHLBNY
      Advances / Lines of Credit*


•
            Sale
      of Available-for-Sale Investment
Securities


•
            Brokered
      Deposits


•
            Correspondent
      Lines of Credit


•
            Federal
      Reserve Discount Window Borrowings


•
            Sale
      of Loans


•
            Proceeds
      from Issuance of Equity Securities


•
            Branch
      Acquisition


•
            Cash
      Surrender Value of Bank-Owned Life
Insurance





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 for a
potential liquidity crisis.  Based on the limits established in the
Asset and Liability Management Policy, we determined that the Bank was in a
level “2” liquidity position at June 30, 2008.  A level “2” position
on management’s internal liquidity rating system does not indicate a current
liquidity crisis, but rather identifies changes in the composition of balance
sheet or market factors that require management to begin identifying additional
sources of liquidity.  As a result of the level “2” liquidity
position, management has begun to identify additional sources of liquidity to
assure ample amounts of funding to meet future needs.





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





Table of
Liquidity Measures:




Liquidity
      MeasureDollars
      in Thousands
            
            June 30,
      2008
            
            
            December 31,
      2007Cash
      and cash equivalents
            
            $
            31,770
            
            
            $
            18,942Available-for-sale
      and held-to-maturity investment securities at estimated fair value less
      securities pledged for state and municipal deposits and
      borrowings
            
            $
            71,669
            
            
            $
            101,253Total
      loan to total asset ratio
            
            
            57.1
            %
            
            
            56.1
            %FHLBNY
      remaining borrowing capacity
            
            $
            5,588
            
            
            $
            14,294Available
      correspondent bank lines of credit
            
            $
            15,000
            
            
            $
            15,000Federal
      Reserve Bank discount window
            
            $
            9,605
            
            
            $
            10,882








Our
overall liquidity position decreased between December 31, 2007 and June 30,
2008.  At June 30, 2008, we maintained $31.770 million in cash and
cash equivalents, $71.669 million in unpledged available-for-sale (at estimated
fair value) and held-to-maturity investment securities, and $30.193 million of
readily available lines of credit at other banks to fund any anticipated or
unanticipated growth in earning assets.  This compares to $18.942
million in cash and cash equivalents, $101.253 million in unpledged
available-for-sale (at estimated fair value) and held-to-maturity investment
securities, and $40.176 million


34
 Index


in
readily available lines of credit at other banks on December 31,
2007.  In aggregate, these potential funding sources provided $133.632
million of short- and long-term liquidity at June 30, 2008 as compared to
$160.371 million at December 31, 2007, a $26.379 million decrease between
periods.  The decrease in our liquidity is largely due to a
significant increase in loans outstanding between the periods.  In
spite of our significant loan growth between the periods, our total loan to
total asset ratios of 57.1% at June 30, 2008 and 56.1% at December 31, 2007 were
low relative to our comparative peer group of financial
institutions.





Our
commitments to extend credit and stand-by letters of credit increased
significantly between December 31, 2007 and June 30,
2008.  Commitments to extend credit and stand-by letters of credit
totaled $114.176 million at June 30, 2008 versus $97.543 at December 31, 2007, a
$16.633 million or 17.1% increase.  The increase between the periods
was principally due to increases in unused portions of commercial lines of
credit and commitments to fund commercial construction loans.  Our
experience indicates that draws on the commitments to extend credit and stand-by
letters of credit do not fluctuate significantly from quarter to quarter and
therefore are not expected to materially impact our liquidity
prospectively.





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





G.  Capital
Resources and Dividends





The
maintenance of appropriate capital levels is a management
priority.  Overall capital adequacy is monitored on an ongoing basis
by our management and reviewed 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 complying with all regulatory
standards.





Due to
the significant growth in total assets during the first six months of 2008,
total shareholders’ equity to total assets decreased from 8.74% at December 31,
2007 to 7.93% at June 30, 2008.  Between June 30, 2008 and December
31, 2007, our total shareholders’ equity decreased by $48 thousand or
0.1%.  Total shareholders’ equity was $69.351 million at June 30, 2008
as compared to $69.399 million at December 31, 2007.  The decrease in
shareholders’ equity between the periods was due to a few significant
factors.  In the first half of 2008, we adopted a new accounting
standard, EITF 06-4, “Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements.”  The new standard required us to record an estimated
liability for our executive split-dollar life insurance benefit plan through
retained earnings.  In connection with this new standard, we recorded
a $1.537 million decrease in retained earnings during the first half of
2008.  Also during the first half of 2008, we recorded net income of
$2.845 million and paid $1.995 million in cash dividends to
shareholders.  Finally, during the period we recorded a $98 thousand
positive adjustment to retained earnings to recognize the effect of the change
in the measurement date of our defined benefit pension plan and recorded a $541
thousand change in net unrealized gain (loss) on investment securities, net of
tax, due to a general decrease in the level of interest rates.





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 ratio 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, 2008 and
December 31, 2007.  In addition, the Bank’s Board of Directors has
established a minimum capital policy that exceeds “well capitalized” regulatory
standards to ensure the safety and soundness of the Compnay’s banking
subsidiary.  The Company’s tier 1 capital to risk-weighted assets
ratio and total capital to risk-weighted assets ratio at June 30, 2008, were
10.79% and 11.98%, respectively.  This compares to 12.04% and 13.29%,
respectively, at December 31, 2007.


35
 Index




The
principal source of funds for the payment of shareholder dividends by the
Company has been dividends declared and paid to the Company by its subsidiary
bank.  There are various legal and regulatory limitations applicable
to the payment of dividends to the Company by its subsidiaries as well as the
payment of dividends by the Company to its shareholders.  As of June
30, 2008, 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 $2.549 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.





ITEM 3:  QUANTITATIVEAND 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 that are typically exercised by
the issuer when interest rates on comparable maturity securities are lower than
the current coupon rate on the security.





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


36
 Index




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, 2008 and ending
June 30, 2009, 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
            %
            
            
            8.00
            %
            
            $
            27,688
            
            
            $
            (413
            )
            
            
            -1.47
            %
            
            
            -0.60
            %2.00
            %
            
            
            7.00
            %
            
            
            27,589
            
            
            
            (512
            )
            
            
            -1.82
            %
            
            
            -0.74
            %1.00
            %
            
            
            6.00
            %
            
            
            27,680
            
            
            
            (421
            )
            
            
            -1.50
            %
            
            
            -0.61
            %No
      change
            
            
            
            5.00
            %
            
            
            28,101
            
            
            
            -
            
            
            
            -
            
            
            
            --1.00
            %
            
            
            4.00
            %
            
            
            28,031
            
            
            
            (70
            )
            
            
            -0.25
            %
            
            
            -0.10
            %-2.00
            %
            
            
            3.00
            %
            
            
            27,279
            
            
            
            (822
            )
            
            
            -2.93
            %
            
            
            -1.19
            %-3.00
            %
            
            
            2.00
            %
            
            
            27,225
            
            
            
            (876
            )
            
            
            -3.12
            %
            
            
            -1.26
            %(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 $512 thousand or
0.74% of total shareholders’ equity in a +2.00% ramped interest rate shock and
by $822 thousand or 1.19% 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 overall market
conditions and customer demand, but we generally 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 25.0% of
our total assets at June 30, 2008 were invested in adjustable rate loans and
investments.





ITEM 4: Controlsand 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


37
 Index


13(a)-15(e)
and 15(d)–15(e) under the Securities Exchange Act of 1934, as amended) as of
June 30, 2008.  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.





ITEM
4T:  Controlsand Procedures





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








PART
II – OTHER INFORMATION





ITEM 1: LegalProceedings





From time
to time, the Company becomes subject to various legal claims that arise in the
normal course of business.  At June 30, 2008, 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:  RiskFactors





During
the second quarter of 2008 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 12, 2008.





ITEM 2: UnregisteredSales of Equity Securities and Use of
Proceeds





A. Not
applicable.





B.  Not
applicable





C.  Purchases
of Equity Securities by Issuer and Affiliated Purchasers





On July
26, 2005 we announced that the Company’s Board of Directors authorized
management to purchase up to $1.5 million of the Company’s common stock under a
stock repurchase program.  At December 31, 2007, management’s
remaining share repurchase authority under this program was $283 thousand due to
the purchase of treasury shares totaling $1.217 million under this program since
inception.  During the six month period ended June 30, 2008, the
Company’s management did not purchase any additional shares of common stock
under this program.  Management’s remaining share repurchase authority
was $283 thousand at June 30, 2008.





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


38
 Index


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, 2008, 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, 2008.





ITEM 4: Submissionof Matters to a Vote of Security Holders





On April
25, 2008, the Company held its Annual Meeting of Shareholders.  On the
record date for the Annual Meeting of Shareholders, March 10, 2008, 10,503,704
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 8,662,951 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
            
            
            Abstentions
            
            
            Broker
      Non-Votes1.
      To fix the number of directors of the Company at ten (10)
            
            
            8,627,384
            
            
            
            25,909
            
            
            
            9,658
            
            
            
            -2.
      To elect the following three (3) nominees to the Company's Board of
      DirectorsMary
      C. Albrecht
            
            
            8,323,980
            
            
            
            338,971
            
            
            
            -
            
            
            
            -Alfred
      S. Whittet
            
            
            8,309,065
            
            
            
            353,886
            
            
            
            -
            
            
            
            -David
      F. Wilber, III
            
            
            8,318,830
            
            
            
            344,121
            
            
            
            -
            
            
            
            -3.
      To adopt The Wilber Corporation 2008 Omnibus Incentive
Plan
            
            
            6,571,565
            
            
            
            705,196
            
            
            
            346,587
            
            
            
            1,039,603








ITEM 5: OtherInformation





None.





ITEM 6: Exhibits





See
Exhibit Index to this Form 10-Q


39
 Index


SIGNATURES







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








THE
      WILBER CORPORATIONBy:
            /s/
      Douglas C. Gulotty
            
            Date:
            
            August
      5, 2008Douglas
      C. GulottyPresident
      and Chief Executive OfficerBy:
            /s/
      Joseph E. Sutaris
            
            Date:
            
            August
      5, 2008Joseph
      E. SutarisExecutive
      Vice President, Chief Financial Officer, Treasurer, and
  Secretary





40
 Index


EXHIBIT
INDEX








No.
            
            Document31.1
            
            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






41