UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





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


THE
SECURITIES EXCHANGE ACT OF 1934





For
the Quarterly Period Ended March 31, 2010





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  ̈





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  xNon-accelerated
      filer  ̈ (Do
      not check if a smaller reporting company)
            Smaller
      reporting company  x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes   ̈  No x





As of May
5, 2010 there were issued and outstanding 10,706,092 shares of the Registrant’s
Common Stock.










THEWILBER CORPORATION


FORM
10-Q


INDEX








PART
I – FINANCIAL INFORMATION





FORWARD-LOOKING
      STATEMENTSRECENT
      DEVELOPMENTSITEM
      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 March 31, 2010 and December
      31, 2009D.
                
                Comparison of Results of Operations for the Three Months Ended
      March 31, 2010 and 2009E.
                
                LiquidityF.
                
                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:
                
                (REMOVED AND RESERVED)ITEM
      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, including volatility and disruption in national and
international financial markets, legislative and regulatory changes, government
intervention in the U.S. financial system, monetary and fiscal policies of the
federal government, changes in tax policies, tax rates and regulations of
federal, state and local tax authorities, changes in consumer preferences,
changes in interest rates, deposit flows, cost of funds, demand for loan
products, demand for financial services, competition, changes in the quality or
composition of the Company’s loan and investment portfolios, changes in
accounting principles, policies or guidelines, and other economic, competitive,
governmental, and technological factors affecting the Company’s operations,
markets, products, services and fees.





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


2
 Index


ITEM
1:  Interim Financial Statements (Unaudited)





TheWilber Corporation


Consolidated
Statements of Condition (Unaudited)





March
      31,
            
            
            December
      31,in
      thousands except share and per share data
            
            2010
            
            
            2009AssetsCash
      and Due from Banks
            
            $
            8,444
            
            
            $
            10,004Interest
      Bearing Balances with Banks
            
            
            25,278
            
            
            
            22,648Federal
      Funds Sold
            
            
            679
            
            
            
            1,391Total
      Cash and Cash Equivalents
            
            
            34,401
            
            
            
            34,043SecuritiesTrading,
      at Fair Value
            
            
            1,115
            
            
            
            1,165Available-for-Sale,
      at Fair Value
            
            
            219,065
            
            
            
            173,302Held-to-Maturity,
      Fair Value of $66,263 at March 31, 2010 and $70,147 at December 31,
      2009
            
            
            65,169
            
            
            
            69,391Other
      Investments
            
            
            5,887
            
            
            
            5,941Loans
      Held for Sale
            
            
            830
            
            
            
            576Loans
            
            
            576,929
            
            
            
            587,237Allowance
      for Loan Losses
            
            
            (8,862
            )
            
            
            (8,622
            )Loans,
      Net
            
            
            568,067
            
            
            
            578,615Premises
      and Equipment, Net
            
            
            5,847
            
            
            
            6,004Bank
      Owned Life Insurance
            
            
            17,145
            
            
            
            16,994Goodwill
            
            
            4,619
            
            
            
            4,619Pension
      Asset
            
            
            1,309
            
            
            
            1,247Other
      Assets
            
            
            14,573
            
            
            
            14,680Total
      Assets
            
            $
            938,027
            
            
            $
            906,577Liabilities
      and Shareholders’ EquityDeposits:Demand
            
            $
            69,968
            
            
            $
            70,437Savings,
      NOW and Money Market Deposit Accounts
            
            
            380,575
            
            
            
            365,908Certificates
      of Deposit (Over $100M)
            
            
            138,352
            
            
            
            125,418Certificates
      of Deposit (Under $100M)
            
            
            171,610
            
            
            
            165,278Other
      Deposits
            
            
            26,393
            
            
            
            26,699Total
      Deposits
            
            
            786,898
            
            
            
            753,740Short-Term
      Borrowings
            
            
            11,944
            
            
            
            12,650Long-Term
      Borrowings
            
            
            59,438
            
            
            
            60,627Other
      Liabilities
            
            
            5,413
            
            
            
            6,641Total
      Liabilities
            
            
            863,693
            
            
            
            833,658Shareholders’
      Equity:Common
      Stock, $.01 Par Value, 16,000,000 Shares Authorized, and 13,961,664 Shares
      Issued at March 31, 2010 and December 31, 2009
            
            
            140
            
            
            
            140Additional
      Paid in Capital
            
            
            4,224
            
            
            
            4,224Retained
      Earnings
            
            
            99,319
            
            
            
            98,222Accumulated
      Other Comprehensive Loss
            
            
            (2,696
            )
            
            
            (2,866
            )Treasury
      Stock at Cost, 3,253,024 Shares at March 31, 2010 and 3,273,555 Shares at
      December 31, 2009
            
            
            (26,634
            )
            
            
            (26,801
            )Restricted
      Stock, 3,186 Shares at March 31, 2010 and 0 Shares at December 31,
      2009
            
            
            (19
            )
            
            
            -Total
      Shareholders’ Equity
            
            
            74,334
            
            
            
            72,919Total
      Liabilities and Shareholders’ Equity
            
            $
            938,027
            
            
            $
            906,577





See
accompanying notes to consolidated financial statements.


3
 Index


The Wilber Corporation





Consolidated
      Statements of Income (Unaudited)
            
            Three
      Months EndedMarch
      31,in
      thousands except share and per share data
            
            2010
            
            
            2009Interest
      and Dividend IncomeInterest
      and Fees on Loans
            
            $
            8,460
            
            
            $
            8,896Interest
      and Dividends on Securities:U.S.
      Government and Agency Obligations
            
            
            1,988
            
            
            
            2,360State
      and Municipal Obligations
            
            
            465
            
            
            
            440Other
            
            
            59
            
            
            
            57Interest
      on Federal Funds Sold and Interest Bearing Balances at Other
      Banks
            
            
            19
            
            
            
            14Total
      Interest and Dividend Income
            
            
            10,991
            
            
            
            11,767Interest
      ExpenseInterest
      on Deposits:Savings,
      NOW and Money Market Deposit Accounts
            
            
            409
            
            
            
            956Certificates
      of Deposit (Over $100M)
            
            
            615
            
            
            
            1,024Certificates
      of Deposit (Under $100M)
            
            
            1,063
            
            
            
            1,667Other
      Deposits
            
            
            116
            
            
            
            126Interest
      on Short-Term Borrowings
            
            
            14
            
            
            
            38Interest
      on Long-Term Borrowings
            
            
            654
            
            
            
            664Total
      Interest Expense
            
            
            2,871
            
            
            
            4,475Net
      Interest Income
            
            
            8,120
            
            
            
            7,292Provision
      for Loan Losses
            
            
            800
            
            
            
            1,200Net
      Interest Income After Provision for Loan Losses
            
            
            7,320
            
            
            
            6,092Noninterest
      IncomeTrust
      Fees
            
            
            418
            
            
            
            324Service
      Charges on Deposit Accounts
            
            
            405
            
            
            
            413Investment
      Security Gains, Net
            
            
            627
            
            
            
            441Net
      Gain on Sale of Loans
            
            
            80
            
            
            
            55Increase
      in Cash Surrender Value of Bank Owned Life Insurance
            
            
            151
            
            
            
            147Other
      Service Fees
            
            
            180
            
            
            
            170Other
      Income
            
            
            94
            
            
            
            81Total
      Noninterest Income
            
            
            1,955
            
            
            
            1,631Noninterest
      ExpenseSalaries
            
            
            3,066
            
            
            
            2,731Employee
      Benefits
            
            
            819
            
            
            
            855Occupancy
      Expense of Company Premises
            
            
            546
            
            
            
            587Furniture
      and Equipment Expense
            
            
            237
            
            
            
            251Computer
      Service Fees
            
            
            416
            
            
            
            412Advertising
      and Marketing
            
            
            121
            
            
            
            156Professional
      Fees
            
            
            258
            
            
            
            281FDIC
      Premium Assessment
            
            
            446
            
            
            
            91Loan
      Collection Expense
            
            
            120
            
            
            
            73Other
      Miscellaneous Expenses
            
            
            794
            
            
            
            944Total
      Noninterest Expense
            
            
            6,823
            
            
            
            6,381Income
      Before Taxes
            
            
            2,452
            
            
            
            1,342Income
      Taxes
            
            
            (688
            )
            
            
            (269
            )Net
      Income
            
            $
            1,764
            
            
            $
            1,073Basic
      and Diluted Earnings Per Share
            
            $
            0.16
            
            
            $
            0.10





See
accompanying notes to consolidated financial statements.


4
 Index





The Wilber Corporation


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





Common
            
            
            Additional
              Paid
      in
            
            
            Retained
            
            
            Accumulated
              Other
              Comprehensive
            
            
            Treasury
            
            
            Restrictedin
      thousands except share and per share data
            
            Stock
            
            
            Capital
            
            
            Earnings
            
            
            Income
      (Loss)
            
            
            Stock
            
            
            Stock
            
            
            TotalBalance
      at December 31, 2008
            
            $
            140
            
            
            $
            4,224
            
            
            $
            93,966
            
            
            $
            (2,560
            )
            
            $
            (28,311
            )
            
            $
            -
            
            
            $
            67,459Comprehensive
      Income:Net
      Income
            
            
            -
            
            
            
            -
            
            
            
            1,073
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,073Change
      in Net Unrealized Gain on Securities, Net of Taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            454
            
            
            
            -
            
            
            
            -
            
            
            
            454Change
      in Net Actuarial Loss on Defined Benefit Plan, Net of
Taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            73
            
            
            
            -
            
            
            
            -
            
            
            
            73Total
      Comprehensive Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,600Cash
      Dividends ($.095 per share)
            
            
            -
            
            
            
            -
            
            
            
            (998
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (998
            )Balance
      at March 31, 2009
            
            $
            140
            
            
            $
            4,224
            
            
            $
            94,041
            
            
            $
            (2,033
            )
            
            $
            (28,311
            )
            
            $
            -
            
            
            $
            68,061Balance
      at December 31, 2009
            
            $
            140
            
            
            $
            4,224
            
            
            $
            98,222
            
            
            $
            (2,866
            )
            
            $
            (26,801
            )
            
            $
            -
            
            
            $
            72,919Comprehensive
      Income:Net
      Income
            
            
            -
            
            
            
            -
            
            
            
            1,764
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,764Change
      in Net Unrealized Gain on Securities, Net of Taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            119
            
            
            
            -
            
            
            
            -
            
            
            
            119Change
      in Net Actuarial Loss on Defined Benefit Plan, Net of
Taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            51
            
            
            
            -
            
            
            
            -
            
            
            
            51Total
      Comprehensive Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,934Cash
      Dividends ($.06 per share)
            
            
            -
            
            
            
            -
            
            
            
            (642
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (642
            )Sale
      of Treasury Stock under Dividend Reinvestment and Direct Stock Purchase
      Plan (17,345 shares)
            
            
            -
            
            
            
            -
            
            
            
            (20
            )
            
            
            -
            
            
            
            142
            
            
            
            -
            
            
            
            122Issuance
      of Restricted Stock (3,186 shares)
            
            
            -
            
            
            
            -
            
            
            
            (5
            )
            
            
            -
            
            
            
            25
            
            
            
            (20
            )
            
            
            -Amortization
      of Restricted Stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1
            
            
            
            1Balance
      at March 31, 2010
            
            $
            140
            
            
            $
            4,224
            
            
            $
            99,319
            
            
            $
            (2,696
            )
            
            $
            (26,634
            )
            
            $
            (19
            )
            
            $
            74,334


5
 Index





The Wilber Corporation





Consolidated
      Statements of Cash Flows (Unaudited)
            
            Three
      Months EndedMarch
      31,in
      thousands
            
            2010
            
            
            2009Cash
      Flows from Operating Activities:Net
      Income
            
            $
            1,764
            
            
            $
            1,073Adjustments
      to Reconcile Net Income to Net CashProvided
      by (Used in) Operating Activities:Provision
      for Loan Losses
            
            
            800
            
            
            
            1,200Depreciation
      and Amortization
            
            
            343
            
            
            
            430Net
      Amortization of Premiums and Accretion of Discounts on
      Investments
            
            
            236
            
            
            
            96Available-for-Sale
      Security Gains, net
            
            
            (590
            )
            
            
            (520
            )Other
      Real Estate (Gains) Losses
            
            
            (6
            )
            
            
            134Increase
      in Cash Surrender Value of Bank Owned Life Insurance
            
            
            (151
            )
            
            
            (147
            )Net
      Decrease in Trading Securities
            
            
            87
            
            
            
            109Net
      (Gains) Losses on Trading Securities
            
            
            (37
            )
            
            
            79Net
      Gain on Sale of Mortgage Loans
            
            
            (80
            )
            
            
            (55
            )Originations
      of Mortgage Loans Held for Sale
            
            
            (3,651
            )
            
            
            (2,797
            )Proceeds
      from Sale of Mortgage Loans Held for Sale
            
            
            3,477
            
            
            
            2,423Increase
      in Other Assets
            
            
            (89
            )
            
            
            (904
            )Decrease
      in Other Liabilities
            
            
            (1,228
            )
            
            
            (1,970
            )Net
      Cash Provided by (Used in) Operating Activities
            
            
            875
            
            
            
            (849
            )Cash
      Flows from Investing Activities:Proceeds
      from Maturities of Held-to-Maturity Investment Securities
            
            
            5,661
            
            
            
            1,373Proceeds
      from Maturities of Available-for-Sale Investment
Securities
            
            
            12,866
            
            
            
            12,405Proceeds
      from Sales and Calls of Available-for-Sale Investment
      Securities
            
            
            20,889
            
            
            
            16,559Purchases
      of Held-to Maturity Investment Securities
            
            
            (1,500
            )
            
            
            (5,657
            )Purchases
      of Available-for-Sale Investment Securities
            
            
            (78,909
            )
            
            
            (30,873
            )Net
      Decrease in Other Investments
            
            
            54
            
            
            
            27Net
      Decrease (Increase) in Loans
            
            
            9,616
            
            
            
            (16,819
            )Purchase
      of Premises and Equipment, Net of Disposals
            
            
            (53
            )
            
            
            (274
            )Proceeds
      from Sale of Other Real Estate
            
            
            116
            
            
            
            -Net
      Cash Used in Investing Activities
            
            
            (31,260
            )
            
            
            (23,259
            )Cash
      Flows from Financing Activities:Net
      Increase in Demand, Savings, NOW, Money Market and Other
      Deposits
            
            
            13,892
            
            
            
            57,037Net
      Increase (Decrease) in Certificates of Deposit
            
            
            19,266
            
            
            
            (21,968
            )Net
      Decrease in Short-Term Borrowings
            
            
            (706
            )
            
            
            (6,340
            )Repayment
      of Long-Term Borrowings
            
            
            (1,189
            )
            
            
            (1,111
            )Sale
      of Treasury Stock
            
            
            122
            
            
            
            -Cash
      Dividends Paid
            
            
            (642
            )
            
            
            (998
            )Net
      Cash Provided by Financing Activities
            
            
            30,743
            
            
            
            26,620Net
      Increase in Cash and Cash Equivalents
            
            
            358
            
            
            
            2,512Cash
      and Cash Equivalents at Beginning of Period
            
            
            34,043
            
            
            
            44,421Cash
      and Cash Equivalents at End of Period
            
            $
            34,401
            
            
            $
            46,933Supplemental
      Disclosures of Cash Flow Information:Cash
      Paid during Period for:Interest
            
            $
            2,897
            
            
            $
            4,679Income
      Taxes
            
            
            132
            
            
            
            684Non
      Cash Investing Activities:Change
      in Net Unrealized Gain on Securities, Net of Tax
            
            
            119
            
            
            
            454Transfer
      of Loans to Other Real Estate
            
            
            51
            
            
            
            22





See
accompanying notes to interim consolidated financial
statements.


6
 Index


The Wilber Corporation


Notes to
Unaudited Consolidated Interim Financial Statements





Note
1. Summary of Significant Accounting Policies





Basis of Presentation - The
accompanying unaudited consolidated interim financial statements include the
accounts of The Wilber Corporation (the “Company”) and its wholly owned
subsidiary 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.  Estimates that are particularly
susceptible to change in the near term are used in connection with the
determination of the allowance for loan losses.  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, 2009 was derived from the
Company's 2009 Annual Report on Form 10-K.  The Annual Report on Form
10-K includes the Company's audited consolidated statements of condition,
consolidated statements of income, consolidated statements of cash flows, and
consolidated statements of shareholders’ equity and comprehensive income as of
December 31, 2009 and 2008.  That data, along with the unaudited
interim financial information presented in the consolidated statements of
condition as of March 31, 2010, and the consolidated statements of income, the
consolidated statements of cash flows, and the consolidated statements of
changes in shareholders' equity and comprehensive income for the three months
ended March 31, 2010 and 2009, should be read in conjunction with the 2009
consolidated financial statements, including the notes thereto.





Restricted Stock Plan - In
2008 the Company’s shareholders established an Omnibus Incentive Plan (the
“Omnibus Plan”).  The Omnibus Plan permits the granting of cash-based
awards, restricted stock, restricted stock units, covered employee annual
incentive awards and other stock-based awards, other than stock options, for a
select group of management or highly compensated employees and directors of the
Company.  In connection with the Omnibus Plan, the Board approved
individual incentive plans for the President and Chief Executive Officer (“CEO”)
and the Executive Vice President (“EVP”) and Chief Financial Officer (“CFO”), to
be contingent upon the Company meeting certain performance goals.  As
a result of the 2009 performance goals being met, in January 2010, both the
President and CEO and the EVP and CFO were awarded restricted stock as part of
the Omnibus Plan. The restricted stock will become vested at a rate of twenty
five percent per year for the next four years. The related compensation expense
will be recognized over the four year vesting life and will be offset within the
shareholder equity account of the Company.  As a result of the
granting of these awards, in addition to reporting basic earnings per share
(“EPS”), the Company will report Diluted EPS, which reflects the potential
dilution that could occur assuming complete vesting of the restricted
stock.





The Board
expanded the Stock Incentive Plan in January 2010, to include the Senior Vice
Presidents and the Regional Presidents, who will be eligible for the benefits of
the Plan commencing in 2011, if the performance goals for 2010 are
met.





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


7
 Index


Note
1. Summary of Significant Accounting Policies, Continued





Recently Adopted Accounting
Pronouncements – On January 1, 2010, the Company adopted the provisions
of the Accounting Standards Codification (“ASC”) Topic 860-10-50, Transfers and
Servicing-Amounts in prior periods' consolidated financial statements are
reclassified when necessary to conform to the current period's
presentation.  Overall-Disclosures as
updated by Accounting Standards Update (“ASU”) 2009-16, Accounting for Transfers of
Financial Assets. The standard enhances the reporting for transfers of
financial assets, including securitization transactions.  It also
requires companies to report where they have continuing exposure to the risks
related to transferred financial assets and eliminates the concept of a
"qualifying special-purpose entity."  In addition, it changes the
requirements for derecognizing financial assets and requires additional
disclosures about all continuing involvements with transferred financial assets,
including information about gains and losses resulting from transfers during the
period.  This standard also requires additional year-end and interim
disclosures. The standard must be applied to transfers that occurred before and
after its effective date. The adoption of ASC Topic 860-10-50 had no impact on
the Company’s financial statements.





On
January 1, 2010, the Company adopted ASC topic 810-10-50, Consolidation-Overall-Disclosures
as amended by ASU 2009-17, Consolidation Improvements to
Financial Reporting by Enterprises Involved with Variable Interest
Entities, to change how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated.  The determination of whether a
company is required to consolidate an entity is based on, among other things, an
entity’s purpose and design and a company’s ability to direct the activities of
the entity that most significantly impact the entity’s economic
performance.  This standard also requires additional disclosures about
the reporting entity’s involvement with variable-interest entities and any
significant changes in risk exposure due to that involvement as well as its
effect on the entity’s financial statements.  The standard also
requires additional year-end and interim disclosures.  In February
2010, ASU 2010-10, Consolidation: Amendments for
Certain Investment Funds was issued which provides an indefinite deferral
of ASC topic 810-10 for certain entities.  Entities that meet the
criteria for deferral of consolidation guidance are still required to provide
disclosures required by the topic.  The update also clarifies how a
related party’s interests in an entity should be considered when evaluating the
criteria for determining whether a decision maker or service provider fee
represents a variable interest.  It clarifies that a quantitative
calculation should not be the only basis for evaluating whether a decision
maker’s or service provider’s fee is a variable interest. The adoption of ASC
Topic 810-10-50 had no impact on the Company’s financial
statements.





In
January 2010, a clarification ASU 2010-06, Fair Value and Disclosures, Improving
Disclosures about Fair Value Measurementswas issued for ASC topic
820-10-50, Fair Value
Measurements and Disclosures.   The amendments in ASU
2010-06 require companies to provide a separate disclosure for transfers in and
out of Levels 1 and 2, including a description of the reasons for the
transfer.  The amendments also require companies to report activity in
Level 3 fair value measurements on a gross basis, including information about
purchases, sales, issuances and settlements.  The amendments also
clarify existing disclosures related to disaggregated reporting, model inputs
and valuation techniques.  The new disclosures are effective for the
first quarter of 2010, except for the gross reporting of Level 3 activity, which
is effective beginning the first quarter of 2011. These amendments resulted in
additional disclosures in our interim and annual reports.





Subsequent Events–The Company
has evaluated whether any subsequent events that require recognition or
disclosure have taken place through the date these financial statements were
issued.  There were no subsequent events that materially affected
these Consolidated Financial Statements.


8
 Index


Note
2. Earnings Per Share





Basic
earnings per share are calculated by dividing net income available to common
shareholders by the weighted average number of common shares outstanding during
the period.  Diluted earnings per share includes the potential
dilutive effect that could occur upon the assumed exercise of restricted stock
awards.





The
following table sets forth the calculation of basic and diluted earnings per
share:


Three
      Months EndedMarch
      31,in
      thousands except share and per share data
            
            2010
            
            
            2009Basic
      Earnings Per ShareNet
      income applicable to common shareholders
            
            $
            1,764
            
            
            $
            1,073Weighted
      average common shares outstanding
            
            
            10,698,126
            
            
            
            10,503,704Basic
      earnings per share
            
            $
            0.16
            
            
            $
            0.10Diluted
      Earnings Per ShareNet
      income applicable to common shareholders
            
            $
            1,764
            
            
            $
            1,073Weighted
      average common shares outstanding
            
            
            10,698,126
            
            
            
            10,503,704Effect
      of assumed exercise of average restricted stock shares
            
            
            147
            
            
            
            -Diluted
      average common shares outstanding
            
            
            10,698,273
            
            
            
            10,503,704Diluted
      earnings per share
            
            $
            0.16
            
            
            $
            0.10




Note
3. Investment Securities





The
amortized cost and fair value of investment securities are shown in the table
below.  The trading securities are comprised of mutual funds and
individual equity and debt securities held for the Company's executive deferred
compensation plan.





March
      31, 2010in
      thousands
            
            Amortized
              Cost
            
            
            Gross
              Unrealized
              Gains
            
            
            Gross
              Unrealized
              Losses
            
            
            Estimated
              Fair
              ValueAvailable-for-Sale
      PortfolioObligations
      of States and Political Subdivisions
            
            $
            36,365
            
            
            $
            423
            
            
            $
            256
            
            
            $
            36,532Mortgage-Backed
      Securities
            
            
            181,253
            
            
            
            1,762
            
            
            
            574
            
            
            
            182,441Other
            
            
            92
            
            
            
            -
            
            
            
            -
            
            
            
            92$
            217,710
            
            
            $
            2,185
            
            
            $
            830
            
            
            $
            219,065Trading
      Portfolio
            
            $
            1,116
            
            
            $
            57
            
            
            $
            58
            
            
            $
            1,115Held-to-Maturity
      PortfolioObligations
      of States and Political Subdivisions
            
            $
            14,226
            
            
            $
            269
            
            
            $
            5
            
            
            $
            14,490Mortgage-Backed
      Securities
            
            
            50,943
            
            
            
            966
            
            
            
            136
            
            
            
            51,773$
            65,169
            
            
            $
            1,235
            
            
            $
            141
            
            
            $
            66,263


9
 Index


Note
3. Investment Securities, Continued





December
      31, 2009in
      thousands
            
            Amortized
              Cost
            
            
            Gross
              Unrealized
              Gains
            
            
            Gross
              Unrealized
              Losses
            
            
            Estimated
              Fair
              ValueAvailable-for-Sale
      PortfolioObligations
      of States and Political Subdivisions
            
            $
            32,872
            
            
            $
            496
            
            
            $
            412
            
            
            $
            32,956Mortgage-Backed
      Securities
            
            
            139,192
            
            
            
            1,800
            
            
            
            724
            
            
            
            140,268Other
            
            
            78
            
            
            
            -
            
            
            
            -
            
            
            
            78$
            172,142
            
            
            $
            2,296
            
            
            $
            1,136
            
            
            $
            173,302Trading
      Portfolio
            
            $
            1,194
            
            
            $
            55
            
            
            $
            84
            
            
            $
            1,165Held-to-Maturity
      PortfolioObligations
      of States and Political Subdivisions
            
            $
            14,407
            
            
            $
            277
            
            
            $
            6
            
            
            $
            14,678Mortgage-Backed
      Securities
            
            
            54,984
            
            
            
            832
            
            
            
            347
            
            
            
            55,469$
            69,391
            
            
            $
            1,109
            
            
            $
            353
            
            
            $
            70,147





The
following tables provide information on temporarily impaired
securities:





March
      31, 2010Less Than 12 Months
            
            
            12 Months or Longer
            
            
            Totalin
      thousands
            
            Estimated
              Fair Value
            
            
            Unrealized
              Losses
            
            
            Estimated
              Fair Value
            
            
            Unrealized
              Losses
            
            
            Estimated
              Fair Value
            
            
            Unrealized
              LossesObligations
      of States and Political Subdivisions
            
            $
            15,164
            
            
            $
            256
            
            
            $
            130
            
            
            $
            5
            
            
            $
            15,294
            
            
            $
            261Mortgage-Backed
      Securities
            
            
            67,053
            
            
            
            710
            
            
            
            -
            
            
            
            -
            
            
            
            67,053
            
            
            
            710$
            82,217
            
            
            $
            966
            
            
            $
            130
            
            
            $
            5
            
            
            $
            82,347
            
            
            $
            971





December
      31, 2009Less Than 12 Months
            
            
            12 Months or Longer
            
            
            Totalin
      thousands
            
            Estimated
              Fair
      Value
            
            
            Unrealized
              Losses
            
            
            Estimated
              Fair
      Value
            
            
            Unrealized
              Losses
            
            
            Estimated
              Fair
      Value
            
            
            Unrealized
              LossesObligations
      of States and Political Subdivisions
            
            $
            10,567
            
            
            $
            415
            
            
            $
            67
            
            
            $
            3
            
            
            $
            10,634
            
            
            $
            418Mortgage-Backed
      Securities
            
            
            73,663
            
            
            
            1,027
            
            
            
            1,422
            
            
            
            44
            
            
            
            75,085
            
            
            
            1,071$
            84,230
            
            
            $
            1,442
            
            
            $
            1,489
            
            
            $
            47
            
            
            $
            85,719
            
            
            $
            1,489





The above
unrealized losses are considered temporary, based on the following:





Obligations
of states and political subdivisions: The unrealized losses on these investments
were caused by market interest rate increases since the time of
purchase.  The contractual terms of these investments require the
issuer to settle the securities at par upon maturity of the
investment.  Because the decline in fair value is attributed to market
interest rates and not credit quality, and because the Company has the ability
and intent to hold these investments until a market price recovery, which may be
to maturity, these investments are not considered other than temporarily
impaired.





Mortgage-backed
securities:  The unrealized losses on investments in mortgage-backed
securities were caused by market interest rate differences between the time of
purchase and the measurement date.  All of the contractual cash flows
of these securities are rated AAA or backed by various U.S. Government Agencies
or U.S. Government Sponsored Enterprises such as Government National Mortgage
Association, Federal National Mortgage Association and Federal Home Loan
Mortgage Corporation.  Because the decline in fair value is attributed
to market interest rates and not credit quality, and because the Company does
not intend to sell these investments, they are not considered other than
temporarily impaired.


10
 Index


Note
3. Investment Securities, Continued





The
amortized cost and fair value of debt securities by contractual maturity are
shown below.  Expected maturities will differ from contractual
maturities because issuers may have the right to call or prepay obligations with
or without call or prepayment penalties.  Although principal payments
on mortgage-backed securities are received monthly, they are included based on
the final contractual maturity date, while equity securities have no stated
maturity and are excluded from the following tables.





March
      31, 2010in
      thousands
            
            Amortized
              Cost
            
            
            Estimated
              Fair
      ValueAvailable-for-Sale
      SecuritiesDue
      in One Year or Less
            
            $
            9,313
            
            
            $
            9,398Due
      After One Year Through Five Years
            
            
            12,513
            
            
            
            12,870Due
      After Five Years Through Ten Years
            
            
            16,817
            
            
            
            16,977Due
      After Ten Years
            
            
            178,975
            
            
            
            179,728$
            217,618
            
            
            $
            218,973





March
      31, 2010in
      thousands
            
            Amortized
              Cost
            
            
            Estimated
              Fair
      ValueHeld-to-Maturity
      SecuritiesDue
      in One Year or Less
            
            $
            7,465
            
            
            $
            7,560Due
      After One Year Through Five Years
            
            
            7,434
            
            
            
            7,743Due
      After Five Years Through Ten Years
            
            
            14,470
            
            
            
            15,054Due
      After Ten Years
            
            
            35,800
            
            
            
            35,906$
            65,169
            
            
            $
            66,263





Proceeds
from sales and calls of available-for sale investment securities were $20.889
million and $16.559 million for the three months ended March 31, 2010 and 2009,
respectively.





The
following table sets forth information with regard to securities gains and
losses realized on sales or calls of available-for-sale and held-to-maturity
securities:





Three
      Months EndedMarch
      31,in
      thousands
            
            2010
            
            
            2009Gross
      Gains
            
            $
            590
            
            
            $
            520Gross
      Losses
            
            
            -
            
            
            
            -Net
      Securities Gains
            
            $
            590
            
            
            $
            520





Federal
Home Loan Bank of New York ("FHLBNY") and Federal Reserve Bank stock totaling
$3.985 million at March 31, 2010 and $4.039 million at December 31, 2009 is
carried at cost as fair values are not readily determinable.  Both
investments are classified in other investments on the Company's consolidated
statements of condition and are required for membership.  The FHLBNY
common stock we own enables us to borrow funds under the FHLBNY advance program
and qualify for membership.  As a member of the FHLBNY, the Company is
required to hold shares of Federal Home Loan Bank stock. The Company’s holding
requirement varies based on its activities, primarily its outstanding
borrowings, with the FHLBNY.  The Company’s investment in FHLBNY stock
is carried at cost.  The Company conducts a periodic review and
evaluation of its Federal Home Loan Bank stock to determine if any impairment
exists. The factors considered include, among other things, significant
deterioration in earnings performance, credit rating, asset quality; significant
adverse change in the regulatory or economic environment; and other factors that
raise significant concerns about the ability for a Federal Home Loan Bank to
continue as a going concern.





At March
31, 2010, investment securities with an amortized cost of $237.918 million and
an estimated fair value of $240.506 million were pledged as collateral for
certain public deposits, borrowings, and other purposes as required or permitted
by law.


11
 Index


Note
4. Guarantees





Standby
letters of credit written are conditional commitments issued by the Company 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 standby 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 standby letters of credit was $12 thousand
and $16 thousand at March 31, 2010 and December 31, 2009,
respectively.  The estimated fair value of standby letters of credit
at their inception is equal to the fee that is charged to the customer by the
Company.  Generally, the Company’s standby 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 standby
letter of credit to the respective dates above.




Note
5. Employee Benefit Plans





The
Company's defined benefit pension plan has been frozen since February
2006.  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. The funded status
of the Company’s defined benefit pension plan has and will continue to be
affected by market conditions.  We expect to continue to fund this
plan on an as needed basis and do not foresee any issues or conditions that
could negatively impact the payment of benefit obligations to plan
participants.  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
Company also provides a split-dollar life insurance plan to former members of
senior management.  The Company is required to recognize the post
retirement aspects of an endorsement-type split-dollar life insurance
arrangement as a liability.  The benefit obligation is re-evaluated
annually and is recorded as a change to the Company's liability with an
offsetting amount recorded in other comprehensive income.  The cost of
insurance is recognized through the income statement.





The
components of net periodic benefit expense for pension and split-dollar life
insurance plan are:





Split-Dollar
      LifePension
      Benefit
            
            
            Insurance
      BenefitThree
      Months Ended
            
            
            Three
      Months EndedMarch
      31,
            
            
            March
      31,in
      thousands
            
            2010
            
            
            2009
            
            
            2010
            
            
            2009Service
      Cost
            
            $
            32
            
            
            $
            38
            
            
            $
            -
            
            
            $
            6Interest
      Cost
            
            
            239
            
            
            
            240
            
            
            
            14
            
            
            
            26Cost
      of Insurance Payments
            
            
            -
            
            
            
            -
            
            
            
            (13
            )
            
            
            (11
            )Expected
      Return on Plan Assets
            
            
            (334
            )
            
            
            (279
            )
            
            
            -
            
            
            
            -Net
      Amortization
            
            
            82
            
            
            
            118
            
            
            
            -
            
            
            
            -$
            19
            
            
            $
            117
            
            
            $
            1
            
            
            $
            21





For the
three months ended March 31, 2010, the Company recorded $51 thousand, net of
tax, as amortization of pension amounts previously recognized in accumulated
other comprehensive income.


12
 Index


Note
6. Other Comprehensive Income





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





Three
      Months EndedMarch
      31,in
      thousands
            
            2010
            
            
            2009Unrealized
      Holding Gains Arising During the Period, Net of Tax (Pre-tax Amount of
      $784 and $1,261)
            
            $
            481
            
            
            $
            773Reclassification
      Adjustment for Gains Realized in Net IncomeDuring
      the Period, Net of Tax (Pre-tax Amount of $590 and $520)
            
            
            (362
            )
            
            
            (319
            )Change
      in Pension Asset (Pre-tax Amount of $82 and $118)
            
            
            51
            
            
            
            73Other
      Comprehensive Income
            
            $
            170
            
            
            $
            527





Note
7. Disclosures about Fair Value of Financial Instruments





The
following are the major categories of assets measured at fair value on a
recurring basis at March 31, 2010 using quoted prices in active markets for
identical assets (Level 1), significant other observable inputs (Level 2), and
significant unobservable inputs (Level 3).





in
      thousands
            
            Level
      1
              Quoted
              Prices
      in
              Active
      Markets
              for
      Identical
              Assets
            
            
            Level
      2
              Significant
              Other
              Observable
              Inputs
            
            
            Level
      3
              Significant
              Unobservable
              Inputs
            
            
            Total
      at
              March
      31,
              2010DescriptionTrading
      securitiesCash
      and equivalents
            
            $
            90
            
            
            
            
            
            
            
            
            $
            90Fixed
      income securities
            
            
            284
            
            
            
            
            
            
            
            
            
            284Equity
      securities
            
            
            741
            
            
            
            
            
            
            
            
            
            741Total
      trading securities
            
            $
            1,115
            
            
            
            
            
            
            
            
            $
            1,115Available-for-sale
      debt securitiesObligations
      of states and political subdivisions
            
            
            
            
            
            $
            36,532
            
            
            
            
            
            $
            36,532Mortgage-backed
      securities
            
            
            
            
            
            
            182,441
            
            
            
            
            
            
            182,441Total
      available-for-sale debt securities
            
            $
            -
            
            
            $
            218,973
            
            
            $
            -
            
            
            $
            218,973Available-for-sale
      equity securitiesFinancial
      services industry
            
            
            
            
            
            $
            50
            
            
            
            
            
            
            $
            50Other
            
            $
            42
            
            
            
            
            
            
            
            
            
            
            
            42Total
      available-for-sale equity securities
            
            $
            42
            
            
            $
            50
            
            
            $
            -
            
            
            $
            92





Price
evaluations for our level 1 trading securities portfolio, consisting of mutual
funds and individual equity and debt securities held by the Company’s executive
deferred compensation plan, are obtained from national exchanges and active
secondary markets.


13
 Index


Note
7. Disclosures about Fair Value of Financial Instruments, Continued





Price
evaluations for our level 2 available-for-sale debt securities are good faith
opinions as to what a buyer in the marketplace would pay for a security
(typically in an institutional round lot position) in a current
sale.  The evaluation considers interest rate movements, new issue
information, and other pertinent data.  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 that
employs the Securities Industry and Financial Markets Association standard
calculations for cash flow and price/yield analysis, or live benchmark bond
pricing, or terms/conditions data available from major pricing
sources.





The
Company's single level 2 available-for-sale equity security is in a thinly
traded market comprised of banks.  The price evaluation for this
equity security represents an opinion within this market as to what a buyer
would pay for this security.





The
Company reported no significant transfers in and out of Levels 1 and 2 during
the first quarter of 2010.





Disclosure
is required of assets and liabilities measured and recorded at fair value on a
non-recurring basis.  For the Company, these include loans held for
sale, collateral dependent impaired loans, other real estate owned, goodwill and
other intangible assets.  In accordance with accounting by creditors
for impairment of a loan, the Company had collateral-dependent impaired loans
with a carrying value of approximately $15.880 million, which had specific
reserves included in the allowance for loan and lease losses of $526 thousand at
March 31, 2010.  The Company uses the fair value of underlying
collateral to estimate the specific reserves for collateral-dependent impaired
loans.  Based on the valuation techniques used, the fair value
measurements for collateral-dependent impaired loans are classified as Level
3.





The
Company currently has eight properties recorded as other real estate
owned.  Seven of these properties were the result of debts previously
contracted and are carried at a cost of $1.594 million, as it is lower than
market value.  The eighth property was the result of land previously
purchased with the intent of development for branch operations, but development
was later halted with the Company deciding to sell the property.  The
following table reports the fair value of this property as of March 31,
2010:





Level
      1
              Quoted
              Prices
      in
              Active
      Markets
              for
      Identical
            
            
            Level
      2
              Significant
              Other
              Observable
            
            
            Level
      3
              Significant
              Unobservable
            
            
            Total
      at
              March
      31,in
      thousands
            
            Assets
            
            
            Inputs
            
            
            Inputs
            
            
            2010Other
      Real Estate Owned
            
            $
            -
            
            
            $
            277
            
            
            $
            -
            
            
            $
            277





Disclosure
is required of fair value information about financial instruments, whether or
not recognized in the consolidated statement of condition, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and in many cases, could not be realized in
immediate settlement of the instruments. Certain financial instruments and all
nonfinancial instruments are excluded from disclosure requirements. Accordingly,
the aggregate fair value amounts presented do not represent the underlying value
of the Bank.





The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments:


14
 Index





Note
7. Disclosures about Fair Value of Financial Instruments, Continued





Short-Term
Financial Instruments


The fair
value of certain financial instruments is estimated to approximate their
carrying value because the remaining term to maturity of the financial
instrument is less than 90 days or the financial instrument reprices in 90 days
or less. Such financial instruments include cash and due from banks, Federal
Funds sold, accrued interest receivable and accrued interest
payable.





The fair
value of time deposits with other banks is estimated using discounted cash flow
analysis based on the Company's current reinvestment rate for similar
deposits.





Securities


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 that employs the Securities Industry and Financial Markets
Association standard calculations for cash flow and price/yield analysis, or
live benchmark bond pricing, or terms/conditions data available from major
pricing sources.  The fair value of other investments is estimated at
their carrying value.





Loans
Held for Sale


The fair
value of loans held for sale approximates the carrying value.





Loans


The fair
value of loans is estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.





Deposits


The fair
value of demand deposits, savings accounts, and certain NOW and money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity time deposits is estimated using the rates currently offered
for deposits of similar remaining maturities.





Borrowings


The fair
value of repurchase agreements, short-term borrowings, and long-term borrowings
is estimated using discounted cash flow analysis based on the Company's current
incremental borrowing rate for similar borrowing arrangements.





Off-Balance
Sheet Instruments


The fair
value of outstanding loan commitments and standby letters of credit are based on
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements, the counter parties' credit standing and
discounted cash flow analysis. The fair value of these instruments approximates
the value of the related fees and is not material.


15
 Index


Note
7. Disclosures about Fair Value of Financial Instruments, Continued





The
carrying values and estimated fair values of the Company’s financial instruments
are as follows:





March
      31, 2010
            
            
            December
      31, 2009dollars
      in thousands
            
            Carrying
              Value
            
            
            Fair
              Value
            
            
            Carrying
              Value
            
            
            Fair
              ValueFinancial
      Assets:Cash
      and Cash Equivalents
            
            $
            34,401
            
            
            $
            34,401
            
            
            $
            34,043
            
            
            $
            34,043Trading
      Securities
            
            
            1,115
            
            
            
            1,115
            
            
            
            1,165
            
            
            
            1,165Available-for-Sale
            
            
            219,065
            
            
            
            219,065
            
            
            
            173,302
            
            
            
            173,302Held-to-Maturity
            
            
            65,169
            
            
            
            66,263
            
            
            
            69,391
            
            
            
            70,147Other
      Investments
            
            
            5,887
            
            
            
            5,887
            
            
            
            5,941
            
            
            
            5,941Securities
            
            
            291,236
            
            
            
            292,330
            
            
            
            249,799
            
            
            
            250,555Loans
      Held for Sale
            
            
            830
            
            
            
            830
            
            
            
            576
            
            
            
            576Residential
      real estate1
            
            
            176,880
            
            
            
            177,643
            
            
            
            177,720
            
            
            
            178,241Commercial
      real estate
            
            
            239,009
            
            
            
            240,040
            
            
            
            240,823
            
            
            
            241,530Commercial
      2
            
            
            92,201
            
            
            
            92,599
            
            
            
            93,928
            
            
            
            94,204Consumer
            
            
            68,839
            
            
            
            69,136
            
            
            
            74,766
            
            
            
            74,985Loans
            
            
            576,929
            
            
            
            579,417
            
            
            
            587,237
            
            
            
            588,960Allowance
      for Loan Losses
            
            
            (8,862
            )
            
            
            (8,862
            )
            
            
            (8,622
            )
            
            
            (8,622
            )Net
      Loans
            
            
            568,067
            
            
            
            570,555
            
            
            
            578,615
            
            
            
            580,338Accrued
      Interest Receivable
            
            
            3,312
            
            
            
            3,312
            
            
            
            3,007
            
            
            
            3,007Financial
      Liabilities:Demand
            
            $
            69,968
            
            
            $
            69,968
            
            
            $
            70,437
            
            
            $
            70,437Savings,
      NOW and Money Market Deposit Accounts
            
            
            380,575
            
            
            
            380,575
            
            
            
            365,908
            
            
            
            365,908Certificates
      of Deposit
            
            
            309,962
            
            
            
            318,287
            
            
            
            290,696
            
            
            
            299,886Other
      Deposits
            
            
            26,393
            
            
            
            26,393
            
            
            
            26,699
            
            
            
            26,699Borrowings
            
            
            71,382
            
            
            
            73,492
            
            
            
            73,277
            
            
            
            75,462Accrued
      Interest Payable
            
            
            756
            
            
            
            756
            
            
            
            782
            
            
            
            782





1
              Includes
      loans secured by 1-4 family residential dwellings, 5+ family residential
      dwellings, home equity loans and residential construction loans. 
      Excludes residential mortgage loans held for
  sale.


2
              Includes
      commercial and industrial loans, agricultural loans and obligations (other
      than securities and leases) of states and political subdivisions in the
      United States





Note
8. Stock Plans and Stock Based Compensation





The
Company awarded 3,186 restricted stock awards during the first quarter 2010,
with a grant date fair value of $6.59, which was the closing price of the
Company's common stock on the grant date.  Prior to 2010 there were no
restricted stock awards.  During the first quarter of
2010,  the Company recognized stock-based compensation related to
these restricted stock awards of $1 thousand, and unrecognized compensation
costs totaling $19 thousand will be recognized over four years.


16
 Index


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





A. General





The
primary objective of this quarterly report is to provide: (i) an overview of the
material changes in our financial condition, including liquidity and capital
resources, at March 31, 2010 as compared to December 31, 2009 and (ii) a
comparison of our results of operations for the three-month period ended March
31, 2010, as compared to the three-month period ended March 31,
2009.





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, noninterest income, noninterest expense and
taxes.  Noninterest income includes trust fees, service charges on
deposit accounts, net investment securities gains, the net gain on sale of
loans, increase in the cash surrender value on bank owned life insurance, other
service fees, and other income.  Noninterest expense consists of
salaries, employee benefits, occupancy expense, furniture and equipment expense,
computer service fees, advertising and marketing expense, professional fees,
FDIC premium assessment, loan collection expense and other miscellaneous
expenses.  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.
Management of the Company 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
current evaluation of the allowance for loan losses indicates that the allowance
is adequate, under adversely different conditions or assumptions, the allowance
would need to be increased.  For example, if loan loss experience
significantly worsened from historical levels or if current economic conditions
deteriorated further, additional provisions for loan losses would be required to
increase the allowance for loan losses.  In addition, the assumptions
and estimates used in the internal reviews of the Company’s nonperforming loans
and potential problem loans have a significant impact on the overall analysis of
the adequacy of the allowance for loan losses.  While management has
concluded that the evaluation of collateral values was reasonable under the
circumstances for each of the reported periods, if collateral valuations were
significantly lowered, the Company’s allowance for loan losses would also
require an additional provision for loan losses.





Recently Issued Accounting
Pronouncements Not Yet Adopted.  In January 2010 FASB issued a
clarification and amendment to its accounting standard regarding disclosure of
assets and liabilities measured at fair value.  The amendment required
companies to provide a separate disclosure for transfers in and out of Levels 1
and 2, including a description of the reasons for the transfer.  Level
1 assets and liabilities are those in which the fair value is based upon quoted
prices in active markets for identical instruments.  Level 2 assets
and liabilities are those in which the fair value is determined by significant
other observable inputs, such as good faith opinions as to what a buyer in the
marketplace would pay for a security (typically in an institutional round lot
position) in a current sale.  The clarification and amendment also
required companies to report activity in Level 3 fair value measurements on a
gross basis, including information about purchases, sales, issuances and
settlements.  Level 3 assets and liabilities are those in which the
fair value is based on significant unobservable inputs, such as management’s
involvement in valuing collateral dependent impaired loans or developing
assumptions about future cash flows when valuing financial
instruments.  The amendments also clarify existing disclosures related
to disaggregated reporting, model inputs and valuation
techniques.  The new disclosures were effective for the first quarter
of 2010, except for the gross reporting of Level 3 activity, which is effective
beginning the first quarter of 2011.  The Level 1 and Level 2 related
amendments were implemented effective the first quarter of 2010 during which
time the Company reported no significant transfers in and out of levels 1 and
2.  We will evaluate the Level 3 related amendment upon its
implementation during the first quarter of 2011.





B. Financial Condition and Performance Overview





Total
assets increased from $906.577 million at December 31, 2009 to $938.027 million
at March 31, 2010, a $31.450 million or 3.5% increase between the
periods.  The increase in total assets was funded principally by an
increase in customer deposits, in particular, interest bearing deposits from our
municipal customers and certificates of deposit.  These additional
funds were primarily invested in the available-for-sale investment securities
portfolio during the period.  Total loans, conversely, decreased from
$587.237


17
 Index


million
at December 31, 2009 to $576.929 million at March 31, 2010.  During
the second half of 2009, we curtailed some of our lending activities,
particularly our commercial real estate secured and consumer lending activities,
to reduce the Company’s overall risk profile given the weakened state of the
regional and national economies.  During the first quarter of 2010
this trend continued, resulting in a $10.308 million or 1.8% decrease in loans
outstanding.





Our
liquidity position improved between December 31, 2009 and March 31, 2010 due to
a significant growth in deposit liabilities, the curtailment of certain types of
lending activities and an increased level of liquid available-for-sale
investment securities.





Between
December 31, 2009 and March 31, 2010 most of our loan quality metrics
worsened.  The amount of nonperforming loans, impaired loans and
potential problem loans increased during the period.  Conversely, the
amount of delinquent loans (those 30 to 89 days past due, excluding
nonperforming loans) decreased modestly.  Generally weaker loan
quality metrics coupled with a weak economic climate, required us to increase
the allowance for loan losses during the first quarter of 2010.  The
allowance for loan losses was $8.862 million or 1.54% of total loans at March
31, 2010, as compared to $8.622 million or 1.47% of total loans at December 31,
2009.  In addition, net charge-offs totaled $560 thousand or 0.39%,
annualized of average loans outstanding during the first quarter of 2010, as
compared to $273 thousand or 0.19%, annualized in the first quarter of
2009.





We
recorded net income and earnings per share of $1.764 million and $0.16,
respectively, for the three-month period ended March 31, 2010.  This
compares to net income and earnings per share of $1.073 million and $0.10,
respectively, for the quarterly period ended March 31, 2009. The $691 thousand
increase in net income and $0.06 increase in earnings per share between
comparable quarterly periods were attributable to a few primary factors, namely
increases in net interest income and noninterest income, a reduction in the
provision for loan losses, offset, in part, by increases in noninterest expense
and taxes.





Our
return on average assets and return on average equity were 0.77% and 9.68%
during the first quarter of 2010, as compared to, 0.46% and 6.44% during the
first quarter of 2009, respectively.





Our first
quarter 2010 dividend payout ratio was 38%.  We declared and paid a
$0.06 dividend per share during the quarter, while recording earnings per share
of $0.16.  This compares to a 95% dividend payout ratio during the
first quarter of 2009, when we declared and paid a $0.095 dividend per share and
recorded $0.10 in earnings per share.  Due to the need to preserve the
Company’s capital resources, particularly in these difficult economic times, the
Company’s Board of Directors decreased its quarterly dividend payment by $0.035
per share during the second quarter of 2009.





The
following tables set forth in this quarterly financial report provide readers
with supplementary information that 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.


18
 Index


Asset and
Yield Summary Table:





The
following tables set forth the total dollar amount and resultant yields of
interest income from average earning assets, as well as the interest expense on
average interest bearing liabilities for the periods stated.  Average
balances are daily averages.





For
      the Three Months Ended March 31,2010
            
            
            2009Average
              Outstanding
              Balance
            
            
            Interest
              Earned
      /Paid
            
            
            Yield
      / Rate
            
            
            Average
              Outstanding
              Balance
            
            
            Interest
              Earned
      /Paid
            
            
            Yield
      / Rate(in
      thousands)Earning
      Assets:Federal
      funds sold
            
            $
            1,044
            
            
            $
            -
            
            
            
            0.00
            %
            
            $
            441
            
            
            $
            -
            
            
            
            0.00
            %Interest
      bearing deposits
            
            
            39,999
            
            
            
            19
            
            
            
            0.19
            %
            
            
            34,621
            
            
            
            14
            
            
            
            0.16
            %Securities
      1
            
            
            261,601
            
            
            
            2,512
            
            
            
            3.89
            %
            
            
            269,342
            
            
            
            2,857
            
            
            
            4.30
            %Loans
      2
            
            
            583,547
            
            
            
            8,460
            
            
            
            5.88
            %
            
            
            594,135
            
            
            
            8,896
            
            
            
            6.07
            %Total
      earning assets
            
            
            886,191
            
            
            
            10,991
            
            
            
            5.03
            %
            
            
            898,539
            
            
            
            11,767
            
            
            
            5.31
            %Nonearning
      assets
            
            
            43,949
            
            
            
            
            
            
            
            
            
            
            
            37,606Total
      assets
            
            $
            930,140
            
            
            
            
            
            
            
            
            
            
            $
            936,145Liabilities:Savings
      accounts
            
            $
            72,110
            
            
            $
            45
            
            
            
            0.25
            %
            
            $
            67,899
            
            
            $
            64
            
            
            
            0.38
            %Money
      market accounts
            
            
            179,909
            
            
            
            213
            
            
            
            0.48
            %
            
            
            181,824
            
            
            
            665
            
            
            
            1.48
            %NOW
      accounts
            
            
            128,100
            
            
            
            151
            
            
            
            0.48
            %
            
            
            102,502
            
            
            
            227
            
            
            
            0.90
            %Time
      & other deposit accounts
            
            
            327,772
            
            
            
            1,794
            
            
            
            2.22
            %
            
            
            359,308
            
            
            
            2,817
            
            
            
            3.18
            %Borrowings
            
            
            73,536
            
            
            
            668
            
            
            
            3.68
            %
            
            
            79,142
            
            
            
            702
            
            
            
            3.60
            %Total
      interest bearing liabilities
            
            
            781,427
            
            
            
            2,871
            
            
            
            1.49
            %
            
            
            790,675
            
            
            
            4,475
            
            
            
            2.30
            %Noninterest
      bearing deposits
            
            
            68,755
            
            
            
            
            
            
            
            
            
            
            
            68,285Other
      noninterest bearing liabilities
            
            
            6,072
            
            
            
            
            
            
            
            
            
            
            
            9,595Total
      liabilities
            
            
            856,254
            
            
            
            
            
            
            
            
            
            
            
            868,555Shareholders'
      equity
            
            
            73,886
            
            
            
            
            
            
            
            
            
            
            
            67,590Total
      liabilities and shareholders' equity
            
            $
            930,140
            
            
            
            
            
            
            
            
            
            
            $
            936,145Net
      interest income
            
            
            
            
            
            $
            8,120
            
            
            
            
            
            
            
            
            
            
            $
            7,292Net
      interest rate spread 3
            
            
            
            
            
            
            
            
            
            
            3.54
            %
            
            
            
            
            
            
            
            
            
            
            3.01
            %Net
      earning assets
            
            $
            104,764
            
            
            
            
            
            
            
            
            
            
            $
            107,864Net
      interest margin 4
            
            
            
            
            
            
            
            
            
            
            3.72
            %
            
            
            
            
            
            
            
            
            
            
            3.29
            %Net
      interest margin (tax-equivalent)
            
            
            
            
            
            
            
            
            
            
            3.90
            %
            
            
            
            
            
            
            
            
            
            
            3.46
            %Ratio
      of earning assets to interest bearing liabilities
            
            
            113.41
            %
            
            
            
            
            
            
            
            
            
            
            113.64
            %





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 nonearning assets.


2
            Average
      loans includes loans held for sale, net deferred loan fees and costs,
      nonaccrual 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.


19
 Index


Table of
Nonperforming Assets:





The
following table sets forth information regarding nonperforming loans and assets
as of the periods indicated:





At
      March 31,
              2010
            
            
            At
      December 31, 2009(in
      thousands)Loans
      in nonaccrual status:Residential
      real estate1
            
            $
            994
            
            
            $
            702Commercial
      real estate
            
            
            10,510
            
            
            
            9,843Commercial
      2
            
            
            1,514
            
            
            
            1,568Consumer
            
            
            39
            
            
            
            36Total
      nonaccruing loans
            
            
            13,057
            
            
            
            12,149Loans
      contractually past due 90 days or more and still accruing
      interest
            
            
            961
            
            
            
            731Troubled
      debt restructured loans
            
            
            -
            
            
            
            -Total
      nonperforming loans
            
            
            14,018
            
            
            
            12,880Other
      real estate owned3
            
            
            1,595
            
            
            
            1,684Total
      nonperforming assets
            
            $
            15,613
            
            
            $
            14,564Total
      nonperforming assets as a percentage of total assets
            
            
            1.66
            %
            
            
            1.61
            %Total
      nonperforming loans as a percentage of total loans
            
            
            2.43
            %
            
            
            2.19
            %





1
            Includes
      loans secured by 1-4 family residential dwellings, 5+ family residential
      dwellings, home equity loans and residential construction
      loans.  Excludes residential mortgage loans held for
      sale.


2
            Includes
      commercial and industrial loans, agricultural loans and obligations (other
      than securities and leases) of states and political subdivisions in the
      United States


3
            Includes
      only properties and assets acquired through in-substance foreclosure,
      voluntary deed transfer, legal foreclosure or similar
      proceedings.  Excludes properties acquired by the Company for
      its own development.


20
 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
              March
      31,2010
            
            
            2009(in
      thousands)Balance
      at beginning of period
            
            $
            8,622
            
            
            $
            7,564Charge
      offs:Residential
      real estate
            
            
            136
            
            
            
            -Commercial
      real estate
            
            
            104
            
            
            
            -Commercial
            
            
            93
            
            
            
            32Consumer
            
            
            428
            
            
            
            400Total
      charge offs
            
            
            761
            
            
            
            432Recoveries:Residential
      real estate
            
            
            -
            
            
            
            -Commercial
      real estate
            
            
            -
            
            
            
            -Commercial
            
            
            21
            
            
            
            6Consumer
            
            
            180
            
            
            
            153Total
      recoveries
            
            
            201
            
            
            
            159Net
      charge-offs
            
            
            560
            
            
            
            273Provision
      for loan losses
            
            
            800
            
            
            
            1,200Balance
      at end of period
            
            $
            8,862
            
            
            $
            8,491Ratio
      of net charge-offs during the period to average loans outstanding during
      the period (annualized)
            
            
            0.39
            %
            
            
            0.19
            %Allowance
      for loan losses to total loans
            
            
            1.54
            %
            
            
            1.41
            %Allowance
      for loan losses to nonperforming loans
            
            
            63
            %
            
            
            118
            %


21
 Index


C. Comparison of Financial Condition at March 31, 2010 and December
31, 2009





Overview.  Total
assets increased from $906.577 million at December 31, 2009 to $938.027 million
at March 31, 2010, a $31.450 million or 3.5% increase between the
periods.  The net increase in total assets included a $45.763 million
or 26.4% increase in available-for-sale investment securities
outstanding.  Total loans, conversely, decreased from $587.237 million
at December 31, 2009 to $576.929 million at March 31, 2010.  During
the first quarter of 2010, we curtailed our lending activities in connection
with our plan to mitigate credit risk and increase our regulatory capital
levels.  The $10.308 million or 1.8% decrease in total loans during
the first quarter of 2010 was due to the implementation of these
strategies.





At March
31, 2010, we maintained a strong shareholders’ equity
position.  Shareholders’ equity totaled $74.334 million or 7.92% of
total assets.  This compares to $72.919 million or 8.04% of total
assets at December 31, 2009.  In addition, both the Company and the
Bank maintained regulatory capital ratios at March 31, 2010 that significantly
exceed required minimum standards.





At March
31, 2010 our liquidity position was strong.  We maintained total cash
and cash equivalents of $34.401 million or 3.67% of total assets and increased
our holdings of liquid available-for-sale investment securities to $219.065
million, as compared to $173.302 million at December 31, 2009.  In
addition, the amount of available-for-sale and held-to-maturity investment
securities that were not pledged to secure public deposit liabilities increased
from $4.890 million at December 31, 2009 to $44.762 million at March 31,
2010.  The available-for-sale portion of these securities, totaling
$42.814 million, could be pledged for additional borrowings or sold to meet our
anticipated and unanticipated funding needs. Similarly, the held-to-maturity
portion of these securities, totaling $1.948 million, could be pledged for
additional borrowings to meet our anticipated and unanticipated funding
needs.  In addition, we continue to have access to various wholesale
funding sources, including, lines of credit with other banks and brokered
certificates of deposit.  However, we have not unduly relied and do
not plan to rely, on these sources to fund our loan and investment
activities.  The substantial majority of our funding is provided by
customer deposits, a more stable funding source than the wholesale credit
markets.





During
the first quarter of 2010, the outstanding balances in our interest-bearing,
non-maturity deposit account liabilities increased moderately due principally to
municipal deposit growth.  Savings, NOW and money market deposit
accounts (on a combined basis) increased $14.667 million or 4.0% during the
period, from $365.908 million at December 31, 2009 to $380.575 million at March
31, 2010.  In addition, both of our certificates of deposit
portfolios, over $100,000 and less than $100,000, increased during the first
quarter of 2010.  Our certificates of deposit over $100,000 increased
$12.934 million or 10.3% during the quarter, due largely to an increase in
municipal deposit balances.  Our certificates of deposit under
$100,000 increased $6.332 million or 3.8% due to our conservative
funding  strategy to increase long term deposits as a hedge against
potential market interest rate increases in future periods. Increases in these
categories of deposits were offset, in part, by slight decreases in demand
deposits and other deposits during the quarter.





The
overall credit quality of our loan portfolio worsened between December 31, 2009
and March 31, 2010.  Although the level of loans 30 to 89 days
delinquent (excluding nonperforming loans) decreased modestly during the first
quarter of 2010, the level of nonperforming loans, impaired loans and potential
problem loans increased.  Due to these factors, we recorded $800
thousand in the provision for loan losses during the first quarter of 2010,
which resulted in a net increase in the allowance for loan losses of $240
thousand during the period.  The allowance for loan losses at March
31, 2010 was $8.862 million or 1.54% of loans outstanding, versus $8.622 million
or 1.47% of loans outstanding at December 31, 2009.


Over the
last several quarters, the credit quality of our loan portfolio has
worsened.  Due to these increased levels of credit risk in our loan
portfolio, we are proactively and continually managing our credit relationships
with borrowers.  This includes monitoring our borrowers’ financial
condition, particularly those exhibiting weak or deteriorating credit
worthiness, evaluating the collateral values on collateral-dependent loans,
obtaining additional collateral and, when necessary, providing forbearance for
borrowers or restructuring loans when we believe it is in our best
interest.  In addition, we have implemented several new systems and
procedures to improve credit monitoring, hired and trained asset quality staff
members and amended our loan policies to mitigate further deterioration in asset
quality.  Although we believe our credit risk mitigation strategies
have been effective, there are no assurances that our overall credit quality
will improve over coming quarters.





Asset Quality.  We
use several measures to determine the overall credit quality of our loan
portfolio, including the level of delinquent loans (those 30 to 89 days
delinquent, excluding nonperforming loans), the


22
 Index


level of
nonperforming loans, the level of impaired loans, the level of potential problem
loans, and the dollar amount and type of loan charge-offs we
experience.





Total
nonperforming loans, which include nonaccrual loans, loans 90 days or more past
due and still accruing interest, and troubled debt restructured loans, increased
$1.138 million during the first quarter of 2010, from $12.880 million at
December 31, 2009 to $14.018 million at March 31, 2010.  At March 31,
2010, the total nonperforming loans as a percentage of total loans outstanding
were 2.43%.  This compares to 2.19% at December 31,
2009.  Between December 31, 2009 and March 31, 2010, the level of
nonperforming loans secured by both commercial and residential real estate
increased.  More specifically, nonperforming loans secured by first
liens on 1 to 4 family residences increased from $322 thousand at December 31,
2009 to $752 thousand at March 31, 2010, a $430 thousand increase during the
period.  Similarly, nonperforming loans secured by commercial
properties increased $603 thousand during the first quarter of 2010, from $6.716
million at December 31, 2009 to $7.319 million at March 31,
2010.  During the first quarter of 2010, six borrowers with
outstanding loan balances ranging from $134 thousand to $436 thousand were
placed in nonaccrual status.




Potential
problem loans are loans that are currently performing, but where information
about possible credit problems exist, which causes management to have doubts as
to the ability of such borrowers to comply with present loan repayment terms and
which may result in the loans eventually moving to nonperforming
status.  The amount of potential problem loans may vary significantly
from quarter to quarter due to the significant volume of commercial loans with
balances in excess of $1.000 million.  The amount of potential problem
loans increased during the first quarter of 2010, from $24.866 million at
December 31, 2009 to $27.029 million at March 31, 2010.  Potential
problem loans as a percent of total loans outstanding equaled 4.68% at March 31,
2010, versus 4.23% at December 31, 2009.  During the first quarter of
2010, several loans to one of our large commercial borrowers with total
outstanding balances of $4.098 million were downgraded from satisfactory status
to potential problem loan status on our internal loan grading
system.  At March 31, 2010 none of the loans to that borrower was past
due.





We
recorded net loan charge-offs of $560 thousand during the three-month period
ended March 31, 2010.  This compares to $273 thousand for the same
period last year.  Annualized net loan charge-offs as a percent of
average total loans outstanding was 0.39% for the three-month period ended March
31, 2010, versus 0.19% for the same period last year.  The increase in
the amount of net charge-offs between comparable three-month periods were
principally due to an increase in losses on loans secured by residential
properties and commercial real estate.  During the first quarter of
2010, we recorded $240 thousand in losses on real estate secured
loans.  This compares to no losses in these loan categories during the
first quarter of 2009.





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 $8.095 million or
1.40% of total loans outstanding at March 31, 2010.  By comparison, at
December 31, 2009 delinquent loans totaled $8.469 million or 1.44% of total
loans outstanding.  This represents a $374 thousand or 4.4% decrease
in delinquent loans between the periods.  Although the level of loans
30 to 89 days delinquent decreased during the first quarter of 2010, the total
level of loans 30 or more days past due increased as some loans previously
classified as 30 to 89 days delinquent migrated to nonperforming
status.





Impaired
loans are commercial loans where management has determined that it is probable a
borrower will be unable to pay all amounts due in accordance with contractual
terms of his loan agreement.  The level of impaired loans increased
$3.267 million or 25.2% during the first quarter of 2010, from $12.957 million
at December 31, 2009 to $16.224 million at March 31, 2010.  Although
the level of impaired loans increased significantly during the quarter, the
specific reserve allocated to the impaired loans only totaled $531 thousand or
6.0% of the allowance for loan losses at March 31, 2010.  We attribute
the moderate level of specific reserve allocated to impaired loans to our
general practice of obtaining strong collateral positions in the loans we
originate and hold.  If real estate values fail to stabilize or
decrease further, the specific reserve allocated to impaired loans, particularly
collateral-dependent impaired loans, would likely increase in future
periods.





The
credit quality of our debt securities portfolio is strong.  At March
31, 2010, 99.7% 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; 90.8% were rated “AAA.”  This compares
to 99.6% and 89.4%, respectively, at December 31, 2009.


23
 Index


Similarly,
the credit quality of the insurance carriers that issued our bank-owned life
insurance policies remained strong.  At March 31, 2010, we held
fifty-six life insurance policies on fifteen current and former members of the
Bank’s senior management.  The cash surrender value of these policies
at March 31, 2010 totaled $17.145 million.





D. Comparison of Results of Operations for the Three Months Ended
March 31, 2010 and 2009





Overview.We
recorded significant increases in net income and earnings per share between the
comparable three-month periods ended March 31, 2010 and March 31,
2009.  During the first quarter of 2010, we recorded net income and
earnings per share of $1.764 million and $0.16, respectively.  This
compares to net income of $1.073 million and earnings per share of $0.10 during
the first quarter of 2009.  The $691 thousand increase in net income
and the $0.06 increase in earnings per share between comparable quarterly
periods were due to several factors, including significant increases in net
interest income and noninterest income, and a decrease in the provision for loan
losses, offset, in part by significant increases in noninterest expense and
taxes.





Net
interest income increased $828 thousand or 11.4% between comparable periods,
from $7.292 million during the first quarter of 2009 to $8.120 million during
the first quarter of 2010. The increase in net interest income was largely due
to a reduction in interest expense on deposit liabilities between periods. A low
interest rate environment throughout 2009 and the first quarter of 2010 helped
reduce our interest expense and overall cost of funds on a comparable quarter
basis.





Noninterest
income increased $324 thousand or 19.9% between comparable quarters, from $1.631
million in the three-month period ended March 31, 2009 to $1.955 million in the
three-month period ended March 31, 2010.  The increase between the
comparable quarters was largely attributed to a $186 thousand increase in net
investment securities gains and a $94 thousand increase in trust
fees.





During
the first quarter of 2010, we recorded $800 thousand in the provision for loan
losses.  This was the amount we determined necessary to increase the
allowance for loan losses to a level that was adequate to absorb probable loan
losses, particularly in light of increases in nonperforming loans, potential
problem loans and impaired loans during the quarter.  By comparison,
during the first quarter of 2009, we recorded $1.200 million in the provision
for loan losses due to these factors, including a large increase in potential
problem loans, as well as generally deteriorating economic
conditions.





The
improvement in net income due to increases in net interest income and
noninterest income, and a decrease in the provision for loan losses, were partly
offset by a $442 thousand or 6.9% increase in noninterest expense and a $419
thousand increase in taxes. The increase in noninterest expense between the
first quarter of 2009 and the first quarter of 2010 was largely attributed to
increases in salaries expense and our FDIC premium assessment, and to a lesser
extent, loan collection expense and computer service fees.  The
increase in taxes was largely attributed to an increased amount of income before
tax in the first quarter of 2010, as compared to the first quarter of
2009.





Net Interest
Income.  Net interest income is our most significant source of
revenue.  During the first quarter of 2010, net interest income
comprised 81% of our net revenue (net interest income plus noninterest
income).  This compares to 82% in the first quarter of
2009.  For the three-month period ended March 31, 2010, our net
interest income was $8.120 million.  By comparison, for the
three-month period ended March 31, 2009, our net interest income was $7.292
million.  The $828 thousand or 11.4% increase in net interest income
between comparable periods was primarily due to a significant decrease in
funding costs.





During
2009 and the first quarter of 2010 market interest rates remained at or near
historical lows.  These market conditions drove down our cost of funds
and, correspondingly, our interest expense. We recorded $2.871 million of
interest expense during the first quarter of 2010, as compared to $4.475 million
during the first quarter of 2009.  This represented a $1.604 million
or 35.8% decrease in interest expense between comparable periods.  The
weighted average rate on our interest bearing liabilities decreased 81 basis
points between comparable periods, from 2.30% during the first quarter of 2009
to 1.49% during the first quarter of 2010. Between comparable quarters, we
reduced the average rate paid on all categories of our interest-bearing
liabilities, including money market deposit accounts and time and other deposit
accounts, our two largest and highest cost interest-bearing deposit liabilities.
During the first quarter of 2010, we recorded $213 thousand of interest expense
on our money market deposit accounts at an average rate of 0.48%.  By
comparison, during the first quarter of 2009 we recorded $665 thousand of
interest expense at an average rate of 1.48%.  The 100 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


24
 Index


market
deposit account.  Similarly, the interest expense recorded on time and
other deposit accounts decreased $1.023 million between comparable
quarters.  During the first quarter of 2010 the average rate paid on
time and other deposit accounts was 2.22%, versus 3.18% in the first quarter of
2009, a 96 basis point decrease.





The
decrease in interest expense and funding costs between comparable quarters was
offset, in part, by a decrease in interest income.  Due to generally
weak economic conditions during 2009, and the first quarter of 2010, we curbed
our asset growth rate targets and focused the Company’s resources on increasing
current period net income and shareholders’ equity.  This modification
in our strategic plan resulted in a reduction in average earning assets between
the three-month period ended March 31, 2010 and the three-month period ended
March 31, 2009. In particular, average earning assets decreased from $898.539
million during the first quarter of 2009 to $886.191 million during the first
quarter of 2010, a $12.348 million or 1.4% decrease between the
periods.  The decrease in earning assets, coupled with a drop in
market interest rates decreased interest income $776 thousand or 6.6% between
the periods.  We recorded $10.991 million in interest income during
the first quarter of 2010, versus $11.767 million in interest income during the
first quarter of 2009. The overall yield on our earning assets decreased 28
basis points, from 5.31% in the first quarter of 2009 to 5.03% in the first
quarter of 2010.  Between the comparable periods, the yields on loan
and investment securities decreased 19 basis points and 41 basis points,
respectively.





Due to
the combination of changes in interest rates and the volume and composition of
our earning assets and interest bearing liabilities, our net interest margin
increased between comparable quarters.  Net interest margin was 3.72%
(3.90% tax equivalent) in the first quarter of 2010.  By comparison,
net interest margin was 3.29% (3.46% tax equivalent) in the first quarter of
2009.





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 March 31,2010
      vs. 2009Rate
            
            
            Volume
            
            
            Total(in
      thousands)Earning
      assets:Federal
      Funds Sold
            
            $
            -
            
            
            $
            -
            
            
            $
            -Interest
      Bearing Deposits
            
            
            3
            
            
            
            2
            
            
            
            5Securities
            
            
            (265
            )
            
            
            (80
            )
            
            
            (345
            )Loans
            
            
            (279
            )
            
            
            (157
            )
            
            
            (436
            )Total
      earning assets
            
            
            (541
            )
            
            
            (235
            )
            
            
            (776
            )Interest
      bearing liabilities:Savings
      accounts
            
            
            (22
            )
            
            
            3
            
            
            
            (19
            )Money
      market accounts
            
            
            (444
            )
            
            
            (8
            )
            
            
            (452
            )NOW
      accounts
            
            
            (123
            )
            
            
            47
            
            
            
            (76
            )Time
      & other deposit accounts
            
            
            (799
            )
            
            
            (224
            )
            
            
            (1,023
            )Borrowings
            
            
            17
            
            
            
            (51
            )
            
            
            (34
            )Total
      interest bearing liabilities
            
            
            (1,371
            )
            
            
            (233
            )
            
            
            (1,604
            )Change
      in net interest income
            
            $
            830
            
            
            $
            (2
            )
            
            $
            828


25
 Index


Net
interest income increased $828 thousand between the first quarter of 2009 and
the first quarter of 2010.  Between the periods we recorded a $776
thousand decrease in interest income, versus a $1.604 million decrease in
interest expense.  The decrease in interest income between comparable
quarters was driven by decreases in both the volume and yield on earning assets.
Similarly, the decrease in interest expense was driven by decreases in both the
volume and rate on interest bearing liabilities.





Market
interest rates dropped precipitously during the fourth quarter of 2008 and
generally remained low throughout 2009 and the first quarter of 2010 due to weak
economic conditions.  Throughout 2009, we dropped the interest rates
paid on our interest bearing deposit liability accounts.  Similarly,
the yields on our loans and investment securities decreased as principal amounts
matured, re-indexed or were sold and reinvested.  Net interest income
increased $830 thousand between comparable periods due to changes in rate
factors.  Between comparable quarterly periods, the change in net
interest income due to volume related factors was insignificant.  The
volume of earning assets decreased $12.348 million, from $898.539 million in the
first quarter of 2009, as compared to $886.191 million in the first quarter of
2010.  Similarly, the average outstanding balance of our interest
bearing liabilities decreased $9.248 million, from $790.675 million during the
first quarter of 2009 to $781.427 million during the first quarter of
2010.





The
interest income recorded on the investment securities portfolio decreased $345
thousand between the first quarter of 2009 and the first quarter of 2010 due to
both rate and volume factors.  Throughout 2009 and the first quarter
of 2010, we sold substantial amounts of our available-for-sale securities
portfolio to increase current period earnings, shareholders’ equity, as well as
our regulatory capital ratios, in alignment with our strategic
plan.  The proceeds from these sales, as well as the proceeds from
other scheduled principal payments and prepayments, were largely reinvested in
new lower-yielding available-for-sale securities.  These activities
decreased the yield on our investment securities portfolio by 41 basis points,
from 4.30% in the first quarter of 2009 to 3.89% in the first quarter of
2010.  Due to these rate factors, net interest income on securities
decreased $265 thousand between the comparable quarters. The average outstanding
balance of our securities also decreased moderately between comparable quarters,
which reduced interest income due to volume factors by $80
thousand.





The
interest income recorded on the loan portfolio decreased $436 thousand between
the first quarter of 2009 and the first quarter of 2010 due to both rate and
volume factors.  During the second half of 2009 and the first quarter
of 2010, we curtailed some of our lending activities to mitigate credit risk and
improve our regulatory capital ratios.  This resulted in a decrease in
the average outstanding balance of loans between comparable quarters and a
decrease in interest income due to volume factors totaling $157
thousand.  In addition, as new loans replaced maturing loans and
variable rate loans re-indexed, the yield on our loan portfolio decreased 19
basis points, from 6.07% in the first quarter of 2009 to 5.88% in the first
quarter of 2010.  These rate factors decreased interest income $279
thousand between the comparable quarters.





We
recorded $1.794 million in interest expense on time and other deposit accounts
during the first quarter of 2010, as compared to $2.817 million in the first
quarter of 2009, a $1.023 million thousand or 36.3% decrease in interest expense
between the periods.  Low market rates for certificates of deposit
throughout 2009 and the first quarter of 2010 drove down interest expense as new
and renewed certificates were opened at lower rates of interest than maturing
certificates.  These rate factors decreased interest expense on time
accounts $799 thousand between comparable quarters.  However, due to
the low interest rates offered on the certificates the average outstanding
balances decreased between comparable quarters as depositors sought other
investments.  Interest expense on time accounts decreased $224
thousand between comparable quarterly periods due to the decrease in average
outstanding balances.





Interest
expense on money market deposit accounts decreased $452 thousand between the
first quarter of 2009 and the first quarter of 2010.  As short-term
interest rates decreased between comparable quarters, we lowered the interest
rate paid on money market deposit accounts causing a $444 thousand decrease in
interest expense due to rate factors.  Due to the lower interest rates
offered on the money market accounts between comparable quarterly periods
outstanding balances decreased slightly.  Interest expense on money
market accounts decreased $8 thousand between comparable quarterly periods due
to a slight decrease in average outstanding balances.





The
average rate paid on NOW accounts decreased from 0.90% in the first quarter of
2009 to 0.48% in the first quarter of 2010.  Despite the decrease in
the average rate paid on these accounts, the average outstanding balance in the
NOW account portfolio increased from $102.502 million in the first quarter of
2009 to $128.100 million in the first quarter of 2010 due principally to an
increase in municipal deposits.  Between comparable periods, interest
expense on NOW accounts decreased $76 thousand.  The
increase


26
 Index


in the
volume of NOW accounts increased interest expense $47 thousand between
comparable periods, but was offset by a $123 thousand decrease in interest
expense due to a decrease in rate.





In 2009
we decreased the interest rates paid on savings accounts.  The
decrease in interest rates paid on these accounts caused a $22 thousand decrease
in interest expense between comparable quarters, but it was offset, slightly, by
a $3 thousand increase in interest expense due to an increase in average
volume.





The
average rate on borrowings increased from 3.60% during the first quarter of 2009
to 3.68% during the first quarter of 2010.  The substantial majority
of our borrowings are long-term fixed rate advances obtained at the
FHLBNY.  These borrowings were primarily used to fund the long-term
fixed rate loans we originate for our borrowers.  Between comparable
quarters, we recorded only moderate levels of principal repayment on these
borrowings and did not secure any new long-term
borrowings.  Therefore, the rate on these borrowings did not change
significantly between comparable quarterly periods.  In addition,
approximately 81% of the borrowings were classified as long-term in the first
quarter of 2010, versus approximately 74% being classified as long-term in the
first quarter of 2009.  Since the rate on short-term borrowings was
less than the rate on long-term borrowings in both periods, the weighted average
rate on total borrowings increased 8 basis points between the comparable periods
primarily due to a change in the composition of borrowings.  This
resulted in a $17 thousand increase in interest expense due to rate between the
quarters.  Conversely, the decrease in the average volume of our
borrowings decreased interest expense $51 thousand between comparable periods in
connection with our strategy to deleverage the Company.





Provision for Loan
Losses.We recorded $800 thousand in the provision for loan
losses during the first quarter of 2010.  This compares to $1.200
million recorded in the provision for loan losses during the first quarter of
2009. This represents a $400 thousand or 33.3% decrease between the
periods.  Although the credit quality of our loan portfolio weakened
during the first quarter of 2010, the rate at which it weakened
slowed.  Potential problem loans increased $2.163 million during the
first quarter of 2010.  By comparison during the first quarter of 2009
we faced rapidly deteriorating economic conditions and experienced a $10.019
million increase in potential problem loans. Loans 30 to 89 days past due
(excluding nonperforming loans) decreased $374 thousand or 4.4%, from $8.469
million at December 31, 2009 to $8.095 million at March 31,
2010.  Nonperforming loans increased $1.138 million or 8.8% during the
first quarter of 2010 to $14.018 million or 2.43% of loans
outstanding.  This compares to $12.880 million or 2.19% of loans
outstanding at December 31, 2009.  Net charge-offs for the first
quarter of 2010 were $560 thousand, versus $273 thousand during the first
quarter of 2009.  For comparative purposes, we recorded $850 thousand
in the provision for loan losses during the fourth quarter of 2009




Noninterest
Income.  Noninterest 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, other service
fees and other income.  Noninterest income increased in the first
quarter of 2010, as compared to first quarter of 2009 due principally to a
significant increase in net investment securities gains and trust
fees.  Specifically, total noninterest income increased from $1.631
million in the first quarter of 2009 to $1.955 million in the first quarter of
2010, a $324 thousand or 19.9% increase.





Net
investment securities gains increased $186 thousand or 42.2%, from $441 thousand
in the first quarter of 2009 to $627 thousand in the first quarter of
2010.  During the first quarter of 2010, we recorded $590 thousand of
net gains on the sales and calls of $20.889 million of available-for-sale
investment securities.  This compares to $520 thousand of net gains
recorded during the first quarter of 2009.  As interest rates remained
low during the first quarter of 2010, we captured gains by selling selected
available-for-sale investment securities.  In addition, we recorded
$37 thousand of net investment securities gains on our trading portfolio in the
first quarter of 2010.  This compares to $79 thousand in net
investment securities loss on the trading portfolio during the first quarter of
2009.  Our trading portfolio consists of equity and debt securities
held by the Company’s executive deferred compensation plan.




We
recorded a $94 thousand or 29.0% increase in trust fees between the first
quarter of 2009 and the first quarter of 2010.  In particular, we
recorded $418 thousand in trust fees during the first quarter of 2010, versus
$324 thousand during the first quarter of 2009.  The increase in trust
fees between comparable quarters was attributable to a few
factors.  First, between comparable quarters the value of the
securities held in our trust and investment division increased substantially due
to a significant improvement in the Unites States and global equity
markets.  Since our trust and investment management fees are based, in
part, on the value of the assets held by the various accounts, we experienced a
substantial increase in these fees between comparable
quarters.  Second, we increased fees on selected accounts in mid-2009,
which increased fees on a comparative quarterly basis. Third, we secured several
new trust account relationships during 2009, which provided incremental revenue
on a comparative quarterly basis.


27
 Index


Other
categories of noninterest income, including service charges on deposit accounts,
net gain on sale of loans, income on bank-owned life insurance, other service
fees and other income, contributed (on a net basis) $44 thousand of additional
noninterest income between comparable periods.  On a combined basis,
during the first quarter of 2010 we recorded $910 thousand of revenue within
these categories of noninterest income, as compared to $866 thousand during the
first quarter of 2009.  Due to pending changes in customer overdraft
regulation, we expect to experience up to a $100 thousand decrease in our
service charges on deposit accounts beginning in the third quarter of
2010.





Noninterest
Expense.  Noninterest expense is comprised of salaries,
employee benefits, occupancy expense, furniture and equipment expense, computer
service fees, advertising and marketing expense, professional fees, FDIC premium
assessment, loan collection expense and other miscellaneous
expenses.  Total noninterest expense increased $442 thousand or 6.9%
on a comparable quarter basis, from $6.381 million in the first quarter of 2009
to $6.823 million in the first quarter of 2010.  The substantial
increase in total noninterest expense between comparable quarters was
principally due to an increase in salaries and our FDIC premium
assessment.  Most of the other noninterest expense categories
decreased on a comparative quarter basis.





Salaries
expense increased $335 thousand or 12.3% between the first quarter of 2010 and
the first quarter of 2009 due to general wage and incentive compensation
increases between the periods totaling $241 thousand.  In addition, we
recorded a $94 thousand increase in executive deferred compensation
expenses.  Specifically, we recorded $34 thousand in executive
deferred compensation expense during the first quarter of 2010, versus a $60
thousand reduction to salaries expense during the first quarter of
2009.





We
recorded $446 thousand in FDIC premium expense during the first quarter of 2010,
versus $91 thousand in the first quarter of 2009, a $355 thousand increase
between the periods.  During the first quarter of 2009, we offset a
portion of our FDIC premium assessment with credits previously provided by the
FDIC.  In addition, the amount of insured deposits and the FDIC
premium assessment formula rate increased between comparable
quarters.





Loan
collection expense includes the payment of various insurance and tax payments on
behalf of our borrowers to protect the Bank’s interest in its loan
collateral.  During the first quarter of 2010, we incurred and paid
past due taxes and lapsed insurance premiums for our borrowers and incurred $120
thousand in expense, as compared to $73 thousand in similar expenses for the
first quarter of 2009.





Employee
benefits expense, occupancy expenses, furniture and equipment expense, computer
service fees, advertising and marketing expense and professional fees decreased
moderately (on a net basis) between the first quarter of 2009 and the first
quarter of 2010.  More specifically, we recorded $2.397 million in
these noninterest expense categories during the first quarter of 2010, versus
$2.542 million in the first quarter of 2009, a $145 thousand or 5.7% decrease
between the periods.  The decrease in these noninterest expense
categories was largely due to the curtailment of our asset growth plan between
comparable periods.  In addition, other miscellaneous expenses
decreased $150 thousand or 15.9%, from $944 thousand in the first quarter of
2009 to $794 thousand in the first quarter of 2010.





Income
Taxes.  Income tax expense increased $419 thousand, from $269
thousand during the first quarter of 2009 to $688 thousand during the first
quarter of 2010.  The increase in income tax expense was primarily due
to a significant increase in income before tax.  The effective tax
rate increased between periods, from 20.0% in the first quarter of 2009 to 28.1%
in the first quarter of 2010.  In the first quarter of 2010 a larger
proportion of our income was derived from taxable revenues and activities,
whereas during the first quarter of 2009 a substantial portion of our revenues
were derived from nontaxable sources such as municipal bonds and notes and
bank-owned life insurance.





E. 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:


28
 Index


●
            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 overnight funds, liquid assets, and borrowing
      resources are available to meet obligations, including reasonably
      anticipated daily fluctuations.





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 and NOW Accounts*•
      Savings and Money Market Deposits*•
      Certificates of Deposit and Other Time Deposits*•
      Repurchase Agreements*•
      FHLBNY Advances / Lines of Credit*•
      Sale of Available-for-Sale Investment Securities•
      Brokered Deposits•
      Correspondent Lines of Credit•
      Federal Reserve Discount Window Borrowings•
      Sale of Loans•
      Proceeds from Issuance of Equity Securities•
      Branch Acquisition





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 Bank’s Asset and Liability Committee
and 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 our Asset and Liability
Management Policy, at March 31, 2010 the Bank maintained sufficient levels of
liquidity to meet its anticipated and unanticipated funding needs.





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





Table of
Liquidity Measures:





Liquidity
      Measure
            
            March
      31, 2010
            
            
            December
      31, 2009(in
      thousands)Cash
      and cash equivalents
            
            $
            34,401
            
            
            $
            34,043Available-for-Sale
      and Held-to-Maturity investment securities at estimated fair value less
      securities pledged for state and municipal deposits and
      borrowings
            
            $
            44,762
            
            
            $
            4,890Total
      loan to total asset ratio
            
            
            61.5
            %
            
            
            64.8
            %FHLBNY
      remaining borrowing capacity
            
            $
            15,913
            
            
            $
            16,832Available
      correspondent bank lines of credit
            
            $
            12,000
            
            
            $
            12,000Brokered
      certificate of deposit line of credit
            
            $
            83,112
            
            
            $
            90,332





Between
December 31, 2009 and March 31, 2010, our overall liquidity position improved
significantly.  At March 31, 2010 we maintained $34.401 million in
cash and cash equivalents, $44.762 million in unpledged available-for-sale (at
estimated fair value) and held-to-maturity investment securities, and $27.913
million of readily available lines of credit at other banks (excluding the
brokered certificate of deposit line of credit) to fund any anticipated or
unanticipated growth in earning assets.  This compares to $34.043
million in cash and cash equivalents, $4.890 million in unpledged
available-for-sale (at estimated fair value) and held-to-


29
 Index


maturity
investment securities, and $28.832 million of readily available lines of credit
at other banks on December 31, 2009.  Including our brokered
certificate of deposit line of credit, our potential funding sources provided
$190.188 million of short- and long-term liquidity at March 31, 2010, as
compared to $158.097 million at December 31, 2009, a $32.091 million increase
between periods.  Our total loan to total asset ratios of 61.5% at
March 31, 2010 and 64.8% at December 31, 2009 were low relative to those of our
comparative peer group of financial institutions.





Our
commitments to extend credit and standby letters of credit decreased between
December 31, 2009 and March 31, 2010.  Commitments to extend credit
and standby letters of credit totaled $107.979 million at March 31, 2010, versus
$110.310 million at December 31, 2009, a $2.331 million or 2.1%
decrease.  The decrease between periods was principally due to
decreases in commercial line of credit commitments, offset, in part, by an
increase in commitments to fund commercial real estate construction
loans.  Our experience indicates that draws on the commitments to
extend credit and standby letters of credit do not fluctuate significantly from
quarter to quarter.  We, however, will closely monitor our liquidity
position over the next several quarters to assure adequate levels of short-term
funding are available to fund our off-balance sheet commitments.





On a
quarterly basis we also prepare a forward-looking 90-day sources and uses report
to determine future liquidity needs.  Based on this report, our
deposit retention experience, anticipated loan and investment funding and
prepayment activity, the product offerings of our competitors, the level of
interest rates, the level of regional economic activity, and our current pricing
strategies, we anticipate that we will have sufficient levels of liquidity to
meet our funding commitments over the next several quarters
prospectively.





F.  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 maintaining a sufficient capital base to
provide for future expansion and complying with all regulatory
standards.





Total
shareholders’ equity increased $1.415 million or 1.9% between December 31, 2009
and March 31, 2010.  Total shareholders’ equity was $74.334 million at
March 31, 2010, as compared to $72.919 million at December 31,
2009.  The net increase in shareholders’ equity between periods was
due to a few factors.  During the first quarter of 2010, we recorded
net income of $1.764 million.  In addition, we recorded a $119
thousand increase in accumulated other comprehensive income due to an increase,
net of tax in the market value of our available-for-sale investment securities
portfolio and $51 thousand decrease in the net actuarial loss on our defined
benefit plan.  These were offset, in part, by cash dividend payments
totaling $642 thousand.  And finally, during the first quarter of
2010, we raised $122 thousand of shareholders’ equity by reissuing our common
stock through a Dividend Reinvestment and Direct Stock Purchase Plan (“the
Plan”).  The Company registered 3,457,960 treasury shares with the SEC
under the Plan and reissued 17,345 of these shares during the first quarter of
2010.  Under the Plan, the Company’s registered shareholders may
reinvest all or part of their dividend payments on each dividend payable date,
and/or purchase additional shares monthly through the optional cash investment
feature.  In addition, prospective shareholders may purchase the
shares directly from the Company.  The maximum amount of optional cash
investments that can be made by individual participants is $300,000 in any
calendar year.





The
Company and the Bank are both subject to regulatory capital guidelines as
established by federal bank regulators.  Under these guidelines, in
order to be “adequately capitalized” the Company and the Bank must both maintain
a minimum ratio of Tier 1 capital to average assets and Tier 1 capital to
risk-weighted assets of 4.0% and a minimum ratio of total capital to
risk-weighted assets of 8.0%.  Tier 1 capital is comprised of
shareholders’ equity less intangible assets and accumulated other comprehensive
income.  Total capital for this risk-based capital standard includes
Tier 1 capital plus allowable portions of the Company’s allowance for loan
losses.  Similarly, for the Bank to be considered “well capitalized,”
it must maintain a Tier 1 capital to average assets ratio of 5.0%, 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
March 31, 2010 and December 31, 2009.





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 Company’s banking subsidiary.  The Bank’s Tier 1
capital to average assets ratio, Tier 1 capital to risk-weighted assets ratio
and total


30
 Index


capital
to risk-weighted assets ratio at March 31, 2010 were 7.70%, 11.87% and 13.13%,
respectively.  This compares to 7.72%, 11.34% and 12.59%,
respectively, at December 31, 2009.





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.  At March 31,
2010, under statutory limitations, the maximum amount that could have been paid
by the Bank subsidiary to the Company without special regulatory approval was
approximately $9.345 million.  These statutory limitations
notwithstanding, the Bank entered into an informal agreement with the OCC during
the third quarter of 2009, which requires the Bank’s Board of Directors to
obtain OCC approval prior to declaring a dividend.  The ability of the
Company and the Bank to pay dividends in the future is and will continue to be
influenced by regulatory policies and practices, capital guidelines, and
applicable laws.





ITEM
3:  Quantitative and Qualitative Disclosures about Market
Risk





This item
is not applicable.





ITEM
4: Controls and Procedures





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





Our
management, including the Chief Executive Officer and Chief Financial Officer,
evaluated the design and operational effectiveness of the Company’s disclosure
controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)–15(e) under
the Securities Exchange Act of 1934, as amended) as of December 31,
2009.  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.





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.





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.





ITEM 4T:  Controls and Procedures





This item
is not applicable.





PART
II – OTHER INFORMATION





ITEM
1: Legal Proceedings





From time
to time, the Company becomes subject to various legal claims that arise in the
normal course of business.  At March 31, 2010 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.


31
 Index


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





ITEM
1A:  Risk Factors





During
the first quarter of 2010 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, 2010.





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





A.  Not
applicable.





B.  Not
applicable.





C.  Purchases
of Equity Securities by Issuer and Affiliated Purchasers





None





ITEM
3: Defaults Upon Senior Securities





The
Company did not default on any senior securities during the three-month period
ended March 31, 2010.





ITEM
4: REMOVED AND RESERVED





ITEM
5: Other Information





None.





ITEM
6: Exhibits





See
Exhibit Index to this Form 10-Q.


32
 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:
            
            May
      7, 2010Douglas
      C. GulottyPresident
      and Chief Executive OfficerBy:
            /s/
      Joseph E. Sutaris
            
            Date:
            
            May
      7, 2010Joseph
      E. SutarisExecutive
      Vice President, Chief Financial Officer, Treasurer, and
      Secretary


33
 Index


EXHIBIT INDEX






No.
              Document
 
 31.1
              Certification
      of Chief Executive Officer Pursuant to 302 of the Sarbanes-Oxley Act of
      2002
 
 31.2
              Certification
      of Chief Financial Officer Pursuant to 302 of the Sarbanes-Oxley Act of
      2002
 
 32.1
              Certification
      of Chief Executive Officer Pursuant to 18 U.S.C.
  1350
 
 32.2
              Certification
      of Chief Financial Officer Pursuant to 18 U.S.C.
  1350


34