See accompanying notes to unaudited consolidated financial statements.

2. Earnings Per Share

Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

The review that follows focuses on the significant factors affecting the financial condition and results of operations of the Corporation during the three and nine-month periods ended September 30, 2007, with comparisons to the comparable periods in 2006, as applicable. The following discussion and the unaudited consolidated interim financial statements and related notes included in this report, should be read in conjunction with our 2006 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 15, 2007. 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.

Forward-looking Statements

This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Corporation intends its forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. All statements regarding the Corporation's expected financial position and operating results, the Corporation's business strategy, the Corporation's financial plans, forecasted demographic and economic trends relating to the Corporation's industry and similar matters are forward-looking statements. These statements can sometimes be identified by the Corporation's use of forward-looking words such as "may," "will," "anticipate," "estimate," "expect," or "intend." The Corporation cannot promise that its expectations in such forward-looking statements will turn out to be correct. The Corporation's actual results could be materially different from expectations because of various factors, including changes in economic conditions or interest rates, credit risk, difficulties in managing our growth, competition, changes in the regulatory environment, and changes in general business and economic trends.

Critical Accounting Policies, Estimates and Risks and Uncertainties

Critical accounting policies include the areas where the Corporation has made what it considers to be particularly difficult, subjective or complex judgments in making estimates, and where these estimates can significantly affect the Corporation's financial results under different assumptions and conditions. The Corporation prepares its financial statements in conformity with accounting principles generally accepted in the United States of America. As a result, the Corporation is required to make certain estimates, judgments and assumptions that it believes are reasonable based upon the information available. These estimates, judgments and assumptions affect the reported amounts of assets and liabilities at the date of the financial statement and the reported amounts of revenue and expenses during the periods presented. Actual results could be different from these estimates.

Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the inherent uncertainty in evaluating the level of the allowance required to cover probable credit losses inherent in the loan portfolio, and the material effect that such judgments can have on the Corporation's 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 historical loan loss experience significantly worsened or if current economic conditions significantly deteriorated, additional provisions for loan losses would be required to increase the allowance. In addition, the assumptions and estimates used in the internal reviews of the Corporation's non-performing loans and potential problem loans, and the associated evaluation of the related collateral coverage for these loans, has a significant impact on the overall analysis of the adequacy of the allowance for loan losses. While management has concluded that the current evaluation of collateral values is reasonable under the circumstances, if collateral evaluations were significantly lowered, the Corporation's allowance for loan losses policy would also require additional provisions for loan losses.

Consolidated assets at September 30, 2007 totaled $791.2 million, an increase of $52.2 million or 7.1% since December 31, 2006. As discussed in greater detail below, this increase is reflected primarily in a $65.4 million increase in loans, net of deferred fees and costs and unearned income, and a $4.9 million increase in intangible assets, net, offset principally by an $18.8 million decrease in investment securities.

As noted above, total loans, net of deferred fees and costs and unearned income increased $65.4 million or 13.7% from December 31, 2006 to September 30, 2007. Growth was exhibited in all segments of the loan portfolio, with total consumer loans increasing $30.0 million, residential mortgages increasing $23.3 million and commercial loans (including commercial mortgages) increasing $12.1 million. The increase in consumer loans was principally due to a $26.1 million increase in installment loans, due in large part to a significant increase in indirect auto financing originations during the second quarter of this year, driven primarily by pricing. We do not anticipate future growth in this area to continue at the rate experienced thus far in 2007. Additionally, outstanding balances on home equity loans increased $3.4 million since December 31, 2006. The increases in both residential mortgages and commercial loans have been significantly impacted by the Corporation's expansion into Tompkins County, with total residential mortgages and commercial loans in this market increasing $11.0 million and $14.0 million, respectively.

The composition of the loan portfolio is summarized as follows:

The available for sale segment of the securities portfolio totaled $168.1 million at September 30, 2007, down approximately $16.8 million or 9.1% from December 31, 2006. At amortized cost, the available for sale portfolio was down approximately $19.7 million, with unrealized appreciation related to the available for sale portfolio increasing $2.9 million. The decrease in this portfolio was principally due to paydowns on mortgage-backed securities totaling $11.4 million, maturities and calls of corporate bonds totaling $4.8 million, and maturities and principal reductions of municipal bonds totaling $3.6 million. Proceeds from the above were used to support the loan growth during the first nine months of this year. The held to maturity portion of the portfolio, consisting of local municipal obligations, was down approximately $2.1 million from $6.9 million at December 31, 2006 to $4.8 million at September 30, 2007.

A $4.9 million net increase in intangibles is due to the Corporation's acquisition on May 3, 2007 of the trust relationships of Partners Trust Financial Group, Inc. ("Partners Trust") at a purchase price of approximately $5.2 million or 1.49% of the fair value of the business acquired, which is being amortized over a 15 year period. At that time, the Corporation acquired $351 million of trust business under administration at fair value.

A $1.3 million increase in Federal Home Loan Bank and Federal Reserve Bank stock is due primarily to an increase in the Corporation's ownership of Federal Home Loan Bank of New York ("FHLB") stock, which is reflective of the increase in FHLB borrowings since the end of 2006.

Since December 31, 2006, total deposits have increased $17.1 million or 2.9% from $585.1 million to $602.2 million. Non-interest bearing demand deposits were down $2.6 million due to a decrease in period-end non-personal account balances. A $19.7 million increase in interest bearing balances was reflected primarily in an $18.8 million increase in time deposits and a $6.0 million increase in NOW balances, due in large part to increases in municipal time and NOW deposits. These increases were offset to some extent primarily by a $4.0 million decrease in savings balances, due in large part to lower personal account balances.

With loan growth during the first nine months of this year exceeding funding provided through the increase in deposits and the reduction in the securities portfolio, short term borrowings under our line of credit with the FHLB have increased $27.1 million from $7.9 million at December 31, 2006 to $35.0 million at September 30, 2007.

Asset Quality

Non-performing loans at September 30, 2007 totaled $3.565 million as compared to $3.610 million at December 31, 2006, a decrease of $45 thousand. This decrease resulted primarily from a $561 thousand decrease in non-accrual loans, offset by a $522 thousand increase in troubled debt restructurings. The decrease in non-accrual loans was principally due to a $504 thousand reduction in non-accruing commercial loans. As compared to the December 31, 2006 balances, commercial loans totaling $534 thousand were placed in non-accrual status, offset by upgrades totaling $310 thousand and principal reductions of $728 thousand. Additionally, since December 31, 2006, non-accruing mortgages and consumer loans have decreased $85 thousand and $54 thousand, respectively, somewhat offset by an $81 thousand increase in non-accruing home equity loans. A $522 thousand increase in troubled debt restructurings was due to the restructuring of two commercial relationships during the third quarter of this year. Other Real Estate Owned has decreased $1.797 million since December 31, 2006, primarily due to the sale of two commercial properties during the first half of this year.

In addition to non-performing loans, as of September 30, 2007, the Corporation has identified 16 commercial loan relationships totaling $11.6 million in potential problem loans, as compared to $12.0 million (15 commercial loan relationships) at December 31, 2006. Potential problem loans are loans that are currently performing, but where known information about possible credit problems of the related borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms, and which may result in the disclosure of such loans as non-performing at some time in the future. At the Corporation, potential problem loans are typically loans that are performing but are classified in the Corporation's loan rating system as "substandard". Management cannot predict the extent to which any factors may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on non-accrual, become restructured, or require increased allowance coverage and provisions for loan losses.

Management's evaluation of the adequacy of the allowance for loan losses is performed on a periodic basis and takes into consideration such factors as the historical loan loss experience, review of specific problem loans (including evaluation of the underlying collateral), changes in the composition and volume of the loan portfolio, recent charge-off experience, overall portfolio quality, and current economic conditions that may affect the borrowers' ability to pay. The provision for loan losses during the third quarter of this year compared with the corresponding period in 2006 was up $250 thousand. This increase reflects both loan growth as well as an increase in direct allocations related to collateral evaluations on commercial loans. During the second quarter of this year, the Corporation charged off a commercial loan against the allowance for loan losses for which no previous allocation to the allowance had been made, this being the primary factor in a $475 thousand increase in the second quarter provision. This increase, coupled with the third quarter increase has resulted in a $725 thousand increase in the year-to-date provision when compared to the corresponding period in 2006. At September 30, 2007, the Corporation's allowance for loan losses totaled $8.253 million, resulting in a coverage ratio of allowance to non-performing loans of 231.5%. The allowance for loan losses is an amount that management believes will be adequate to absorb probable loan losses on existing loans. Net loan charge-offs for the first nine months of 2007 totaled $580 thousand as compared to $683 thousand during the first nine months of 2006, this decrease primarily due to a $111 thousand decrease in net commercial loan charge-offs, as recoveries on previously charged off commercial loans increased $211 thousand. The allowance for loan losses to total loans at September 30, 2007 was 1.52% as compared to 1.67% as of December 31, 2006.

Activity in the allowance for loan losses was as follows:

Net income for the third quarter of 2007 totaled $2.153 million, an increase of $316 thousand or 17.2% as compared to third quarter 2006 net income of $1.837 million. Earnings per share increased 17.6% from $0.51 per share to $0.60 per share on 52,029 fewer average shares outstanding. This improvement in third quarter net income resulted principally from increases in net interest income and non-interest income, partially offset by increases in operating expenses and the provision for loan losses, as well as a higher effective tax rate.

Net interest income increased $432 thousand or 7.0% from $6.179 million during the third quarter of 2006 to $6.611 million during the third quarter of 2007, with the net interest margin unchanged at 3.70%. This improvement in net interest income resulted from a $45.6 million or 6.9% increase in average earning assets, and a 31 basis point increase in average yield as compared to the third quarter of 2006, offset to some extent by a $55.4 million increase in average interest bearing liabilities, and a 27 basis point increase in the average cost of these liabilities. The increase in average earning assets was due to an $81.9 million or 18.1% increase in average loans, offset primarily by a $34.1 million or 16.4% decrease in the average securities portfolio. The increase in average loans is reflective of growth in all segments of the loan portfolio, with average mortgages increasing $37.1 million, average consumer loans increasing $33.2 million and average commercial loans increasing $11.6 million. As loans have grown, principal reductions in the securities portfolio have been reinvested in these higher yielding loans, a significant factor in the decrease in the average securities portfolio. The growth in average earning assets, coupled with the increase in average yield, resulted in a $1.238 million or 12.3% increase in total interest income from $10.068 million in the third quarter of 2006 to $11.306 million in the third quarter of this year.

Total average funding liabilities, including non-interest bearing demand deposits, increased $57.5 million or 9.2% compared to third quarter 2006 averages, due primarily to a $39.3 million increase in average borrowings from the FHLB, as well as a $19.1 million increase in average deposits. The increase in average FHLB borrowings has been impacted by funding requirements to support the aforementioned increase in average loans. Average non-interest bearing demand deposits have increased $2.1 million, while average interest bearing deposits have increased $17.0 million. The increase in average interest bearing deposits was reflected primarily in higher average time deposits of $22.3 million, somewhat offset primarily by a $4.5 million decrease in average savings account balances. While average interest bearing liabilities increased $55.4 million or 11.4%, interest expense increased $806 thousand or 20.7%, as the average cost of interest bearing liabilities rose 27 basis points from 3.18% to 3.45%.

As discussed more fully under the Asset Quality section of this report, the $250 thousand increase in the provision for loan losses reflects managements evaluation of the adequacy of the allowance for loan losses based upon a number of factors including an analysis of historical loss factors, the evaluation of collateral, recent charge-off experience, overall credit quality and loan growth.

Non-interest income during the third quarter of 2007 compared to the third quarter of 2006 increased $516 thousand or 13.7%. The major factor in this increase was a $655 thousand increase in Trust and Investment Center fee income, impacted to a great extent by the acquisition in May of this year of the trust department relationships of Partners Trust. Other significant factors included a $75 thousand increase in service charges, due primarily to an increase in fee income related to checks presented against insufficient funds, a $37 thousand increase in credit card merchant earnings, and increases in cash management fees and check card interchange fee income of $27 thousand and $18 thousand, respectively. These increases were somewhat offset primarily by a $149 thousand decrease in revenue from OREO properties, this decrease due to the sale of two commercial properties during the first half of 2007, an $88 thousand decrease associated with the receipt during the third quarter of 2006 of an insurance experience rebate related to credit life and disability insurance on consumer loans, and a $66 thousand decrease in revenue from the Corporation's equity investment in Cephas Capital Partners, LP ("Cephas"). The decrease in revenue from Cephas was due principally to a decrease in realized gains on the sale of equity positions taken in companies to which Cephas had provided financing.

Third quarter 2007 operating expenses were $142 thousand or 1.9% higher than the comparable period last year. Areas having the greatest impact on this increase include a $404 thousand increase in salaries and wages, an $88 thousand increase in amortization of intangible assets, a $77 thousand increase in net occupancy costs and a $40 thousand increase in professional services fees. The increase in salaries and wages reflects higher base pay related to additions to staff during the second half of 2006, as well as the addition of former Partners Trust employees in May of this year, merit increases effective in January of this year and an increase in incentive compensation. The increase in amortization expense is directly related to the amortization of the purchased intangible associated with the acquisition of the trust department relationships from Partners Trust, while the increase in net occupancy expense includes higher depreciation expense, real estate taxes, rent expense and buildings and grounds maintenance costs. A $40 thousand increase in professional services fees was primarily due to higher legal fees. The above mentioned increases were offset to some extent primarily by a $202 thousand decrease in costs associated with OREO and a $143 thousand decrease in pension and other employee benefits, as well as decreases in marketing and advertising and furniture and equipment expenses of $105 thousand and $92 thousand, respectively. The decrease in OREO costs was due to the sale during the first half of 2007 of two commercial properties that had previously been acquired through foreclosure proceedings, while the decrease in the cost of employee benefits is primarily due to lower pension expense accruals resulting from an increase in the expected return on plan assets associated with the Corporation's $10 million contribution to this plan in the fourth quarter of 2006, as well as lower postretirement medical expenses associated with plan changes implemented in the third quarter of last year. The marketing expense decrease reflects lower production, design and printing costs, as well as reduced levels of print, radio and billboard advertising, while the reduction in furniture and equipment expenses was primarily due to lower equipment depreciation expense.

A $239 thousand increase in income tax expense reflects an increase in income subject to federal and state income taxes, resulting in an effective tax rate of 31.9% for the third quarter of this year compared to 29.5% for the third quarter of 2006.

Net income for the nine-month period ended September 30, 2007 totaled $5.671 million, an increase of 8.4% as compared to net income of $5.230 million for the nine-month period ended September 30, 2006. Earnings per share were up 10.5% from $1.43 per share to $1.58 per share on 56,163 fewer average shares outstanding. Similar to third quarter results, this increase in year-to-date income resulted primarily from increases in net interest income and non-interest income, partially offset by increases in operating expenses and the provision for loan losses, as well as a higher effective tax rate.

Net interest income increased $776 thousand or 4.2% from $18.350 million for the first nine months of 2006 to $19.126 million for the nine months ended September 30, 2007, with the net interest margin declining 1 basis point from 3.69% to 3.68%. The improvement in net interest income resulted from a $29.4 million or 4.4% increase in average earning assets, and a 37 basis point increase in average yield from 5.89% to 6.26%, offset by a 43 basis point increase in the average cost of interest bearing liabilities. The increase in average earning assets is due to a $70.5 million or 15.9% increase in average loans, offset primarily by a $40.2 million or 18.3% decrease in the average securities portfolio. As was the case in the third quarter, the increase in average loans reflects growth in all segments of the loan portfolio, with average mortgages increasing $37.2 million, average consumer loans increasing $25.1 million and average commercial loans up $8.2 million. The decrease in the average securities portfolio has been impacted by loan growth, with principal reductions in the securities portfolio being reinvested in higher yielding loans. The growth in average earning assets and yield resulted in a $3.204 million or 10.9% increase in total interest and dividend income from $29.316 million for the nine months ended September 30, 2006 to $32.520 million for the nine months ended September 30, 2007.

Total average funding liabilities, including non-interest bearing demand deposits increased $40.6 million or 6.5% when compared to the first nine months of last year, the result of a $29.7 million increase in average deposits and a $10.6 million increase in total borrowings and securities sold under agreements to repurchase funded through the FHLB. While average demand deposits increased $7.7 million, average interest bearing deposits increased $22.0 million. The increase in average interest bearing deposits was due primarily to higher average time deposits and insured money market balances of $24.7 million and $4.4 million, respectively, offset primarily by a $6.2 million decrease in average savings balances. Higher average borrowings with the FHLB were related to an increase in funding requirements to support loan growth. While average interest bearing liabilities increased $32.9 million or 6.7%, total interest expense increased $2.429 million or 22.1%, as the average cost of interest bearing liabilities increased 43 basis points to 3.41%.

A $725 thousand increase in the year-to-date provision for loan losses is due to increases in both the second and third quarters of this year as discussed more fully under the "Asset Quality" section of this report.

Non-interest income for the first nine months of 2007 increased $1.627 million or 15.2% when compared to the comparable period in 2006. A $967 thousand increase in Trust and Investment Center fee income and a $668 thousand increase in gains on the sale of OREO have contributed significantly to this increase. The increase in Trust and Investment Center fee income is due in large part to the purchase of trust relationships from Partners Trust in May of this year, while the gains on the sale of OREO resulted principally from the sale of two commercial properties during the first half of this year. Other areas impacting this increase include a $101 thousand increase in credit card merchant earnings, as well as increases in service charges and check card interchange fee income of $79 thousand and $72 thousand, respectively. Similar to the third quarter, these increases were somewhat offset primarily by a $236 thousand reduction in revenue from the Corporation's equity investment in Cephas, as well as a $161 thousand decrease in revenue from OREO properties.

Operating expenses for the first nine months of this year increased $838 thousand or 3.9% compared to the corresponding period in 2006. As was the case with the third quarter operating expense increase, and for reasons discussed above, areas impacting this increase include a $1.168 million increase in salaries and wages, a $233 thousand increase in net occupancy costs, and a $147 thousand increase in amortization of intangible assets. These increases were somewhat offset primarily by a $557 thousand decrease in pension and other employee benefits and a $356 thousand decrease in costs associated with OREO.

Income taxes for the first nine months of 2007 were $399 thousand higher than last year, principally due to a higher level of taxable income and a reduction in the future tax benefit associated with deferred tax assets due to the decrease in the statutory New York State tax rate, resulting in an increase in the effective tax rate from 28.9% in 2006 to 30.8% this year.