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See accompanying notes to unaudited consolidated financial statements.

2. Earnings Per Share

12. Segment Reporting

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The review that follows focuses on the significant factors affecting the financial condition and results of operations of the Corporation during the three-month period ended March 31, 2008, with comparisons to the comparable period in 2007, 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 2007 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 13, 2008. 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.

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 March 31, 2008 totaled $831.4 million, an increase of $42.5 million or 5.4% since December 31, 2007. As discussed in greater detail below, this increase was due in large part to the Corporation's acquisition of three branch offices from Manufacturers and Traders Trust Company ("M&T") on March 14, 2008. At that time, the Corporation acquired approximately $64.6 million of deposits as well as approximately $12.6 million of loans. The increase in period-end assets is reflected primarily in a $24.5 million increase in federal funds sold and interest-bearing deposits, a $17.1 million increase in loans, net of deferred fees and costs and unearned income, and an $8.4 million increase in goodwill and other intangible assets, net, offset principally by an $8.2 million decrease in investment securities and a $2.8 million decrease in Federal Home Loan Bank and Federal Reserve Bank stock.

As noted above, total loans, net of deferred fees and costs and unearned income increased $17.1 million or 3.2% from December 31, 2007 to March 31, 2008. The most significant growth was in consumer loans, which in total increased $11.7 million, primarily due to an $8.6 million increase in home equity balances outstanding and a $2.1 million increase in student loans. The increase in home equity loans resulted from the M&T branch acquisition, while the student loan increase reflects seasonal borrowing. Additionally, consumer installment loans increased $1.1 million, again due in large part to the M&T branch acquisition. Total commercial loans (including commercial mortgages) and residential mortgages increased $4.9 million and $477 thousand, respectively, with approximately $1.6 million of the commercial loan growth related to the M&T branch acquisition.

The composition of the loan portfolio is summarized as follows:

The available for sale segment of the securities portfolio totaled $156.8 million at March 31, 2008, down approximately $8.5 million or 5.1% from December 31, 2007. At amortized cost, the available for sale portfolio was down approximately $8.8 million, with unrealized appreciation related to the available for sale portfolio increasing $356 thousand. During the quarter, $31.8 million of federal agency bonds were called, replaced with federal agency purchases totaling $25.0 million. Other significant activity during the quarter included mortgage-backed securities paydowns totaling $3.4 million, and the purchase of a Trust Preferred Pool in the amount of $2.2 million. The held to maturity portion of the portfolio, consisting of local municipal obligations, increased approximately $258 thousand from $4.5 million at December 31, 2007 to $4.7 million at March 31, 2008.

The $7.8 million increase in goodwill along with a $633 thousand increase in other intangible assets, net, reflects the Corporation's acquisition on March 14, 2008 of the M&T branch offices. The identified intangible asset from this acquisition is a core deposit intangible of approximately $1.1 million which is being amortized over 7.25 years. Goodwill resulting from the acquisition totaled $7.8 million. During the quarter, the Corporation recognized $226 thousand in accelerated amortization of

the purchased relationship intangible associated with the purchase of the trust relationships from Partners Trust in May of 2007, as a large account was closed during the first quarter of 2008.

A $2.8 million decrease in Federal Home Loan Bank and Federal Reserve Bank stock is due primarily to a decrease in the Corporation's ownership of Federal Home Loan Bank of New York ("FHLB") stock, which is reflective of a decrease in FHLB borrowings since the end of 2007, as excess funds from a significant increase in deposits were used to payoff overnight borrowings with the FHLB, which resulted in a $62.4 million decrease in these borrowings since December 31, 2007, as well as the $24.5 million increase in federal funds sold and interest-bearing deposits.

Since December 31, 2007, total deposits have increased $102.6 million or 17.9% from $572.6 million to $675.2 million, with $64.6 million of this increase associated with the M&T branch acquisition and $24.5 million due to higher public fund balances, with all other deposits increasing $13.4 million. Non-interest bearing demand deposits increased $8.2 million, including newly acquired demand deposits totaling $10.2 million. A $94.4 million increase in interest bearing balances was reflected primarily in a $53.9 million increase in time deposits and a $24.5 million increase in insured money market balances, as well as increases in NOW and savings balances totaling $9.3 million and $6.7 million, respectively. The increase in time deposits includes a $13.0 million increase in public fund balances and $30.6 million of time deposits acquired from M&T, with the increase in insured money market accounts due in large part to a $14.9 million increase resulting from the M&T acquisition and a $6.1 million increase in public fund balances. The increase in NOW account balances was due primarily to a $4.2 million increase in public fund balances, and $3.5 million of newly acquired deposits, while the savings increase includes $5.5 million of newly acquired deposits.

Asset Quality

Non-performing loans at March 31, 2008 totaled $3.606 million as compared to $3.573 million at December 31, 2007, an increase of $33 thousand. This increase resulted from an $87 thousand increase in non-accrual loans, offset by decreases in accruing loans 90 days or more past due and troubled debt restructurings totaling $33 thousand and $21 thousand, respectively. During the first quarter of this year, commercial relationships totaling $269 thousand at March 31, 2008 were placed in non-accrual status, and the outstanding balance of one commercial relationship increased $18 thousand. These increases in non-accruing commercial loans were offset to some extent by a $168 thousand reduction related to the partial charge-off ($76 thousand) of one commercial relationship, with the balance transferred to Other Real Estate Owned ($92 thousand), as well as other principal reductions totaling $73 thousand. Additionally, since December 31, 2007, an $89 thousand increase in non-accruing consumer loans was partially offset by a $46 thousand decrease in non-accruing home equity loans. The increase in Other Real Estate Owned of $117 thousand reflects the addition of the above mentioned commercial property and one residential property during the quarter.

In addition to non-performing loans, as of March 31, 2008, the Corporation has identified 14 commercial loan relationships totaling $10.8 million in potential problem loans, as compared to $11.1 million (14 commercial loan relationships) at December 31, 2007. 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. Based upon an analysis of these factors, including the increase in net charge-offs as discussed below, the Corporation expensed $200 thousand to the provision for loan losses during the first quarter of 2008, an increase of $75 thousand over what had been expensed in the related prior period. At March 31, 2008, the Corporation's allowance for loan losses totaled $8.442 million, resulting in a coverage ratio of allowance to non-performing loans of 234.1%. 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 quarter of 2008 totaled $211 thousand compared to net recoveries during the first quarter of last year of $2 thousand. This increase was principally due to a $169 thousand increase in net consumer loan charge-offs, as well as a $44 thousand decrease in net recoveries on commercial loans, as during the first quarter of 2007, payments of $162 thousand were received related to a commercial mortgage that had been charged-off in 2006. The allowance for loan losses to total loans at March 31, 2008 was 1.52% as compared to 1.57% as of December 31, 2007.

Activity in the allowance for loan losses was as follows:

Earnings per share increased 27.7% from $0.47 per share to $0.60 per share on 11,558 fewer average shares outstanding. This improvement in first quarter net income resulted in part from an initial public offering ("IPO") of Visa, Inc. ("Visa") common stock. As a Visa member institution, the Corporation was issued shares of Visa stock prior to the IPO, approximately 39% of which were redeemed by Visa following the IPO, resulting in a net pre-tax gain of $411 thousand. Additionally, the positive first quarter results reflect higher net interest income and other non-interest income, somewhat offset by higher operating expenses, an increase in the provision for loan losses and a higher effective tax rate.

Net interest income increased $916 thousand or 15.0% from $6.119 million during the first quarter of 2007 to $7.035 million during the first quarter of 2008, with the net interest margin increasing 33 basis points to 3.99%. This improvement in net interest income and margin resulted principally from an increase in average loans, a 7 basis point increase in the yield on average earning assets and a 38 basis point decrease in the average cost of interest-bearing liabilities. A $30.6 million or 4.5% increase in average earning assets was due to a $56.2 million or 11.5% increase in average loans and a $3.3 million increase in average federal funds sold and interest-bearing deposits, offset by a $28.9 million or 15.4% decrease in the average securities portfolio. The increase in average loans is reflective of growth in all segments of the loan portfolio, with average consumer loans increasing $27.0 million, average mortgages increasing $23.7 million and average commercial loans increasing $5.5 million. With the significant growth in loans since the first quarter of 2007, 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 $679 thousand or 6.5% increase in total interest income from $10.394 million in the first quarter of 2007 to $11.073 million in the first quarter of this year.

Total average funding liabilities, including non-interest bearing demand deposits, increased $31.9 million or 4.9% compared to first quarter 2007 averages, due primarily to a $25.1 million increase in average deposits and a $6.8 million increase in other borrowed funds. Approximately $12.9 million of the increase in average deposits was related to the M&T branch acquisition. In total, average non-interest bearing deposits increased $2.7 million, while average interest-bearing deposits increased $22.4 million. The increase in average interest-bearing deposits was reflected primarily in higher average insured money market and time deposits of $12.0 million and $9.8 million, respectively. The increase in average other borrowings was impacted by funding requirements to support the aforementioned increase in average loans. While average interest-bearing liabilities increased $29.2 million or 5.7%, interest expense decreased $237 thousand or 5.5%, as with the decline in interest rates since the first quarter of 2007, the average cost of interest bearing liabilities decreased 38 basis points from 3.40% to 3.02%.

As discussed more fully under the Asset Quality section of this report, a $75 thousand increase in the provision for loan losses reflects management's 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 first quarter of 2008 compared to the first quarter of 2007 increased $924 thousand or 24.3%. In addition to the increase related to the above mentioned Visa IPO, this increase was impacted to a great extent by increases in Trust and Investment Center fee income and service charges on deposit accounts totaling $594 thousand and $158 thousand, respectively. The increase in Trust and Investment Center fee income was principally due to higher fee income associated with the Corporation's acquisition in May of 2007 of the trust department relationships of Partners Trust, while the increase in service charges is primarily due to higher fee income related to checks presented against insufficient funds. Other significant non-interest income increases included a $57 thousand increase in revenue from the Corporation's equity investment in Cephas Capital Partners, LP ("Cephas"), and a $42 thousand increase in check card interchange fee income. The above increases were somewhat offset primarily by a $464 thousand decrease in gains on the sale of Other Real Estate Owned ("OREO"), as during the first quarter of 2007 the Corporation recognized a $464 thousand gain on the sale of a commercial property that had previously been foreclosed upon.

First quarter 2008 operating expenses were $980 thousand or 13.3% higher than the comparable period last year, due in large part to expenses associated with the

Corporation's acquisition of the trust relationships of Partners Trust in May of 2007, and the M&T branch acquisition on March 14, 2008. Costs associated with these acquisitions represent approximately $790 thousand of the operating expense increase and are reflected to a great extent in the increases in salaries and wages, net occupancy expenses, data processing and amortization of intangible assets. Of the $223 thousand increase in salaries and wages, approximately $161 thousand is related to acquisitions, with the balance primarily reflecting merit increases effective in January of 2008. The increase in pension and other benefits of $52 thousand is due principally to higher employee health insurance costs. A $231 thousand increase in net occupancy expenses includes approximately $79 thousand of increased expenses related to acquisitions, as well as increases in other rent and building maintenance costs. A $326 thousand increase in amortization of intangible assets resulted primarily from a $314 thousand increase in amortization of the intangible related to the purchase of the trust relationships of Partners Trust, including $226 thousand in accelerated amortization associated with the closing of a large account during the first quarter of this year, as well as $12 thousand of amortization of the core deposit intangible associated with the M&T branch acquisition. Data processing expenses increased approximately $138 thousand, with approximately $55 thousand of this increase associated with acquisitions, with the balance reflecting higher trust processing costs, as well as increased hardware and software maintenance costs.

A $343 thousand increase in income tax expense and the increase in the effective tax rate from 29.8% in the first quarter of 2007 to 33.2% in the first quarter of this year resulted principally from an increase in pre-tax income as well as a decrease in the relative percentage of tax-exempt income to pre-tax income.

The following table sets forth for the periods indicated, a summary of the changes in interest and dividends earned and interest paid resulting from changes in volume and changes in rates (in thousands of dollars):