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, 2009, with comparisons to the comparable period in 2008, 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 2008 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 13, 2009. 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 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 incurred 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. Real Estate values in the Corporation's market area have not increased dramatically in the prior several years, and, as a result, current declines in Real Estate values have been modest. 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.

Management also considers the accounting policy relating to other-than-temporary impairment of investment securities to be a critical accounting policy. If the Company deems any investment security's decline in market value to be other-than-temporary, the security is written down to a new cost basis and the resulting loss is charged against earnings. The determination of whether a decline in market value is other-than-temporary is necessarily a matter of subjective judgment. The timing and amount of any realized losses reported in the Company's financial statements could vary if management's conclusions were to change as to whether an other-than-temporary impairment exists. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer's financial condition, the Company's management considers whether the securities are issued by the U.S. Government or its agencies, whether downgrades by bond rating agencies have occurred and industry analysts' reports. The Company's management currently conducts impairment evaluations at least on a quarterly basis and had concluded that at December 31, 2008, one collateralized debt obligation consisting of a pool of trust preferred securities issued by financial institutions was considered to be other-than-temporarily impaired. This investment had a cost basis of $1.563 million and a fair value of $760 thousand at December 31, 2008, resulting in an $803 thousand write-down of this security which was charged against earnings in December of 2008. Based upon an updated impairment evaluation, it was determined that the estimated fair value of this investment had decreased from $760 thousand at December 31, 2008 to $604 thousand at March 31, 2009, resulting in an additional charge to earnings of $156 thousand in March of this year.

Consolidated assets at March 31, 2009 totaled $882.1 million, an increase of $43.8 million or 5.2% since December 31, 2008. The increase was due in large part to a $52.5 million increase in total cash and cash equivalents, which is directly related to a $46.8 million increase in deposits since year-end 2008. This increase was offset to some extent primarily by a $9.4 million decrease in loans, net of deferred fees and costs and unearned income.

As noted above, total loans, net of deferred fees and costs and unearned income decreased $9.4 million or 1.7% from December 31, 2008 to March 31, 2009 primarily due to decreases in the consumer loan and residential mortgage portfolios. Total consumer loans were down $4.9 million, principally due to decreases in installment and home equity loans totaling $3.9 million and $801 thousand, respectively. The decrease in installment loans reflects a lower volume of indirect auto financing originations, while the decrease in home equity balances was due to a slowdown in activity and an increase in payoffs. Residential mortgages decreased $4.2 million, as payments and an accelerated level of payoffs due to refinancings associated with the current low interest rate environment exceeded originations of $8.4 million. An additional $5.0 million of newly originated mortgages were sold in the secondary mortgage market during the quarter. Total commercial loans (including commercial mortgages) were down $325 thousand, with activity being relatively flat during the quarter.

The composition of the loan portfolio is summarized as follows:

As noted above, the significant increase in period-end deposits coupled with the decrease in loans were the principal factors in the $52.5 million increase in cash and cash equivalents, with $50.9 million of this increase in interest bearing deposits at other financial institutions, the vast majority of these deposits held at the Federal Reserve Bank of New York. We continue to evaluate alternative investment opportunities with caution given the historically low interest rate environment and the inherent interest rate risk associated with longer term securities portfolio investments.

Since December 31, 2008, total deposits have increased $46.8 million or 7.1% from $656.9 million to $703.7 million, with public fund balances increasing $33.2 million and all other deposits increasing $13.6 million. The increase in public fund accounts was primarily due to a $15.5 million increase in insured money market account ("IMMA") balances, as well as increases in NOW and time deposit balances totaling $8.0 million and $7.5 million, respectively. The increase in other deposits was principally due to a $4.4 million increase in personal savings balances, a $4.1 million increase in non-personal demand deposits and increases in non-personal time and IMMA deposits of $2.9 million each.

A $5.5 million decrease in other liabilities was primarily due to the payment of previously accrued income taxes during the quarter.

Non-performing loans at March 31, 2009 totaled $9.096 million as compared to $4.544 million at December 31, 2008, an increase of $4.552 million. This increase resulted from a $5.194 million increase in non-accrual loans, offset by decreases in accruing loans 90 days or more past due and troubled debt restructurings totaling $633 thousand and $9 thousand, respectively. The increase in non-accrual loans was primarily due to the addition of commercial loans to one borrower totaling $4.300 million, as well as an $852 thousand increase in non-accrual mortgages. The above mentioned $4.300 million in loans to the commercial loan client carry an 80% United States Department of Agriculture ("USDA") guarantee, thereby reducing the Corporation's exposure on these loans to $860 thousand. Excluding the guaranteed amount, non-performing loans would total $5.656 million. The decrease in accruing loans 90 days or more past due was principally due to a decrease in this category of residential mortgage delinquencies as more mortgages were placed in non-accrual status during the quarter. The decrease in Other Real Estate Owned ("OREO") of $141 thousand reflects the sale of properties during the quarter totaling $249 thousand, offset by the addition to OREO of two properties totaling $109 thousand.

The following table summarizes the Corporation's non-performing assets:

Included in the Corporation's investment portfolio at March 31, 2009 are two collateralized debt obligations consisting of pools of trust preferred securities issued by other financial institutions. While we continue to receive all contractual payments on these securities, given the continued weakness in the economy, and the financial services sector in particular, there can be no assurance that these securities will not become non-performing at some future date.

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 consumer loan charge-offs as discussed below, the Corporation expensed $425 thousand to the provision for loan losses during the first quarter of 2009, an increase of $225 thousand over what had been expensed in the related prior period. At March 31,

2009, the Corporation's allowance for loan losses totaled $9.138 million, resulting in a coverage ratio of allowance to non-performing loans of 100.5%. However, excluding the aforementioned USDA guaranteed portion of loans to a commercial client in non-accrual status, the coverage ratio would be 161.6%. 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 2009 totaled $393 thousand compared to $211 thousand during the first quarter of 2008. This increase was principally due to increases in net consumer loan and residential mortgage charge-offs totaling $205 thousand and $14 thousand, respectively, partially offset by a $37 thousand increase in net commercial loan recoveries. The allowance for loan losses to total loans at March 31, 2009 was 1.64% as compared to 1.61% as of December 31, 2008.

Activity in the allowance for loan losses was as follows: