Total stockholders' equity was $30,729,000 at March 31, 2001, an increase of 6.7% over December 31, 2000. The increase of $1,941,000 was the result of net income for the three month period ended March 31, 2001, of $1,457,000; less $79,000 utilized for the purchase of 5,000 shares of treasury stock; plus $29,000 obtained from the issuance of vested stock awards from treasury; less cash dividends declared of $549,000; and plus the net increase in unrealized appreciation in securities available for sale, net of tax, of $1,083,000. Total capital before unrealized gains on available-for-sale securities increased by $858,000 or 3.1%. Securities held as available-for-sale may be sold in response to , or in anticipation of, changes in interest rates and resulting prepayment risk, or other factors. During the first quarter of 2001, management sold municipal securities in the available for sale investment portfolio and reinvested these funds in mortgage backed securities earning higher market rates of return. Changes in market conditions were the primary reason for the net increase in unrealized appreciation in securities available for sale.

Analysis of Net Interest Income

Net interest income, the primary contributor to earnings, represents the difference between income on interest earning assets and expenses on interest bearing liabilities. The following table sets forth certain information relating to the Company's average consolidated statements of financial condition and reflects the average yields on assets and average costs of liabilities for the three month period ended March 31, 2001 and 2000, respectively. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from daily average balances. Interest on nonaccruing loans has been included only to the extent reflected in the consolidated statements of income. However, the loan balances are included in the average amounts outstanding. For purposes of this table the average balances for investment in debt and equity securities exclude unrealized appreciation/depreciation due to the application of SFAS No. 115.

Three months ended March 31,  2001 2000
- ----------------------------------------------------------------------------------------------------------------------- Average Average Average Average
(In thousands)  Balance Interest Yield/Cost Balance Interest Yield/Cost
- -----------------------------------------------------------------------------------------------------------------------
Assets:
Interest earning assets:
Loans, net (including fee income)  $203,650 $4,640 9.2% $172,168 $3,912 9.1%
Mortgage backed securities (1)  73,681 1,352 7.4% 46,569 812 7.0%
Tax exempt investment securities (1)  39,384 656 6.8% 40,847 619 6.1%
Taxable investment securities (1)  8,962 153 6.9% 15,556 250 6.5%
Federal funds sold  7,885 108 5.6% 12,863 186 5.8%
Other securities  1,103 19 7.0% 1,083 18 6.7%
Deposits with banks  82 1 4.9% 420 5 4.8%
-------------------------------------------------------------------
Total interest earning assets  334,747 6,929 8.4% 289,506 5,802 8.1%
Non-interest earning assets:
Cash and due from banks  14,189  14,090
Other assets  12,809  13,026
-------- --------
Total assets  $361,745  $316,622
======== ========
Liabilities and Stockholders' Equity:
Interest bearing liabilities:
Savings, N.O.W. and money market deposits  $175,306 $1,639 3.8% $133,483 $895 2.7%
Certificates of deposit of $100,000 or more 24,038 329 5.6% 35,085 461 5.3%
Other time deposits  32,918 403 5.0% 34,480 379 4.4%
Federal funds purchased  699 10 5.8% - - -
-------------------------------------------------------------------
Total interest bearing liabilities  232,961 2,381 4.1% 203,048 1,735 3.4%
Non-interest bearing liabilities:
Demand deposits  99,241  87,348
Other liabilities  1,709  1,541
-------- --------
Total liabilities  333,911  291,937
Stockholders' equity (1)  27,834  24,685
-------- --------
Total liabilities and stockholders' equity  $361,745  $316,622
======== ========
Net interest income/interest rate spread (2)  $4,548 4.3% $4,067 4.7%
------------------ ------------------
Net interest earning assets/net
interest margin(3)  $103,909 5.5% $ 88,467 5.6%
-------- ------------------ ------
Ratio of interest earning assets
to interest bearing liabilities  143.7%  142.6%
------ ------
Less: Tax equivalent adjustment  $ (203)  $ (181)
------ ------
Net interest income  $4,345  $3,886
------ ------

(1) Excludes unrealized depreciation\appreciation in available-for-sale securities.

(2) The above table is presented on a tax equivalent basis. Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.

(3) Net interest margin represents net interest income divided by average interest-earning assets.

Rate/Volume Analysis

Net interest income can also be analyzed in terms of the impact of changing rates and changing volumes. The following table describes the extent to which changes in interest rates and changes in the volume of interest earning assets and interest bearing liabilities have affected the Bank’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate),(ii) changes attributable to changes in rates (changes in rates multiplied by prior volume), and (iii) the net changes. For purposes of this table, changes which are not due solely to volume changes or rate changes have been allocated to these categories based on the respective percentage changes in average volume and average rate as they compare to each other. Due to the numerous simultaneous volume and rate changes during the period analyzed, it is not possible to precisely allocate changes between volume and rates. In addition, average earning assets include nonaccrual loans.

For the Periods Ended March 31, Three months ended
2001 Over 2000
(In thousands) Changes Due To
==============================================================================
Volume Rate Net Change
Interest income on interest
earning assets:
Loans (including loan fee income) $682 $46 $728
Mortgage-backed securities 488 52 540
Tax exempt investment securities (125) 162 37
Taxable investment securities (206) 109 (97)
Federal funds sold (70) (8) (78)
Other securities - 1 1
Deposits with banks (5) 1 (4)
---------------------------
Total interest earning assets $764 $363 $1,127
---------------------------
Interest expense on interest
bearing liabilities
Savings, N.O.W. and money market deposits 324 420 744
Certificates of deposit of $100,000 or more (274) 142 (132)
Other time deposits (95) 119 24
Federal funds purchased 10 - 10
---------------------------
Total interest bearing liabilities ($35) $681 $646
---------------------------
Net interest income $729 $(318) $481
===========================

(1) The above table is presented on a tax equivalent basis.

Capital

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of March 31, 2001, that the Bank meets all capital adequacy requirements to which it is subject and is considered well capitalized.

The Bank’s actual capital amounts and ratios are presented in the following table:

As of March 31, 2001
==================================================================================================================
(In thousands) To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
==================================================================================================================
Amount Ratio Amount Ratio Amount Ratio
=========================================================================
Total Capital (to risk weighted assets) 30,514 12.8% 19,141 >8.0% 23,926 >10.0%
Tier 1 Capital (to risk weighted assets) 28,302 11.8% 9,570 >4.0% 14,356 > 6.0%
Tier 1 Capital (to average assets) 28,302 7.8% 14,470 >4.0% 18,087 > 5.0%As of December 31, 2000
==================================================================================================================
(In thousands) To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
==================================================================================================================
Amount Ratio Amount Ratio Amount Ratio
=========================================================================
Total Capital (to risk weighted assets) 29,544 12.6% 18,799 >8.0% 23,498 >10.0%
Tier 1 Capital (to risk weighted assets) 27,444 11.7% 9,399 >4.0% 14,099 > 6.0%
Tier 1 Capital (to average assets) 27,444 7.9% 13,911 >4.0% 17,389 > 5.0%

Recent Accounting Developments

In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133). This Statement established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of a derivative and the resulting designation. In June 1999, the FASB issued SFAS No. 137 “Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133.” SFAS No. 133 is now effective for fiscal quarters of fiscal years beginning after June 2000 and does not require restatement of prior periods . In management’s opinion, the adoption of SFAS No. 133 and 137 did not have a material effect on the Company’s consolidated financial statements.

Comparison of Operating Results for the Three Months Ended March 31, 2001 and 2000

During the three month period ended March 31, 2001, the Registrant earned net income of $1,457,000 or $ .34 per share as compared with $1,210,000 or $.28 per share for the same period in 2000. Highlights for the three months ended March 31, 2001 include: (i) a $459,000 or 11.8% increase in net interest income; (ii) a $142,000 or 32.1% increase in total other income; and (iii) a $218,000 or 8.7% increase in total other expenses over the same period in 2000. The effective income tax rate increased to 30.90% from 29.20% for the same period last year.

Net income for the first three months of 2001 reflects annualized returns of 21.23% on average total stockholders’ equity and 1.63% on average total assets as compared to the corresponding figures for the preceding calendar year of 21.86% on average total stockholders’ equity and 1.62% on average total assets. For purposes of these calculations, average stockholders’ equity excludes the effects of changes in the unrealized appreciation (depreciation) on securities available for sale, net of taxes.

Net interest income, the primary source of income, increased by $459,000 or 11.8% for the current three month period over the same period last year. The increase primarily resulted from an increase in average total interest earning assets from $289,506,000 in 2000 to $334,747,000 for the comparable period in 2001, a 15.6% increase. Average interest bearing liabilities increased 14.7% to $232,961,000 in 2001 from $203,048,000 for the same period last year. The yield on average interest earning assets at March 31, 2001 increased to 8.4% from 8.1% during the same period in 2000. The cost of average interest bearing liabilities increased to 4.1% from 3.4% during the same period in 2000. The net yield on average earning assets decreased to 5.5% from 5.6% during the same period last year.

Average mortgage back securities grew by $27,112,000 or 58.2% when compared to the same three month period in 2000. This increase is partially due to deposit growth outpacing loan growth and a repositioning of the investment portfolio.

Average loans grew by $31,482,000 or 18.3% when compared to the same three month period in 2000. Each component of the loan portfolio contributed to the growth; however, real estate loans increased $29,860,000 or 20.8% and unsecured business and personal loans increased $3,058,000 or 10.0%. Growth in real estate loans is partially attributed to a change in holding strategy whereby a portion of originated residential mortgages are held in portfolio instead of being sold on the secondary market. Unsecured business and personal loans increased as a result of business development efforts.

The performance of the loan portfolio continued to be strong through March 31, 2001 with net recoveries of $27,000. Since December 31, 2000 non-performing loans increased 17.2% from $769,000 to $901,000, representing 0.43% of loans, net, at March 31, 2001. The Company had no foreclosed real estate at quarter’s end. Total non-performing assets represented 0.25% of total assets at the corresponding date.

An $85,000 provision for loan losses was recorded during the three month period ended 2001 compared to a $105,000 provision for the same period in 2000. The allowance for loan losses increased to $2,212,000 at March 31, 2001, as compared to $2,100,000 at December 31, 2000. As a percentage of loans, the allowance was 1.06% at March 31, 2001 and 1.04% at December 31, 2000.

The Bank monitors its portfolio on a regular basis, with consideration given to detailed analysis of classified loans, delinquency trends, probable losses, past loss experience, current economic conditions, concentrations of credit and other pertinent factors. Weight is also given to input from the Bank’s outside loan review consultants. Additions to the allowance are charged to expense and realized losses, net of recoveries, are charged to the allowance. Based on management’s and the loan classification committee’s determination of the condition of the portfolio, the overall level of reserves is periodically adjusted to account for the inherent and specific risks within the entire portfolio. At a minimum, the adequacy of these reserves are adjusted quarterly, to a level deemed appropriate by management based on their risk assessment of the entire portfolio. Based on the loan classification committee’s review of the classified loans and the overall reserve levels as they relate to the entire loan portfolio at the quarter ended March 31, 2001, management believes the allowance for possible loan losses is adequate.

While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in conditions. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments after consideration of the information available to them at the time of their examination.

Total other income increased during the three month period ended March 31, 2001 by $142,000 or 32.1% over the same period last year. Service charges on deposit accounts for the three month period ended March 31, 2001 totaled $349,000, an increase of $104,000 or 42.5% over the same period last year. This increase is attributed to a change, in January of 2001, in the process of charging fees for checks drawn on non-sufficient funds and returned checks. Fees for other customer services for the three month period ended March 31, 2001 totaled $151,000, an increase of $8,000 or 5.6% over the same period last year.

Other operating income for the three month period ended March 31, 2001 totaled $6,000, a decrease of $48,000 or 88.9% over the same period last year. The decrease primarily resulted from a decrease in income from the gain on the sale of mortgages resulting from a change in strategy whereby a portion of originated residential mortgages are held in portfolio instead of being sold on the secondary market. While revenue from mortgage banking operations was down, corresponding expense reductions partially offset such decline.

During the first quarter of 2001, management sold a portion of the lowest yielding securities in the available for sale investment portfolio and reinvested these funds in securities earning current market rates of return. The net gain recognized on this sale was $78,000.

Total other expenses increased during the three month period ended March 31, 2001 by $218,000 or 8.7% over the same period last year. Salary and benefit expense increased $233,000 or 17.8% for the three month period ended March 31, 2001 over the same period last year. The increase in salary expense is attributed to increased staffing, primarily for the new branch office in Sag Harbor that the Bank opened in the first quarter of 2001, and salary increases. Net occupancy expenses increased $54,000 or 26.7% during the three month period ended March 31, 2001. These increases primarily result from the leasing of space for the new branch office in Sag Harbor, opened during the first quarter. Furniture and fixture expense for the three month period ended March 31, 2001 increased $34,000 or 19.4% over the same period last year. The increase in furniture and fixture expense is attributed to the depreciation of item processing assets and fixed assets for the new branch offices in Greenport, opened during the second quarter of 2000, and Sag Harbor opened in the first quarter of this year.

Total other operating expenses for the three month period ended March 31, 2001 totaled $731,000, a decrease of $103,000 or 12.4% over the same period last year. During the first quarter of 2000, the Company incurred nonrecurring set up costs to bring the item processing function in house. Expenses paid to a former vendor of these services remained high during the transition period. With more item processing transactions now being conducted in house, the fees paid to this vendor are steadily declining.

Date: May 14, 2001 /s/ Thomas J. Tobin
-----------------------------------
Thomas J. Tobin
President and Chief Executive Officer
Date: May 14, 2001 /s/ Christopher Becker
-----------------------------------
Christopher Becker
Executive Vice President and Treasurer