Seneca-Cayuga Bancorp (SCAY) 10QSB 2007 Q3 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-QSB

(Mark One)

x Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2007

¨ Transition report under Section 13 or l5(d) of the Exchange Act

For the transition period from            to            

Commission file number 000-52111

Seneca-Cayuga Bancorp, Inc.

(Exact name of registrant as specified in its charter)

United States of America	16-1601243
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

19 Cayuga Street, Seneca Falls, NY 13148

(Address of Principal Executive Offices)

(315) 568-5855

(Registrant’s telephone number, including area code)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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.    x  Yes    ¨  No

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

State the number of shares outstanding of each class of issuer’s classes of common stock as of the last practicable date:

Class	Outstanding at November 9, 2007
Common Stock, par value $0.01	2,380,500

Transitional Small Business Disclosure Format (Check one):    ¨  Yes    x  No

1

TABLE OF CONTENTS

Part I – Financial Information
Item 1	Financial Statements (unaudited)
	Consolidated Statements of Financial Condition as of September 30, 2007 and December 31, 2006	3
	Consolidated Statements of Operations for the Three Months Ended September 30, 2007 and 2006	4
	Consolidated Statements of Operations for the Nine Months Ended September 30, 2007 and 2006	5
	Consolidated Statements of Shareholders’ Equity for the Nine Months Ended September 30, 2007 and 2006	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006	7
	Notes to Consolidated Financial Statements	8
Item 2	Management’s Discussion and Analysis of Results of Operations and Financial Condition	15
Item 3	Controls and Procedures	24
Part II – Other Information
Item 1	Legal Proceedings	24
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3	Defaults Upon Senior Securities	25
Item 4	Submission of Matters to a Vote of Security Holders	25
Item 5	Other Information	25
Item 6	Exhibits	25
Signatures		25

2

Seneca-Cayuga Bancorp, Inc.

Consolidated Statements of Financial Condition (Unaudited)

(Dollars in thousands, except per share data)

	September 30, 2007			December 31, 2006
Assets
Cash and due from banks	$	4,083		$	3,026
Interest-bearing deposits in banks		9,937			61
Cash and cash equivalents		14,020			3,087
Interest-bearing term deposits		—			4,000
Trading securities		5,747			—
Securities available for sale		2,971			22,667
Securities held to maturity (fair value 2007 - $14,324 and 2006 - $23,155)		14,220			23,719
Loans held for sale		—			65
Loans receivable, net of allowance for loan losses (2007 - $445 and 2006 - $391)		100,169			87,622
Federal Home Loan Bank of New York stock, at cost		1,067			1,417
Premises and equipment, net		4,246			4,378
Foreclosed assets		30			140
Bank-owned life insurance		2,877			2,809
Prepaid pension expense		509			499
Intangible assets, net and goodwill		395			410
Accrued interest receivable		584			773
Other assets		1,527			1,180
Total assets	$	148,362		$	152,766
Liabilities and Shareholders’ equity
Liabilities
Non-interest bearing deposits	$	9,678		$	8,706
Interest-bearing deposits		105,884			104,219
Total deposits		115,562			112,925
Short-term borrowings		—			575
Long-term debt		11,615			18,431
Advances from borrowers for taxes and insurance		146			603
Official checks		2,101			920
Other liabilities		552			588
Total liabilities		129,976			134,042
Commitments and contingencies
Shareholders’ equity
Preferred stock, $0.01 par value, 1,000,000 shares authorized, zero shares issued and outstanding		—			—
Common stock, $0.01 par value, 9,000,000 shares authorized, 2,380,500 shares issued and outstanding		24			24
Additional paid-in-capital		9,938			9,942
Retained earnings		9,734			10,604
Accumulated other comprehensive loss		(455	)		(944	)
Unearned ESOP shares, at cost		(855	)		(902	)
Total shareholders’ equity		18,386			18,724
Total liabilities and shareholders’ equity	$	148,362		$	152,766

See accompanying notes to unaudited consolidated financial statements.

3

Seneca-Cayuga Bancorp, Inc.

Consolidated Statements of Operations (Unaudited)

(In thousands)

	For the three months ended Sept 30,
	2007		2006
Interest and dividend income:
Loans, including fees	$	1,512	$	1,280
Debt securities:
Mortgage-backed		161		488
Taxable		—		26
Tax-exempt		2		2
Trading securities		61		—
Other		272		128
Total interest and dividend income		2,008		1,924
Interest expense:
Deposits		837		750
Short-term borrowings		2		20
Long-term debt		124		173
Total interest expense		963		943
Net interest income		1,045		981
Provision for loan losses		24		20
Net interest income after provision for loan losses		1,021		961
Non-interest income:
Banking fees and service charges		268		258
Insurance commissions		169		170
Mortgage banking income, net		28		42
Net gain on trading securities		3		—
Other		21		29
Total non-interest income		489		499
Non-interest expense:
Compensation and benefits		759		780
Occupancy and equipment expenses		225		240
Service charges		109		106
Professional fees		83		77
Advertising		92		84
Directors fees		36		33
Supplies		18		16
Telephone and postage		44		44
Amortization of intangible assets		5		7
Other		65		72
Total non-interest expense		1,436		1,459
Income before income taxes		74		1
Income tax expense		15		2
Net income (loss)	$	59	$	(1	)
Earnings per common share	$	0.03	$	0.00
Weighted average number of common shares outstanding		2,294		2,192

See accompanying notes to unaudited consolidated financial statements.

4

Seneca-Cayuga Bancorp, Inc.

Consolidated Statements of Operations (Unaudited)

(In thousands)

	For the nine months ended Sept 30,
	2007			2006
Interest and dividend income:
Loans, including fees	$	4,283		$	3,797
Debt securities:
Mortgage-backed		330			1,530
Taxable		—			77
Tax-exempt		5			7
Trading securities		607			—
Other		633			254
Total interest and dividend income		5,858			5,665
Interest expense:
Deposits		2,508			2,195
Short-term borrowings		9			143
Long-term debt		411			509
Total interest expense		2,928			2,847
Net interest income		2,930			2,818
Provision for loan losses		72			70
Net interest income after provision for loan losses		2,858			2,748
Non-interest income:
Banking fees and service charges		775			759
Insurance commissions		540			549
Mortgage banking income, net		86			85
Net loss on trading securities		(62	)		—
Gain on sale of securities available for sale		—			51
Other		76			80
Total non-interest income		1,415			1,524
Non-interest expense:
Compensation and benefits		2,281			2,295
Occupancy and equipment expenses		711			744
Service charges		326			305
Professional fees		224			205
Advertising		271			270
Directors fees		105			96
Supplies		53			54
Telephone and postage		131			129
Amortization of intangible assets		15			18
Other		197			161
Total non-interest expense		4,314			4,277
Loss before income tax benefit		(41	)		(5	)
Income tax benefit		(29	)		(7	)
Net (loss) income	$	(12	)	$	2
(Loss) earnings per common share	$	(0.01	)	$	0.00
Weighted average number of common shares outstanding		2,293			1,607

See accompanying notes to unaudited consolidated financial statements.

5

Seneca-Cayuga Bancorp, Inc.

Consolidated Statements of Shareholders’ Equity (Unaudited)

For the Nine Months Ended September 30, 2007 and 2006

(In thousands)

	Common Stock		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Unearned ESOP Shares			Total Shareholders’ Equity
Balance, January 1, 2006	$	—	$	80		$	10,523		$	(491	)	$	—		$	10,112
Comprehensive income:
Net income		—		—			2			—			—			2
Unrealized holding gains (net of $72 tax expense)		—		—			—			112			—			112
Total comprehensive income																114
Shares issued in public offering		24		9,867			—			—			—			9,891
Shares purchased by ESOP		—		—			—			—			(933	)		(933	)
ESOP shares committed to be released		—		—			—			—			16			16
Balance, September 30, 2006	$	24	$	9,947		$	10,525		$	(379	)	$	(917	)	$	19,200
Balance, January 1, 2007	$	24	$	9,942		$	10,604		$	(944	)	$	(902	)	$	18,724
Cumulative effect of a change in accounting principle upon the adoption of SFAS 157 and SFAS 159 (net of recognized tax benefit of $545 and reversal of unrecognized tax benefit of $292)		—		—			(858	)		464			—			(394	)
Comprehensive income:
Net loss		—		—			(12	)		—			—			(12	)
Unrealized holding gains (net of $14 tax expense)		—		—			—			25			—			25
Total comprehensive income																13
ESOP shares committed to be released (4,666 shares)		—		(4	)		—			—			47			43
Balance, September 30, 2007	$	24	$	9,938		$	9,734		$	(455	)	$	(855	)	$	18,386

See accompanying notes to unaudited consolidated financial statements.

6

Seneca-Cayuga Bancorp, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	For the nine months ended Sept 30,
	2007			2006
Cash flows from operating activities:
Net (loss) income	$	(12	)	$	2
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Net (accretion) amortization of discounts and premiums		(4	)		10
Net loss in trading securities		62			—
Gains on sale of securities available for sale		—			(51	)
Loans originated for sale		(117	)		(5,888	)
Proceeds from sale of loans		182			5,963
Gains on sale of loans		—			(8	)
Provision for loan losses		72			70
Depreciation and amortization		281			345
Net (gains) losses on sale of foreclosed property and assets		3			(18	)
Non-cash ESOP expense		43			16
Income from bank-owned life insurance		(68	)		(56	)
Increase in prepaid pension expense		(10	)		(223	)
Amortization of intangible assets		15			18
Decrease (increase) in accrued interest receivable		189			(70	)
Increase in other assets		(113	)		(22	)
Increase in official checks and other liabilities		1,145			1,275
Net cash provided by operating activities		1,669			1,363
Cash flows from investing activities:
Maturity (purchase) of interest-bearing term deposits		4,000			(4,000	)
Principal repayments on mortgage-backed securities held-to-maturity		1,359			2,815
Principal repayments on trading securities		3,292			—
Proceeds from sale of trading securities		35,950			—
Proceeds from sale of securities available for sale		—			1,061
Maturities and calls of securities held-to-maturity		57			49
Principal repayments on mortgage-backed securities available for sale		—			5,107
Purchases of securities held-to-maturity		(11,815	)		—
Purchases of securities available for sale		(1,313	)		(55	)
Purchases of trading securities		(4,743	)		—
Net increase in loans		(12,649	)		(5,833	)
Purchases of Federal Home Loan Bank stock		(774	)		(1,216	)
Proceeds from sale of Federal Home Loan Bank stock		1,124			1,303
Purchase of bank-owned life insurance		—			(600	)
Proceeds from sale of foreclosed assets		139			68
Purchases of premises and equipment		(151	)		(104	)
Net cash provided (used) by investing activities		14,475			(1,405	)
Cash flows from financing activities:
Increase (decrease) in deposits		2,637			(503	)
Net decrease in short-term borrowings		(575	)		(7,900	)
Proceeds from long-term debt		—			5,000
Repayment of long-term debt		(6,816	)		(4,412	)
Decrease in advance payments by borrowers for taxes and insurance		(457	)		(426	)
Net proceeds from common stock offering		—			9,891
Purchase of shares for Employee Stock Ownership Program		—			(933	)
Net cash (used) provided by financing activities		(5,211	)		717
Net change in cash and cash equivalents		10,933			675
Cash and cash equivalents at beginning of period		3,087			3,418
Cash and cash equivalents at end of period	$	14,020		$	4,093
Supplementary information:
Interest paid	$	2,962		$	2,858
Income taxes paid		3			—
Net loans transferred to foreclosed real estate		30			190

See accompanying notes to unaudited consolidated financial statements.

7

Seneca-Cayuga Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

1. Basis of Presentation

The accompanying unaudited consolidated financial statements of Seneca-Cayuga Bancorp, Inc. and its wholly owned subsidiary (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions for Form 10-QSB. Accordingly, they do not include all of the information and footnotes necessary for a complete presentation of consolidated financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included.

The unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the years ended December 31, 2006 and 2005, included in its Annual Report filed on Form 10-KSB dated March 27, 2007.

Operating results for the three and nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

The consolidated financial statements at September 30, 2007 and for the three and nine months ended September 30, 2007 and 2006 include the accounts of Seneca-Cayuga Bancorp, Inc., Seneca Falls Savings Bank (the “Bank”) and the Bank’s wholly-owned subsidiary, Seneca-Cayuga Personal Services, LLC. All intercompany balances and transactions have been eliminated in consolidation.

2. Earnings (Loss) Per Share

Basic earnings (loss) per common share is calculated by dividing the net income (loss) by the weighted-average number of common shares outstanding during the period. The common shares issued to Seneca Falls Savings Bank, MHC of 1,309,275 are assumed to be outstanding for all periods presented, consistent with the provisions of SFAS No. 128,Earnings per Share, pertaining to changes in capital structure. The 1,071,225 shares issued to the public are included in the weighted average common shares outstanding calculation since their issuance. Unallocated common shares held by the ESOP are not included in the weighted-average number of common shares outstanding for purposes of calculating both basic and diluted earnings per common share until they are committed to be released. The Company has not granted any restricted stock awards or stock options and, during the nine months ended September 30, 2007 and 2006, had no potentially dilutive common stock equivalents.

3. Pension Benefits

The composition of net periodic benefit plan cost for is as follows:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2007			2006			2007			2006
	(in thousands)
Service cost	$	50		$	39		$	150		$	117
Interest cost		50			44			150			132
Expected return on assets		(85	)		(74	)		(255	)		(222	)
Amortization of unrecognized loss		10			12			30			36
Amortization of past service liability		3			2			9			6
Net periodic pension expense	$	28		$	23		$	84		$	69

The Company expects to contribute $102,000 to its pension plan in 2007. As of September 30, 2007, $55,000 had been contributed to the pension plan.

8

Seneca-Cayuga Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

4. Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the statement of financial condition, such items, along with net income, are components of comprehensive income.

The components of other comprehensive income and related tax effects are as follows:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2007		2006		2007		2006
	(in thousands)
Gross change in unrealized losses on securities available for sale	$	10	$	290	$	39	$	235
Reclassification adjustment for gains included in net income		—		—		—		(51	)
		10		290		39		184
Tax expense		3		113		14		72
Other comprehensive income	$	7	$	177	$	25	$	112

5. Fair Value Accounting

In September 2006, the FASB issued FASB Statement No. 157,Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 85, 2007, and for interim periods within those fiscal years.

In February 2007, the FASB issued SFAS No. 159The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment to FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The purpose of SFAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS 159 is effective January 1, 2008. SFAS 159 provides for early adoption for fiscal years beginning after November 85, 2007, provided:

• the choice to adopt early is made within 120 days of the beginning of the fiscal year of adoption;

• SFAS 157 is adopted at the same time;

• the entity has not yet issued financial statements for any interim period of the fiscal year that includes the early adoption date; and

• the choices to apply or not apply the fair value option are retroactive to the early adoption date.

We have opted to adopt the provisions of SFAS 157 and SFAS 159 (the “new standards”) as of January 1, 2007. We began evaluating the potential impact of SFAS 157 and of SFAS 159 after the issuance of SFAS 159 in February 2007. The primary effect of SFAS 157 on the Company was to expand the required disclosures pertaining to the methods used to determine the fair values. Under SFAS 159, available-for-sale and held-to-maturity securities held at the date of adoption are eligible for the fair value option on that date. By adopting the new standards early, we are able to modify our balance sheet management strategies in the context of a broader use of fair value accounting. The factors influencing our decision to adopt the new standards early included:

• the inversion of the Treasury yield curve has compressed interest rate spreads on earning assets;

• competition for low-cost deposits has increased significantly in our market place which has caused an increased dependence upon higher cost time deposits;

9

Seneca-Cayuga Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

• during 2006, in response to our current and projected economy, we reduced our balance sheet leverage and began to implement strategies for improving net income;

• accounting for certain financial assets, primarily securities, at fair value enables us to more closely align their financial performance with the economic value of those assets; and

• 2007 balance sheet management strategies shifted to altering the construct and usage of investment securities, increase our consumer loan portfolio, more closely align anticipated cash flows from borrowings with selected securities, and increase use of short-term securities.

Under the new standards, the use of fair value is specifically prohibited for our deposits. As our deposits represent a very significant portion of our liabilities, we determined that to use fair value for most of our assets was not appropriate, as we would be measuring assets and liabilities differently and the overall presentation would not fairly present our financial position. As our investment portfolio is utilized to address interest rate management objectives, we elected fair value for most of our securities portfolio. Upon adoption of the new standards, the remaining securities for which the use of fair value reporting was not elected included our investment in a large cap equity fund carried in our available-for-sale portfolio, several mortgage-backed securities held to maturity and our municipal bonds held-to-maturity. The large cap equity fund is held by the Holding Company and is maintained to provide sufficient income to cover the Holding Company’s expenses rather than to address specific interest rate management objectives. The mortgage-backed securities held-to-maturity either have very small balances, are pledged as collateral against a specific borrowing, or have projected cash flows that are closely aligned with anticipated cash flows from borrowings. The municipal bonds are pledged as collateral against a specific borrowing.

Our objective is to more actively trade securities and remove longer term and lower yielding securities and replace them with new securities of different types with shorter terms. The new securities will be included in our trading portfolio to the extent they are not aligned with anticipated cash flows from borrowings. We may also sell a portion of the trading portfolio and use the proceeds to fund loan originations or to purchase loans. At September 30, 2007, the securities held-to-maturity exceeds the balance of long-term debt by $2.6 million. We anticipate the rate at which our securities held-to-maturity prepay to increase as the rates are reduced. As a result, it is likely that the balance of securities held-to-maturity will generally exceed the balance of long term debt to compensate for the uncertainty of principal cash flows from the securities held-to-maturity. We purchased $1.3 million in mortgage-backed securities during the three months ended September 30, 2007 to meet balance sheet management objectives.

The following table is a summary of the securities transferred to trading upon the early adoption of the new standards at January 1, 2007:

	Amortized Cost		Pre-tax Loss Upon the Adoption of the New Standards			Fair Value
	(in thousands)
Securities transferred to trading securities from:
Securities available for sale:
Mortgage-backed securities	$	20,077	$	(713	)	$	19,364
Equity securities		1,732		(48	)		1,684
Subtotal		21,809		(761	)		21,048
Securities held-to-maturity:
U.S. Government and federal agency obligations		2,500		(52	)		2,448
Mortgage-backed securities		17,401		(590	)		16,811
Subtotal		19,901		(642	)		19,259
Total securities transferred to trading	$	41,710	$	(1,403	)	$	40,307

The cumulative effect adjustment recorded in retained earnings at January 1, 2007 is as follows:

Pre-tax loss upon the adoption of the new standards	$	(1,403	)
Tax effect		545
Net of tax amount recorded as an adjustment to retained earnings	$	(858	)

10

Seneca-Cayuga Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Upon the adoption of the new standards at January 1, 2007, an additional $249,000 was recorded as a deferred tax related to the unrealized net loss on trading securities.

For trading securities, interest and dividends earned are separately reported on the Statement of Operations.

During April 2007, the Company sold all mortgage-backed securities and mortgage-backed bonds held in its trading portfolio. These securities were moved to the trading portfolio from our held-to-maturity and available-for-sale portfolios with the early adoption of SFAS 159.

With the adoption of SFAS 159, the Company changed its method for managing securities. As opposed to holding securities with long-term maturities with characteristics that primarily focused on their effect on our interest rate sensitivity goals, we began to weigh more heavily the economic value of the securities and their total return. In addition, we anticipated that securities would be sold in order to more closely align anticipated cash flows from borrowings with selected securities and to shorten the average life of our security portfolio.

The decision to sell the securities was made on April 17, 2007 based on the loss of value between March 31, 2007 and that date. The trading portfolio had recorded net gains of $315,000 on a pre-tax basis between January 1, 2007 and March 31, 2007. However, by April 17, 2007, we had estimated that the market value for these securities had declined by over $370,000. In addition, economic forecasts reflected increased uncertainty with regard to both the short-term and long-term interest rate futures, which implied that the interest rate yield curve would remain inverted indefinitely.

The sale resulted in the Company realizing a pre-tax net loss of $361,000. The proceeds of the purchase were used to:

• purchase held-to-maturity securities that more closely match the repayment schedule of our FHLB amortizing borrowings and FHLB term advances totaling $13.4 million at March 31, 2007; and

• purchase trading securities that maintain their economic value in a flat rate environment and are generally of a much shorter duration than the trading portfolio at March 31, 2007.

We purchased $9.3 million in CMOs and REMICs with projected cash flows closely aligned with our FHLB borrowings, which settled by May 31, 2007. These securities were classified as held-to-maturity and have an estimated weighted average duration of 1.59 years as compared to an average duration of 2.36 years for the trading portfolio at March 31, 2007. We have also purchased a $2.0 million CMO with an average life of 0.69 years that also settled by May 31, 2007 which is included in our trading portfolio.

For assets measured at fair value on a recurring basis, the fair value measurements used are as follows:

			Fair Value Measurements at September 30, 2007
Description	September 30, 2007		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(in thousands)
Trading securities	$	5,747	$	5,747	$	—	$	—
Securities available-for-sale		2,971		2,971		—		—
Foreclosed assets		30		—		30		—
Total	$	8,748	$	8,718	$	30	$	—

11

Seneca-Cayuga Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

For assets measured at fair value on a nonrecurring basis, the fair value measurements used are as follows:

			Fair Value Measurements at September 30, 2007
	December 31, 2006		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(in thousands)
Amortized intangible assets:
Customer lists	$	48	$	—	$	—	$	38
Non-compete agreements		35		—		—		30
Goodwill		327		—		—		327
Total	$	410	$	—	$	—	$	395

Amortization of $15,000 was recorded for the intangible assets during the nine months ended September 30, 2007 and was included as a component of other non-interest expense. The remaining intangible asset balance approximates the estimated value of the acquired customer lists and non-compete agreements based on the original sum of discounted cash flows over an estimated life of 112 months. The estimated fair value of goodwill used in connection with our impairment analysis is determined based upon the Agency’s projected discounted cash flows over the next ten years factoring in the Agency’s performance over the past five years.

6. Segment Reporting

The Company has determined that it has two primary business segments, its community banking franchise and its insurance agency.

The community banking segment provides financial services to consumers and businesses principally in the Finger Lakes region of New York State. These services include providing various types of loans to customers, accepting deposits, mortgage banking and other traditional banking services. Parent company and treasury function income is included in the community-banking segment, as the majority of effort of these functions is related to this segment. Major revenue sources include net interest income and service fees on deposit accounts. Expenses include personnel and branch support network support charges.

The insurance agency segment offers insurance coverage to businesses and individuals in the Finger Lakes region. The insurance activities consisted of those conducted through the Bank’s wholly owned subsidiary, Seneca-Cayuga Personal Services, LLC d/b/a Royce & Rosenkrans, Inc. Major revenue sources include commission income. Expenses include personnel and office support charges.

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Seneca-Cayuga Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Information about the segments is presented in the following table for the period indicated:

	For the Three Months Ended September 30, 2007									For the Three Months Ended September 30, 2006
	Banking Activities			Insurance Activities			Total			Banking Activities			Insurance Activities			Total
	(in thousands)
Net interest income	$	1,045		$	—		$	1,045		$	981		$	—		$	981
Provision for loan losses		24			—			24			20			—			20
Net interest income after provision for loan losses		1,021			—			1,021			961			—			961
Other income		320			169			489			329			170			499
Compensation and benefits		(643	)		(116	)		(759	)		(662	)		(118	)		(780	)
Amortization of intangible assets		—			(5	)		(5	)		—			(7	)		(7	)
Other non-interest expense		(638	)		(34	)		(672	)		(625	)		(47	)		(672	)
Income (loss) before income taxes		60			14			74			3			(2	)		1
Income tax (expense) benefit		(9	)		(6	)		(15	)		(4	)		2			(2	)
Net income (loss)	$	51		$	8		$	59		$	(1	)	$	—		$	(1	)
	For the Nine Months Ended September 30, 2007									For the Nine Months Ended September 30, 2006
	Banking Activities			Insurance Activities			Total			Banking Activities			Insurance Activities			Total
	(in thousands)
Net interest income	$	2,930		$	—		$	2,930		$	2,826		$	(8	)	$	2,818
Provision for loan losses		72			—			72			70			—			70
Net interest income after provision for loan losses		2,858			—			2,858			2,756			(8	)		2,748
Other income		875			540			1,415			924			600			1,524
Compensation and benefits		(1,920	)		(361	)		(2,281	)		(1,941	)		(354	)		(2,295	)
Amortization of intangible assets		—			(15	)		(15	)		—			(18	)		(18	)
Other non-interest expense		(1,899	)		(119	)		(2,018	)		(1,829	)		(135	)		(1,964	)
Income (loss) before income taxes		(86	)		45			(41	)		(90	)		85			(5	)
Income tax benefit (expense)		50			(21	)		29			21			(14	)		7
Net (loss) income	$	(36	)	$	24		$	(12	)	$	(69	)	$	71		$	2
Total assets	$	148,333		$	814		$	149,147		$	153,233		$	755		$	153,988

The following represents a reconciliation of the Company’s reported segment assets:

	September 30,
	2007			2006
	(in thousands)
Total assets for reportable segments	$	149,147		$	153,988
Elimination of intercompany balances		(785	)		(775	)
Consolidated total	$	148,362		$	153,213

The accounting policies of each segment are the same as those described in the summary of significant accounting policies.

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Seneca-Cayuga Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

7. Recent Accounting Pronouncements

In February 2006, the FASB issued SFAS No. 155,Accounting for Certain Hybrid Financial Instruments (“SFAS 155”). SFAS 155 amends FASB Statement No. 133 and FASB Statement No. 140, and improves the financial reporting of certain hybrid financial instruments by requiring more consistent accounting that eliminates exemptions and provides a means to simplify the accounting for these instruments. Specifically, SFAS 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. The Company adopted the provisions of SFAS 155, as required, on January 1, 2007, with no impact on the Company’s consolidated financial position and results of operations.

In March 2006, the FASB issued SFAS No. 156,Accounting for Servicing of Financial Assets - An Amendment of FASB Statement No. 140 (“SFAS 156”). SFAS 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. The statement permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. The Company adopted the provisions of SFAS 156, as required, on January 1, 2007, with no impact on the Company’s consolidated financial position and results of operations.

In July 2006, the FASB issued FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that companies recognize in their financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. In May 2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1 “Definition of Settlement in FASB Interpretation No. 48” (FSP FIN 48-1). FSP FIN 48-1 provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. The provisions of FIN 48 and FSP FIN 48-1 are effective for years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company adopted the provisions of FIN 48 and FSP FIN 48-1, as required, on January 1, 2007, with no impact on the Company’s consolidated financial position and results of operations.

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Seneca-Cayuga Bancorp, Inc.

Item 2 – Management’s Discussion and Analysis of Results of Operations and Financial Condition

General

Throughout the Management’s Discussion and Analysis (“MD&A”) the term, “the Company”, refers to the consolidated entity of Seneca-Cayuga Bancorp, Inc. (“Company”), Seneca Falls Savings Bank and Seneca-Cayuga Personal Services, LLC. Seneca-Cayuga Personal Services, LLC is a wholly owned subsidiary of Seneca Falls Savings Bank. At September 30, 2007, The Seneca Falls Savings Bank, MHC, the Company’s mutual holding company parent, whose activities are not included in the MD&A, held 55% of the Company’s common stock.

Forward-Looking Statements

This Quarterly Report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including, among other things, changes in economic conditions including real estate values in the Company’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans, deposits, insurance and other financial products in the Company’s market areas and competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The Company does not undertake, and specifically declines any obligation, to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Critical Accounting Policies

The most significant accounting policies followed by the Company are presented in Note 2 to the consolidated financial statements (“the Consolidated Financial Statements”) included in the Company’s Annual Report filed on Form 10-KSB dated March 27, 2007. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined. We have identified the accounting of our allowance for loan losses as our critical accounting policy.

Our allowance for loan losses is the amount estimated by management as necessary to cover credit losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of our most critical. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.

As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals and discounted cash flow valuations are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans.

Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. We consider a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective, as it requires material estimates by management that may be susceptible to significant change based on changes in economic and real estate market conditions.

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Seneca-Cayuga Bancorp, Inc.

The evaluation has a specific and general component. The specific component relates to loans that are delinquent or otherwise identified as a problem loan through the application of our loan review process and our loan grading system. All such loans are evaluated individually, with principal consideration given to the value of the collateral securing the loan. Specific allowances are established as required by this analysis. The general component is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general component of the allowance for loan losses.

Actual loan losses may be significantly more than the allowances we have established which could have a material negative effect on our financial results.

Overview

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, investment securities (including mortgage-backed and other securities) and other interest-earning assets primarily cash and interest bearing deposits, and the interest paid on our interest-bearing liabilities, consisting primarily of savings accounts, money market accounts, transaction accounts, certificates of deposit, long- and short-term borrowings and Federal Home Loan Bank advances. Our results of operations also are affected by our provisions for loan losses, noninterest income and noninterest expense. Noninterest income currently consists primarily of deposit account fees, insurance agency commissions, dividends on mutual funds, increases in cash value-insurance, gains and losses on the sale of securities, gains and losses on trading securities and miscellaneous other income. Noninterest expense currently consists primarily of compensation and employee benefits, occupancy and equipment expenses, advertising and marketing, service charges, professional fees, directors’ fees, supplies, and other operating expenses. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

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Seneca-Cayuga Bancorp, Inc.

Analysis of Net Interest Income

The following tables set forth average balance sheets, average yields and costs, and certain other information at the date and for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income.

	For the Three Months Ended September 30,
	2007							2006
	Average Balance		Interest			Yield/ Cost		Average Balance		Interest			Yield/ Cost
	(Dollars in thousands)
Assets:
Interest-earning assets:
Loans	$	96,586	$	1,512		6.26	%	$	83,543	$	1,280		6.13	%
Mortgage-backed securities		12,290		161		5.24			44,215		488		4.41
Trading securities		4,745		61		5.14			—		—		—
Other interest-earning assets		21,421		274		5.12			13,682		156		4.56
Total interest-earning assets		135,042		2,008		5.95			141,440		1,924		5.44
Non-interest-earning assets		12,807							13,509
Total assets	$	147,849						$	154,949
Liabilities and equity:
Interest-bearing liabilities:
Interest-bearing demand deposits and escrow	$	7,765	$	6		0.31	%	$	7,280	$	9		0.49	%
Money market accounts		5,145		24		1.87			6,549		32		1.95
Savings accounts		46,728		269		2.30			48,018		265		2.21
Certificates of deposit		46,731		538		4.61			43,133		444		4.12
Total interest-bearing deposits		106,369		837		3.15			104,980		750		2.86
Borrowings		12,092		126		4.17			20,447		193		3.78
Total interest-bearing liabilities		118,461		963		3.25			125,427		943		3.01
Other non-interest-bearing liabilities		11,074							11,346
Total liabilities		129,535							136,773
Equity		18,314							18,176
Total liabilities and equity	$	147,849						$	154,949
Net interest income			$	1,045						$	981
Interest rate spread						2.70	%						2.43	%
Net interest-earning assets	$	16,581						$	16,013
Net interest margin						3.10	%						2.77	%
Average interest-earning assets to average interest-bearing liabilities				114.00	%						112.77	%

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Seneca-Cayuga Bancorp, Inc.

	For the Nine Months Ended September 30,
	2007							2006
	Average Balance		Interest			Yield/ Cost		Average Balance		Interest			Yield/ Cost
	(Dollars in thousands)
Assets:
Interest-earning assets:
Loans	$	92,618	$	4,283		6.17	%	$	81,533	$	3,797		6.21	%
Mortgage-backed securities		8,149		330		5.40			46,659		1,530		4.37
Trading securities		17,872		607		4.53			—		—		—
Other interest-earning assets		17,306		638		4.92			11,266		338		4.00
Total interest-earning assets		135,945		5,858		5.75			139,458		5,665		5.42
Non-interest-earning assets		12,895							13,313
Total assets	$	148,840						$	152,771
Liabilities and equity:
Interest-bearing liabilities:
Interest-bearing demand deposits and escrow	$	7,327	$	17		0.31	%	$	6,936	$	29		0.56	%
Money market accounts		5,255		69		1.75			7,222		99		1.83
Savings accounts		45,551		755		2.21			49,646		798		2.14
Certificates of deposit		48,688		1,667		4.57			42,520		1,269		3.98
Total interest-bearing deposits		106,821		2,508		3.13			106,324		2,195		2.75
Borrowings		13,720		420		4.08			23,150		652		3.76
Total interest-bearing liabilities		120,541		2,928		3.24			129,474		2,847		2.93
Other non-interest-bearing liabilities		9,883							10,497
Total liabilities		130,424							139,971
Equity		18,416							12,800
Total liabilities and equity	$	148,840						$	152,771
Net interest income			$	2,930						$	2,818
Interest rate spread						2.51	%						2.49	%
Net interest-earning assets	$	15,404						$	9,984
Net interest margin						2.87	%						2.69	%
Average interest-earning assets to average interest-bearing liabilities				112.78	%						107.71	%

Results of Operations for the Three Months Ended September 30, 2007 and 2006

General. Net income increased $60,000 to $59,000 for the three months ended September 30, 2007 compared to a net loss of $1,000 for the same period in the prior year. The increase was primarily attributable to a $64,000 increase in our net interest income and a $23,000 decrease in non-interest expense, offset partially by a $4,000 increase in the provision for loan losses, a decrease in non-interest income of $10,000 and a $13,000 increase in income tax expense.

Net Interest Income. Net interest income increased $64,000, or 6.5%, to $1.0 million for the three months ended September 30, 2007 from $981,000 for the three months ended September 30, 2006. The increase was due primarily to a $7.0 million, or 5.6%, decrease in average interest-bearing liabilities and a 51-basis point increase in the average yield on average interest-earning assets, offset partially by a $6.4 million, or 4.5%, decrease in average interest-earning assets and a 24-basis point increase in the cost of interest-bearing liabilities. The reason for the decreased average interest-bearing assets and liabilities is that borrowings were repaid primarily from security cash flows.

Interest Income.Interest income increased $84,000, or 4.4%, to $2.0 million for the three months ended September 30, 2007 from $1.9 million for the three months ended September 30, 2006, the result of an increase in average yield as well as loan growth offset by a net reduction in the average balance of securities and other interest-earning assets. Average interest-earning assets decreased $6.4 million, or 4.5%, to $135.0 million at September 30, 2007 from $141.4 million at September 30, 2006.

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Seneca-Cayuga Bancorp, Inc.

Average loans increased $13.0 million, or 15.6%, to $96.6 million for the three months ended September 30, 2007 from $83.5 million for the three months ended September 30, 2006. Interest and fee income from loans increased $232,000, or 18.1%, to $1.5 million from $1.3 million for the same period. Just over half of loan originations for the three months ended September 30, 2007 were for residential properties, including construction loans, which continue to be our primary market. Automobile and mobile home originations represented approximately one-fourth of total loan originations for the same period, which is consistent with our business plan of diversifying our loan portfolio. The remaining loan production included commercial and other consumer loans.

With the adoption of SFAS 159, a significant portion of the mortgage-backed securities were transferred from our held-to-maturity and available-for-sale portfolios to the trading securities portfolio. Mortgage-backed securities, including CMOs and REMICs, of $13.1 million were purchased during the second and third quarters, which partially offset the effects of the SFAS 159 adoption. The yield on mortgage-backed securities increased 83 basis points, or 18.8%, to 5.24% for the quarter ended September 30, 2007 from 4.41% for the quarter ended September 30, 2006 primarily because the new securities purchased provided a higher yield than those moved to the trading securities portfolio.

All mortgage-backed securities and mortgage-backed bonds classified as trading securities at March 31, 2007 were sold in April 2007. There have been no further sales of trading securities. We purchased $4.7 million in trading securities during the second and third quarters, which have shorter terms and higher yields than trading securities sold. We did not have a trading portfolio for the three months ended September 30, 2006.

Other interest-earning assets increased $7.7 million, or 56.6%, to $21.4 million for the three months ended September 30, 2007 from $13.7 million for the three months ended September 30, 2006. A significant portion of the proceeds from the sale of the trading securities portfolio during the quarter ended June 30, 2007 remains in a cash account which accounts for the increase in the average balance. The yield earned on average other interest-earning assets increased 56 basis points to 5.12% for the three months ended September 30, 2007 from 4.56% for the three months ended September 30, 2006 as the portion of the average balance held in interest-bearing deposits increased significantly during the period and are earning a higher interest rate than previously.

Interest Expense. Interest expense increased $20,000, or 2.1%, to $963,000 for the three months ended September 30, 2007 from $943,000 for the three months ended September 30, 2006. The increase in interest expense resulted from an increase of $94,000, or 21.2%, in certificates of deposit interest expense, an increase of $4,000, or 1.5%, in savings accounts interest expense, offset partially by a decrease of $11,000, or 26.8%, in interest-bearing demand, escrow and money market accounts interest expense and a $67,000, or 34.7%, decrease in borrowings interest expense.

The higher certificate of deposit interest expense is attributable to a $3.6 million, or 8.3%, increase in average certificates of deposit to $46.7 million for the three months ended September 30, 2007 from $43.1 million for the three months ended September 30, 2006 and a 49 basis point, or 11.9%, increase in the average certificates of deposit cost during the same comparable period, which was the result of offering higher certificate of deposit rates in 2007 as consumer preference shifted toward certificates of deposit, and the cost was favorable compared to alternative funding sources.

Savings interest expense increased by $4,000, or 1.5%, even though there was a $1.3 million, or 2.7%, decrease in average savings outstanding balance to $46.7 million for the three months ended September 30, 2007 from $48.0 million for the three months ended September 30, 2006. The increased savings interest expense is due to growth in our higher yielding IRA savings offset by a decrease in our traditional savings products.

Money market interest expense decreased primarily due to a $1.4 million, or 21.4%, decrease in average balances outstanding to $5.1 million for the three months ended September 30 2007 from $6.5 million for the three months ended September 30, 2006, which was the result of our decision not to participate in a highly competitive market where higher rates are being paid primarily through brokerage firms.

The primary reason for the decreased borrowing expense is that the average borrowings decreased $8.4 million, or 40.9%, to $12.1 million for the three months ended September 30, 2007 from $20.4 million for the three months ended September 30, 2006. We have been reducing borrowings through application of cash flow from our mortgage-backed securities and by obtaining funds from deposit growth.

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Seneca-Cayuga Bancorp, Inc.

Provision for Loan Losses. The provision for loan losses was $24,000 for the three months ended September 30, 2007 as compared to $20,000 for the three months ended September 30, 2006. Loans in non-accrual status that were included in loans receivable totaled $519,000 as of September 30, 2007 as compared to $376,000 at December 31, 2006.

Non-Interest Income. Non-interest income decreased $10,000, or 2.0%, to $489,000 for the three months ended September 30, 2007 from $499,000 for the three months ended September 30, 2006. The decrease is primarily due to a decrease in mortgage banking income of $14,000 and a loss of $9,000 in rental income, which were partially offset by an increase of $10,000 in banking fees and service charges and a $3,000 net gain on trading securities. Mortgage banking income declined, as we did not sell any loans during the quarter ended September 30, 2007. Rental income was being earned from a property held for branch development, and we demolished the building during the quarter ended September 30, 2007. Banking fees and service charges increased as check volume and ATM card activity increased during the quarter.

Non-Interest Expense. Non-interest expense decreased $23,000, or 1.6%, to $1.4 million for the three months ended September 30, 2007 from $1.5 million for the three months ended September 30, 2006. Compensation and benefits decreased $21,000, or 2.7%, to $759,000 for the three months ended September 30, 2007 from $780,000 for the three months ended September 30, 2006 due to a reduction of staff. Occupancy and equipment expenses decreased $15,000, or 6.3%, to $225,000 for the three months ended September 30, 2007 from $240,000 for the three months ended September 30, 2006 as depreciation expense was less as some of the buildings and equipment had been fully depreciated.

Income Taxes. Income tax expense increased $13,000 to $15,000 for the three months ended September 30, 2007 from $2,000 for the three months ended September 30, 2006. The increase in expense is the direct result of higher levels of pre-tax income. The reason that income tax effective rate differs from the statutory rate is primarily because the Company is subject to a New York State minimum tax based on average assets.

Results of Operations for the Nine Months Ended September 30, 2007 and 2006

General. Net income decreased $14,000 to a net loss of $12,000 for the nine months ended September 30, 2007 compared to income of $2,000 for the nine months ended September 30, 2006. The decrease was attributable to a $109,000 decrease in non-interest income, a $37,000 increase in non-interest expense, offset partially by an increase of $112,000 in net interest income and a $22,000 increase in income tax benefit.

Net Interest Income. Net interest income increased $112,000, or 4.0%, to $2.9 million for the nine months ended September 30, 2007 from $2.8 million for the nine months ended September 30, 2006. The increase was attributable to a $8.9 million, or 6.9%, decrease in average interest-bearing liabilities to $120.5 million for the nine months ended September 30, 2007 from $129.5 million for the nine months ended September 30, 2006 funded by a $5.6 million, or 43.9%, increase in average equity and a $3.5 million decrease in average interest-earning assets during the same period. Interest-bearing liabilities decreased primarily due to the repayment of borrowings from proceeds from the Company’s stock offering and cash flows from mortgage-backed securities.

Interest Income.Interest income increased $193,000 or 3.4%, and was $5.9 million for the nine months ended September 30, 2007 as compared to $5.7 million for the nine months ended September 30, 2006, which is the result of loan growth and higher yields earned on securities and other interest-earning assets, partially offset by a net decrease in the average balance of mortgage-backed securities.

Average loans increased $11.1 million, or 13.6%, to $92.6 million for the nine months ended September 30, 2007 from $81.5 million for the nine months ended September 30, 2006, and interest and fee income from loans increased $486,000, or 12.8%, to $4.3 million from $3.8 million during the same respective periods. The yield earned on loans decreased 4 basis points reflecting the effects of the continued flat rate environment.

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Seneca-Cayuga Bancorp, Inc.

With the adoption of SFAS 159, a significant portion of the mortgage-backed securities were transferred from our held-to-maturity and available-for-sale portfolios to the trading securities portfolio and sold in April 2007. Mortgage-backed securities, including CMOs and REMICs, of $13.1 million were purchased following the adoption of SFAS 159, which partially offset the effects of the SFAS 159 adoption. The yield on mortgage-backed securities increased 103 basis points to 5.40% for the nine months ended September 30, 2007 from 4.37% for the nine months ended September 30, 2006 primarily because the new securities purchased provided a higher yield than those moved to the trading securities portfolio. The remaining mortgage-backed securities have anticipated cash flows similar to a portion of our borrowings or have small remaining balances.

Average other interest-earning assets increased $6.0 million, or 53.6%, to $17.3 million for the nine months ended September 30, 2007 from $11.3 million for the nine months ended September 30, 2006. A significant portion of the proceeds from the sale of the trading securities portfolio remains in an interest-bearing deposit account, which accounts for the increase in the average balance. The yield earned on average other interest-earning assets increased 92 basis points to 4.92% for the nine months ended September 30, 2007 from 4.00% for the nine months ended September 30, 2006 as the portion of the average balance held in interest-bearing deposits increased significantly during the period and are earning a higher interest rate than previously.

Interest Expense. Interest expense increased $81,000, or 2.9%, to $2.9 million for the nine months ended September 30, 2007 from $2.8 million for the nine months ended September 30, 2006, which is primarily attributable to both an increase in certificates of deposit and their cost, offset partially by a reduction in average balances of money market accounts, savings accounts and borrowings and a decrease in borrowing costs.

Average certificates of deposit increased $6.2 million, or 14.5%, to $48.7 million for the nine months ended September 30, 2007 from $42.5 million for the nine months ended September 30, 2006. During the same comparative time periods, the cost of certificates of deposit increased 59 basis points to 4.57% from 3.98%. The higher average balances and average cost are the result of offering higher certificate of deposit rates in 2007 as the cost was favorable compared to alternative funding sources.

Average money market accounts decreased $2.0 million, or 27.2%, to $5.3 million for the nine months ended September 30, 2007 from $7.2 million for the nine months ended September 30, 2006, and average savings accounts decreased $4.1 million, or 8.3%, to $45.6 million from $49.6 million during the same period. The decline in money market and savings accounts is the result of our not increasing rates to match certain competitors as the additional cost outweighed the benefits of retaining the balances.

Average borrowings decreased $9.4 million, or 40.7%, to $13.7 million for the nine months ended September 30, 2007 from $23.2 million for the nine months ended September 30, 2006, which is the result of repaying borrowings with proceeds from our common stock offering and cash flow from securities.

Provision for Loan Losses. The provision for loan losses was $72,000 for the nine months ended September 30, 2007 and $70,000 for the period ending September 30, 2006.

Non-Interest Income. Non-interest income decreased $109,000, or 7.2%, to $1.4 million for the nine months ended September 30, 2007 from $1.5 million for the nine months ended September 30, 2006. For the nine months ended September 30, 2007, net losses incurred from the sale of the trading securities portfolio was $360,000, which was offset partially by net gains on the trading securities portfolio of $298,000. For the nine months ended September 30, 2006, a net gain of $51,000 was realized on the sale of securities available for sale. Absent the effects of these three items, non-interest income increased $4,000, or 0.3%. Banking fees and service charges increased $16,000, which was the result of increased check and ATM activity. Insurance commissions decreased $9,000, reflecting a general net reduction in auto and home insurance premiums.

Non-Interest Expense. Non-interest expense increased $37,000, or 0.9%, and was $4.3 million for the nine months ended September 30, 2007 and 2006. Increased expenses included a $21,000 increase in service charges caused by increased transaction volume, a $19,000 increase in professional fees directly related to increased costs from the Company being a publicly held entity, a $9,000 increase in directors fees and a $35,000 increase in other expenses, primarily from increased costs associated with employee training, checking account losses and increased costs associated with ORE. The non-interest expense increases were offset partially by a $14,000 decrease in compensation and benefits due to a net staff reduction and a $33,000 decrease in occupancy and equipment expenses primarily as a result of less depreciation taken as several buildings and pieces of equipment were fully depreciated.

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Seneca-Cayuga Bancorp, Inc.

Income Taxes. The income tax benefit increased $22,000 to $29,000 for the nine months ended September 30, 2007 from $7,000 for the nine months ended September 30, 2006. The effective tax rate differs from the statutory federal rate for the nine months ended September 30, 2007 primarily due to state income tax expense, partially offset by the Company’s non-taxable income derived from changes in the cash value of bank-owned life insurance.

Comparison of Financial Condition at September 30, 2007 and December 31, 2006

Assets.Total assets decreased by $4.4 million, or 2.9%, to $148.4 million at September 30, 2007 from $152.8 million at December 31, 2006 primarily due to decreases in total securities, offset by increases in cash and cash equivalents and loans receivable.

Cash and cash equivalents.Cash and cash equivalents increased by $10.9 million, or 354.2%, to $14.0 million at September 30, 2007 from $3.1 million at December 31, 2006, as a significant portion of the proceeds from the sale of the trading securities portfolio during the second quarter ended June 30, 2007 were retained in an interest-bearing deposit.

Trading securities.Trading securities were $5.7 million at September 30, 2007. There were no trading securities at December 31, 2006. These securities include an investment in a mutual fund that holds interests in adjustable rate mortgage-backed securities, a single REMIC collateralized by a pool of mortgage-backed securities and two securities backed by Small Business Administration loan pools. The REMIC was purchased during the second quarter, and the other securities were purchased during the third quarter. Since changes in the fair value of our trading securities are reflected in our earnings, our earnings volatility may increase.

Securities.Securities decreased by $29.2 million, or 62.9%, to $17.2 million at September 30, 2007 from $46.4 million at December 31, 2006. The decrease is primarily attributable to the reclassification of available-for-sale and held-to-maturity securities totaling $40.3 million to the trading portfolio at March 31, 2007, of which $38.6 million were subsequently sold, upon the early adoption of SFAS 157 and SFAS 159, the effects of which were partially offset by purchases of $11.8 million in securities held-to-maturity and $1.3 million in securities available-for-sale and by $1.4 million in security amortization, paydowns and changes in fair values for securities available-for-sale.

Loans Receivable.Loans receivable, including loans held for sale, increased by $12.5 million, or 14.2%, to $100.2 million at September 30, 2007 from $87.7 million at December 31, 2006. We limited our loan sales significantly during the nine months ended Sept 30, 2007, selling $182,000 in residential mortgages, as compared to loans sales of $6.0 million during the nine months ended September 30, 2006. We determined to maintain the newly originated mortgages as a strategy to increase yield on the Company’s interest-earning asset portfolio. In addition, we have focused more attention on growing our automobile and manufactured home loans, which have increased $4.4 million since December 31, 2006.

Deposits.Deposits increased by $2.6 million, or 2.3%, to $115.6 million at September 30, 2007 from $112.9 million at December 31, 2006. Most of the growth in deposits represented checking and IRA savings accounts, offset partially by a decrease in money market accounts and certificate of deposits.

Borrowings.Borrowings decreased by $7.4 million, or 38.9%, to $11.6 million at September 30, 2007 from $19.0 million at December 31, 2006. Borrowings were repaid primarily from the proceeds from a $4.0 million term deposit that matured during the first quarter of 2007 and from cash flows from securities.

Shareholders’ Equity.Total shareholders’ equity decreased $338,000, or 1.8%, to $18.4 million at September 30, 2007 from $18.7 at December 31, 2006. The net decrease was a primarily the result of a $858,000 cumulative effect adjustment to retained earnings representing net unrealized losses, net of taxes, on securities transferred from available-for-sale and held-to-maturity to trading securities upon the adoption of SFAS 157 and SFAS 159, of which $464,000 was a reclassification of net unrealized losses, net of taxes, on available-for-sale securities previously included as a component of other comprehensive loss, combined with the net loss of $12,000 for the nine months ended September 30, 2007, offset by $25,000 in unrealized holding gains, net of taxes, from securities available-for-sale and by $43,000 for ESOP shares committed to be released.

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Seneca-Cayuga Bancorp, Inc.

Nonperforming Assets

The table below is a summary of the Company’s non-performing assets at the dates indicated:

	September 30, 2007			December 31, 2006
	(in thousands)
Non-accrual loans:
Real estate mortgages:
One- to-four-family	$	232		$	245
Non-residential		164			85
Manufactured home		76			—
Home equity		47			46
Total non-accrual loans	$	519		$	376
Foreclosed assets, net		30			140
Total non-performing assets	$	549		$	516
Ratios:
Non-performing loans to total loans		0.52	%		0.43	%
Non-performing loans to total assets		0.35	%		0.25	%
Non-performing assets to total assets		0.37	%		0.34	%

At September 30, 2007, there were no other loans or other assets that were not disclosed in the table, where known information about the possible credit problems of borrowers caused us to have serious doubts as to the ability of the borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans in the future.

Non-accrual loans have increased $143,000 to $519,000 at September 30, 2007 from $376,000 at December 31, 2006, which is primarily in non-residential and manufactured home loans. Non-accrual non-residential loans consist of two loans, one of which was non-accrual at December 31, 2006 for which we are in the process of foreclosing and anticipate no principal loss. We have a payment plan in place for the other non-accrual non-residential loan and expect no principal loss. There is one non-accrual manufactured home loan. The homeowner has passed away, and the estate is expected to be settled within the year at which time we expect full repayment.

Liquidity and Capital Resources

Liquidity management involves the Company’s ability to generate cash or otherwise obtain funds at reasonable rates to support asset growth and reduce assets to meet deposit withdrawals, to maintain reserve requirements, and to otherwise operate the Company on an ongoing basis. The Company’s primary sources of funds consist of deposits, scheduled amortization and prepayments of loans and mortgage-backed securities, maturities of investments, interest-bearing deposits at other financial institutions and funds provided from operations. Loan repayments and maturing investment securities are a relatively predictable source of funds. However, deposit flows, calls of investment securities, and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and local economic conditions, and competition in the marketplace. These factors reduce the predictability of the timing of these sources of funds.

The Company has an agreement with the Federal Home Loan Bank that allows it to borrow up to $49.7 million. At September 30, 2007, the Company had outstanding advances and amortizing notes totaling $11.5 million. The Company also has a repurchase agreement with a correspondent bank providing an additional $10 million in liquidity, which is secured by the Company’s mortgage-backed securities. There were no advances outstanding under the repurchase agreement at September 30, 2007.

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Seneca-Cayuga Bancorp, Inc.

A significant decrease in deposits in the future could result in the Company having to seek other sources of funds for liquidity purposes. Such sources could include, but are not limited to, additional borrowings, trust preferred security offerings, brokered deposits, negotiated time deposits, the sale of trading securities, the sale of securitized loans, or the sale of whole loans. Such actions could result in higher interest expense costs and/or losses on the sale of securities or loans.

At September 30, 2007, the Company had loan commitments to borrowers of approximately $3.3 million and unused lines of credit of approximately $5.7 million. For the third quarter ended September 30, 2007, the Company originated loans of $9.0 million, as compared to $8.8 million of loans originated in the prior year quarter. No loans were sold during the third quarter ended September 30, 2007 as compared to $2.5 million for the prior year quarter. There were no letters of credit outstanding at September 30, 2007.

Time deposit accounts scheduled to mature within one year were $31.3 million at September 30, 2007. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of these time deposits will remain with the Company. We are committed to maintaining a strong liquidity position; therefore, the Company monitors its liquidity position on a daily basis. The Company anticipates that it will have sufficient funds to meet its current funding commitments. The marginal cost of new funding however, whether from deposits or borrowings from the Federal Home Loan Bank, will be carefully considered as the Company monitors its liquidity needs. Therefore, in order to minimize its costs of funds, the Company may consider additional borrowings from the Federal Home Loan Bank in the future.

At September 30, 2007, the Seneca Falls Savings Bank (“Bank”) exceeded each of the applicable regulatory capital requirements. The Bank’s leverage (Tier 1) capital at September 30, 2007 was $16.3 million, or 11.1% of adjusted assets. In order to be classified as “well-capitalized” by the Office of Thrift Supervision (“OTS), the Bank is required to have Tier 1 capital of $7.4 million, or 5.0% of adjusted assets. To be classified as a well-capitalized bank by the OTS, the Bank must also have a total risk-based capital ratio of 10.0%. At September 30, 2007, the Bank had a total risk-based capital ratio of 19.8%.

Item 3 – Controls and Procedures

The Company has adopted disclosure controls and procedures designed to facilitate the Company’s financial reporting. The disclosure controls currently consist of communications between the Chief Executive Officer, Chief Financial Officer and each department head to identify any new transactions, events, trends or contingencies which may be material to the Company’s operations. In addition, the Company’s Chief Executive Officer, Chief Financial Officer, Audit Committee and independent accountants meet on a quarterly basis and discuss the Company’s material accounting policies. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of these disclosure controls as of the end of the period covered by this report and found them to be adequate.

The Company maintains internal control over financial reporting. There have not been any significant changes in such internal control over financial reporting in the last quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II – Other Information

Item 1 – Legal Proceedings

At September 30, 2007, we were not involved in any legal proceedings, the outcome of which would be material to our financial condition or results of operations.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

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Seneca-Cayuga Bancorp, Inc.

Item 3 – Defaults Upon Senior Securities

Not applicable.

Item 4 – Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5 – Other Information

Not applicable.

Item 6 – Exhibits

Exhibit No.	Description
31.1	Rule 13a-14(a) / 15d-14(a) Certification of the Chief Executive Officer
31.2	Rule 13a-14(a) / 15d-14(a) Certification of the Chief Financial Officer
32.1	Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Seneca-Cayuga Bancorp, Inc.

Date: November 9, 2007	/s/ Robert E. Kernan, Jr.
	Robert E. Kernan, Jr.
	President and Chief Executive Officer
Date: November 9, 2007	/s/ Menzo D. Case
	Menzo D. Case
	Executive Vice President and Chief Financial Officer

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Seneca-Cayuga Bancorp, Inc.

Index to Exhibits

Exhibit No.	Description	Page No.
31.1	Rule 13a-14(a) / 15d-14(a) Certification of the Chief Executive Officer	27
31.2	Rule 13a-14(a) / 15d-14(a) Certification of the Chief Financial Officer	28
32.1	Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer	29

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