FORM 10-K

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                     THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005    Commission File Number: 0-19212

                            JEFFERSONVILLE BANCORP
            (Exact name of Registrant as specified in its charter)

           New York                                    22-2385448
(State or other jurisdiction of           (I.R.S. employer identification no.)

 P.O. Box 398, Jeffersonville, New York                            12748
(Address of principal executive offices)                        (Zip Code)

Registrant's telephone number, including area code:           (845) 482-4000

         Securities registered pursuant to Section 12(b) of the Act:

Title of each class                     Name of exchange on which registered
       NONE                                             NONE

         Securities registered pursuant to Section 12 (g) of the Act:
                Title of Class: Common Stock, $0.50 Par Value


Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [ X ]

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [ X ]

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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. Yes [ X ] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. Large accelerated filer [ ] Accelerated filer [ X ] Non-accelerated
filer [ ]

Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]

As of June 30, 2005, the aggregate market value of the registrant's
common stock held by non-affiliates of the registrant was $88,276,000 based
on the closing price of $23.20 as reported on the National Association of
Securities Dealers Automated Quotation System National Market System.

Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.

                 Class                        Outstanding at March 15, 2006
Common Stock, $0.50 par value per share              4,434,321 shares


                     DOCUMENTS INCORPORATED BY REFERENCE

                Document                         Parts Into Which Incorporated
Annual Report to Stockholders for the Fiscal          Parts I, II, and IV

Year Ended December 31, 2005 (Annual Report)

Proxy Statement for the Annual Meeting of          Part III Items 10, 11, 12,
Stockholders to be held April 25, 2006                     13 and 14
(Proxy Statement)

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                  JEFFERSONVILLE BANCORP INDEX TO FORM 10-K


PART I                                                                    Page

ITEM 1.    Business.........................................................1

ITEM 1A.   Risk Factors.....................................................5

ITEM 1B.   Unresolved Staff Comments........................................6

ITEM 2.    Properties.......................................................6

ITEM 3.    Legal Proceedings................................................7

ITEM 4.    Submission of Matters to a Vote of Security Holders..............7


PART II

ITEM 5.    Market for the Registrant's Common Equity,
           Related Stockholder Matters and Issuers
           Purchasing of Equity Securities..................................8

ITEM 6.    Selected Financial Data..........................................9

ITEM 7.    Management's Discussion and Analysis of
           Financial Condition and Results of Operations...................10

ITEM 7A.   Quantitative and Qualitative Disclosures
           about Market Risk...............................................24

ITEM 8.    Financial Statements and Supplementary Data.....................25

ITEM 9.    Changes in and Disagreements with Accountants
           on Accounting and Financial Disclosure..........................25

ITEM 9A.   Controls and Procedures.........................................25

ITEM 9B.   Other Information...............................................25


PART III

ITEM 10.   Directors and Executive Officers of the Registrant..............26

ITEM 11.   Executive Compensation..........................................26

ITEM 12.   Security Ownership of Certain Beneficial Owners
           and Management, and Related Stockholder Matters ................26

ITEM 13.   Certain Relationships and Related Transactions..................26

ITEM 14.   Principal Accountant and Fees and Services......................26


PART IV

ITEM 15.   Exhibits, Financial Statement Schedules.........................27

           Signatures......................................................28

<PAGE>

PART I



Item 1. Business


GENERAL

Jeffersonville Bancorp (the "Company") was organized as a New York
corporation on January 12, 1982, for the purpose of becoming a registered
bank holding company under the Bank Holding Company Act of 1956, as amended
(the "BHC Act"). Effective June 30, 1982, the Company became the registered
bank holding company for The First National Bank of Jeffersonville, a bank
chartered in 1913 and organized under the national banking laws of the United
States (the "Bank"). The Company is engaged in the business of managing or
controlling its subsidiary bank and such other business related to banking as
may be authorized under the BHC Act.

    At December 31, 2005 and 2004, the Company had total assets of $387.3
million and $365.5 million, securities available for sale of $89.0 million
and $100.7 million, securities held to maturity of $8.2 million and $6.0
million and net loans receivable of $240.6 million and $220.6, respectively.
At December 31, 2005 and 2004, total deposits were $312.1 million and $293.1
million, respectively. At December 31, 2005 and 2004, stockholders' equity
was $42.5 million and $39.6 million, respectively.

    The Bank is based in Sullivan County, New York. In addition to its main
office and operations center in Jeffersonville, the Bank has nine additional
branch office locations in Eldred, Liberty, Loch Sheldrake, Monticello,
Livingston Manor, Narrowsburg, Callicoon, Wurtsboro and one in a Wal*Mart
store in Monticello. The Bank is a full service banking institution employing
approximately 135 people and serving all of Sullivan County, New York as well
as some areas of adjacent counties in New York and Pennsylvania.


NARRATIVE DESCRIPTION OF BUSINESS

Through its community bank subsidiary, The First National Bank of
Jeffersonville, the Company provides traditional banking related services,
which constitute the Company's only business segment. Banking services
consist primarily of attracting deposits from the areas served by its banking
offices and using those deposits to originate a variety of commercial,
consumer, and real estate loans. The Company's primary sources of liquidity
are its deposit base; Federal Home Loan Bank ("FHLB") borrowings; repayments
and maturities on loans; short-term assets such as federal funds and
short-term interest bearing deposits in banks; and maturities and sales of
securities available for sale.

    The Bank has one subsidiary, FNBJ Holding Corporation, which is a Real
Estate Investment Trust (REIT) and is wholly-owned by the Bank.

    The Company's filings with the Securities and Exchange Commission,
including this Annual Report on Form 10-K, are available on the Company's
website, www.jeffbank.com or upon request submitted to Charles E. Burnett,
P.O. Box 398, Jeffersonville, New York 12748.


DEPOSIT AND LOAN PRODUCTS

Deposit Products. The Bank offers a variety of deposit products typical of
commercial banks and has designed product offerings responsive to the needs
of both individuals and businesses. Traditional demand deposit accounts,
interest-bearing transaction accounts (NOW accounts) and savings accounts are
offered on a competitive basis to meet customers' basic banking needs. Money
market accounts, time deposits in the form of certificates of deposit and
IRA/KEOGH accounts provide customers with price competitive and flexible
investment alternatives. The Bank does not have a single depositor or a small
group of related depositors whose loss would have a material adverse effect
upon the business of the Bank. See item 7, Distribution of Assets,
Liabilities & Stockholders' Equity for average balances of deposit products
at December 31, 2005, 2004 and 2003.

    Loan Products. The Company originates residential and commercial real
estate loans, as well as commercial, consumer and agricultural loans, to
borrowers in Sullivan County, New York designed to meet the banking needs of
individual customers, businesses and municipalities. A substantial portion of
the loan portfolio is secured by real estate properties located in that area.
The ability of the Company's borrowers to make principal and interest
payments is dependent upon, among other things, the level of overall economic
activity and the real estate market conditions prevailing within the
Company's concentrated lending area. Periodically, the Company purchases
loans from other financial institutions that are in markets outside of
Sullivan County.

    Please see item 7, Results of Operations 2005 versus 2004 for a
description of the loan portfolio and recent loan loss experience. Additional
information is set forth below relating to the Bank's loan products,
including major loan categories, general loan terms, credit underwriting
criteria, and risks particular to each category of loans. The Bank does not
have a major loan concentration in any individual industry.

    Commercial Loans and Commercial Real Estate Loans. The Bank offers a
variety of commercial credit products and services to its customers. These
include secured and unsecured loan products specifically tailored to the
credit needs of the customers, underwritten with terms and conditions
reflective of risk profile objectives and corporate earnings requirements.
These products are offered at all branch locations. All loans are governed by
a commercial loan policy which was developed to provide a clear framework for
determining acceptable levels of credit risk, underwriting criteria,
monitoring existing credits, and managing


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problem credit relationships. Credit risk control mechanisms have been
established and are monitored closely for compliance by the internal auditor
and an external loan review company.

    Risks particular to commercial loans include borrowers' capacities to
perform according to contractual terms of loan agreements during periods of
unfavorable economic conditions and changing competitive environments.
Management expertise and competency are critical factors affecting the
customers' performance and ultimate ability to repay their debt obligations.
Commercial real estate loans are exposed to fluctuations in collateral value.

    Consumer Loans. The Bank also offers a variety of consumer loan products.
These products include both open-end credit (home equity lines of credit,
unsecured revolving lines of credit) and closed-end credit secured and
unsecured direct and installment loans. Most of these loans are originated at
the branch level. This delivery mechanism is supported by an automated loan
platform delivery system and a decentralized underwriting process. The
lending process is designed to ensure not only the efficient delivery of
credit products, but also compliance with applicable consumer regulations
while minimizing credit risk exposure.

    Credit decisions are made under the guidance of a standard consumer loan
policy, with the assistance of senior credit managers. The loan policy was
developed to provide definitive guidance encompassing credit underwriting,
monitoring and management. The quality and condition of the consumer loan
portfolio, as well as compliance with established standards, is also
monitored closely.

    A borrower's ability to repay consumer debt is generally dependent upon
the stability of the income stream necessary to service the debt. Adverse
changes in economic conditions resulting in higher levels of unemployment
increase the risk of consumer defaults. Risk of default is also impacted by a
customer's total debt obligation. While the Bank can analyze a borrower's
capacity to repay at the time a credit decision is made, subsequent
extensions of credit by other financial institutions may cause the customer
to become over-extended, thereby increasing the risk of default.

    Residential Real Estate Loans. The Company originates a variety of
mortgage loan products including balloon mortgages, adjustable rate mortgages
and fixed rate mortgages. All mortgage loans originated are held in the
Bank's portfolio. Residential real estate loans possess risk characteristics
much the same as consumer loans. Stability of the borrower's employment is a
critical factor in determining the likelihood of repayment. Mortgage loans
are also subject to the risk that the value of the underlying collateral will
decline due to economic conditions or other factors.


SUPERVISION AND REGULATION

The Company is a bank holding company, registered with the Board of Governors
of the Federal Reserve System ("Federal Reserve") under the Bank Holding
Company Act ("BHC Act"). As such, the Federal Reserve is the Company's
primary federal regulator, and the Company is subject to extensive
regulation, examination, and supervision by the Federal Reserve. The Bank is
a national association, chartered by the Office of the Comptroller of the
Currency ("OCC"). The OCC is the Bank's primary federal regulator, and the
Bank is subject to extensive regulation, examination, and supervision by the
OCC. In addition, as to certain matters, the Bank is subject to regulation by
the Federal Reserve and the Federal Deposit Insurance Corporation ("FDIC").

    The Company is subject to capital adequacy guidelines of the Federal
Reserve. The guidelines apply on a consolidated basis and require bank
holding companies having the highest regulatory ratings for safety and
soundness to maintain a minimum ratio of Tier 1 capital to total average
assets (or "leverage ratio") of 3%. All other bank holding companies are
required to maintain an additional capital cushion of 100 to 200 basis
points. The Federal Reserve capital adequacy guidelines also require bank
holding companies to maintain a minimum ratio of Tier 1 capital to
risk-weighted assets of 4% and a minimum ratio of qualifying total capital to
risk-weighted assets of 8%. As of December 31, 2005, the Company's leverage
ratio was 11.5%, its ratio of Tier 1 capital to risk-weighted assets was
16.9%, and its ratio of qualifying total capital to risk-weighted assets was
18.2%. The Federal Reserve may set higher minimum capital requirements for
bank holding companies whose circumstances warrant it, such as companies
anticipating significant growth or facing unusual risks. The Federal Reserve
has not advised the Company of any special capital requirement applicable to
it.

    Any bank holding company whose capital does not meet the minimum capital
adequacy guidelines is considered to be undercapitalized and is required to
submit an acceptable plan to the Federal Reserve for achieving capital
adequacy. As an example the company's ability to pay dividends to its
stockholders could be restricted. In addition, the Federal Reserve has
indicated that it will consider a bank holding company's capital ratios and
other indications of its capital strength in evaluating any proposal to
expand its banking or nonbanking activities.

    The Bank is subject to leverage and risk-based capital requirements and
minimum capital guidelines of the OCC that are similar to those applicable to
the Company. As of December 31, 2005, the Bank was in compliance with all
minimum capital requirements.

    Any bank that is less than well-capitalized is subject to certain
mandatory prompt corrective actions by its primary federal regulatory agency,
as well as other discretionary actions, to resolve its capital deficiencies.
The severity of the actions required to be taken increases as the bank's
capital position deteriorates. A bank holding company must guarantee that a
subsidiary bank will meet its capital restoration plan, up to an amount equal
to 5% of the subsidiary bank's assets or the amount required to meet
regulatory capital requirements, whichever is less. In addition, under
Federal Reserve policy, a bank holding company is expected to serve as a
source of financial strength, and to commit financial resources to support
its subsidiary banks. Any capital loans made by a bank


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holding company to a subsidiary bank are subordinate to the claims of
depositors in the bank and to certain other indebtedness of the subsidiary
bank. In the event of the bankruptcy of a bank holding company, any
commitment by the bank holding company to a federal banking regulatory agency
to maintain the capital of a subsidiary bank would be assumed by the
bankruptcy trustee and would be entitled to priority of payment.

    The Bank also is subject to substantial regulatory restrictions on its
ability to pay dividends to the Company. Under OCC regulations, the Bank may
not pay a dividend, without prior OCC approval, if the total amount of all
dividends declared during the calendar year, including the proposed dividend,
exceeds the sum of its retained net income to date during the calendar year
and its retained net income over the preceding two years. As of December 31,
2005, approximately $13.1 million was available for the payment of dividends
without prior OCC approval. The Bank's ability to pay dividends also is
subject to the Bank being in compliance with the regulatory capital
requirements described above. The Bank is currently in compliance with these
requirements.

    The deposits of the Bank are insured up to regulatory limits by the FDIC
and, accordingly, are subject to deposit insurance assessments to maintain
the insurance funds administered by the FDIC. The deposits of the Bank
historically have been subject to deposit insurance assessments to maintain
the Bank Insurance Fund ("BIF"). On February 8, 2006, the Federal Deposit
Insurance Reform Act of 2005 was signed into law, which gives the FDIC
increased flexibility in assessing premiums on banks and savings
associations, including the Bank, to pay for deposit insurance and in
managing its deposit insurance reserves. The reform legislation provides a
limited credit to all insured institutions, based on the amount of their
insured deposits at year-end 1996, to offset the premiums that they may be
assessed, combines the BIF and the Savings Association Insurance Fund to form
a single Deposit Insurance Fund, increases deposit insurance to $250,000 for
Individual Retirement Accounts, and authorized inflation-based increases in
deposit insurance on all accounts every 5 years, beginning in 2011. The FDIC
also is directed to conduct studies regarding further deposit insurance
reform.

    The Federal Deposit Insurance Act provides for additional assessments to
be imposed on insured depository institutions to pay for the cost of
Financing Corporation ("FICO") funding. The FICO assessments are adjusted
quarterly to reflect changes in the assessment basis of the FDIC insurance
funds and do not vary depending upon a depository institution's
capitalization or supervisory evaluation. During 2005, FDIC-insured banks
paid an average rate of approximately $0.014 per $100 for purposes of funding
FICO bond obligations. The assessment rate is set at approximately $0.013 per
$100 for the first quarter of 2006.

    Transactions between the Bank and any affiliate, which includes the
Company, are governed by sections 23A and 23B of the Federal Reserve Act
which are implemented in Federal Reserve Regulation W. Generally, Regulation
W is intended to protect insured depository institutions from suffering
losses arising from transactions with non-insured affiliates by limiting the
extent to which a bank or its subsidiaries may engage in covered transactions
with any one affiliate and with all affiliates of the bank in the aggregate,
and requiring that such transactions be on terms that are consistent with
safe and sound banking practices. Regulation W also regulates transactions by
a bank with its financial subsidiaries, which it may operate under the
expanded authority granted to national banks under the Gramm-Leach-Bliley Act
("GLB Act").

    Under the GLB Act, all financial institutions, including the Company and
the Bank, are required to adopt privacy policies to restrict the sharing of
nonpublic customer data with nonaffiliated parties at the customer's request,
and establish procedures and practices to protect customer data from
unauthorized access. The Company has developed such policies and procedures
for itself and the Bank, and believes it is in compliance with all privacy
provisions of the GLB Act. In addition the Fair and Accurate Credit
Transactions Act ("FACT Act") includes many provisions concerning national
credit reporting standards, and permits consumers, including customers of the
Company and the Bank, to opt out of information sharing among affiliated
companies for marketing purposes. The FACT Act also requires banks and other
financial institutions to notify their customers if they report negative
information about them to a credit bureau or if they are granted credit on
terms less favorable than those generally available. In response to periodic
disclosures by companies in various industries of the loss or theft of
computer-based nonpublic customer information, several bills have been
introduced in Congress to establish national standards for the safeguarding
of such information and the disclosure of security breaches.

    Under Title III of the USA PATRIOT Act, also known as the International
Money Laundering Abatement and Anti-Terrorism Financing Act of 2001, all
financial institutions, including the Company and the Bank, are required to
take certain measures to identify their customers, prevent money laundering,
monitor certain customer transactions and report suspicious activity to U.S.
law enforcement agencies, and scrutinize or prohibit altogether certain
transactions of special concern. Financial institutions also are required to
respond to requests for information from federal banking regulatory agencies
and law enforcement agencies concerning their customers and their
transactions. Information-sharing among financial institutions concerning
terrorist or money laundering activities is encouraged by an exemption
provided from the privacy provisions of the GLB Act and other laws. Financial
institutions that hold correspondent accounts for foreign banks or provide
private banking services to foreign individuals are required to take measures
to avoid dealing with certain foreign individuals or entities, including
foreign banks with profiles that raise money laundering concerns, and are
prohibited altogether from dealing with foreign "shell banks" and persons
from jurisdictions of particular concern. All financial institutions also are
required to adopt internal anti-money laundering programs.


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The effectiveness of a financial institution in combating money laundering
activities is a factor to be considered in any application submitted by the
financial institution under the Bank Merger Act, which applies to the Bank,
or the BHC Act, which applies to the Company. The Company and the Bank have
in place a Bank Secrecy Act and USA PATRIOT Act compliance program, and they
engage in very few transactions of any kind with foreign financial
institutions or foreign persons.

    The Sarbanes-Oxley Act ("SOA implemented a broad range of measures to
increase corporate responsibility, enhance penalties for accounting and
auditing improprieties at publicly traded companies, and protect investors by
improving the accuracy and reliability of corporate disclosures for companies
that have securities registered under the Securities Exchange Act of 1934,
including publicly-held bank holding companies such as the Company. SOA
includes very specific disclosure requirements and corporate governance rules
and requires the SEC and securities exchanges to adopt extensive additional
disclosure, corporate governance, and other related rules. SOA represents
significant federal involvement in matters traditionally left to state
regulatory systems, such as the regulation of the accounting profession, and
to state corporate law, such as the relationship between a board of directors
and management and between a board of directors and its committees. In
addition, the federal banking regulators have adopted generally similar
requirements concerning the certification of financial statements by bank
officials.

    Beginning in March 2005, home mortgage lenders, including banks, were
required under the Home Mortgage Disclosure Act to make available to the
public expanded information regarding the pricing of home mortgage loans,
including the "rate spread" between the interest rate on loans and certain
Treasury securities and other benchmarks. The availability of this
information has led to increased scrutiny of higher-priced loans at all
financial institution to detect illegal discriminatory practices and to the
initiation of a limited number of investigations by federal banking agencies
and the U.S. Department of Justice. The Company has no information that it or
its affiliates are the subject of any investigation.

    The Bankruptcy Abuse Prevention and Consumer Protection Act amended the
U.S. Bankruptcy Code, effective October 17, 2005. Under the new law, the
ability of consumers to discharge their debts in bankruptcy is limited by a
needs-based test, and more debtors than in the past are expected to enter
into repayment programs with their creditors. The law also limits certain
homestead exemptions, limits the discharge of debt incurred for the purchase
of certain luxury items, and extends from 6 year to 8 years the minimum time
between successive bankruptcy discharges. The Company expects no material
effects from this new law.


TAXATION

Except for the Bank's REIT subsidiary, the Company files a calendar year
consolidated federal income tax return on behalf of itself and its
subsidiaries. The Company reports its income and deductions using the accrual
method of accounting. The components of income tax expense are as follows for
the years ended December 31:

                                          2005           2004           2003

Current tax expenses:
  Federal                           $2,094,000     $2,115,000     $2,159,000
  State                                302,000        325,000        327,000
Deferred tax benefit                  (354,000)      (223,000)      (502,000)

      Total income tax expense      $2,042,000     $2,217,000     $1,984,000

    For a detailed discussion of income taxes please refer to note 9 in the
Notes to Consolidated Financial Statements.


MONETARY POLICY AND ECONOMIC CONDITIONS

The earnings of the Company and the Bank are affected by the policies of
regulatory authorities, including the Federal Reserve System. Federal Reserve
System monetary policies have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so
in the future. Because of the changing conditions in the national economy and
in the money markets, as a result of actions by monetary and fiscal
authorities, interest rates, credit availability and deposit levels may
change due to circumstances beyond the control of the Company and the Bank.


COMPETITION

The Bank faces strong competition for local business in the communities it
serves from other financial institutions. Throughout Sullivan County there
are 35 branches of commercial banks, savings banks, savings and loan
associations and other financial organizations.

    With respect to most of the services that the Bank performs, there is
increasing competition from financial institutions other than commercial
banks due to the relaxation of regulatory restrictions. Money market funds
actively compete with banks for deposits. Savings banks, savings and loan
associations and credit institutions, as well as consumer finance companies,
insurance companies and pension trusts are important competitors. The Bank's
ability to maintain profitability is also affected by competition for loans.


NUMBER OF PERSONNEL

At December 31, 2005, there were 135 persons employed by the Company and the
Bank.


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Item 1A. Risk Factors


Although our common stock is traded on the NASDAQ Small Cap Market, the
volume of trading in the common stock has been light. As a result,
shareholders may not be able to quickly and easily sell their common stock.

Although our common stock is traded on the NASDAQ Small Cap Market, and a
number of brokers offer to make a market in the common stock on a regular
basis, trading volume is limited. As a result, you may find it difficult to
sell shares at or above the price at which you purchased them and you may
lose part of your investment.


Our common stock is not FDIC-insured.

Shares of our common stock are not securities or savings or deposit accounts
or other obligations of our subsidiary bank. Our common stock is not insured
by the Federal Deposit Insurance Corporation ("FDIC") or any other
governmental agency and is subject to investment risk, including the possible
loss of your entire investment.


Applicable laws and regulations restrict both the ability of the Bank to
pay dividends to the Company, and the ability of the Company to pay dividends
to you.

Our principal source of income consists of dividends, if any, from the
Bank. Payment of dividends by the Bank to us is subject to regulatory
limitations imposed by the Office of the Comptroller of the Currency ("OCC")
and the Bank must meet OCC capital requirements before and after the payment
of any dividends. In addition the Bank also cannot pay a dividend, without
prior OCC approval, if the total amount of all dividends declared during a
calendar year, including the proposed dividend, exceeds the sum of its
retained net income to date during the calendar year. The OCC has discretion
to prohibit any otherwise permitted capital distribution on general safety
and soundness grounds. As of December 31, 2005, approximately $13.1 million
was available for the payment of dividends without prior OCC approval.

    Moreover, the law of the State of New York, where the Company is
incorporated, requires that dividends be paid only from capital surplus so
that the net assets of the Company remaining after such dividend payments are
at least equal to the amounts of the Company's stated capital.

    Any payment of dividends in the future will continue be at the sole
discretion of our board of directors and will depend on a variety of factors
deemed relevant by our board of directors, including, but not limited to,
earnings, capital requirements and financial condition.


We operate in a highly regulated environment and may be adversely affected by
changes in laws and regulations.

We are subject to extensive regulation, supervision and examination by the
Board of Governors of the Federal Reserve System ("Federal Reserve"). The OCC
is the Bank's primary regulator, and the Bank is subject to extensive
regulation, examination, and supervision by the OCC. In addition , as to
certain matters, the Bank is subject to regulation by the Federal Reserve and
the FDIC. Such regulation and supervision govern the activities in which a
financial institution and its holding company may engage and are intended
primarily for the protection of the insurance fund and depositors and are not
intended for the protection of investors in our common stock. Regulatory
authorities have extensive discretion in connection with their supervisory
and enforcement activities, including the imposition of restrictions on the
operation of an institution, the classification of assets by the institution
and the adequacy of an institution's allowance for loan losses. Any change in
such regulation and oversight, whether in the form of regulatory policy,
regulations, or legislation, may have a material impact on our operations.


Changes in local economic conditions could reduce our income and growth, and
could lead to higher levels of problem loans and charge-offs.

We make loans, and most of our assets are located, in Sullivan County, New
York as well as some adjacent areas in New York and Pennsylvania. Adverse
changes in economic conditions in these markets could hurt our ability to
collect loans, could reduce the demand for loans, and otherwise could
negatively affect our performance and financial condition.


There is no assurance that we will be able to successfully compete with
others for business.

We compete for loans, deposits, and investment dollars with other insured
depository institutions and enterprises, such as securities firms, insurance
companies, savings associations, credit unions, mortgage brokers, and private
lenders, many of which have substantially greater resources. The differences
in resources and regulations may make it harder for us to compete profitably,
reduce the rates that we can earn on loans and investments, increase the
rates we must offer on deposits and other funds, and adversely affect our
overall financial condition and earnings.


Our profitability depends on economic policies and factors beyond our
control.

Our operating income and net income depend to a great extent on "rate
differentials," i.e., the difference between the interest yields we receive
on loans, securities and other interest bearing assets and the interest rates
we pay on interest bearing deposits and other liabilities. These rates are
highly sensitive to many factors which are beyond our control, including
general economic conditions and the policies of various governmental and
regulatory authorities, including the Federal Reserve.


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Rising interest rate negatively affect the fair value of our portfolio of
securities available for sale.

At December 31, 2005, securities available for sale constituted 23% of our
total assets, or $88,984,000. As interest rates have risen, the fair value of
these securities have fallen below their carrying value. If interest rates
continue to rise, as is predicted, the fair value of these securities will
continue to decline and the amount of unrealized losses will rise. Such
unrealized losses would be recognized if the Company sells the affected
securities.


Our growth and expansion may be limited by many factors.

We have pursued and intend to continue to pursue an internal growth strategy,
the success of which will depend primarily on generating an increasing level
of loans and deposits at acceptable risk and interest rate levels without
corresponding increases in non interest expenses. We cannot assure you that
we will be successful in continuing our growth strategies, due, in part, to
delays and other impediments inherent in our highly regulated industry,
limited availability of qualified personnel or unavailability of suitable
branch sites. In addition, the success of our growth strategy will depend, in
part, on continued favorable economic conditions in our market area.


The value of residential and commercial properties underlying certain loans
held by the Company would be negatively affected if Casino gambling and other
projects are not completed satisfactorily.

The value of residential and commercial properties in the vicinity of an arts
complex have risen in anticipation of its successful completion. A similar
rise in property values has been seen near properties where Casinos are
expected to be constructed. Some of these properties provide the chief
collateral for loans originated by the Company. If these projects are not
successful, the value of these properties would be expected to decline,
negatively affecting the financial condition of the Company.

    In addition a dam forming a large recreational lake is severely impaired
and if not repaired the collateral values of both residential and commercial
properties will decline.



Item 1B. Unresolved Staff Comments

Not Applicable.



Item 2. Properties

In addition to the main office of the Company and the Bank in
Jeffersonville, New York, the Bank has nine branch locations and an
operations center. Set forth below is a description of the offices of the
Company and the Bank.

MAIN OFFICE -- OWNED
4864 State Route 52
Jeffersonville, New York 12748
(845)482-4000

OPERATIONS CENTER -- OWNED
4866 State Route 52
Jeffersonville, New York 12748
(845) 482-4000

CALLICOON BRANCH -- LEASED
9 Lower Main Street
Callicoon, New York 12723
(845) 887-4866

ELDRED BRANCH -- OWNED
561 Route 55
Eldred, New York 12732
(845) 557-8513

LIBERTY BRANCH -- OWNED
19 Church Street
Liberty, New York 12754
(845) 292-6300

LIVINGSTON MANOR BRANCH -- OWNED
33 Main Street
Livingston Manor, New York 12758
(845)439-8123

LOCH SHELDRAKE BRANCH -- OWNED
1278 State Route 52
Loch Sheldrake, New York 12759
(845) 434-1180


                                      6

<PAGE>

MONTICELLO BRANCH -- OWNED
19 Forestburgh Road
Monticello, New York 12701
(845) 791-4000

NARROWSBURG BRANCH -- LEASED
122 Kirk Road
Narrowsburg, New York 12764
(845) 252-6570

WAL*MART BRANCH -- LEASED
33 Anawana Lake Road
Monticello, New York 12701
(845) 794-3988

WURTSBORO BRANCH -- LEASED
2930 State Route 209
Wurtsboro, New York 12790
(845) 888-5890

    The major classifications of premises and equipment and the book value
thereof were as follows at December 31, 2005:

                                                                    2005

Land                                                         $   387,000
Buildings                                                      2,907,000
Furniture and fixtures                                           132,000
Equipment                                                      3,207,000
Building and leasehold improvements                            1,207,000
Construction in progress                                          28,000

                                                               7,868,000

Less accumulated depreciation and amortization                (4,841,000)

      Total premises and equipment, net                      $ 3,027,000



Item 3. Legal Proceedings

The Company and the Bank are not parties to any material legal proceedings
other than ordinary routine litigation incidental to business to which the
Company or any of its subsidiaries is a party or of which and of their
property is subject.



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

Not applicable.


                                      7

<PAGE>

PART II

Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities

The Company's common stock is traded on the NASDAQ Small Cap Market under the
symbol JFBC. The following investment firms are known to handle
Jeffersonville Bancorp stock transactions: UBS Securities, LLC, Knight Equity
Markets, L.P., Citadel Derivatives Group LLC, Hill, Thompson, Magid and Co.,
FTN Midwest Securities Corp., and E-Trade Capital Markets. The following
table shows the range of high and low sale prices for the Company's stock and
cash dividends paid for the quarters indicated.

                                                                       Cash
                                   Sales             Sales        Dividends
Quarter Ended                        Low              High             Paid

March 31, 2004                    $17.00            $20.50            $0.09
June 30, 2004                     $15.75            $18.20            $0.09
September 30, 2004                $16.17            $18.00            $0.09
December 31, 2004                 $16.41            $20.87            $0.13

March 31, 2005                    $17.94            $20.43            $0.10
June 30, 2005                     $20.15            $25.99            $0.10
September 30, 2005                $21.92            $26.15            $0.10
December 31, 2005                 $21.15            $24.00            $0.14

    Number of Holders of Record. At the close of business on March 6, 2006,
the Company had 1,432 stockholders of record of the 4,434,321 shares of
common stock then outstanding.

    Securities Authorized for Issuance Under Equity Compensation Plan. The
Company has no equity compensation plans under which options may be issued.

    Payment of Dividends. Applicable laws and regulations restrict the
ability of the Bank to pay dividends to the Company, and the ability of the
Company to pay dividends to stockholders. Payment of dividends in the future
will be at the sole discretion of the Company's board of directors and will
depend on a variety of factors deemed relevant by the board of directors,
including, but not limited to, earnings, capital requirements and financial
condition. See "Item 1. Business -- Supervision and Regulation."


                                      8

<PAGE>



Item 6. Selected Financial Data

<TABLE>

FIVE-YEAR SUMMARY

<CAPTION>

                                              2005              2004             2003              2002             2001

<S>                                   <C>               <C>              <C>               <C>              <C>
RESULTS OF OPERATIONS
Interest income                       $ 22,170,000      $ 20,820,000     $ 20,082,000      $ 20,635,000     $ 20,230,000
Interest expense                         5,402,000         4,051,000        4,037,000         5,331,000        7,627,000
Net interest income                     16,768,000        16,769,000       16,045,000        15,304,000       12,603,000
Provision for loan losses                  180,000           360,000          620,000           900,000          300,000
Net income                               5,725,000         6,171,000        5,732,000         5,242,000        3,625,000

FINANCIAL CONDITION
Total assets                          $387,343,000      $365,523,000     $352,204,000      $325,025,000     $298,110,000
Deposits                               312,096,000       293,094,000      280,227,000       252,792,000      238,029,000
Gross loans                            244,261,000       224,236,000      196,675,000       171,977,000      162,711,000
Stockholders' equity                    42,519,000        39,646,000       35,786,000        32,497,000       27,313,000

AVERAGE BALANCES
Total assets                          $374,413,000      $361,783,000     $340,575,000      $313,022,000     $286,823,000
Deposits                               297,643,000       291,426,000      268,687,000       247,953,000      234,431,000
Gross loans                            238,993,000       211,846,000      183,335,000       165,607,000      157,165,000
Stockholders' equity                    41,350,000        37,149,000       33,561,000        30,271,000       28,139,000

FINANCIAL RATIOS
Net income to average total assets            1.53%             1.71%            1.68%             1.67%            1.26%
Net income to average
  stockholders' equity                       13.85%            16.61%           17.08%            17.32%           12.88%
Average stockholders' equity
  to average total assets                    11.04%            10.27%            9.85%             9.67%            9.81%

SHARE AND PER SHARE DATA(1)
Basic earnings per share              $       1.29      $       1.39     $       1.29      $       1.18     $       0.81
Dividends per share                   $       0.44      $       0.40     $       0.33      $       0.30     $       0.25
Dividend payout ratio                        34.04%            28.78%           25.28%            25.39%           30.40%
Book value at year end                $       9.59      $       8.94     $       8.07      $       7.33     $       6.16
Total dividends paid                  $  1,949,000      $  1,776,000     $  1,449,000      $  1,331,000     $  1,102,000
Average number of
shares outstanding                       4,434,321         4,434,321        4,434,321         4,434,321        4,472,664
Shares outstanding at year end           4,434,321         4,434,321        4,434,321         4,434,321        4,434,321

</TABLE>

(1)  Share and per share data has been restated for a 3 for 1 stock split
     effected in the form of a stock dividend in 2003.


                                      9

<PAGE>

<TABLE>

SUMMARY OF QUARTERLY RESULTS
OF OPERATIONS FOR 2005 AND 2004

<CAPTION>

2005                                      March 31           June 30     September 30       December 31            Total

<S>                                    <C>               <C>              <C>               <C>             <C>
Interest income                        $ 5,262,000       $ 5,391,000      $ 5,665,000       $ 5,852,000     $ 22,170,000
Interest expense                        (1,088,000)       (1,252,000)      (1,438,000)       (1,624,000)      (5,402,000)

Net interest income                      4,174,000         4,139,000        4,227,000         4,228,000       16,768,000

Provision for loan losses                  (60,000)          (60,000)         (60,000)                0         (180,000)
Non-interest income                        949,000           964,000        1,017,000         1,133,000        4,063,000
Non-interest expenses                   (3,249,000)       (3,149,000)      (3,278,000)       (3,208,000)     (12,884,000)

Income before taxes                      1,814,000         1,894,000        1,906,000         2,153,000        7,767,000
Income taxes                              (454,000)         (498,000)        (497,000)         (593,000)      (2,042,000)

Net income                             $ 1,360,000       $ 1,396,000      $ 1,409,000       $ 1,560,000     $  5,725,000

Basic earnings per share               $      0.31       $      0.31      $      0.32       $      0.35     $       1.29

</TABLE>


<TABLE>

<CAPTION>

2004                                      March 31           June 30     September 30       December 31            Total

<S>                                    <C>               <C>              <C>               <C>             <C>
Interest income                        $ 5,137,000       $ 5,109,000      $ 5,261,000       $ 5,313,000     $ 20,820,000
Interest expense                          (990,000)         (975,000)      (1,031,000)       (1,055,000)      (4,051,000)

Net interest income                      4,147,000         4,134,000        4,230,000         4,258,000       16,769,000

Provision for loan losses                  (90,000)          (90,000)         (90,000)          (90,000)        (360,000)
Non-interest income                        860,000         1,030,000        1,046,000           936,000        3,872,000
Non-interest expenses                   (2,784,000)       (3,064,000)      (3,110,000)       (2,935,000)     (11,893,000)

Income before taxes                      2,133,000         2,010,000        2,076,000         2,169,000        8,388,000
Income taxes                              (573,000)         (525,000)        (544,000)         (575,000)      (2,217,000)

Net income                             $ 1,560,000       $ 1,485,000      $ 1,532,000       $ 1,594,000     $  6,171,000

Basic earnings per share               $      0.35       $      0.33      $      0.35       $      0.36     $       1.39

</TABLE>


Item 7. Management's Discussion and Analysis of Financial Condition and
        Results of Operations

The following is a discussion of the factors which significantly affected the
consolidated results of operations and financial condition of Jeffersonville
Bancorp ("the Parent Company") and its wholly-owned subsidiary, The First
National Bank of Jeffersonville ("the Bank"). For purposes of this
discussion, references to the Company include both the Bank and Parent
Company, as the Bank is the Parent Company's only subsidiary. This discussion
should be read in conjunction with the consolidated financial statements and
notes thereto, and the other financial information appearing elsewhere in
this annual report.

    This document contains forward-looking statements, which are based on
assumptions and describe future plans, strategies and expectations of the
Company. These forward-looking statements are generally identified by use of
the words "believe," "expect," "intend," "anticipate," "estimate," "project,"
or similar words. The Company's ability to predict results and the actual
effect of future plans or strategies is uncertain. Factors which could have a
material adverse effect on operations include, but are not limited to,
changes in interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and Federal Reserve
Board, the quality or composition of the loan or investment portfolios,
demand for loan products, deposit flows, competition, demand for financial
services in the Company's market areas and accounting principles and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements. Actual results could differ materially from
forward-looking statements.


GENERAL

The Parent Company is a bank holding company founded in 1982 and
headquartered in Jeffersonville, New York. The Parent Company owns 100% of
the outstanding shares of the Bank's common stock and derives substantially
all of its income from the Bank's operations in the form of dividends paid to
the Parent Company. The Bank is a New York commercial bank chartered in 1913
serving Sullivan County, New York with branch offices in Jeffersonville,
Eldred, Liberty, Loch Sheldrake, Monticello (2), Livingston Manor,
Narrowsburg, Callicoon and Wurtsboro. The Bank's administrative offices are
located in Jeffersonville, New York.


                                     10

<PAGE>

    The Company's mission is to serve the community banking needs of its
borrowers and depositors, who predominantly are individuals, small businesses
and local municipal governments. The Company believes it understands its
local customer needs and provides quality service with a personal touch.

    The financial results of the Company are influenced by economic events
that affect the communities we serve as well as national economic trends,
primarily interest rates, affecting the entire banking industry. Changes in
net interest income have the greatest impact on the Company's net income.

    National economic policies have caused interest rates to rise 14 times
since June 2004. The Company's yields on interest earning assets have fallen
and the costs of interest bearing liabilities have risen, creating net
interest margin compression. Locally, the economy continued to exhibit
strength in 2005. While the local economic forecast has been bright, it
should be acknowledged that the economy in most other areas of New York State
continues to be less robust. Significant improvement in the local economy
continues to be demonstrated in the Sullivan County real estate market.
Several new housing projects continued to progress along with a vibrant real
estate market, which increase optimism in the county's future. A permanent
concert facility will open on the original site of the Woodstock Festival in
Bethel this year. Several Native American run casinos are still on the
horizon. The success of these projects, tourism, real estate values and the
availability of qualified labor is critical to the local economy and the
Company.


CRITICAL ACCOUNTING POLICIES

Management of the Company considers the accounting policy relating to the
allowance for loan losses to be a critical accounting policy given the
inherent uncertainty in evaluating the levels of the allowance required to
cover credit losses in the portfolio and the material effect that such
judgments can have on the results of operations. The allowance for loan
losses is maintained at a level deemed adequate by management based on an
evaluation of such factors as economic conditions in the Company's market
area, past loan loss experience, the financial condition of individual
borrowers, and underlying collateral values based on independent appraisals.
While management uses available information to recognize losses on loans,
future additions to the allowance for loan losses may be necessary based on
changes in economic conditions and values of real estate particularly in
Sullivan County. Collateral underlying certain real estate loans could lose
value which could lead to future additions to the allowance for loan losses.
In addition, Federal regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan
losses and may require the Company to recognize additions to the allowance
based on their judgments about information available to them at the time of
their examination, which may not be currently available to management.


RECENT ACCOUNTING PRONOUNCEMENTS

In November 2005, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position (FSP) 115-1, The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments. This FSP provides additional
guidance on when an investment in a debt or equity security should be
considered impaired and when that impairment should be considered
other-than-temporary and recognized as a loss in earnings. Specifically, the
guidance clarifies that an investor should recognize an impairment loss no
later than when the impairment is deemed other-than-temporary, even if a
decision to sell has not been made. The FSP also requires certain disclosures
about unrealized losses that have not been recognized as other-than-temporary
impairments. It is not expected to have a significant effect on the
consolidated financial statements.

FINANCIAL CONDITION

Total assets increased by $21.8 million or 6.0% to $387.3 million at December
31, 2005 from $365.5 million at December 31, 2004. The increase was primarily
due to a $20.1 million or 9.1% increase in net loans from $220.6 million at
December 31, 2004 to $240.6 million at December 31, 2005. A net decrease of
$11.7 million in the portfolio of securities available for sale for 2005,
primarily due to maturities and calls, was a funding source for new loan
growth. The overall assets increase was funded by a $19.0 million increase in
total deposits from $293.1 million at December 31, 2004 to $312.1 million at
December 31, 2005. The deposit increase included $15.0 million of brokered
deposits. Two new borrowings from the Federal Home Loan Bank (FHLB) totaling
$10.0 million were added to help fund the loan growth and repay one FHLB
borrowing which matured for $3.5 million.

    In 2005, total gross loans increased $20.0 million or 8.9% from $224.2
million to $244.3 million. Within the loan portfolio, commercial loans
increased by $7.3 million to $28.6 million at December 31, 2005, residential
real estate increased by $7.1 million to $89.6 million, commercial real
estate loans increased $6.3 million to $81.6 million, home equity loans
increased $1.6 million to $22.7 million, while consumer installment loans
decreased $2.4 million to $11.7 million. The growth in commercial real estate
loans reflects the Company's strategy to provide loans for local real estate
projects where there is strong loan to value ratio (taking into consideration
possible speculation regarding casino gambling proposals). The growth in
residential mortgages reflects new products to meet the highly competitive
nature of this market. As a result of casino gambling proposals and related
local economic improvement, the Company anticipates continued residential and
commercial real estate loan opportunities. Accordingly, additional growth is
anticipated in real estate loans during 2006. The growth in the non-real
estate commercial loan portfolio reflects continued business growth in the
county. The overall loan portfolio is structured in accordance with
management's belief that loans


                                      11

<PAGE>

secured by residential and commercial real estate generally result in lower
loan loss levels compared to other types of loans, because of the value of
the underlying collateral. In the event that the casino gambling proposals do
not progress, collateral underlying certain real estate projects could lose
value.

    There was no other real estate owned at December 31, 2005 or at December
31, 2004. Total non-performing loans increased from $2.1 million at December
31, 2004 to $2.9 million at December 31, 2005. Net loan charge-offs decreased
from $284,000 in 2004 to $209,000 in 2005. At December 31, 2005, the
allowance for loan losses equaled $3.6 million representing 1.48% of total
gross loans outstanding and 123.7% of total non-performing loans.

    Total deposits increased $19.0 million to $312.1 million at December 31,
2005 from $293.1 million at December 31, 2004. Time deposits increased from
$104.2 million at December 31, 2004 to $123.2 million at December 31, 2005,
an increase of $19.1 million or 18.3%. The majority of this increase was due
to brokered time deposits in the amount of $15.0 million or 4.8% of total
deposits. These deposits were obtained to fund future anticipated growth of
the loan portfolio. Increases in demand and Now and super Now accounts
totaling $1.0 million were offset by reductions in saving and insured money
market deposits of $1.0 million.

    Total stockholders' equity was $42.5 million at December 31, 2005, an
increase of $2.9 million from December 31, 2004. The increase was due
primarily to net income of $5.7 million partially offset by cash dividends of
$1.9 million and a reduction in accumulated other comprehensive income of
$903,000.


RESULTS OF OPERATIONS 2005 VERSUS 2004


Net Income

Net income for 2005 of $5.7 million decreased 7.2% or $446,000 from the 2004
net income of $6.2 million. The lower earnings level in 2005 reflects the
interaction of a number of factors. The most significant factor which reduced
2005 net income was an increase in deposit interest expense which outpaced
loan and security rate increases, squeezing the net interest spread. Net
interest income remained flat from 2004 to 2005 at $16.8 million. An increase
in loan interest and fees of $2.2 million to $17.6 million from $15.4 million
or 13.9% were partially offset by a decrease in income on securities of
$864,000 or 16.2% to $4.5 million. Interest expense on deposits increased
$1.2 million or 40.5% to $4.1 million primarily due to continued rate
increases by the Federal Reserve Bank. The provision for loan losses
decreased 50.0% or $180,000 from $360,000 in 2004 to $180,000 in 2005. Salary
and employee benefit expense increased $732,000 or 10.6% primarily due to the
addition of new employees, normal salary increases and the increased costs of
providing pension and health care benefits. Occupancy and equipment expense
increased $178,000 or 9.9%, primarily due to an increase in software and
equipment maintenance agreements and the on-line banking program.


Interest Income and Interest Expense

Throughout the following discussion, net interest income and its components
are expressed on a tax equivalent basis which means that, where appropriate,
tax exempt income is shown as if it were earned on a fully taxable basis.

    The largest source of income for the Company is net interest income,
which represents interest earned on loans, securities and short-term
investments, less interest paid on deposits and other interest bearing
liabilities. Tax equivalent net interest income of $17.8 million for 2005
represented an increase of 0.4% over 2004. Net interest margin decreased 22
basis points to 5.18% in 2005 compared to 5.40% in 2004, due to overall
increases in interest bearing liability yields.

    Total interest income for 2005 was $23.2 million, compared to $21.9
million in 2004. The increase in 2005 is the result of a 13 basis point
increase in the earning asset yield combined with an increase in the average
balance of interest earning assets from $329.7 million in 2004 to $342.8
million in 2005, an increase of 4.0%. Total average securities (securities
available for sale and securities held to maturity) decreased $13.1 million
or 11.3% in 2005 to $102.6 million. The yield on total securities decreased
11 basis points to 5.4% in 2005 from 5.5% in 2004. The decrease in total
average securities during 2005 reflected the need to fund new loans. In 2005,
average loans increased $27.1 million to $239.0 million from $211.8 million
in 2004. Concurrently the average loan yield increased from 7.28% in 2004 to
7.35% in 2005 due to a consistent increase in time and demand loans tied to
prime rate which increased in volume by 48.3% or $9.1 million. Average
residential and commercial real estate loans continued to make up a major
portion of the loan portfolio at 71.0% of total loans in 2005. In 2006, any
increases in funding will continue to be allocated first to meet loan demand,
as necessary, and then to the securities portfolios.

    Total interest expense in 2005 increased $1.4 million to $5.4 million
from $4.1 in 2004. The average balance of interest bearing liabilities
increased from $253.9 million in 2004 to $258.8 million in 2005, an increase
of 1.9% as a result of $10 million increase in Federal Home Loan Bank
borrowings. During 2005, the average cost of total interest bearing
liabilities increased by 49 basis points from 1.60% to 2.09%. Average
interest bearing deposits increased $2.8 million to reach $230.4 million in
2005, an increase of 1.2%. Interest rates on interest bearing deposits
increased by 49 basis points from an average rate paid of 1.27% in 2004 to
1.76% in 2005. In 2005, average demand deposit balances increased 5.4% over
2004.


                                      12

<PAGE>


Provision for Loan Losses

The provision for loan losses was $180,000 in 2005 as compared to
$360,000 in 2004 as a result of the reduction in net loan charge offs from
$284,000 in 2004 to $210,000 in 2005, offset slightly by the increase in
nonaccruing loans. However, while nonaccruing loans have increased at year
end 2005, as compared to 2004, the vast majority of the nonaccruing loans in
2005 were well secured with interest recognized on a cash basis. Provisions
for loan losses are recorded to maintain the allowance for loan losses at a
level deemed adequate by management based on an evaluation of such factors as
economic conditions in the Company's market area, past loan loss experience,
the financial condition of individual borrowers, and underlying collateral
values based on independent appraisals. While management uses available
information to recognize losses on loans, future additions to the allowance
for loan losses may be necessary based on changes in economic conditions,
particularly in Sullivan County. In addition, Federal regulatory agencies, as
an integral part of their examination process, periodically review the
Company's allowance for loan losses and may require the Company to recognize
additions to the allowance based on their judgments about information
available to them at the time of their examination, which may not be
currently available to management.

    The allowance for loan losses was $3.6 million at December 31, 2005, 2004
and 2003. The allowance as a percentage of total loans was 1.48% at December
31, 2005, compared to 1.62% and 1.81% at December 31, 2004 and 2003,
respectively. The allowance's coverage of non-performing loans was 123.7% at
December 31, 2005 compared to 170.6% and 114.3% at December 31, 2004 and 2003
respectively.


Summary of Loan Loss Experience

The following table indicates the amount of charge-offs and recoveries in the
loan portfolio by category.

<TABLE>

ANALYSIS OF THE CHANGES IN ALLOWANCE FOR
LOAN LOSSES FOR YEARS 2001 THROUGH 2005

<CAPTION>

                                              2005              2004             2003              2002             2001

<S>                                     <C>               <C>              <C>               <C>              <C>
Balance at beginning of year            $3,645,000        $3,569,000       $3,068,000        $2,614,000       $2,435,000
Charge-offs:
   Commercial, financial
     and agriculture                        (2,000)               --         (141,000)         (404,000)         (29,000)
   Real estate -- mortgage                      --            (3,000)          (5,000)          (84,000)         (35,000)
   Installment loans                      (308,000)         (284,000)        (240,000)         (108,000)        (179,000)
   Other loans                            (129,000)         (146,000)        (102,000)          (66,000)         (76,000)

      Total charge-offs                   (439,000)         (433,000)        (488,000)         (662,000)        (319,000)

Recoveries:
   Commercial, financial
     and agriculture                        59,000             1,000          235,000            17,000           43,000
   Real estate -- mortgage                   8,000            22,000            7,000            97,000           38,000
   Installment loans                        83,000            59,000          104,000            84,000           95,000
   Other loans                              79,000            67,000           23,000            18,000           22,000

      Total recoveries                     229,000           149,000          369,000           216,000          198,000

Net charge-offs                           (210,000)         (284,000)        (119,000)         (446,000)        (121,000)
Provision charged to operations            180,000           360,000          620,000           900,000          300,000

Balance at end of year                  $3,615,000        $3,645,000       $3,569,000        $3,068,000       $2,614,000

Ratio of net charge-offs to
  average outstanding loans                   0.09%             0.13%            0.06%             0.27%            0.08%

</TABLE>

    The Company manages asset quality with a review process which includes
ongoing financial analysis of credits and both internal and external loan
review of existing outstanding loans and delinquencies. Management strives to
identify potential non-performing loans timely; take charge-offs promptly
based on a realistic assessment of probable losses; and maintain an adequate
allowance for loan losses based on the inherent risk of loss in the existing
portfolio.


                                      13

<PAGE>

    No portion of the allowance for loan losses is restricted to any loan or
group of loans, as the entire allowance is available to absorb charge-offs in
any loan category. The amount and timing of future charge-offs and allowance
allocations may vary from current estimates and will depend on local economic
conditions. The following table shows the allocation of the allowance for
loan losses to major portfolio categories and the percentage of each loan
category to total loans outstanding.

    Commercial non-performing loans are evaluated individually for impairment
in accordance with FAS 114. On the remaining loan portfolios, the Company
applies reserve factors considering historical loan loss data and other
subjective factors.

<TABLE>

DISTRIBUTION OF ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31,

<CAPTION>

                                    2005                 2004                 2003                 2002                 2001

                                       Percent              Percent              Percent              Percent              Percent
                                      of Loans             of Loans             of Loans             of Loans             of Loans
                           Amount of   in Each  Amount of   in Each  Amount of   in Each  Amount of   in Each  Amount of   in Each
                           Allowance  Category  Allowance  Category  Allowance  Category  Allowance  Category  Allowance  Category
                            for Loan  to Total   for Loan  to Total   for Loan  to Total   for Loan  to Total   for Loan  to Total
(Dollars in Thousands)        Losses     Loans     Losses     Loans     Losses     Loans     Losses     Loans     Losses     Loans


<S>                           <C>        <C>       <C>        <C>       <C>        <C>       <C>        <C>       <C>        <C>
Residential mortgages(1)      $1,048      48.5%    $1,039      48.4%    $1,011      52.4%    $  890      52.2%    $  848      55.1%
Commercial mortgages             351      34.9%       351      35.3%       300      30.2        300      27.3        300      21.6
Commercial loans               1,343      11.7%     1,286       9.4%     1,255       8.7      1,010       8.1        630       7.0
Installment loans                648       4.8%       753       6.3%       828       7.8        644      11.0        603      13.4
Other loans                      225       0.1%       216       0.6%       175       0.9        224       1.4        233       2.9

      Total                   $3,615     100.0%    $3,645     100.0%    $3,569     100.0%    $3,068     100.0%    $2,614     100.0%

</TABLE>

(1)  Includes home equity loans.


Nonaccrual and Past Due Loans

The Company places a loan on nonaccrual status when collectability of
principal or interest is doubtful, or when either principal or interest is 90
days or more past due and the loan is not well secured and in the process of
collection. Interest payments received on nonaccrual loans are applied as a
reduction of the principal balance when concern exists as to the ultimate
collection of principal. A distribution of nonaccrual loans and loans 90 days
or more past due and still accruing interest is shown in the following table.

<TABLE>

DECEMBER 31, 2005

<CAPTION>

                                                          90 Days or
                                                         More, Still
Loan Category                           Nonaccrual          Accruing            Total       Percentage(1)    Percentage(2)

<S>                                     <C>                      <C>       <C>                        <C>            <C>
Residential mortgages(3)                $  438,000               $--       $  438,000                 0.4%            15.0%
Commercial mortgages                       199,000                --          199,000                  --              6.8
Commercial loans                         2,285,000                --        2,285,000                 8.0             78.2
Installment loans                               --                --               --                  --               --

      Total                             $2,922,000               $--       $2,922,000                 1.2%           100.0%

</TABLE>


<TABLE>

DECEMBER 31, 2004

<CAPTION>

                                                          90 Days or
                                                         More, Still
Loan Category                           Nonaccrual          Accruing            Total       Percentage(1)    Percentage(2)

<S>                                       <C>             <C>              <C>                        <C>             <C>
Residential mortgages(3)                  $491,000        $  166,000       $  657,000                 0.6%            22.5%
Commercial mortgages                            --                --               --                  --               --
Commercial loans                           233,000         1,230,000        1,463,000                 6.9             50.1
Installment loans                               --            16,000           16,000                 0.1              0.5

      Total                               $724,000        $1,412,000       $2,136,000                 0.9%            73.1%

</TABLE>


                                      14

<PAGE>

<TABLE>

DECEMBER 31, 2003

<CAPTION>

                                                          90 Days or
                                                         More, Still
Loan Category                           Nonaccrual          Accruing            Total       Percentage(1)    Percentage(2)

<S>                                     <C>               <C>              <C>                        <C>            <C>
Residential mortgages(3)                $  411,000        $  379,000       $  790,000                 0.8%            25.3%
Commercial mortgages                       514,000         1,364,000        1,878,000                 3.1             60.1
Commercial loans                           434,000             7,000          441,000                 2.6             14.1
Installment loans                               --            14,000           14,000                 0.1              0.5

      Total                             $1,359,000        $1,764,000       $3,123,000                 1.6%           100.0%

</TABLE>


<TABLE>

DECEMBER 31, 2002

<CAPTION>

                                                          90 Days or
                                                         More, Still
Loan Category                           Nonaccrual          Accruing            Total       Percentage(1)    Percentage(2)

<S>                                     <C>                  <C>           <C>                        <C>            <C>
Residential mortgages(3)                $1,766,000           $57,000       $1,823,000                 2.5%            56.6%
Commercial mortgages                       367,000                --          367,000                 0.8             11.4
Commercial loans                           888,000                --          888,000                 5.1             27.6
Installment loans                          141,000                --          141,000                 0.8              4.4

      Total                             $3,162,000           $57,000       $3,219,000                 1.9%           100.0%

</TABLE>


<TABLE>

DECEMBER 31, 2001

<CAPTION>

                                                          90 Days or
                                                         More, Still
Loan Category                           Nonaccrual          Accruing            Total       Percentage(1)    Percentage(2)

<S>                                       <C>               <C>            <C>                        <C>            <C>
Residential mortgages(3)                  $126,000          $539,000       $  665,000                 1.0%            40.1%
Commercial mortgages                       439,000            95,000          534,000                 1.3             32.2
Commercial loans                           269,000           167,000          436,000                 2.4             26.3
Installment loans                           15,000             8,000           23,000                 0.1              1.4

      Total                               $849,000          $809,000       $1,658,000                 1.0%           100.0%

</TABLE>

(1)  Percentage of gross loans outstanding for each loan category.

(2)  Percentage of total nonaccrual and 90 day past due loans.

(3)  Includes home equity loans.

    Total nonperforming residential mortgage, commercial mortgage and
commercial loans represent 0.4%, 0.2%, and 8.0% of their respective portfolio
totals at December 31, 2005, compared to 0.6%, 0.0%, and 6.9% at December 31,
2004, respectively. The majority of the Company's total nonaccrual and past
due loans are secured loans and, as such, management anticipates there will
be limited risk of loss in their ultimate resolution.

    Nonaccrual loans increased $2.2 million from $724,000 at December 31,
2004 to $2.9 million at December 31, 2005. The majority of the increase arose
from the transfer of $1.2 million of commercial past due loans to nonaccrual
status in 2005. All nonperforming loans are well collateralized with interest
being recognized as received.

    From time to time, loans may be renegotiated in a troubled debt
restructuring when the Company determines that it will ultimately receive
greater economic value under the new terms than through foreclosure,
liquidation, or bankruptcy. Candidates for renegotiation must meet specific
guidelines. There were no restructured loans as of December 31, 2005, 2004,
and 2003.


                                      15

<PAGE>


Loan Portfolio

Set forth below is selected information concerning the composition of our
loan portfolio in dollar amounts and in percentages as of the dates
indicated.

<TABLE>

LOAN PORTFOLIO COMPOSITION

<CAPTION>

At December 31,                      2005                2004                2003                2002                2001

(Dollars in Thousands)         Amount  Percent     Amount  Percent     Amount  Percent     Amount  Percent     Amount  Percent

<S>                          <C>         <C>     <C>         <C>     <C>         <C>     <C>         <C>     <C>         <C>
REAL ESTATE LOANS
Residential                  $ 89,599     36.7%  $ 82,482     36.8%  $ 77,284     39.3%  $ 70,645     41.1%  $ 63,363     38.9%
Commercial                     81,587     33.4     75,266     33.6     59,682     30.3%    44,594     25.9     39,509     24.3
Home equity                    22,697      9.3     21,127      9.4     18,337      9.3%    14,825      8.6     12,756      7.8
Farm land                       3,443      1.4      3,721      1.7      2,872      1.5%     1,828      1.1      2,009      1.2
Construction                    5,956      2.4      4,524      2.0      4,102      2.1%     3,414      2.0      5,570      3.4

                             $203,282     83.2   $187,120     83.4   $162,277     82.5%  $135,306     78.7   $123,207     75.7

OTHER LOANS
Commercial loans             $ 28,643     11.7%  $ 21,317      9.5%  $ 17,157      8.7%  $ 17,445     10.1%  $ 18,111     11.1%
Consumer installment loans     11,673      4.8     14,116      6.3     15,350      7.8%    17,314     10.1     19,222     11.8
Other consumer loans              128      0.1      1,345      0.6      1,488      0.8%     1,537      0.9      1,504      0.9
Agricultural loans                535      0.2        338      0.2        403      0.2%       375      0.2        667      0.4

                               40,979     16.8     37,116     16.6     34,398     17.5%    36,671     21.3     39,504     24.3

    Total loans               244,261    100.0%   224,236    100.0%   196,675    100.0%   171,977    100.0%   162,711    100.0%

Allowance for loan loss        (3,615)             (3,645)             (3,569)             (3,068)             (2,614)

    Total loans, net         $240,646            $220,591            $193,106            $168,909            $160,097

</TABLE>

    The following table indicates the amount of loans in portfolio categories
according to their period to maturity. The table also indicates the dollar
amount of these loans that have predetermined or fixed rates versus variable
or adjustable rates.

<TABLE>

MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES AT DECEMBER 31, 2005

<CAPTION>

                                                                             One Year
                                                            One Year          Through             After
                                                             or Less       Five Years        Five Years            Total

<S>                                                          <C>              <C>                <C>             <C>
Commercial and agricultural                                  $16,271          $ 9,451            $3,456          $29,178
Real estate construction                                       1,216            4,678                62            5,956

      Total                                                  $17,487          $14,129            $3,518          $35,134

Interest sensitivity of loans:
  Predetermined rate                                         $ 2,229          $12,339            $3,518          $18,086
  Variable rate                                               15,258             1790                 0           17,048

      Total                                                  $17,487          $14,129            $3,518          $35,134

</TABLE>


Other Real Estate Owned

Other real estate owned represents properties acquired through foreclosure
and is recorded on an individual-asset basis at the lower of (1) fair value
less estimated costs to sell or (2) cost, which represents the loan balance
at initial foreclosure. When a property is acquired, the excess of the loan
balance over the fair value of the property is charged to the allowance for
loan losses. Subsequent write downs to reflect further declines in fair value
are included in non-interest expense.

    The following are the changes in other real estate owned during the last
two years:

Years Ended December 31,             2005             2004

Beginning balance                     $--          $43,000
Additions (includes
  costs capitalized)                   --               --
Sales                                  --          (43,000)
Write downs                            --               --

Ending balance                        $--           $   --


                                     16

<PAGE>


Non-Interest Income and Expense

Non-interest income primarily consists of service charges, commissions and
fees for various banking services, and securities gains and losses. Total
non-interest income of $4.1 million in 2005 was an increase of 4.8% or
$186,000 over 2004. The increase is primarily attributable to the sale of the
final three Grandview Palace units, eliminating all company owned real
estate, and a $234,000 gain on the sale of the credit card portfolio. The
elimination of the one time gain on the sale of the credit card portfolio
would have resulted in a decrease of $48,000 from 2004 to 2005.

    Non-interest expense increased by $986,000 or 8.3% to $12.9 million in
2005. Salaries and employee benefit expense increased 10.6% to $7.6 million
in 2005. This increase was caused by increased expenses for normal salary
increases and increased costs of providing pension and healthcare benefits.
Occupancy and equipment expense increased by $178,000 or 9.9% to $2.0 million
in 2005, primarily due to an increase in equipment maintenance agreements and
the addition of the on-line banking system. Other non-interest expense
increased by $76,000 or 2.4% in 2005 to $3.3 million from $3.2 million in
2004. The increase was primarily due to professional fees incurred due to the
implementation of the Sarbanes-Oxley Act. These costs amounted to $248,000 in
2005, an increase of $118,000 over 2004.


Income Tax Expense

Income tax expense totaled $2.0 million in 2005 versus $2.2 million in 2004.
The effective tax rate approximated 26.3% in 2005 and 26.4% in 2004. These
relatively low effective tax rates reflect the favorable tax treatment
received on tax-exempt interest income and net earnings from bank-owned life
insurance.

    The proposed 2006 New York State budget bill contains a provision that
world disallow the exclusion of dividends paid by a real estate investment
trust subsidiary ("REIT"). The bill, if enacted as proposed would be
effective for taxable years beginning on or after January 1, 2006, and the
Company would lose the tax benefit associated with the REIT. Further, Article
32 of the New York State Tax law, which sets forth the taxation of financial
institutions, expired at year end 2005. The reenactment of Article 32 is also
included in the proposed 2006 New York State budget bill. Until there is
resolution to the proposal, the Company may have to increase the 2006 tax
provision by approximately $37,000 per quarter as compared to 2005 and may
have to begin recording the increased provision in the first quarter of 2006.
Additionally, the proposed legislation would reduce the statutory tax rate on
the taxable income base from 7.5% to 6.75%.


RESULTS OF OPERATIONS 2004 VERSUS 2003


Net Income

Net income for 2004 of $6.2 million increased 7.7% or $439,000 from the 2003
net income of $5.7 million. The higher level of earnings in 2004 reflects the
interaction of a number of factors. The most significant factor which
increased 2004 net income was the increase in loan interest and fees of $1.2
million to $15.4 million from $14.2 million or 8.4%. The increase in interest
income on loans was partially offset by a decrease in interest income on
securities which went down from $5.8 million in 2003 to $5.4 million in 2004.
The provision for loan losses decreased 41.9% or $260,000 from $620,000 in
2003 to $360,000 in 2004. Salary and employee benefit expense increased
$356,000 or 5.4% primarily due to the addition of new employees, normal
salary increases and the increased costs of providing pension and health care
benefits. Occupancy and equipment expense decreased $394,000 or 17.9%,
primarily due to increase focus on reducing building and equipment
maintenance expenses.


Interest Income and Interest Expense

Throughout the following discussion, net interest income and its components
are expressed on a tax equivalent basis which means that, where appropriate,
tax exempt income is shown as if it were earned on a fully taxable basis.

    The largest source of income for the Company is net interest income,
which represents interest earned on loans, securities and short-term
investments, less interest paid on deposits and other interest bearing
liabilities. Tax equivalent net interest income of $17.8 million for 2004
represented an increase of 4.7% compared to $17.0 million for 2003. Net
interest margin decreased to 5.40% in 2004 compared to 5.56% in 2003, due to
overall decreases in earning asset yields.

    Total interest income for 2004 was $21.9 million, compared to $21.1
million in 2003. The increase in 2004 is the result of a 25 basis point
decrease in the earning asset yield which was offset by an increase in the
average balance of interest earning assets from $306.3 million in 2003 to
$329.7 million in 2004, an increase of 7.6%. Total average securities
(securities available for sale and securities held to maturity) decreased
$5.4 million or 4.4% in 2004 to $115.7 million. The yield on total securities
decreased to 5.5% in 2004 from 5.6% in 2003. The decrease in total average
securities during 2004 reflected the need to fund new loans. In 2004, average
loans increased $28.5 million to $211.8 million from $183.3 million in 2003.
Concurrently the average loan yield decreased from 7.76% in 2003 to 7.28% in
2004 due to a consistent decline in interest rates coupled with a significant
volume of refinanced mortgage loans. Average residential and commercial real
estate loans continued to make up a major portion of the loan portfolio at
72.3% of total loans in 2004. In 2005, any increases in funding will continue
to be allocated first to meet loan demand, as necessary, and then to the
securities portfolios.


                                      17

<PAGE>

    Total interest expense in 2004 was consistent with 2003. The average
balance of interest bearing liabilities increased from $248.3 million in 2003
to $253.9 million in 2004, an increase of 2.2%. During 2004, the average cost
of total interest bearing liabilities decreased by 2 basis points.

    Average interest bearing deposits increased $13.9 million to reach $227.6
million in 2004, an increase of 6.5%. Overall interest rates paid on all
deposit accounts only dropped one basis point from 2003 to 2004. Interest
rates on interest bearing deposits decreased from an average rate paid of
1.30% in 2003 to 1.27% in 2004. In 2004, average demand deposit balances
increased 16.1% over 2003.


Provision for Loan Losses

The provision for loan losses was $360,000 in 2004 as compared to $620,000 in
2003 as a result of improved asset quality. The provision for loan losses was
reduced in 2004 due to the reduction in non-performing loans as well as a
continuation of the relatively low level of net loan charge-offs.

    Total non-performing loans decreased from $3.1 million at December 31,
2003 to $2.1 million at December 31, 2004. Net loan charge-offs increased
from $119,000 in 2003 to $284,000 in 2004 while gross charge-offs decreased
from $488,000 in 2003 to $433,000 in 2004.


Non-Interest Income and Expense

Non-interest income primarily consists of service charges, commissions and
fees for various banking services, and securities gains and losses. Total
non-interest income of $3.9 million in 2004 was a decrease of 2.1% or $83,000
over 2003. The decrease is attributable to lower securities gains, a decrease
in income from the cash surrender value of bank owned life insurance
partially offset by higher service charges for checking accounts and an
increase in other non-interest income.

    Non-interest expense increased by $229,000 or 2.0% to $11.9 million in
2004. Salaries and employee benefit expense increased 5.4% to $6.9 million in
2004. This increase was caused by increased expenses for normal salary
increases and increased costs of providing pension and healthcare benefits.
Occupancy and equipment expense decreased 17.9% to $1.8 million in 2004, due
to increases in insurance premiums, offset by tighter control over
maintenance expense. Net other real estate owned (income) expense decreased
$88,000 to ($5,000) in 2004 from $83,000 of expense in 2004 primarily due to
reduced maintenance expenses at Grandview Palace. Other non-interest expense
increased by $355,000 or 12.5% in 2004 to $3.2 million from $2.8 million in
2003.


Income Tax Expense

Income tax expense totaled $2.2 million in 2004 versus $2.0 million in 2003.
The effective tax rate approximated 26.4% in 2004 and 25.7% in 2003. These
relatively low effective tax rates reflects the favorable tax treatment
received on tax-exempt interest income and net earnings from bank-owned life
insurance.


OFF-BALANCE SHEET ARRANGEMENTS

In the normal course of operations, the Company engages in a variety of
financial transactions that, in accordance with generally accepted accounting
principles, are not recorded in the financial statements, or are recorded in
amounts that differ from the notional amounts. These transactions involve, to
varying degrees, elements of credit, interest rate, and liquidity risk. Such
transactions are used by us for general corporate purposes or for customer
needs. Corporate purpose transactions are used to help manage credit,
interest rate, and liquidity risk or to optimize capital. Customer
transactions are used to manage customers' requests for funding. See note 16
of Notes to Consolidated Financial Statements contained elsewhere within this
report for further information concerning off-balance sheet arrangements.


LIQUIDITY

Liquidity is the ability to provide sufficient cash flow to meet financial
commitments such as additional loan demand and withdrawals of existing
deposits. The Company's primary sources of liquidity are its deposit base;
FHLB borrowings; repayments and maturities on loans; short-term assets such
as federal funds and short-term interest bearing deposits in banks; and
maturities and sales of securities available for sale. These sources are
available in amounts sufficient to provide liquidity to meet the Company's
ongoing funding requirements. The Bank's membership in the FHLB of New York
enhances liquidity in the form of overnight and 30 day lines of credit of
approximately $36.7 million, which may be used to meet unforeseen liquidity
demands. There were no overnight borrowings at December 31, 2005. Five
separate FHLB term advances totaling $25.0 million at December 31, 2005 were
being used to fund loan growth and to leverage our excess capital position.


                                     18

<PAGE>

    In 2005, cash generated from operating activities amounted to $7.6
million and cash generated from financing activities amounted to $15.6
million. These amounts were offset by a use of cash in investing activities
of $13.0 million, resulting in a net increase in cash and cash equivalents of
$10.2 million. See the Consolidated Statements of Cash Flows for additional
information.

    The following table reflects the Maturities of Time Deposits of $100,000
or more:

MATURITY SCHEDULE OF TIME DEPOSITS
OF $100,000 OR MORE AT DECEMBER 31, 2005

Deposits

Due three months or less                       $ 9,665,000
Over three months through six months             3,386,000
Over six months through twelve months           14,344,000
Over twelve months                              16,441,000

      Total                                    $43,836,000

    Management anticipates much of these maturing deposits to rollover at
maturity, and that liquidity will be adequate to meet funding requirements.


CAPITAL ADEQUACY

One of management's primary objectives is to maintain a strong capital
position to merit the confidence of depositors, the investing public, bank
regulators and stockholders. A strong capital position should help the
Company withstand unforeseen adverse developments and take advantage of
profitable investment opportunities when they arise. Stockholders' equity
increased $2.9 million or 7.2% in 2005 following an increase of 10.8% in
2004.

    The Company retained $3.8 million from 2005 earnings, while accumulated
other comprehensive loss decreased stockholders' equity by $903,000. In
accordance with regulatory capital rules, the adjustment for the after tax
net unrealized gain or loss on securities available for sale is not
considered in the computation of regulatory capital ratios.

    Under the Federal Reserve Bank's risk-based capital rules at December 31,
2005, the Company's Tier I risk-based capital was 16.9% and total risk-based
capital was 18.2% of risk-weighted assets. These risk-based capital ratios
are well above the minimum regulatory requirements of 4.0% for Tier I capital
and 8.0% for total capital. The Company's leverage ratio (Tier I capital to
average assets) of 11.5% is well above the 4.0% minimum regulatory
requirement.

    The following table shows the Company's actual capital measurements
compared to the minimum regulatory requirements.

<TABLE>

<CAPTION>

As of December 31,                                                               2005              2004

<S>                                                                      <C>               <C>
TIER I CAPITAL
Stockholders' equity, excluding the after-tax net
  unrealized gain on securities available for sale                       $ 42,984,000      $ 39,370,000

TIER II CAPITAL
Allowance for loan losses(1)                                                3,156,000         2,891,000

Total risk-based capital                                                 $ 46,140,000      $ 42,261,000

Risk-weighted assets(2)                                                  $253,911,000      $232,679,000

Average assets                                                           $374,413,000      $361,783,000

RATIOS
Tier I risk-based capital (minimum 4.0%)                                         16.9%             16.9%
Total risk-based capital (minimum 8.0%)                                          18.2%             18.2%
Leverage (minimum 4.0%)                                                          11.5%             10.9%

</TABLE>

(1)  The allowance for loan losses is limited to 1.25% of risk-weighted
     assets for the purpose of this calculation.

(2)  Risk-weighted assets have been reduced for the portion allowance for
     loan losses excluded from total risk-based capital.


CONTRACTUAL OBLIGATIONS

The Company is contractually obligated to make the following payments on
long-term debt and leases as of December 31, 2005:

<TABLE>

<CAPTION>

                                         Less Than            1 to 3           3 to 5         More Than
                                            1 Year             Years            Years           5 Years            Total

<S>                                        <C>           <C>               <C>                      <C>      <C>
Federal Home Loan
  Bank borrowings                          $    --       $20,000,000       $5,000,000               $--      $25,000,000
Operating leases                            85,000           131,000           48,000                --          264,000

      Total                                $85,000       $20,131,000       $5,048,000               $--      $25,264,000

</TABLE>

    In regard to short-term borrowings, see note 8 of Notes to Consolidated
Financial Statements.


                                      19

<PAGE>

DISTRIBUTION OF ASSETS, LIABILITIES & STOCKHOLDERS' EQUITY:
INTEREST RATES & INTEREST DIFFERENTIAL

The following schedule presents the condensed average consolidated balance
sheets for 2005, 2004 and 2003. The total dollar amount of interest income
from earning assets and the resultant yields are calculated on a tax
equivalent basis. The interest paid on interest-bearing liabilities,
expressed in dollars and rates, are also presented.

<TABLE>

CONSOLIDATED AVERAGE BALANCE SHEET 2005

<CAPTION>

                                                                              Percentage
                                                                                of Total
                                                             Average             Average       Interest             Average
                                                             Balance              Assets    Earned/Paid          Yield/Rate

<S>                                                     <C>                       <C>       <C>                       <C>
ASSETS
Securities available for sale
  and held to maturity:(1)
Taxable securities                                      $ 54,542,000               14.57%   $ 2,618,000                4.80%
Tax exempt securities                                     48,082,000               12.84      2,944,000                6.12%

      Total securities                                   102,624,000               27.41      5,562,000                5.42%

Short-term investments                                     1,224,000                0.33         39,000                3.19%
Loans
  Real estate mortgages                                  169,585,000               45.29     12,005,000                7.08%
  Home equity loans                                       21,708,000                5.80      1,326,000                6.11%
  Time and demand loans                                   27,965,000                7.47      2,179,000                7.79%
  Installment and other loans                             19,735,000                5.27      2,059,000               10.45%

      Total loans(2)                                     238,993,000               63.83     17,569,000                7.35%

      Total interest earning assets                      342,841,000               91.57     23,170,000                6.76%

Allowance for loan losses                                 (3,663,000)              (0.98)
Unrealized gains and losses on portfolio                      52,000                0.01
Cash and due from banks (demand)                          13,027,000                3.48
Fixed assets (net)                                         2,967,000                0.79
Bank owned life insurance                                 12,972,000                3.46
Other assets                                               6,217,000                1.66

      Total assets                                      $374,413,000              100.00%

LIABILITIES AND STOCKHOLDERS' EQUITY
NOW and Super NOW deposits                              $ 36,743,000                9.81%       118,000                0.32%
Savings and insured money market deposits                 88,083,000               23.53        947,000                1.08
Time deposits                                            105,585,000               28.20      2,994,000                2.84

      Total interest bearing deposits                    230,411,000               61.54      4,059,000                1.76

Federal funds purchased and other short-term debt          3,436,000                0.92        120,000                3.49
Long-term debt                                            24,914,000                6.65      1,223,000                4.91

      Total interest bearing liabilities                 258,761,000               69.11      5,402,000                2.09

Demand deposits                                           67,232,000               17.96
Other liabilities                                          7,070,000                1.89

      Total liabilities                                  333,063,000               88.96
Stockholders' equity                                      41,350,000               11.04

      Total liabilities and stockholders' equity        $374,413,000              100.00%

Net interest income                                                                         $17,768,000

Net interest spread                                                                                                    4.67%

Net interest margin(3)                                                                                                 5.18%

</TABLE>

(1)  Yields on securities available for sale are based on amortized cost.

(2)  For purpose of this schedule, interest in nonaccruing loans has been
     included only to the extent reflected in the consolidated income
     statement. However, the nonaccrual loan balances are included in the
     average amount outstanding.

(3)  Computed by dividing net interest income by total interest earning
     assets.


                                      20

<PAGE>

DISTRIBUTION OF ASSETS, LIABILITIES & STOCKHOLDERS' EQUITY:
INTEREST RATES & INTEREST DIFFERENTIAL

<TABLE>

CONSOLIDATED AVERAGE BALANCE SHEET 2004

<CAPTION>

                                                                              Percentage
                                                                                of Total
                                                             Average             Average       Interest             Average
                                                             Balance              Assets    Earned/Paid          Yield/Rate

<S>                                                     <C>                       <C>       <C>                       <C>
ASSETS
Securities available for sale
  and held to maturity:(1)
Taxable securities                                      $ 66,265,000               18.32%   $ 3,366,000                5.08%
Tax exempt securities                                     49,467,000               13.67      3,043,000                6.15%

      Total securities                                   115,732,000               31.99      6,409,000                5.54%

Short-term investments                                     2,079,000                0.57         25,000                1.20%
Loans
  Real estate mortgages                                  153,147,000               42.33     10,920,000                7.13%
  Home equity loans                                       19,689,000                5.44      1,207,000                6.13%
  Time and demand loans                                   18,855,000                5.21      1,255,000                6.66%
  Installment and other loans                             20,155,000                5.57      2,039,000               10.12%

      Total loans(2)                                     211,846,000               58.56     15,421,000                7.28%

      Total interest earning assets                      329,657,000               91.12     21,855,000                6.63%

Allowance for loan losses                                 (3,554,000)              (0.98)
Unrealized gains and losses on portfolio                     390,000                0.11
Cash and due from banks (demand)                          12,816,000                3.54
Fixed assets (net)                                         3,037,000                0.84
Bank owned life insurance                                 12,488,000                3.45
Other assets                                               6,949,000                1.92

      Total assets                                      $361,783,000              100.00%

LIABILITIES AND STOCKHOLDERS' EQUITY
NOW and Super NOW deposits                              $ 38,887,000               10.75%       102,000                0.26%
Savings and insured money market deposits                 85,134,000               23.53        550,000                0.65%
Time deposits                                            103,625,000               28.64      2,237,000                2.16%

      Total interest bearing deposits                    227,646,000               62.92      2,889,000                1.27%

Federal funds purchased and other short-term debt          1,411,000                0.39         23,000                1.63%
Long-term debt                                            24,836,000                6.86      1,139,000                4.59%

      Total interest bearing liabilities                 253,893,000               70.18      4,051,000                1.60%

Demand deposits                                           63,780,000               17.63
Other liabilities                                          6,961,000                1.92

      Total liabilities                                  324,634,000               89.73
Stockholders' equity                                      37,149,000               10.27

      Total liabilities and stockholders' equity        $361,783,000              100.00%

Net interest income                                                                         $17,804,000

Net interest spread                                                                                                    5.03%

Net interest margin(3)                                                                                                 5.40%

</TABLE>

(1)  Yields on securities available for sale are based on amortized cost.

(2)  For purpose of this schedule, interest in nonaccruing loans has been
     included only to the extent reflected in the consolidated income
     statement. However, the nonaccrual loan balances are included in the
     average amount outstanding.

(3)  Computed by dividing net interest income by total interest earning
     assets.


                                     21

<PAGE>

DISTRIBUTION OF ASSETS, LIABILITIES & STOCKHOLDERS' EQUITY:
INTEREST RATES & INTEREST DIFFERENTIAL

<TABLE>

CONSOLIDATED AVERAGE BALANCE SHEET 2003

<CAPTION>

                                                                              Percentage
                                                                                of Total
                                                             Average             Average       Interest             Average
                                                             Balance              Assets    Earned/Paid          Yield/Rate

<S>                                                     <C>                       <C>       <C>                       <C>
ASSETS
Securities available for sale
  and held to maturity:(1)
Taxable securities                                      $ 75,504,000               22.17%   $ 3,893,000                5.16%
Tax exempt securities                                     45,579,000               13.38      2,913,000                6.39%

      Total securities                                   121,083,000               35.55      6,806,000                5.62%

Short-term investments                                     1,871,000                0.55         23,000                1.23%
Loans
  Real estate mortgages                                  131,978,000               38.75     10,108,000                7.66%
  Home equity loans                                       16,826,000                4.94      1,073,000                6.38%
  Time and demand loans                                   14,387,000                4.22        947,000                6.58%
  Installment and other loans                             20,144,000                5.92      2,098,000               10.42%

      Total loans(2)                                     183,335,000               53.83     14,226,000                7.76%

      Total interest earning assets                      306,289,000               89.93     21,055,000                6.87%

Allowance for loan losses                                 (3,149,000)              (0.92)
Unrealized gains and losses on portfolio                   1,924,000                0.57
Cash and due from banks (demand)                          12,436,000                3.65
Fixed assets (net)                                         3,206,000                0.94
Bank owned life insurance                                 12,005,000                3.52
Other assets                                               7,864,000                2.31

      Total assets                                      $340,575,000              100.00%

LIABILITIES AND STOCKHOLDERS' EQUITY
NOW and Super NOW deposits                              $ 37,363,000               10.97%       169,000                0.45%
Savings and insured money market deposits                 86,323,000               25.34        542,000                0.63
Time deposits                                             90,067,000               26.45      2,067,000                2.29

      Total interest bearing deposits                    213,753,000               62.76      2,778,000                1.30

Federal funds purchased and other short-term debt          4,808,000                1.41         56,000                1.16
Long-term debt                                            29,753,000                8.74      1,203,000                4.04

      Total interest bearing liabilities                 248,314,000               72.91      4,037,000                1.63

Demand deposits                                           54,934,000               16.13
Other liabilities                                          3,766,000                1.11

      Total liabilities                                  307,014,000               90.15
Stockholders' equity                                      33,561,000                9.85

      Total liabilities and stockholders' equity        $340,575,000              100.00%

Net interest income                                                                         $17,018,000

Net interest spread                                                                                                    5.24%

Net interest margin(3)                                                                                                 5.56%

</TABLE>

(1)  Yields on securities available for sale are based on amortized cost.

(2)  For purpose of this schedule, interest in nonaccruing loans has been
     included only to the extent reflected in the consolidated income
     statement. However, the nonaccrual loan balances are included in the
     average amount outstanding.

(3)  Computed by dividing net interest income by total interest earning
     assets.


                                     22

<PAGE>

    The following schedule sets forth, for each major category of interest
earning assets and interest bearing liabilities, the dollar amount of
interest income (calculated on a tax equivalent basis) and interest expense,
and changes therein for 2005 as compared to 2004, and 2004 as compared to
2003.

    The increase and decrease in interest income and expense due to both rate
and volume have been allocated to the two categories of variances (volume and
rate) based on percentage relationships of such variance to each other.

<TABLE>

VOLUME AND RATE ANALYSIS

<CAPTION>

                                               2005 Compared to 2004                        2004 Compared to 2003
                                                Increase (Decrease)                          Increase (Decrease)
                                                 Due to Change In                             Due to Change In

                                         Volume           Rate          Total         Volume            Rate          Total

<S>                                  <C>           <C>             <C>            <C>            <C>             <C>
INTEREST INCOME
Investment securities and
  securities available for sale      $ (726,000)   $  (121,000)    $ (847,000)    $ (301,000)    $   (96,000)    $ (397,000)
Short-term investments                  (10,000)        24,000         14,000          3,000          (1,000)         2,000
Loans                                 1,976,000        172,000      2,148,000      2,212,000      (1,017,000)     1,195,000

      Total interest income           1,240,000         75,000      1,315,000      1,914,000      (1,114,000)       800,000

INTEREST EXPENSE
NOW and
  Super NOW deposits                     (6,000)        22,000         16,000          7,000         (74,000)       (67,000)
Savings and insured
  money market deposits                  19,000        378,000        397,000        (75,000)         83,000          8,000
Time deposits                            42,000        715,000        757,000        311,000        (141,000)       170,000
Federal funds purchased
  and other short-term debt              33,000         63,000         96,000        (39,000)          6,000        (33,000)
Long-term debt                            4,000         81,000         85,000       (199,000)        135,000        (64,000)

      Total interest expense             92,000      1,259,000      1,351,000          5,000           9,000         14,000

      Net interest income            $1,148,000    $(1,184,000)    $  (36,000)    $1,909,000     $ 1,123,000     $  786,000

</TABLE>


INFLATION

The Company's operating results are affected by inflation to the extent that
interest rates, loan demand and deposit levels adjust to inflation and impact
net interest income. Management can best counter the effect of inflation over
the long term by managing net interest income and controlling expenses.


SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES ANALYSIS*

<TABLE>

SUMMARY OF INVESTMENT SECURITIES

<CAPTION>

At December 31,                         2005                             2004                             2003

                          Carrying Value      Fair Value   Carrying Value      Fair Value   Carrying Value      Fair Value

<S>                          <C>             <C>             <C>             <C>              <C>             <C>
Government Sponsored
  Enterprises                $45,323,000     $44,011,000     $ 51,351,000    $ 50,461,000     $ 59,837,000    $ 59,415,000
Municipal securities          48,394,000      48,861,000       48,596,000      49,875,000       50,248,000      51,748,000
Mortgage backed
  securities and
  collateralized
  mortgage obligations         3,416,000       3,323,000        5,585,000       5,590,000        9,434,000       9,596,000
Other securities                      --              --               --              --               --              --

                             $97,133,000     $96,195,000     $105,532,000    $105,926,000     $119,519,000    $120,759,000

</TABLE>


                                     23

<PAGE>

<TABLE>

ANALYSIS BY TYPE AND BY PERIOD TO MATURITY

<CAPTION>

                                   Under 1 Year           1-5 Years              5-10 Years         After 10 Years

December 31, 2005               Balance    Rate       Balance     Rate       Balance     Rate       Balance    Rate          Total

<S>                         <C>            <C>    <C>            <C>     <C>            <C>     <C>           <C>      <C>
Government Sponsored
  Enterprises               $ 5,971,000    5.55%  $ 4,000,000     3.93%  $13,352,000     4.74%  $22,000,000    5.22%   $45,323,000
Municipal securities
  -- tax exempt(1)            1,584,000    4.75     8,988,000    4.253    27,573,000    4.009     2,054,000   4.146     40,199,000
Municipal securities
  -- taxable                  4,346,000    3.24     3,146,000    4.834       703,000    4.456             0       0      8,195,000
Mortgage backed
  securities
  and collateralized
  mortgage obligations        1,620,000    5.29     1,796,000    5.098             0        0             0       0      3,416,000

                            $13,521,000    4.68%  $17,930,000     4.37%  $41,628,000     4.25%  $24,054,000    5.13%   $97,133,000

</TABLE>

*    The analysis shown above combines the Company's Securities Available for
     Sale portfolio and the Investment Securities portfolio, excluding equity
     securities. All securities are included above at their amortized cost.

(1)  Yields on tax exempt securities have not been stated on a tax equivalent
     basis.



Item 7A. Quantitative and Qualitative Disclosures about Market Risk


INTEREST RATE RISK

Measuring and managing interest rate risk is a dynamic process that the
Bank's management must continually perform to meet the objectives of
maintaining stable net interest income and net interest margin. This means
that prior to setting the term or interest rate on loans or deposits, or
before purchasing investment securities or borrowing funds, management must
understand the impact that alternative interest rates will have on the Bank's
interest rate risk profile. This is accomplished through simulation modeling.
Simulation modeling is the process of "shocking" the current balance sheet
under a variety of interest rate scenarios and then measuring the impact of
interest rate changes on both projected earning ands the economic value of
the Bank's equity. The estimates underlying the sensitivity analysis are
based upon numerous assumptions including, but not limited to; the nature and
timing of interest rate changes, prepayments on loan and securities, deposit
decay rates, pricing decisions on loans and deposits, and
reinvestment/replacement rates on asset and liability cash flows. While
assumptions are developed based on available information and current economic
and general market conditions, management cannot make any assurance as to the
ultimate accuracy of these assumptions including competitive influences and
customer behavior. Accordingly, actual results will differ from those
predicted by simulation modeling.

    The following table shows the projected changes in net interest income
from an instantaneous shift in all market interest rates. The projected
changes in net interest income are totals for the 12-month period beginning
January 1, 2006 and ending December 31, 2006 under instantaneous shock
scenarios.

<TABLE>

INTEREST RATE SENSITIVITY TABLE

<CAPTION>

                                                                                                               Projected
                                                                                                               Change in
                                                                        Projected         Projected         Net Interest
                                                     Projected             Dollar        Percentage          Income as a
                                                    Annualized          Change in         Change in     Percent of Total
                                                  Net Interest       Net Interest      Net Interest        Stockholders'
Interest Rate Shock(1)            Prime Rate            Income             Income            Income               Equity

<S>                                    <C>         <C>                <C>                      <C>                  <C>
3.00%                                  10.25%      $15,207,000        $   (82,000)             (0.5)%               (0.2)%
2.00%                                   9.25%      $15,275,000        $   (14,000)             (0.1)%                 --
1.00%                                   8.25%      $15,321,000        $    32,000               0.2%                (0.1)%
No change                               7.25%      $15,289,000
(1.00)%                                 6.25%      $14,980,000        $  (309,000)             (2.0)%               (0.7)%
(2.00)%                                 5.25%      $13,901,000        $(1,388,000)             (9.1)%               (3.3)%
(3.00)%                                 4.25%      $12,488,000        $(2,801,000)            (18.3)%               (6.6)%

</TABLE>

(1)  Under an instantaneous interest rate shock, interest rates are modeled
     to change at once. This is a very conservative modeling technique that
     illustrates immediate rather than gradual increases or decreases in
     interest rates.


                                     24

<PAGE>

    Many assumptions are embedded within our interest rate risk model. These
assumptions are approved by the Asset and Liability Committee and are based
upon both management's experience and projections provided by investment
securities companies. Assuming our prepayment and other assumptions are
accurate and assuming we take reasonable actions to preserve net interest
income, we project that net interest income would decline by $14,000 or -0.1%
of total stockholders' equity in a +2.00% instantaneous interest rate shock
and decline by $1,388 million or -9.01% of stockholders' equity in a -2.00%
instantaneous interest rate shock. This is within our Asset and Liability
Policy guideline which limits the maximum projected decrease in net interest
income in a +2.00% or -2.00% instantaneous interest rate shock to +/-12% of
the Company's total equity capital.

    Our strategy for managing interest rate risk is impacted by general
market conditions and customer demand. Generally we try to limit the volume
and term of fixed-rate assets and fixed-rate liabilities, so that we can
adjust it and pricing of assets and liabilities to mitigate net interest
income volatility. The Bank purchases investments for the securities
portfolio and borrowings from the FHLB of NY to offset interest rate risk
taken in the loan portfolio. The Banks also offers adjustable rate loan and
deposit products that change as interest rates change. Approximately 12% of
the Bank's assets at December 31, 2005 were invested in adjustable rate
loans.



Item 8. Financial Statements and Supplementary Data

Consolidated financial statements and supplementary data are found on pages 3
to 27 of this report.



Item 9. Changes In and Disagreements With Accountants On Accounting and
        Financial Disclosure

None.



Item 9A. Controls and Procedures


EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company's principal executive officer and principal financial officer
have evaluated the disclosure controls and procedures (as defined in Rules
13a-15(e) or 15d-15(e) under the Exchange Act as of December 31, 2005. Based
on this evaluation, the principal executive officer and principal financial
officer have concluded that the disclosure controls and procedures
effectively ensure that information required to be disclosed in the Company's
filings and submissions with the Securities and Exchange Commission under the
Exchange Act, is recorded, processed, summarized and reported within the time
periods specified by the Securities and Exchange Commission. In addition, the
Company has reviewed its internal controls and there have been no significant
changes in its internal controls over financial reporting or in other factors
during the Company's most recent fiscal quarter that have or are likely to
materially affect internal control over financial reporting.


MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f) or 15d-15(f). The Company's internal control system was
designed to provide reasonable assurance to the Company's management and
board of directors regarding the preparation and fair presentation of
published financial statements. Under the supervision and with the
participation of the Company's management, including its principal executive
officer and principal financial officer, an evaluation of the effectiveness
of internal controls over financial reporting was conducted, based on the
framework in Internal Control -- Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on the
evaluation under the framework in Internal Control -- Integrated Framework,
management concluded that the internal controls over financial reporting were
effective as of December 31, 2005. Management's assessment of the
effectiveness of internal control over financial reporting as of December 31,
2005 has been audited by KPMG LLP, and independent registered public
accounting firm, as stated in their report, which is included in Item 8
herein.



Item 9B. Other Information

Nothing to disclose.


                                     25

<PAGE>

PART III



Item 10. Directors and Executive Officers of the Registrant

See "Nomination of Directors and Election of Directors" on page 3 contained
in the proxy statement ("Proxy Statement") for the Company's 2006 annual
meeting which will be filed with the Securities and Exchange Commission
within 120 days of the Company's 2005 fiscal year end, which is incorporated
herein by reference.



Item 11. Executive Compensation

See "Executive Compensation" on page 13 of the Proxy Statement, which is
incorporated herein by reference.



Item 12. Security Ownership of Certain Beneficial Owners and Management
         and Related Stockholder Matters

See "Executive Compensation" on page 13 of the Proxy Statement, which is
incorporated herein by reference.

    See "Security Ownership of Certain Beneficial Owners and of Management"
on page 11 of the Proxy Statement, which is incorporated herein by reference.



Item 13. Certain Relationships and Related Transactions

See "Director and Executive Officer Information" on pages 5-7,
"Transactions with Management" on page 18 and "Remuneration of Management and
Others" on pages 8, 13-16 and 18 of the Proxy Statement, which are
incorporated herein by reference.



Item 14. Principal Accountant Fees and Services

See "Audit Fees" on page 17 of the Proxy Statement, which is incorporated
herein by reference.


                                     26

<PAGE>

PART IV



Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K


(a) 1.  Consolidated financial statements and schedules of the Company and
        Bank.

                Independent Registered Public Accounting Firm's Report

                Consolidated Balance Sheets -- December 31, 2005 and 2004

                Consolidated Statements of Income
                  Years Ended December 31, 2005, 2004 and 2003

                Consolidated Statements of Changes in Stockholders' Equity
                  Years Ended December 31, 2005, 2004 and 2003

                Consolidated Statements of Cash Flows
                  Years Ended December 31, 2005, 2004 and 2003

                Notes to Consolidated Financial Statements


(a) 2.  All schedules are omitted since the required information is either not
        applicable, not required or contained in the respective consolidated
        financial statements or in the notes thereto.


(a) 3.  Exhibits (numbered in accordance with Item 601 of Regulation S-K).

          3.1   Certificate of Incorporation of the Company (Incorporation by
                Reference to Exhibit 3.1, 3.2, 3.3 and 3.4 to Form 8
                Registration Statement, effective June 29, 1991)

          3.2   The Bylaws of the Company (Incorporated by Reference to
                Exhibit 3.5 and 3.6 to Form 8 Registration Statement,
                effective June 29, 1991)

          4.1   Instruments defining the Rights of Security Holders.
                (Incorporated by Reference to Exhibit 4 to Form 8 Registration
                Statement, effective June 29, 1991)

          21.1  Subsidiaries of the Company

          31.1  Section 302 Certification of Chief Executive Officer

          31.2  Section 302 Certification of Chief Financial Officer

          32.1  906 certification of Chief Executive Officer

          32.2  906 certification of Chief Financial Officer


(b)     Exhibits to this Form 10-K are attached or incorporated herein by
        reference.


(c)     Not applicable


                                     27

<PAGE>

                                 SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.


Dated: March 15, 2006    By: /s/ Raymond Walter     By: /s/ Charles E. Burnett
                         Chief Executive Officer    Chief Financial Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.


<TABLE>

<CAPTION>

SIGNATURE                                   TITLE                                       DATE

<S>                                         <C>                                         <C>
/s/ Arthur E. Keesler                       Chairman-Director                           March 15, 2006
Arthur E. Keesler

/s/ Wayne V. Zanetti                        Vice President                              March 15, 2006
Wayne V. Zanetti

/s/ John K. Gempler                         Secretary-Director                          March 15, 2006
John K. Gempler

/s/ Edward T. Sykes                         Director                                    March 15, 2006
Edward T. Sykes

/s/ Raymond Walter                          Chief Executive Officer                     March 15, 2006
Raymond Walter                              President-Director

/s/ Earle A. Wilde                          Director                                    March 15, 2006
Earle A. Wilde

/s/ James F. Roche                          Director                                    March 15, 2006
James F. Roche

/s/ John W. Galligan                        Director                                    March 15, 2006
John W. Galligan

/s/ Kenneth C. Klein                        Director                                    March 15, 2006
Kenneth C. Klein

/s/ Gibson E. McKean                        Director                                    March 15, 2006
Gibson E. McKean

/s/ Douglas A. Heinle                       Director                                    March 15, 2006
Douglas A. Heinle

</TABLE>


                                     28

<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

[LOGO]
KPMG

The Board of Directors and Shareholders
Jeffersonville Bancorp:

    We have audited the accompanying consolidated balance sheets of
Jeffersonville Bancorp and subsidiary as of December 31, 2005 and 2004, and
the related consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 2005. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

    We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

    In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Jeffersonville Bancorp and subsidiary as of December 31, 2005 and 2004, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2005, in conformity with U.S.
generally accepted accounting principles.

    We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control -- Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 15, 2006 expressed an
unqualified opinion on management's assessment of, and the effective
operation of, internal control over financial reporting.

/s/ KPMG LLP

Albany, New York
March 15, 2006


                                     F-1

<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

[LOGO]
KPMG

The Board of Directors and Shareholders
Jeffersonville Bancorp:

    We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting that
Jeffersonville Bancorp (the Company) maintained effective internal control
over financial reporting as of December 31, 2005, based on criteria
established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility is to
express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting
based on our audit.

    We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management's
assessment, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.

    A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in a
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

    Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

    In our opinion, management's assessment that Jeffersonville Bancorp
maintained effective internal control over financial reporting as of December
31, 2005, is fairly stated, in all material respects, based on criteria
established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Also, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control -- Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).

    We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of Jeffersonville Bancorp and subsidiaries as of December 31, 2005 and
2004, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2005, and our report dated March 15, 2006,
expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Albany, New York
March 15, 2006


                                     F-2

<PAGE>

CONSOLIDATED BALANCE SHEETS

December 31,                                                2005           2004

ASSETS

Cash and due from banks (note 2)                    $ 24,192,000   $ 14,040,000
Securities available for sale, at
   fair value (notes 3 and 7)                         88,984,000    100,705,000
Securities held to maturity (estimated
   fair value of $8,233 at December 31, 2005
   and $5,998 at December 31, 2004) (note 3)           8,195,000      5,957,000
Loans, net of allowance for loan losses
   of $3,615 at December 31, 2005 and
   $3,645 at December 31, 2004
    (notes 4, 7, and 8)                              240,646,000    220,591,000
Accrued interest receivable                            2,040,000      2,085,000
Premises and equipment, net (note 5)                   3,027,000      2,869,000
Federal Home Loan Bank stock (notes 7 and 8)           2,496,000      2,175,000
Cash surrender value of bank-owned life insurance     13,217,000     12,747,000
Other assets                                           4,546,000      4,354,000

         Total assets                               $387,343,000   $365,523,000

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
   Deposits:
     Demand deposits                                $ 65,266,000   $ 65,208,000
     NOW and Super NOW accounts                       37,501,000     36,594,000
     Savings and money market deposits                86,094,000     87,115,000
     Time deposits (note 6)                          123,235,000    104,177,000

         Total deposits                              312,096,000    293,094,000

   Federal Home Loan Bank borrowings (note 7)         25,000,000     18,500,000
   Short-term borrowings (note 8)                        427,000      8,424,000
   Accrued expenses and other liabilities              7,301,000      5,859,000

         Total liabilities                           344,824,000    325,877,000

Commitments and contingent liabilities (note 16)

Stockholders' equity (notes 11, 12, and 13):
   Series A preferred stock, no par value
     2,000,000 shares authorized
     none issued                                              --             --
   Common stock, $0.50 par value
     11,250,000 shares authorized
     4,767,786 shares issued at December 31, 2005
     and at December 31, 2004                          2,384,000      2,384,000
   Paid-in capital                                     6,483,000      6,483,000
   Treasury stock, at cost 333,465 shares at
     December 31, 2005 and at December 31, 2004       (1,108,000)    (1,108,000)
   Retained earnings                                  36,118,000     32,342,000
   Accumulated other comprehensive loss,
     net of taxes of $905 at December 31, 2005
     and $297 at December 31, 2004                    (1,358,000)      (455,000)

         Total stockholders' equity                   42,519,000     39,646,000

         Total liabilities and
           stockholders' equity                     $387,343,000   $365,523,000


See accompanying notes to consolidated financial statements.


                                     F-3

<PAGE>

<TABLE>

CONSOLIDATED STATEMENTS OF INCOME

<CAPTION>

Years Ended December 31,                            2005              2004             2003

<S>                                          <C>               <C>              <C>
INTEREST AND DIVIDEND INCOME
Loan interest and fees                       $17,570,000       $15,421,000      $14,226,000
Securities:
   Taxable                                     2,627,000         3,365,000        3,893,000
   Non-taxable                                 1,943,000         2,009,000        1,940,000
Federal funds sold                                30,000            25,000           23,000

         Total interest and
           dividend income                    22,170,000        20,820,000       20,082,000

INTEREST EXPENSE
Deposits                                       4,060,000         2,889,000        2,778,000
Federal Home Loan Bank borrowings              1,223,000         1,139,000        1,203,000
Other interest expense                           119,000            23,000           56,000

         Total interest expense                5,402,000         4,051,000        4,037,000

         Net interest income                  16,768,000        16,769,000       16,045,000
Provision for loan losses (note 4)               180,000           360,000          620,000

         Net interest income after
          provision for loan losses           16,588,000        16,409,000       15,425,000

NON-INTEREST INCOME
Service charges                                1,894,000         2,198,000        2,054,000
Earnings from cash surrender value
   of bank-owned life insurance                  470,000           479,000          534,000
Net security gains (note 3)                        6,000            14,000          307,000
Gain on sale of credit card portfolio            234,000                --               --
Other real estate owned income
  (expense), net                                 141,000             5,000          (83,000)
Other non-interest income                      1,318,000         1,181,000        1,060,000

         Total non-interest income             4,063,000         3,877,000        3,872,000

NON-INTEREST EXPENSES

Salaries and employee benefits                 7,636,000         6,904,000        6,548,000
Occupancy and equipment expenses               1,981,000         1,803,000        2,197,000
Other non-interest expenses (note 10)          3,267,000         3,191,000        2,836,000

         Total non-interest expenses          12,884,000        11,898,000       11,581,000

Income before income tax expense               7,767,000         8,388,000        7,716,000
Income tax expense (note 9)                    2,042,000         2,217,000        1,984,000

Net income                                   $ 5,725,000       $ 6,171,000      $ 5,732,000

Basic earnings per common share              $      1.29       $      1.39      $      1.29

</TABLE>

See accompanying notes to consolidated financial statements.


                                     F-4

<PAGE>

<TABLE>

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<CAPTION>

                                                                                                  Accumulated
                                                                                                        Other          Total
Years Ended December 31,               Common        Paid-in       Treasury       Retained      Comprehensive  Stockholders'
2005, 2004, and 2003                    Stock        Capital          Stock       Earnings      (Loss) Income         Equity

<S>                                <C>           <C>            <C>            <C>                <C>            <C>
BALANCE AT DECEMBER 31, 2002       $  795,000    $ 8,072,000    $(1,108,000)   $23,664,000        $ 1,074,000    $32,497,000
Net income                                 --             --             --      5,732,000                 --      5,732,000
Other comprehensive loss                   --             --             --             --           (994,000)      (994,000)

Comprehensive income                                                                                               4,738,000
Cash dividends ($0.33 per share)           --             --             --     (1,449,000)                --     (1,449,000)
3 for 1 stock split
   (3,178,524 shares)               1,589,000     (1,589,000)            --             --                 --             --

BALANCE AT DECEMBER 31, 2003        2,384,000      6,483,000     (1,108,000)    27,947,000             80,000     35,786,000
Net income                                 --             --             --      6,171,000                 --      6,171,000
Other comprehensive loss                   --             --             --             --           (535,000)      (535,000)

Comprehensive income                                                                                               5,636,000
Cash dividends ($0.40 per share)           --             --             --     (1,776,000)                --     (1,776,000)

BALANCE AT DECEMBER 31, 2004        2,384,000      6,483,000     (1,108,000)    32,342,000           (455,000)    39,646,000
Net income                                 --             --            --       5,725,000                 --      5,725,000
Other comprehensive loss                   --             --             --             --           (903,000)      (903,000)

Comprehensive income                                                                                               4,822,000
Cash dividends ($0.44 per share)           --             --             --     (1,949,000)                --     (1,949,000)

BALANCE AT DECEMBER 31, 2005       $2,384,000    $ 6,483,000    $(1,108,000)   $36,118,000        $(1,358,000)   $42,519,000

</TABLE>

See accompanying notes to consolidated financial statements.


                                     F-5

<PAGE>

<TABLE>

CONSOLIDATED STATEMENTS OF CASH FLOWS

<CAPTION>

Years Ended December 31,                                                2005              2004             2003

<S>                                                             <C>               <C>              <C>
OPERATING ACTIVITIES
Net income                                                      $  5,725,000      $  6,171,000     $  5,732,000
Adjustments to reconcile net income to net
cash provided by operating activities:
   Provision for loan losses                                         180,000           360,000          620,000
   Write down of other real estate owned                                  --                --           29,000
   Net gain on sales of other real estate owned                     (125,000)           (6,000)        (108,000)
   Depreciation and amortization                                     632,000           640,000          730,000
   Net loss (gain) on disposal of premises
     and equipment                                                     3,000            (9,000)          29,000
   Increase in cash surrender value of bank-owned
     life insurance                                                 (470,000)         (479,000)        (534,000)
   Deferred income tax benefit                                      (354,000)         (223,000)        (502,000)
   Net security gains                                                 (6,000)          (14,000)        (307,000)
   Increase (decrease) in accrued interest receivable                 45,000           216,000         (172,000)
   (Increase) decrease in other assets                               511,000           209,000          471,000
   Increase in accrued expenses and other liabilities              1,442,000           490,000          554,000

         Net cash provided by operating activities                 7,583,000         7,355,000        6,542,000

INVESTING ACTIVITIES
Proceeds from maturities and calls:
   Securities available for sale                                  10,626,000        20,527,000       56,207,000
   Securities held to maturity                                     4,431,000         3,182,000        1,741,000
Proceeds from sales of securities available for sale               4,782,000                --       20,343,000
Purchases:
   Securities available for sale                                  (4,933,000)       (6,479,000)     (75,858,000)
   Securities held to maturity                                    (6,669,000)       (3,223,000)      (2,984,000)
Proceeds from sale of credit card portfolio                        1,468,000                --               --
Disbursements for loan originations, net of
principal collections                                            (21,703,000)      (27,845,000)     (24,993,000)
Proceeds from call of Federal Home Loan Bank stock                 4,826,000         1,375,000        1,525,000
Purchase of Federal Home Loan Bank stock                          (5,147,000)       (1,950,000)      (1,225,000)
Net purchases of premises and equipment                             (793,000)         (437,000)        (592,000)
Proceeds from sales of other real estate owned                       125,000            49,000          338,000

         Net cash used in investing activities                   (12,987,000)      (14,801,000)     (25,498,000)

FINANCING ACTIVITIES
Net increase in deposits                                          19,002,000        12,867,000       27,435,000
Proceeds from Federal Home Loan Bank borrowings                   10,000,000                --        5,000,000
Repayments of Federal Home Loan Bank borrowings                   (3,500,000)       (8,500,000)      (8,000,000)
Net (decrease) increase in short-term borrowings                  (7,997,000)        2,903,000         (912,000)
Cash dividends paid                                               (1,949,000)       (1,776,000)      (1,449,000)

         Net cash provided by financing activities                15,556,000         5,494,000       22,074,000

Net increase (decrease) in cash and cash equivalents              10,152,000        (1,952,000)       3,118,000
Cash and cash equivalents at beginning of year                    14,040,000        15,992,000       12,874,000

Cash and cash equivalents at end of year                        $ 24,192,000      $ 14,040,000     $ 15,992,000

SUPPLEMENTAL INFORMATION:
Cash paid for:
   Interest                                                     $  5,173,000      $  4,043,000     $  4,183,000
   Income taxes                                                    1,668,000         2,070,000        2,128,000
Transfer of loans to other real estate owned                              --                --          176,000

</TABLE>

See accompanying notes to consolidated financial statements.


                                     F-6

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1. Summary of Significant Accounting Policies


BASIS OF PRESENTATION

The consolidated financial statements of Jeffersonville Bancorp (the Parent
Company) include its wholly owned subsidiary, The First National Bank of
Jeffersonville (the Bank). Collectively, these entities are referred to
herein as the "Company". All significant intercompany transactions have been
eliminated in consolidation.

     The Parent Company is a bank holding company whose principal activity is
the ownership of all outstanding shares of the Bank's stock. The Bank is a
commercial bank providing community banking services to individuals, small
businesses and local municipal governments in Sullivan County, New York.
Management makes operating decisions and assesses performance based on an
ongoing review of the Bank's community banking operations, which constitute
the Company's only operating segment for financial reporting purposes.

     The consolidated financial statements have been prepared, in all
material respects, in conformity with accounting principles generally
accepted in the United States of America. In preparing the consolidated
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Material estimates that are particularly susceptible to
near-term change include the allowance for loan losses which is described
below. Actual results could differ from these estimates.

     For purposes of the consolidated statements of cash flows, the Company
considers cash and due from banks and federal funds sold, if any, to be cash
equivalents.

     Reclassifications are made to prior years' consolidated financial
statements whenever necessary to conform to the current year's presentation.


INVESTMENT SECURITIES

Management determines the appropriate classification of securities
at the time of purchase. If management has the positive intent and ability to
hold debt securities to maturity, they are classified as securities held to
maturity and are stated at amortized cost. If securities are purchased for
the purpose of selling them in the near term, they are classified as trading
securities and are reported at fair value with unrealized gains and losses
reflected in current earnings. All other debt and marketable equity
securities are classified as securities available for sale and are reported
at fair value. Net unrealized gains or losses on securities available for
sale are reported (net of income taxes) in stockholders' equity as
accumulated other comprehensive income (loss). Nonmarketable equity
securities are carried at cost. At December 31, 2005 and 2004, the Company
had no trading securities.

     Gains and losses on sales of securities are based on the net proceeds
and the amortized cost of the securities sold, using the specific
identification method. The amortization of premium and accretion of discount
on debt securities is calculated using the level-yield interest method over
the period to the earlier of the call date or maturity date. Unrealized
losses on securities that reflect a decline in value which is other than
temporary, if any, are charged to income.


LOANS

Loans are stated at unpaid principal balances, less unearned discounts
and the allowance for loan losses. Unearned discounts on certain installment
loans are accreted into income using a level-yield interest method. Interest
income is recognized on the accrual basis of accounting. When, in the opinion
of management, the collection of interest or principal is in doubt, the loan
is classified as nonaccrual. Generally, loans past due more than 90 days are
classified as nonaccrual. Thereafter, no interest is recognized as income
until received in cash or until such time as the borrower demonstrates the
ability to make scheduled payments of interest and principal.


ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is established through a provision for
loan losses charged to expense. Loans are charged-off against the allowance
when management believes that the collectibility of all or a portion of the
principal is unlikely. Recoveries of loans previously charged-off are
credited to the allowance when realized.

     The Company identifies impaired loans and measures loan impairment in
accordance with Statement of Financial Accounting Standards (SFAS) No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118.
Under SFAS No. 114, a loan is considered to be impaired when, based on
current information and events, it is probable that the creditor will be
unable to collect all principal and interest contractually due. SFAS No. 114
applies to loans that are individually evaluated for collectibility in
accordance with the Company's ongoing loan review procedure, principally
commercial mortgage loans and commercial loans. Smaller balance, homogeneous
loans which are collectively evaluated, such as consumer and smaller balance
residential mortgage loans are specifically excluded from the classification
of impaired loans. Creditors are permitted to measure impaired loans based on
(i) the present value of expected future cash flows discounted at the loan's
effective interest rate, (ii) the loan's observable market price or (iii) the
fair value of the collateral if the loan is collateral dependent. If the
approach used results in a measurement that is less than an impaired loan's
recorded investment, an impairment loss is recognized as part of the
allowance for loan losses.


                                     F-7

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The allowance for loan losses is maintained at a level deemed adequate
by management based on an evaluation of such factors as economic conditions
in the Company's market area, past loan loss experience, the financial
condition of individual borrowers, and underlying collateral values based on
independent appraisals. While management uses available information to
recognize losses on loans, future additions to the allowance for loan losses
may be necessary based on changes in economic conditions, particularly in
Sullivan County. In addition, Federal regulatory agencies, as an integral
part of their examination process, periodically review the Company's
allowance for loan losses and may require the Company to recognize additions
to the allowance based on their judgments about information available to them
at the time of their examination, which may not be currently available to
management.


PREMISES AND EQUIPMENT

Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are provided over the estimated
useful lives of the assets using straight-line or accelerated methods.


FEDERAL HOME LOAN BANK STOCK

As a member institution of the Federal Home Loan Bank (FHLB), the Bank is
required to hold a certain amount of FHLB stock. This stock is considered to
be a nonmarketable equity security and, accordingly, is carried at cost.


OTHER REAL ESTATE OWNED

Other real estate owned consists of properties acquired through foreclosure
and is stated on an individual-asset basis at the lower of (i) fair value
less estimated costs to sell or (ii) cost which represents the fair value at
initial foreclosure. When a property is acquired, the excess of the loan
balance over the fair value of the property is charged to the allowance for
loan losses. If necessary, subsequent write downs to reflect further declines
in fair value are included in non-interest expenses. Fair value estimates are
based on independent appraisals and other available information. While
management estimates losses on other real estate owned using the best
available information, such as independent appraisals, future write downs may
be necessary based on changes in real estate market conditions, particularly
in Sullivan County, and the results of regulatory examinations.


BANK-OWNED LIFE INSURANCE

The investment in bank-owned life insurance, which covers certain officers of
the Bank, is carried at the policies' cash surrender value. Increases in the
cash surrender value of bank-owned life insurance, net of premiums paid, are
included in non-interest income.


INCOME TAXES

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets are reduced by a valuation
allowance when management determines that it is more likely than not that all
or a portion of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date.


EARNINGS PER COMMON SHARE

Basic earnings per share (EPS) is computed by dividing income available
to common stockholders (net income less dividends on preferred stock, if any)
by the weighted average number of common shares outstanding for the period.
Entities with complex capital structures must also present diluted EPS which
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
shares. The Company does not have a complex capital structure and,
accordingly, has presented only basic EPS.

     Basic earnings per common share was computed based on average
outstanding common shares of 4,434,321 in 2005, 2004, and 2003. Income
available to common stockholders equaled net income for each of these years.


RECENT ACCOUNTING PRONOUNCEMENTS

In November 2005, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position (FSP) 115-1, The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments. This FSP provides additional
guidance on when an investment in a debt or equity security should be
considered impaired and when that impairment should be considered
other-than-temporary and recognized as a loss in earnings. Specifically, the
guidance clarifies that an investor should recognize an impairment loss no
later than when the impairment is deemed other-than-temporary, even if a
decision to sell has not been made. The FSP also requires certain disclosures
about unrealized losses that have not been recognized as other-than-temporary
impairments. It is not expected to have a significant effect on the
consolidated financial statements.


                                     F-8

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



2. Cash and Due From Banks

The Bank is required to maintain certain reserves in the form of vault cash
and/or deposits with the Federal Reserve Bank. The amount of this reserve
requirement, which is included in cash and due from banks, was $6,288,000 at
December 31, 2005 and $6,418,000 at December 31, 2004.



3. Investment Securities

The amortized cost and estimated fair value of securities available for sale
are as follows:

<TABLE>

<CAPTION>

                                                                      Gross              Gross
                                                  Amortized      Unrealized         Unrealized        Estimated
                                                       Cost           Gains             Losses       Fair Value

<S>                                            <C>              <C>                <C>             <C>
DECEMBER 31, 2005
Government sponsored enterprises               $ 45,323,000     $     2,000        $(1,314,000)    $ 44,011,000
Obligations of states and
  political subdivisions                         40,199,000         736,000           (307,000)      40,628,000
Mortgage-backed securities and
  collateralized mortgage obligations             3,416,000          37,000           (130,000)       3,323,000

      Total debt securities                      88,938,000         775,000         (1,751,000)      87,962,000
Equity securities                                   820,000         202,000                 --        1,022,000

      Total securities available
       for sale                                $ 89,758,000     $   977,000        $(1,751,000)    $ 88,984,000

</TABLE>

<TABLE>

<CAPTION>

                                                                      Gross              Gross
                                                  Amortized      Unrealized         Unrealized        Estimated
                                                       Cost           Gains             Losses       Fair Value

<S>                                            <C>               <C>               <C>             <C>
DECEMBER 31, 2004
Government sponsored enterprises               $ 51,351,000      $  103,000        $  (993,000)    $ 50,461,000
Obligations of states and
  political subdivisions                         42,639,000       1,371,000           (133,000)      43,877,000
Mortgage-backed securities and
  collateralized mortgage obligations             5,585,000         100,000            (95,000)       5,590,000

      Total debt securities                      99,575,000       1,574,000         (1,221,000)      99,928,000
Equity securities                                   653,000         124,000                 --          777,000

      Total securities available
       for sale                                $100,228,000      $1,698,000        $(1,221,000)    $100,705,000

</TABLE>

     Proceeds from sales of securities available for sale during 2005 were
$4,782,000. No securities available for sale were sold in 2004, while
proceeds from sales during 2003 were $20,343,000. Gross gains and gross
losses realized on sales and calls of securities were as follows:


                                            2005          2004           2003

Gross realized gains                    $ 42,000       $14,000       $344,000
Gross realized losses                    (36,000)           --        (37,000)

      Net security gains (losses)       $  6,000       $14,000       $307,000


                                     F-9

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The amortized cost and estimated fair value of debt securities available
for sale at December 31, 2005, by remaining period to contractual maturity,
are shown in the following table. Actual maturities will differ from
contractual maturities because of security prepayments and the right of
certain issuers to call or prepay their obligations.


                                          Amortized                Estimated
                                               Cost               Fair Value

Within one year                         $ 9,174,000              $ 9,034,000
One to five years                        14,784,000               14,779,000
Five to ten years                        40,926,000               40,865,000
Over ten years                           24,054,000               23,284,000

      Total                             $88,938,000              $87,962,000

     Securities included in government sponsored enterprises are securities
of the Federal Home Loan Bank, FNMA and FHLMC. These securities are not
backed by the full faith of the U.S. government. Substantially all
mortgage-backed securities and collateralized mortgage obligations are
securities guaranteed by Freddie Mac or Fannie Mae, which are U.S.
government-sponsored entities. Securities available for sale with an
estimated fair value of $43,130,000, and $45,507,000 at December 31, 2005 and
2004 respectively, were pledged to secure public funds on deposit and for
other purposes.

     The amortized cost and estimated fair value of securities held to
maturity are as follows:

<TABLE>

<CAPTION>

                                                                      Gross             Gross
                                                  Amortized      Unrealized         Unrealized        Estimated
                                                       Cost           Gains             Losses       Fair Value

<S>                                              <C>               <C>                <C>            <C>
DECEMBER 31, 2005
Obligations of states and
  political subdivisions                         $8,195,000        $121,000           $(83,000)      $8,233,000

DECEMBER 31, 2004
Obligations of states and
  political subdivisions                         $5,957,000        $ 95,000           $(54,000)      $5,998,000

</TABLE>

     There were no sales of securities held to maturity in 2005, 2004,
or 2003.

     The amortized cost and estimated fair value of these securities at
December 31, 2005, by remaining period to contractual maturity, are shown in
the following table. Actual maturities will differ from contractual
maturities because certain issuers have the right to call or prepay their
obligations.

                                           Amortized                Estimated
                                                Cost               Fair Value

Within one year                           $4,346,000               $4,330,000
One to five years                          3,146,000                3,218,000
Five to ten years                            703,000                  685,000

      Total                               $8,195,000               $8,233,000


                                     F-10

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Gross unrealized losses on investment securities and the fair value of
the related securities, aggregated by investment category and length of time
that individual securities have been in a continuous unrealized loss
position, at December 31, 2005 were as follows:

<TABLE>

<CAPTION>

                                               Less Than 12 Months            12 Months or More                 Total

                                            Estimated     Unrealized      Estimated     Unrealized      Estimated     Unrealized
                                           Fair Value         Losses     Fair Value         Losses     Fair Value         Losses


<S>                                       <C>             <C>           <C>             <C>           <C>             <C>
AVAILABLE FOR SALE
Government sponsored enterprises          $25,438,000     $1,054,000    $17,570,000     $  261,000    $43,008,000     $1,315,000
Obligations of states and
political subdivisions                      4,689,000        188,000      7,272,000        118,000     11,961,000        306,000
Mortgage-backed securities and
collateralized mortgage obligations         2,008,000        130,000             --             --      2,008,000        130,000

                                          $32,135,000     $1,372,000    $24,842,000     $  379,000    $56,977,000     $1,751,000

HELD TO MATURITY
Obligations of states and
  political subdivisions                  $        --     $       --    $ 4,205,000     $   83,000    $ 4,205,000     $   83,000

</TABLE>

     At December 31, 2004 there was $385,000 in unrealized losses on
available for sale securities with an estimated fair value of $23,675,000
that had been in a continuous unrealized loss position for less than 12
months. There was $836,000 in unrealized losses on available for sale
securities with an estimated fair value of $23,725,000 for those securities
that have been in a continuous unrealized loss position 12 months or more.

     At December 31, 2004 there were $1,000 in unrealized losses on held to
maturity securities with an estimated fair value of $612,000 that had been in
a continuous unrealized loss position for less than 12 months and $53,000 in
unrealized losses on held to maturity securities with an estimated fair value
of $912,000 that have been in a continuous unrealized loss position for 12
months or more.

     The unrealized losses on securities at December 31, 2005 and 2004 were
caused by increases in market interest rates. The contractual terms of the
government sponsored enterprise securities and the obligations of states and
political subdivisions require the issuer to settle the securities at par
upon maturity of the investment. The contractual cash flows of the mortgage
backed securities and collateralized mortgage obligations are guaranteed by
various government agencies or government sponsored enterprises such as GNMA,
FNMA, and FHLMC. Because the Company has the ability and intent to hold these
securities until a market price recovery or possibly to maturity, these
investments are not considered other-than-temporarily impaired at December
31, 2005 and 2004.


                                     F-11

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



4. Loans

The major classifications of loans are as follows at December 31:

                                                2005                     2004

REAL ESTATE LOANS
Residential                             $ 89,598,000             $ 82,482,000
Commercial                                81,587,000               75,266,000
Home equity                               22,697,000               21,127,000
Farm land                                  3,443,000                3,721,000
Construction                               5,956,000                4,524,000

                                         203,281,000              187,120,000

OTHER LOANS
Commercial loans                          28,644,000               21,317,000
Consumer installment loans                11,673,000               14,116,000
Other consumer loans                         128,000                1,345,000
Agricultural loans                           535,000                  338,000

                                          40,980,000               37,116,000

      Total loans                        244,261,000              224,236,000
Allowance for loan losses                 (3,615,000)              (3,645,000)

      Total loans, net                  $240,646,000             $220,591,000

     The Company originates residential and commercial real estate loans, as
well as commercial, consumer and agricultural loans, to borrowers in Sullivan
County, New York. A substantial portion of the loan portfolio is secured by
real estate properties located in that area. The ability of the Company's
borrowers to make principal and interest payments is dependent upon, among
other things, the level of overall economic activity and the real estate
market conditions prevailing within the Company's concentrated lending area.

     Included in other consumer loans is a credit card portfolio whose
balance was $1,225,000 at December 31, 2004. This portfolio was sold in
November 2005 for $1,468,000 when its carrying value was $1,234,000.

     Nonperforming loans are summarized as follows at December 31:

                                          2005            2004            2003

Nonaccrual loans                    $2,922,000      $  724,000      $1,359,000
Loans past due 90 days or more
  and still accruing interest               --       1,412,000       1,764,000

      Total nonperforming loans     $2,922,000      $2,136,000      $3,123,000

     Nonaccrual loans had the following effect on interest income for the
years ended December 31:

                                          2005            2004            2003

Interest contractually due
  at original rates                  $ 169,000        $ 90,000        $166,000
Interest income recognized            (134,000)        (29,000)        (37,000)

      Interest income
       not recognized                $  35,000        $ 61,000        $129,000


                                     F-12

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Changes in the allowance for loan losses are summarized as follows for
the years ended December 31:

                                           2005           2004           2003

Balance at beginning of the year     $3,645,000     $3,569,000     $3,068,000
Provision for loan losses               180,000        360,000        620,000
Loans charged-off                      (440,000)      (433,000)      (488,000)
Recoveries                              230,000        149,000        369,000

      Balance at end of year         $3,615,000     $3,645,000     $3,569,000

     As of December 31, 2005 and 2004, there were no loans which were
considered to be impaired under SFAS No. 114. There are no commitments to
lend additional funds on the above noted non-performing loans.



5. Premises and Equipment

The major classifications of premises and equipment were as follows at
December 31:

                                                   2005                  2004

Land                                        $   387,000           $   387,000
Buildings                                     2,907,000             2,790,000
Furniture and fixtures                          132,000               116,000
Equipment                                     3,207,000             2,739,000
Building and leasehold improvements           1,207,000             1,099,000
Construction in progress                         28,000                    --

                                              7,868,000             7,131,000
Less accumulated depreciation
  and amortization                           (4,841,000)           (4,262,000)

      Total premises and equipment, net     $ 3,027,000           $ 2,869,000

     Depreciation and amortization expense was $632,000, $640,000, and
$730,000 in 2005, 2004, and 2003, respectively.



6. Time Deposits

     The following is a summary of time deposits at December 31, 2005 by
remaining period to contractual maturity:

Within one year                            $ 77,834,000
One to two years                             26,608,000
Two to three years                            9,978,000
Three to four years                           3,032,000
Four to five years                            5,780,000
Over five years                                   3,000

      Total time deposits                  $123,235,000

     Time deposits of $100,000 or more totaled $43,836,000, $24,532,000 and
$22,863,000 at December 31, 2005, 2004 and 2003 respectively. Interest
expense related to time deposits over $100,000 was $812,000, $514,000, and
$441,000 for 2005, 2004, and 2003, respectively.

    Total time deposits include brokered time deposits obtained from the
national market, which during 2005 averaged $1,110,000 and amounted to
$15,034,000, or 4.82% of total deposits at December 31, 2005. There were no
brokered deposits in 2004 or 2003. The rates of interest paid on time
deposits obtained from the national market averaged 4.56% during 2005.


                                     F-13

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



7. Federal Home Loan Bank Borrowings

The following is a summary of FHLB advances outstanding at December 31:

<TABLE>

<CAPTION>

                                                            2005                        2004

                                                     Amount      Rate            Amount        Rate

<S>                                             <C>              <C>        <C>                <C>
Fixed rate advances maturing in 2005            $        --                 $ 3,500,000        4.86%
Fixed rate advances maturing in 2007              5,000,000      4.12%               --
Fixed rate advances maturing in 2008             15,000,000      4.80%       10,000,000        5.02%
Fixed rate advances maturing in 2009              5,000,000      5.45%        5,000,000        5.45%

      Total FHLB advances                       $25,000,000      4.79%      $18,500,000        5.11%

</TABLE>

     Borrowings are secured by the Bank's investment in FHLB stock and by a
blanket security agreement. This agreement requires the Bank to maintain as
collateral certain qualifying assets (principally residential mortgage loans)
not otherwise pledged. The carrying value of the total qualifying residential
mortgage loan and security collateral at December 31, 2005 and 2004 were
$26.5 million and $10.6 million respectively, which satisfied the collateral
requirements of the FHLB.



8. Short-Term Borrowings

Short-term borrowings at December 31, 2005 and 2004 are primarily comprised
of overnight FHLB borrowings. The Bank, as a member of the FHLB, has access
to a line of credit program with a maximum borrowing capacity of $36.7
million and $35.5 million as of December 31, 2005 and 2004, respectively.
There were no borrowings under the overnight program at December 31, 2005; at
December 31, 2004 borrowings totaled $8.0 million at a rate of 2.38%. The
Bank has pledged mortgage loans and FHLB stock as collateral on these
borrowings. During 2005, the maximum month-end balance was $10.0 million, the
average balance was $4.7 million, and the average interest rate was 3.39%.
During 2004, the maximum month-end balance was $8.0 million, the average
balance was $1.1 million, and the average interest rate was 1.72%. Short-term
borrowings at December 31, 2005 and 2004 also included $427,000 and $424,000,
respectively of treasury, tax and loan notes.



9. Income Taxes

The components of income tax expense are as follows for the years ended
December 31:

                                         2005            2004           2003


CURRENT TAX EXPENSES
Federal                            $2,094,000      $2,115,000     $2,159,000
State                                 302,000         325,000        327,000
Deferred tax benefit                 (354,000)       (223,000)      (502,000)

      Total income tax expense     $2,042,000      $2,217,000     $1,984,000

    Not included in the above table is net deferred income tax benefit of
$607,000, $354,000, and $685,000, in 2005, 2004, and 2003, respectively,
associated with the unrealized gain or loss on securities available for sale
and a minimum pension liability, which are recorded directly in stockholders'
equity as components of other comprehensive loss.


                                     F-14

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The reasons for the differences between income tax expense and taxes
computed by applying the statutory Federal tax rate of 34% to income before
income taxes are as follows:

<TABLE>

<CAPTION>

                                                                                 2005              2004             2003

<S>                                                                        <C>               <C>              <C>
Tax at statutory rate                                                      $2,641,000        $2,852,000       $2,623,000
State taxes, net of Federal tax benefit                                       158,000           186,000          152,000
Tax-exempt interest                                                          (661,000)         (683,000)        (660,000)
Interest expense allocated to tax-exempt securities                            47,000            38,000           37,000
Net earnings from cash surrender value
  of bank-owned life insurance                                               (160,000)         (168,000)        (182,000)
Other adjustments                                                              17,000            (8,000)          14,000

      Income tax expense                                                   $2,042,000        $2,217,000       $1,984,000

</TABLE>

     The tax effects of temporary differences and tax credits that give rise
to deferred tax assets and liabilities at December 31 are presented below:

<TABLE>

<CAPTION>

                                                                                 2005              2004

<S>                                                                        <C>               <C>
DEFERRED TAX ASSETS
Allowance for loan losses in excess of tax bad debt reserve                $1,259,000        $1,271,000
Interest on nonaccrual loans                                                    1,000             2,000
Retirement benefits                                                         1,456,000         1,166,000
Deferred compensation                                                         106,000            84,000
Depreciation                                                                  420,000           328,000
Other real estate owned                                                            --            90,000

      Total deferred tax assets                                             3,242,000         2,941,000

DEFERRED TAX LIABILITIES
Prepaid expenses                                                             (281,000)         (329,000)
Other taxable temporary differences                                                --            (5,000)

      Total deferred tax liabilities                                         (281,000)         (334,000)

      Net deferred tax asset                                               $2,961,000        $2,607,000

</TABLE>

     In addition to the deferred tax assets and liabilities described above,
the Company also has a deferred tax asset of $310,000 at December 31, 2005
related to the net unrealized loss on securities available for sale as of
December 31, 2005 and a deferred tax asset of $595,000 related to a minimum
pension liability as of December 31, 2005. In addition to the deferred tax
assets described above, the Company also has a deferred tax liability of
$195,000 at December 31, 2004 related to the net unrealized gain on
securities available for sale as of December 31, 2004 and a deferred tax
asset of $492,000 related to a minimum pension liability as of December 31,
2004.

     In assessing the realizability of the Company's total deferred tax
assets, management considers whether it is more likely than not that some
portion or all of those assets will not be realized. Based upon management's
consideration of historical and anticipated future pre-tax income, as well as
the reversal period for the items giving rise to the deferred tax assets and
liabilities, a valuation allowance for deferred tax assets was not considered
necessary at December 31, 2005 and 2004.

    The proposed 2006 New York State budget bill contains a provision that
world disallow the exclusion of dividends paid by a real estate investment
trust subsidiary ("REIT"). The bill, if enacted as proposed would be
effective for taxable years beginning on or after January 1, 2006, and the
Company would lose the tax benefit associated with the REIT. Further, Article
32 of the New York State Tax law, which sets forth the taxation of financial
institutions, expired at year end 2005. The reenactment of Article 32 is also
included in the proposed 2006 New York State budget bill. Until there is
resolution to the proposal, the Company may have to increase the 2006 tax
provision by approximately $37,000 per quarter as compared to 2005 and may
have to begin recording the increased provision in the first quarter of 2006.
Additionally, the proposed legislation would reduce the statutory tax rate on
the taxable income base from 7.5% to 6.75%.


                                     F-15

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



10. Other Non-interest Expenses

The major components of other non-interest expenses are as follows for the
years ended December 31:

<TABLE>

<CAPTION>

                                                                                 2005              2004             2003

<S>                                                                        <C>               <C>              <C>
Stationary and supplies                                                    $  237,000        $  287,000       $  348,000
Director expenses                                                             286,000           277,000          227,000
ATM and credit card processing fees                                           582,000           582,000          469,000
Professional services                                                         639,000           581,000          406,000
Other expenses                                                              1,523,000         1,464,000        1,386,000

      Other non-interest expenses                                          $3,267,000        $3,191,000       $2,836,000

</TABLE>



11. Regulatory Capital Requirements

National banks are required to maintain minimum levels of regulatory capital
in accordance with regulations of the Office of the Comptroller of the
Currency (OCC). The Federal Reserve Board (FRB) imposes similar requirements
for consolidated capital of bank holding companies. The OCC and FRB
regulations require a minimum leverage ratio of Tier 1 capital to total
adjusted assets of 4.0%, and minimum ratios of Tier I and total capital to
risk-weighted assets of 4.0% and 8.0%, respectively.

     Under its prompt corrective action regulations, the OCC is required to
take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized bank. Such actions could have a
direct material effect on a bank's financial statements. The regulations
establish a framework for the classification of banks into five categories:
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Generally, a bank is
considered well capitalized if it has a leverage (Tier I) capital ratio of at
least 5.0%, a Tier 1 risk-based capital ratio of at least 6.0%, and a total
risk-based capital ratio of at least 10.0%.

     The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the regulators
about capital components, risk weightings and other factors.

     Management believes that, as of December 31, 2005 and 2004, the Bank and
the Parent Company met all capital adequacy requirements to which they are
subject. Further, the most recent OCC notification categorized the Bank as a
well-capitalized bank under the prompt corrective action regulations. There
have been no conditions or events since that notification that management
believes have changed the Bank's capital classification.


                                     F-16

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The following is a summary of the actual capital amounts and ratios as
of December 31, 2005 and 2004 for the Bank and the Parent Company
(consolidated), compared to the required ratios for minimum capital adequacy
and for classification as well-capitalized:

<TABLE>

<CAPTION>

                                                                       Actual                          Required Ratios

                                                                                                  Minimum   Classification
                                                                                                  Capital          as Well
                                                              Amount              Ratio          Adequacy      Capitalized

<S>                                                      <C>                       <C>                <C>             <C>
DECEMBER 31, 2005
BANK
Leverage (Tier 1) capital                                $41,113,000               10.8%              4.0%             5.0%
Risk-based capital:
   Tier 1                                                 41,113,000               16.3               4.0              6.0
   Total                                                  44,269,000               17.5               8.0             10.0

CONSOLIDATED
Leverage (Tier 1) capital                                $42,984,000               11.5%              4.0%
Risk-based capital:
   Tier 1                                                 42,984,000               16.9               4.0
   Total                                                  46,140,000               18.2               8.0

DECEMBER 31, 2004
BANK
Leverage (Tier 1) capital                                $36,981,000               10.2%              4.0%             5.0%
Risk-based capital:
   Tier 1                                                 36,981,000               16.0               4.0              6.0
   Total                                                  39,872,000               17.3               8.0             10.0

CONSOLIDATED
Leverage (Tier 1) capital                                $39,370,000               10.9%              4.0%
Risk-based capital:
   Tier 1                                                 39,370,000               16.9               4.0
   Total                                                  42,261,000               18.2               8.0

</TABLE>



12. Stockholders' Equity


DIVIDEND RESTRICTIONS

Dividends paid by the Bank are the primary source of funds available to the
Parent Company for payment of dividends to its stockholders and for other
working capital needs. Applicable Federal statutes, regulations and
guidelines impose restrictions on the amount of dividends that may be
declared by the Bank. Under these restrictions, the dividends declared and
paid by the Bank to the Parent Company may not exceed the total amount of the
Bank's net profit retained in the current year plus its retained net profits,
as defined, from the two preceding years. The Bank's retained net profits
(after dividend payments to the Parent Company) for 2005 and 2004 totaled
$13,057,000 and $13,282,000, respectively.


PREFERRED STOCK PURCHASE RIGHTS

On July 9, 1996, the board of directors declared a dividend distribution of
one purchase right ("Right") for each outstanding share of Parent Company
common stock ("Common Stock"), to stockholders of record at the close of
business on July 9, 1996. The Rights have a 10-year term.

     The Rights become exercisable (i) 10 days following a public
announcement that a person or group has acquired, or obtained the right to
acquire, beneficial ownership of 20% or more of the outstanding shares of
Common Stock, or (ii) 10 days following the commencement of a tender offer or
exchange offer that, if successful, would result in an acquiring person or
group beneficially owning 30% or more of the outstanding Common Stock (unless
such tender or exchange offer is predicated upon the redemption of the
Rights).

     When the Rights become exercisable, a holder is entitled to purchase one
one-hundredth of a share, subject to adjustment, of Series A Preferred Stock
of the Parent Company or, upon the occurrence of certain events described
below, Common Stock of the Parent Company or common stock of an entity that
acquires the Company. The purchase price per one one-hundredth of a share of
Series A Preferred Stock (Purchase Price) will equal the board of directors'
judgment as to the "long-term investment value" of one share of Common Stock
at the end of the 10-year term of the Rights.


                                     F-17

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Upon the occurrence of certain events (including certain acquisitions of
more than 20% of the Common Stock by a person or group), each holder of an
unexercised Right will be entitled to receive Common Stock having a value
equal to twice the Purchase Price of the Right. Upon the occurrence of
certain other events (including acquisition of the Parent Company in a merger
or other business combination in which the Parent Company is not the
surviving corporation), each holder of an unexercised Right will be entitled
to receive common stock of the acquiring person having a value equal to twice
the Purchase Price of the Right.

     The Parent Company may redeem the Rights (to the extent not exercised)
at any time, in whole but not in part, at a price of $0.01 per Right.



13. Comprehensive (Loss) Income

Comprehensive (loss) income represents the sum of net income and items of
"other comprehensive (loss) income" which are reported directly in
stockholders' equity, such as the net unrealized gain or loss on securities
available for sale and minimum pension liability adjustments. The Company has
reported its comprehensive (loss) income for 2005, 2004, and 2003 in the
consolidated statements of changes in stockholders' equity.

     The Company's other comprehensive loss consisted of the following
components for the years ended December 31:

<TABLE>

<CAPTION>

                                                                                 2005              2004             2003

<S>                                                                         <C>               <C>              <C>
Net unrealized holding losses arising during the year,
  net of taxes of $502,000 in 2005, $327,000 in 2004, and
  $688,000 in 2003                                                          $(744,000)        $(490,000)       $(998,000)
Reclassification adjustment for net realized gains
  included in income, net of taxes of $2,000 in 2005,
  $6,000 in 2004, and $125,000 in 2003                                         (4,000)           (8,000)        (182,000)
Minimum pension liability adjustment, net of taxes of
  $103,000 in 2005, $21,000 in 2004, and ($128,000) in 2003                  (155,000)          (37,000)         186,000

      Other comprehensive loss                                              $(903,000)        $(535,000)       $(994,000)

</TABLE>

    The Company has accumulated other comprehensive losses related to the net
unrealized loss on securities available for sale and minimum pension
liability of $465,000 and $893,000, respectively, as of December 31, 2005. As
of December 31, 2004, the Company recorded an accumulated other comprehensive
income on the net unrealized gain on securities available for sale of $282,000
and a $737,000 loss related to the minimum pension liability.



14. Related Party Transactions

Certain directors and executive officers of the Company, as well as certain
affiliates of these directors and officers, have engaged in loan transactions
with the Company. Such loans were made in the ordinary course of business at
the Company's normal terms, including interest rates and collateral
requirements, and do not represent more than normal risk of collection.
Outstanding loans to these related parties are summarized as follows at
December 31:

                                     2005             2004

Directors                      $2,301,000       $1,102,000
Executive offices
  (nondirectors)                  373,000          216,000

                               $2,674,000       $1,318,000

     During 2005, total advances to these directors and officers were
$3,493,000 and total payments made on these loans were $2,137,000. These
directors and officers had unused lines of credit with the Company of
$892,000 and $730,000 at December 31, 2005 and 2004, respectively.


                                     F-18

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



15. Employee Benefit Plans


PENSION AND OTHER POSTRETIREMENT BENEFITS

The Company has a noncontributory defined benefit pension plan covering
substantially all of its employees. The benefits are based on years of
service and the employee's average compensation during the five consecutive
years in the last ten years of employment affording the highest such average.
The Company's funding policy is to contribute annually an amount sufficient
to satisfy the minimum funding requirements of ERISA, but not greater than
the maximum amount that can be deducted for Federal income tax purposes.
Contributions are intended to provide not only for benefits attributed to
service to date, but also for benefits expected to be earned in the future.

    The Company also sponsors a postretirement medical, dental and life
insurance benefit plan for retirees in the pension plan. Effective in 2005,
employees attaining age 55 or later, and whose age plus service is greater
than or equal to 85 are eligible for medical benefits. The retirees pay a
percentage of the medical benefit costs. Both of the plans are unfunded. The
Company accounts for the cost of these postretirement benefits in accordance
with SFAS No. 106, Employers' Accounting for Postretirement Benefits Other
Than Pensions. Accordingly, the cost of these benefits is recognized on an
accrual basis as employees perform services to earn the benefits. The Company
adopted SFAS No. 106 as of January 1, 1993 and elected to amortize the
accumulated benefit obligation at that date (transition obligation) into
expense over the allowed period of 20 years.

    In December 2004, the Medicare Prescription Drug, Improvement and
Modernization Act of 2004 (Medicare Act) was signed into law. The Medicare
Act introduced both a Medicare prescription-drug benefit and a federal
subsidy to sponsors of retiree health-care plans that provide a benefit at
least "actuarially equivalent" to the Medicare benefit. These provisions of
the Medicare Act will affect accounting measurements under SFAS No. 106.
Accordingly, the FASB staff has issued guidance allowing companies to
recognize or defer recognizing the effects of the Medicare Act in annual
financial statements for fiscal years ending after enactment of the Medicare
Act. The Company has elected to defer recognizing the effects of the Medicare
Act in its December 31, 2005 consolidated financial statements. Accordingly,
the reported measures of the accumulated postretirement benefit obligation
and net periodic postretirement benefit cost do not include the effects of
the Medicare Act. When issued, the specific authoritative literature on
accounting for the federal subsidy could require the Company to revise its
previously reported information.

    The Company expects to contribute $328,000 to its pension plan and
$69,000 to its other postretirement benefit plan in 2006. The pension
benefits expected to be paid in each year from 2006-2010 are $246,000,
$254,000, $255,000, $339,000, and $342,000, respectively. The aggregate
pension benefits expected to be paid in the five years from 2011-2015 are
$2,478,000. The expected benefits are based on the same assumptions used to
measure the Company's benefit obligation at September 30, 2005 and include
estimated future employee service. The other postretirement benefits expected
to be paid in each year from 2006-2010 are $101,000, $109,000, $114,000,
$129,000 and $146,000, respectively. The aggregate other postretirement
benefits expected to be paid in the five years from 2011-2015 are $1,127,000.
The expected benefits are based on the same assumptions used to measure the
Company's benefit obligation at December 31, 2005 and include estimated
future employee service.


                                     F-19

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The following is a summary of changes in the benefit obligations and
plan assets for the pension plan as of a September 30th measurement date and
the other postretirement benefit plan as of a December 31st measurement date,
together with a reconciliation of each plan's funded status to the amounts
recognized in the consolidated balance sheets:

<TABLE>

<CAPTION>

                                                                Pension Benefits                  Postretirement Benefits

                                                                2005             2004              2005             2004

<S>                                                      <C>              <C>               <C>              <C>
CHANGES IN BENEFIT OBLIGATION
Beginning of year                                        $ 6,988,000      $ 6,049,000       $ 3,104,000      $ 3,604,000
Service cost                                                 298,000          266,000           166,000          242,000
Interest cost                                                408,000          375,000           176,000          209,000
Actuarial (gain) loss                                        846,000          547,000          (216,000)          (7,000)
Benefits paid                                               (250,000)        (249,000)          (56,000)         (49,000)
Plan Amendments                                                   --               --                --         (906,000)
Contributions by plan participants                                --               --            16,000           11,000

End of year                                                8,290,000        6,988,000         3,190,000        3,104,000

CHANGES IN FAIR VALUE OF PLAN ASSETS
Beginning of year                                          4,877,000        4,222,000                --               --
Actual return on plan assets                                 414,000          416,000                --               --
Employer contributions                                       341,000          488,000            16,000           38,000
Contributions by plan participants                                --               --            39,000           10,000
Benefits paid                                               (250,000)        (249,000)          (55,000)         (48,000)

End of year                                                5,382,000        4,877,000                --               --

Unfunded status at end of year                            (2,908,000)      (2,111,000)       (3,190,000)      (3,104,000)
Unrecognized net transition asset                             (2,000)          (6,000)               --               --
Unrecognized net actuarial loss                            3,183,000        2,520,000         1,101,000        1,370,000
Unrecognized prior service cost (benefit)                    212,000          236,000          (714,000)        (758,000)

      Net amount recognized                              $   485,000      $   639,000       $(2,803,000)     $(2,492,000)

AMOUNTS RECOGNIZED IN THE
CONSOLIDATED BALANCE SHEET
CONSIST OF
Prepaid (accrued) benefit cost                           $   485,000      $   639,000       $(2,803,000)     $(2,492,000)
Additional minimum liability                              (1,699,000)      (1,465,000)               --               --
Intangible asset                                             212,000          236,000                --               --
Accumulated other comprehensive loss
  (pre-tax basis)                                          1,487,000        1,229,000                --               --

      Net amount recognized                              $   485,000      $   639,000       $(2,803,000)     $(2,492,000)

</TABLE>

     The accumulated benefit obligation for the pension plan was $6,597,000
and $5,705,000 at September 30, 2005 and 2004, respectively.


                                     F-20

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The components of the net periodic benefit cost for these plans were as
follows:

<TABLE>

<CAPTION>

                                                                                   Pension Benefits

                                                                        2005              2004             2003

<S>                                                                <C>               <C>              <C>
Service cost                                                       $ 298,000         $ 266,000        $ 253,000
Interest cost                                                        408,000           375,000          339,000
Expected return on plan assets                                      (366,000)         (321,000)        (278,000)
Amortization of prior service cost                                    25,000            25,000           25,000
Amortization of transition asset                                      (4,000)           (4,000)          (4,000)
Recognized net actuarial loss                                        134,000           135,000          110,000

      Net periodic benefit cost                                    $ 495,000         $ 476,000        $ 445,000

</TABLE>

<TABLE>

<CAPTION>

                                                                                Postretirement Benefits

                                                                        2005              2004             2003

<S>                                                                 <C>               <C>              <C>
Service cost                                                        $166,000          $242,000         $151,000
Interest cost                                                        176,000           209,000          146,000
Amortization of transition obligation                                     --            18,000           18,000
Amortization of prior services cost                                  (45,000)               --               --
Recognized net actuarial loss                                         53,000            60,000            8,000

      Net periodic benefit cost                                     $350,000          $529,000         $323,000

</TABLE>

     Assumptions used to determine benefit obligations for the pension plan
as of a September 30th measurement date and for the other postretirement
benefits plan as of a December 31st measurement date were as follows:

<TABLE>

<CAPTION>

                                                                     Pension Benefits                Postretirement Benefits

                                                                   2005             2004              2005             2004

<S>                                                                <C>              <C>               <C>              <C>
Discount rate                                                      5.35%            5.75%             5.35%            5.75%
Rate of compensation increase                                      4.00             3.75                --               --

</TABLE>

     Assumptions used to determine net periodic benefit cost were as follows:

<TABLE>

<CAPTION>

                                                                     Pension Benefits                Postretirement Benefits

                                                                   2005             2004              2005             2004

<S>                                                                <C>              <C>               <C>              <C>
Discount rate                                                      5.75%            5.85%             5.75%            5.85%
Expected long-term rate of return on plan assets                   7.50             7.50                --               --
Rate of compensation increase                                      3.75             3.85                --               --

</TABLE>

     The Company's expected long-term rate of return on plan assets reflects
long-term earnings expectations and was determined based on historical
returns earned by existing plan assets adjusted to reflect expectations of
future returns as applied to plan's targeted allocation of assets.

     In 2004, the postretirement plan was amended from retiree eligibility at
age 60 with a minimum of 10 years of service to age 60 with a minimum of 10
years of service and whose age plus service is greater than or equal to 85.
This changed from the requirement that employees must retire after age 60
with at least 10 years of service to be eligible for medical benefits. In
addition, retiree contributions for ages 65 and over changed to retiree pays
25% of the special Medicare Supplement premium if single coverage is selected
and 40% of the special Medicare Supplement premium otherwise, from the
previous provision of retiree pays 25% of the active premium or the special
Medicare Supplement premium for any coverage selected.

     The assumed health care cost trend rate for retirees under age 65 which
was used to determine the benefit obligation for the other postretirement
benefits plan at December 31, 2005 was 9.0%, declining gradually to 5.0% in
2010 and remaining at that level


                                     F-21

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

thereafter. The assumed health care cost trend rate for retirees over
age 65 which was also used to determine the benefit obligation for the other
postretirement benefits plan at December 31, 2005 was 8.0%, declining
gradually to 4.0% in 2010 and remaining at that level thereafter. Increasing
the assumed health care cost trend rates by one percentage point in each year
would increase the benefit obligation at December 31, 2005 by approximately
$645,000 and the net periodic benefit cost for the year by approximately
$84,000; a one percentage point decrease would decrease the benefit
obligation and benefit cost by approximately $495,000 and $63,000,
respectively.

     The Company's pension plan asset allocation at October 3, 2005 and
September 30, 2004, by asset category is as follows:

                                     2005             2004

ASSET CATEGORY
Equity securities                      63%              50%
Debt securities                        32               37
Other                                   5               13

      Total                           100%             100%


     Plan assets were in transit as of the end of the plan year as a new
discretionary trustee, Citizens Bank, was employed on October 1, 2005.

     Plan assets are invested in eleven diversified investment funds of
Citizens Bank. The investment funds include six equity funds, four bond funds
and one money market fund. Citizens Bank has been given discretion by the
Company to determine the appropriate strategic asset allocation as governed
by the Company's Discretionary Asset Management Investment Policy Statement
which provides specific targeted asset allocations for each investment fund
as follows:

                                          Allocation Range

CITIZENS BANK INVESTMENT FUNDS
Large Cap Domestic Equity                        30% - 40%
Mid Cap Domestic Equity                           5% - 15%
Small Cap Domestic Equity                         0% - 10%
International Equity                              5% - 20%
Real Estate                                       0% - 10%
Core Investment Grade Bonds                      15% - 30%
Mortgages                                         0% - 15%
Money Market                                      0% - 10%

    The actual asset allocations at December 31, 2005 are consistent with
the table above.


DIRECTORS SURVIVAL INSURANCE

The Company maintains a separate insurance program for Directors not
insurable under the post-retirement plan. The benefits accrued under this
plan totaled $273,000 at December 31, 2005 and $215,000 at December 31, 2004
and are unfunded. The Company recorded an expense of $58,000, $18,000 and
$17,000 relating to this plan during the years ended December 31, 2005, 2004
and 2003 respectively.


TAX-DEFERRED SAVINGS PLAN

The Company maintains a qualified 401(k) plan for all employees, which
permits tax-deferred employee contributions up to 75% of salary and provides
for matching contributions by the Company. The Company matches 100% of
employee contributions up to 4% of the employee's salary and 25% of the next
2% of the employee's salary. The Company incurred annual expenses of
$161,000, $133,000 and $144,000 in 2005, 2004 and 2003 respectively


SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

In 2003, the Company established a Supplemental Executive Retirement Plan
for certain executive officers primarily to restore benefits cutback in
certain employee benefit plans due to Internal Revenue Service regulations.
The benefits accrued under this plan totaled $596,000 at December 31, 2005
and $186,000 at December 31, 2004, and are unfunded. The Company recorded an
expense of $410,000, $83,000 and $103,000 relating to this plan during the
years ended December 31, 2005, 2004 and 2003 respectively.


DIRECTOR RETIREMENT PLAN

In 2003, the Company established a Director Retirement Plan in order to
provide certain retirement benefits to participating directors. Generally,
each participating director receives an annual retirement benefit of eighty
percent of their average annual cash compensation during the three calendar
years preceding their retirement date, as defined in the plan. This annual
retirement benefit is payable until death and may not exceed $40,000 per
year. The benefits accrued under this plan totaled $339,000 and $187,000 at
December 31, 2005 and 2004 respectively, and are unfunded. The Company
recorded an expense of $152,000, $107,000 and $80,000 relating to this plan
during the years ended December 31, 2005, 2004 and 2003 respectively.


                                     F-22

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



16. Commitments and Contingent Liabilities


LEGAL PROCEEDINGS

The Parent Company and the Bank are, from time to time, defendants in legal
proceedings relating to the conduct of their business. In the best judgment
of management, the consolidated financial position of the Company will not be
affected materially by the outcome of any pending legal proceedings.


OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS

The Company is a party to certain financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These are limited to commitments to extend credit and
standby letters of credit which involve, to varying degrees, elements of
credit risk in excess of the amounts recognized in the consolidated balance
sheets. The contract amounts of these instruments reflect the extent of the
Company's involvement in particular classes of financial instruments.

     The Company's maximum exposure to credit loss in the event of
nonperformance by the other party to these instruments represents the
contract amounts, assuming that they are fully funded at a later date and any
collateral proves to be worthless. The Company uses the same credit policies
in making commitments as it does for on-balance-sheet extensions of credit.

     Contract amounts of financial instruments that represent agreements to
extend credit are as follows at December 31:

<TABLE>

<CAPTION>

                                                                                 2005              2004

<S>                                                                       <C>               <C>
Loan origination commitments and unused lines of credit:
   Mortgage loans                                                         $13,655,000       $ 9,211,000
   Commercial loans                                                        12,540,000        15,430,000
   Credit card lines                                                               --         4,998,000
   Home equity lines                                                       11,661,000         9,727,000
   Other revolving credit                                                   3,875,000         4,587,000

                                                                           41,731,000        43,953,000
Standby letters of credit                                                   1,691,000           808,000

                                                                          $43,422,000       $44,761,000

</TABLE>

     These agreements to extend credit have been granted to customers within
the Company's lending area described in note 4 and relate primarily to
fixed-rate loans.

     Loan origination commitments and lines of credit are agreements to lend
to a customer as long as there is no violation of any condition established
in the contract. These agreements generally have fixed expiration dates or
other termination clauses and may require payment of a fee by the customer.
Since commitments and lines of credit may expire without being fully drawn
upon, the total contract amounts do not necessarily represent future cash
requirements.

     The Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral, if any, required by the Company upon the
extension of credit is based on management's credit evaluation of the
customer. Mortgage commitments are secured by a first lien on real estate.
Collateral on extensions of credit for commercial loans varies but may
include accounts receivable, equipment, inventory, livestock, and
income-producing commercial property.

     FASB Interpretation No. 45 (FIN No. 45), Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others; an Interpretation of FASB Statements No. 5, 57, and
107 and rescission of FASB Interpretation No. 34, requires certain
disclosures and liability-recognition for the fair value at issuance of
guarantees that fall within its scope. Under FIN No. 45, the Company does not
issue any guarantees that would require liability-recognition or disclosure,
other than its standby letters of credit. The Company has issued conditional
commitments in the form of standby letters of credit to guarantee payment on
behalf of a customer and guarantee the performance of a customer to a third
party. Standby letters of credit generally arise in connection with lending
relationships. The credit risk involved in issuing these instruments is
essentially the same as that involved in extending loans to customers.
Contingent obligations under standby letters of credit totaled $1,691,000 and
$808,000 at December 31, 2005 and 2004, respectively, and represent the
maximum potential future payments the Company could be required to make.
Typically, these instruments have terms of twelve months or less and expire
unused; therefore, the total amounts do not necessarily represent future cash
requirements. Each customer is evaluated individually for creditworthiness
under the same underwriting standards used for commitments to extend credit
and on-balance sheet instruments. Company policies governing loan collateral
apply to standby letters of credit at the time of credit extension.
Loan-to-value ratios are generally consistent with loan-to-value requirements
for other commercial loans secured by similar types of collateral. The fair
value of the Company's standby letters of credit at December 31, 2005 and
2004 was not significant.


                                     F-23

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



17. Fair Values of Financial Instruments

SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires
that the Company disclose estimated fair values for its on- and
off-balance-sheet financial instruments. SFAS No. 107 defines fair value as
the amount at which a financial instrument could be exchanged in a current
transaction between parties other than in a forced sale or liquidation.

     Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holding of a particular
financial instrument, nor do they reflect possible tax ramifications or
transaction costs. Because no market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected net cash flows, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment, and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.

     Fair value estimates are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of anticipated
future business or the value of nonfinancial assets and liabilities. In
addition, there are significant unrecognized intangible assets that are not
included in these fair value estimates, such as the value of "core deposits"
and the Company's branch network.

     The following is a summary of the net carrying values and estimated fair
values of the Company's financial assets and liabilities (none of which were
held for trading purposes) at December 31:

<TABLE>

<CAPTION>

                                                                      2005                               2004

                                                                 Net                                Net
                                                            Carrying        Estimated          Carrying        Estimated
                                                               Value       Fair Value             Value       Fair Value

<S>                                                     <C>              <C>               <C>              <C>
FINANCIAL ASSETS
Cash and due from banks                                 $ 24,192,000     $ 24,192,000      $ 14,040,000     $ 14,040,000
Securities available for sale                             88,984,000       88,984,000       100,705,000      100,705,000
Securities held to maturity                                8,195,000        8,233,000         5,957,000        5,998,000
Loans, net                                               240,646,000      239,105,000       220,591,000      222,140,000
Accrued interest receivable                                2,040,000        2,040,000         2,085,000        2,085,000
FHLB stock                                                 2,496,000        2,496,000         2,175,000        2,175,000

FINANCIAL LIABILITIES
Demand deposits (non-interest bearing)                    65,266,000       65,266,000        65,208,000       65,208,000
Interest-bearing deposits                                246,830,000      246,830,000       227,886,000      227,886,000
FHLB advances                                             25,000,000       24,908,000        18,500,000       19,159,000
Short-term borrowings                                        427,000          427,000         8,424,000        8,424,000
Accrued interest payable                                     450,000          450,000           232,000          232,000

</TABLE>

     The specific estimation methods and assumptions used can have a
substantial impact on the estimated fair values. The following is a summary
of the significant methods and assumptions used by the Company to estimate
the fair values shown in the preceding table:


SECURITIES

The carrying values for securities maturing within 90 days approximate fair
values because there is little interest rate or credit risk associated with
these instruments. The fair values of longer-term securities are estimated
based on bid prices published in financial newspapers or bid quotations
received from securities dealers. The fair values of certain state and
municipal securities are not readily available through market sources;
accordingly, fair value estimates are based on quoted market prices of
similar instruments, adjusted for any significant differences between the
quoted instruments and the instruments being valued.


LOANS

Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, consumer,
real estate and other loans. Each loan category is further segregated into
fixed and adjustable rate interest terms and by performing and nonperforming
categories. The fair values of performing loans are calculated by discounting
scheduled cash flows through estimated maturity using estimated market
discount rates that reflect the credit and interest rate risks inherent in
the loans. Estimated maturities are based on contractual terms and repricing
opportunities.


                                     F-24

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The fair values of nonperforming loans are based on recent external
appraisals and discounted cash flow analyses. Estimated cash flows are
discounted using a rate commensurate with the risk associated with the
estimated cash flows. Assumptions regarding credit risk, cash flows and
discount rates are judgmentally determined using available market information
and specific borrower information.


DEPOSIT LIABILITIES

The fair values of deposits with no stated maturity (such as checking,
savings and money market deposits) equal the carrying amounts payable on
demand. The fair values of time deposits are based on the discounted value of
contractual cash flows (but are not less than the net amount at which
depositors could settle their accounts). The discount rates are estimated
based on the rates currently offered for time deposits with similar remaining
maturities.


FHLB ADVANCES

The fair value was estimated by discounting scheduled cash flows through
maturity using current market rates.


OTHER FINANCIAL INSTRUMENTS

The fair values of cash and cash equivalents, FHLB stock, accrued interest
receivable, accrued interest payable and short-term debt approximated their
carrying values at December 31, 2005 and 2004.

     The fair values of the agreements to extend credit described in note 16
are estimated based on the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
present creditworthiness of the counterparties. For fixed rate loan
commitments, fair value estimates also consider the difference between
current market interest rates and the committed rates. At December 31, 2005
and 2004, the fair values of these financial instruments approximated the
related carrying values which were not significant.



18. Condensed Parent Company Financial Statements

The following are the condensed parent company only financial statements
for Jeffersonville Bancorp:

<TABLE>

BALANCE SHEETS

<CAPTION>

December 31,                                                                     2005              2004

<S>                                                                       <C>               <C>
ASSETS
Cash                                                                      $    88,000       $   292,000
Securities available for sale                                                 982,000           736,000
Investment in subsidiary                                                   40,094,000        37,137,000
Premises and equipment, net                                                   901,000           963,000
Other assets                                                                  457,000           570,000

      Total assets                                                        $42,522,000       $39,698,000

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities                                                               $     3,000       $    52,000
Stockholders' equity                                                       42,519,000        39,646,000

      Total liabilities and stockholders' equity                          $42,522,000       $39,698,000

</TABLE>


                                     F-25

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>

STATEMENTS OF INCOME

<CAPTION>

Years Ended December 31,                                                         2005              2004             2003

<S>                                                                        <C>               <C>              <C>
Dividend income from subsidiary                                            $1,800,000        $1,800,000       $  700,000
Dividend income on securities available for sale                               29,000            23,000           48,000
Rental income from subsidiary                                                 235,000           313,000          313,000
Other non-interest income                                                      11,000             7,000               --

                                                                            2,075,000         2,143,000        1,061,000

Occupancy and equipment expenses                                              116,000           110,000          108,000
Other non-interest expenses                                                   108,000           134,000          154,000

                                                                              224,000           244,000          262,000

Income before income taxes and undistributed
  income of subsidiary                                                      1,851,000         1,899,000          799,000
Income tax expense                                                             33,000            38,000           38,000

      Income before undistributed income of subsidiary                      1,818,000         1,861,000          761,000
Equity in undistributed income of subsidiary                                3,907,000         4,310,000        4,971,000

      Net income                                                           $5,725,000        $6,171,000       $5,732,000

</TABLE>

<TABLE>

STATEMENTS OF CASH FLOWS

<CAPTION>

Years Ended December 31,                                                         2005              2004             2003

<S>                                                                       <C>               <C>              <C>
OPERATING ACTIVITIES
Net income                                                                $ 5,725,000       $ 6,171,000      $ 5,732,000
Equity in undistributed income of subsidiary                               (3,907,000)       (4,310,000)      (4,971,000)
Depreciation and amortization                                                  62,000            61,000           62,000
Other adjustments, net                                                         32,000            34,000           (2,000)

      Net cash provided by operating activities                             1,912,000         1,956,000          821,000

INVESTING ACTIVITIES
Proceeds from calls of securities available for sale                            3,000           150,000          598,000
Purchase of securities available for sale                                    (170,000)         (150,000)        (376,000)

      Cash provided by investing activities                                  (167,000)               --          222,000

FINANCING ACTIVITIES
Cash dividends paid                                                        (1,949,000)       (1,776,000)      (1,449,000)

      Net cash used in financing activities                                (1,949,000)       (1,776,000)      (1,449,000)

Net (decrease) increase in cash                                              (204,000)          180,000         (406,000)
      Cash at beginning of year                                               292,000           112,000          518,000

      Cash at end of year                                                 $    88,000       $   292,000      $   112,000

</TABLE>


                                    F-26

<PAGE>

MANAGEMENT'S STATEMENT OF RESPONSIBILITY

    The consolidated financial statements contained in this annual report on
Form 10-K have been prepared in accordance with generally accepted accounting
principles and, where appropriate, include amounts based upon management's
best estimates and judgments. Management is responsible for the integrity and
the fair presentation of the consolidated financial statements and related
information.

    Management maintains a system of internal controls to provide reasonable
assurance that the Company's assets are safeguarded against loss and that
transactions are executed in accordance with management's authorization and
recorded properly to permit the preparation of consolidated financial
statements in accordance with generally accepted accounting principals in the
United States of America. These internal controls include the establishment
and communication of policies and procedures, the selection and training of
qualified personnel and an internal auditing program that evaluates the
adequacy and effectiveness of such internal controls, policies and
procedures. Management recognizes that even a highly effective internal
control system has inherent risks, including the possibility of human error
and the circumvention or overriding of controls, and that the effectiveness
of an internal control system can change with circumstances. However
management believes that the internal control system provides reasonable
assurance that errors or irregularities that could be material to the
consolidated financial statements are prevented or would be detected on a
timely basis and corrected through the normal course of business. As of
December 31, 2005, management believes the internal controls were in place
and operating effectively.

    The Board of Directors discharges its responsibility for the consolidated
financial statements through its Audit committee, which is comprised entirely
of non-employee directors. The Audit Committee meets periodically with
management, internal auditors and the independent public accountants. The
internal auditor and the independent public accountants have direct full and
free access to the Audit Committee and meet with it, with and without
management being present, to discuss the scope and results of their audits
and any recommendations regarding the system of internal controls.

    The independent accountants were engaged to perform an independent audit
of the consolidated financial statements. They have conducted their audit in
accordance with the standards of the Public Company Accounting Oversight
Board (United States) as stated in their report with appears on pages 3 and
4.


/s/ Raymond Walter
Raymond Walter
President and Chief Executive Officer


/s/ Charles E. Burnett
Charles E. Burnett
Treasurer and Chief Financial Officer


                                    F-27