**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      10-K**




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




For
      the
      fiscal year ended December 31, 2007





OR





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




For
      the
      transition period from ____________ to ____________





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 incorporation or organization)
            
            (I.R.S.
                Employer Identification No.)




4864
                State Rt 52, Jeffersonville, New York
            
            12748(Address
                of principal executive offices)
            
            (Zip
                Code)





(845) 482-4000


(Registrant’s
      telephone number, including area code)




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




Title
                of each class
            
            Name
                of each exchange on which registeredNONE
            
            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
o    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
o    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
o





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. o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer or a smaller reporting company.
      See
      definitions of “large accelerated filer”, “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act.


Large
      accelerated filer o Accelerated filer x Non-accelerated
      filer o Smaller reporting company
o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes
o    No
x





As
      of
      June 30, 2007 the aggregate market value of the registrant’s common stock held
      by non-affiliates of the registrant was $71,979,000 based on the closing price
      of $18.66 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 13, 2008Common
                Stock, $0.50 par value per share
            
            4,234,321
                shares





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Document
            
            Parts
                Into Which IncorporatedProxy
                Statement for the Annual Meeting of Stockholders to be held
            
            Part
                III Items 10, 11, 12, 13 and 14April
                29, 2008 (Proxy Statement)





**JEFFERSONVILLE
      BANCORP INDEX TO FORM 10-K**


*Page***PART
                  I**Item
                  1.
              Business
              3Item
                  1A.
              Risk
                  Factors
              7Item
                  1B.
              Unresolved
                  Staff Comments
              8Item
                  2.
              Properties
              8Item
                  3.
              Legal
                  Proceedings
              8Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              9**PART
                  II**Item
                  5.
              Market
                  for the Registrant’s Common Equity,Related
                  Stockholder Matters and Issuer Purchases of Equity
                  Securities
              10Item
                  6.
              Selected
                  Financial Data
              11Item
                  7.
              Management’s
                  Discussion and Analysis ofFinancial
                  Condition and Results of Operations
              12Item
                  7A.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              26Item
                  8.
              Financial
                  Statements and Supplementary Data
              27Item
                  9.
              Changes
                  in and Disagreements with Accountantson
                  Accounting and Financial Disclosure
              28Item
                  9A.
              Controls
                  and Procedures
              28Item
                  9B.
              Other
                  Information
              28**PART
                  III**Item
                  10.
              Directors,
                  Executive Officers and Corporate Governance
              29Item
                  11.
              Executive
                  Compensation
              29Item
                  12.
              Security
                  Ownership of Certain Beneficial Ownersand
                  Management, and Related Stockholder Matters
              29Item
                  13.
              Certain
                  Relationships and Related Transactions and Director
                  Independence
              29Item
                  14.
              Principal
                  Accountant and Fees and Services
              29**PART
                  IV**Item
                  15.
              Exhibits,
                  Financial Statement Schedules
              30Signatures
              31


2


**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, 2007 and 2006, the Company had total assets of $387.4 million
      and
      $397.3 million, securities available for sale of $92.1 million and $99.8
      million, securities held to maturity of $6.3 million and $9.4 million and net
      loans receivable of $249.6 million and $247.2 million, respectively. At December
      31, 2007 and 2006, total deposits were $299.2 million and $325.1 million,
      respectively. At December 31, 2007 and 2006, stockholders’ equity was $44.0
      million and $41.3 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 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, 2007, 2006 and 2005.




***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 2007 versus 2006 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 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.


3


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
      and other secured commercial 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 fixed rate
      mortgages, balloon mortgages, and adjustable 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”).




On
      November 28, 2006, the Bank entered into a formal written agreement with the
      OCC. The agreement provides for a comprehensive action plan designed to enhance
      the Board of Directors’ and management’s supervision of the Bank, credit risk
      management and regulatory compliance, including compliance with the Bank Secrecy
      Act and related anti-money laundering laws. The management of the Company and
      the Bank believe this plan is being successfully implemented as required by
      the
      written agreement with the OCC.




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, 2007, the
      Company’s leverage ratio was
      11.6%, its
      ratio of Tier 1 capital to risk-weighted assets was
      17.4%, and its
      ratio of qualifying total capital to risk-weighted assets
      was 18.6%. 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 non-banking
      activities.




The
      Bank
      is subject to leverage and risk-based capital requirements and minimum capital
      guidelines of the OCC. As of December 31, 2007, the Bank was in compliance
      with
      all minimum capital requirements. The Bank’s leverage ratio was 11.1%, its ratio
      of Tier 1 capital to risk-weighted assets were 16.8%, and its ratio of
      qualifying total capital to risk-weighted assets was 18.1%.




Any
      bank
      that is less than adequately-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. Among the actions that may be imposed on an undercapitalized
      bank
      is the implementation of a capital restoration plan. 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 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.


4


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, 2007, the Bank
      had
      approximately $4.7 million 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. The
      Federal Deposit Insurance Reform Act of 2005 (“Reform Act”), which was signed
      into law on February 8, 2006, gave 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. Effective
      January 1, 2007, the FDIC established a new risk-based assessment system for
      determining the deposit insurance assessments to be paid by insured depository
      institutions. Under this assessment system, all insured depository institutions
      are placed into one of four risk categories. Base assessment rates range from
      2
      to 4 basis points (a basis point is $0.01 per $100 of assessable deposits)
      for
      institutions in Risk Category I to 40 basis points for Risk Category IV
      institutions. Risk Category assessments generally are determined based on the
      risk of loss to the Depository Insurance Fund (“DIF”) posed by the particular
      institution. The FDIC has the authority to adjust rates, without further notice
      and comment up to three basis points. The FDIC’s current assessment rates are
      set at 3 basis points above the base rates discussed above. Therefore assessment
      rates currently range from 5 to 43 basis points. The Reform Act legislation
      also
      provided a credit to all insured depository institutions, based on the amount
      of
      their insured deposits at year-end 1996, that may be used as an offset to the
      premiums that are assessed. The Bank received a total credit of approximately
      $239,000. This credit offset a substantial portion of its 2007 deposit insurance
      assessment. The
      Bank
      paid $119,083 of FICO assessments during 2007.




As
      a
      member of the Federal Home Loan Bank of New York, the Bank is required to hold
      a
      minimum amount of the capital stock thereof. As of December 31, 2007, the Bank
      satisfied this requirement.




Transactions
      between the Bank and any affiliate, which includes the Company, are governed
      by
      sections 23A and 23B of the Federal Reserve Act. Generally, sections 23A and
      23B
      are intended to protect insured depository institutions from suffering losses
      arising from transactions with non-insured affiliates by placing quantitative
      and qualitative limitations on in covered transactions between a bank and any
      one affiliate as well as 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.




Under
      the
      Gramm-Leach-Bliley Act (“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. The Federal Reserve and the Federal Trade Commission
      (“FTC”) have extensive rulemaking authority under the FACT Act, and the Company
      and the Bank are subject to the rules that have been promulgated by the Federal
      Reserve and FTC.




In
      response to periodic disclosures by companies in various industries of the
      loss
      or theft of computer-based nonpublic customer information, several members
      of
      Congress have called for the adoption of national standards for the safeguarding
      of such information and the disclosure of security breaches. Several committees
      of both houses of Congress have conducted hearings on data security and related
      issues, and have legislation pending before them regarding this
      issue.




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. 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 pursuant to federal
      securities laws. SOA applies generally to 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 the SEC and
      securities exchanges have adopted extensive additional disclosure, corporate
      governance, and other related rules pursuant to SOA’s mandate. 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.


5


Beginning
      in March 2005, home mortgage lenders, including banks, were required under
      the
      Home Mortgage Disclosure Act (“HMDA”) 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
      HMDA investigation.




In
      December 2006, the Federal Reserve, OCC and other federal financial regulatory
      agencies issued final guidance on sound risk management practices for
      concentrations in commercial real estate (“CRE”) lending. The CRE guidance
      provided supervisory criteria, including numerical indicators to direct
      examiners in identifying institutions with potentially significant CRE loan
      concentrations that may warrant greater supervisory scrutiny. The CRE criteria
      do not constitute limits on CRE lending, but the CRE guidance does provide
      certain additional expectations, such as enhanced risk management practices
      and
      levels of capital, for banks with concentrations in CRE lending.





**TAXATION**





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:





**2007**
            
            **2006**
            
            **2005**(In
                thousands)Current
                tax expense:Federal
            
            $
            1,302
            
            $
            1,428
            
            $
            2,094State
            
            
            43
            
            
            169
            
            
            302Deferred
                tax (benefit)
            
            
            (76
            )
            
            (357
            )
            
            (354
            )Total
                income tax expense
            
            $
            1,269
            
            $
            1,240
            
            $
            2,042





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, 2007, there were 135 persons employed by the Bank.


6


**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, 2007,
      approximately $4.7 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.





On
      November 28, 2006, the Bank entered into a formal written agreement with the
      OCC. The agreement provides for a comprehensive action plan designed to enhance
      the Board of Directors’ and management’s supervision of the Bank, credit risk
      management and regulatory compliance, including compliance with the Bank Secrecy
      Act and related anti-money laundering laws. The management of the Company and
      the Bank believe this plan is being successfully implemented as required by
      the
      written agreement with the OCC. The Bank continues to operate under this formal
      agreement. The OCC continues its enhanced supervisory presence and monitoring
      of
      the Bank’s progress.





**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.





In
      early
      2008, the Bureau of Indian Affairs denied pending casino applications to be
      located in Sullivan County which is expected to negatively impact the value
      of
      commercial properties underlying certain loans. The value of other properties
      would be negatively affected if other projects are not completed
      satisfactorily.





The
      values of residential and commercial properties in the vicinity of an arts
      complex have risen with its completion. A similar rise in property values had
      been seen near properties where Casinos were expected to be constructed. In
      2008, licenses for the proposed casinos were denied. Some properties near the
      expected Casino projects provide the chief collateral for loans originated
      by
      the Company and are expected to be negatively affected.


7


The
      Company has little exposure in properties purchased in anticipation of the
      casinos. Currently there are no impaired loans due to this event. However,
      there
      may be depreciation of property values and diminished marketability
      forthcoming.





**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 maintaining our projected interest rate
      differentials.**





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. These
      rate differentials have been gradually shrinking during the last three fiscal
      years.





**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.





**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 all within
      Sullivan County. Our branches are located in Callicoon, Eldred, Liberty,
      Livingston Manor, Loch Sheldrake, two in Monticello, Narrowsburg and Wurtsboro.
      The Bank owns the main office and operations center along with six branches;
      Eldred, Liberty, Livingston Manor, Loch Sheldrake, Narrowsburg and one location
      in Monticello. We occupy three branch locations pursuant with a lease
      arrangement in Callicoon, Wurtsboro and one located in a Wal*Mart store in
      Monticello.





The
      Company’s supermarket leases expired this year. New facilities near the previous
      sites were found in both towns. A new facility was purchased in Narrowsburg
      and
      a new lease was signed in Callicoon. The Company’s leases for Callicoon,
      Wal*Mart and Wurtsboro expire in 2012, 2009, and 2010 respectively. Renewal
      options exist for Callicoon for an additional 15 years. Future minimum lease
      payments are disclosed under the title Contractual Obligations in Item
      7.





The
      major
      classifications of premises and equipment and the book value thereof were as
      follows at December 31, 2007:





**2007**(In thousands)Land
            
            $
            837Buildings
                and improvements
            
            
            5,351Furniture
                and fixtures
            
            
            177Equipment
            
            
            4,00710,372Less
                accumulated depreciation and amortization
            
            
            (5,974
            )Total
                premises and equipment, net
            
            $
            4,398





**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.


8





**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





Not
      applicable.


9


**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: Citigroup Global Markets, Inc., Knight Equity Markets,
      L.P.,
      Hill, Thompson, Magid and Co., UBS Securities, LLC, Citadel Derivatives Group
      LLC. 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****low**
            
            **high**
            
            **paid**Quarter
                Ended:March
                31, 2007
            
            $
            17.08
            
            $
            19.25
            
            $
            0.12June
                30, 2007
            
            $
            18.01
            
            $
            19.00
            
            $
            0.12September
                30, 2007
            
            $
            15.50
            
            $
            18.66
            
            $
            0.12December
                31, 2007
            
            $
            13.04
            
            $
            16.35
            
            $
            0.14March
                31, 2006
            
            $
            21.49
            
            $
            24.00
            
            $
            0.11June
                30, 2006
            
            $
            20.33
            
            $
            21.90
            
            $
            0.11September
                30, 2006
            
            $
            18.32
            
            $
            21.00
            
            $
            0.11December
                31, 2006
            
            $
            17.48
            
            $
            20.00
            
            $
            0.15





***Number
      of Holders of Record.*** At
      the
      close of business on March
      1,
      2008, the Company had 1,312 stockholders of
      record of the 4,234,321 shares of common stock then outstanding.





***Securities
      Authorized for Issuance Under Equity Compensation
      Plan.*** ** The
      Company has no equity compensation plans under which its securities 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.”





***Stock
      Repurchase Plan*** *.* In
      April
      2006, the Board of Directors approved a Stock Repurchase Program under which
      the
      Company could repurchase up to 100,000 shares of outstanding stock. In July
      2006, the Board of Directors approved an increase in the number of shares to
      150,000 under this program. In March 2007, an additional 50,000 shares were
      authorized for a total of 200,000 shares under this program. During
      the year 2007, 71,027 shares were purchased under this program for a cumulative
      total of 200,000. All authorized shares have been repurchased.  The
      following shares were purchased as a part of the repurchase program during
      the
      fourth quarter of 2007:





**Shares****Average**
            
            **repurchased****price**
            
            **as
                part of**
            
            **Capacity
                to****purchased**
            
            **per
                share**
            
            **program**
            
            **more
                shares****Shares**
            
            **paid**
            
            **repurchase**
            
            **purchase**10/1/2007 –
                10/31/07
            
            
            1,100
            
            $
            16.000
            
            
            1,10011/1/2007 –
                11/30/07
            
            
            11,200
            
            $
            14.582
            
            
            11,20012/1/2007 –
                12/31/07
            
            
            3,486
            
            $
            14.500
            
            
            3,486Total
            
            
            15,786
            
            $
            14.663
            
            
            15,786
            
            
            None




10


**ITEM
      6. SELECTED FINANCIAL DATA**





**FIVE-YEAR
      SUMMARY**





**2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**(Dollars
                in thousands, except share and per share data)**RESULTS
                OF OPERATIONS**Interest
                income
            
            $
            23,479
            
            $
            23,881
            
            $
            22,170
            
            $
            20,820
            
            $
            20,082Interest
                expense
            
            
            8,615
            
            
            8,211
            
            
            5,402
            
            
            4,051
            
            
            4,037Net
                interest income
            
            
            14,864
            
            
            15,670
            
            
            16,768
            
            
            16,769
            
            
            16,045Provision
                (credit) for loan losses
            
            
            (370
            )
            
            90
            
            
            180
            
            
            360
            
            
            620Net
                income
            
            
            4,275
            
            
            4,943
            
            
            5,725
            
            
            6,171
            
            
            5,732**FINANCIAL
                CONDITION**Total
                assets
            
            $
            387,430
            
            $
            397,291
            
            $
            387,343
            
            $
            365,523
            
            $
            352,204Total
                deposits
            
            
            299,242
            
            
            325,073
            
            
            312,096
            
            
            293,094
            
            
            280,227Gross
                loans
            
            
            252,985
            
            
            250,760
            
            
            244,261
            
            
            224,236
            
            
            196,675Stockholders’
                equity
            
            
            43,958
            
            
            41,275
            
            
            42,519
            
            
            39,646
            
            
            35,786**AVERAGE
                BALANCES**Total
                assets
            
            $
            389,384
            
            $
            400,535
            
            $
            374,413
            
            $
            361,783
            
            $
            340,575Total
                deposits
            
            
            315,941
            
            
            326,136
            
            
            297,643
            
            
            291,426
            
            
            268,687Gross
                loans
            
            
            250,277
            
            
            246,890
            
            
            238,993
            
            
            211,846
            
            
            183,335Stockholders’
                equity
            
            
            42,249
            
            
            42,272
            
            
            41,350
            
            
            37,149
            
            
            33,561**FINANCIAL
                RATIOS**Net
                income to average total assets
            
            
            1.10
            %
            
            1.23
            %
            
            1.53
            %
            
            1.71
            %
            
            1.68
            %Net
                income to average stockholders’ equity
            
            
            10.12
            %
            
            11.69
            %
            
            13.85
            %
            
            16.61
            %
            
            17.08
            %Average
                stockholders’ equity to average total assets
            
            
            10.85
            %
            
            10.55
            %
            
            11.04
            %
            
            10.27
            %
            
            9.85
            %**SHARE
                AND PER SHARE DATA**Basic
                earnings per share
            
            $
            1.00
            
            $
            1.13
            
            $
            1.29
            
            $
            1.39
            
            $
            1.29Dividends
                per share
            
            $
            0.50
            
            $
            0.48
            
            $
            0.44
            
            $
            0.40
            
            $
            0.33Dividend
                payout ratio
            
            
            49.92
            %
            
            42.44
            %
            
            34.04
            %
            
            28.78
            %
            
            25.28
            %Book
                value at year end
            
            $
            10.38
            
            $
            9.59
            
            $
            9.59
            
            $
            8.94
            
            $
            8.07Total
                dividends paid
            
            $
            2,134,000
            
            $
            2,098,000
            
            $
            1,949,000
            
            $
            1,776,000
            
            $
            1,449,000Average
                number of shares outstanding
            
            
            4,266,397
            
            
            4,376,494
            
            
            4,434,321
            
            
            4,434,321
            
            
            4,434,321Shares
                outstanding at year end
            
            
            4,234,321
            
            
            4,305,348
            
            
            4,434,321
            
            
            4,434,321
            
            
            4,434,321





**SUMMARY
      OF QUARTERLY RESULTS OF OPERATIONS FOR 2007 AND 2006**





**31-Mar**
            
            **30-Jun**
            
            **30-Sep**
            
            **31-Dec**
            
            **Total**(Dollars
                in thousands, except per share data)**2007**Interest
                income
            
            $
            5,951
            
            $
            5,791
            
            $
            5,895
            
            $
            5,842
            
            $
            23,479Interest
                expense
            
            
            (2,197
            )
            
            (2,145
            )
            
            (2,122
            )
            
            (2,151
            )
            
            (8,615
            )Net
                interest income
            
            
            3,754
            
            
            3,646
            
            
            3,773
            
            
            3,691
            
            
            14,864(Provision)
                Credit for loan losses
            
            
            370
            
            
            —
            
            
            —
            
            
            —
            
            
            370Non-interest
                income
            
            
            866
            
            
            800
            
            
            953
            
            
            851
            
            
            3,470Non-interest
                expenses
            
            
            (3,329
            )
            
            (3,094
            )
            
            (3,262
            )
            
            (3,475
            )
            
            (13,160
            )Income
                before income taxes
            
            
            1,661
            
            
            1,352
            
            
            1,464
            
            
            1,067
            
            
            5,544Income
                taxes
            
            
            (402
            )
            
            (364
            )
            
            (305
            )
            
            (198
            )
            
            (1,269
            )Net
                income
            
            $
            1,259
            
            $
            988
            
            $
            1,159
            
            $
            869
            
            $
            4,275Basic
                earnings per share
            
            $
            0.29
            
            $
            0.23
            
            $
            0.27
            
            $
            0.21
            
            $
            1.00**2006**Interest
                income
            
            $
            5,767
            
            $
            5,996
            
            $
            6,089
            
            $
            6,029
            
            $
            23,881Interest
                expense
            
            
            (1,859
            )
            
            (2,044
            )
            
            (2,118
            )
            
            (2,190
            )
            
            (8,211
            )Net
                interest income
            
            
            3,908
            
            
            3,952
            
            
            3,971
            
            
            3,839
            
            
            15,670Provision
                for loan losses
            
            
            (90
            )
            
            —
            
            
            —
            
            
            —
            
            
            (90
            )Non-interest
                income
            
            
            795
            
            
            844
            
            
            1,027
            
            
            920
            
            
            3,586Non-interest
                expenses
            
            
            (3,370
            )
            
            (3,257
            )
            
            (3,231
            )
            
            (3,125
            )
            
            (12,983
            )Income
                before income taxes
            
            
            1,243
            
            
            1,539
            
            
            1,767
            
            
            1,634
            
            
            6,183Income
                taxes
            
            
            (270
            )
            
            (339
            )
            
            (409
            )
            
            (222
            )
            
            (1,240
            )Net
                income
            
            $
            973
            
            $
            1,200
            
            $
            1,358
            
            $
            1,412
            
            $
            4,943Basic
                earnings per share
            
            $
            0.22
            
            $
            0.27
            
            $
            0.31
            
            $
            0.33
            
            $
            1.13


11


**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 (two), Livingston Manor, Narrowsburg, Callicoon and Wurtsboro. The
      Bank’s administrative offices are located in Jeffersonville, New
      York.




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 performance for 2007 has deteriorated significantly since 2006.
      Subprime lending problems have battered large banks and investment companies.
      A
      direct result of this situation is the material drop in market values of new
      and
      existing homes. The cost of energy in 2007 has increased over 30% resulting
      in
      an all time high cost of gasoline, fuel oil, propane and natural gas. Retail
      sales levels have dropped despite heavy holiday discounting. The automobile
      industry is struggling to stay afloat. Locally, our economy is also suffering.
      Real estate values are declining as the inventory of unsold homes escalates.
      The
      possibility of casinos revitalizing our local economy has evaporated. The racino
      (slot machine casino) is having financial difficulties. The construction
      industry may suffer due to a decline in real estate sales and the growing
      inventory of existing housing. Lack of commercial growth will also impact the
      construction industry. This will in turn create a decline in demand from
      suppliers of building materials as well as the demand for construction workers.
      Fortunately the Company did not have any subprime mortgages in our loan
      portfolio or in our investment security holdings. Our overall asset quality
      remains strong. Management believes the Company will weather this economic
      downturn, as it has survived many others in the past, with sound financial
      decisions.





**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.


12


**RECENT
      ACCOUNTING PRONOUNCEMENTS**





FASB
      Statement No. 141 (R) “Business Combinations” was issued in December of 2007.
      This Statement establishes principles and requirements for how the acquirer
      of a
      business recognizes and measures in its financial statements the identifiable
      assets acquired, the liabilities assumed, and any noncontrolling interest in
      the
      acquiree. The Statement also provides guidance for recognizing and measuring
      the
      goodwill acquired in the business combination and determines what information
      to
      disclose to enable users of the financial statements to evaluate the nature
      and
      financial effects of the business combination. The guidance will become
      effective as of the beginning of a company’s fiscal year beginning after
      December 15, 2008. This new pronouncement will impact the Company’s accounting
      for business combinations completed beginning January 1, 2009.




FASB
      Statement No. 160 “Noncontrolling Interests in Consolidated Financial
      Statements—an amendment of ARB No. 51” was issued in December of 2007. This
      Statement establishes accounting and reporting standards for the noncontrolling
      interest in a subsidiary and for the deconsolidation of a subsidiary. The
      guidance will become effective as of the beginning of a company’s fiscal year
      beginning after December 15, 2008. The Company is currently evaluating the
      potential impact the new pronouncement will have on its consolidated financial
      statements.




Staff
      Accounting Bulletin No. 109 (SAB 109), "Written Loan Commitments Recorded at
      Fair Value Through Earnings" expresses the views of the staff regarding written
      loan commitments that are accounted for at fair value through earnings under
      generally accepted accounting principles. To make the staff's views consistent
      with current authoritative accounting guidance, the SAB revises and rescinds
      portions of SAB No. 105, "Application of Accounting Principles to Loan
      Commitments."  Specifically, the SAB revises the SEC staff's views on
      incorporating expected net future cash flows related to loan servicing
      activities in the fair value measurement of a written loan commitment. The
      SAB
      retains the staff's views on incorporating expected net future cash flows
      related to internally-developed intangible assets in the fair value measurement
      of a written loan commitment. The staff expects registrants to apply the views
      in Question 1 of SAB 109 on a prospective basis to derivative loan commitments
      issued or modified in fiscal quarters beginning after December 15, 2007. The
      Company does not expect SAB 109 to have a material impact on its financial
      statements.




In
      September 2006, the Financial Accounting Standards Board issued FASB Statement
      No. 157, *Fair
      Value Measurements* ,
      which
      defines fair value, establishes a framework for measuring fair value under
      GAAP,
      and expands disclosures about fair value measurements. FASB Statement
      No. 157 applies to other accounting pronouncements that require or permit
      fair value measurements. The new guidance is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and for interim
      periods within those fiscal years. In December 2007, the FASB issued proposed
      FASB Staff Position (FSP) 157-b, “Effective Date of FASB Statement
      No. 157,” that would permit a one-year deferral in applying the measurement
      provisions of Statement No. 157 to non-financial assets and non-financial
      liabilities (non-financial items) that are not recognized or disclosed at fair
      value in an entity’s financial statements on a recurring basis (at least
      annually). Therefore, if the change in fair value of a non-financial item is
      not
      required to be recognized or disclosed in the financial statements on an annual
      basis or more frequently, the effective date of application of Statement 157
      to
      that item is deferred until fiscal years beginning after November 15, 2008
      and interim periods within those fiscal years. The Company will adopt the
      requirements of FASB Statement No. 157 in its March 31, 2008 financial
      statements.




In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* .
      This
      statement permits entities to choose to measure many financial instruments
      and
      certain other items at fair value. An entity shall report unrealized gains
      and
      losses on items for which the fair value option has been elected in earnings
      at
      each subsequent reporting date. This statement is effective as of the beginning
      of an entity’s first fiscal year that begins after November 15, 2007. The
      Company is continuing to evaluate the impact of this statement.




In
      July
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation (“FIN”) No. 48, *Accounting
      for Uncertainty in Income Taxes* .
      This
      Interpretation requires an entity to analyze each tax position taken in its
      tax
      returns and determine the likelihood that that position will be realized. Only
      tax positions that are “more-likely-than-not” to be realized can be recognized
      in an entity’s financial statements. For tax positions that do not meet this
      recognition threshold, an entity will record an unrecognized tax benefit for
      the
      difference between the position taken on the tax return and the amount
      recognized in the financial statements. The Company adopted this Interpretation
      on January 1, 2007. The Company does not have any unrecognized tax benefits
      at
      December 31, 2007 or during the year ended December 31, 2007. No unrecognized
      tax benefits are expected to arise within the next twelve months.




In
      September 2006, the FASB ratified the consensus reached by the EITF in Issue
      06-4, *Accounting
      for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
      Split-Dollar Life Insurance Arrangements* .
      EITF
      06-4 applies to life insurance arrangements that provide an employee with a
      specified benefit that is not limited to the employee’s active service period,
      including certain bank-owned life insurance policies. EITF 06-4 requires an
      employer to recognize a liability and related compensation costs for future
      benefits that extend to postretirement periods. EITF 06-4 is effective for
      fiscal years beginning after December 15, 2007, with earlier application
      permitted. The impact of its adoption did not have a material impact on the
      Company’s statements.




**FINANCIAL
      CONDITION**




Total
      assets decreased by $9.9 million or 2.5% to $387.4 million at December 31,
      2007
      from $397.3 million at December 31, 2006. The decrease was primarily due to
      a
      $7.7 million or 7.7% decrease in securities available for sale from $99.8
      million at December 31, 2006 to $92.1 million at December 31, 2007 and a $3.1
      million or 33.1% decrease in securities held to maturity from $9.4 million
      to
      $6.3 million at December 31, 2007. Sales and maturities in the investment
      security portfolio were used to rebalance the portfolio in the changing rate
      environment during 2007 and to pay off $11.3 million in brokered deposits.
      Deposits decreased $25.8 million or 7.9% from $325.1 million at December 31,
      2006 to $299.2 million at December 31, 2007. The loss in deposits was replaced
      partially by long and short-term borrowings with the Federal Home Loan Bank
      (FHLB). Long-term borrowings were entered into in the late fourth quarter in
      order to secure a lower average cost of funds.


13


In
      2007,
      total gross loans increased $2.2 million or 0.9% from $250.8 million to $253.0
      million. Within the loan portfolio, residential
      and commercial real estate increased by $3.3 million or 3.5%, home equity loans
      increased $1.8 million or 7.4%, and commercial loans decreased by $1.6 million
      or 5.8% at December 31, 2007. The growth in residential and commercial real
      estate and home equity loans reflects the Company’s strategy to provide loans
      for local real estate projects where there is strong loan to value ratio. The
      Company is well aware of the economic slow down in the housing market but
      believes that real estate sales and prices have stabilized in its market area.
      The Company remains committed to maintaining loan credit quality and sacrificing
      growth in the loan portfolio. The overall loan portfolio is structured in
      accordance with management’s belief that loans 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. With
      the denial for the building of a casino in the Catskills, the Company expects
      a
      slow down in the commercial loan area and a possible reduction in loan to asset
      value in the commercial loan portfolio.




There
      was
      a $5,000 decrease in other foreclosed real estate at December 31, 2007, from
      $40,000 at December 31, 2006 as the result of a write down in value on the
      foreclosed property. Total nonperforming loans increased $2.7 million primarily
      in the commercial mortgage category, to $4.6 million at December 31, 2007,
      with
      $0.9 million of the increase resulting from loans past due 90 days or more
      and
      still accruing interest. Net loan (charge-offs) recoveries decreased from
      ($189,000) in 2006 to $206,000 in 2007. At December 31, 2007, the allowance
      for
      loan losses equaled $3.4 million representing 1.32% of total gross loans
      outstanding and 72.2% of total nonperforming loans.




Total
      deposits decreased $25.8 million or 7.9% to $299.2 million at December 31,
      2007
      from $325.1 million at December 31, 2006. Savings and insured money market
      accounts decreased to $88.0 million at December 31, 2007 from $100.4 million
      at
      December 31, 2006, a decrease of $12.4 million or 12.3%. Time deposits decreased
      $7.4 million or 5.8% to $121.0 at December 31, 2007. Decreases in demand, NOW
      and super NOW accounts totaled $6.1 million or 6.3%. Maturities of $11.3 million
      of brokered deposits in 2007 were not renewed.




Total
      stockholders’ equity was $44.0 million at December 31, 2007, an increase of $2.7
      million from December 31, 2006. The increase was due primarily to net income
      of
      $4.3 million and $1.8 million decrease in accumulated other comprehensive income
      (loss), partially offset by cash dividends of $2.1 million and the repurchase
      the remaining authorized treasury stock of $1.3 million.




**RESULTS
      OF OPERATIONS 2007 VERSUS 2006**




***Net
      Income***




Net
      income for 2007 of $4.3 million decreased 13.5% or $668,000 from the 2006 net
      income of $4.9 million. The lower earnings level in 2007 reflects the
      interaction of a number of factors. The most significant factor which reduced
      2007 net income was an increase in deposit interest expense combined with lower
      earnings on the investment portfolio. Net interest income decreased $0.8 million
      from 2006 to 2007 to $14.9 million. Increases in loan interest and fees of
      $311,000 to $18.6 million from $18.3 million or 1.7% was offset by decreased
      security interest income of $725,000. Decreased holdings in both investment
      securities and federal funds sold accounted for the bulk of the decrease in
      earnings. Interest expense increased $404,000 primarily due to rising interest
      rates on deposits as a result of market pressure. The provision (credit) for
      loan losses decreased $460,000 to ($370,000) in 2007 primarily as a result
      of a
      large recovery as discussed in the “Summary of Loan Loss” below. Salary and
      employee benefit expense modestly decreased $4,000 or 0.5% as a result of lower
      retirement benefit costs, partially offset by normal salary increases and new
      staff positions. Occupancy and equipment expense increased $52,000. Other
      non-interest expense increased $125,000 due to increased examination fees,
      FDIC
      assessments and advertising costs associated with the opening of two new branch
      locations.




***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 $15.8 million for 2007 represented a decrease of 5.5%
      over 2006. Net interest margin decreased 13 basis points to 4.42% in 2007
      compared to 4.55% in 2006, due to overall increases in interest bearing
      liability yields.




Total
      interest income for 2007 was $24.4 million, compared to $24.9 million in 2006.
      The decrease in 2007 is largely the result of a decrease in the average balance
      of interest earning assets from $367.5 million in 2006 to $357.3 million in
      2007, a decrease of 2.8%. Total average securities (securities available for
      sale and securities held to maturity) decreased $6.6 million or 6.0% in 2007
      to
      $104.7 million. The yield on total securities decreased 15 basis points to
      5.40%
      in 2007 from 5.55% in 2006. During 2007, total average securities decreased
      to
      provide liquidity for several purposes. Average loans increased $3.4 million
      to
      $250.3 million from $246.9 million in 2006, concurrently with a 3 basis point
      increase in yields from 7.42% in 2006 to 7.45% in 2007. Loan growth in real
      estate and fixed rate home equity loans generated amounted to $4.4 million
      and
      $1.3 million respectively. Time and demand loans, which are tied to prime,
      decreased 10 basis points in yield and $2.0 million in volume. In the second
      half of 2007, variable rate time and demand loans decreased $2.0 million or
      7.4%
      in volume. Average residential and commercial real estate loans continued to
      make up a major portion of the loan portfolio at 71.7% of total loans in
      2007.


14


Total
      interest expense in 2007 increased $0.4 million to $8.6 million from $8.2 in
      2006 as a result of an increase in rates paid. The average balance of interest
      bearing liabilities decreased from $282.7 million in 2006 to $272.0 million
      in
      2007, a decrease of 3.8% as a result of $9.6 million decrease in average
      deposits. Matured brokered deposits made up $6.9 million of the reduction in
      deposits. The Company expects to continue to reduce its reliance on brokered
      deposits during 2008. During 2007, the average cost of total interest bearing
      liabilities increased by 27 basis points from 2.90% to 3.17%. Average interest
      bearing deposits decreased $9.6 million to $251.0 million in 2007, a decrease
      of
      3.7%. Interest rates on interest bearing deposits increased by 26 basis points
      from an average rate paid of 2.74% in 2006 to 3.00% in 2007. Savings and insured
      money market interest rates increased 25 basis points and time deposits
      increased 40 basis points in response to competition. In 2007, average demand
      deposit balances decreased 0.9% over 2006.





***Provision
      for Loan Losses***




The
      provision (credit) for loan losses was $(370,000) in 2007 as compared to $90,000
      in 2006 largely as a result of a $441,000
      recovery on a previously written-off loan and loans remaining well
      secured. 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. The provision for loan losses
      was reduced in 2007 due to the reductions net charge-offs as noted below. 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. Based
      on
      management’s comprehensive analysis of the loan portfolio, and that the company
      has no exposure to subprime loans, management believes the current level of
      the
      allowance for loan losses is adequate.




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.




Total
      nonperforming loans increased $2.7 million from $1.9 million at December 31,
      2006 to $4.6 million at December 31, 2007. Net loan recoveries (charge-offs)
      increased from ($189,000) in 2006 to $206,000 in 2007 and gross charge-offs
      decreased from $533,000 in 2006 to $318,000 in 2007.





***Summary
      of Loan Loss Experience***




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





**ANALYSIS
      OF THE CHANGES IN ALLOWANCE FOR LOAN LOSSES FOR YEARS 2003 THROUGH
      2007**





**2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**(Dollars
                in thousands)Balance
                at beginning of year
            
            $
            3,516
            
            $
            3,615
            
            $
            3,645
            
            $
            3,569
            
            $
            3,068Charge-offs:Commercial,
                financial and agriculture
            
            
            (106
            )
            
            (208
            )
            
            (2
            )
            
            —
            
            
            (141
            )Real
                estate – mortgage
            
            
            (5
            )
            
            (66
            )
            
            —
            
            
            (3
            )
            
            (5
            )Installment
                loans
            
            
            (118
            )
            
            (156
            )
            
            (308
            )
            
            (284
            )
            
            (240
            )Other
                loans
            
            
            (89
            )
            
            (103
            )
            
            (129
            )
            
            (146
            )
            
            (102
            )Total
                charge-offs
            
            
            (318
            )
            
            (533
            )
            
            (439
            )
            
            (433
            )
            
            (488
            )Recoveries:Commercial,
                financial and agriculture
            
            
            388
            
            
            187
            
            
            59
            
            
            1
            
            
            235Real
                estate – mortgage
            
            
            5
            
            
            —
            
            
            8
            
            
            22
            
            
            7Installment
                loans
            
            
            72
            
            
            98
            
            
            83
            
            
            59
            
            
            104Other
                loans
            
            
            59
            
            
            59
            
            
            79
            
            
            67
            
            
            23Total
                recoveries
            
            
            524
            
            
            344
            
            
            229
            
            
            149
            
            
            369Net
                recoveries (charge-offs)
            
            
            206
            
            
            (189
            )
            
            (210
            )
            
            (284
            )
            
            (119
            )Provision
                charged (credited) to operations
            
            
            (370
            )
            
            90
            
            
            180
            
            
            360
            
            
            620Balance
                at end of year
            
            $
            3,352
            
            $
            3,516
            
            $
            3,615
            
            $
            3,645
            
            $
            3,569Ratio
                of net (recoveries) charge-offs to average outstanding
                loans
            
            
            (0.08
            )%
            
            0.08
            %
            
            0.09
            %
            
            0.13
            %
            
            0.06
            %





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 nonperforming loans in a timely basis; 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.


15






The
      provision (credit) for loan losses was ($370,000) for the year ended December
      31, 2007 compared to $90,000 for 2006. As disclosed in the Company’s 2006 Form
      10-K, the Company recovered $441,000 on a previously written-off loan. This
      recovery was for a loan made in 2002. The loan turned out to be fraudulent
      and
      the participants brought a legal suit against the Bank of New York. The
      participating lenders prevailed and received their settlements in the first
      quarter of 2007.




The
      allowance for loan losses was $3.4 million at December 31, 2007, $3.5 million
      at
      2006, and $3.6 million at 2005. The allowance as a percentage of total loans
      was
      1.32% at December 31, 2007, compared to 1.40% and 1.48% at December 31, 2006
      and
      2005, respectively. The allowance’s coverage of nonperforming loans was 72.2% at
      December 31, 2007 compared to 187.0% and 123.7% at December 31, 2006 and 2005
      respectively. Despite the increase in nonperforming loans, recent subprime
      issues and downturn in local economic conditions, the Bank is and has been
      committed to common sense lending practices, sacrificing loan quantity for
      quality. This is reflected in the Banks net charge-off (recovery) history in
      the
      above table. Now as before, while nonperforming loans have increased, the Banks
      loans remain well collateralized and no specific reserves have been made as
      management believes the loans will be collected in full.





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
      nonperforming loans are evaluated individually for impairment in accordance
      with
      FAS 114. As of December 31, 2007, there were $3,394,000 in loans, compared
      to $1,528,000 as of December 31, 2006, which were considered to be impaired
      under SFAS No. 114. On the remaining loan portfolios, the Company applies
      reserve factors considering historical loan loss data and other subjective
      factors.





**DISTRIBUTION
      OF ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31,**




**2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003****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****losses**
            
            **loans**
            
            **losses**
            
            **loans**
            
            **losses**
            
            **loans**
            
            **losses**
            
            **loans**
            
            **losses**
            
            **loans**(Dollars in thousands)Residential
                mortgages(1)
            
            $
            1,048
            
            
            51.4
            %
            $
            1,048
            
            
            50.2
            %
            $
            1,048
            
            
            48.5
            %
            $
            1,039
            
            
            48.4
            %
            $
            1,011
            
            
            52.4
            %Commercial
                mortgages
            
            
            285
            
            
            34.3
            
            
            285
            
            
            34.7
            
            
            351
            
            
            34.9
            
            
            351
            
            
            35.3
            
            
            300
            
            
            30.2Commercial
                loans
            
            
            1,263
            
            
            10.5
            
            
            1,353
            
            
            11.2
            
            
            1,343
            
            
            11.7
            
            
            1,286
            
            
            9.4
            
            
            1,255
            
            
            8.7Installment
                loans
            
            
            604
            
            
            3.7
            
            
            650
            
            
            3.9
            
            
            648
            
            
            4.8
            
            
            753
            
            
            6.3
            
            
            828
            
            
            7.8Other
                loans
            
            
            152
            
            
            0.1
            
            
            180
            
            
            0.0
            
            
            225
            
            
            0.1
            
            
            216
            
            
            0.6
            
            
            175
            
            
            0.9Total
            
            $
            3,352
            
            
            100.0
            %
            $
            3,516
            
            
            100.0
            %
            $
            3,615
            
            
            100.0
            %
            $
            3,645
            
            
            100.0
            %
            $
            3,569
            
            
            100.0
            %


*1* ** *Includes
      home equity loans.*





***Nonaccrual
      and Past Due Loans***




The
      Company places a loan on nonaccrual status when collectibility 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.





**90
                days or****more,
                still****Nonaccrual**
            
            **Accruing**
            
            **Total**
            
            **Percentage****(1)**
            
            **Percentage****(2)**(Dollars
                in thousands)December
                31, 2007Loan
                CategoryResidential
                mortgages (3)
            
            $
            368
            
            $
            32
            
            $
            400
            
            
            0.3
            %
            
            8.6
            %Commercial
                mortgages
            
            
            1,819
            
            
            828
            
            
            2,647
            
            
            3.0
            
            
            57.0Commercial
                loans
            
            
            1,574
            
            
            —
            
            
            1,574
            
            
            6.0
            
            
            33.9Installment
                loans
            
            
            —
            
            
            23
            
            
            23
            
            
            0.3
            
            
            0.5Total
            
            $
            3,761
            
            $
            883
            
            $
            4,644
            
            
            1.8
            %
            
            100.0
            %




16




December
      31, 2006





Loan
                CategoryResidential
                mortgages (3)
            
            $
            347
            
            $
            —
            
            $
            347
            
            
            0.3
            %
            
            18.5
            %Commercial
                mortgages
            
            
            1,520
            
            
            —
            
            
            1,520
            
            
            1.7
            
            
            80.9Commercial
                loans
            
            
            —
            
            
            —
            
            
            —
            
            
            0.0
            
            
            0.0Installment
                loans
            
            
            —
            
            
            13
            
            
            13
            
            
            0.1
            
            
            0.6Total
            
            $
            1,867
            
            $
            13
            
            $
            1,880
            
            
            0.8
            %
            
            100.0
            %




December
      31, 2005





Loan
                CategoryResidential
                mortgages (3)
            
            $
            438
            
            $
            —
            
            $
            438
            
            
            0.4
            %
            
            15.0
            %Commercial
                mortgages
            
            
            2,484
            
            
            —
            
            
            2,484
            
            
            2.9
            
            
            85.0Commercial
                loans
            
            
            —
            
            
            —
            
            
            —
            
            
            0.0
            
            
            0.0Installment
                loans
            
            
            —
            
            
            —
            
            
            —
            
            
            0.0
            
            
            0.0Total
            
            $
            2,922
            
            $
            —
            
            $
            2,922
            
            
            1.2
            %
            
            100.0
            %





December
      31, 2004




Loan
                CategoryResidential
                mortgages (3)
            
            $
            491
            
            $
            166
            
            $
            657
            
            
            0.6
            %
            
            30.8
            %Commercial
                mortgages
            
            
            —
            
            
            —
            
            
            —
            
            
            0.0
            
            
            0.0Commercial
                loans
            
            
            233
            
            
            1,230
            
            
            1,463
            
            
            6.9
            
            
            68.5Installment
                loans
            
            
            —
            
            
            16
            
            
            16
            
            
            0.1
            
            
            0.7Total
            
            $
            724
            
            $
            1,412
            
            $
            2,136
            
            
            0.9
            %
            
            100.0
            %





December
      31, 2003





Loan
                CategoryResidential
                mortgages (3)
            
            $
            411
            
            $
            379
            
            $
            790
            
            
            0.8
            %
            
            25.3
            %Commercial
                mortgages
            
            
            514
            
            
            1,364
            
            
            1,878
            
            
            3.1
            
            
            60.1Commercial
                loans
            
            
            434
            
            
            7
            
            
            441
            
            
            2.6
            
            
            14.1Installment
                loans
            
            
            —
            
            
            14
            
            
            14
            
            
            0.1
            
            
            0.5Total
            
            $
            1,359
            
            $
            1,764
            
            $
            3,123
            
            
            1.6
            %
            
            100.0
            %





*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, commercial loans and
      installment loans represent
      0.3%, 3.0 %,
      6.0%
      and 0.3% of their
      respective portfolio totals at December 31, 2007, compared to 0.3%, 1.7% and
      0.1% at December 31, 2006, 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 $1.9 million from $1.9 million at December 31, 2006 to $3.8
      million at December 31, 2007. All nonaccrual 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, 2007, 2006, and 2005.





***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.




17




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.


**LOAN
      PORTFOLIO COMPOSITION AT DECEMBER 31,**


**2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003****Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent**(Dollars
                  in thousands)Real
                  Estate LoansResidential
              
              $
              99,157
              
              
              39.2
              %
              $
              95,520
              
              
              38.1
              %
              $
              89,599
              
              
              36.7
              %
              $
              82,482
              
              
              36.7
              %
              $
              77,284
              
              
              39.3
              %Commercial
              
              
              82,637
              
              
              32.7
              
              
              82,987
              
              
              33.1
              
              
              81,587
              
              
              33.4
              
              
              75,266
              
              
              33.6
              
              
              59,682
              
              
              30.3Home
                  equity
              
              
              25,977
              
              
              10.3
              
              
              24,195
              
              
              9.6
              
              
              22,697
              
              
              9.3
              
              
              21,127
              
              
              9.4
              
              
              18,337
              
              
              9.3Farm
                  land
              
              
              3,883
              
              
              1.5
              
              
              3,726
              
              
              1.5
              
              
              3,443
              
              
              1.4
              
              
              3,721
              
              
              1.7
              
              
              2,872
              
              
              1.5Construction
              
              
              5,531
              
              
              2.2
              
              
              6,087
              
              
              2.4
              
              
              5,956
              
              
              2.4
              
              
              4,524
              
              
              2.0
              
              
              4,102
              
              
              2.1$
              217,185
              
              
              85.9
              %
              $
              212,515
              
              
              84.7
              %
              $
              203,282
              
              
              83.2
              %
              $
              187,120
              
              
              83.4
              %
              $
              162,277
              
              
              82.5
              %Other
                  LoansCommercial
                  loans
              
              $
              26,431
              
              
              10.4
              %
              $
              28,106
              
              
              11.3
              %
              $
              28,643
              
              
              11.7
              %
              $
              21,317
              
              
              9.5
              %
              $
              17,157
              
              
              8.7
              %Consumer
                  installment loans
              
              
              8,948
              
              
              3.5
              
              
              9,773
              
              
              3.9
              
              
              11,673
              
              
              4.8
              
              
              14,116
              
              
              6.3
              
              
              15,350
              
              
              7.8Other
                  consumer loans
              
              
              148
              
              
              0.1
              
              
              118
              
              
              0.0
              
              
              128
              
              
              0.1
              
              
              1,345
              
              
              0.6
              
              
              1,488
              
              
              0.8Agricultural
                  loans
              
              
              273
              
              
              0.1
              
              
              248
              
              
              0.1
              
              
              535
              
              
              0.2
              
              
              338
              
              
              0.2
              
              
              403
              
              
              0.235,800
              
              
              14.1
              
              
              38,245
              
              
              15.3
              
              
              40,979
              
              
              16.8
              
              
              37,116
              
              
              16.6
              
              
              34,398
              
              
              17.5Total
                  loans
              
              
              252,985
              
              
              100.0
              %
              
              250,760
              
              
              100.0
              %
              
              244,261
              
              
              100.0
              %
              
              224,236
              
              
              100.0
              %
              
              196,675
              
              
              100.0
              %Allowance
                  for loan losses
              
              
              (3,352
              )
              
              
              
              
              (3,516
              )
              
              
              
              
              (3,615
              )
              
              
              
              
              (3,645
              )
              
              
              
              
              (3,569
              )Total
                  loans, net
              
              $
              249,633
              
              
              
              
              $
              247,244
              
              
              
              
              $
              240,646
              
              
              
              
              $
              220,591
              
              
              
              
              $
              193,106




**MATURITIES
      AND SENSITIVITIES OF LOANS TO**


**CHANGES
      IN INTEREST RATES AT DECEMBER 31, 2007**





**One
                year****One
                year**
            
            **through**
            
            **After****or
                less**
            
            **five
                years**
            
            **five
                years**
            
            **Total**(In
                thousands)Commercial
                and agricultural
            
            $
            14,389
            
            $
            7,659
            
            $
            4,656
            
            $
            26,704Real
                estate construction
            
            
            4,129
            
            
            1,353
            
            
            49
            
            
            5,531Total
            
            $
            18,518
            
            $
            9,012
            
            $
            4,705
            
            $
            32,235Interest
                sensitivity of loans:Predetermined
                rate
            
            $
            590
            
            $
            8,766
            
            $
            4,705
            
            $
            14,061Variable
                rate
            
            
            17,928
            
            
            246
            
            
            —
            
            
            18,174Total
            
            $
            18,518
            
            $
            9,012
            
            $
            4,705
            
            $
            32,235




***Investment
      Securities***




The
      carrying amount and the fair value of the Company’s available for sale and
      investment securities and their expected maturities are outlined in the
      following tables:





**SECURITIES
      AVAILABLE FOR SALE AND INVESTMENT SECURITIES ANALYSIS**




**Summary
                of Investment Securities at December 31,*****2007**
            
            **2006**
            
            **2005**Amortized
            
            Fair
            
            Amortized
            
            Fair
            
            Amortized
            
            Faircost
            
            value
            
            cost
            
            value
            
            cost
            
            value(In
                thousands)Government
                sponsored enterprises
            
            $
            39,360
            
            $
            39,282
            
            $
            54,351
            
            $
            52,784
            
            $
            45,323
            
            $
            44,011Municipal
                securities
            
            
            42,147
            
            
            42,755
            
            
            48,597
            
            
            49,122
            
            
            48,394
            
            
            48,861Mortgage
                backed securities and collateralized mortgage obligations
            
            
            10,192
            
            
            10,237
            
            
            6,428
            
            
            6,393
            
            
            3,416
            
            
            3,323Equity
                securities
            
            
            5,928
            
            
            6,167
            
            
            821
            
            
            1,059
            
            
            820
            
            
            1,022$
            97,627
            
            $
            98,441
            
            $
            110,197
            
            $
            109,358
            
            $
            97,953
            
            $
            97,217




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




18





**ANALYSIS
      BY TYPE AND BY PERIOD TO MATURITY**





**Under
                1 year**
            
            **1-5
                years**
            
            **5-10
                years**
            
            **After
                10 years****December
                31, 2007**
            
            **Balance**
            
            **Rate**
            
            **Balance**
            
            **Rate**
            
            **Balance**
            
            **Rate**
            
            **Balance**
            
            **Rate**
            
            **Total**(Dollars
                in thousands)Government
                sponsored enterprises
            
            $
            —
            
            
            0.00
            %
            $
            3,381
            
            
            5.34
            %
            $
            16,979
            
            
            4.81
            %
            $
            19,000
            
            
            5.24
            %
            $
            39,360Municipal
                securities – tax exempt(1)
            
            
            2,047
            
            
            4.46
            
            
            25,579
            
            
            4.06
            
            
            7,965
            
            
            3.79
            
            
            236
            
            
            4.17
            
            
            35,827Municipal
                securities – taxable
            
            
            3,040
            
            
            3.85
            
            
            2,304
            
            
            4.43
            
            
            352
            
            
            5.12
            
            
            624
            
            
            5.91
            
            
            6,320Mortgage
                backed securities and collateralized mortgage obligations
            
            
            3,734
            
            
            5.00
            
            
            5,353
            
            
            5.00
            
            
            1,065
            
            
            5.70
            
            
            40
            
            
            5.75
            
            
            10,192$
            8,821
            
            
            4.48
            %
            $
            36,617
            
            
            4.34
            %
            $
            26,361
            
            
            4.54
            %
            $
            19,900
            
            
            5.25
            %
            $
            91,699




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





***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
      $3.5 million in 2007 was a decrease of 3.2% or $116,000 over 2006. The decrease
      is primarily attributable to recognition of net security losses and less of
      a
      gain on foreclosed real estate partially offset by earnings on bank-owned life
      insurance.




Non-interest
      expense increased by $177,000 or 1.4% to $13.2 million in 2007. Salaries and
      employee benefit expense decreased 0.5% to $7.7 million in 2007. Salaries and
      employee benefits decreased slightly due to reduced retirement costs, partially
      offset by normal salary increases and additional staffing. Other non-interest
      expense increased $125,000 or 3.9% due to examination fees, FDIC assessments
      and
      advertising of two new branch locations. Occupancy and equipment expenses
      increased a net of $56,000.





***Income
      Tax Expense***




Income
      tax expense totaled $1.3 million in 2007 versus $1.2 million in 2006. The
      effective tax rate approximated 22.9% in 2007 and 20.1% in 2006. 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.





**RESULTS
      OF OPERATIONS 2006 VERSUS 2005**





***Net
      Income***




Net
      income for 2006 of $4.9 million decreased 13.7% or $782,000 from the 2005 net
      income of $5.7 million. The lower earnings level in 2006 reflects the
      interaction of a number of factors. The most significant factor which reduced
      2006 net income was an increase in deposit interest expense which outpaced
      loan
      and security rate increases, squeezing the net interest spread. Net interest
      income decreased $1.1 million from 2005 to 2006 to $15.7 million. Increases
      in
      loan interest and fees of $754,000 to $18.3 million from $17.6 million or 4.3%
      and an increase of $646,000 or 14.4% in income on securities to $5.1 million
      were offset by interest expense on deposits which increased $3.1 million or
      75.7% to $7.1 million. This increase in interest expense is primarily due to
      continued rate increases by the Federal Reserve Bank for the full year. The
      provision for loan losses decreased 50.0% or $90,000 from $180,000 in 2005
      to
      $90,000 in 2006. Salary and employee benefit expense modestly increased $91,000
      or 1.2%, occupancy and equipment expense increased $47,000, and other
      non-interest expense decreased $39,000 due to the full year effect of switching
      to a new telephone service provider and savings in professional
      fees.


19


***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 $16.7 million for 2006 represented a decrease of 6.0%
      over 2005. Net interest margin decreased 63 basis points to 4.55% in 2006
      compared to 5.18% in 2005, due to overall increases in interest bearing
      liability yields.




Total
      interest income for 2006 was $24.9 million, compared to $23.2 million in 2005.
      The increase in 2006 is the result of a 12 basis point increase in the earning
      asset percentage yield combined with an increase in the average balance of
      interest earning assets from $342.8 million in 2005 to $367.5 million in 2006,
      an increase of 7.2%. Total average securities (securities available for sale
      and
      securities held to maturity) increased $8.7 million or 8.5% in 2006 to $111.3
      million. The yield on total securities increased 11 basis points to 5.5% in
      2006
      from 5.4% in 2005. The increase in total average securities during 2006
      reflected the need to invest excess funds not needed to fund new loans. In
      2006,
      average loans increased $7.9 million to $246.9 million from $239.0 million
      in
      2005. Concurrently the average loan yield increased from 7.35% in 2005 to 7.42%
      in 2006 due to a consistent increase in time and demand and home equity loans
      tied to prime rate which increased in volume by 2.3% or $1.1 million. Average
      residential and commercial real estate loans continued to make up a major
      portion of the loan portfolio at 71.9% of total loans in 2006. In 2007, 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 2006 increased $2.8 million to $8.2 million from $5.4 in
      2005. The average balance of interest bearing liabilities increased from $258.8
      million in 2005 to $282.7 million in 2006, an increase of 9.3% as a result
      of
      $14.1 million increase in average brokered deposits. During 2006, the average
      cost of total interest bearing liabilities increased by 81 basis points from
      2.09% to 2.90%. Average interest bearing deposits increased $30.2 million to
      reach $260.7 million in 2006, an increase of 13.1%. Interest rates on interest
      bearing deposits increased by 98 basis points from an average rate paid of
      1.76%
      in 2005 to 2.74% in 2006. A major component of the increased interest expense
      rate was due to a 41 basis point increase in average brokered deposits. The
      brokered deposits were purchased in anticipation of further interest rate
      increases. The proceeds were to be used to fund anticipated loan demand which
      never materialized. The Company expects to significantly reduce its reliance
      on
      these deposits during 2007. Savings and insured money market interest rates
      increased 106 basis points in response to rising interest rate environment.
      In
      2006, average demand deposit balances decreased 2.6% over 2005.





***Provision
      for Loan Losses***




The
      provision for loan losses was $90,000 in 2006 as compared to $180,000 in 2005
      as
      a result of improved asset quality. 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.
      The
      provision for loan losses was reduced in 2006 due to the reduction in both
      nonperforming loans and net charge-offs as noted above under “Summary of Loan
      Loss Experience”. 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 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.




Total
      nonperforming loans decreased $1.0 million from $2.9 million at December 31,
      2005 to $1.9 million at December 31, 2006. Net loan charge-offs decreased from
      $210,000 in 2005 to $189,000 in 2006 while gross charge-offs increased from
      $439,000 in 2005 to $533,000 in 2006.





***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
      $3.6 million in 2006 was a decrease of 11.7 % or $477,000 over 2005. The
      decrease is primarily attributable to the $234,000 gain in 2005 on the one
      time
      sale of the credit card portfolio. Other non-interest income decreased $116,000
      due to reduced income from bank owned life insurance and foreclosed real
      estate.




Non-interest
      expense increased by $99,000 or 0.1% to $13.0 million in 2006. Salaries and
      employee benefit expense increased 1.2% to $7.7 million in 2006. This increase
      was caused by increased expenses for normal salary increases and increased
      costs
      of providing pension and healthcare benefit, offset by FAS 91 deferments.
      Occupancy, equipment and other non-interest expenses increase a net of $47,000.
      Benefits derived by reduced professional fees relating to the second year in
      Sarbanes-Oxley compliance and savings from switching telephone providers were
      offset by increases in maintenance contract expense.


20


***Income
      Tax Expense***




Income
      tax expense totaled $1.2 million in 2006 versus $2.0 million in 2005. The
      effective tax rate approximated 20.1% in 2006 and 26.3% in 2005. 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.





**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 $40.4 million, which
      may
      be used to meet unforeseen liquidity demands. There were $5,100,000 in overnight
      borrowings at December 31, 2007. Five separate FHLB term advances totaling
      $30.0
      million at December 31, 2007 were being used to fund the decline in deposits
      and
      to leverage our excess capital position.




In
      2007,
      cash generated from operating activities amounted to $4.9 million and cash
      generated from investing activities amounted to $7.8 million. These amounts
      were
      offset by a use of cash in financing activities of $14.6 million, resulting
      in a
      net decrease in cash and cash equivalents of $1.8 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, 2007**





Deposits(In
                thousands)Due
                three months or less
            
            $
            6,573Over
                three months through six months
            
            
            5,142Over
                six months through twelve months
            
            
            14,830Over
                twelve months
            
            
            11,268Total
            
            $
            37,813




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


21




**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 $2.7 million or 6.5% in 2007 following a
      decrease of 2.9% in 2006. The adoption of FAS 158 for pension and other
      retirement plans had contributed $1.4 million to that decrease in
      2006.




The
      Company retained $2.1 million from 2007 earnings, a reduction in the accumulated
      other comprehensive loss increased stockholders’ equity by $1.8 million, while
      the purchase of treasury stock decreased stockholders’ equity by $1.2 million.
      In accordance with regulatory capital rules, the adjustment for the after tax
      net unrealized gain or loss on securities available for sale and SFAS 158 other comprehensive items are not considered
      in
      the computation of regulatory capital ratios.




Under
      the
      Federal Reserve Bank’s risk-based capital rules at December 31, 2007, the Bank’s
      Tier I risk-based capital was 16.8 % and total risk-based capital was 18.1%
      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 Bank’s leverage ratio (Tier I capital to average assets) of 11.1% is well
      above the 4.0% minimum regulatory requirement.




The
      following table shows the Bank’s actual capital measurements compared to the
      minimum regulatory requirements.





**As
                of December 31,**
            
            **2007**
            ****
            **2006**(Dollars
                in thousands)TIER
                I CAPITALBanks’
                equity, excluding the after-tax net other comprehensive
                loss
            
            $
            42,852
            
            $
            42,477TIER
                II CAPITALAllowance
                for loan losses (1)
            
            $
            3,183
            
            $
            3,279Total
                risk-based capital
            
            $
            46,035
            
            $
            45,756Risk-weighted
                assets (2)
            
            $
            254,468
            
            $
            262,065Average
                assets
            
            $
            387,337
            
            $
            398,640RATIOSTier
                I risk-based capital (minimum 4.0%)
            
            
            16.8
            %
            
            16.2
            %Total
                risk-based capital (minimum 8.0%)
            
            
            18.1
            %
            
            17.5
            %Leverage
                (minimum 4.0%)
            
            
            11.1
            %
            
            10.7
            %




*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 of 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, 2007:





**Less than**
            
            **1 to 3**
            
            **3 to 5**
            
            **More than****1 year**
            
            **years**
            
            **years**
            
            **5
                years**
            
            **Total**(In
                thousands)Federal
                Home LoanBank
                borrowings
            
            $
            10,000
            
            $
            20,000
            
            $
            —
            
            $
            —
            
            $
            30,000Operating
                leases
            
            
            71
            
            
            95
            
            
            8
            
            
            —
            
            
            174Total
            
            $
            10,071
            
            $
            20,095
            
            $
            8
            
            $
            —
            
            $
            30,174





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


22


**DISTRIBUTION
      OF ASSETS, LIABILITIES & STOCKHOLDERS’ EQUITY:**


**INTEREST
      RATES & INTEREST DIFFERENTIAL**





The
      following schedule presents the condensed average consolidated balance sheets
      for 2007, 2006, and 2005. 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.





**CONSOLIDATED
      AVERAGE BALANCE SHEET 2007**





**Average**
              **balance**
            
            **Interest**
              **earned/paid**
            
            **Average**
              **yield/rate****ASSETS**Securities
                available for sale and held to maturity:(1)Taxable
                securities
            
            $
            59,593,000
            
            $
            2,928,000
            
            
            4.91
            %Tax-exempt
                securities(2)
            
            
            45,112,000
            
            
            2,724,000
            
            
            6.04Total
                securities
            
            
            104,705,000
            
            
            5,652,000
            
            
            5.40Short-term
                investments
            
            
            2,309,000
            
            
            118,000
            
            
            5.11LoansReal
                estate mortgages
            
            
            182,028,000
            
            
            12,797,000
            
            
            7.03Home
                equity loans
            
            
            24,960,000
            
            
            1,704,000
            
            
            6.83Time
                and demand loans
            
            
            25,163,000
            
            
            2,169,000
            
            
            8.62Installment
                and other loans
            
            
            18,126,000
            
            
            1,965,000
            
            
            10.84Total
                loans(3)
            
            
            250,277,000
            
            
            18,635,000
            
            
            7.45Total
                interest earning assets
            
            
            357,291,000
            
            
            24,405,000
            
            
            6.83Other
                assets
            
            
            32,093,000Total
                assets
            
            $
            389,384,000**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**NOW
                and Super NOW deposits
            
            $
            32,099,000
            
            
            160,000
            
            
            0.50
            %Savings
                and insured money market deposits
            
            
            101,411,000
            
            
            2,422,000
            
            
            2.39Time
                deposits
            
            
            117,539,000
            
            
            4,957,000
            
            
            4.22Total
                interest bearing deposits
            
            
            251,049,000
            
            
            7,539,000
            
            
            3.00Federal
                funds purchased and other short-term debt
            
            
            3,363,000
            
            
            171,000
            
            
            5.08Long-term
                debt
            
            
            17,630,000
            
            
            905,000
            
            
            5.13Total
                interest bearing liabilities
            
            
            272,042,000
            
            
            8,615,000
            
            
            3.17Demand
                deposits
            
            
            64,892,000Other
                liabilities
            
            
            10,201,000Total
                liabilities
            
            
            347,135,000Stockholders’
                equity
            
            
            42,249,000Total
                liabilities and stockholders’ equity
            
            $
            389,384,000Net
                interest income - tax effected
            
            
            
            
            
            15,790,000Less:
                Tax gross up on exempt securities
            
            
            
            
            
            (926,000
            )Net
                interest income per statement of income
            
            
            
            
            $
            14,864,000Net
                interest spread
            
            
            
            
            
            
            
            
            3.66
            %Net
                interest margin(4)
            
            
            
            
            
            
            
            
            4.42
            %




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


*2*
            *Tax
                exempt securities are effected using a 34% tax
                rate.*


*3*
            *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.*


*4*
            *Computed
                by dividing net interest income by total interest earning
                assets.*




23


**DISTRIBUTION
      OF ASSETS, LIABILITIES & STOCKHOLDERS’ EQUITY:**


**INTEREST
      RATES & INTEREST DIFFERENTIAL**





**CONSOLIDATED
      AVERAGE BALANCE SHEET 2006**





**Average**
              **balance**
            
            **Interest**
              **earned/paid**
            
            **Average**
              **yield/rate****ASSETS**Securities
                available for sale and held to maturity:(1)Taxable
                securities
            
            $
            61,988,000
            
            $
            3,127,000
            
            
            5.04
            %Tax-exempt
                securities(2)
            
            
            49,346,000
            
            
            3,047,000
            
            
            6.17Total
                securities
            
            
            111,334,000
            
            
            6,174,000
            
            
            5.55Short-term
                investments
            
            
            9,226,000
            
            
            419,000
            
            
            4.54LoansReal
                estate mortgages
            
            
            177,571,000
            
            
            12,467,000
            
            
            7.02Home
                equity loans
            
            
            23,615,000
            
            
            1,573,000
            
            
            6.66Time
                and demand loans
            
            
            27,181,000
            
            
            2,370,000
            
            
            8.72Installment
                and other loans
            
            
            18,523,000
            
            
            1,914,000
            
            
            10.33Total
                loans(3)
            
            
            246,890,000
            
            
            18,324,000
            
            
            7.42Total
                interest earning assets
            
            
            367,450,000
            
            
            24,917,000
            
            
            6.78Other
                assets
            
            
            33,085,000Total
                assets
            
            $
            400,535,000**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**NOW
                and Super NOW deposits
            
            $
            34,515,000
            
            
            172,000
            
            
            0.50
            %Savings
                and insured money market deposits
            
            
            99,364,000
            
            
            2,125,000
            
            
            2.14Time
                deposits
            
            
            126,777,000
            
            
            4,837,000
            
            
            3.82Total
                interest bearing deposits
            
            
            260,656,000
            
            
            7,134,000
            
            
            2.74Federal
                funds purchased and other short-term debt
            
            
            503,000
            
            
            23,000
            
            
            4.57Long-term
                debt
            
            
            21,548,000
            
            
            1,054,000
            
            
            4.89Total
                interest bearing liabilities
            
            
            282,707,000
            
            
            8,211,000
            
            
            2.90Demand
                deposits
            
            
            65,480,000Other
                liabilities
            
            
            10,076,000Total
                liabilities
            
            
            358,263,000Stockholders’
                equity
            
            
            42,272,000Total
                liabilities and stockholders’ equity
            
            $
            400,535,000Net
                interest income - tax effected
            
            
            
            
            
            16,706,000Less:
                Tax gross up on exempt securities
            
            
            
            
            
            (1,036,000
            )Net
                interest income per statement of income
            
            
            
            
            $
            15,670,000Net
                interest spread
            
            
            
            
            
            
            
            
            3.88
            %Net
                interest margin(4)
            
            
            
            
            
            
            
            
            4.55
            %




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


*2*
              *Tax
                  exempt securities are effected using a 34% tax
                  rate.*


*3*
            *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.*


*4*
            *Computed
                by dividing net interest income by total interest earning
                assets.*




24


**DISTRIBUTION
      OF ASSETS, LIABILITIES & STOCKHOLDERS’ EQUITY:**


**INTEREST
      RATES & INTEREST DIFFERENTIAL**





**CONSOLIDATED
      AVERAGE BALANCE SHEET 2005**





**Average**
              **balance**
            ****
            **Interest**
              **earned/paid**
            ****
            **Average**
              **yield/rate****ASSETS**Securities
                available for sale and held to maturity:(1)Taxable
                securities
            
            $
            54,542,000
            
            $
            2,627,000
            
            
            4.82
            %Tax-exempt
                securities(2)
            
            
            48,082,000
            
            
            2,944,000
            
            
            6.12Total
                securities
            
            
            102,624,000
            
            
            5,571,000
            
            
            5.43Short-term
                investments
            
            
            1,224,000
            
            
            30,000
            
            
            2.45LoansReal
                estate mortgages
            
            
            169,585,000
            
            
            12,006,000
            
            
            7.08Home
                equity loans
            
            
            21,708,000
            
            
            1,326,000
            
            
            6.11Time
                and demand loans
            
            
            27,965,000
            
            
            2,179,000
            
            
            7.79Installment
                and other loans
            
            
            19,735,000
            
            
            2,059,000
            
            
            10.43Total
                loans(3)
            
            
            238,993,000
            
            
            17,570,000
            
            
            7.35Total
                interest earning assets
            
            
            342,841,000
            
            
            23,171,000
            
            
            6.76Other
                assets
            
            
            31,572,000Total
                assets
            
            $
            374,413,000**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**NOW
                and Super NOW deposits
            
            $
            36,743,000
            
            
            118,000
            
            
            0.32
            %Savings
                and insured money market deposits
            
            
            88,083,000
            
            
            947,000
            
            
            1.08Time
                deposits
            
            
            105,585,000
            
            
            2,995,000
            
            
            2.84Total
                interest bearing deposits
            
            
            230,411,000
            
            
            4,060,000
            
            
            1.76Federal
                funds purchased and other short-term debt
            
            
            3,436,000
            
            
            119,000
            
            
            3.46Long-term
                debt
            
            
            24,914,000
            
            
            1,223,000
            
            
            4.91Total
                interest bearing liabilities
            
            
            258,761,000
            
            
            5,402,000
            
            
            2.09Demand
                deposits
            
            
            67,232,000Other
                liabilities
            
            
            7,070,000Total
                liabilities
            
            
            333,063,000Stockholders’
                equity
            
            
            41,350,000Total
                liabilities and stockholders’ equity
            
            $
            374,413,000Net
                interest income - tax effected
            
            
            
            
            $
            17,769,000Less:
                Tax gross up on exempt securities
            
            
            
            
            
            (1,001,000
            )Net
                interest income per statement of income
            
            
            
            
            $
            16,768,000Net
                interest spread
            
            
            
            
            
            
            
            
            4.67
            %Net
                interest margin(4)
            
            
            
            
            
            
            
            
            5.18
            %




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


*2*
            *Tax
                exempt securities are effected using a 34% tax
                rate.*


*3*
            *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.*


*4*
            *Computed
                by dividing net interest income by total interest earning
                assets.*




25


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 2007 as compared to 2006, and 2006 as compared to 2005.




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.





**VOLUME
      AND RATE ANALYSIS**





**2007
                compared to 2006**
              **increase
                (decrease)**
              **due
                to change In**
            ****
            **2006
                compared to 2005**
              **increase
                (decrease)**
              **due
                to change In**
            ********
            ****
            **Volume**
            ****
            **Rate**
            ****
            **Total**
            ****
            **Volume**
            ****
            **Rate**
            ****
            **Total**Interest
                IncomeInvestment
                securities and securities available for sale
            
            $
            (368,000
            )
            $
            (154,000
            )
            $
            (522,000
            )
            $
            630,000
            
            $
            (39,000
            )
            $
            591,000Short-term
                investments
            
            
            (314,000
            )
            
            13,000
            
            
            (301,000
            )
            
            262,000
            
            
            140,000
            
            
            402,000Loans
            
            
            251,000
            
            
            60,000
            
            
            311,000
            
            
            774,000
            
            
            (21,000
            )
            
            753,000Total
                interest income
            
            
            (431,000
            )
            
            (81,000
            )
            
            (512,000
            )
            
            1,666,000
            
            
            80,000
            
            
            1,746,000Interest
                ExpenseNOW
                and Super NOW deposits
            
            
            (12,000
            )
            
            —
            
            
            (12,000
            )
            
            (10,000
            )
            
            64,000
            
            
            54,000Savings
                and insured money market deposits
            
            
            44,000
            
            
            253,000
            
            
            297,000
            
            
            162,000
            
            
            1,016,000
            
            
            1,178,000Time
                deposits
            
            
            (352,000
            )
            
            472,000
            
            
            120,000
            
            
            802,000
            
            
            1,040,000
            
            
            1,842,000Federal
                funds purchased and other short-term debt
            
            
            131,000
            
            
            17,000
            
            
            148,000
            
            
            (135,000
            )
            
            39,000
            
            
            (96,000
            )Long-term
                debt
            
            
            (192,000
            )
            
            43,000
            
            
            (149,000
            )
            
            (220,000
            )
            
            51,000
            
            
            (169,000
            )Total
                interest expense
            
            
            (381,000
            )
            
            785,000
            
            
            404,000
            
            
            599,000
            
            
            2,210,000
            
            
            2,809,000Net
                interest income
            
            $
            (50,000
            )
            $
            (866,000
            )
            $
            (916,000
            )
            $
            1,067,000
            
            $
            (2,130,000
            )
            $
            (1,063,000
            )





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.




**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 and 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.


26





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, 2008
      and
      ending December 31, 2008 under instantaneous shock scenarios.





**INTEREST
      RATE SENSITIVITY TABLE**


(Dollars
      in thousands)





Interest
                Rate
              Shock(1)
            
            
            
            Prime
                rate
            
            Projected
                annualized
              net
                interest income
            
            Projected
              dollar
              change
                in
              net
                interest income
            
            Projected
                percentage change in
              net
                interest income
            
            Projected
              change
                in net interest
              income
                as a percent of
              total
                stockholders’ equity3.00
            %
            
            10.25
            %
            $
            14,217
            
            $
            (366
            )
            
            -2.5
            %
            
            -11.9
            %2.00
            %
            
            9.25
            %
            $
            14,371
            
            $
            (212
            )
            
            -1.5
            %
            
            -7.4
            %1.00
            %
            
            8.25
            %
            $
            14,489
            
            $
            (94
            )
            
            -0.6
            %
            
            -2.6
            %No
                change
            
            
            
            
            
            7.25
            %
            $
            14,583
            
            
            —
            
            
            —
            
            
            —-1.00
            %
            
            6.25
            %
            $
            13,866
            
            $
            (717
            )
            
            -4.9
            %
            
            -4.3
            %-2.00
            %
            
            5.25
            %
            $
            12,882
            
            $
            (1,701
            )
            
            -11.7
            %
            
            -12.6
            %-3.00
            %
            
            4.25
            %
            $
            11,585
            
            $
            (2,998
            )
            
            -20.6
            %
            
            -21.3
            %





*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.*





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 $212,000 or -0.5% of total
      stockholders’ equity in a +2.00% instantaneous interest rate shock and decline
      by $1.7 million or -3.9% 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 net
      interest income.




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
      Bank also offers adjustable rate loan and deposit products that change as
      interest rates change. Approximately 19% of the Bank’s assets at December 31,
      2007 were invested in adjustable rate loans and 2% in floating rate investment
      securities.




**ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**





Management’s
      Report on the Financial Statements




Report
      of
      Independent Registered Public Accounting Firm




Report
      of
      Independent Registered Public Accounting Firm




Report
      of
      Independent Registered Public Accounting Firm




Consolidated
      Balance Sheets as of December 31, 2007 and December 31, 2006




Consolidated
      Statements of Income for the years ended December 31, 2007, December 31, 2006
      and December 31, 2005




Consolidated
      Statements of Changes in Stockholders’ Equity as of December 31, 2007, December
      31, 2006 and December 31, 2005




Consolidated
      Statements of Cash flows for the years ended as of December 31, 2007, December
      31, 2006 and December 31, 2005




Notes
      to
      Consolidated Financial Statement




27




**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
        is responsible for designing, implementing, documenting and maintaining an
        adequate system of internal control over financial reporting. An adequate
        system
        of internal control over financial reporting encompasses the processes and
        procedures that have been established by management to maintain 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 principles 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.
  Management
        is also responsible to perform an annual evaluation of the system of internal
        control over financial reporting, including an assessment of the effectiveness
        of the system. Management’s assessment is based on the criteria in Internal
        Control Integrated Framework issued by the Committee of Sponsoring Organizations
        of the Treadway Commission (COSO). The COSO framework identifies five defining
        characteristics of a system of internal control as follows: an appropriate
        control environment; an adequate risk assessment process; sufficient control
        activities; satisfactory communication of pertinent information; and proper
        monitoring controls.
  Management
        performed an assessment of the effectiveness of its internal control over
        financial reporting in accordance with the COSO framework. As part of this
        process, consideration was given to the potential existence of deficiencies
        in
        either the design or operating effectiveness of controls. Based on this
        assessment, management believes the internal controls were in place and
        operating effectively as of December 31, 2007. Furthermore, during the conduct
        of management’s assessment, no material weaknesses were identified in the
        financial reporting control system.
  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 reports which appear on pages F-2 and
        F-3.
   /s/
        Raymond Walter
 Raymond
        Walter
 President
        and Chief Executive Officer
  /s/
        Charles E. Burnett
 Charles
        E. Burnett
 Treasurer
        and Chief Financial Officer
 
 F-1
  REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To
        the
        Board of Directors and Stockholders of
 Jeffersonville
        Bancorp
  We
        have
        audited Jeffersonville Bancorp’s internal control over financial reporting as of
        December 31, 2007, based on criteria established in *Internal
        Control Integrated Framework* issued
        by
        the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
        Jeffersonville Bancorp’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 included in the
        accompanying Management’s Statement of Responsibility. Our responsibility is to
        express an opinion on 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 of internal control over financial reporting included
        obtaining an understanding of internal control over financial reporting,
        assessing the risk that a material weakness exists, and testing and evaluating
        the design and operating effectiveness of internal control based on the assessed
        risk. Our audit also included 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 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 of changes in conditions, or that the degree of compliance
        with the policies or procedures may deteriorate.
  In
        our
        opinion, Jeffersonville Bancorp maintained, in all material respects, effective
        internal control over financial reporting as of December 31, 2007, based
        on
        criteria established in *Internal
        Control – Integrated Framework* issued
        by
        the Committee of Sponsoring Organizations of the Treadway Commission
        (COSO).
  We
        have
        also audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the consolidated balance sheets and the
        related
        consolidated statements of income, changes in stockholders’ equity and cash
        flows of Jeffersonville Bancorp, and our report dated February 29, 2008
        expressed an unqualified opinion.
   /s/
        Beard
        Miller Company LLP
  Beard
        Miller Company LLP
 Harrisburg,
        Pennsylvania
 February
        29, 2008
  F-2
  REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To
        the
        Board of Directors and Stockholders of
  Jeffersonville
        Bancorp
  We
        have
        audited the accompanying consolidated balance sheets of Jeffersonville Bancorp
        and subsidiary (the Company) as of December 31, 2007 and 2006, and the
        related consolidated statements of income, changes in stockholders’ equity, and
        cash flows for the years then ended. The Company’s management is responsible for
        these financial statements. Our responsibility is to express an opinion on
        these
        consolidated financial statements based on our audits. The financial statements
        for the year ended December 31, 2005 were audited by other auditors whose
        report
        dated March 15, 2006, expressed an unqualified opinion on those
        statements.
  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 2007 and 2006 consolidated financial statements referred to
        above
        present fairly, in all material respects, the financial position of
        Jeffersonville Bancorp and subsidiary as of December 31, 2007 and 2006, and
        the results of their operations and their cash flows for the years then ended
        in
        conformity with accounting principles generally accepted in the United States
        of
        America.
  As
        discussed in Note 1 to the consolidated financial statements, the Company
        changed its method of accounting for its defined benefit pension and other
        postretirement benefit plans in 2006.
  We
        have
        also audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), Jeffersonville Bancorp’s internal control over
        financial reporting as of December 31, 2007, 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 February 29, 2008 expressed an unqualified opinion.
   /s/
        Beard
        Miller Company LLP
  Beard
        Miller Company LLP
 Harrisburg,
        Pennsylvania
 February
        29, 2008
  F-3
  **Report
        of Independent Registered Public Accounting Firm**
  The
        Board
        of Directors and Stockholders
 Jeffersonville
        Bancorp
  We
        have
        audited the accompanying consolidated statements of income, changes in
        stockholders' equity, and cash flows of Jeffersonville Bancorp and subsidiary
        for the year 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
        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 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 audit provides a
        reasonable basis for our opinion.
  In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the results of operations and cash flows of
        Jeffersonville Bancorp and subsidiary for the year ended December 31, 2005,
        in
        conformity with U.S. generally accepted accounting principles.
   /s/
        KPMG
        LLP
 KPMG
        LLP
 Albany,
        New York
 March
        15,
        2006
  F-4
  **Jeffersonville
        Bancorp and Subsidiary**
 **Consolidated
        Balance Sheets**
 (Dollars
        in thousands, except share and per share data)
  **December
                    31,**
                
                **December
                    31,****2007**
                
                **2006****ASSETS**Cash
                    and cash equivalents
                
                $
                10,428
                
                $
                12,270Securities
                    available for sale, at fair value
                
                
                92,064
                
                
                99,788Securities
                    held to maturity, estimated fair value of $6,377 at
                    December 31, 2007 and $9,570 at December 31, 2006
                
                
                6,320
                
                
                9,445Loans,
                    net of allowance for loan losses of $3,352 at December 31, 2007
                    and $3,516
                    at December 31, 2006
                
                
                249,633
                
                
                247,244Accrued
                    interest receivable
                
                
                2,119
                
                
                2,441Premises
                    and equipment, net
                
                
                4,398
                
                
                3,040Federal
                    Home Loan Bank stock
                
                
                2,998
                
                
                2,296Bank-owned
                    life insurance
                
                
                14,132
                
                
                13,651Other
                    assets
                
                
                5,338
                
                
                7,116Total
                    Assets
                
                $
                387,430
                
                $
                397,291**LIABILITIES
                    AND STOCKHOLDERS’ EQUITY**LiabilitiesDeposits:Demand
                    deposits
                
                $
                62,143
                
                $
                64,974NOW
                    and super NOW accounts
                
                
                28,046
                
                
                31,276Savings
                    and insured money market deposits
                
                
                88,011
                
                
                100,391Time
                    deposits
                
                
                121,042
                
                
                128,432Total
                    Deposits
                
                
                299,242
                
                
                325,073Federal
                    Home Loan Bank borrowings
                
                
                30,000
                
                
                20,000Short-term
                    debt
                
                
                5,509
                
                
                903Other
                    liabilities
                
                
                8,721
                
                
                10,040Total
                    Liabilities
                
                
                343,472
                
                
                356,016Commitments
                    and contingent liabilitiesStockholders’
                    equity: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
                
                
                2,384
                
                
                2,384Paid-in
                    capital
                
                
                6,483
                
                
                6,483Treasury
                    stock, at cost; 533,465 shares at December 31, 2007 and 462,438
                    shares at
                    December 31, 2006
                
                
                (4,967
                )
                
                (3,722
                )Retained
                    earnings
                
                
                41,104
                
                
                38,963Accumulated
                    other comprehensive loss
                
                
                (1,046
                )
                
                (2,833
                )Total
                    Stockholders’ Equity
                
                
                43,958
                
                
                41,275Total
                    Liabilities and Stockholders’ Equity
                
                $
                387,430
                
                $
                397,291
  See
        accompanying notes to consolidated financial statements.
  F-5
 
 **Jeffersonville
        Bancorp and Subsidiary**
 **Consolidated
        Statements of Income**
 (In
        thousands, except per share data)
 
 **For
                  the year ended December 31,****2007**
              
              **2006**
              
              **2005****INTEREST
                  AND DIVIDEND INCOME**Loan
                  interest and fees
              
              $
              18,635
              
              $
              18,324
              
              $
              17,570Securities:Taxable
              
              
              2,928
              
              
              3,127
              
              
              2,627Tax-exempt
              
              
              1,798
              
              
              2,011
              
              
              1,943Federal
                  funds sold
              
              
              118
              
              
              419
              
              
              30Total
                  Interest and Dividend Income
              
              
              23,479
              
              
              23,881
              
              
              22,170**INTEREST
                  EXPENSE**Deposits
              
              
              7,539
              
              
              7,134
              
              
              4,060Federal
                  Home Loan Bank borrowings
              
              
              905
              
              
              1,054
              
              
              1,223Other
              
              
              171
              
              
              23
              
              
              119Total
                  Interest Expense
              
              
              8,615
              
              
              8,211
              
              
              5,402Net
                  interest income
              
              
              14,864
              
              
              15,670
              
              
              16,768Provision
                  (credit) for loan losses
              
              
              (370
              )
              
              90
              
              
              180Net
                      Interest Income After Provision (Credit) for Loan
                      Losses
              
              
              15,234
              
              
              15,580
              
              
              16,588**NON-INTEREST
                  INCOME**Service
                  charges
              
              
              1,858
              
              
              1,892
              
              
              1,894Earnings
                  on bank-owned life insurance
              
              
              482
              
              
              424
              
              
              470Net
                  security gains (losses)
              
              
              (49
              )
              
              (4
              )
              
              6Foreclosed
                  real estate income, net
              
              
              5
              
              
              72
              
              
              141Gain
                  on sale of credit card portfolio
              
              
              —
              
              
              —
              
              
              234Other
                  non-interest income
              
              
              1,174
              
              
              1,202
              
              
              1,318Total
                  Non-Interest Income
              
              
              3,470
              
              
              3,586
              
              
              4,063**NON-INTEREST
                  EXPENSES**Salaries
                  and employee benefits
              
              
              7,723
              
              
              7,727
              
              
              7,636Occupancy
                  and equipment expenses
              
              
              2,084
              
              
              2,028
              
              
              1,981Other
                  non-interest expenses
              
              
              3,353
              
              
              3,228
              
              
              3,267Total
                  Non-Interest Expenses
              
              
              13,160
              
              
              12,983
              
              
              12,884Income
                  before income tax expense
              
              
              5,544
              
              
              6,183
              
              
              7,767Income
                  tax expense
              
              
              1,269
              
              
              1,240
              
              
              2,042Net
                  Income
              
              $
              4,275
              
              $
              4,943
              
              $
              5,725Basic
                  earnings per common share
              
              $
              1.00
              
              $
              1.13
              
              $
              1.29Average
                  common shares outstanding
              
              
              4,266
              
              
              4,376
              
              
              4,434Cash
                  dividend declared per share
              
              $
              0.50
              
              $
              0.48
              
              $
              0.44
 
 See
        accompanying notes to consolidated financial statements.
  F-6
  **Jeffersonville
        Bancorp and Subsidiary**
 **Consolidated
        Statements of Changes in Stockholders’ Equity**
 **Years
        ended December 31, 2007, 2006 and 2005**
 (In
        thousands, except per share data)
 
 **Common****Accumulated**
              
              
              
              **shares****other**
              
              **Total**
              
              **issued****Common**
              
              **Paid-in**
              
              **Treasury**
              
              **Retained**
              
              **comprehensive**
              
              **stockholders’**
              
              **and****stock**
              
              **capital**
              
              **stock**
              
              **earnings**
              
              **(loss)**
              
              **equity**
              
              **outstanding**Balance
                  at December 31, 2004
              
              $
              2,384
              
              $
              6,483
              
              $
              (1,108
              )
              $
              32,342
              
              $
              (455
              )
              $
              39,646
              
              
              4,434Net
                  income
              
              
              —
              
              
              —
              
              
              —
              
              
              5,725
              
              
              —
              
              
              5,725Other
                  comprehensive loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (903
              )
              
              (903
              )Comprehensive
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4,822Cash
                  dividends ($0.44 per share)
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,949
              )
              
              —
              
              
              (1,949
              )Balance
                  at December 31, 2005
              
              
              2,384
              
              
              6,483
              
              
              (1,108
              )
              
              36,118
              
              
              (1,358
              )
              
              42,519
              
              
              4,434Net
                  income
              
              
              —
              
              
              —
              
              
              —
              
              
              4,943
              
              
              —
              
              
              4,943Other
                  comprehensive loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (114
              )
              
              (114
              )Comprehensive
                  income
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              4,829Adjustment
                    to initially apply SFAS No. 158, net of tax benefit of
                    $908
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,361
              )
              
              (1,361
              )Purchase
                  of treasury stock
              
              
              —
              
              
              —
              
              
              (2,614
              )
              
              —
              
              
              —
              
              
              (2,614
              )
              
              (129
              )Cash
                  dividends ($0.48 per share)
              
              
              —
              
              
              —
              
              
              —
              
              
              (2,098
              )
              
              —
              
              
              (2,098
              )Balance
                  at December 31, 2006
              
              
              2,384
              
              
              6,483
              
              
              (3,722
              )
              
              38,963
              
              
              (2,833
              )
              
              41,275
              
              
              4,305Net
                  income
              
              
              —
              
              
              —
              
              
              —
              
              
              4,275
              
              
              —
              
              
              4,275Other
                  comprehensive income
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,787
              
              
              1,787Comprehensive
                  income
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              6,062Purchase
                  of treasury stock
              
              
              —
              
              
              —
              
              
              (1,245
              )
              
              —
              
              
              —
              
              
              (1,245
              )
              
              (71
              )Cash
                  dividends ($0.50 per share)
              
              
              —
              
              
              —
              
              
              —
              
              
              (2,134
              )
              
              —
              
              
              (2,134
              )Balance
                  at December 31, 2007
              
              $
              2,384
              
              $
              6,483
              
              $
              (4,967
              )
              $
              41,104
              
              $
              (1,046
              )
              $
              43,958
              
              
              4,234
  See
        accompanying notes to consolidated financial statements.
  F-7
  **Jeffersonville
        Bancorp and Subsidiary**
 **Consolidated
        Statements of Cash Flows**
 (In
        thousands)
 
 **For
                  the year ended December 31,****2007**
              
              **2006**
              
              **2005****OPERATING
                  ACTIVITIES:**Net
                  income
              
              $
              4,275
              
              $
              4,943
              
              $
              5,725Adjustments
                    to reconcile net income to netcash
                    provided by operating activities:Provision
                  (credit) for loan losses
              
              
              (370
              )
              
              90
              
              
              180Net
                  gain on sales of foreclosed real estate
              
              
              —
              
              
              (43
              )
              
              (125
              )Depreciation
                  and amortization
              
              
              628
              
              
              635
              
              
              632Net
                  (gain) loss on disposal of premises and equipment
              
              
              —
              
              
              (1
              )
              
              3Net
                  earnings on bank-owned life insurance
              
              
              (482
              )
              
              (424
              )
              
              (470
              )Deferred
                  income tax expense
              
              
              (76
              )
              
              (357
              )
              
              (354
              )Net
                  security losses (gains)
              
              
              49
              
              
              4
              
              
              (6
              )Decrease
                  (increase) in accrued interest receivable
              
              
              322
              
              
              (401
              )
              
              45(Increase)
                  decrease in other assets
              
              
              664
              
              
              (1,368
              )
              
              511(Decrease)
                  increase in other liabilities
              
              
              (63
              )
              
              470
              
              
              1,442Net
                  Cash Provided by Operating Activities
              
              
              4,947
              
              
              3,548
              
              
              7,583**INVESTING
                  ACTIVITIES:**Proceeds
                  from maturities and calls:Securities
                  available for sale
              
              
              10,009
              
              
              5,956
              
              
              10,626Securities
                  held to maturity
              
              
              5,962
              
              
              4,096
              
              
              4,431Proceeds
                  from sales of securities available for sale
              
              
              18,780
              
              
              1,713
              
              
              4,782Purchases:Securities
                  available for sale
              
              
              (19,392
              )
              
              (18,666
              )
              
              (4,933
              )Securities
                  held to maturity
              
              
              (2,837
              )
              
              (5,346
              )
              
              (6,669
              )Proceeds
                  from sale of credit card portfolio
              
              
              —
              
              
              —
              
              
              1,468Disbursement
                  for loan originations, net of principal collections
              
              
              (2,019
              )
              
              (7,079
              )
              
              (21,703
              )Purchase
                  of Federal Home Loan Bank stock
              
              
              (2,720
              )
              
              —
              
              
              (5,147
              )Sale
                  of Federal Home Loan Bank stock
              
              
              2,018
              
              
              200
              
              
              4,826Net
                  purchases of premises and equipment
              
              
              (1,986
              )
              
              (647
              )
              
              (793
              )Proceeds
                  from sales of foreclosed real estate
              
              
              —
              
              
              562
              
              
              125Net
                  Cash Provided by (Used in) Investing Activities
              
              
              7,815
              
              
              (19,211
              )
              
              (12,987
              )**FINANCING
                  ACTIVITIES:**Net
                  (decrease) increase in deposits
              
              
              (25,831
              )
              
              12,977
              
              
              19,002Proceeds
                  from Federal Home Loan Bank borrowings
              
              
              15,000
              
              
              10,000
              
              
              10,000Repayments
                  of Federal Home Loan Bank borrowings
              
              
              (5,000
              )
              
              (15,000
              )
              
              (3,500
              )Net
                  increase (decrease) in short-term borrowings
              
              
              4,606
              
              
              476
              
              
              (7,997
              )Purchases
                  of treasury stock
              
              
              (1,245
              )
              
              (2,614
              )
              
              —Cash
                  dividends paid
              
              
              (2,134
              )
              
              (2,098
              )
              
              (1,949
              )Net
                  Cash (Used in) Provided by Financing Activities
              
              
              (14,604
              )
              
              3,741
              
              
              15,556Net
                  (Decrease) Increase in Cash and Cash Equivalents
              
              
              (1,842
              )
              
              (11,922
              )
              
              10,152Cash
                  and Cash Equivalents at Beginning of Year
              
              
              12,270
              
              
              24,192
              
              
              14,040Cash
                  and Cash Equivalents at End of Year
              
              $
              10,428
              
              $
              12,270
              
              $
              24,192**SUPPLEMENTAL
                  INFORMATION:**Cash
                  paid for:Interest
              
              $
              8,671
              
              $
              8,157
              
              $
              5,173Income
                  taxes
              
              
              1,465
              
              
              1,614
              
              
              1,668Transfer
                  of loans to foreclosed real estate
              
              
              —
              
              
              391
              
              
              —
 
 See
        accompanying notes to consolidated financial statements.
 
 F-8
 
 **Jeffersonville
        Bancorp and Subsidiary**
 **Notes
        to Consolidated Financial Statements**
 **December 31,
        2007, 2006, and 2005**
  **(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 and the evaluation of other than temporary impairment of investment
        securities which are 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, 2007
        and 2006, 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.
 
 Securities
        are evaluated on at least a quarterly basis, and more frequently when market
        conditions warrant such an evaluation, to determine whether a decline in
        their
        value is other-than-temporary. To determine whether a loss in value is
        other-than-temporary, management utilizes criteria such as the reasons
        underlying the decline, the magnitude and duration of the decline and the
        intent
        and ability of the Company to retain its investment in the security for a
        period
        of time sufficient to allow for an anticipated recovery in the fair value.
        The
        term “other-than-temporary” is not intended to indicate that the decline is
        permanent, but indicates that the prospects for a near-term recovery of value
        is
        not necessarily favorable, or that there is a lack of evidence to support
        a
        realizable value equal to or greater than the carrying value of the investment.
        Once a decline in value is determined to be other-than-temporary, the value
        of
        the security is reduced and a corresponding charge to earnings is recognized.
        An
        impairment charge of $30,000 was recognized during the year ended December
        31,
        2007. No impairment charge was recognized during the years ended December
        31,
        2006 and 2005.
  F-9
 
 ***Loans***
  Loans
        are
        stated at unpaid principal balances, less unearned discounts, deferred loan
        fees
        and costs and the allowance for loan losses. Unearned discounts on certain
        installment loans and deferred loan fees and costs 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. Impaired loans are measured 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.
  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.
 
 ***Foreclosed
        Real Estate***
  Foreclosed
        real estate 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
        foreclosed real estate 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.
  F-10
 
 ***Advertising
        Costs***
 
 Advertising
        costs are expensed as incurred and are included in other expenses.
 
 ***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*** **P** **er
        Common Share**
  The
        Company has a simple capital structure. Basic earnings per share (EPS) is
        computed by dividing net income by the weighted average number of common
        shares
        outstanding for the period.
  ***Recent
        Accounting Pronouncements***
  FASB
        Statement No. 141 (R) “Business Combinations” was issued in December of 2007.
        This Statement establishes principles and requirements for how the acquirer
        of a
        business recognizes and measures in its financial statements the identifiable
        assets acquired, the liabilities assumed, and any noncontrolling interest
        in the
        acquiree. The Statement also provides guidance for recognizing and measuring
        the
        goodwill acquired in the business combination and determines what information
        to
        disclose to enable users of the financial statements to evaluate the nature
        and
        financial effects of the business combination. The guidance will become
        effective as of the beginning of a company’s fiscal year beginning after
        December 15, 2008. This new pronouncement will impact the Company’s accounting
        for business combinations completed beginning January 1, 2009.
  FASB
        Statement No. 160 “Noncontrolling Interests in Consolidated Financial
        Statements—an amendment of ARB No. 51” was issued in December of 2007. This
        Statement establishes accounting and reporting standards for the noncontrolling
        interest in a subsidiary and for the deconsolidation of a subsidiary. The
        guidance will become effective as of the beginning of a company’s fiscal year
        beginning after December 15, 2008. The Company is currently evaluating the
        potential impact the new pronouncement will have on its consolidated financial
        statements.
  Staff
        Accounting Bulletin No. 109 (SAB 109), "Written Loan Commitments Recorded
        at
        Fair Value Through Earnings" expresses the views of the staff regarding written
        loan commitments that are accounted for at fair value through earnings under
        generally accepted accounting principles. To make the staff's views consistent
        with current authoritative accounting guidance, the SAB revises and rescinds
        portions of SAB No. 105, "Application of Accounting Principles to Loan
        Commitments."  Specifically, the SAB revises the SEC staff's views on
        incorporating expected net future cash flows related to loan servicing
        activities in the fair value measurement of a written loan commitment. The
        SAB
        retains the staff's views on incorporating expected net future cash flows
        related to internally-developed intangible assets in the fair value measurement
        of a written loan commitment. The staff expects registrants to apply the
        views
        in Question 1 of SAB 109 on a prospective basis to derivative loan commitments
        issued or modified in fiscal quarters beginning after December 15, 2007.
        The
        Company does not expect SAB 109 to have a material impact on its financial
        statements.
  In
        September 2006, the Financial Accounting Standards Board issued FASB Statement
        No. 157, *Fair
        Value Measurements* ,
        which
        defines fair value, establishes a framework for measuring fair value under
        GAAP,
        and expands disclosures about fair value measurements. FASB Statement
        No. 157 applies to other accounting pronouncements that require or permit
        fair value measurements. The new guidance is effective for financial statements
        issued for fiscal years beginning after November 15, 2007, and for interim
        periods within those fiscal years. In December 2007, the FASB issued proposed
        FASB Staff Position (FSP) 157-b, “Effective Date of FASB Statement
        No. 157,” that would permit a one-year deferral in applying the measurement
        provisions of Statement No. 157 to non-financial assets and non-financial
        liabilities (non-financial items) that are not recognized or disclosed at
        fair
        value in an entity’s financial statements on a recurring basis (at least
        annually). Therefore, if the change in fair value of a non-financial item
        is not
        required to be recognized or disclosed in the financial statements on an
        annual
        basis or more frequently, the effective date of application of Statement
        157 to
        that item is deferred until fiscal years beginning after November 15, 2008
        and interim periods within those fiscal years. The Company will adopt the
        requirements of FASB Statement No. 157 in its March 31, 2008 financial
        statements.
  F-11
 
 In
        February 2007, the FASB issued SFAS No. 159, *The
        Fair Value Option for Financial Assets and Financial
        Liabilities* .
        This
        statement permits entities to choose to measure many financial instruments
        and
        certain other items at fair value. An entity shall report unrealized gains
        and
        losses on items for which the fair value option has been elected in earnings
        at
        each subsequent reporting date. This statement is effective as of the beginning
        of an entity’s first fiscal year that begins after November 15, 2007. The
        Company is continuing to evaluate the impact of this statement.
  In
        September 2006, the FASB ratified the consensus reached by the EITF in Issue
        06-4, *Accounting
        for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
        Split-Dollar Life Insurance Arrangements* .
        EITF
        06-4 applies to life insurance arrangements that provide an employee with
        a
        specified benefit that is not limited to the employee’s active service period,
        including certain bank-owned life insurance policies. EITF 06-4 requires
        an
        employer to recognize a liability and related compensation costs for future
        benefits that extend to postretirement periods. EITF 06-4 is effective for
        fiscal years beginning after December 15, 2007, with earlier application
        permitted. The impact of its adoption did not have a material impact on the
        Company’s 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 $296,000 at December 31,
        2007 and $5,652,000 at December 31, 2006. The reduction was due to the Bank
        instituting a deposit reclassification program as authorized by the Federal
        Reserve Bank.
 
 **(3)**
              **Investment
                  Securities**
 
 The
        amortized cost and estimated fair value of securities available for sale
        are as
        follows:
 
 **December
                  31, 2007****Gross**
              
              **Gross****Amortized**
              
              **unrealized**
              
              **unrealized**
              
              **Estimated****cost**
              
              **gains**
              
              **losses**
              
              **fair
                  value**(In
                  thousands)Government
                  sponsored enterprises
              
              $
              39,360
              
              $
              113
              
              $
              (191
              )
              $
              39,282Obligations
                  of states andpolitical
                  subdivisions
              
              
              35,827
              
              
              646
              
              
              (95
              )
              
              36,378Mortgage-backed
                  securities andcollateralized
                  mortgage obligations
              
              
              10,192
              
              
              115
              
              
              (70
              )
              
              10,237Total
                  debt securities
              
              
              85,379
              
              
              874
              
              
              (356
              )
              
              85,897Equity
                  securities
              
              
              5,928
              
              
              262
              
              
              (23
              )
              
              6,167Total
                  securities available for sale
              
              $
              91,307
              
              $
              1,136
              
              $
              (379
              )
              $
              92,064
  **December
                  31, 2006****Gross**
              
              **Gross****Amortized**
              
              **unrealized**
              
              **unrealized**
              
              **Estimated****cost**
              
              **gains**
              
              **losses**
              
              **fair
                  value**(In
                    thousands)Government
                  sponsored enterprises
              
              $
              54,351
              
              $
              1
              
              $
              (1,568
              )
              $
              52,784Obligations
                  of states andpolitical
                  subdivisions
              
              
              39,152
              
              
              629
              
              
              (229
              )
              
              39,552Mortgage-backed
                  securities andcollateralized
                  mortgage obligations
              
              
              6,428
              
              
              —
              
              
              (35
              )
              
              6,393Total
                  debt securities
              
              
              99,931
              
              
              630
              
              
              (1,832
              )
              
              98,729Equity
                  securities
              
              
              821
              
              
              272
              
              
              (34
              )
              
              1,059Total
                  securities available for sale
              
              $
              100,752
              
              $
              902
              
              $
              (1,866
              )
              $
              99,788
  F-12
  Proceeds
        from sales of securities available for sale during 2007, 2006 and 2005 were
        $18,780,000, $1,713,000 and $4,782,000 respectfully. Gross gains and gross
        losses realized on sales and calls of securities were as follows:
 
 **2007**
              
              **2006**
              
              **2005**(In
                  thousands)Gross
                  realized gains
              
              $
              21
              
              $
              12
              
              $
              42Gross
                  realized losses
              
              
              (40
              )
              
              (16
              )
              
              (36
              )Impairment
                  charge
              
              
              (30
              )
              
              —
              
              
              —Net
                  security gains (losses)
              
              $
              (49
              )
              $
              (4
              )
              $
              6
  The
        amortized cost and estimated fair value of debt securities available for
        sale at
        December 31, 2007, 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**(In
                  thousands)Within
                  one year
              
              $
              5,781
              
              $
              5,767One
                  to five years
              
              
              34,313
              
              
              35,004Five
                  to ten years
              
              
              26,009
              
              
              25,988Over
                  ten years
              
              
              19,276
              
              
              19,138Total
                  debt securities
              
              $
              85,379
              
              $
              85,897
 
 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 $39,250,000, and $46,790,000 at
        December 31, 2007 and 2006 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:
 
 **Gross**
              
              **Gross****Amortized**
              
              **unrealized**
              
              **unrealized**
              
              **Estimated****cost**
              
              **gains**
              
              **losses**
              
              **fair
                  value**(In
                    thousands)December
                  31, 2007:Obligations
                  of states andpolitical
                  subdivisions
              
              $
              6,320
              
              $
              96
              
              $
              (39
              )
              $
              6,377December
                  31, 2006:Obligations
                  of states andpolitical
                  subdivisions
              
              $
              9,445
              
              $
              173
              
              $
              (48
              )
              $
              9,570
  There
        were no sales of securities held to maturity in 2007, 2006 or 2005.
  The
        amortized cost and estimated fair value of these securities at December 31,
        2007, 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 (in
        thousands).
 
 **Amortized**
              
              **Estimated****cost**
              
              **fair
                  value**Within
                  one year
              
              $
              3,040
              
              $
              3,038One
                  to five years
              
              
              2,304
              
              
              2,308Five
                  to ten years
              
              
              352
              
              
              362Over
                  ten years
              
              
              624
              
              
              669Total
              
              $
              6,320
              
              $
              6,377
  F-13
  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, 2007 and 2006 were as follows
        (in thousands):
 
 December
        31, 2007:
 **Less
                    than 12 months**
                
                **12
                    months or more**
                
                **Total****Estimated**
                
                **Unrealized**
                
                **Estimated**
                
                **Unrealized**
                
                **Estimated**
                
                **Unrealized****fair
                    value**
                
                **losses**
                
                **fair
                    value**
                
                **losses**
                
                **fair
                    value**
                
                **losses**Available
                    for sale:Government
                    sponsoredenterprises
                
                $
                1,000
                
                $
                —
                
                $
                20,308
                
                $
                191
                
                $
                21,308
                
                $
                191Obligations
                    of states andpolitical
                    subdivisions
                
                
                766
                
                
                3
                
                
                6,054
                
                
                92
                
                
                6,820
                
                
                95Mortgage-backed
                    securitiesand
                    collateralized mortgageobligations
                
                
                —
                
                
                —
                
                
                1,176
                
                
                70
                
                
                1,176
                
                
                70$
                1,766
                
                $
                3
                
                $
                27,538
                
                $
                353
                
                $
                29,304
                
                $
                356Equity
                    securities
                
                $
                192
                
                $
                23
                
                $
                —
                
                $
                —
                
                $
                192
                
                $
                23Held
                    to maturity:Obligations
                    of states andpolitical
                    subdivisions
                
                $
                2,496
                
                $
                8
                
                $
                1,562
                
                $
                31
                
                $
                4,058
                
                $
                39
 December
          31, 2006:
 **Less
                    than 12 months**
                
                **12
                    months or more**
                
                **Total****Estimated**
                
                **Unrealized**
                
                **Estimated**
                
                **Unrealized**
                
                **Estimated**
                
                **Unrealized****fair
                    value**
                
                **losses**
                
                **fair
                    value**
                
                **losses**
                
                **fair
                    value**
                
                **losses**Available
                    for sale:Government
                    sponsoredenterprises
                
                $
                6,966
                
                $
                29
                
                $
                44,817
                
                $
                1,539
                
                $
                51,783
                
                $
                1,568Obligations
                    of states andpolitical
                    subdivisions
                
                
                1,414
                
                
                4
                
                
                10,462
                
                
                225
                
                
                11,876
                
                
                229Mortgage-backed
                    securitiesand
                    collateralized mortgageobligations
                
                
                4,000
                
                
                12
                
                
                1,206
                
                
                23
                
                
                5,206
                
                
                35$
                12,380
                
                $
                45
                
                $
                56,485
                
                $
                1,787
                
                $
                68,865
                
                $
                1,832Equity
                    securities
                
                $
                116
                
                $
                34
                
                $
                —
                
                $
                —
                
                $
                116
                
                $
                34Held
                    to maturity:Obligations
                    of states andpolitical
                    subdivisions
                
                $
                3,600
                
                $
                7
                
                $
                1,626
                
                $
                41
                
                $
                5,226
                
                $
                48
  At
        December 31, 2007 there were 14 securities in a continual loss position for
        less
        than 12 months and 48 securities in a continual loss position for 12 months
        or
        more. Of the 14 securities in a continual loss position for less than 12
        months,
        one was from government sponsored enterprises, eleven were obligations of
        states
        and political subdivisions and two were equity securities. Of the 48 securities
        in a continual loss position for 12 months or more, twelve were from government
        sponsored enterprises, 34 were obligations of states and political subdivisions,
        and two were mortgage-backed securities. None of the individual unrealized
        losses is significant.
 
 The
        reduction in unrealized losses on securities at December 31, 2007 was the
        result
        of decreases 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, 2007 and 2006.
        An
        impairment charge of $30,000 was recorded on an equity security for the year
        ended December 31, 2007.
  F-14
 
 **(4)**
              **Loans**
 
 The
        major
        classifications of loans are as follows at December 31:
 
 **2007**
              
              **2006**(In
                  thousands)Real
                  estate loans:Residential
              
              $
              99,157
              
              $
              95,520Commercial
              
              
              82,637
              
              
              82,987Home
                  equity
              
              
              25,977
              
              
              24,195Farm
                  land
              
              
              3,883
              
              
              3,726Construction
              
              
              5,531
              
              
              6,087217,185
              
              
              212,515Other
                  loans:Commercial
                  loans
              
              
              26,431
              
              
              28,106Consumer
                  installment loans
              
              
              8,948
              
              
              9,773Other
                  consumer loans
              
              
              148
              
              
              118Agricultural
                  loans
              
              
              273
              
              
              24835,800
              
              
              38,245Total
                  loans
              
              
              252,985
              
              
              250,760Allowance
                  for loan losses
              
              
              (3,352
              )
              
              (3,516
              )Total
                  loans, net
              
              $
              249,633
              
              $
              247,244
 
 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 primarily 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.
 
 Nonperforming
        loans are summarized as follows at December 31:
 
 **2007**
              
              **2006**
              
              **2005**(In
                  thousands)Nonaccrual
                  loans
              
              $
              3,761
              
              $
              1,867
              
              $
              2,922Loans
                  past due 90 days or more and stillaccruing
                  interest
              
              
              883
              
              
              13
              
              
              —Total
                  nonperforming loans
              
              $
              4,644
              
              $
              1,880
              
              $
              2,922
 
 Nonaccrual
        loans had the following effect on interest income for the years ended
        December 31:
  **2007**
              
              **2006**
              
              **2005**(In
                  thousands)Interest
                  contractually due at original rates
              
              $
              162
              
              $
              178
              
              $
              169Interest
                  income recognized
              
              
              (29
              )
              
              (15
              )
              
              (134
              )Interest
                  income not recognized
              
              $
              133
              
              $
              163
              
              $
              35
 
 F-15
  Changes
        in the allowance for loan losses are summarized as follows for the years
        ended
        December 31:
 
 **2007**
              
              **2006**
              
              **2005**(In
                  thousands)Balance
                  at beginning of the year
              
              $
              3,516
              
              $
              3,615
              
              $
              3,645Provision
                  (credit) for loan losses
              
              
              (370
              )
              
              90
              
              
              180Loans
                  charged-off
              
              
              (318
              )
              
              (533
              )
              
              (440
              )Recoveries
              
              
              524
              
              
              344
              
              
              230Balance
                  at end of year
              
              $
              3,352
              
              $
              3,516
              
              $
              3,615
 
 As
        of
        December 31, 2007 and 2006 there were $3,394,000 and $1,528,000 loans,
        respectively, which were considered to be impaired under SFAS No. 114 with
        no valuation allowance. As of December 31, 2007 and 2006 there were no loans
        which were considered impaired with a valuation allowance. Average impaired
        loans for the years ended December 31, 2007, 2006 and 2005 were $2,526,000,
        $1,797,000 and $0 respectively. There are no commitments to lend additional
        funds on the above noted non-performing loans.
 
 The
        provision (credit) for loan losses was ($370,000) for the year ended December,
        2007 compared to $90,000 for 2006. The Company recovered $441,000 on a
        previously written-off loan. This recovery was for a loan made in 2002. The
        loan
        turned out to be fraudulent and the participants brought a legal suit against
        the Bank of New York. The participating lenders prevailed and received their
        settlements in the first quarter of 2007. Despite the increase in the amount
        of
        non-performing loans, management has determined that all these loans remain
        well
        collateralized. Based on management’s comprehensive analysis of the loan
        portfolio, and that the company has no exposure to subprime loans, management
        believes the current level of the allowance for loan losses is
        adequate.
 
 **(5)**
              **Premises
                  and Equipment**
 
 The
        major
        classifications of premises and equipment were as follows at
        December 31:
 
 **2007**
              
              **2006**(In
                  thousands)Land
              
              $
              837
              
              $
              387Buildings
                  and improvements
              
              
              5,351
              
              
              4,255Furniture
                  and fixtures
              
              
              177
              
              
              157Equipment
              
              
              4,007
              
              
              3,70310,372
              
              
              8,502Less
                  accumulated depreciation and amortization
              
              
              (5,974
              )
              
              (5,462
              )Total
                  premises and equipment, net
              
              $
              4,398
              
              $
              3,040
 
 Depreciation
        and amortization expense was $628,000, $635,000, and $632,000 in 2007, 2006,
        and
        2005, respectively.
 
 **(6)**
              **Time
                  Deposits**
 
 The
        following is a summary of time deposits at December 31, 2007 by remaining
        period to contractual maturity (in thousands):
 
 Within
                  one year
              
              $
              84,468One
                  to two years
              
              
              20,995Two
                  to three years
              
              
              5,151Three
                  to four years
              
              
              4,507Four
                  to five years
              
              
              5,921Total
                  time deposits
              
              $
              121,042
 
 Time
        deposits of $100,000 or more totaled $37,813,000, $46,054,000, and $43,836,000
        at December 31, 2007, 2006 and 2005 respectively. Interest expense related
        to
        time deposits over $100,000 was $1,590,000, $1,891,000 and $812,000 for 2007,
        2006, and 2005, respectively.
  F-16
  Total
        time deposits include brokered time deposits obtained from the national market,
        which during 2007 averaged $8,493,000 and amounted to $5,052,000, or 1.69%
        of
        total deposits at December 31, 2007. Brokered time deposits in 2006 averaged
        $15,198,000 and amounted to $16,332,000, or 5.03% of total deposits at December
        31, 2006. Brokered time deposits in 2005 averaged $1,110,000 and amounted
        to
        $15,034,000, or 4.82% of total deposits at December 31, 2005. The rates of
        interest paid on time deposits obtained from the national market averaged
        4.73%
        during 2007, 4.97% during 2006 and 4.56% during 2005.
 
 **(7)**
              **Federal
                  Home Loan Bank Borrowings**
 
 The
        following is a summary of Federal Home Loan Bank (FHLB) advances outstanding
        at
        December 31:
 
 **2007**
              
              **2006****Amount**
              
              **Rate**
              
              **Amount**
              
              **Rate**(Dollars
                  in thousands)Fixed
                  rate advances maturing in 2007
              
              $
              —
              
              
              
              
              $
              5,000
              
              
              4.12
              %Fixed
                  rate advances and securities sold under agreements to repurchase
                  maturing
                  in 2008
              
              
              10,000
              
              
              4.98
              
              
              10,000
              
              
              4.98Securities
                  sold under agreements to repurchase maturing in 2009
              
              
              20,000
              
              
              4.50
              
              
              5,000
              
              
              5.45Total
                  FHLB advances and securities sold under an agreement to
                  repurchase
              
              $
              30,000
              
              
              4.69
              %
              $
              20,000
              
              
              4.88
              %
 
 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, 2007 and 2006 were $60.5 million
        and
        $55.0 million respectively, which satisfied the collateral requirements of
        the
        FHLB.
 
 **(8)**
              **Short-Term
                  Borrowings**
 
 Short-term
        borrowings at December 31, 2007 and 2006 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 $39.4 million
        and
        $40.4 million as of December 31, 2007 and 2006, respectively. There
        were $5,100,000 in borrowings under the overnight program at December 31,
        2007 at a rate of 3.63%; at December 31, 2006 borrowings totaled $500,000
        at a
        rate of 5.63%. The Bank has pledged mortgage loans and FHLB stock as collateral
        on these borrowings. During 2007, the maximum month-end balance was $14.5
        million, the average balance was $3.1 million, and the average interest
        rate was 4.98%. During 2006, the maximum month-end balance was
        $3.9 million, the average balance was $0.5 million, and the average
        interest rate was 5.74%. Short-term borrowings at December 31, 2007 and
        2006 also included $409,000 and $403,000, respectively of demand
        notes.
 
 **(9)**
              **Income
                  Taxes**
 
 Income
        taxes for the years ended December 31, 2007, 2006 and 2005 consisted of the
        following:
 
 **2007**
              
              **2006**
              
              **2005**(In
                  thousands)Current
                  tax expense:Federal
              
              $
              1,302
              
              $
              1,428
              
              $
              2,094State
              
              
              43
              
              
              169
              
              
              302Deferred
                  tax (benefit)
              
              
              (76
              )
              
              (357
              )
              
              (354
              )Total
                  income tax expense
              
              $
              1,269
              
              $
              1,240
              
              $
              2,042
 
 F-17
  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:
 
 **2007**
              
              **2006**
              
              **2005****%
                  of**
              
              
              
              **%
                  of**
              
              
              
              **%
                  of****Pre-tax**
              
              
              
              **Pre-tax**
              
              
              
              **Pre-tax****Amount**
              
              **income**
              
              **Amount**
              
              **income**
              
              **Amount**
              
              **income**(In
                  thousands)Tax
                  at statutory rate
              
              $
              1,885
              
              
              34
              %
              $
              2,102
              
              
              34
              %
              $
              2,641
              
              
              34
              %State
                  taxes, net of Federal tax benefit
              
              
              34
              
              
              1
              
              
              66
              
              
              1
              
              
              158
              
              
              2Tax-exempt
                  interest
              
              
              (611
              )
              
              (11
              )
              
              (684
              )
              
              (11
              )
              
              (661
              )
              
              (9
              )Interest
                  expense allocated to tax-exempt securities
              
              
              78
              
              
              1
              
              
              64
              
              
              1
              
              
              47
              
              
              1Net
                  earnings from bank-owned life insurance
              
              
              (164
              )
              
              (3
              )
              
              (144
              )
              
              (2
              )
              
              (160
              )
              
              (2
              )Other
                  adjustments
              
              
              47
              
              
              1
              
              
              (164
              )
              
              (3
              )
              
              17
              
              
              0Income
                  tax expense
              
              $
              1,269
              
              
              23
              %
              $
              1,240
              
              
              20
              %
              $
              2,042
              
              
              26
              %
 
 The
        tax
        effects of temporary differences that give rise to deferred tax assets and
        liabilities at December 31 are presented below:
 
 **2007**
              
              **2006**(In
                  thousands)Deferred
                  tax assets:Allowance
                  for loan losses in excess of tax bad debt reserve
              
              $
              1,149
              
              $
              1,221Retirement
                  benefits
              
              
              1,788
              
              
              1,708Deferred
                  compensation
              
              
              94
              
              
              115Depreciation
              
              
              502
              
              
              454Other
              
              
              23
              
              
              12Total
                  deferred tax assets
              
              
              3,556
              
              
              3,510Deferred
                  tax liabilities:Prepaid
                  expenses
              
              
              (162
              )
              
              (192
              )Total
                  deferred tax liabilities
              
              
              (162
              )
              
              (192
              )Net
                  deferred tax asset
              
              $
              3,394
              
              $
              3,318
 
 In
        addition to the table above, the Company had the following deferred tax assets
        and liabilities in accumulated other comprehensive loss at December 31 are
        presented below:
 
 **2007**
              
              **2006**(In
                  thousands)Deferred
                  tax assets:Pension
                  benefits
              
              $
              935
              
              $
              1,410Other
                  retirement benefits
              
              
              93
              
              
              232Unrealized
                  loss on securities available for sale
              
              
              —
              
              
              386Total
                  deferred tax assets
              
              
              1,028
              
              
              2,028Deferred
                  tax liabilities:Post
                  retirement benefits
              
              
              (27
              )
              
              (139
              )Unrealized
                  gain on securities available for sale
              
              
              (303
              )
              
              —Total
                  deferred tax liabilities
              
              
              (330
              )
              
              (139
              )Net
                  deferred tax asset
              
              $
              698
              
              $
              1,889
 
 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, 2007 and 2006.
  F-18
  In
        July
        2006, the Financial Accounting Standards Board (“FASB”) issued FASB
        Interpretation (“FIN”) No. 48, *Accounting
        for Uncertainty in Income Taxes* .
        This
        Interpretation requires an entity to analyze each tax position taken in its
        tax
        returns and determine the likelihood that that position will be realized.
        Only
        tax positions that are “more-likely-than-not” to be realized can be recognized
        in an entity’s financial statements. For tax positions that do not meet this
        recognition threshold, an entity will record an unrecognized tax benefit
        for the
        difference between the position taken on the tax return and the amount
        recognized in the financial statements. The Company adopted this Interpretation
        on January 1, 2007. The Company does not have any unrecognized tax benefits
        at
        December 31, 2007 or during the year ended December 31, 2007. No unrecognized
        tax benefits are expected to arise within the next twelve months.
 
 **(10)**
              **Other
                  Non-****I****nterest
                  Expenses**
 
 The
        major
        components of other non-interest expenses are as follows for the years ended
        December 31:
 
 **2007**
              
              **2006**
              
              **2005**(In
                  thousands)Stationery
                  and supplies
              
              $
              254
              
              $
              293
              
              $
              237Advertising
                  expense
              
              
              278
              
              
              227
              
              
              194Director
                  expenses
              
              
              261
              
              
              294
              
              
              286ATM
                  and credit card processing fees
              
              
              539
              
              
              622
              
              
              581Professional
                  services
              
              
              721
              
              
              623
              
              
              674Other
                  expenses
              
              
              1,300
              
              
              1,169
              
              
              1,295Other
                  non-interest expenses
              
              $
              3,353
              
              $
              3,228
              
              $
              3,267
 
 **(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 OCC 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, 2007 and 2006, the Bank 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-19
  The
        following is a summary of the actual capital amounts and ratios as of
        December 31, 2007 and 2006 for the Bank compared to the required ratios for
        minimum capital adequacy and for classification as
        well-capitalized:
 
 **Required
                  Ratios****Minimum**
              
              **Classification****Actual**
              
              **capital**
              
              **as
                  well****Amount**
              
              **Ratio**
              
              **adequacy**
              
              **capitalized**(Dollars
                  in thousands)December
                  31, 2007:Leverage
                  (Tier 1) capital
              
              $
              42,852
              
              
              11.1
              %
              
              4.0
              %
              
              5.0
              %Risk-based
                  capital:Tier
                  1
              
              
              42,852
              
              
              16.8
              
              
              4.0
              
              
              6.0Total
              
              
              46,035
              
              
              18.1
              
              
              8.0
              
              
              10.0December
                  31, 2006:Leverage
                  (Tier 1) capital
              
              $
              42,477
              
              
              10.7
              %
              
              4.0
              %
              
              5.0
              %Risk-based
                  capital:Tier
                  1
              
              
              42,477
              
              
              16.2
              
              
              4.0
              
              
              6.0Total
              
              
              45,756
              
              
              17.5
              
              
              8.0
              
              
              10.0
  **(12)**
              **Stockholders’
                  Equity**
  ***Dividend
        Restrictions***
  Dividends
        paid by the Bank are the primary source of funds available to the 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 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 available for dividends at December 31, 2007 totaled
        $4,652,000.
  ***Stock
        Repurchase Plan***
  In
        April
        2006, the Board of Directors approved a Stock Repurchase Program under which
        the
        company could repurchase up to 100,000 shares of outstanding stock. The Board
        of
        Directors approved an increase in the number of shares to 150,000 in July
        2006.
        In March 2007 an additional 50,000 shares were authorized for a total of
        200,000
        under this program. During 2007 and 2006, 71,027 shares and 128,973 shares
        were
        purchased under this program. No shares remain authorized to be
        repurchased.
  **(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 unrecognized
        deferred costs of the Company’s defined benefit pension plan, other
        postretirement benefits plan, and the supplemental retirement plans. The
        Company
        has reported its comprehensive (loss) income for 2007, 2006, and 2005 in
        the
        consolidated statements of changes in stockholders’ equity.
  The
        Company’s other comprehensive income (loss) consisted of the following
        components for the years ended December 31:
  **2007**
              
              **2006**
              
              **2005**(In
                  thousands)Net
                  unrealized holding gains (losses) arising during the year, net
                  of taxes
                  (benefit) of $670 in 2007, ($78) in 2006, and ($502) in
                  2005
              
              $
              1,005
              
              $
              (117
              )
              $
              (744
              )Reclassification
                  adjustment for net realized losses (gains) included in income,
                  net of
                  taxes (benefit) of ($19) in 2007, ($1) in 2006, and $2 in
                  2005
              
              
              29
              
              
              3
              
              
              (4
              )Amortization
                  of pension and post retirement liabilities’ gains and losses, net of taxes
                  of $502 in 2007
              
              
              753
              
              
              —
              
              
              —Minimum
                  pension liability adjustment, net of taxes $103 in 2005
              
              
              —
              
              
              —
              
              
              (155
              )Other
                  comprehensive income (loss)
              
              $
              1,787
              
              $
              (114
              )
              $
              (903
              )
 
 F-20
  At
        December 31, 2007 and 2006, the components of accumulated other comprehensive
        loss are as follows:
 
 **2007**
              
              **2006**(In
                  thousands)Supplemental
                  executive retirement plan, net of taxes of $93 in 2007 and $232
                  in
                  2006
              
              $
              (139
              )
              $
              (348
              )Postretirement
                  benefits, net of tax benefit of $27 in 2007 and $139 in
                  2006
              
              
              40
              
              
              209Defined
                  benefit pension liability, net of taxes of $935 in 2007 and $1,410
                  in
                  2006
              
              
              (1,402
              )
              
              (2,115
              )Net
                  unrealized holding gains (losses), net of taxes (benefit) of $303
                  in 2007
                  and $(386) in 2006
              
              
              455
              
              
              (579
              )Accumulated
                  other comprehensive loss
              
              $
              (1,046
              )
              $
              (2,833
              )
  **(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:
 
 **2007**
              
              **2006**(In
                  thousands)Directors
              
              $
              2,151
              
              $
              1,048Executive
                  officers (nondirectors)
              
              
              533
              
              
              545$
              2,684
              
              $
              1,593
 
 During
        2007, total advances to these directors and officers were $1,516,000 and
        total
        payments made on these loans were $425,000. These directors and officers
        had
        unused lines of credit with the Company of $450,000 and $919,000 at
        December 31, 2007 and 2006, respectively.
  **(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. 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. The plan is 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, 2007 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.
  F-21
  The
        Company expects to contribute $506,000 to its pension plan and $98,000 to
        its
        other postretirement benefit plan in 2008. Benefits, which reflect estimated
        future employee service, are expected to be paid as follows:
  **Pension**
                **benefit**
              
              **Postretirement**
                **benefit**(In
                  thousands)2008
              
              
              $
              364
              
              $
              1502009
              
              
              
              403
              
              
              1572010
              
              
              
              436
              
              
              1702011
              
              
              
              577
              
              
              1932012
              
              
              
              615
              
              
              196Years
                  2013-2017
              
              
              
              4,135
              
              
              1,243
 
 The
        following is a summary of changes in the benefit obligations and plan assets
        for
        the pension plan as of a September 30 measurement date and the other
        postretirement benefit plan as of a December 31 measurement date, together
        with
        a reconciliation of each plan’s funded status to the amounts recognized in the
        consolidated balance sheets:
 
 **Obligations
        and Funded Status**
  **Pension
                  benefit**
              
              **Postretirement
                  benefit****For
                  the year ended**
              
              **2007**
              
              **2006**
              
              **2007**
              
              **2006**(In
                  thousands)Change
                  in benefit obligationBeginning
                  of year
              
              $
              9,187
              
              $
              8,290
              
              $
              2,751
              
              $
              3,190Service
                  cost
              
              
              418
              
              
              437
              
              
              143
              
              
              174Interest
                  cost
              
              
              521
              
              
              474
              
              
              156
              
              
              169Actuarial
                  (gain) loss
              
              
              (616
              )
              
              234
              
              
              238
              
              
              (741
              )Benefits
                  paid
              
              
              (374
              )
              
              (248
              )
              
              (63
              )
              
              (59
              )Contributions
                  by plan participants
              
              
              —
              
              
              —
              
              
              21
              
              
              18End
                  of year
              
              
              9,136
              
              
              9,187
              
              
              3,246
              
              
              2,751Changes
                  in fair value of plan assets:Beginning
                  of year
              
              
              5,877
              
              
              5,382
              
              
              —
              
              
              —Actual
                  return on plan assets
              
              
              804
              
              
              286
              
              
              —
              
              
              —Employer
                  contributions
              
              
              504
              
              
              457
              
              
              42
              
              
              41Contributions
                  by plan participants
              
              
              —
              
              
              —
              
              
              21
              
              
              18Benefits
                  paid
              
              
              (374
              )
              
              (248
              )
              
              (63
              )
              
              (59
              )End
                  of year
              
              
              6,811
              
              
              5,877
              
              
              —
              
              
              —Unfunded
                  status at end of year, recognized in Other liabilites on the balance
                  sheet
              
              $
              (2,325
              )
              $
              (3,310
              )
              $
              (3,246
              )
              $
              (2,751
              )Amounts
                  recognized in accumulated other comprehensive loss consists
                  of:Unrecognized
                  actuarial (gain) loss
              
              $
              2,175
              
              $
              3,338
              
              $
              (557
              )
              $
              (321
              )Unrecognized
                  prior service cost
              
              
              162
              
              
              187
              
              
              625
              
              
              669Net
                  amount recognized
              
              $
              2,337
              
              $
              3,525
              
              $
              68
              
              $
              348
 
 The
        accumulated benefit obligation for the pension plan was $7,230,000 and
        $7,147,000 at September 30, 2007 and 2006, respectively.
  F-22
  The
        components of the net periodic benefit cost for these plans were as
        follows:
 
 **Pension
                  benefit**
              
              **Postretirement
                  benefit****For
                  the year ended December 31,**
              
              **2007**
              
              **2006**
              
              **2005**
              
              **2007**
              
              **2006**
              
              **2005**(In
                  thousands)Net
                  periodic benefit cost:Service
                  cost
              
              $
              418
              
              $
              437
              
              $
              298
              
              $
              143
              
              $
              174
              
              $
              166Interest
                  cost
              
              
              520
              
              
              474
              
              
              408
              
              
              156
              
              
              169
              
              
              176Expected
                  return on plan assets
              
              
              (430
              )
              
              (402
              )
              
              (366
              )
              
              —
              
              
              —
              
              
              —Amortization
                  of unrecognized transition (obligation) asset
              
              
              —
              
              
              (2
              )
              
              (4
              )
              
              —
              
              
              —
              
              
              —Amortization
                  of prior service cost
              
              
              25
              
              
              25
              
              
              25
              
              
              (45
              )
              
              (45
              )
              
              (45
              )Recognized
                  net actuarial loss
              
              
              172
              
              
              196
              
              
              134
              
              
              2
              
              
              39
              
              
              53Net
                  amount recognized
              
              $
              705
              
              $
              728
              
              $
              495
              
              $
              256
              
              $
              337
              
              $
              350
 
 The
        estimated net loss and prior service cost for the defined benefit pension
        plans
        that will be amortized from accumulated other comprehensive loss into net
        periodic benefit cost over the next fiscal year are $90,000 and $25,000,
        respectively. The estimated prior service cost for the postretirement plan
        that
        will be amortized from accumulated other comprehensive loss into net periodic
        benefit cost over the next fiscal year is $45,000.
 
 Assumptions
        used to determine benefit obligations for the pension plan as of a
        September 30 measurement date and for the other postretirement benefits
        plan as of a December 31 measurement date were as follows:
 
 **Pension
                  benefits**
              
              **Postretirement
                  benefits****2007**
              
              **2006**
              
              **2007**
              
              **2006**Discount
                  rate
              
              
              6.25
              %
              
              5.65
              %
              
              5.75
              %
              
              5.75
              %Rate
                  of compensation increase
              
              
              5.00
              
              
              5.00
              
              
              —
              
              
              —
 
 Assumptions
        used to determine net periodic benefit cost were as follows:
 
 **Pension
                  benefits**
              
              **Postretirement
                  benefits****2007**
              
              **2006**
              
              **2007**
              
              **2006**Discount
                  rate
              
              
              6.25
              %
              
              5.65
              %
              
              5.75
              %
              
              5.35
              %Expected
                  long-term rate of return on plan assets
              
              
              7.50
              
              
              7.50
              
              
              —
              
              
              —Rate
                  of compensation increase
              
              
              5.00
              
              
              5.00
              
              
              —
              
              
              —
 
 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.
  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, 2007 was 7.0%, declining gradually to 5.0% in 2010 and
        remaining at that level 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, 2007 was 6.0%,
        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, 2007 by
        approximately $597,000 and the net periodic benefit cost for the year by
        approximately $71,000; a one percentage point decrease would decrease the
        benefit obligation and benefit cost by approximately $462,000 and $54,000,
        respectively.
  The
        Company’s pension plan asset allocation at September 30, 2007 and 2006, by asset
        category is as follows:
 
 **2007**
              
              **2006**Asset
                  category:Equity
                  securities
              
              
              64
              %
              
              60
              %Debt
                  securities
              
              
              35
              
              
              31Other
              
              
              1
              
              
              9Total
              
              
              100
              %
              
              100
              %
  F-23
  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, 2007 are consistent with the table
        above.*
 
 ***Directors
        Survival Insurance***
  The
        Company maintains a separate insurance program for Directors not insurable
        under
        the postretirement plan. The benefits accrued under this plan totaled $244,000
        at December 31, 2007 and $295,000 at December 31, 2006 and are unfunded.
        The
        Company recorded an expense of $24,000, $22,000 and $58,000 relating to this
        plan during the years ended December 31, 2007, 2006 and 2005
        respectively.
 
 ***Bonus*** **Plan**
  The
        Company maintains a program for full time employees. The benefits accrued
        under
        this plan totaled $50,000 at December 31, 2007 and $50,000 at December 31,
        2006
        and are unfunded. The Company recorded an expense of $622,000, $582,000 and
        $633,000 relating to this plan during the years ended December 31, 2007,
        2006
        and 2005 respectively.
 
 ***Tax-Deferred
        Savings Plan***
  The
        Company maintains a qualified 401(k) plan for all employees, which permits
        tax-deferred employee contributions up to the greater of 75% of salary or
        the
        maximum allowed by law 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 $150,000, $145,000 and $161,000 in 2007, 2006 and 2005
        respectively.
 
 ***Supplemental
        Executive Retirement Plan***
  In
        2004,
        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 $1,131,000 at December 31, 2007 and $1,325,000 at
        December 31, 2006, and are unfunded. The Company recorded an expense of
        $191,000, $185,000 and $410,000 relating to this plan during the years ended
        December 31, 2007, 2006 and 2005 respectively.
 
 ***Director
        Retirement Plan***
  In
        2004,
        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 $635,000 and $563,000 at December 31, 2007 and 2006
        respectively, and are unfunded. The Company recorded an expense of $104,000,
        $224,000 and $152,000 relating to this plan during the years ended December
        31,
        2007, 2006 and 2005 respectively.
 
 F-24
  **(16)**
              **Commitments
                  and Contingent Liabilities**
 
 ***Legal
        Proceedings***
  The
        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:
 
 **2007**
              
              **2006**(In
                  thousands)Loan
                  origination commitments and unused lines of credit:Mortgage
                  loans
              
              $
              12,740
              
              $
              9,346Commercial
                  loans
              
              
              14,545
              
              
              12,900Home
                  equity lines
              
              
              10,938
              
              
              12,383Other
                  revolving credit
              
              
              2,563
              
              
              3,43240,786
              
              
              38,061Standby
                  letters of credit
              
              
              1,753
              
              
              1,175$
              42,539
              
              $
              39,236
 
 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 liens 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.
  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 $1,753,000
        and
        $1,175,000 at December 31, 2007 and 2006, 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, 2007 and 2006 was not
        significant.
  F-25
  **(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:
 
 **2007**
              
              **2006****Net**
              
              
              
              **Net****carrying**
              
              **Estimated**
              
              **carrying**
              
              **Estimated****amount**
              
              **fair
                  value**
              
              **amount**
              
              **fair
                  value**(In
                  thousands)
              
              (In
                  thousands)Financial
                  assets:Cash
                  and cash equivalents
              
              $
              10,428
              
              $
              10,428
              
              $
              12,270
              
              $
              12,270Securities
                  available for sale
              
              
              92,064
              
              
              92,064
              
              
              99,788
              
              
              99,788Securities
                  held to maturity
              
              
              6,320
              
              
              6,377
              
              
              9,445
              
              
              9,570Loans,
                  net
              
              
              249,633
              
              
              250,554
              
              
              247,244
              
              
              247,759Accrued
                  interest receivable
              
              
              2,119
              
              
              2,119
              
              
              2,441
              
              
              2,441FHLB
                  stock
              
              
              2,998
              
              
              2,998
              
              
              2,296
              
              
              2,296Financial
                  liabilities:Demand
                  deposits (non-interest-bearing)
              
              
              62,143
              
              
              62,143
              
              
              64,974
              
              
              64,974Interest-bearing
                  deposits
              
              
              237,099
              
              
              236,764
              
              
              260,099
              
              
              259,575Short-term
                  debt
              
              
              5,509
              
              
              5,509
              
              
              903
              
              
              903Federal
                  Home Loan Bank borrowings
              
              
              30,000
              
              
              30,019
              
              
              20,000
              
              
              19,930Accrued
                  interest payable
              
              
              548
              
              
              548
              
              
              604
              
              
              604
 
 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.
  F-26
  ***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.
  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.
        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
        amounts
        at December 31, 2007 and 2006.
  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, 2007 and 2006, 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:
 
 **Balance
        Sheets**
 
 **December
                  31****2007**
              
              **2006**(In
                  thousands)**Assets**Cash
              
              $
              56
              
              $
              10Securities
                  available for sale
              
              
              977
              
              
              1,017Investment
                  in subsidiary
              
              
              41,662
              
              
              39,502Premises
                  and equipment, net
              
              
              1,127
              
              
              839Other
                  assets
              
              
              230
              
              
              4Total
                  Assets
              
              $
              44,052
              
              $
              41,372**Liablities
                  and Stockholders’ Equity**Liabilities
              
              $
              94
              
              $
              97Stockholders’
                  equity
              
              
              43,958
              
              
              41,275Total
                  Liabilities and Stockholders’ Equity
              
              $
              44,052
              
              $
              41,372
  F-27
  **Statements
        of Income**
 
 **Years
                  ended December 31****2007**
              
              **2006**
              
              **2005**(In
                  thousands)Dividend
                  income from subsidiary
              
              $
              4,175
              
              $
              4,787
              
              $
              1,800Dividend
                  income on securities available for sale
              
              
              34
              
              
              34
              
              
              29Rental
                  income from subsidiary
              
              
              —
              
              
              —
              
              
              235Recognized
                  loss on securities
              
              
              (29
              )
              
              —
              
              
              —Other
                  non-interest income
              
              
              2
              
              
              3
              
              
              114,182
              
              
              4,824
              
              
              2,075Occupancy
                  and equipment expenses
              
              
              120
              
              
              121
              
              
              116Other
                  non-interest expenses
              
              
              162
              
              
              131
              
              
              108282
              
              
              252
              
              
              224Income
                  before income taxes and undistributed income of subsidiary
              
              
              3,900
              
              
              4,572
              
              
              1,851Income
                  tax expense
              
              
              —
              
              
              —
              
              
              33Income
                  before undistributed income of subsidiary
              
              
              3,900
              
              
              4,572
              
              
              1,818Equity
                  in undistributed income of subsidiary
              
              
              375
              
              
              371
              
              
              3,907Net
                  Income
              
              $
              4,275
              
              $
              4,943
              
              $
              5,725
  **Statements
        of Cash Flows**
 
 **Years
                  ended December 31****2007**
              
              **2006**
              
              **2005**(In
                  thousands)**Operating
                  activities:**Net
                  income
              
              $
              4,275
              
              $
              4,943
              
              $
              5,725Equity
                  in undistributed income of subsidiary
              
              
              (375
              )
              
              (371
              )
              
              (3,907
              )Depreciation
                  and amortization
              
              
              62
              
              
              62
              
              
              62Net
                  security loss
              
              
              29
              
              
              —
              
              
              —Other
                  adjustments, net
              
              
              (229
              )
              
              —
              
              
              32Net
                  Cash Provided by Operating Activities
              
              
              3,762
              
              
              4,634
              
              
              1,912**Investing
                  activities:**Proceeds
                  from calls of securities available for sale
              
              
              13
              
              
              —
              
              
              3Purchase
                  of securities available for sale
              
              
              —
              
              
              —
              
              
              (170
              )Purchases
                  of premises and equipment
              
              
              (350
              )
              
              —
              
              
              —Cash
                  Provided (Used) by Investing Activities
              
              
              (337
              )
              
              —
              
              
              (167
              )**Financing
                  activities:**Purchases
                  of treasury stock
              
              
              (1,245
              )
              
              (2,614
              )
              
              —Cash
                  dividends paid
              
              
              (2,134
              )
              
              (2,098
              )
              
              (1,949
              )Net
                  Cash Used in Financing Activities
              
              
              (3,379
              )
              
              (4,712
              )
              
              (1,949
              )Net
                  (Decrease) Increase in Cash
              
              
              46
              
              
              (78
              )
              
              (204
              )Cash
                  at Beginning of Year
              
              
              10
              
              
              88
              
              
              292Cash
                  at End of Year
              
              $
              56
              
              $
              10
              
              $
              88
  F-28




**ITEM 9**
            **CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE**





On
      June
      14, 2006, the Company dismissed its independent accountants, KPMG, LLP and
      appointed Beard Miller Company LLP (BMC) as its new independent accountants,
      each effective immediately. The Company filed a Current Report on form 8K on
      June 16, 2006 in connection with this change.





**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, 2007. 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, 2007




**ITEM
      9B. OTHER INFORMATION**





Nothing
      to disclose.


28


**PART
      III**








**ITEM
      10.**  **DIRECTORS,
      EXECUTIVE OFFICERS**  **AND
      CORPORATE GOVERNANCE**





Certain
      portions of the information required by this Item will be included in the 2008
      Proxy Statement, which will be filed with the Securities and Exchange Commission
      within 120 days of the
      Company’s 2007 fiscal year end, in the Election of Directors section, the
      Management section, the Executive Compensation And Other Information section,
      and the corporate governance disclosures which sections is incorporated herein
      by reference.




**ITEM
      11.**  **EXECUTIVE
      COMPENSATION**





The
      information required by this Item will be included in the 2008 Proxy Statement
      in the Compensation of Directors and Executive Officer Compensation and Other
      Information section, and is incorporated herein by reference.




**ITEM
      12.**  **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS**





The
      information required by this Item will be included in the 2008 Proxy Statement
      in the Security Ownership of Certain Beneficial Owners and of Management
      section, and is incorporated herein by reference.




**ITEM
      13.**  **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**  **AND DIRECTOR INDEPENDENCE**





The
      information required by this Item will be included in the 2008 Proxy Statement
      in the Transactions with Management section, and is incorporated herein by
      reference.




**ITEM
      14.**  **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**





The
      information required by this Item will be included in the 2008 Proxy Statement
      in the Report of the Audit Committee section, and is incorporated herein by
      reference.


29


**PART
      IV**




**ITEM
      15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES**





(a)
                1.
            The
                consolidated financial statements and schedules of the Company and
                Bank
                are included in item 8 of Part II.(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
                Amended and Restated Bylaws of the Company (Incorporated by Reference
                to
                Exhibit 3.1 to From 8-K filed on December 31, 2007)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 Company31.1
            Section
                302 Certification of Chief Executive Officer31.2
            Section
                302 Certification of Chief Financial Officer32.1
            906
                certification of Chief Executive Officer32.2
            906
                certification of Chief Financial Officer99.1
            Written
                agreement between The First National Bank of Jeffersonville and the
                Office
                of the Comptroller of the Currency dated November 28, 2006 (Incorporated
                by Reference to Exhibit 99.1 to Form 8-K Current Report filed on
                November
                30, 2006).(b)
            Exhibits
                to this Form 10-K are attached or incorporated herein by
                reference.(c)
            Not
                applicable


30


**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 17, 2008
            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.




**SIGNATURE**
            
            **TITLE**
            
            **DATE**/s/
                Kenneth C. Klein
            
            *Chairman-Director*
            
            March
                17, 2008Kenneth
                C. Klein/s/
                Raymond Walter
            
            *Chief
                Executive Officer*
            
            March
                17, 2008Raymond
                Walter
            
            *President-Director*/s/
                John K. Gempler
            
            *Secretary-Director*
            
            March
                17, 2008John
                K. Gempler/s/
                John W. Galligan
            
            Director
            
            March
                17, 2008John
                W. Galligan/s/
                Douglas A. Heinle
            
            Director
            
            March
                17, 2008Douglas
                A. Heinle/s/
                Donald L. Knack
            
            Director
            
            March
                17, 2008Donald
                L. Knack/s/
                James F. Roche
            
            *Director*
            
            March
                17, 2008James
                F. Roche/s/
                Edward T. Sykes
            
            *Director*
            
            March
                17, 2008Edward
                T. Sykes/s/
                Earle A. Wilde
            
            *Director*
            
            March
                17, 2008Earle
                A. Wilde




31