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, 2009





OR





 ̈
            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 Rte. 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   ̈
              No  x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.


Yes   ̈
              No  x


Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes  x
              No   ̈





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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes   ̈
              No   ̈





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   ̈
              Accelerated
      filer   ̈
              Non-accelerated
      filer   ̈
              Smaller
      reporting company  x





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


Yes   ̈
              No  x


As of
June 30, 2009 the aggregate market value of the registrant’s common stock held
by non-affiliates of the registrant was $46,481,000 based on the closing price
of $11.90 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 23, 2010Common
      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 April 27, 2010
      (Proxy Statement)
                  
                  Part
      III Items 10, 11, 12, 13 and
14





JEFFERSONVILLE
BANCORP INDEX TO FORM 10-K




PagePART
      I
                              
                              
                              3Item
      1.
                              Business
                              
                              3Item
      1A.
                              Risk
      Factors
                              
                              8Item
      1B.
                              Unresolved
      Staff Comments
                              
                              10Item
      2.
                              Properties
                              
                              10Item
      3.
                              Legal
      Proceedings
                              
                              10PART
      II
                              
                              
                              11Item
      5.
                              Market
      for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                              
                              11Item
      6.
                              Selected
      Financial Data
                              
                              12Item
      7.
                              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                              
                              13Item
      7A.
                              Quantitative
      and Qualitative Disclosures about Market Risk
                              
                              26Item
      8.
                              Financial
      Statements and Supplementary Data
                              
                              27Item
      9.
                              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                              
                              28Item
      9A.
                              Controls
      and Procedures
                              
                              28Item
      9B.
                              Other
      Information
                              
                              28PART
      III
                              
                              
                              29Item
      10.
                              Directors,
      Executive Officers and Corporate Governance
                              
                              29Item
      11.
                              Executive
      Compensation
                              
                              29Item
      12.
                              Security
      Ownership of Certain Beneficial Owners and Management, and Related
      Stockholder Matters
                              
                              29Item
      13.
                              Certain
      Relationships and Related Transactions and Director
      Independence
                              
                              29Item
      14.
                              Principal
      Accountant and Fees and Services
                              
                              29PART
      IV
                              
                              
                              30Item
      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, 2009 and 2008, the Company had total assets of $422.7 million and
$398.6 million, securities available for sale of $91.3 million and $85.8
million, securities held to maturity of $8.2 million and $5.8 million, and net
loans receivable of $275.4 million and $264.4 million, respectively. At December
31, 2009 and 2008, total deposits were $352.2 million and $296.7 million,
respectively. At December 31, 2009 and 2008, stockholders’ equity was $44.7
million and $42.7 million, respectively.




The Bank
is based in Sullivan County, New York. In addition to its main office and
operations center in Jeffersonville, the Bank had 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 has opened a branch in Bloomingburg in January 2010 and plans to open an
additional branch in White Lake by mid-year 2010. The Bank is a full service
banking institution employing approximately 129 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 John A. Russell, 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,
2009, 2008 and 2007.




Loan
Products. The Company originates residential and commercial real estate
loans, as well as commercial, consumer and agricultural loans, to borrowers
primarily 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 2009 versus 2008 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.


3




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.




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
installment loans. Most of these loans are originated at the branch level. This
delivery mechanism is supported by an automated loan platform delivery system.
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 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 banking 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. The In addition, as to
certain matters, the Bank is subject to regulation by the Federal Reserve and
the Federal Deposit Insurance Corporation (“FDIC”) also has authority to conduct
special examinations of insured depository institutions, such as the Bank, as
deposit insurer.




Each of
the federal banking agencies, including the Federal Reserve and the OCC, has
issued substantially similar risk-based and leverage capital guidelines
applicable to the banking organizations they supervise. The guidelines apply on
a consolidated basis and require bank holding companies (on a consolidated
basis) and banks to maintain a minimum ratio of Tier 1 capital to total average
assets (or “leverage ratio”) of 3%. For those banks that do not have the highest
regulatory ratings, the minimum Tier 1 leverage ratio is 4%. The capital
adequacy guidelines also require bank holding companies and banks 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%. Under the
Federal Reserve guidelines, certain small bank holding companies with pro forma
consolidated assets of less than $500 million, such as the Company, are not
required to follow the risk-based and leverage capital guidelines. As of
December 31, 2009, the Bank’s leverage ratio was
10.5%, its ratio of Tier 1 capital to risk-weighted assets was15.4%, and
its ratio of qualifying total capital to risk-weighted assets was16.6%. The
federal banking agencies may set higher minimum capital requirements for bank
holding companies and banks whose circumstances warrant it, such as companies or
banks anticipating significant growth or facing unusual risks. The Federal
Reserve has not advised the Bank of any special capital requirement applicable
to it.


4




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. 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. An acceptable capital
plan would likely include, among other actions, a restriction on the Company’s
ability to pay dividends to its stockholders.




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 at the time the bank
became undercapitalized 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 and
managerial strength, and to commit financial resources to support its subsidiary
banks in times of financial stress. Any capital loans made by a bank holding
company to a subsidiary bank are subordinate to the claims of the bank’s
depositors and to certain other indebtedness of the subsidiary bank. In the
event of the bankruptcy of a bank holding company, any commitment by the bank
holding company to a federal banking regulatory agency to maintain the capital
of a subsidiary bank would be assumed by the bankruptcy trustee and would be
entitled to priority of payment.




The Bank
also is subject to regulatory limits on its ability to pay dividends to the
Company. By statue, 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, 2009, the Bank had approximately $1.8 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”) gave the FDIC increased flexibility
in assessing premiums on insured depository institutions including the Bank, to
pay for deposit insurance and in managing its deposit insurance reserves. The
FDIC has adopted regulations to implement this. Under these regulations, all
insured depository institutions are placed into one of four risk categories. As
of January 1, 2009, all insured institutions paid a base rate annual assessment
of 12 to 50 basis points (a basis point is $0.01 per $100 of assessable
deposits) for the first quarter of 2009 based on the risk of loss to the
Depository Insurance Fund (“DIF”) posed by the particular institution. This is a
substantial increase from the base rate assessment of 2 to 43 basis points that
was in effect during 2008. The increase in the base rate assessment from 2008 to
2009 is due to the financial crises affecting the banking system and financial
markets. On February 27, 2009, the FDIC adopted a final rule modifying the
risk-based assessment system and setting initial base assessment rates at 12 to
45 basis points beginning April 1, 2009. For Risk Category Iinstitutions
such as the Bank generally, those institutions with less than $10 billion in
assets and those with $10 billion or more in assets that do not have long-term
debt issuer ratings, the base assessment rate is calculated using a combination
of financial ratios and supervisory ratings (the financial ratios method). For
institutions that have a long-term public debt rating, the individual risk
assessment is based on its supervisory ratings and its debt rating. In the final
rule, the FDIC introduced a new financial ratio into the financial ratios method
(the adjusted brokered deposit ratio). The adjusted brokered deposit ratio
affects institutions whose brokered deposits are more than 10 percent of
domestic deposits and whose total assets are more than 40 percent greater than
they were four years previously. The adjusted brokered deposit ratio excludes
certain reciprocal deposits for institutions in Risk Category I. Brokered
deposits that consist of balances swept into an insured institution are included
in the adjusted brokered deposit ratio for all institutionsThe FDIC also
introduced three possible adjustments to an institution's initial base
assessment rate: (1) a decrease of up to five basis points for long-term
unsecured debt, including senior unsecured debt (other than debt guaranteed
under the Temporary Liquidity Guarantee Program) and subordinated debt and, for
small institutions, a portion of Tier 1 capital; (2) an increase not to exceed
50 percent of an institution's assessment rate before the increase for secured
liabilities in excess of 25 percent of domestic deposits; and (3) for non-Risk
Category I institutions, an increase not to exceed 10 basis points for brokered
deposits in excess of 10 percent of domestic deposits.These risk
adjustments can increase assessments from the base range of 12 to 45 basis
points to assessments in a range from 7 to 77.5 basis points. In addition, on
May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special
assessment on each insured depository institution's assets minus Tier 1 capital
as of June 30, 2009. The special assessment was collected on September 30, 2009.
Further, on November 12, 2009, the FDIC adopted a final rule imposing a
13-quarter prepayment of FDIC insurance premiums.  Estimated quarterly
assessments for the fourth quarter of 2009 through the fourth quarter of 2012
were due December 30, 2009.




On
October 1, 2009, the FDIC issued a final rule extending the Transaction Account
Guarantee (TAG) program that provides unlimited deposit insurance on funds
invested in noninterest-bearing transaction deposit accounts in excess of the
existing deposit insurance limit of $250,000. The rule extended the coverage
period from its original expiration date of December 31, 2009 to June 30, 2010.
The assessment surcharge for participating institutions was increased from $0.10
to $0.25 per $100 of deposits above the existing deposit insurance limit.
Participating banks were given the option to opt out of the extended coverage.
The Bank was a participant and opted to remain in the TAG
program.


5




The
Federal Deposit Insurance Act provides for additional assessments to be imposed
on insured depository institutions to pay for the cost of Financing Corporation
(“FICO”) funding. The FICO assessments are adjusted quarterly to reflect changes
in the assessment base of the DIF and do not vary depending upon a depository
institution’s capitalization or supervisory evaluation. During 2009, FDIC
assessments for purposes of funding FICO bond obligations ranged from an
annualized $0.0114 per $100 of deposits for the first quarter of 2009 to $0.0102
per $100 of deposits for the fourth quarter of 2009. The Bank paid
$32,810 of FICO assessments in 2009. For the first quarter of 2010, the
FICO assessment rate is $0.0106 per $100 of deposits. The Bank paid a total of
$800,000 in special and regular assessments during 2009, and $2.0 million in
prepayments for the three-year period ending December 31, 2012.




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, 2009, 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 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 market terms as well as 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, including recent rules regarding limitations of affiliate
marketing and implementation of programs to identify, detect and mitigate
certain identity theft red flags.




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
transactionsof
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
BHCAct,
which applies to the Company. The Company and the Bank have in place a Bank
Secrecy Act and USAPATRIOT
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.


6




Home
mortgage lenders, including banks, are 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 institutions 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 the
past two years, declining housing values have resulted in deteriorating economic
conditions across the U.S., resulting in significant write-downs in the values
of mortgage-backed securities and derivative securities by financial
institutions, government sponsored entities, and major commercial and investment
banks. This has led to decreased confidence in financial markets among
borrowers, lenders, and depositors as well as extreme volatility in the capital
and credit markets and the failure of some entities in the financial sector. The
Company is fortunate that the markets it serves have been impacted to a lesser
extent than many areas around the country.




In
response to the financial crises affecting the banking system and financial
markets, several federal programs were implemented to purchase assets from,
provide equity capital to, and guarantee the liquidity of, the
industry.




On
October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the “EESA”)
was signed into law. The EESA authorized the U.S. Treasury to, among other
things, purchase up to $700 billion of mortgages, mortgage-backed securities,
and certain other financial instruments from financial institutions for the
purpose of stabilizing and providing liquidity to the U.S. financial markets.
EESA initially increased the FDIC deposit insurance limit for most accounts from
$100,000 to $250,000 through December 31, 2009. On May 20, 2009, the FDIC
extended the $250,000 per depositor coverage through December 31,
2013.




On
October 14, 2008, the U.S. Treasury announced that pursuant to its authority
under the EESA it would purchase equity stakes in a wide variety of banks and
thrifts. Under this program, known as the Troubled Asset Relief Program Capital
Purchase Program (the “TARP Capital Purchase Program”), the U.S. Treasury made
$250 billion of capital available (from the $700 billion authorized by the EESA)
to U.S. financial institutions in the form of preferred stock. In conjunction
with the purchase of preferred stock, the U.S. Treasury received warrants to
purchase common stock with an aggregate market price equal to 15% of the
preferred investment. Participating financial institutions were required to
adopt the U.S. Treasury’s standards for executive compensation and corporate
governance for the period during which the Treasury holds equity issued under
the TARP Capital Purchase Program, as well as the more stringent executive
compensation limits enacted as part of the American Recovery and Reinvestment
Act of 2009 (the “ARRA” or “Stimulus Bill”), which was signed into law on
February 17, 2009. The Company chose not to participate in the TARP Capital
Purchase Program.





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 (dollars in thousands):





Current
      Tax Expense
                    
                    2009
                    
                    
                    2008
                    
                    
                    2007Federal
                    
                    $
                    616
                    
                    
                    $
                    1,135
                    
                    
                    $
                    1,302State
                    
                    
                    57
                    
                    
                    
                    57
                    
                    
                    
                    43Benefit
      of loss carryback
                    
                    
                    (1,407
                    )
                    
                    
                    -
                    
                    
                    
                    -Deferred
      tax (benefit)
                    
                    
                    1,417
                    
                    
                    
                    (2,053
                    )
                    
                    
                    (76
                    )Total
      income tax expense
                    
                    $
                    683
                    
                    
                    $
                    (861
                    )
                    
                    $
                    1,269





For a
detailed discussion of income taxes please refer to note 10 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 40 branches
of commercial banks, savings banks, savings and loan associations and other
financial organizations.


7


With
respect to most of the services that the Bank offers, there is competition from
financial institutions other than commercial banks. Money market funds and
internet banks 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, 2009, there were 129 persons employed by the Bank.





ITEM
      1A.
            RISK
      FACTORS





Although
our common stock is traded on the NASDAQ Small Cap Market, the volume of trading
in our 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 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 plus the previous two years. The OCC has discretion to prohibit any
otherwise permitted capital distribution on general safety and soundness
grounds. As of December 31, 2009, approximately $1.8 million was available for
the payment of dividends without prior OCC approval.




Moreover,
the laws of the State of New York, where the Company is incorporated, require
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 to 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. The Federal Deposit Insurance
Corporation (“FDIC”) also has authority to conduct special examinations of
insured depository institutions, such as the Bank, a deposit insurer. 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.


8





The
Company’s profitability depends significantly on local and national economic
conditions.





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 compromise our ability to collect loans, could
reduce the demand for loans, and otherwise could negatively affect our
performance and financial condition. A significant decline in general economic
conditions, caused by inflation, recession, acts of terrorism, outbreak of
hostilities or other international or domestic occurrences, unemployment,
changes in securities markets or other factors could impact these local economic
conditions and, in turn, have a material adverse effect on the Company’s
financial condition and results of operations.




2009
continued to be impacted by significant disruption and volatility in the
financial and capital marketplaces that began in 2008. This turbulence has been
attributable to a variety of factors, including the fallout associated with the
subprime mortgage market. One aspect of this fallout has been significant
deterioration in the mortgage activity of the secondary market. The disruptions
have been exacerbated by the continued decline of the real estate and housing
market along with significant mortgage loan related losses incurred by many
lending institutions. The turmoil in the mortgage market has impacted the global
markets as well as the domestic markets and led to a significant credit and
liquidity crisis in many domestic markets during 2008 and 2009. These conditions
have had a negative impact on the financial industries centered in the metro New
York City [NYC] areas resulting in job losses. While Sullivan County is not
located in the metro NYC area, it is a benefactor of individuals who own second
homes in Sullivan County and tourists visiting Sullivan County. The
corresponding impact of reduced earnings among individuals who live in metro NYC
could have a negative impact on Sullivan County businesses.




As a
lender, we may be adversely affected by general economic weaknesses, and, in
particular, a sharp downturn in the housing industry in the states of New York
and Pennsylvania. A depressed economy has led to higher foreclosure rates and
the reduction in real estate values in Sullivan County. No assurance can be
given that these conditions will improve or will not worsen or that such
conditions will not result in an increase in delinquencies, causing a decrease
in our interest income, or continue to have an adverse impact on our loan loss
experience, causing an increase in our allowance for loan losses.





There
can be no assurance that recent government action will help stabilize the U.S.
financial system and will not have unintended adverse consequences.





In recent
periods, the U.S. government and various federal agencies and bank regulators
have taken steps to stabilize and stimulate the financial services industry.
Changes also have been made in tax policy for financial institutions. The
Emergency Economic Stabilization Act of 2008 (the “EESA”), was an initial
legislative response to the financial crises affecting the banking system and
financial markets and going concern threats to financial institutions. Pursuant
to the EESA, the U.S. Treasury was given the authority to, among other things,
purchase up to $700 billion of mortgages, mortgage-backed securities and certain
other financial instruments from financial institutions for the purpose of
stabilizing and providing liquidity to the U.S. financial markets. As an initial
program, the U.S. Treasury exercised its authority to purchase an aggregate of
$250 billion of capital instruments from financial entities throughout the
United States. Other government action, such as the Homeowner Affordability and
Stability Plan are intended to prevent mortgage defaults and foreclosures, which
may provide benefits to the economy as a whole, but may reduce the value of
certain mortgage loans or related mortgage-related securities investors such as
the Company may hold. There can be no assurance as to the actual impact that
these or other government actions will have on the financial markets, including
the extreme levels of volatility and limited credit availability currently being
experienced. The failure of the EESA and other measures to help stabilize the
financial markets and a continuation or worsening of current financial market
conditions could materially and adversely affect the Company’s business,
financial condition, results of operations, access to credit or the trading
price of its common stock.





Declining
residential and commercial real estate values could threaten the soundness and
collectability of the real estate loans in the Bank’s portfolio.





At
December 31, 2009, 65.2% of the total assets of the Company, or $275,419,000,
consisted of net loans. Of that amount, $244,336,000 or 88.7% of net total loans
were secured by residential or commercial real estate. Based on information from
the National Association of Realtors, the average residential real estate sales
price in its primary market area for the quarter ended December 31, 2009 has
fallen approximately 5.4% from the average residential real estate sales price
for the comparable quarter in 2008. See Management’s
Discussion and Analysis – Nonaccrual and Past Due Loans.





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.


9





Declining
tax revenues could threaten the soundness of the Bank’s investments in certain
securities.





The Bank
owns local non-rated municipal securities which are intended to be held until
maturity. At December 31, 2009, the carrying value of these investment
securities was $8,218,000. If declining economic activity and real estate values
result in significant reduced tax revenues to the municipal entities which
issued these securities, the entities could be forced to default on repayment of
the securities, having an adverse effect on the Bank’s financial
condition.





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.




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 ten branch locations and an operations center all within
Sullivan County. Our branches are located in Callicoon, Eldred, Liberty,
Livingston Manor, Loch Sheldrake, Monticello (two), 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. In January of 2010, the Bank opened its eleventh branch in
Bloomingburg in a building it purchased in 2009.




The
Company’s leases for Wal*Mart, Wurtsboro and Callicoon expire in 2014, 2010, and
2012 respectively. Renewal options exist at Wal*Mart for an additional 5 years
and for Callicoon, an additional 15 years. A lease for a twelfth branch in White
Lake was signed in 2009 for a term of 20 years beginning when the branch opens,
and it is expected to open mid year 2010. 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, 2009 (in thousands):





Premises
      and Equipment
                    
                    2009Land
                    
                    $
                    1,057Buildings
      and improvements
                    
                    
                    6,168Furniture
      and fixtures
                    
                    
                    226Equipment
                    
                    
                    4,32311,774Less
      accumulated depreciation and amortization
                    
                    
                    6,754Total
      premises and equipment, net
                    
                    $
                    5,020





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.


10


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. There are currently no market makers for the stock but the following
investment firms are known to handle Jeffersonville Bancorp stock transactions:
E*TRADE Securities, TD Ameritrade, Inc. and Stifel, Nicolaus & Company. 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.





CashSales
                            
                            
                            Sales
                            
                            
                            dividendsFor
      the Quarter Ended:
                            
                            low
                            
                            
                            high
                            
                            
                            paidDecember
      31, 2009
                            
                            $
                            9.00
                            
                            
                            $
                            10.03
                            
                            
                            $
                            0.13September
      30, 2009
                            
                            $
                            8.62
                            
                            
                            $
                            9.75
                            
                            
                            $
                            0.13June
      30, 2009
                            
                            $
                            8.56
                            
                            
                            $
                            9.75
                            
                            
                            $
                            0.13March
      31, 2009
                            
                            $
                            8.52
                            
                            
                            $
                            9.78
                            
                            
                            $
                            0.13December
      31, 2008
                            
                            $
                            7.50
                            
                            
                            $
                            11.00
                            
                            
                            $
                            0.13September
      30, 2008
                            
                            $
                            10.11
                            
                            
                            $
                            12.00
                            
                            
                            $
                            0.13June
      30, 2008
                            
                            $
                            11.00
                            
                            
                            $
                            14.35
                            
                            
                            $
                            0.13March
      31, 2008
                            
                            $
                            11.00
                            
                            
                            $
                            14.00
                            
                            
                            $
                            0.13





Number of Holders
of Record. At the
close of business on March1, 2010, the Company had 1,379stockholders 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.





COMPARATIVE
STOCK PERFORMANCE GRAPH





The
following graph sets forth the cumulative total shareholder return on the
Company’s Common Stock for the last five fiscal years. Total shareholder return
is measured by dividing total dividends (assuming dividend reinvestment) for the
measurement period plus share price change for a period by the share price at
the beginning of the measurement period. The Company’s cumulative shareholder
return over a five-year period is based on an investment of $100 on December 31,
2004 and the reinvestment of all dividends since that date to December 31, 2009
and is compared to the cumulative total return of the NASDAQ - Composite Index
and the SNL Bank $250m - $500m Index. The data used was obtained from published
sources and is believed to be accurate.




11




COMPARISON OF FIVE-YEAR CUMULATIVE
RETURN FISCAL YEAR ENDED DECEMBER 31, 2009








Period Ending December 31,Index:
                    
                    2004
                    
                    
                    2005
                    
                    
                    2006
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2009Jeffersonville
      Bancorp
                    
                    
                    100.00
                    
                    
                    
                    126.54
                    
                    
                    
                    102.48
                    
                    
                    
                    77.93
                    
                    
                    
                    55.96
                    
                    
                    
                    58.62NASDAQ
      Composite Index
                    
                    
                    100.00
                    
                    
                    
                    101.37
                    
                    
                    
                    111.03
                    
                    
                    
                    121.92
                    
                    
                    
                    72.49
                    
                    
                    
                    104.31SNL
      Bank $250M-$500M Index
                    
                    
                    100.00
                    
                    
                    
                    106.17
                    
                    
                    
                    110.93
                    
                    
                    
                    90.16
                    
                    
                    
                    51.49
                    
                    
                    
                    47.66





ITEM
      6.
            SELECTED
      FINANCIAL DATA





FIVE-YEAR
SUMMARY


(In
thousands, except share and per share data)





December 31,
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005Results
      of OperationsInterest
      income
                  
                  $
                  21,827
                  
                  
                  $
                  22,953
                  
                  
                  $
                  23,479
                  
                  
                  $
                  23,881
                  
                  
                  $
                  22,170Interest
      expense
                  
                  
                  5,847
                  
                  
                  
                  7,228
                  
                  
                  
                  8,615
                  
                  
                  
                  8,211
                  
                  
                  
                  5,402Net
      interest income
                  
                  
                  15,980
                  
                  
                  
                  15,725
                  
                  
                  
                  14,864
                  
                  
                  
                  15,670
                  
                  
                  
                  16,768Provision
      (credit) for loan losses
                  
                  
                  1,300
                  
                  
                  
                  265
                  
                  
                  
                  (370
                  )
                  
                  
                  90
                  
                  
                  
                  180Net
      income
                  
                  
                  3,084
                  
                  
                  
                  2,702
                  
                  
                  
                  4,275
                  
                  
                  
                  4,943
                  
                  
                  
                  5,725Financial
      ConditionTotal
      assets
                  
                  $
                  422,684
                  
                  
                  $
                  398,567
                  
                  
                  $
                  387,430
                  
                  
                  $
                  397,291
                  
                  
                  $
                  387,343Total
      deposits
                  
                  
                  352,205
                  
                  
                  
                  296,724
                  
                  
                  
                  299,242
                  
                  
                  
                  325,073
                  
                  
                  
                  312,096Gross
      loans
                  
                  
                  279,407
                  
                  
                  
                  267,563
                  
                  
                  
                  252,985
                  
                  
                  
                  250,760
                  
                  
                  
                  244,261Stockholders’
      equity
                  
                  
                  44,663
                  
                  
                  
                  42,662
                  
                  
                  
                  43,958
                  
                  
                  
                  41,275
                  
                  
                  
                  42,519Average
      BalancesTotal
      assets
                  
                  $
                  415,678
                  
                  
                  $
                  393,964
                  
                  
                  $
                  389,384
                  
                  
                  $
                  400,535
                  
                  
                  $
                  374,413Total
      deposits
                  
                  
                  327,257
                  
                  
                  
                  300,984
                  
                  
                  
                  315,941
                  
                  
                  
                  326,136
                  
                  
                  
                  297,643Gross
      loans
                  
                  
                  270,361
                  
                  
                  
                  259,713
                  
                  
                  
                  250,277
                  
                  
                  
                  246,890
                  
                  
                  
                  238,993Stockholders’
      equity
                  
                  
                  43,755
                  
                  
                  
                  43,929
                  
                  
                  
                  42,249
                  
                  
                  
                  42,272
                  
                  
                  
                  41,350Financial
      RatiosNet
      income to average total assets
                  
                  
                  0.74
                  %
                  
                  
                  0.69
                  %
                  
                  
                  1.10
                  %
                  
                  
                  1.23
                  %
                  
                  
                  1.53
                  %Net
      income to average stockholders’ equity
                  
                  
                  7.05
                  %
                  
                  
                  6.15
                  %
                  
                  
                  10.12
                  %
                  
                  
                  11.69
                  %
                  
                  
                  13.85
                  %Average
      stockholders’ equity to average total assets
                  
                  
                  10.53
                  %
                  
                  
                  11.15
                  %
                  
                  
                  10.85
                  %
                  
                  
                  10.55
                  %
                  
                  
                  11.04
                  %Share
      and Per Share DataBasic
      earnings per share
                  
                  $
                  0.73
                  
                  
                  $
                  0.64
                  
                  
                  $
                  1.00
                  
                  
                  $
                  1.13
                  
                  
                  $
                  1.29Dividends
      per share
                  
                  $
                  0.52
                  
                  
                  $
                  0.52
                  
                  
                  $
                  0.50
                  
                  
                  $
                  0.48
                  
                  
                  $
                  0.44Dividend
      payout ratio
                  
                  
                  71.40
                  %
                  
                  
                  81.49
                  %
                  
                  
                  49.92
                  %
                  
                  
                  42.44
                  %
                  
                  
                  34.04
                  %Book
      value at year end
                  
                  $
                  10.55
                  
                  
                  $
                  10.08
                  
                  
                  $
                  10.38
                  
                  
                  $
                  9.59
                  
                  
                  $
                  9.59Total
      dividends paid
                  
                  $
                  2,202,000
                  
                  
                  $
                  2,202,000
                  
                  
                  $
                  2,134,000
                  
                  
                  $
                  2,098,000
                  
                  
                  $
                  1,949,000Average
      number of shares outstanding
                  
                  
                  4,234,321
                  
                  
                  
                  4,234,321
                  
                  
                  
                  4,266,397
                  
                  
                  
                  4,376,494
                  
                  
                  
                  4,434,321Shares
      outstanding at year end
                  
                  
                  4,234,321
                  
                  
                  
                  4,234,321
                  
                  
                  
                  4,234,321
                  
                  
                  
                  4,305,348
                  
                  
                  
                  4,434,321




12





SUMMARY
OF QUARTERLY RESULTS OF OPERATIONS


(Dollars
in thousands, except per share data)





December 31,
                
                
                September 30,
                
                
                June 30,
                
                
                March 31,
                
                
                December 31,
                
                
                September 30,
                
                
                June 30,
                
                
                March 31,2009
                
                
                2009
                
                
                2009
                
                
                2009
                
                
                2008(1)
                
                
                2008(1)
                
                
                2008
                
                
                2008Interest
      income
                
                $
                5,482
                
                
                $
                5,565
                
                
                $
                5,407
                
                
                $
                5,373
                
                
                $
                5,642
                
                
                $
                5,757
                
                
                $
                5,715
                
                
                $
                5,839Interest
      expense
                
                
                (1,277
                )
                
                
                (1,438
                )
                
                
                (1,539
                )
                
                
                (1,593
                )
                
                
                (1,721
                )
                
                
                (1,756
                )
                
                
                (1,776
                )
                
                
                (1,975
                )Net
      interest income
                
                
                4,205
                
                
                
                4,127
                
                
                
                3,868
                
                
                
                3,780
                
                
                
                3,921
                
                
                
                4,001
                
                
                
                3,939
                
                
                
                3,864Provision
      for loan losses
                
                
                (800
                )
                
                
                (350
                )
                
                
                —
                
                
                
                (150
                )
                
                
                (125
                )
                
                
                (100
                )
                
                
                (40
                )
                
                
                —Non-interest
      income
                
                
                993
                
                
                
                890
                
                
                
                854
                
                
                
                891
                
                
                
                575
                
                
                
                (2,436
                )
                
                
                869
                
                
                
                822Non-interest
      expenses
                
                
                (3,671
                )
                
                
                (3,570
                )
                
                
                (3,645
                )
                
                
                (3,655
                )
                
                
                (3,556
                )
                
                
                (3,288
                )
                
                
                (3,230
                )
                
                
                (3,375
                )Income
      before income taxes
                
                
                727
                
                
                
                1,097
                
                
                
                1,077
                
                
                
                866
                
                
                
                815
                
                
                
                (1,823
                )
                
                
                1,538
                
                
                
                1,311Income
      tax (expense) benefit
                
                
                (91
                )
                
                
                (281
                )
                
                
                (199
                )
                
                
                (112
                )
                
                
                1,818
                
                
                
                (363
                )
                
                
                (337
                )
                
                
                (257
                )Net
      income
                
                $
                636
                
                
                $
                816
                
                
                $
                878
                
                
                $
                754
                
                
                $
                2,633
                
                
                $
                (2,186
                )
                
                $
                1,201
                
                
                $
                1,054Basic
      earnings per share
                
                $
                0.15
                
                
                $
                0.19
                
                
                $
                0.21
                
                
                $
                0.18
                
                
                $
                0.63
                
                
                $
                (0.52
                )
                
                $
                0.28
                
                
                $
                0.25





1
              In
      the quarter ended September 30, 2008, the Company recognized an impairment
      charge of $4.8 million with the related tax benefit of $1.1 million
      recognized in the quarter ending December 31, 2008. Further discussion on
      this topic may be found in the Management’s Discussion and Analysis as
      filed on Form 10-K on March 23, 2009
..





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 (“Parent Company”) and its wholly-owned subsidiary, The First National
Bank of Jeffersonville (“Bank”). For purposes of this discussion, references to
the Company include both the Bank and the 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 national 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 opened
a branch in Bloomingburg in January 2010 and an additional branch is planned to
be opened by mid-year 2010 in White Lake. 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 conditions, primarily
interest rates trends, affecting the entire banking industry. Changes in net
interest income have the greatest impact on the national economic performance
which deteriorated significantly in 2008 and continued to be volatile in 2009.
While government intervention served to stabilize the country’s largest
financial institutions, uncertainty surrounding employment prospects, real
estate activity and consumer spending has muted optimism for near-term economic
recovery. Regulatory concerns over lingering subprime residential lending
problems and increasing commercial real estate defaults make the current banking
environment very challenging as bank failures continue to occur at an elevated
rate. Real estate values continued to decline in the Bank’s lending area in
2009. Retail sales levels decreased by 6.2% for the full year from 2008 to 2009,
and small business owners continue to struggle financially as a
result.




13




Locally,
our economy continues to suffer with higher unemployment, a decline in small
businesses, and lower property values. However, 2009 saw the beginning of the
construction of interstate highway 86 in Sullivan County and the influx of
stimulus monies from the American Recovery and Reinvestment Act. With continued
concerns over financial and capital markets, especially the stock market, the
Bank has seen a large influx of deposits as investors pursued a “flight to
safety” strategy to safeguard their funds. The Bank used a portion of these
additional deposits to grow its real estate loan portfolio to help home buyers
and businesses in its local communities. The deposit growth also helped the Bank
ensure it had sufficient liquidity to weather any unexpected downturns in the
economy.




The
Company has a long history of profitable operations and a strong capital base
that have been the foundation of the Company since its inception. Management
believes this trend will continue and the Company will be well positioned to
take advantage of business opportunities when the current economic downturn
reverses course.




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.




Foreclosed
real estate consists of properties acquired through foreclosure or by acceptance
of a deed in lieu of foreclosure. These assets are recorded at the lower of fair
value of the asset acquired less estimated costs to sell or “cost” (defined as
the fair value at initial foreclosure). At the time of foreclosure, or when
foreclosure occurs in-substance, the excess, if any, of the loan over the fair
market value of the assets received, less estimated selling costs, is charged to
the allowance for loan and lease losses and any subsequent valuation write-downs
are charged to other expense. Operating costs associated with the properties are
charged to expense as incurred. Rental income is recognized in non-interest
income in the period in which it was received. Gains on the sale of foreclosed
real estate are included in income when title has passed and the sale has met
the minimum down payment requirements prescribed by GAAP.




Impaired
securities are evaluated on at least a quarterly basis, and more frequently when
market conditions warrant such an evaluation, to determine whether the
impairment is other-than-temporary. To determine whether an impairment is
other-than-temporary, management utilizes criteria such as the reasons
underlying the impairment, the magnitude and duration of the impairment 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
security. In addition, the total impairment is separated into the amount of the
impairment related to (a) credit loss and (b) the amount of the impairment
related to all other factors, such as interest rate changes. The difference
between the present value of the cash flows expected to be collected and the
amortized cost basis of a security is considered to be the credit loss. Once an
impairment is determined to be other-than-temporary, the impairment related to
credit loss, if any, is charged to income and the amount of the impairment
related to all other factors is recognized in other comprehensive
income.





The
Company has evaluated subsequent events and transactions occurring through the
date of issuance of the financial data included herein.





RECENT
ACCOUNTING PRONOUNCEMENTS





For
recent accounting pronouncements, turn to page F-9 in the financial
statements.




14




FINANCIAL
CONDITION





Total
assets increased by $24.1 million or 6.1% to $422.7 million at December 31, 2009
from $398.6 million at December 31, 2008. The increase was primarily due to a
$11.0 million or 4.2% increase in loans, net of allowance, from $264.4 million
at December 31, 2008 to $275.4 million at December 31, 2009, an increase in
securities available for sale of $5.5 million or 6.4% from $85.8 at December 31,
2008 to $91.3 at December 31, 2009, a $4.3 million or 49.0% increase in cash and
cash equivalents from $9.0 million at December 31, 2008 to $13.3 million at
December 31, 2009 and an increase in held to maturity securities of $2.4 million
or 42.5% to $8.2 million at December 31, 2009. Partially reducing these
increases was a decrease in restricted investments of $1.1 million or 31.9% to
$2.3 million at December 31, 2009 from $3.4 million at December 31, 2008.
Deposit growth funded new loans, investment securities and cash growth along
with providing funding for maturing long- and short- term debt. Deposits
increased $55.5 million or 18.7% from $296.7 million at December 31, 2008 to
$352.2 million at December 31, 2009. The increase in deposits was due to the
Bank’s enhanced sales initiative, along with uncertainty in the marketplace
causing consumers to seek safe investment vehicles. Time deposits increased
$38.4 million or 28.2% from $136.1 million at December 31, 2008 to $174.5
million at December 31, 2009. Savings and insured money market accounts
increased $6.1 million or 8.3% to $79.9 million at December 31, 2009 from $73.8
million at December 31, 2008. NOW and Super NOW deposits increased $5.4 million
or 19.1% to $33.5 million at December 31, 2009. Demand deposits grew $5.6
million or 9.6% to $64.3 million at December 31, 2009. Non-deposit liabilities
decreased $33.4 million or 56.4% in 2009 from $59.2 million at December 31, 2008
to $25.8 million at December 31, 2009.  The liabilities were primarily
long- and short-term borrowings from the Federal Home Loan Bank of New York
[FHLB]. $10.0 million of short-term borrowings and $20.0 million of long-term
borrowings matured in 2009 and were not replaced, reducing total FHLB borrowings
by $30.0 million in 2009.




In 2009,
total gross loans increased $11.8 million or 4.4% from $267.6 million at
December 31, 2008 to $279.4 million. Within the loan portfolio, commercial real
estate increased by $6.2 million or 6.7%. Home equity, farmland and construction
loans increased $1.7 million or 5.4%, $1.0 million or 27.0% and $1.1 million or
40.3% respectively. The growth in residential and commercial real estate loans
and home equity loans reflects the Company’s strategy to conservatively grow the
real estate 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. The Company remains
committed to maintaining loan credit quality and sacrificing growth in the loan
portfolio, if necessary.




There was
an $119,000 increase in foreclosed real estate at December 31, 2009 to $1.4
million, up from $1.3 million at December 31, 2008. The balance in both years
consisted primarily of one commercial property. This commercial property was
under a lease agreement, with lease payments being recorded in income. Total
nonperforming loans increased $7.2 million from $6.1 million at December 31,
2008 to $13.3 million at December 31, 2009 primarily due to commercial
mortgages. Net loan charge-offs increased from $447,000 in 2008 to $482,000 in
2009 due to the increase in nonperforming loans and high charge-off level. At
December 31, 2009, the allowance for loan losses equaled $4.0 million
representing 1.43% of total gross loans outstanding and 30.0% of total
nonperforming loans.




Total
stockholders’ equity was $44.7 million at December 31, 2009, an increase of $2.0
million over December 31, 2008 at $42.7 million. This increase was the result of
$3.1 million of net income and an improvement in accumulated other comprehensive
loss of $1.1 million partially offset by cash dividends of $2.2
million.





RESULTS
OF OPERATIONS 2009 VERSUS 2008





Net
Income


Net
income for 2009 of $3.1 million increased 14.1% or $382,000 from 2008’s net
income of $2.7 million. The higher earnings level in 2009 reflects the
interaction of a number of factors. The most significant factor which increased
2009 net income was an increase in other non-interest income of $3.8 million
partially offset by an increase in income tax expense and non-interest expense
of $1.5 million and $1.1 million, respectively. The increase in other
non-interest income was due primarily to impairment charges of Federal Home Loan
Mortgage Corporation (FHLMC or “Freddie Mac”) preferred stock in the amount of
$5.1 million partially offset by $1.5 million in insurance proceeds from bank
owned life insurance being recorded in 2008. The increase in income tax expense
in 2009 was due to the loss created by the FHLMC stock and related tax benefit
recorded in 2008. In addition to the above, net interest income after provision
for loan losses decreased $780,000 or 5.0% to $14.7 million for the year ended
December 31, 2009. This decrease was comprised of a decrease in interest and
dividend income of $1.2 million or 4.9%, from $23.0 million for the year ended
December 31, 2008 to $21.8 million for the same period ended December 31, 2009,
and an increase in the provision for loan losses of $1,035,000 to $1,300,000 for
the year ended December 31, 2009. A further discussion of the provision follows
in the “Summary of Loan Loss Experience” below. Partially offsetting these
decreases was a decrease in interest expense of $1.4 million or 19.1% from $7.2
million to $5.8 million for the year ended December 31, 2009. The decrease in
interest and dividend income was primarily the result of a $746,000 or 4.1%
decrease in loan interest and fees due to lower interest rates despite loan
growth, and a net reduction of $362,000 or 7.9% in interest earned on
securities. The decrease in interest expense was primarily due to a decrease in
interest expense on deposits of $1.2 million or 20.6% due to the lower interest
rate environment. Other interest expense decreased $120,000 due to reduced
borrowing levels during 2009. Non-interest expense increased $1.1 million or
8.1% from $13.4 million in 2008 to $14.5 million in 2009 due to an $810,000 or
10.4% increase in salaries and employee benefits primarily due to retirement
benefits and a $367,000 or 10.4% increase in other non-interest expense, which
is discussed in more detail below.




15




Tax
Equivalent Interest Income and Interest Expense


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




The
largest source of income for the Company is net interest income, which
represents interest earned on loans, securities and short-term investments, less
interest paid on deposits and other interest bearing liabilities. Tax equivalent
net interest income of $17.0 million for 2009 represented an increase of 2.2%
over 2008. Net interest margin decreased 8 basis points to 4.51% in 2009
compared to 4.59% in 2008 due to reduced interest rates on interest bearing
assets combined with a relatively fixed interest rate on long-term
debt.




Total tax
equivalent interest income for 2009 was $22.8 million, compared to $23.8 million
in 2008. The decrease of $1.0 million or 4.2% in 2009 is largely the result of a
decrease of 53 basis points in the average yield on tax equivalent interest
earning assets from 6.59% in 2008 to 6.06% in 2009. Despite average loans
increasing in all categories for a total of $10.7 million to $270.4 million from
$259.7 million in 2008, combined yields decreased 55 basis points from 7.06% in
2008 to 6.51% in 2009 due to new lower-yielding loans comprising a greater
percentage of total loans. Loan growth in real estate, fixed rate home equity,
and time and demand loans amounted to $5.3 million, $3.7 million and $0.6
million, respectively. The average loan yields on those loans decreased 41 basis
points, 34 basis points and 170 basis points, respectively. Time and demand
loans decreased more than the other categories due to the variable rate feature
which is tied to the Bank’s prime rate. During 2009, total average tax
equivalent securities and average short-term investments each increased $2.1
million with a decrease in yield of 35 basis points and 227 basis points,
respectively. Yield on total tax equivalent average securities decreased as
higher-yielding securities were called or matured and replaced with
lower-yielding securities. The yield on average short-term investments, which
are comprised primarily of federal funds sold, decreased from 2.62% to
0.35%.




Total
interest expense in 2009 decreased $1.4 million to $5.8 million from $7.2
million in 2008 primarily as a result of a decrease in average rates paid on
total interest bearing liabilities from 2.59% in 2008 to 1.95% in 2009. The
average balance of interest bearing liabilities increased $20.7 million from
$278.7 million in 2008 to $299.4 million in 2009, an increase of 7.4%. The
increase was the result of a $28.9 million increase in average interest bearing
deposits, due to sales initiatives and continuing market uncertainties,
partially offset by an $8.1 million decrease in average federal funds purchased
and long-term debt. Despite the increase in average interest bearing deposits,
the yield decreased 71 basis points due to market conditions and the
lower-yielding environment.  While average time deposits increased
$28.7 million, interest paid on these deposits decreased $680,000 or 22.8% due
to a 114 basis point reduction in interest rates paid to a yield of 2.63% in
2009. Average savings and insured money market deposits decreased $2.8 million
or 3.3% to $79.8 million for 2009 with a 52 basis point or $438,000 decrease in
interest expense due to lower interest rates. The yield on average federal funds
purchased and other short-term debt decreased 120 basis points to 0.38% from
1.58%. The yield on average fixed rate long-term debt decreased 9 basis points
to 4.14% due to the maturities of $20.0 million in debt.





Non-Interest
Income and Non-Interest Expense


Non-interest
income primarily consists of service charges, commissions and fees for various
banking services, and security gains and losses. Total non-interest income of
$3,628,000 in 2009 was an increase of $3,798,000 over 2008. The bulk of this
increase was due to an impairment charge on FHLMC preferred stock during 2008 of
$5.1 million, partially offset by an insurance benefit on a bank owned life
insurance policy of $1.5 million received in 2008. Excluding the impairment
charge and insurance benefit as discussed above, non-interest income increased
primarily due to an increase in net gain on the sale of securities of $480,000,
partially offset by an increase in foreclosed real estate loss of $101,000.
Foreclosed real estate losses increased due to carrying costs associated with an
increased level of foreclosed real estate. Service charge income and other
non-interest income, including merchant ATM and interchange fees decreased
$97,000 or 5.5% and $89,000 or 7.9%, respectively.




Non-interest
expense increased by $1.1 million or 8.1% to $14.5 million for the year ended
December 31, 2009. The increase in total non-interest expense was primarily the
result of an $810,000 or 10.4% increase in salaries and employee benefits, from
$7.8 million to $8.6 million in 2009, and $367,000 or 10.4% in other
non-interest expenses, from $3.5 million to $3.9 million in 2009. Salaries and
employee benefits increased due to $533,000 in increased retirement benefits, a
result of an increase in early retirements and the effect of plan assets
declining in market value, and $206,000 in normal salary increases. Non-interest
expense increased due to an increased FDIC assessment of $621,000 to $800,000 in
2009 partially offset by a reduction of $161,000 in professional and outside
consulting fees, which was primarily due to a deferment of requirements for
smaller reporting companies to audit internal controls over financial reporting,
and a $78,000 reduction in consulting services, a result of the termination of
the previously disclosed formal agreement with the Bank’s regulators. Occupancy
and equipment expenses decreased $85,000 or 4.0% to $2.0 million for
2009.





Income
Tax Expense


Income
tax expense (benefit) totaled $0.7 million in 2009 versus $(0.9) million in
2008. The effective tax rate approximated 18.1% in 2009 and (46.8)% in 2008. The
relatively low effective tax rates in 2009 and 2008 reflect the favorable tax
treatment received on tax-exempt interest income and net earnings from
bank-owned life insurance. Additionally, the 2008 effective tax rate was
favorably impacted by the $1.5 million tax-exempt insurance
benefit.




16




Provision
for Loan Losses


The
provision for loan losses was $1,300,000 in 2009 as compared to $265,000 in 2008
largely as a result of increased non-accrual loan activity in 2009. Provisions
for loan losses are recorded to maintain the allowance for loan losses at a
level deemed adequate by management based on an evaluation of such factors as
economic conditions in the Company’s market area, past loan loss experience, the
financial condition of individual borrowers, and underlying collateral values
based on independent appraisals. While management uses available information to
recognize losses on loans, future additions to the allowance for loan losses may
be necessary based on changes in economic conditions, particularly in Sullivan
County. In addition, Federal regulatory agencies, as an integral part of their
examination process, periodically review the Company’s allowance for loan losses
and may require the Company to recognize additions to the allowance based on
their judgments about information available to them at the time of their
examination, which may not be currently available to management. Based on
management’s comprehensive analysis of the loan portfolio, management believes
the current level of the allowance for loan losses is adequate.




The allowancefor
loan losses is a valuation allowance that management has
determined to be necessary to absorb probable incurred credit losses
inherent in the loan portfolio. The allowance is established through provisions for
losses charged to earnings. Loan losses are charged against the allowance
when management believes the uncollectability of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance. Management
evaluates the allowance quarterly using past loan loss experience to establish
base allowance pool rates for commercial mortgages, commercial loans,
residential loans, consumer and other loans. These allowance pool rates
are then adjusted based on management’s current assessment of eight risk
factors. These risk factors are:




1.
            Changes
      in lending policies and procedures, including underwriting standards and
      collection, charge-off, and recovery
practices.


2.
            Changes
      in national, regional, and local economic and business conditions as well
      as the condition of various market segments, including the value of
      underlying collateral for collateral dependent
  loans.


3.
            Changes
      in the nature and volume of the portfolio and terms of
    loans.


4.
            Changes
      in the experience, ability, and depth of lending management and
      staff.


5.
            Changes
      in volume and severity of past due, classified and nonaccrual loans as
      well as and other loan
modifications.


6.
            Changes
      in the quality of the Bank’s loan review system, and the degree of
      oversight by the Bank’s Board of
Directors.


7.
            The
      existence and effect of any concentrations of credit and changes in the
      level of such concentrations.


8.
            The
      effect of external factors, such as competition and legal and regulatory
      requirements.





Each
factor is assigned a value to reflect improving, stable or declining conditions
based on management’s best judgment using relevant information available at the
time of the evaluation. Adjustments to the factors are supported through
documentation of changes in conditions in a narrative accompanying the allowance
for loan loss calculation. Several specific factors are believed to have more
impact on a loan’s risk rating, such as those related to national and local
economic trends, lending management and staff, volume of past dues and
nonaccruals, and concentrations of credit. Therefore, due to the increased risk
inherent in criticized and classified loans, the values of these specific
factors are increased proportionally. Management believes these increased
factors provide adequate coverage for the additional perceived risk. Doubtful
loans by definition have inherent losses in which the precise amounts are
dependent on likely future events. These particular loans are reserved at higher
pool rates unless specifically reviewed and deemed impaired as described
below.




Prior to
applying the allowance pool rate, commercial mortgages and commercial loans in
nonaccrual status or those with loan relationships of $500,000 or more are
individually considered for impairment. A loan is impaired when, based on
current information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. Loans that are considered individually for impairment and not
determined to be impaired are returned to their original pools for allowance
purposes. If a loan is determined to be impaired, it is evaluated under
guidelines, which dictate that a creditor shall measure
impairment based on either the present value of expected future cash flows
discounted at the loan's effective interest rate, the loan's observable market
price, or the fair value of the collateral less estimated costs to sell if the
loan is collateral dependent. If the measure of the
impaired loan, such as the collateral value, is less than the recorded
investment in the loan,a specific reserve is established in the
allowance for loan losses.




Residential,
consumer and other loans are considered homogenous pools and are not
individually considered for impairment. Commercial mortgages and commercial
loans with an original principal balance under $10,000 for unsecured loans or
under $25,000 for secured loans are also not individually considered. Instead,
the appropriate allowance pool rate is applied to the aggregate balance of these
pools.




The amount of the
allowance is based on estimates and the ultimate losses may vary from such
estimates as more information becomes available, or as later events occur or
circumstances change. Allocations of the allowance may be made for specific
loans, but the entire allowance is available for any loan that, in management’s
judgment, should be charged off.Modifications to the methodology used in
the allowance for loan losses evaluation may be necessary in the future based on
economic and real estate market conditions, new information obtained regarding
known problem loans, regulatory guidelines and examinations, the identification
of additional problem loans, changes in general accepted accounting principals
or other factors.




17




Total
nonperforming loans increased $7.2 million to $13.3 million at December 31, 2009
from $6.1 million at December 31, 2008. Net loan charge-offs increased to
$482,000 in 2009 from $447,000 in 2008 and gross charge-offs increased to
$648,000 in 2009 from $647,000 in 2008.





Summary
of Loan Loss Experience


The
following table indicates the amount of charge-offs and recoveries in the loan
portfolio by category (dollars in thousands):





ANALYSIS
OF THE CHANGES IN ALLOWANCE FOR LOAN LOSSES





2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005Balance
      at beginning of year
                  
                  $
                  3,170
                  
                  
                  $
                  3,352
                  
                  
                  $
                  3,516
                  
                  
                  $
                  3,615
                  
                  
                  $
                  3,645Charge-offs:Commercial,
      financial and agriculture
                  
                  
                  (301
                  )
                  
                  
                  (294
                  )
                  
                  
                  (106
                  )
                  
                  
                  (208
                  )
                  
                  
                  (2
                  )Real
      estate – mortgage
                  
                  
                  (95
                  )
                  
                  
                  (21
                  )
                  
                  
                  (5
                  )
                  
                  
                  (66
                  )
                  
                  
                  —Installment
      loans
                  
                  
                  (150
                  )
                  
                  
                  (179
                  )
                  
                  
                  (118
                  )
                  
                  
                  (156
                  )
                  
                  
                  (308
                  )Other
      loans
                  
                  
                  (102
                  )
                  
                  
                  (153
                  )
                  
                  
                  (89
                  )
                  
                  
                  (103
                  )
                  
                  
                  (129
                  )Total
      charge-offs
                  
                  
                  (648
                  )
                  
                  
                  (647
                  )
                  
                  
                  (318
                  )
                  
                  
                  (533
                  )
                  
                  
                  (439
                  )Recoveries:Commercial,
      financial and agriculture
                  
                  
                  25
                  
                  
                  
                  80
                  
                  
                  
                  388
                  
                  
                  
                  187
                  
                  
                  
                  59Real
      estate – mortgage
                  
                  
                  3
                  
                  
                  
                  9
                  
                  
                  
                  5
                  
                  
                  
                  —
                  
                  
                  
                  8Installment
      loans
                  
                  
                  74
                  
                  
                  
                  47
                  
                  
                  
                  72
                  
                  
                  
                  98
                  
                  
                  
                  83Other
      loans
                  
                  
                  64
                  
                  
                  
                  64
                  
                  
                  
                  59
                  
                  
                  
                  59
                  
                  
                  
                  79Total
      recoveries
                  
                  
                  166
                  
                  
                  
                  200
                  
                  
                  
                  524
                  
                  
                  
                  344
                  
                  
                  
                  229Net
      recoveries (charge-offs)
                  
                  
                  (482
                  )
                  
                  
                  (447
                  )
                  
                  
                  206
                  
                  
                  
                  (189
                  )
                  
                  
                  (210
                  )Provision
      charged (credited) to operations
                  
                  
                  1,300
                  
                  
                  
                  265
                  
                  
                  
                  (370
                  )
                  
                  
                  90
                  
                  
                  
                  180Balance
      at end of year
                  
                  $
                  3,988
                  
                  
                  $
                  3,170
                  
                  
                  $
                  3,352
                  
                  
                  $
                  3,516
                  
                  
                  $
                  3,615Ratio
      of net (recoveries) charge-offs to average outstanding
    loans
                  
                  
                  0.18
                  %
                  
                  
                  0.17
                  %
                  
                  
                  (0.08
                  )%
                  
                  
                  0.08
                  %
                  
                  
                  0.09
                  %





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.




The
provision for loan losses was $1,300,000 for the year ended December 31, 2009,
up from $265,000 for 2008. The allowance for loan losses was $4.0 million at
December 31, 2009, $3.2 million at 2008, and $3.4 million at 2007. The allowance
as a percentage of total loans was 1.43% at December 31, 2009, compared to 1.18%
and 1.32% at December 31, 2008 and 2007, respectively. The allowance’s coverage
of nonperforming loans was 30.0% at December 31, 2009 compared to 51.8% and
72.2% at December 31, 2008 and 2007, respectively. Despite the continuing high
levels of nonperforming loans and the downturn in local economic conditions, the
Bank is and has been committed to common sense lending practices, sacrificing
loan quantity for quality. This policy is reflected in the Banks net charge-off
(recovery) history in the above table. While nonperforming loans have increased,
the Bank’s management believes that loans remain well collateralized. 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. As of
December 31, 2009, there were $11,824,000 in loans, compared to $5,191,000
as of December 31, 2008, which were considered to be impaired. A specific
reserve of $862,000 has been established to help reduce the risk on these
nonperforming loans. On the remaining loan portfolios, the Company applies
reserve factors considering historical loan loss data adjusted for current
conditions.




18




DISTRIBUTION
OF ALLOWANCE FOR LOAN LOSSES


(Dollars
in thousands)





At December 31,
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005Amount
      of Allowance for Loan Losses:Residential
      mortgages (1)
                  
                  $
                  944
                  
                  
                  $
                  1,036
                  
                  
                  $
                  1,048
                  
                  
                  $
                  1,048
                  
                  
                  $
                  1,048Commercial
      mortgages
                  
                  
                  1,135
                  
                  
                  
                  285
                  
                  
                  
                  285
                  
                  
                  
                  285
                  
                  
                  
                  351Commercial
      loans
                  
                  
                  1,189
                  
                  
                  
                  1,314
                  
                  
                  
                  1,263
                  
                  
                  
                  1,353
                  
                  
                  
                  1,343Installment
      loans
                  
                  
                  446
                  
                  
                  
                  473
                  
                  
                  
                  604
                  
                  
                  
                  650
                  
                  
                  
                  648Other
      loans
                  
                  
                  274
                  
                  
                  
                  62
                  
                  
                  
                  152
                  
                  
                  
                  180
                  
                  
                  
                  225Total
                  
                  $
                  3,988
                  
                  
                  $
                  3,170
                  
                  
                  $
                  3,352
                  
                  
                  $
                  3,516
                  
                  
                  $
                  3,615Percent
      of Loans in Each Category to Total Loans:Residential
      mortgages (1)
                  
                  
                  50.2
                  %
                  
                  
                  51.2
                  %
                  
                  
                  51.4
                  %
                  
                  
                  50.2
                  %
                  
                  
                  48.5
                  %Commercial
      mortgages
                  
                  
                  37.6
                  
                  
                  
                  36.5
                  
                  
                  
                  34.3
                  
                  
                  
                  34.7
                  
                  
                  
                  34.9Commercial
      loans
                  
                  
                  9.3
                  
                  
                  
                  9.4
                  
                  
                  
                  10.5
                  
                  
                  
                  11.2
                  
                  
                  
                  11.7Installment
      loans
                  
                  
                  2.8
                  
                  
                  
                  2.8
                  
                  
                  
                  3.7
                  
                  
                  
                  3.9
                  
                  
                  
                  4.8Other
      loans
                  
                  
                  0.1
                  
                  
                  
                  0.1
                  
                  
                  
                  0.1
                  
                  
                  
                  0.0
                  
                  
                  
                  0.1


1 Includes
home equity loans.





Nonaccrual
and Past Due Loans


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





At December 31,
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005Nonaccrual
      Loan Category:Residential
      mortgages (1)
                  
                  $
                  617
                  
                  
                  $
                  769
                  
                  
                  $
                  368
                  
                  
                  $
                  347
                  
                  
                  $
                  438Commercial
      mortgages
                  
                  
                  10,534
                  
                  
                  
                  3,667
                  
                  
                  
                  1,819
                  
                  
                  
                  1,520
                  
                  
                  
                  2,484Commercial
      loans
                  
                  
                  886
                  
                  
                  
                  998
                  
                  
                  
                  1,574
                  
                  
                  
                  —
                  
                  
                  
                  —Total
      nonaccrual loans
                  
                  
                  12,037
                  
                  
                  
                  5,434
                  
                  
                  
                  3,761
                  
                  
                  
                  1,867
                  
                  
                  
                  2,922Loans
      90 days or more, still accruing interest
                  
                  
                  1,270
                  
                  
                  
                  686
                  
                  
                  
                  883
                  
                  
                  
                  13
                  
                  
                  
                  —Total
      nonperforming loans
                  
                  $
                  13,307
                  
                  
                  $
                  6,120
                  
                  
                  $
                  4,644
                  
                  
                  $
                  1,880
                  
                  
                  $
                  2,922Percent
      of Nonperforming Loans outstanding to total Loans
                  
                  
                  4.8
                  %
                  
                  
                  2.3
                  %
                  
                  
                  1.8
                  %
                  
                  
                  0.8
                  %
                  
                  
                  1.2
                  %


1 Includes
home equity loans





Total
nonperforming residential mortgages, commercial mortgages, and commercial loans
represent 1.3%, 10.2%, and 3.4% of their respective portfolios totals at
December 31, 2009, compared to 0.6%, 4.5%, and 4.0% at December 31, 2008,
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 $6.6 million from $5.4 million at December 31, 2008 to $12.0
million at December 31, 2009. Except for a specific reserve of $862,000
allocated to certain impaired loans, the remaining loan balances 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 significant loans
that were considered to be troubled debt restructures as of December 31, 2009,
2008, or 2007.





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.




19




LOAN
PORTFOLIO COMPOSITION





At December 31,
                    
                    2009
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005Amount
                    
                    
                    Percent
                    
                    
                    Amount
                    
                    
                    Percent
                    
                    
                    Amount
                    
                    
                    Percent
                    
                    
                    Amount
                    
                    
                    Percent
                    
                    
                    Amount
                    
                    
                    PercentReal
      Estate Mortgage LoansResidential (1)
                    
                    $
                    103,232
                    
                    
                    
                    36.9
                    %
                    
                    $
                    103,212
                    
                    
                    
                    38.6
                    %
                    
                    $
                    96,612
                    
                    
                    
                    38.2
                    %
                    
                    $
                    92,912
                    
                    
                    
                    37.1
                    %
                    
                    $
                    86,936
                    
                    
                    
                    35.6
                    %Commercial (1)
                    
                    
                    99,572
                    
                    
                    
                    35.6
                    
                    
                    
                    93,342
                    
                    
                    
                    34.9
                    
                    
                    
                    85,182
                    
                    
                    
                    33.7
                    
                    
                    
                    85,595
                    
                    
                    
                    34.1
                    
                    
                    
                    84,250
                    
                    
                    
                    34.5Home
      equity
                    
                    
                    32,765
                    
                    
                    
                    11.7
                    
                    
                    
                    31,096
                    
                    
                    
                    11.6
                    
                    
                    
                    25,977
                    
                    
                    
                    10.3
                    
                    
                    
                    24,195
                    
                    
                    
                    9.6
                    
                    
                    
                    22,697
                    
                    
                    
                    9.3Farm
      land
                    
                    
                    4,926
                    
                    
                    
                    1.8
                    
                    
                    
                    3,879
                    
                    
                    
                    1.4
                    
                    
                    
                    3,883
                    
                    
                    
                    1.5
                    
                    
                    
                    3,726
                    
                    
                    
                    1.5
                    
                    
                    
                    3,443
                    
                    
                    
                    1.4Construction
                    
                    
                    3,841
                    
                    
                    
                    1.4
                    
                    
                    
                    2,737
                    
                    
                    
                    1.0
                    
                    
                    
                    5,531
                    
                    
                    
                    2.2
                    
                    
                    
                    6,087
                    
                    
                    
                    2.4
                    
                    
                    
                    5,956
                    
                    
                    
                    2.4244,336
                    
                    
                    
                    87.4
                    
                    
                    
                    234,266
                    
                    
                    
                    87.5
                    %
                    
                    
                    217,185
                    
                    
                    
                    85.9
                    %
                    
                    
                    212,515
                    
                    
                    
                    84.7
                    %
                    
                    
                    203,282
                    
                    
                    
                    83.2
                    %Other
      LoansCommercial
      loans
                    
                    
                    26,034
                    
                    
                    
                    9.3
                    
                    
                    
                    25,183
                    
                    
                    
                    9.4
                    
                    
                    
                    26,431
                    
                    
                    
                    10.4
                    %
                    
                    
                    28,106
                    
                    
                    
                    11.3
                    %
                    
                    
                    28,643
                    
                    
                    
                    11.7
                    %Consumer
      installment loans
                    
                    
                    7,769
                    
                    
                    
                    2.8
                    
                    
                    
                    7,511
                    
                    
                    
                    2.8
                    
                    
                    
                    8,948
                    
                    
                    
                    3.5
                    
                    
                    
                    9,773
                    
                    
                    
                    3.9
                    
                    
                    
                    11,673
                    
                    
                    
                    4.8Other
      consumer loans
                    
                    
                    386
                    
                    
                    
                    0.2
                    
                    
                    
                    173
                    
                    
                    
                    0.1
                    
                    
                    
                    148
                    
                    
                    
                    0.1
                    
                    
                    
                    118
                    
                    
                    
                    0.0
                    
                    
                    
                    128
                    
                    
                    
                    0.1Agricultural
      loans
                    
                    
                    882
                    
                    
                    
                    0.3
                    
                    
                    
                    430
                    
                    
                    
                    0.2
                    
                    
                    
                    273
                    
                    
                    
                    0.1
                    
                    
                    
                    248
                    
                    
                    
                    0.1
                    
                    
                    
                    535
                    
                    
                    
                    0.235,071
                    
                    
                    
                    12.6
                    
                    
                    
                    33,297
                    
                    
                    
                    12.5
                    
                    
                    
                    35,800
                    
                    
                    
                    14.1
                    
                    
                    
                    38,245
                    
                    
                    
                    15.3
                    
                    
                    
                    40,979
                    
                    
                    
                    16.8Total
      loans
                    
                    
                    279,407
                    
                    
                    
                    100.0
                    %
                    
                    
                    267,563
                    
                    
                    
                    100.0
                    %
                    
                    
                    252,985
                    
                    
                    
                    100.0
                    %
                    
                    
                    250,760
                    
                    
                    
                    100.0
                    %
                    
                    
                    244,261
                    
                    
                    
                    100.0
                    %Allowance
      for loan losses
                    
                    
                    (3,988
                    )
                    
                    
                    
                    
                    
                    
                    (3,170
                    )
                    
                    
                    
                    
                    
                    
                    (3,352
                    )
                    
                    
                    
                    
                    
                    
                    (3,516
                    )
                    
                    
                    
                    
                    
                    
                    (3,615
                    )Total
      loans, net
                    
                    $
                    275,419
                    
                    
                    
                    
                    
                    
                    $
                    264,393
                    
                    
                    
                    
                    
                    
                    $
                    249,633
                    
                    
                    
                    
                    
                    
                    $
                    247,244
                    
                    
                    
                    
                    
                    
                    $
                    240,646





1Historical data restated to conform
with current classification.





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





MATURITIES
AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES


(In
thousands)




One yearOne year
                
                
                through
                
                
                AfterAt December 31, 2009
                
                or less
                
                
                five years
                
                
                five years
                
                
                TotalMaturities
      of loans:Commercial
      and agricultural
                
                $
                7,538
                
                
                $
                9,768
                
                
                $
                9,610
                
                
                $
                26,916Real
      estate construction
                
                
                1,353
                
                
                
                2,452
                
                
                
                36
                
                
                
                3,841Total
                
                $
                8,891
                
                
                $
                12,220
                
                
                $
                9,646
                
                
                $
                30,757Interest
      sensitivity of loans:Predetermined
      rate
                
                $
                1,395
                
                
                $
                12,220
                
                
                $
                9,646
                
                
                $
                23,261Variable
      rate
                
                
                7,496
                
                
                
                —
                
                
                
                —
                
                
                
                7,496Total
                
                $
                8,891
                
                
                $
                12,220
                
                
                $
                9,646
                
                
                $
                30,757





Investment
Securities


The
carrying amount and the fair value of the Company’s investment securities and
their expected maturities are outlined in the following tables (in
thousands):





INVESTMENT
SECURITIES ANALYSIS





Summary of Investment SecuritiesAt December 31,*
                          
                          2009
                          
                          
                          2008
                          
                          
                          2007Amortized
                          
                          
                          Fair
                          
                          
                          Amortized
                          
                          
                          Fair
                          
                          
                          Amortized
                          
                          
                          Faircost
                          
                          
                          value
                          
                          
                          cost
                          
                          
                          value
                          
                          
                          cost
                          
                          
                          valueGovernment
      sponsored enterprises
                          
                          $
                          9,478
                          
                          
                          $
                          9,471
                          
                          
                          $
                          29,000
                          
                          
                          $
                          29,128
                          
                          
                          $
                          39,360
                          
                          
                          $
                          39,282Obligations
      of state and political subdivisions
                          
                          
                          56,947
                          
                          
                          
                          58,758
                          
                          
                          
                          42,615
                          
                          
                          
                          43,520
                          
                          
                          
                          42,147
                          
                          
                          
                          42,755Mortgage
      backed securities and collateralized mortgage obligations
                          
                          
                          28,868
                          
                          
                          
                          29,510
                          
                          
                          
                          17,819
                          
                          
                          
                          18,059
                          
                          
                          
                          10,192
                          
                          
                          
                          10,237Corporate
      debt and certificates of deposit
                          
                          
                          1,502
                          
                          
                          
                          1,548
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Equity
      securities
                          
                          
                          549
                          
                          
                          
                          611
                          
                          
                          
                          794
                          
                          
                          
                          896
                          
                          
                          
                          5,928
                          
                          
                          
                          6,167$
                          97,344
                          
                          
                          $
                          99,898
                          
                          
                          $
                          90,228
                          
                          
                          $
                          91,603
                          
                          
                          $
                          97,627
                          
                          
                          $
                          98,441




*
            The
      analysis shown combines the Company’s securities available for sale and
      held to maturity. All securities are included above at their amortized
      cost less impairment charges. Impairment charges of $5,162,000 and $30,000
      were recognized for the years ended December 31, 2008 and 2007,
      respectively. No impairment charge was recorded in
  2009.




20




The
following table sets forth the maturity distribution, yield (calculated on the
basis of the stated yields to maturity, considering applicable premium or
discount) and amortized cost of investment securities available for sale and
held to maturity (dollars in thousands):





ANALYSIS
BY TYPE AND BY PERIOD TO MATURITY





December 31, 2009
                      
                      Under 1 year
                      
                      
                      1-5 years
                      
                      
                      5-10 years
                      
                      
                      After 10 yearsBalance
                      
                      
                      Rate
                      
                      
                      Balance
                      
                      
                      Rate
                      
                      
                      Balance
                      
                      
                      Rate
                      
                      
                      Balance
                      
                      
                      Rate
                      
                      
                      TotalGovernment
      sponsoredenterprises
                      
                      $
                      7,175
                      
                      
                      
                      2.69
                      %
                      
                      $
                      2,003
                      
                      
                      
                      4.97
                      %
                      
                      $
                      -
                      
                      
                      
                      0.00
                      %
                      
                      $
                      300
                      
                      
                      
                      5.00
                      %
                      
                      $
                      9,478Obligations of state
      and political subdivisions–
      tax exempt(1)
                      
                      
                      10,185
                      
                      
                      
                      2.94
                      
                      
                      
                      33,000
                      
                      
                      
                      3.79
                      
                      
                      
                      12,943
                      
                      
                      
                      3.91
                      
                      
                      
                      819
                      
                      
                      
                      5.79
                      
                      
                      
                      56,947Mortgage
      backed securities and collateralized mortgage obligations
                      
                      
                      6,464
                      
                      
                      
                      4.41
                      
                      
                      
                      12,383
                      
                      
                      
                      4.58
                      
                      
                      
                      4,625
                      
                      
                      
                      4.87
                      
                      
                      
                      5,396
                      
                      
                      
                      4.77
                      
                      
                      
                      28,868Corporate
      debt and certificate of deposit
                      
                      
                      -
                      
                      
                      
                      0.00
                      
                      
                      
                      1,502
                      
                      
                      
                      4.80
                      
                      
                      
                      -
                      
                      
                      
                      0.00
                      
                      
                      
                      -
                      
                      
                      
                      0.00
                      
                      
                      
                      1,502$
                      23,824
                      
                      
                      
                      3.27
                      %
                      
                      $
                      48,888
                      
                      
                      
                      4.07
                      %
                      
                      $
                      17,568
                      
                      
                      
                      4.16
                      %
                      
                      $
                      6,515
                      
                      
                      
                      4.91
                      %
                      
                      $
                      96,795





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





RESULTS
OF OPERATIONS 2008 VERSUS 2007





Net
Income


Net
income for 2008 of $2.7 million decreased 36.8% or $1.6 million from 2007 net
income of $4.3 million. The lower earnings level in 2008 reflects the
interaction of a number of factors. The most significant factor which reduced
2008 net income was a decrease in other non-interest income of $3.6 million
partially offset by a reduction of income tax expense of $2.1 million. The $3.6
million decrease in other non-interest income was due primarily to impairment
charges on FHLMC preferred stock in the amount of $5.2 million partially offset
by $1.5 million in insurance proceeds from bank owned life insurance. Other
changes were an increase in net interest income of $861,000 offset by an
increase in provision for loan losses of $635,000 and an increase in other
non-interest expenses of $289,000. Net interest income increased $861,000 due to
a decrease in interest expense of $1,387,000 partially offset by a decrease of
$526,000 in interest income. The provision (credit) for loan losses increased
$635,000, from $(370,000) in 2007, which was primarily the result of a large
recovery that year, to $265,000 in 2008. The increase in total non-interest
expense of $289,000 was primarily the result of a $176,000 increase in other
non-interest expense, composed mainly of $103,000 in consulting fees and $60,000
in FDIC assessment fees, and a $78,000 increase in salaries and employee
benefits. Net interest income increased $0.9 million from $14.8 million in 2007
to $15.7 million in 2008. Interest expense on deposits decreased $1.8 million or
23.8% from $7.5 million to $5.7 million. Partially offsetting this was an
increase in interest on Federal Home Loan Bank (FHLB) borrowings of $0.5 million
or 50.3% due to increased levels of these borrowings, a decrease in loan
interest and fees of $297,000 or 1.6% to $18.3 million from $18.6 million, and a
decrease in interest on securities of $140,000 or 3.0%. Decreased interest rates
on loans and decreased levels of both investment securities and federal funds
sold accounted for the decrease in earnings. Interest expense on deposits
decreased $1.8 million or 23.8% primarily due to falling interest rates and
market pressure. Salary and employee benefit expense increased $78,000 or 1.0%.
Occupancy and equipment expense increased $35,000. Other non-interest expense
increased $176,000 due to increased FDIC assessments and consulting costs
associated with staff training.




Tax
Equivalent 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 $16.6 million for 2008 represented an increase of 5.2%
over 2007. Net interest margin increased 17 basis points to 4.59% in 2008
compared to 4.42% in 2007, due to overall decreases in interest bearing
liability rates.




21




Total tax
equivalent interest income for 2008 was $23.8 million, compared to $24.4 million
in 2007. The decrease in 2008 is largely the result of a decrease in the average
yield on interest earning assets from 6.83% in 2007 to 6.59% in 2008. Total
average securities (securities available for sale and securities held to
maturity) decreased $3.6 million or 3.5% in 2008 to $101.1 million. The yield on
total securities increased 1 basis point to 5.41% in 2008 from 5.40% in 2007.
During 2008, total average securities and short-term investments decreased a
total of $4.8 million. Average loans increased $9.4 million to $259.7 million
from $250.3 million in 2007, with a 39 basis point decrease in yields from 7.45%
in 2007 to 7.06% in 2008. Loan growth in real estate and fixed rate home equity
loans amounted to $6.6 million and $3.3 million, respectively. Due to falling
interest rates, new fixed rate loans have brought the average loan yields down.
Real estate and home equity loans yields decreased by 3 and 46 basis points,
respectively. Time and demand loans, which are tied to the Bank’s prime rate,
decreased 260 basis points in yield and $0.3 million in volume.




Total
interest expense in 2008 decreased $1.4 million to $7.2 million from $8.6
million in 2007 primarily as a result of a decrease in average rates paid on
total interest bearing liabilities from 3.17% in 2007 to 2.59% in 2008. The
average balance of interest bearing liabilities increased from $272.0 million in
2007 to $278.7 million in 2008, an increase of 2.4%. The increase was result of
an $18.9 million increase in average borrowings partially offset by a $12.3
million decrease in average interest bearing deposits. Brokered deposits of $5.0
million matured (an average balance of $3.3 million) during 2008 and were not
replaced. During 2008, the average cost of total interest bearing liabilities
decreased by 58 basis points from 3.17% to 2.59%. Average interest bearing
deposits decreased $12.3 million to $238.7 million in 2008, a decrease of 4.9%.
Interest rates on interest bearing deposits decreased by 59 basis points from an
average rate paid of 3.00% in 2007 to 2.41% in 2008. Savings and insured money
market interest rates decreased 134 basis points, and time deposits decreased 45
basis points in response to falling rates. In 2008, average demand deposit
balances decreased 4.3% over 2007.




Provision
for Loan Losses


The
provision (credit) for loan losses was $265,000 in 2008 as compared to
$(370,000) in 2007, largely the result of a $441,000 recovery in 2007 on a
previously charged-off loan. Higher charge-off levels in 2008 resulted in the
2008 provision. 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 loss was also reduced in 2007 due to the reduction in net charge-offs.
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, 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 collectability 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 $1.5 million from $4.6 million at December 31,
2007 to $6.1 million at December 31, 2008. Net loan recoveries (charge-offs)
decreased from $206,000 in 2007 to $(447,000) in 2008 and gross charge-offs
increased from $318,000 in 2007 to $647,000 in 2008.




Non-Interest
Income and Non-Interest Expense


Non-interest
income primarily consists of service charges, commissions and fees for various
banking services, and security gains and losses. Total non-interest income of
$(170,000) in 2008 was a decrease of 104.9% or $3,640,000 from 2007. This
decrease was primarily due to an impairment charge on FHLMC preferred stock of
$5.2 million partially offset by an insurance benefit on a bank owned life
insurance policy of $1.5 million.




Non-interest
expense increased by $289,000 or 2.2% to $13.4 million in 2008. Salaries and
employee benefit expense increased 1.0% to $7.8 million in 2008. Salaries and
employee benefits increased by $383,000 due to additional staffing and normal
salary increases partially offset by wage deferrals of $305,000. Other
non-interest expense increased $176,000 or 5.39% due to FDIC assessments and
costs associated with staff training and development. Occupancy and equipment
expenses increased a net of $35,000.




Income
Tax Expense


Income
tax expense (benefit) totaled $(0.9) million in 2008 versus $1.3 million in
2007. The effective tax rate approximated (46.8)% in 2008 and 22.9% in 2007.
These relatively low effective tax rates reflect the favorable tax treatment
received on the life insurance benefit in 2008, and tax-exempt interest income
and net earnings from bank-owned life insurance in both years.





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 Consolidated 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 17 of Notes to Consolidated
Financial Statements for further information concerning off-balance sheet
arrangements.




22




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 $40.1 million, which may
be used to meet unforeseen liquidity demands. There were no overnight borrowings
at December 31, 2009. Three separate FHLB term advances totaling $15.0 million
at December 31, 2009 were used to fund loan growth. The Company maintains $5.0
million unsecured lines of credit with Atlantic Central Bankers Bank and First
Tennessee Bank. In addition, during 2009 the Bank established the ability to
borrow at the Federal Reserve Discount Window.




In 2009,
cash generated from operating activities amounted to $0.7 million, and cash
generated from financing activities was $23.0 million. These amounts were offset
by cash used for investing activities in the amount of $19.3 million, resulting
in a net increase in cash and cash equivalents of $4.4 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 (in
thousands):





MATURITY
SCHEDULE OF TIME DEPOSITS OF $100,000 OR MORE





At December 31, 2009
                  
                  DepositsDue
      three months or less
                  
                  $
                  28,751Over
      three months through six months
                  
                  
                  24,809Over
      six months through twelve months
                  
                  
                  15,622Over
      twelve months
                  
                  
                  11,555Total
                  
                  $
                  80,737





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





CAPITAL
ADEQUACY





One of
management’s primary objectives is to maintain a strong capital position to
merit the confidence of depositors, the investing public, bank regulators and
stockholders. A strong capital position should help the Company withstand
unforeseen adverse developments and take advantage of profitable investment
opportunities when they arise. Stockholders’ equity increased $2.0 million or
4.7% in 2009 following a decrease of 0.3% in 2008, primarily due to improved
accumulated other comprehensive income and net income in 2009.




The
Company retained $0.9 million from 2009 net income after the payment of
dividends which decreased stockholders’ equity by $2.2 million. In addition,
improved accumulated other comprehensive loss increased stockholders’ equity by
$1.1 million. In accordance with regulatory capital rules, the adjustment for
the after tax net unrealized gain or loss on securities available for sale is
not considered in the computation of regulatory capital ratios.




Under the
Federal Reserve’s risk-based capital rules at December 31, 2009, the Bank’s Tier
I risk-based capital was 15.4 % and total risk-based capital was 16.6% 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 risk-based
capital. The Bank’s leverage ratio (Tier I capital to average assets) of 10.5%
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 (dollars in thousands).




23




As of December 31,
                      
                      2009
                      
                      
                      2008Tier
      I CapitalBanks’
      equity, excluding the after-tax net other comprehensive
    loss
                      
                      $
                      43,986
                      
                      
                      $
                      43,081Tier
      II CapitalAllowance
      for loan losses (1)
                      
                      $
                      3,580
                      
                      
                      $
                      3,187Total
      risk-based capital
                      
                      $
                      47,566
                      
                      
                      $
                      46,268Risk-weighted
      assets (2)
                      
                      $
                      285,946
                      
                      
                      $
                      270,883Average
      assets
                      
                      $
                      418,393
                      
                      
                      $
                      393,958RatiosTier
      I risk-based capital (minimum 4.0%)
                      
                      
                      15.4
                      %
                      
                      
                      15.9
                      %Total
      risk-based capital (minimum 8.0%)
                      
                      
                      16.6
                      %
                      
                      
                      17.1
                      %Leverage
      (minimum 4.0%)
                      
                      
                      10.5
                      %
                      
                      
                      10.9
                      %





1
              For
      Federal Reserve risk-based capital rule purposes, the allowance for loan
      losses includes allowance for credit losses on off-balance sheet letters
      of credit and is limited to 1.25% of risk-weighted
  assets


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 principal and interest
payments on long-term debt and leases as of December 31, 2009 (in
thousands):





Less than
                    
                    
                    1 to 3
                    
                    
                    3 to 5
                    
                    
                    More than1 year
                    
                    
                    years
                    
                    
                    years
                    
                    
                    5 years
                    
                    
                    TotalFederal
      Home Loan Bank borrowings
                    
                    $
                    562
                    
                    
                    $
                    16,158
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    16,720Building
      leases
                    
                    
                    103
                    
                    
                    
                    329
                    
                    
                    
                    194
                    
                    
                    
                    699
                    
                    
                    
                    1,325Total
                    
                    $
                    665
                    
                    
                    $
                    16,487
                    
                    
                    $
                    194
                    
                    
                    $
                    699
                    
                    
                    $
                    18,045





In regard
to short-term borrowings, see note 9 of Notes to Consolidated Financial
Statements.


24


DISTRIBUTION
OF ASSETS, LIABILITIES & STOCKHOLDERS’ EQUITY:


INTEREST
RATES & INTEREST DIFFERENTIAL


The
following schedule presents the condensed average consolidated balance sheets
for 2009, 2008, and 2007. 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 with dollars in thousands.





For
      the Year Ended December 31,
                      
                      2009
                      
                      
                      2008
                      
                      
                      2007Interest
                      
                      
                      Average
                      
                      
                      
                      
                      
                      Interest
                      
                      
                      Average
                      
                      
                      
                      
                      
                      Interest
                      
                      
                      AverageAverage
                      
                      
                      Earned
                      
                      
                      yield/
                      
                      
                      Average
                      
                      
                      Earned
                      
                      
                      yield/
                      
                      
                      Average
                      
                      
                      Earned
                      
                      
                      yield/balance
                      
                      
                      paid
                      
                      
                      rate
                      
                      
                      balance
                      
                      
                      paid
                      
                      
                      rate
                      
                      
                      balance
                      
                      
                      paid
                      
                      
                      rateASSETSSecurities available
      for sale and held to maturity: (1)Taxable
      securities
                      
                      $
                      53,641
                      
                      
                      $
                      2,261
                      
                      
                      
                      4.22
                      %
                      
                      $
                      58,388
                      
                      
                      $
                      2,844
                      
                      
                      
                      4.87
                      %
                      
                      $
                      59,593
                      
                      
                      $
                      2,928
                      
                      
                      
                      4.91
                      %Tax-exempt securities
      (2)
                      
                      
                      49,558
                      
                      
                      
                      2,965
                      
                      
                      
                      5.98
                      
                      
                      
                      42,675
                      
                      
                      
                      2,626
                      
                      
                      
                      6.15
                      
                      
                      
                      45,112
                      
                      
                      
                      2,724
                      
                      
                      
                      6.04Total
      securities
                      
                      
                      103,199
                      
                      
                      
                      5,226
                      
                      
                      
                      5.06
                      
                      
                      
                      101,063
                      
                      
                      
                      5,470
                      
                      
                      
                      5.41
                      
                      
                      
                      104,705
                      
                      
                      
                      5,652
                      
                      
                      
                      5.40Short-term
      investments
                      
                      
                      3,187
                      
                      
                      
                      11
                      
                      
                      
                      0.35
                      
                      
                      
                      1,106
                      
                      
                      
                      29
                      
                      
                      
                      2.62
                      
                      
                      
                      2,309
                      
                      
                      
                      118
                      
                      
                      
                      5.11LoansReal
      estate mortgages
                      
                      
                      193,887
                      
                      
                      
                      12,778
                      
                      
                      
                      6.59
                      
                      
                      
                      188,579
                      
                      
                      
                      13,196
                      
                      
                      
                      7.00
                      
                      
                      
                      182,028
                      
                      
                      
                      12,797
                      
                      
                      
                      7.03Home
      equity loans
                      
                      
                      31,922
                      
                      
                      
                      1,926
                      
                      
                      
                      6.03
                      
                      
                      
                      28,244
                      
                      
                      
                      1,799
                      
                      
                      
                      6.37
                      
                      
                      
                      24,960
                      
                      
                      
                      1,704
                      
                      
                      
                      6.83Time
      and demand loans
                      
                      
                      25,455
                      
                      
                      
                      1,100
                      
                      
                      
                      4.32
                      
                      
                      
                      24,849
                      
                      
                      
                      1,495
                      
                      
                      
                      6.02
                      
                      
                      
                      18,126
                      
                      
                      
                      1,965
                      
                      
                      
                      10.84Installment
      and other loans
                      
                      
                      19,097
                      
                      
                      
                      1,788
                      
                      
                      
                      9.36
                      
                      
                      
                      18,041
                      
                      
                      
                      1,848
                      
                      
                      
                      10.24
                      
                      
                      
                      25,163
                      
                      
                      
                      2,169
                      
                      
                      
                      8.62Total loans (3)
                      
                      
                      270,361
                      
                      
                      
                      17,592
                      
                      
                      
                      6.51
                      
                      
                      
                      259,713
                      
                      
                      
                      18,338
                      
                      
                      
                      7.06
                      
                      
                      
                      250,277
                      
                      
                      
                      18,635
                      
                      
                      
                      7.45Total
      interest earning assets
                      
                      
                      376,747
                      
                      
                      
                      22,829
                      
                      
                      
                      6.06
                      
                      
                      
                      361,882
                      
                      
                      
                      23,837
                      
                      
                      
                      6.59
                      
                      
                      
                      357,291
                      
                      
                      
                      24,405
                      
                      
                      
                      6.83Other
      non-interest bearing assets
                      
                      
                      38,931
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      32,082
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      32,093Total
      assets
                      
                      $
                      415,678
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      393,964
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      389,384LIABILITIES
      AND STOCKHOLDERS’ EQUITYNOW
      and Super NOW deposits
                      
                      $
                      33,719
                      
                      
                      $
                      85
                      
                      
                      
                      0.25
                      %
                      
                      $
                      30,731
                      
                      
                      $
                      151
                      
                      
                      
                      0.50
                      %
                      
                      $
                      32,099
                      
                      
                      $
                      160
                      
                      
                      
                      0.50
                      %Savings
      and insured money market deposits
                      
                      
                      79,783
                      
                      
                      
                      425
                      
                      
                      
                      0.53
                      
                      
                      
                      82,540
                      
                      
                      
                      863
                      
                      
                      
                      1.05
                      
                      
                      
                      101,411
                      
                      
                      
                      2,422
                      
                      
                      
                      2.39Time
      deposits
                      
                      
                      154,124
                      
                      
                      
                      4,051
                      
                      
                      
                      2.63
                      
                      
                      
                      125,460
                      
                      
                      
                      4,731
                      
                      
                      
                      3.77
                      
                      
                      
                      117,539
                      
                      
                      
                      4,957
                      
                      
                      
                      4.22Total
      interest bearing deposits
                      
                      
                      267,626
                      
                      
                      
                      4,561
                      
                      
                      
                      1.70
                      
                      
                      
                      238,731
                      
                      
                      
                      5,745
                      
                      
                      
                      2.41
                      
                      
                      
                      251,049
                      
                      
                      
                      7,539
                      
                      
                      
                      3.00Federal
      funds purchased and other short-term debt
                      
                      
                      799
                      
                      
                      
                      3
                      
                      
                      
                      0.38
                      
                      
                      
                      7,778
                      
                      
                      
                      123
                      
                      
                      
                      1.58
                      
                      
                      
                      3,363
                      
                      
                      
                      171
                      
                      
                      
                      5.08Long-term
      debt
                      
                      
                      30,986
                      
                      
                      
                      1,283
                      
                      
                      
                      4.14
                      
                      
                      
                      32,156
                      
                      
                      
                      1,360
                      
                      
                      
                      4.23
                      
                      
                      
                      17,630
                      
                      
                      
                      905
                      
                      
                      
                      5.13Total
      interest bearing liabilities
                      
                      
                      299,411
                      
                      
                      
                      5,847
                      
                      
                      
                      1.95
                      
                      
                      
                      278,665
                      
                      
                      
                      7,228
                      
                      
                      
                      2.59
                      
                      
                      
                      272,042
                      
                      
                      
                      8,615
                      
                      
                      
                      3.17Demand
      deposits
                      
                      
                      59,631
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      62,253
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      64,892Other
      non-interest bearing liabilities
                      
                      
                      12,881
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      9,117
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      10,201Total
      liabilities
                      
                      
                      371,923
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      350,035
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      347,135Stockholders’
      equity
                      
                      
                      43,755
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      43,929
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      42,249Total
      liabilities and stockholders’ equity
                      
                      $
                      415,678
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      393,964
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      389,384Net
      interest income – tax effected
                      
                      
                      
                      
                      
                      
                      16,982
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      16,609
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      15,790Less:
      Tax gross up on exempt securities
                      
                      
                      
                      
                      
                      
                      (1,002
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (884
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (926
                      )Net
      interest income per statement of income
                      
                      
                      
                      
                      
                      $
                      15,980
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      15,725
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      14,864Net
      interest spread
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4.11
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4.00
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.66
                      %Net interest margin
      (4)
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4.51
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4.59
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4.42
                      %


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


2
            Tax
      exempt securities are affected using a 34% tax rate for fully tax exempt
      municipals and 24% for dividends.


3
            For
      the purpose of this schedule, interest on 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 tax effected net interest income by total interest earning
      assets.


25


VOLUME
AND RATE ANALYSIS




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 2009 as compared to 2008, and 2008 as compared to 2007.




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, with dollars in
thousands.





2009 compared to 2008
                  
                  
                  2008 compared to 2007increase (decrease)
                  
                  
                  increase (decrease)due to change in
                  
                  
                  due to change inAverage
                  
                  
                  Average
                  
                  
                  
                  
                  
                  Average
                  
                  
                  AverageVolume
                  
                  
                  Rate
                  
                  
                  Total
                  
                  
                  Volume
                  
                  
                  Rate
                  
                  
                  TotalInterest
      IncomeInvestment securities
      and securities available for sale(1)
                  
                  $
                  116
                  
                  
                  $
                  (360
                  )
                  
                  $
                  (244
                  )
                  
                  $
                  (197
                  )
                  
                  $
                  15
                  
                  
                  $
                  (182
                  )Short-term
      investments
                  
                  
                  55
                  
                  
                  
                  (73
                  )
                  
                  
                  (18
                  )
                  
                  
                  (61
                  )
                  
                  
                  (28
                  )
                  
                  
                  (89
                  )Loans
                  
                  
                  752
                  
                  
                  
                  (1,498
                  )
                  
                  
                  (746
                  )
                  
                  
                  703
                  
                  
                  
                  (1,000
                  )
                  
                  
                  (297
                  )Total
      interest income
                  
                  
                  923
                  
                  
                  
                  (1,931
                  )
                  
                  
                  (1,008
                  )
                  
                  
                  445
                  
                  
                  
                  (1,013
                  )
                  
                  
                  (568
                  )Interest
      ExpenseNOW
      and Super NOW deposits
                  
                  
                  15
                  
                  
                  
                  (81
                  )
                  
                  
                  (66
                  )
                  
                  
                  (7
                  )
                  
                  
                  (2
                  )
                  
                  
                  (9
                  )Savings
      and insured money market deposits
                  
                  
                  (29
                  )
                  
                  
                  (409
                  )
                  
                  
                  (438
                  )
                  
                  
                  (451
                  )
                  
                  
                  (1,108
                  )
                  
                  
                  (1,559
                  )Time
      deposits
                  
                  
                  1,081
                  
                  
                  
                  (1,761
                  )
                  
                  
                  (680
                  )
                  
                  
                  334
                  
                  
                  
                  (560
                  )
                  
                  
                  (226
                  )Federal
      funds purchased and other short-term debt
                  
                  
                  (110
                  )
                  
                  
                  (10
                  )
                  
                  
                  (120
                  )
                  
                  
                  224
                  
                  
                  
                  (272
                  )
                  
                  
                  (48
                  )Long-term
      debt
                  
                  
                  (49
                  )
                  
                  
                  (28
                  )
                  
                  
                  (77
                  )
                  
                  
                  746
                  
                  
                  
                  (291
                  )
                  
                  
                  455Total
      interest expense
                  
                  
                  908
                  
                  
                  
                  (2,289
                  )
                  
                  
                  (1,381
                  )
                  
                  
                  846
                  
                  
                  
                  (2,233
                  )
                  
                  
                  (1,387
                  )Net
      interest income
                  
                  $
                  15
                  
                  
                  $
                  358
                  
                  
                  $
                  373
                  
                  
                  $
                  (401
                  )
                  
                  $
                  1,220
                  
                  
                  $
                  819


1 Fully
taxable-equivalent basis.





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. Therefore, 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 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.




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, 2010 and
ending December 31, 2010 under instantaneous rate shock scenarios.




26




INTEREST
RATE SENSITIVITY TABLE


(Dollars
in thousands)





Projectedchange in netProjected
                  
                  
                  interest incomeProjected
                  
                  
                  Projected dollar
                  
                  
                  percentage
                  
                  
                  as a percentInterest Rate
                  
                  
                  
                  
                  annualized net
                  
                  
                  change in net
                  
                  
                  change in net
                  
                  
                  of total stock-Shock(1)
                  
                  Prime rate
                  
                  
                  interest income
                  
                  
                  interest income
                  
                  
                  interest income
                  
                  
                  holders’ equity3.00%
                  
                  
                  6.25
                  %
                  
                  $
                  16,329
                  
                  
                  $
                  (1,106
                  )
                  
                  
                  -6.3
                  %
                  
                  
                  -11.3
                  %2.00%
                  
                  
                  5.25
                  %
                  
                  $
                  16,807
                  
                  
                  $
                  (628
                  )
                  
                  
                  -3.6
                  %
                  
                  
                  -6.0
                  %1.00%
                  
                  
                  4.25
                  %
                  
                  $
                  17,262
                  
                  
                  $
                  (173
                  )
                  
                  
                  -1.0
                  %
                  
                  
                  -1.4
                  %No
      change
                  
                  
                  3.25
                  %
                  
                  $
                  17,435
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —-1.00%
                  
                  
                  2.25
                  %
                  
                  $
                  17,927
                  
                  
                  $
                  492
                  
                  
                  
                  2.8
                  %
                  
                  
                  -9.1
                  %-2.00%
                  
                  
                  1.25
                  %
                  
                  $
                  18,028
                  
                  
                  $
                  593
                  
                  
                  
                  3.4
                  %
                  
                  
                  -18.1
                  %-3.00%
                  
                  
                  0.25
                  %
                  
                  $
                  17,928
                  
                  
                  $
                  493
                  
                  
                  
                  2.8
                  %
                  
                  
                  -25.9
                  %


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 $1,106,000 or -6.3% in a +3.00%
instantaneous interest rate shock and increase by $493,000 or 2.8% in a -3.00%
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 +3.00% or -3.00% 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 them and
pricing of assets and liabilities to mitigate net interest income volatility.
The Bank purchases investments for the securities portfolio and borrows 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 30% of the Bank’s assets at December 31, 2009 were
invested in adjustable rate loans and 0% in floating rate investment
securities.





ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA




Management’s
      Statement of Responsibility.
                  F-1Report
      of Independent Registered Public Accounting Firm
                  F-2Consolidated
      Balance Sheets as of December 31, 2009 and December 31,
    2008
                  F-3Consolidated
      Statements of Income for the years ended December 31, 2009, December 31,
      2008 and December 31, 2007
                  F-4Consolidated
      Statements of Changes in Stockholders’ Equity for the years ended December
      31, 2009, December 31, 2008 and December 31, 2007
                  F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2009, December
      31, 2008 and December 31, 2007
                  F-6Notes
      to Consolidated Financial Statements
                  F-7




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, 2009. 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.




/s/
Wayne V. Zanetti


Wayne
V. Zanetti


President
and Chief Executive Officer




/s/John A.
Russell


John
A. Russell


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 the accompanying consolidated balance sheets of Jeffersonville Bancorp
and Subsidiary as of December 31, 2009 and 2008, and the related consolidated
statements of income, changes in stockholders’ equity, and cash flows for each
of the years in the three-year period ended December 31, 2009. Jeffersonville
Bancorp’s management is responsible for these consolidated financial statements.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Jeffersonville Bancorp and
Subsidiary as of December 31, 2009 and 2008, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 2009 in conformity with accounting principles generally accepted in
the United States of America.




/s/ParenteBeard
LLC


ParenteBeard
LLC


Harrisburg,
Pennsylvania


March 23,
2010




F-2


Jeffersonville
Bancorp and Subsidiary


Consolidated
Balance Sheets


(In
thousands, except share and per share data)





As of December 31,
                
                2009
                
                
                2008ASSETSCash
      and cash equivalents
                
                $
                8,336
                
                
                $
                8,953Federal
      funds sold
                
                
                5,000
                
                
                
                —Total
      cash and cash equivalents
                
                
                13,336
                
                
                
                8,953Securities
      available for sale, at fair value
                
                
                91,320
                
                
                
                85,805Securities
      held to maturity, estimated fair value of $8,578 at December 31, 2009 and
      $5,798 at December 31, 2008
                
                
                8,218
                
                
                
                5,765Loans,
      net of allowance for loan losses of $3,988 at December 31, 2009 and $3,170
      at December 31, 2008
                
                
                275,419
                
                
                
                264,393Accrued
      interest receivable
                
                
                1,954
                
                
                
                1,858Premises
      and equipment, net
                
                
                5,020
                
                
                
                4,312Restricted
      investments
                
                
                2,341
                
                
                
                3,435Bank-owned
      life insurance
                
                
                14,621
                
                
                
                14,127Foreclosed
      real estate
                
                
                1,397
                
                
                
                1,278Other
      assets
                
                
                9,058
                
                
                
                8,641Total
      Assets
                
                $
                422,684
                
                
                $
                398,567LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilitiesDeposits:Demand
      deposits (non-interest bearing)
                
                $
                64,266
                
                
                $
                58,648NOW
      and super NOW accounts
                
                
                33,503
                
                
                
                28,137Savings
      and insured money market deposits
                
                
                79,905
                
                
                
                73,814Time
      deposits
                
                
                174,531
                
                
                
                136,125Total
      Deposits
                
                
                352,205
                
                
                
                296,724Short-term
      debt
                
                
                212
                
                
                
                10,524Federal
      Home Loan Bank borrowings
                
                
                15,000
                
                
                
                35,000Other
      liabilities
                
                
                10,604
                
                
                
                13,657Total
      Liabilities
                
                
                378,021
                
                
                
                355,905Commitments
      and contingent liabilitiesStockholders’
      equitySeries
      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
                
                
                (4,967
                )
                
                
                (4,967
                )Retained
      earnings
                
                
                42,231
                
                
                
                41,349Accumulated
      other comprehensive loss
                
                
                (1,468
                )
                
                
                (2,587
                )Total
      Stockholders’ Equity
                
                
                44,663
                
                
                
                42,662Total
      Liabilities and Stockholders’ Equity
                
                $
                422,684
                
                
                $
                398,567





See
accompanying notes to consolidated financial statements.


F-3


Jeffersonville
Bancorp and Subsidiary


Consolidated
Statements of Income


(In
thousands, except per share data)





For the Year Ended December 31,
                
                2009
                
                
                2008
                
                
                2007INTEREST
      AND DIVIDEND INCOMELoan
      interest and fees
                
                $
                17,592
                
                
                $
                18,338
                
                
                $
                18,635Securities:Taxable
                
                
                2,261
                
                
                
                2,844
                
                
                
                2,928Tax-exempt
                
                
                1,963
                
                
                
                1,742
                
                
                
                1,798Federal
      funds sold and other
                
                
                11
                
                
                
                29
                
                
                
                118Total
      Interest and Dividend Income
                
                
                21,827
                
                
                
                22,953
                
                
                
                23,479INTEREST
      EXPENSEDeposits
                
                
                4,561
                
                
                
                5,745
                
                
                
                7,539Federal
      Home Loan Bank borrowings
                
                
                1,283
                
                
                
                1,360
                
                
                
                905Other
                
                
                3
                
                
                
                123
                
                
                
                171Total
      Interest Expense
                
                
                5,847
                
                
                
                7,228
                
                
                
                8,615Net
      interest income
                
                
                15,980
                
                
                
                15,725
                
                
                
                14,864Provision
      (credit) for loan losses
                
                
                1,300
                
                
                
                265
                
                
                
                (370
                )Net
      Interest Income After Provision (Credit) for Loan Losses
                
                
                14,680
                
                
                
                15,460
                
                
                
                15,234NON-INTEREST
      INCOMEService
      charges
                
                
                1,677
                
                
                
                1,774
                
                
                
                1,858Fee
      income
                
                
                869
                
                
                
                908
                
                
                
                896Earnings
      on bank-owned life insurance
                
                
                494
                
                
                
                529
                
                
                
                482Net
      gain (loss) on sale of securities
                
                
                544
                
                
                
                64
                
                
                
                (19
                )Impairment
      charge on securities
                
                
                —
                
                
                
                (5,162
                )
                
                
                (30
                )Foreclosed
      real estate income (loss), net
                
                
                (119
                )
                
                
                (18
                )
                
                
                5Life
      insurance benefit
                
                
                —
                
                
                
                1,522
                
                
                
                —Other
      non-interest income
                
                
                163
                
                
                
                213
                
                
                
                278Total
      Non-Interest Income (Loss)
                
                
                3,628
                
                
                
                (170
                )
                
                
                3,470NON-INTEREST
      EXPENSESSalaries
      and employee benefits
                
                
                8,611
                
                
                
                7,801
                
                
                
                7,723Occupancy
      and equipment expenses
                
                
                2,034
                
                
                
                2,119
                
                
                
                2,084Other
      non-interest expenses
                
                
                3,896
                
                
                
                3,529
                
                
                
                3,353Total
      Non-Interest Expenses
                
                
                14,541
                
                
                
                13,449
                
                
                
                13,160Income
      before income tax expense
                
                
                3,767
                
                
                
                1,841
                
                
                
                5,544Income
      tax expense (benefit)
                
                
                683
                
                
                
                (861
                )
                
                
                1,269Net
      Income
                
                $
                3,084
                
                
                $
                2,702
                
                
                $
                4,275Basic
      earnings per common share
                
                $
                0.73
                
                
                $
                0.64
                
                
                $
                1.00Average
      common shares outstanding
                
                
                4,234
                
                
                
                4,234
                
                
                
                4,266Cash
      dividends declared per share
                
                $
                0.52
                
                
                $
                0.52
                
                
                $
                0.50





See
accompanying notes to consolidated financial statements.


F-4


Jeffersonville
Bancorp and Subsidiary


Consolidated
Statements of Changes in Stockholders’ Equity


(In
thousands, except per share data)





Accumulated
                        
                        
                        
                        
                        
                        Commonother
                        
                        
                        
                        
                        
                        sharescompre-
                        
                        
                        Total
                        
                        
                        issuedFor the years ended
                        
                        Common
                        
                        
                        Paid-in
                        
                        
                        Treasury
                        
                        
                        Retained
                        
                        
                        hensive
                        
                        
                        stockholders’
                        
                        
                        andDecember 31, 2009, 2008 and 2007
                        
                        stock
                        
                        
                        capital
                        
                        
                        stock
                        
                        
                        earnings
                        
                        
                        loss
                        
                        
                        equity
                        
                        
                        outstandingBalance
      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
                        
                        
                        
                        4,234Net
      income
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        2,702
                        
                        
                        
                        —
                        
                        
                        
                        2,702Other
      comprehensive loss
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (1,541
                        )
                        
                        
                        (1,541
                        )Comprehensive
      income
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        1,161Adjustment
      to initially apply ASC 715-60 on Split Dollar Life
    Insurance
                        
                        
                        
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (255
                        )
                        
                        
                        —
                        
                        
                        
                        (255
                        )Cash
      dividends ($0.52 per share)
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (2,202
                        )
                        
                        
                        —
                        
                        
                        
                        (2,202
                        )Balance
      at December 31, 2008
                        
                        
                        2,384
                        
                        
                        
                        6,483
                        
                        
                        
                        (4,967
                        )
                        
                        
                        41,349
                        
                        
                        
                        (2,587
                        )
                        
                        
                        42,662
                        
                        
                        
                        4,234Net
      income
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        3,084
                        
                        
                        
                        —
                        
                        
                        
                        3,084Other
      comprehensive income
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        1,119
                        
                        
                        
                        1,119Comprehensive
      income
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        4,203Cash
      dividends ($0.52 per share)
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (2,202
                        )
                        
                        
                        —
                        
                        
                        
                        (2,202
                        )Balance
      at December 31, 2009
                        
                        $
                        2,384
                        
                        
                        $
                        6,483
                        
                        
                        $
                        (4,967
                        )
                        
                        $
                        42,231
                        
                        
                        $
                        (1,468
                        )
                        
                        $
                        44,663
                        
                        
                        
                        4,234





See
accompanying notes to consolidated financial statements.




F-5


Jeffersonville Bancorp and Subsidiary


Consolidated
Statements of Cash Flows


(In
thousands)





For the Year Ended December
    31,
                
                2009
                
                
                2008
                
                
                2007OPERATING
      ACTIVITIES:Net
      income
                
                $
                3,084
                
                
                $
                2,702
                
                
                $
                4,275Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      (credit) for loan losses
                
                
                1,300
                
                
                
                265
                
                
                
                (370
                )Depreciation
      and amortization
                
                
                627
                
                
                
                655
                
                
                
                628Net
      gain on sale of fixed assets
                
                
                8
                
                
                
                —
                
                
                
                —Write
      down of foreclosed real estate
                
                
                74
                
                
                
                11
                
                
                
                —Proceeds
      on sale of foreclosed real estate
                
                
                (18
                )
                
                
                —
                
                
                
                —Earnings
      on bank-owned life insurance
                
                
                (494
                )
                
                
                (529
                )
                
                
                (482
                )Life
      insurance benefit
                
                
                —
                
                
                
                (1,522
                )
                
                
                —Net
      security (gains) losses
                
                
                (544
                )
                
                
                (64
                )
                
                
                19Impairment
      charge on securities
                
                
                —
                
                
                
                5,162
                
                
                
                30Deferred
      income tax (benefit)
                
                
                1,417
                
                
                
                (2,053
                )
                
                
                (76
                )(Increase)
      decrease in accrued interest receivable
                
                
                (96
                )
                
                
                261
                
                
                
                322(Increase)
      decrease in other assets
                
                
                (2,578
                )
                
                
                (257
                )
                
                
                664Increase
      (decrease) in other liabilities
                
                
                (2,042
                )
                
                
                1,529
                
                
                
                (63
                )Net
      Cash Provided by Operating Activities
                
                
                738
                
                
                
                6,160
                
                
                
                4,947INVESTING
      ACTIVITIES:Proceeds
      from maturities and calls:Securities
      available for sale
                
                
                39,071
                
                
                
                18,859
                
                
                
                10,009Securities
      held to maturity
                
                
                2,730
                
                
                
                6,475
                
                
                
                5,962Proceeds
      from sales of securities available for sale
                
                
                17,724
                
                
                
                4,145
                
                
                
                18,780Purchases:Securities
      available for sale
                
                
                (60,913
                )
                
                
                (21,259
                )
                
                
                (19,392
                )Securities
      held to maturity
                
                
                (5,184
                )
                
                
                (5,920
                )
                
                
                (2,837
                )Disbursement
      for loan originations, net of principal collections
                
                
                (12,665
                )
                
                
                (16,279
                )
                
                
                (2,019
                )Proceeds
      from cash surrender value of bank owned life insurance
                
                
                —
                
                
                
                2,055
                
                
                
                —Purchase
      of restricted stock
                
                
                (1,023
                )
                
                
                (3,821
                )
                
                
                (2,720
                )Sale
      of restricted stock
                
                
                2,117
                
                
                
                3,384
                
                
                
                2,018Net
      purchases of premises and equipment
                
                
                (1,343
                )
                
                
                (569
                )
                
                
                (1,986
                )Proceeds
      from sales of foreclosed real estate
                
                
                164
                
                
                
                —
                
                
                
                —Net
      Cash Provided by (Used in) Investing Activities
                
                
                (19,322
                )
                
                
                (12,930
                )
                
                
                7,815FINANCING
      ACTIVITIES:Net
      increase (decrease) in deposits
                
                
                55,481
                
                
                
                (2,518
                )
                
                
                (25,831
                )Proceeds
      from Federal Home Loan Bank borrowings
                
                
                —
                
                
                
                15,000
                
                
                
                15,000Repayments
      of Federal Home Loan Bank borrowings
                
                
                (20,000
                )
                
                
                (10,000
                )
                
                
                (5,000
                )Net
      increase in short-term borrowings
                
                
                (10,312
                )
                
                
                5,015
                
                
                
                4,606Purchases
      of treasury stock
                
                
                —
                
                
                
                —
                
                
                
                (1,245
                )Cash
      dividends paid
                
                
                (2,202
                )
                
                
                (2,202
                )
                
                
                (2,134
                )Net
      Cash Provided by (Used in) Financing Activities
                
                
                22,967
                
                
                
                5,295
                
                
                
                (14,604
                )Net
      Increase (Decrease) in Cash and Cash Equivalents
                
                
                4,383
                
                
                
                (1,475
                )
                
                
                (1,842
                )Cash
      and Cash Equivalents at Beginning of Year
                
                
                8,953
                
                
                
                10,428
                
                
                
                12,270Cash
      and Cash Equivalents at End of Year
                
                $
                13,336
                
                
                $
                8,953
                
                
                $
                10,428SUPPLEMENTAL
      INFORMATION:Cash
      paid for:Interest
                
                $
                6,022
                
                
                $
                7,223
                
                
                $
                8,671Income
      taxes
                
                
                221
                
                
                
                875
                
                
                
                1,465Transfer
      of loans to foreclosed real estate
                
                
                339
                
                
                
                1,254
                
                
                
                —





See
accompanying notes to consolidated financial statements.


F-6


Jeffersonville
Bancorp and Subsidiary


Notes
to Consolidated Financial Statements


December 31,
2009, 2008, and 2007





(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, Jeffersonville Bancorp and its subsidiary are referred
to herein as the “Company” with all significant intercompany transactions having
been eliminated.





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 primarily 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.





The
Company has evaluated subsequent events and transactions occurring through the
date of issuance of the financial data included herein.





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).
Restricted investments, which are nonmarketable equity securities are carried at
cost. At December 31, 2009 and 2008, 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.





A security is impaired
when there is a difference between its amortized cost basis and its fair value
at the balance sheet date. Impairedsecurities are evaluated on at least
a quarterly basis, and more frequently when market conditions warrant such an
evaluation, to determine whether the impairment is other-than-temporary. To
determine whether an impairment is other-than-temporary, management utilizes
criteria such as the reasons underlying the impairment, and the magnitude and
duration of the impairment. Effective June 30, 2009, the Company adopted new
accounting guidance related to recognition and presentation of
other-than-temporary impairment. This recent accounting guidance amends the
recognition guidance for other-than-temporary impairment of debt securities and
expands the financial statement disclosures for other-than-temporary impairment
losses on debt and equity securities. The recent guidance replaces the “intent
and ability” requirement of the previous guidance, by specifying that (a) if a
bank does not have the intent to sell a debt security prior to recovery and (b)
it is more likely than not that it will not have to sell the debt security prior
to recovery, the security would not be considered other-than-temporary
impairment unless there is a credit loss.  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 security. In
addition, the total
impairment for debt securities is separated into the amount of the impairment
related to (a) credit loss and (b) the amount of the impairment related to all
other factors, such as interest rate changes. The difference between the present
value of the cash flows expected to be collected and the amortized cost basis of
a security is considered to be the credit loss.Once an impairment is
determined to be other-than-temporary, the impairment related to credit loss, if
any, is charged to income and the amount of the
impairment related to all other factors is recognized in other comprehensive
income.Impairment charges of $5,162,000 and $30,000 were recognized
during the years ended December 31, 2008 and 2007, respectively, on equity
securities. The $5,162,000 impairment charge in 2008 was related to Freddie Mac
preferred stock. No impairment charge was recognized during the year ended
December 31, 2009. For further discussion see Note 3.




F-7




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.
Except for residential mortgages that are well secured (loan to value 60% or
less) and in the process of collection, 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 collectability of all or a portion of the principal is
unlikely. Recoveries of loans previously charged off are credited to the
allowance when realized.





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. Impaired loan disclosures and classification apply to loans
that are individually evaluated for collectability in accordance with the
Company’s ongoing loan review procedures, 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. Leasehold
improvements are amortized over the shorter of their estimated useful lives or
their respective lease terms.





Restricted
Investments


Included
in restricted investments are equity securities carried at cost which are
nonmarketable. As a member institution of the Federal Home Loan Bank of New York
(FHLB), Federal Reserve Bank and other institutions, the Bank is required to
hold a certain amount of equity stocks.





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, any 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. Operating costs associated with the properties are
charged to expense as incurred and rental income is recognized in foreclosed
real estate income in the period collected.




F-8




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. Liabilities and related compensation costs for employees
that are not limited to the employee’s active service period are recognized
according to ASC Topic 715 Compensation-Retirement Benefits(ASC 715).





Effective
January 1, 2008, the Company adopted new accounting guidance for deferred
compensation and postretirement aspects of endorsement and split dollar life
insurance arrangements. This new guidance 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 and requires an employer to recognize a liability and related
compensation costs for future benefits that extend to postretirement periods.
The impact of its adoption resulted in a $255,000 cumulative effect adjustment
to opening retained earnings in 2008. The adoption will have a minimal impact on
current and future earnings, with a $46,000 and $10,000 effect on earnings for
the years ended December 31, 2009 and 2008, respectively





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
Per Common Share


The
Company has a simple capital structure. Basic earnings per share is computed by
dividing net income by the weighted average number of common shares outstanding
for the period.





Recent
Accounting Pronouncements


In June
2009, the Financial Accounting Standards Board (FASB) issued the following
pronouncements prior to the issuance and adoption of certain Accounting
Standards Updates (ASUs). For such pronouncements, citations to the applicable
Codification by Topic, Subtopic and Section are provided where applicable in
addition to the original standard type and number.





In
October 2009, the FASB issued ASU 2009-16, Transfers and Servicing Topic 860 - Accounting for Transfers of
Financial Assets. This Update amends the Codification for the issuance of
FASB Statement No. 166 Accounting for Transfers of
Financial Assets-an amendment of FAS Statement No. 140. The amendments in
this Update improve financial reporting by eliminating the exceptions for
qualifying special-purpose entities from the consolidation guidance and the
exception that permitted sale accounting for certain mortgage securitizations
when a transferor has not surrendered control over the transferred financial
assets. In addition, the amendments require enhanced disclosures about the risks
that a transferor continues to be exposed to because of its continuing
involvement in transferred financial assets. Comparability and consistency in
accounting for transferred financial assets will also be improved through
clarifications of the requirements for isolation and limitations on portions of
financial assets that are eligible for sale accounting. This Update is effective
at the start of a reporting entity’s first fiscal year beginning after November
15, 2009. Early application is not permitted. The Company is currently reviewing
the effect adopting this Update will have on its consolidated financial
position, results of operations and cash flows.





In
October 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810) –
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities. This Update amends the Codification for the issuance
of FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in the Update replace the quantitative-based
risks and rewards calculation for determining which reporting entity, if any,
has a controlling financial interest in a variable interest entity with an
approach focused on identifying which reporting entity has the power to direct
the activities of a variable interest entity that most significantly impact the
entity’s economic performance and (1) the obligation to absorb losses of the
entity of (2) the right to receive benefits from the entity. An approach that is
expected to be primarily qualitative will be more effective for identifying
which reporting entity has a controlling financial interest in a variable
interest entity. The amendments in this Update also require additional
disclosures about a reporting entity’s involvement in variable interest
entities, which will enhance the information provided to users of financial
statements. This Update is effective at the start of a reporting entity’s first
fiscal year beginning after November 15, 2009. Early application is not
permitted. The Company is currently reviewing the effect adopting this Update
will have on its consolidated financial position, results of operations and cash
flows.




F-9




In
November 2008, the SEC released a proposed roadmap regarding the potential use
by U.S. issuers of financial statements prepared in accordance with
International Financial Reporting Standards (IFRS). IFRS is a comprehensive
series of accounting standards published by the International Accounting
Standards Board (“IASB”). Under the proposed roadmap, the Company may be
required to prepare its consolidated financial statements in accordance with
IFRS as early as 2014. The SEC will make a determination in 2011 regarding the
mandatory adoption of IFRS. The Company is currently assessing the impact that
this potential change would have on its consolidated financial statements, and
it will continue to monitor the development of the potential implementation of
IFRS.





The FASB
issued ASU 2009–05, “Fair Value Measurements and Disclosures (ASC Topic 820) –
Measuring Liabilities at Fair Value” in August 2009 to provide guidance when
estimating the fair value of a liability. When a quoted price in an active
market for the identical liability is not available, fair value should be
measured using (a) the quoted price of an identical liability when traded as an
asset; (b) quoted prices for similar liabilities or similar liabilities when
traded as assets; or (c) another valuation technique consistent with the
principles of Topic 820 such as an income approach or a market approach. If a
restriction exists that prevents the transfer of the liability, a separate
adjustment related to the restriction is not required when estimating fair
value. The ASU was adopted by the Company on October 1, 2009, and it had no
impact on the consolidated financial position or operations of the
Company.





In
January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and
Disclosures (Topic 820-10): Improving Disclosures about Fair Value
Measurements”. This update provides amendments that clarify existing disclosures
on levels of disaggregation, inputs and valuation techniques to improve
transparency in financial reporting. ASU 2010-06 also requires new disclosures
on transfers in and out of Level 1 and 2 and activity in Level 3 fair value
measurements, and conforming all the guidance on employers’ disclosures about
postretirement benefit plan assets. This amendment is effective for interim and
annual reporting periods beginning after December 31, 2009 except for the
disclosures about purchases, sales, issuance and settlements in the roll-forward
of activity in Level 3 fair value measurements. Those disclosures are effective
for fiscal years beginning after December 31, 2010 and for interim periods
within those fiscal years. The Company is currently reviewing the effect
adopting this ASU will have on its consolidated financial position, results of
operations and cash flows.





Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies are not expected to have a material impact on the
Company’s consolidated financial position, results of operations or cash
flows.





(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 $468,000 at December 31,
2009 and $285,000 at December 31, 2008.





(3)
            Investment
      Securities





The
amortized cost and estimated fair value of available for sale and held to
maturity securities at December 31 are as follows (in thousands):





GrossDecember 31, 2009
                  
                  Amortized
                  
                  
                  unrealized
                  
                  
                  EstimatedAvailable for Sale Securities
                  
                  cost
                  
                  
                  gains
                  
                  
                  Losses
                  
                  
                  fair valueDebt
      Securities:Government
      sponsored enterprises (GSE)
                  
                  $
                  9,478
                  
                  
                  $
                  64
                  
                  
                  $
                  (71
                  )
                  
                  $
                  9,471Obligations
      of states and political subdivisions
                  
                  
                  48,729
                  
                  
                  
                  1,516
                  
                  
                  
                  (65
                  )
                  
                  
                  50,180Mortgage-backed
      securities and collateralized mortgage obligations - GSE
      residential
                  
                  
                  28,868
                  
                  
                  
                  725
                  
                  
                  
                  (83
                  )
                  
                  
                  29,510Corporate
      debt
                  
                  
                  1,404
                  
                  
                  
                  46
                  
                  
                  
                  —
                  
                  
                  
                  1,450Certificates
      of deposit
                  
                  
                  98
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  9888,577
                  
                  
                  
                  2,351
                  
                  
                  
                  (219
                  )
                  
                  
                  90,709Equity
      securities
                  
                  
                  549
                  
                  
                  
                  67
                  
                  
                  
                  (5
                  )
                  
                  
                  611$
                  89,126
                  
                  
                  $
                  2,418
                  
                  
                  $
                  (224
                  )
                  
                  $
                  91,320




F-10




GrossDecember 31, 2008
                  
                  Amortized
                  
                  
                  unrealized
                  
                  
                  EstimatedAvailable for Sale Securities
                  
                  cost
                  
                  
                  gains
                  
                  
                  losses
                  
                  
                  fair valueDebt
      Securities:Government
      sponsored enterprises (GSE)
                  
                  $
                  29,000
                  
                  
                  $
                  158
                  
                  
                  $
                  (30
                  )
                  
                  $
                  29,128Obligations
      of states and political subdivisions
                  
                  
                  36,850
                  
                  
                  
                  921
                  
                  
                  
                  (49
                  )
                  
                  
                  37,722Mortgage-backed
      securities and collateralized mortgage obligations - GSE
      residential
                  
                  
                  17,819
                  
                  
                  
                  303
                  
                  
                  
                  (63
                  )
                  
                  
                  18,05983,669
                  
                  
                  
                  1,382
                  
                  
                  
                  (142
                  )
                  
                  
                  84,909Equity
      securities
                  
                  
                  794
                  
                  
                  
                  180
                  
                  
                  
                  (78
                  )
                  
                  
                  896$
                  84,463
                  
                  
                  $
                  1,562
                  
                  
                  $
                  (220
                  )
                  
                  $
                  85,805





Securities
included in government sponsored enterprises are securities of the FHLB, Federal
Home Loan Mortgage Corporation (FHLMC or “Freddie Mac”), and Federal National
Mortgage Association (FNMA or “Fannie Mae”). These securities are not backed by
the full faith of the U.S. government. Substantially all mortgage-backed
securities and collateralized mortgage obligations consist of residential
mortgage securities and are securities guaranteed by Freddie Mac or Fannie Mae,
which are U.S. government-sponsored entities.  Obligations of states
and political subdivisions are general obligation and revenue bonds of New York
State municipalities, agencies and authorities. General obligation bonds must
have a nationally recognized statistical rating organization (NRSRO) investment
grade rating in the top four categories (S&P “BBB-” or higher). Revenue
bonds must have an NRSRO rating in the top three categories (S&P “A” or
higher). Corporate debt securities are comprised of bonds with an NRSRO rating
in the top three investment grades (S&P “A” or better).





In 2008
and 2007, impairment charges of $5,162,000 and $30,000 were recorded in income.
There was no impairment charge in 2009. The 2008 impairment charge was largely
the result of an impairment charge on Freddie Mac preferred stock. Proceeds from
sales of securities available for sale during 2009, 2008 and 2007 were
$17,724,000, $4,145,000 and $18,780,000 respectfully.





Gross
gains and gross losses realized on sales and calls of securities were as follows
for the years ended December 31 (in thousands):





Net Security Gains (Losses)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007Gross
      realized gains
                  
                  $
                  545
                  
                  
                  $
                  102
                  
                  
                  $
                  21Gross
      realized losses
                  
                  
                  (1
                  )
                  
                  
                  (38
                  )
                  
                  
                  (40
                  )Impairment
      charge
                  
                  
                  —
                  
                  
                  
                  (5,162
                  )
                  
                  
                  (30
                  )$
                  544
                  
                  
                  $
                  (5,098
                  )
                  
                  $
                  (49
                  )





The
amortized cost and estimated fair value of debt securities available for sale at
December 31, 2009, by remaining period to contractual maturity, are shown
in the following table (in thousands). Actual maturities will differ from
contractual maturities because of security prepayments and the right of certain
issuers to call or prepay their obligations.





Amortized
                  
                  
                  EstimatedDebt Securities
                  
                  cost
                  
                  
                  fair valueWithin
      one year
                  
                  $
                  12,658
                  
                  
                  $
                  12,643One
      to five years
                  
                  
                  34,411
                  
                  
                  
                  35,788Five
      to ten years
                  
                  
                  12,340
                  
                  
                  
                  12,473Over
      ten years
                  
                  
                  300
                  
                  
                  
                  29559,709
                  
                  
                  
                  61,199Mortgage-backed
      securities
                  
                  
                  28,868
                  
                  
                  
                  29,510$
                  88,577
                  
                  
                  $
                  90,709





Securities
available for sale with an estimated fair value of $60,207,000, and $44,346,000
at December 31, 2009 and 2008 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 (in thousands):


F-11





Held to Maturity Securities
                  
                  
                  
                  
                  GrossObligations of State
                  
                  Amortized
                  
                  
                  unrealized
                  
                  
                  Estimatedand Political Subdivisions
                  
                  cost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  fair valueDecember
      31, 2009
                  
                  $
                  8,218
                  
                  
                  $
                  360
                  
                  
                  $
                  —
                  
                  
                  $
                  8,578December
      31, 2008
                  
                  $
                  5,765
                  
                  
                  $
                  68
                  
                  
                  $
                  (35
                  )
                  
                  $
                  5,798





Held to
Maturity obligations of state and political subdivisions are general obligation
bonds of municipalities local to the Company and are typically not rated by the
NRSRO’s. In accordance with federal regulations, the Company performs an
analysis of the finances of the municipalities to determine that the bonds are
the credit equivalent of investment grade bonds. There were no sales of
securities held to maturity in 2009 or 2008 or 2007.





The
amortized cost and estimated fair value of these held to maturity securities at
December 31, 2009, by remaining period to contractual maturity, are shown
in the following table (in thousands). Actual maturities will differ from
contractual maturities because certain issuers have the right to call or prepay
their obligations.





Amortized
                  
                  
                  EstimatedHeld to Maturity Securities
                  
                  cost
                  
                  
                  fair valueWithin
      one year
                  
                  $
                  4,703
                  
                  
                  $
                  4,741One
      to five years
                  
                  
                  2,092
                  
                  
                  
                  2,240Five
      to ten years
                  
                  
                  604
                  
                  
                  
                  646Over
      ten years
                  
                  
                  819
                  
                  
                  
                  951$
                  8,218
                  
                  
                  $
                  8,578





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, 2009 and 2008 were as follows
(in thousands):





Less than 12 months
                
                
                12 months or more
                
                
                TotalDecember 31, 2009
                
                Estimated
                
                
                Unrealized
                
                
                Estimated
                
                
                Unrealized
                
                
                Estimated
                
                
                UnrealizedInvestment Securities
                
                fair value
                
                
                losses
                
                
                fair value
                
                
                losses
                
                
                fair value
                
                
                lossesAvailable
      for sale:Debt
      Securities:Government
      sponsored enterprises
                
                $
                7,405
                
                
                $
                71
                
                
                $
                —
                
                
                $
                —
                
                
                $
                7,405
                
                
                $
                71Obligations
      of states and political subdivisions
                
                
                6,338
                
                
                
                62
                
                
                
                129
                
                
                
                3
                
                
                
                6,467
                
                
                
                65Mortgage-backed
      securities and collateralized mortgage obligations
                
                
                3,177
                
                
                
                83
                
                
                
                —
                
                
                
                —
                
                
                
                3,177
                
                
                
                8316,920
                
                
                
                216
                
                
                
                129
                
                
                
                3
                
                
                
                17,049
                
                
                
                219Equity
      securities
                
                
                —
                
                
                
                —
                
                
                
                105
                
                
                
                5
                
                
                
                105
                
                
                
                5$
                16,920
                
                
                $
                216
                
                
                $
                234
                
                
                $
                8
                
                
                $
                17,154
                
                
                $
                224Held
      to maturity:Obligations
      of states and political subdivisions
                
                $
                56
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                56
                
                
                $
                —





Less than 12 months
                
                
                12 months or more
                
                
                TotalDecember 31, 2008
                
                Estimated
                
                
                Unrealized
                
                
                Estimated
                
                
                Unrealized
                
                
                Estimated
                
                
                UnrealizedInvestment Securities
                
                fair value
                
                
                losses
                
                
                fair value
                
                
                losses
                
                
                fair value
                
                
                lossesAvailable
      for sale:Debt
      Securities:Government
      sponsored enterprises
                
                $
                1,470
                
                
                $
                30
                
                
                $
                —
                
                
                $
                —
                
                
                $
                1,470
                
                
                $
                30Obligations
      of states and political subdivisions
                
                
                4,088
                
                
                
                40
                
                
                
                308
                
                
                
                9
                
                
                
                4,396
                
                
                
                49Mortgage-backed
      securities and collateralized mortgage obligations
                
                
                3,168
                
                
                
                42
                
                
                
                1,196
                
                
                
                21
                
                
                
                4,364
                
                
                
                638,726
                
                
                
                112
                
                
                
                1,504
                
                
                
                30
                
                
                
                10,230
                
                
                
                142Equity
      securities
                
                
                253
                
                
                
                78
                
                
                
                —
                
                
                
                —
                
                
                
                253
                
                
                
                78$
                8,979
                
                
                $
                190
                
                
                $
                1,504
                
                
                $
                30
                
                
                $
                10,483
                
                
                $
                220Held
      to maturity:Obligations
      of states and political subdivisions
                
                $
                1,115
                
                
                $
                35
                
                
                $
                —
                
                
                $
                —
                
                
                $
                1,115
                
                
                $
                35




F-12




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 FHLMC, FNMA, and the Government National Mortgage
Association (GNMA or “Ginnie Mae”).





Management
evaluates securities for other-than-temporary impairment (“OTTI”) at least on a
quarterly basis, and more frequently when economic or market conditions warrant
such an evaluation. All of the Company’s investment securities classified as
available for sale or held to maturity are evaluated for OTTI. Securities
identified as OTTI are written down to their current fair value. For debt and
equity securities that are intended to be sold, or that management believes will
more-likely-than-not be required to be sold prior to recovery, the full
impairment is recognized immediately in earnings. An impairment will also be
recorded if the present value of expected cash flows is not sufficient to
recover the entire amortized cost basis.





As of
December 31, 2009, a total of $17,154,000 in available for sale securities had a
$224,000 total unrealized loss which is included in accumulated other
comprehensive loss on the consolidated balance sheet, net of tax. Two of these
available for sale securities, totaling $234,000 with $8,000 of unrealized loss,
were in a continual loss position for 12 months or more. One security was an
obligation of a
state or political subdivision and one was an equity security. Management
believes that none of the unrealized losses on non-equity securities at December
31, 2009 are due to the underlying credit quality of the issuers of the
securities, but instead are primarily related to market interest rates, and the
full value of the securities will be realized upon maturity. Additionally, the
Company does not intend to sell the securities, and it is, more-likely-than-not
that the Company will not be required to sell the securities before recovery of
their amortized cost. As such, only the credit loss component of the unrealized
loss would be recognized in earnings, while the balance of the fair value loss
is recognized in other comprehensive income. No impairment charge was recorded
on these securities for the period ended December 31, 2009.





As of
December 31, 2009, 34 available for sale totaling $16,920,000 had $216,000 in
unrealized losses and were in a loss position for less than 12 consecutive
months. Seven of these available for sale securities, totaling $7,405,000 with
$71,000 of unrealized losses, were government sponsored enterprises securities,
three totaling $3,177,000 with $82,000 in unrealized losses were mortgage-backed
securities and collateralized mortgages, and 23 totaling $6,338,000 with $62,000
in unrealized losses were obligations of states and political subdivisions. Held
to maturity securities in a continual loss position for less than 12 months
totaled $56,000 with an unrealized loss less than $1,000 and consisted of one
obligation of a state or political subdivision. Management believes that none of
the unrealized losses on these securities at December 31, 2009 are due to the
underlying credit quality of the issuers of the securities, but instead are
primarily related to market interest rates, and the full value of the securities
will be realized upon maturity. No impairment charge was recorded on these
securities for the period ended December 31, 2009.





As of
December 31, 2008, a total of $10,483,000 in available for sale securities had a
$220,000 total unrealized loss which is included in accumulated other
comprehensive loss on the balance sheet. There were 24 securities in a continual
loss position for less than 12 months and five that were in a continual loss
position for 12 months or more. Of the 24 securities in a continual loss
position for less than 12 months, one was from a government sponsored
enterprise, three were mortgage-backed securities, seventeen were obligations of
states and political subdivisions and three were equity securities. Of the five
securities in a continual loss position for 12 months or more, two were
obligations of states and political subdivisions, two were mortgage-backed
securities and one was an equity security. None of the individual unrealized
losses were significant.





As of
December 31, 2007, an impairment charge of $30,000 was recorded on an equity
security. The impairment charge of $5,162,000 recorded in 2008 was primarily due
to an investment in FHLMC preferred stock. A portion of the FHLMC preferred
stock was sold in 2008, and the remaining shares were sold in 2009. Of the
remaining $131,000 impairment charge at December 31, 2009, $30,000 was recorded
in 2007, and the balance was recorded in 2008 on one equity security, which has
fully recovered as of December 31, 2009. Management believes the impairment on
this security as well as the impairment on the one equity security in a
continual loss position for 12 months or more, as of December 31, 2009, do not
represent underlying credit quality impairment but instead are due to market
fluctuation.


F-13





(4)
            Restricted
      Investments





As a
member of the Federal Home Loan Bank of New York (FHLB), the Company is required
to purchase and hold stock in the FHLB to satisfy membership and borrowing
requirements. This stock is restricted in that it can only be sold to the FHLB
or to another member institution, and all sales of FHLB stock must be at par
value. As a result of these restrictions, FHLB stock is unlike the Company’s
other investment securities insofar as there is no trading market for FHLB stock
and the transfer price is determined by FHLB membership rules, not by market
participants. As of December 31, 2009 and 2008, our FHLB stock totaled
$1,149,000 and $2,435,000, respectively, and is included as a part of restricted
investments on the consolidated balance sheets.





FHLB
stock is held as a long-term investment, and its value is determined based on
the ultimate recoverability of the par value. The Company evaluates impairment
quarterly. The decision of whether impairment exists is a matter of judgment
that reflects our view of the FHLB’s long-term performance, which includes
factors such as:


·
            its
      operating performance;


·
            the
      severity and duration of declines in the fair value of its net assets
      related to its capital stock
amount;


·
            its
      commitment to make payments required by law or regulation and the level of
      such payments in relation to its operating
  performance;





·
            the
      impact of legislative and regulatory changes on the FHLB, and accordingly,
      on the members of FHLB; and


·
            its
      liquidity and funding position.





After
evaluating all of these considerations, the Company concluded that the par value
of its investment in FHLB stock will be recovered. Accordingly, no impairment
charge was recorded on these securities in 2009 or 2008. Our evaluation of the
factors described above in future periods could result in the recognition of
impairment charges on FHLB stock.





(5)
            Loans





The major
classifications of loans are as follows at December 31 (in
thousands):





Loans, Net
                  
                  2009
                  
                  
                  2008Real
      estate loans:Residential
                  
                  $
                  102,963
                  
                  
                  $
                  102,939Commercial
                  
                  
                  98,961
                  
                  
                  
                  92,699Home
      equity
                  
                  
                  33,034
                  
                  
                  
                  31,370Farm
      land
                  
                  
                  4,926
                  
                  
                  
                  3,879Construction
                  
                  
                  3,841
                  
                  
                  
                  2,737243,725
                  
                  
                  
                  233,624Other
      loans:Commercial
      loans
                  
                  
                  26,034
                  
                  
                  
                  25,183Consumer
      installment loans
                  
                  
                  7,769
                  
                  
                  
                  7,511Other
      consumer loans
                  
                  
                  386
                  
                  
                  
                  173Agricultural
      loans
                  
                  
                  882
                  
                  
                  
                  43035,071
                  
                  
                  
                  33,297Total
      loans
                  
                  
                  278,796
                  
                  
                  
                  266,921Unamortized
      deferred loan fees and origination costs
                  
                  
                  611
                  
                  
                  
                  642Allowance
      for loan losses
                  
                  
                  (3,988
                  )
                  
                  
                  (3,170
                  )Total
      loans, net
                  
                  $
                  275,419
                  
                  
                  $
                  264,393





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


F-14





Nonperforming
loans are summarized as follows at December 31 (in thousands):





Nonperforming Loans
                  
                  2009
                  
                  
                  2008Nonaccrual
      loans
                  
                  $
                  12,037
                  
                  
                  $
                  5,434Loans
      past due 90 days or more and still accruing interest
                  
                  
                  1,270
                  
                  
                  
                  686$
                  13,307
                  
                  
                  $
                  6,120





Nonaccrual
loans had the following effect on interest income for the years ended
December 31 (in thousands):





Nonaccrual Loan InterestIncome not Recognized
                    
                    2009
                    
                    
                    2008Interest
      contractually due at original rates
                    
                    $
                    839
                    
                    
                    $
                    135Interest
      income recognized
                    
                    
                    (263
                    )
                    
                    
                    (56
                    )$
                    576
                    
                    
                    $
                    79





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





Allowance for Loan Losses
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007Balance
      at January 1
                  
                  $
                  3,170
                  
                  
                  $
                  3,352
                  
                  
                  $
                  3,516Provision
      (credit) for loan losses
                  
                  
                  1,300
                  
                  
                  
                  265
                  
                  
                  
                  (370
                  )Loans
      charged-off
                  
                  
                  (648
                  )
                  
                  
                  (647
                  )
                  
                  
                  (318
                  )Recoveries
                  
                  
                  166
                  
                  
                  
                  200
                  
                  
                  
                  524Balance
      at December 31
                  
                  $
                  3,988
                  
                  
                  $
                  3,170
                  
                  
                  $
                  3,352





As of
December 31, 2009, there were $11,824,000 in loans which were considered to be
impaired. Of that amount, there were $3,590,000 in impaired loans that received
a $862,000 specific valuation allowance. As of December 31, 2008, there were
$5,191,000 in loans which were considered to be impaired. Of that amount, there
were $795,000 in impaired loans that received a $149,000 specific valuation
allowance. Average impaired loans for the years ended December 31, 2009, 2008
and 2007 were $7,758,000, $6,095,000 and $2,526,000 respectively. There are no
commitments to lend additional funds on the above noted non-performing loans.
Despite the increase in the amount of non-performing loans, management has
determined that the majority of these loans remain well collateralized. Based on
it’s comprehensive analysis of the loan portfolio, and since the Company has no
exposure to subprime loans, management believes the current level of the
allowance for loan losses is adequate.





(6)
            Premises
      and Equipment





The major
classifications of premises and equipment were as follows at December 31
(in thousands):





Premise and Equipment, Net
                  
                  2009
                  
                  
                  2008Land
                  
                  $
                  1,057
                  
                  
                  $
                  837Buildings
      and improvements
                  
                  
                  6,168
                  
                  
                  
                  5,618Furniture
      and fixtures
                  
                  
                  226
                  
                  
                  
                  191Equipment
                  
                  
                  4,323
                  
                  
                  
                  4,26211,774
                  
                  
                  
                  10,908Less
      accumulated depreciation and amortization
                  
                  
                  (6,754
                  )
                  
                  
                  (6,596
                  )$
                  5,020
                  
                  
                  $
                  4,312





Depreciation
and amortization expense was $627,000, $655,000, and $628,000 in 2009, 2008, and
2007, respectively.





(7)
            Time
      Deposits





The
following is a summary of time deposits at December 31, 2009 by remaining
period to contractual maturity (in thousands):





Within
      one year
                  
                  $
                  138,590One
      to two years
                  
                  
                  22,037Two
      to three years
                  
                  
                  7,371Three
      to four years
                  
                  
                  2,941Four
      to five years
                  
                  
                  3,592$
                  174,531


F-15





Time
deposits of $100,000 or more totaled $80,737,000 and  $43,498,000 at
December 31, 2009 and 2008, respectively. Interest expense related to time
deposits over $100,000 was $1,471,000, $1,634,000 and $1,590,000 for 2009, 2008
and 2007, respectively.





For the
years ended December 31, 2008 and 2007, total time deposits include brokered
time deposits obtained from the national market. During 2008, these deposits
averaged $3,285,000 but were repaid by year-end and not replaced during 2009.
Brokered time deposits in 2007 averaged $8,493,000 and amounted to $5,052,000 or
1.69% of total deposits at December 31, 2007. The rates of interest paid on time
deposits obtained from the national market averaged 4.75% during 2008 and 4.73%
during 2007.





(8)
            Federal
      Home Loan Bank Borrowings





The
following is a summary of Federal Home Loan Bank (FHLB) securities sold under
agreements to repurchase, by maturity date at December 31 (dollars in
thousands):





2009
                    
                    
                    2008FHLB Maturities
                    
                    Amount
                    
                    
                    Rate
                    
                    
                    Amount
                    
                    
                    RateMaturing
      in 2009
                    
                    $
                    —
                    
                    
                    
                    
                    
                    
                    $
                    20,000
                    
                    
                    4.41
                    %Maturing
      in 2012
                    
                    
                    5,000
                    
                    
                    
                    3.79
                    %
                    
                    
                    5,000
                    
                    
                    
                    3.79Maturing
      in 2013
                    
                    
                    10,000
                    
                    
                    
                    4.14
                    
                    
                    
                    10,000
                    
                    
                    
                    4.14$
                    15,000
                    
                    
                    
                    4.02
                    %
                    
                    $
                    35,000
                    
                    
                    
                    4.24
                    %





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, 2009 and 2008 was $50.4 million and
$62.9 million respectively, which satisfied the collateral requirements of the
FHLB.





(9)
            Short-Term
      Borrowings





Short-term
borrowings at December 31, 2009 and 2008 are primarily comprised of secured
overnight FHLB borrowings; there were no short-term borrowings at December 31,
2009. The Bank maintains unsecured lines of credit with Atlantic Central Bankers
Bank and First Tennessee Bank.  During 2009, the Bank established the
ability to borrow at the Federal Reserve Discount Window. The Bank, as a member
of the FHLB, has access to a line of credit program with a maximum borrowing
capacity of $40.7 million and $39.1 million as of December 31, 2009
and 2008, respectively. There were $10.1 million in borrowings under the
overnight program at December 31, 2008 at a rate of 0.46%. The Bank pledges
mortgage loans and FHLB stock as collateral on these borrowings. During 2009,
the maximum month-end balance was $1.2 million, the average balance was
$0.5 million, and the average interest rate was 0.50%. During 2008, the
maximum month-end balance was $22.3 million, the average balance was
$7.5 million, and the average interest rate was 1.58%. Short-term
borrowings at December 31, 2009 and 2008 also included demand notes of
$212,000 and $424,000, respectively.





(10)
            Income
      Taxes





Income
taxes for the years ended December 31 consisted of the following (in
thousands):





Income Tax Expense
(Benefit)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007Current
      tax expense:Federal
                  
                  $
                  616
                  
                  
                  $
                  1,135
                  
                  
                  $
                  1,302State
                  
                  
                  57
                  
                  
                  
                  57
                  
                  
                  
                  43NOL
      carryback
                  
                  
                  (1,407
                  )
                  
                  
                  —
                  
                  
                  
                  —Deferred
      tax (benefit)
                  
                  
                  1,417
                  
                  
                  
                  (2,053
                  )
                  
                  
                  (76
                  )$
                  683
                  
                  
                  $
                  (861
                  )
                  
                  $
                  1,269




F-16





Items
creating 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 (in thousands):





Income
      Tax
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007Expense (Benefit)
                  
                  Amount
                  
                  
                  
                  %(1)
                  
                  
                  Amount
                  
                  
                  
                  %(1)
                  
                  
                  Amount
                  
                  
                  
                  %(1)Tax
      at statutory rate
                  
                  $
                  1,281
                  
                  
                  
                  34
                  %
                  
                  $
                  626
                  
                  
                  
                  34
                  %
                  
                  $
                  1,885
                  
                  
                  
                  34
                  %State
      taxes, net of Federal tax benefit
                  
                  
                  192
                  
                  
                  
                  5
                  
                  
                  
                  (211
                  )
                  
                  
                  (11
                  )
                  
                  
                  34
                  
                  
                  
                  1Tax-exempt
      interest and dividends
                  
                  
                  (670
                  )
                  
                  
                  (18
                  )
                  
                  
                  (570
                  )
                  
                  
                  (31
                  )
                  
                  
                  (611
                  )
                  
                  
                  (11
                  )Interest
      expense allocated to tax-exempt securities
                  
                  
                  44
                  
                  
                  
                  1
                  
                  
                  
                  53
                  
                  
                  
                  3
                  
                  
                  
                  78
                  
                  
                  
                  1Bank-owned
      life insurance
                  
                  
                  (168
                  )
                  
                  
                  (4
                  )
                  
                  
                  (697
                  )
                  
                  
                  (38
                  )
                  
                  
                  (164
                  )
                  
                  
                  (3
                  )Other
      adjustments
                  
                  
                  4
                  
                  
                  
                  (0
                  )
                  
                  
                  (62
                  )
                  
                  
                  (4
                  )
                  
                  
                  47
                  
                  
                  
                  1Income
      tax expense (benefit)
                  
                  $
                  683
                  
                  
                  
                  18
                  %
                  
                  $
                  (861
                  )
                  
                  
                  (47
                  )%
                  
                  $
                  1,269
                  
                  
                  
                  23
                  %





(1)
Percentage is of pre-tax
income





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





Deferred Tax Asset, Net
                  
                  2009
                  
                  
                  2008Deferred
      tax assets:Allowance
      for loan losses in excess of tax bad debt reserve
                  
                  $
                  1,395
                  
                  
                  $
                  1,079Impairment
      charge on securities
                  
                  
                  51
                  
                  
                  
                  1,822Retirement
      benefits
                  
                  
                  1,907
                  
                  
                  
                  2,085Deferred
      compensation
                  
                  
                  58
                  
                  
                  
                  70NOL
      and tax credit carryover
                  
                  
                  353
                  
                  
                  
                  —Depreciation
                  
                  
                  444
                  
                  
                  
                  543Other
                  
                  
                  9
                  
                  
                  
                  10Total
      deferred tax assets
                  
                  
                  4,217
                  
                  
                  
                  5,609Deferred
      tax liabilities:Prepaid
      expenses
                  
                  
                  (187
                  )
                  
                  
                  (162
                  )Total
      deferred tax liabilities
                  
                  
                  (187
                  )
                  
                  
                  (162
                  )Net
      Deferred Tax Asset
                  
                  $
                  4,030
                  
                  
                  $
                  5,447





In
addition to the preceding table, the Company had the following deferred tax
assets and liabilities in accumulated other comprehensive income (OCI) at
December 31 (in thousands):





Deferred
      Tax Asset, Net inAccumulated Other Comprehensive
      Income
                  
                  2009
                  
                  
                  2008Deferred
      tax assets:Pension
      benefits
                  
                  $
                  1,573
                  
                  
                  $
                  1,994Post
      retirement benefits
                  
                  
                  —
                  
                  
                  
                  39Other
      retirement benefits
                  
                  
                  334
                  
                  
                  
                  228Total
      deferred tax assets
                  
                  
                  1,907
                  
                  
                  
                  2,261Deferred
      tax liabilities:Post
      retirement benefits
                  
                  
                  (51
                  )
                  
                  
                  —Unrealized
      gain on securities available for sale
                  
                  
                  (877
                  )
                  
                  
                  (537
                  )Total
      deferred tax liabilities
                  
                  
                  (928
                  )
                  
                  
                  (537
                  )Net
      Deferred Tax Asset
                  
                  $
                  979
                  
                  
                  $
                  1,724





In
assessing the ability to realize 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, 2009 and 2008.


F-17


The
Company did not have any unrecognized tax benefits at December 31, 2008 and 2009
or during the years then ended. No unrecognized tax benefits are expected to
arise within the next twelve months. The Company records interest and penalties
on tax positions in the year assessed. Amounts included in expense for the years
ended 2007 through 2009 were not material. The Company files income tax returns
in the both the US Federal and New York State tax jurisdictions. Generally, the
Company is no longer subject to examination by the US Federal and NYS taxing
authorities for years before 2006.





(11)
            Other
      Non-Interest Expenses





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





Other Non-Interest Expense
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007Stationery
      and supplies
                  
                  $
                  235
                  
                  
                  $
                  285
                  
                  
                  $
                  254Advertising
      expense
                  
                  
                  251
                  
                  
                  
                  247
                  
                  
                  
                  278Director
      expenses
                  
                  
                  239
                  
                  
                  
                  239
                  
                  
                  
                  261Merchant
      ATM and interchange fees
                  
                  
                  436
                  
                  
                  
                  532
                  
                  
                  
                  539Professional
      services
                  
                  
                  561
                  
                  
                  
                  824
                  
                  
                  
                  721FDIC
      assessments
                  
                  
                  800
                  
                  
                  
                  179
                  
                  
                  
                  119Other
      expenses
                  
                  
                  1,374
                  
                  
                  
                  1,223
                  
                  
                  
                  1,181$
                  3,896
                  
                  
                  $
                  3,529
                  
                  
                  $
                  3,353





(12)
            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 I 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 company’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 I 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, 2009 and 2008, the Bank met all capital
adequacy requirements to which it is e 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.





The
following is a summary of the actual capital amounts and ratios as of
December 31, 2009 and 2008 for the Bank compared to the required ratios for
minimum capital adequacy and for classification as well-capitalized (dollars in
thousands):





Actual
                          
                          
                          Required
      RatiosMinimumRegulatory
                          
                          
                          
                          
                          
                          
                          
                          Capital
                          
                          
                          WellCapital
                          
                          Amount
                          
                          
                          Ratio
                          
                          
                          Adequacy
                          
                          
                          CapitalizedDecember
      31, 2009:Leverage
      (Tier I) capital
                          
                          $
                          43,986
                          
                          
                          
                          10.5
                          %
                          
                          
                          4.0
                          %
                          
                          
                          5.0
                          %Risk-based
      capital:Tier
      I
                          
                          
                          43,986
                          
                          
                          
                          15.4
                          
                          
                          
                          4.0
                          
                          
                          
                          6.0Total
                          
                          
                          47,566
                          
                          
                          
                          16.6
                          
                          
                          
                          8.0
                          
                          
                          
                          10.0December
      31, 2008:Leverage
      (Tier I) capital
                          
                          $
                          43,081
                          
                          
                          
                          10.9
                          %
                          
                          
                          4.0
                          %
                          
                          
                          5.0
                          %Risk-based
      capital:Tier
      I
                          
                          
                          43,081
                          
                          
                          
                          15.9
                          
                          
                          
                          4.0
                          
                          
                          
                          6.0Total
                          
                          
                          46,268
                          
                          
                          
                          17.1
                          
                          
                          
                          8.0
                          
                          
                          
                          10.0


F-18





Jeffersonville
Bancorp is a small bank holding company, and is exempt from regulatory capital
requirements administered by the federal banking agencies.





(13)
            Stockholders’
      Equity





Dividend
Restrictions


Dividends
paid by the Bank are the primary source of funds available to the Parent Company
for payment of dividends to its stockholders and for other working capital
needs. Applicable Federal statutes, regulations and guidelines impose
restrictions on the amount of dividends that may be declared by the Bank. Under
these restrictions, the dividends declared and paid by the Bank to the Parent
Company may not exceed the total amount of the Bank’s net profit retained in the
current year plus its retained net profits, as defined, from the two preceding
years. The Bank’s retained net profits available for dividends at December 31,
2009 totaled $1,763,000.





(14)
            Comprehensive
      Income (Loss)





Comprehensive
income (loss) represents the sum of net income and items of “other comprehensive
income (loss)” 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 income (loss) for 2009, 2008, and 2007 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 (in thousands):





Other Comprehensive Income (Loss), Net of
      Tax
                
                2009
                
                
                2008
                
                
                2007Securities
      available for sale:Net
      unrealized holding gains (losses) arising during the year
                
                $
                1,396
                
                
                $
                (4,515
                )
                
                $
                1,675Reclassification
      adjustment for net realized losses (gains) included in
    income
                
                
                (544
                )
                
                
                (64
                )
                
                
                19Reclassification
      adjustment for impairment charges included in income
                
                
                -
                
                
                
                5,162
                
                
                
                30Amortization
      of pension and post retirement liabilities’ gains and
    losses
                
                
                1,012
                
                
                
                (3,152
                )
                
                
                1,255Other
      comprehensive income (loss), before tax
                
                
                1,864
                
                
                
                (2,568
                )
                
                
                2,977Income
      tax benefit (expense) related to other comprehensive income
      (loss)
                
                
                (745
                )
                
                
                1,028
                
                
                
                (1,192
                )$
                1,119
                
                
                $
                (1,541
                )
                
                $
                1,787





At
December 31, 2009 and 2008, the components of accumulated other comprehensive
loss are as follows (in thousands):





Accumulated Other Comprehensive Loss, Net of
      Tax
                
                2009
                
                
                2008Supplemental
      executive retirement plan
                
                $
                (834
                )
                
                $
                (570
                )Postretirement
      benefits
                
                
                126
                
                
                
                (98
                )Defined
      benefit pension liability
                
                
                (3,933
                )
                
                
                (4,985
                )Net
      unrealized holding gains (losses) on securities available for
      sale
                
                
                2,194
                
                
                
                1,342Accumulated
      other comprehensive loss, before tax
                
                
                (2,447
                )
                
                
                (4,311
                )Income
      tax benefit (expense) related to accumulated other comprehensive
      loss
                
                
                979
                
                
                
                1,724$
                (1,468
                )
                
                $
                (2,587
                )





(15)
            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 (in
thousands):





Related Party Transactions
                  
                  2009
                  
                  
                  2008Directors
                  
                  $
                  2,705
                  
                  
                  $
                  2,467Executive
      officers (non-directors)
                  
                  
                  416
                  
                  
                  
                  315$
                  3,121
                  
                  
                  $
                  2,782


F-19





During
2009, total advances to these directors and officers were $818,000, and total
payments made on these loans were $364,000. A reduction of $115,000 in related
party transactions was due to the retirement of an executive officer, the
termination of an executive officer, and the appointment of their successors.
Directors and officers had unused lines of credit with the Company of $535,000
and $412,000 at December 31, 2009 and 2008, respectively.





(16)
            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 the Employee Retirement Income Security Act, 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 ASC 715 Compensation - Retirement
Benefits. Accordingly, the cost of these benefits is recognized on an
accrual basis as employees perform services to earn the benefits





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 ASC 715. 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, 2009 and 2008 consolidated
financial statements. Accordingly, the reported measures of the accumulated
postretirement benefit obligation and net periodic postretirement benefit cost
do not include the effects of the Medicare Act. When issued, the specific
authoritative literature on accounting for the federal subsidy could require the
Company to revise its previously reported information.





The
Company expects to contribute $750,000 to its pension plan and $126,000 to its
other postretirement benefit plan in 2010. The Company’s minimum required
contribution for 2010 is $644,000. Benefits, which reflect estimated future
employee service, are expected to be paid as follows (in
thousands):





Pension
                  
                  
                  PostretirementEstimated Future Benefits
                  
                  benefit
                  
                  
                  benefit2010
                  
                  $
                  578
                  
                  
                  $
                  1802011
                  
                  
                  602
                  
                  
                  
                  1862012
                  
                  
                  629
                  
                  
                  
                  1992013
                  
                  
                  645
                  
                  
                  
                  2192014
                  
                  
                  656
                  
                  
                  
                  239Years
      2015-2019
                  
                  
                  3,415
                  
                  
                  
                  1,241





The
following is a summary of changes in the benefit obligations and plan assets for
the pension plan and postretirement benefit plans for the years ended December
31, 2008 and 2009 measurement dates, together with a reconciliation of each
plan’s funded status to the amounts recognized in the consolidated balance
sheets. The expense related to the change in the measurement date totaled
$131,000 and was included in net periodic pension cost for the year ended
December 31, 2008 (in thousands).


F-20





Changes in Benefit Obligations, Plan Assets and Funded Status
                    
                    Pension benefit
                    
                    
                    Postretirement benefitAs of the Measurement Date, December
      31,
                    
                    2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Change
      in benefit obligation:Beginning
      of year
                    
                    $
                    10,410
                    
                    
                    $
                    9,136
                    
                    
                    $
                    3,656
                    
                    
                    $
                    3,246Service
      cost
                    
                    
                    454
                    
                    
                    
                    372
                    
                    
                    
                    162
                    
                    
                    
                    147Interest
      cost
                    
                    
                    568
                    
                    
                    
                    557
                    
                    
                    
                    207
                    
                    
                    
                    184Actuarial
      (gain) loss
                    
                    
                    (586
                    )
                    
                    
                    (148
                    )
                    
                    
                    (254
                    )
                    
                    
                    133Loss
      due to change in discount rate & mortality
                    
                    
                    —
                    
                    
                    
                    743
                    
                    
                    
                    —
                    
                    
                    
                    —Benefits
      paid
                    
                    
                    (558
                    )
                    
                    
                    (482
                    )
                    
                    
                    (96
                    )
                    
                    
                    (80
                    )Adjustment
      for change in measurement date
                    
                    
                    —
                    
                    
                    
                    232
                    
                    
                    
                    —
                    
                    
                    
                    —Contributions
      by plan participants
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    31
                    
                    
                    
                    27End
      of year
                    
                    
                    10,288
                    
                    
                    
                    10,410
                    
                    
                    
                    3,706
                    
                    
                    
                    3,657Changes
      in fair value of plan assets:Beginning
      of year
                    
                    
                    5,285
                    
                    
                    
                    6,811
                    
                    
                    
                    —
                    
                    
                    
                    —Actual
      return on plan assets
                    
                    
                    672
                    
                    
                    
                    (1,546
                    )
                    
                    
                    —
                    
                    
                    
                    —Employer
      contributions
                    
                    
                    2,096
                    
                    
                    
                    502
                    
                    
                    
                    65
                    
                    
                    
                    53Contributions
      by plan participants
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    31
                    
                    
                    
                    27Benefits
      paid
                    
                    
                    (614
                    )
                    
                    
                    (482
                    )
                    
                    
                    (96
                    )
                    
                    
                    (80
                    )End
      of year
                    
                    
                    7,439
                    
                    
                    
                    5,285
                    
                    
                    
                    —
                    
                    
                    
                    —Unfunded
      status at end of year, recognized inOther
      liabilities on the balance sheet
                    
                    $
                    (2,849
                    )
                    
                    $
                    (5,125
                    )
                    
                    $
                    (3,706
                    )
                    
                    $
                    (3,657
                    )Amounts
      recognized in accumulated other comprehensive loss consists
      of:Unrecognized
      actuarial (gain) loss
                    
                    $
                    3,826
                    
                    
                    $
                    4,853
                    
                    
                    $
                    (410
                    )
                    
                    $
                    (678
                    )Unrecognized
      prior service cost
                    
                    
                    107
                    
                    
                    
                    132
                    
                    
                    
                    536
                    
                    
                    
                    580Net
      amount recognized
                    
                    $
                    3,933
                    
                    
                    $
                    4,985
                    
                    
                    $
                    126
                    
                    
                    $
                    98





The
accumulated benefit obligation for the pension plan was $9,347,000 and
$8,159,000 at December 31, 2009 and 2008, respectively.





The
components of the net periodic benefit cost for the years ended December 31, for
these plans were as follows (in thousands):





Net
      Periodic Benefit Cost
                  
                  Pension benefit
                  
                  
                  Postretirement benefitFor the year ended December 31,
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007Net
      periodic benefit cost:Service
      cost
                  
                  $
                  454
                  
                  
                  $
                  372
                  
                  
                  $
                  418
                  
                  
                  $
                  162
                  
                  
                  $
                  147
                  
                  
                  $
                  143Interest
      cost
                  
                  
                  568
                  
                  
                  
                  557
                  
                  
                  
                  521
                  
                  
                  
                  207
                  
                  
                  
                  183
                  
                  
                  
                  156Expected
      return on plan assets
                  
                  
                  (406
                  )
                  
                  
                  (511
                  )
                  
                  
                  (431
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Amortization
      of prior service cost
                  
                  
                  24
                  
                  
                  
                  25
                  
                  
                  
                  25
                  
                  
                  
                  (45
                  )
                  
                  
                  (45
                  )
                  
                  
                  (45
                  )Recognized
      net actuarial loss
                  
                  
                  232
                  
                  
                  
                  80
                  
                  
                  
                  172
                  
                  
                  
                  15
                  
                  
                  
                  12
                  
                  
                  
                  2Net
      amount recognized
                  
                  $
                  872
                  
                  
                  $
                  523
                  
                  
                  $
                  705
                  
                  
                  $
                  339
                  
                  
                  $
                  297
                  
                  
                  $
                  256




The
estimated net loss and prior service cost for the defined benefit pension plan
that will be amortized from accumulated other comprehensive loss into net
periodic benefit cost over the next fiscal year are $193,000 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 credit over the next fiscal year is $45,000.





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





Pension
                  
                  
                  PostretirementBenefit
      Obligation
                  
                  benefits
                  
                  
                  benefitsAssumptions
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Discount
      rate
                  
                  
                  5.87
                  %
                  
                  
                  5.75
                  %
                  
                  
                  5.75
                  %
                  
                  
                  5.75
                  %Rate
      of compensation increase
                  
                  
                  3.00
                  
                  
                  
                  5.00
                  
                  
                  
                  —
                  
                  
                  
                  —




F-21





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





Pension
                  
                  
                  PostretirementNet
      Periodic Benefit
                  
                  benefits
                  
                  
                  benefitsCost Assumptions
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Discount
      rate
                  
                  
                  5.75
                  %
                  
                  
                  5.75
                  %
                  
                  
                  5.75
                  %
                  
                  
                  5.75
                  %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 which was used to determine the
benefit obligation for the other postretirement benefits plan at
December 31, 2009 was 8.0%, declining gradually to 4.0% in 2014 and
remaining at that level thereafter. Age adjusted factors were applied to under
age 65 retiree medical costs in addition to the trend rates. Increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the benefit obligation at December 31, 2009 by approximately
$687,625 and the net periodic benefit cost for the year by approximately
$94,659; a one percentage point decrease would decrease the benefit obligation
and benefit cost by approximately $530,081 and $69,872,
respectively.





The
Company’s pension plan asset allocation at December 31, by asset category is as
follows:





Pension Plan Asset
    Allocation
                  
                  2009
                  
                  
                  2008Asset
      category:Equity
      securities
                  
                  
                  47
                  %
                  
                  
                  46
                  %Debt
      securities
                  
                  
                  27
                  
                  
                  
                  51Other
                  
                  
                  26
                  
                  
                  
                  3





The
following table presents pension plan assets measured at fair value on a
recurring basis by their level within the fair value hierarchy as of December
31, 2009, dollars in thousands. Financial assets are classified based on the
lowest level of input that is significant to their fair value
measurement.





(Level
      1)QuotedPrices
      in
                
                
                (Level
      2)Active
                
                
                Significant
                
                
                (Level
      3)Markets
      for
                
                
                Other
                
                
                SignificantFair
      Value Hierarchy
                
                
                
                
                Identical
                
                
                Observable
                
                
                UnobservableFor Pension Plan Assets
                
                Total
                
                
                Assets
                
                
                Inputs
                
                
                InputsAsset
      category:Cash
      and cash equivalents
                
                $
                1,937
                
                
                $
                1,937
                
                
                $
                —
                
                
                $
                —Municipal
      bonds
                
                
                292
                
                
                
                —
                
                
                
                292
                
                
                
                —Equity
      securities:U.S.
      companies
                
                
                1,232
                
                
                
                1,232
                
                
                
                —
                
                
                
                —International
      companies
                
                
                14
                
                
                
                14
                
                
                
                —
                
                
                
                —Mutual
      funds:U.S.
      companies
                
                
                377
                
                
                
                377
                
                
                
                —
                
                
                
                —International
      companies
                
                
                536
                
                
                
                536
                
                
                
                —
                
                
                
                —Common
      funds:Equity
      (a)
                
                
                1,366
                
                
                
                —
                
                
                
                1,366
                
                
                
                —Fixed
      income (b)
                
                
                1,685
                
                
                
                —
                
                
                
                1,685
                
                
                
                —$
                7,439
                
                
                $
                4,096
                
                
                $
                3,343
                
                
                $
                —





(a)
            This class comprises low-cost
      equity index funds not actively managed that track the S&P 500 Index,
      the S&P Midcap Index, the Russell 2000 Index and the Morgan Stanley
      Capital International EAFE
Index.


(b)
            This class comprises low-cost
      fixed income index funds not actively managed that track the Barclays
      Capital Mortgage-Backed Securities Index, the Barclays Capital
      Intermediate Government Credit Bond Index and the Barclays Capital U.S.
      Treasury Inflation Protected Securities (TIPS)
    Index.


F-22





During
2009, the Company changed pension providers and established a Funding Agreement
with RBS Citizens, NA (Citizens) to act as the Funding Agent of the assets of
the Plan. Citizens has been given discretion by the Company to determine the
appropriate strategic asset allocation as governed by the Company’s Investment
Policy Statement and Guidelines which provides specific targeted asset
allocations for each investment category as follows:





Asset Allocation Targets
                  
                  Allocation RangeLarge
      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, 2009 were overweighted toward money
market investments due to the change in pension providers and progress toward
meeting the allocations in the table above is ongoing.





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 $150,000
at December 31, 2009 and $182,000 at December 31, 2008 and are unfunded. The
Company recorded an expense of $62,000, $13,000 and $24,000 relating to this
plan during the years ended December 31, 2009, 2008 and 2007,
respectively.





Profit
Incentive Program


The
Company maintains a program for full time employees. The benefits accrued under
this plan totaled $35,000 at December 31, 2009 and $40,000 at December 31, 2008
and are unfunded. The Company recorded an expense of $419,000, $427,000 and
$622,000 relating to this plan during the years ended December 31, 2009, 2008
and 2007, 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 $173,000, $160,000 and $150,000 in 2009, 2008 and 2007,
respectively.





Supplemental
Executive Retirement Plan


The
Company maintains 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 $2,058,000 at December 31, 2009 and $1,585,000 at December 31, 2008
and are unfunded. The Company recorded an expense of $314,000, $152,000 and
$191,000 relating to this plan during the years ended December 31, 2009, 2008
and 2007, 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 $666,000 and $658,000 at December 31, 2009 and
2008, respectively, and are unfunded. The Company recorded an expense of
$59,000, $74,000 and $104,000 relating to this plan during the years ended
December 31, 2009, 2008 and 2007, respectively.





(17)
            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 and results of operations of the Company
will not be affected materially by the outcome of any pending legal
proceedings.


F-23





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 (in thousands):





Off-Balance
      SheetFinancial Instruments
                  
                  2009
                  
                  
                  2008Loan
      origination commitments and unused lines of credit:Mortgage
      loans
                  
                  $
                  10,655
                  
                  
                  $
                  14,414Commercial
      loans
                  
                  
                  18,974
                  
                  
                  
                  18,978Home
      equity lines
                  
                  
                  13,429
                  
                  
                  
                  12,509Other
      revolving credit
                  
                  
                  1,493
                  
                  
                  
                  1,45644,551
                  
                  
                  
                  47,357Standby
      letters of credit
                  
                  
                  858
                  
                  
                  
                  1,241$
                  45,409
                  
                  
                  $
                  48,598





These
agreements to extend credit have been granted to customers within the Company’s
lending area described in Note 5 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.
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 $858,000 and
$1,241,000 at December 31, 2009 and 2008, 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, 2009 and 2008 was not
significant.





(18)
            Fair
      Values of Financial Instruments





Effective
January 1, 2008, the Company adopted ASC Topic 820 Fair Value Measurements and
Disclosures(ASC 820), which provides a framework for measuring and
disclosing fair value under generally accepted accounting principles. ASC 820
requires disclosures about the fair value of assets and liabilities recognized
in the consolidated balance sheet in periods subsequent to initial recognition,
whether the measurements are made on a recurring basis (for example,
available-for-sale investment securities) or on a nonrecurring basis (for
example, impaired loans).


F-24


ASC 820
defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. ASC 820 also establishes a fair
value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
The standard established a fair value hierarchy that prioritizes the inputs to
valuation methods used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). The three levels of the fair value hierarchy are
as follows:





Level
1:
            Unadjusted
      quoted prices in active markets that are accessible at the measurement
      date for identical, unrestricted assets or liabilities. Since valuations
      are based on quoted prices that are readily and regularly available in an
      active market, valuation of these products does not entail a significant
      degree of judgment.





Level
2:
            Quoted
      prices in markets that are not active, or inputs that are observable
      either directly or indirectly, for substantially the full term of the
      asset or liability.





Level
3:
            Prices
      or valuation techniques that require inputs that are both significant to
      the fair value measurement and unobservable (i.e., supported with little
      or no market activity).





In
instances where inputs used to measure fair value fall into different levels in
the above fair value hierarchy, an asset’s or liability’s level is based on the
lowest level of input that is significant to the fair value
measurement.





For
financial assets measured at fair value on a recurring and non-recurring basis,
the fair value measurements by level within the fair value hierarchy used at
December 31 are as follows (dollars in thousands):





(Level
      1)QuotedPrices
      in
                                                      
                                                      
                                                      (Level
      2)Active
                                                      
                                                      
                                                      Significant
                                                      
                                                      
                                                      (Level
      3)Fair
      Value Hierarchy
                                                      
                                                      
                                                      
                                                      
                                                      Markets
      for
                                                      
                                                      
                                                      Other
                                                      
                                                      
                                                      SignificantFor
      Assets Valued on a
                                                      
                                                      
                                                      
                                                      
                                                      Identical
                                                      
                                                      
                                                      Observable
                                                      
                                                      
                                                      UnobservableRecurring
      and Non-recurring Basis
                                                      
                                                      Total
                                                      
                                                      
                                                      Assets
                                                      
                                                      
                                                      Inputs
                                                      
                                                      
                                                      InputsDecember
      31, 2009:Recurring:Available
      for sale securitiesGovernment
      sponsored enterprises (GSE) (a)
                                                      
                                                      $
                                                      9,471
                                                      
                                                      
                                                      $
                                                      —
                                                      
                                                      
                                                      $
                                                      9,471
                                                      
                                                      
                                                      $
                                                      —Obligations
      of state and political subdivisions –New
      York state (a)
                                                      
                                                      
                                                      50,180
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      50,180
                                                      
                                                      
                                                      
                                                      —Mortgage
      backed securities and collateralizedmortgage
      obligations – GSE residential (a)
                                                      
                                                      
                                                      29,510
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      29,510
                                                      
                                                      
                                                      
                                                      —Corporate
      Debt – financial services industry
                                                      
                                                      
                                                      1,450
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      1,450
                                                      
                                                      
                                                      
                                                      —Certificates
      of deposit – financial services industry
                                                      
                                                      
                                                      98
                                                      
                                                      
                                                      
                                                      98
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —Equity
      securities – financial services industry
                                                      
                                                      
                                                      611
                                                      
                                                      
                                                      
                                                      570
                                                      
                                                      
                                                      
                                                      41
                                                      
                                                      
                                                      
                                                      —$
                                                      91,320
                                                      
                                                      
                                                      $
                                                      668
                                                      
                                                      
                                                      $
                                                      90,652
                                                      
                                                      
                                                      $
                                                      —Non-recurring:Foreclosed
      assets
                                                      
                                                      $
                                                      1,397
                                                      
                                                      
                                                      $
                                                      —
                                                      
                                                      
                                                      $
                                                      —
                                                      
                                                      
                                                      $
                                                      1,397Impaired
      loans
                                                      
                                                      
                                                      1,428
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      1,428$
                                                      2,825
                                                      
                                                      
                                                      $
                                                      —
                                                      
                                                      
                                                      $
                                                      —
                                                      
                                                      
                                                      $
                                                      2,825December
      31, 2008:Recurring:Available
      for sale securitiesGovernment
      sponsored enterprises (GSE) (a)
                                                      
                                                      $
                                                      29,128
                                                      
                                                      
                                                      $
                                                      —
                                                      
                                                      
                                                      $
                                                      29,128
                                                      
                                                      
                                                      $
                                                      —Obligations
      of state and political subdivisions –New
      York state (a)
                                                      
                                                      
                                                      37,722
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      37,722
                                                      
                                                      
                                                      
                                                      —Mortgage
      backed securities and collateralizedmortgage
      obligations – GSE residential (a)
                                                      
                                                      
                                                      18,059
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      18,059
                                                      
                                                      
                                                      
                                                      —Equity
      securities – financial services industry
                                                      
                                                      
                                                      896
                                                      
                                                      
                                                      
                                                      564
                                                      
                                                      
                                                      
                                                      332
                                                      
                                                      
                                                      
                                                      —$
                                                      85,805
                                                      
                                                      
                                                      $
                                                      564
                                                      
                                                      
                                                      $
                                                      85,241
                                                      
                                                      
                                                      $
                                                      —Non-recurring:Foreclosed
      assets
                                                      
                                                      $
                                                      1,278
                                                      
                                                      
                                                      $
                                                      —
                                                      
                                                      
                                                      $
                                                      —
                                                      
                                                      
                                                      $
                                                      1,278Impaired
      loans
                                                      
                                                      
                                                      646
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      646$
                                                      1,924
                                                      
                                                      
                                                      $
                                                      —
                                                      
                                                      
                                                      $
                                                      —
                                                      
                                                      
                                                      $
                                                      1,924




Based on its analysis
of the nature and risks of these investments, the Company has determined that
presenting them as a single class is appropriate.


F-25





There
were no transfers of assets between Level 1 and Level 2 for recurring
assets.





Foreclosed
assets consist primarily of commercial real estate and are not revalued on a
recurring basis. At the time of foreclosure, foreclosed real estate assets are
adjusted to fair value less estimated costs to sell upon transfer of the loans,
establishing a new cost basis. At that time, they are reported in the Company’s
fair value disclosures in the non-recurring table above. Occasionally,
additional valuation adjustments are made based on updated appraisals and other
factors and are recorded as recognized.





ASC Topic
825 Financial
Instruments (ASC 825) requires disclosure of fair value information about
financial instruments whether or not recognized on the balance sheet, for which
it is practicable to estimate fair value. Fair value estimates are made as of a
specific point in time based on the characteristics of the financial instruments
and the relevant market information. Where available, quoted market prices are
used. In other cases, fair values are based on estimates using present value or
other valuation techniques. These techniques involve uncertainties and are
significantly affected by the assumptions used and the judgments made regarding
risk characteristics of various financial instruments, discount rates,
prepayments, estimates of future cash flows, future expected loss experience and
other factors. Changes in assumptions could significantly affect these
estimates. Derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, may or may not be realized in an
immediate sale of the instrument.





Under ASC
825, fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value of
the assets and liabilities that are not financial instruments. Accordingly, the
aggregate fair value amounts of existing financing instruments do not represent
the underlying value of those instruments on the books of the
Company.





The
following information should not be interpreted as an estimate of the fair value
of the entire Company since a fair value calculation is only provided for a
limited portion of the Company’s assets and liabilities. Due to a wide range of
valuation techniques and the degree of subjectivity used in making the
estimates, comparisons between the Company’s disclosures and those of other
companies may not be meaningful. The following methods and assumptions were used
to estimate the fair values of the Company’s financial instruments at
December 31, 2009 and 2008:





Cash
and Cash Equivalents


The
carrying amounts reported in the consolidated balance sheet for cash and
short-term instruments approximate those assets’ fair values.





Securities


For a
description of securities held in each class, see footnote 3. The fair value of
securities available for sale (carried at fair value) and held to maturity
(carried at amortized cost) are determined by obtaining quoted market prices on
nationally recognized securities exchanges (Level 1), or matrix pricing
(Level 2), which is a mathematical technique used widely in the industry to
value debt securities without relying exclusively on quoted market prices for
the specific securities but rather by relying on the securities’ relationship to
other benchmark quoted prices. 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.





Loans


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


F-26





Impaired
Loans


Impaired
loans, which are predominately commercial real estate loans, are those in which
the Bank has measured impairment generally based on the fair value of the loan’s
collateral. Fair value is generally determined based upon independent
third-party appraisals of the properties, liquidation value or discounted cash
flows based upon the expected proceeds. These assets are included as Level 3
fair values, based upon the lowest level of input that is significant to the
fair value measurements. Impaired loans are transferred out of the Level 3 fair
value hierarchy when payments reduce the outstanding loan balance below the fair
value of the loan’s collateral or the loan is foreclosed upon. As of December
31, 2009 and December 31, 2008, the fair values of collateral-dependent impaired
loans were $1,428,000 and $646,000, net of a valuation allowance of $325,000 and
$149,000, respectively. Impaired loans not requiring an allowance represent
loans for which the fair value of the expected repayments or collateral exceed
the recorded investments in such loans.





Accrued
Interest Receivable and Payable


The
carrying amount of accrued interest receivable and accrued interest payable
approximates its fair value.





Restricted
Investments


The
carrying amount of restricted investments approximates fair value and considers
the limited marketability of such securities.





Deposit
Liabilities


The fair
values disclosed for demand deposits (e.g., interest and noninterest checking,
passbook savings and money market accounts) are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying amounts).
Fair values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered in the market on certificates to a schedule of aggregated expected
monthly maturities on time deposits.





Short-Term
Debt


The
carrying amounts of short-term debt approximate their fair values.





Federal
Home Loan Bank Borrowings


Fair
values of FHLB borrowings are estimated using discounted cash flow analysis,
based on quoted prices for new FHLB borrowings with similar credit risk
characteristics, terms and remaining maturity. These prices obtained from this
active market represent a market value that is deemed to represent the transfer
price if the liability were assumed by a third party.





Off-Balance-Sheet
Financial Instruments


Fair
values for the Bank’s off-balance-sheet financial instruments (lending
commitments and letters of credit) are based on fees currently charged in the
market to enter into similar agreements, taking into account the remaining terms
of the agreements and the counterparties’ credit standing.


For fixed
rate loan commitments, fair value estimates also consider the difference between
current market interest rates and the committed rates. At December 31, 2009 and
December 31, 2008, the fair values of these financial instruments
approximated the related carrying values which were not
significant.





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





2009
                        
                        
                        2008Net
      carrying
                        
                        
                        Estimated
                        
                        
                        Net
      carrying
                        
                        
                        EstimatedFinancial
      Assets and Liabilities
                        
                        amount
                        
                        
                        fair
      value
                        
                        
                        amount
                        
                        
                        fair
      valueFinancial
      assets:Cash
      and cash equivalents
                        
                        $
                        13,336
                        
                        
                        $
                        13,336
                        
                        
                        $
                        8,953
                        
                        
                        $
                        8,953Securities
      available for sale
                        
                        
                        91,320
                        
                        
                        
                        91,320
                        
                        
                        
                        85,805
                        
                        
                        
                        85,805Securities
      held to maturity
                        
                        
                        8,218
                        
                        
                        
                        8,578
                        
                        
                        
                        5,765
                        
                        
                        
                        5,798Loans,
      net
                        
                        
                        275,419
                        
                        
                        
                        274,618
                        
                        
                        
                        264,393
                        
                        
                        
                        263,966Accrued
      interest receivable
                        
                        
                        1,954
                        
                        
                        
                        1,954
                        
                        
                        
                        1,858
                        
                        
                        
                        1,858Restricted
      investments
                        
                        
                        2,341
                        
                        
                        
                        2,341
                        
                        
                        
                        3,435
                        
                        
                        
                        3,435Financial
      liabilities:Demand
      deposits (non-interest-bearing)
                        
                        
                        64,266
                        
                        
                        
                        64,266
                        
                        
                        
                        58,648
                        
                        
                        
                        58,648Interest-bearing
      deposits
                        
                        
                        287,939
                        
                        
                        
                        276,429
                        
                        
                        
                        238,076
                        
                        
                        
                        240,039Accrued
      interest payable
                        
                        
                        378
                        
                        
                        
                        378
                        
                        
                        
                        553
                        
                        
                        
                        553Short-term
      debt
                        
                        
                        212
                        
                        
                        
                        212
                        
                        
                        
                        10,524
                        
                        
                        
                        10,524Federal
      Home Loan Bank borrowings
                        
                        
                        15,000
                        
                        
                        
                        15,951
                        
                        
                        
                        35,000
                        
                        
                        
                        36,286Off
      balance sheet financial instruments:Lending
      commitments
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Letters
      of credit
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —


F-27





(19)
            Condensed
      Parent Company Financial Statements





The
following are the condensed, parent company-only financial statements for
Jeffersonville Bancorp (in thousands):





Balance
      SheetsAs of December 31,
                
                2009
                
                
                2008AssetsCash
                
                $
                33
                
                
                $
                108Securities
      available for sale
                
                
                611
                
                
                
                649Investment
      in subsidiary
                
                
                42,481
                
                
                
                40,433Premises
      and equipment, net
                
                
                1,017
                
                
                
                1,065Other
      assets
                
                
                546
                
                
                
                448Total
      Assets
                
                $
                44,688
                
                
                $
                42,703Liabilities
      and Stockholders’ EquityLiabilities
                
                $
                25
                
                
                $
                41Stockholders’
      equity
                
                
                44,663
                
                
                
                42,662Total
      Liabilities and Stockholders’ Equity
                
                $
                44,688
                
                
                $
                42,703





Statements
      of IncomeFor the Year Ended December
    31,
                        
                        2009
                        
                        
                        2008
                        
                        
                        2007Dividend
      income from subsidiary
                        
                        $
                        2,400
                        
                        
                        $
                        2,475
                        
                        
                        $
                        4,175Dividend
      income on securities available for sale
                        
                        
                        47
                        
                        
                        
                        43
                        
                        
                        
                        34Gain
      on sale of securities
                        
                        
                        —
                        
                        
                        
                        63
                        
                        
                        
                        1Impairment
      charge on securities
                        
                        
                        —
                        
                        
                        
                        (101
                        )
                        
                        
                        (30
                        )Other
      non-interest income
                        
                        
                        17
                        
                        
                        
                        —
                        
                        
                        
                        22,464
                        
                        
                        
                        2,480
                        
                        
                        
                        4,182Occupancy
      and equipment expenses
                        
                        
                        118
                        
                        
                        
                        116
                        
                        
                        
                        120Other
      non-interest expenses
                        
                        
                        167
                        
                        
                        
                        146
                        
                        
                        
                        162285
                        
                        
                        
                        262
                        
                        
                        
                        282Income
      before income taxes andundistributed
      income of subsidiary
                        
                        
                        2,179
                        
                        
                        
                        2,218
                        
                        
                        
                        3,900Income
      tax expense
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Income
      before undistributedincome
      of subsidiary
                        
                        
                        2,179
                        
                        
                        
                        2,218
                        
                        
                        
                        3,900Equity
      in undistributed income of subsidiary
                        
                        
                        905
                        
                        
                        
                        484
                        
                        
                        
                        375Net
      Income
                        
                        $
                        3,084
                        
                        
                        $
                        2,702
                        
                        
                        $
                        4,275




Statements
      of Cash FlowsFor the Year Ended December
    31,
                
                2009
                
                
                2008
                
                
                2007Operating
      activities:Net
      income
                
                $
                3,084
                
                
                $
                2,702
                
                
                $
                4,275Equity
      in undistributed income of subsidiary
                
                
                (905
                )
                
                
                (484
                )
                
                
                (375
                )Depreciation
      and amortization
                
                
                51
                
                
                
                62
                
                
                
                62(Gain)
      loss on sale of securities
                
                
                —
                
                
                
                (63
                )
                
                
                (1
                )Impairment
      charge on securities
                
                
                —
                
                
                
                101
                
                
                
                30Other
      adjustments, net
                
                
                (99
                )
                
                
                (66
                )
                
                
                (229
                )Net
      Cash Provided by Operating Activities
                
                
                2,131
                
                
                
                2,252
                
                
                
                3,762Investing
      activities:Proceeds
      from sale of securities available for sale
                
                
                130
                
                
                
                334
                
                
                
                13Purchase
      of securities available for sale
                
                
                (131
                )
                
                
                (332
                )
                
                
                —Purchases
      of premises and equipment
                
                
                (3
                )
                
                
                —
                
                
                
                (350
                )Net
      Cash Provided by (Used in) Investing Activities
                
                
                (4
                )
                
                
                2
                
                
                
                (337
                )Financing
      activities:Purchases
      of treasury stock
                
                
                —
                
                
                
                —
                
                
                
                (1,245
                )Cash
      dividends paid
                
                
                (2,202
                )
                
                
                (2,202
                )
                
                
                (2,134
                )Net
      Cash Used in Financing Activities
                
                
                (2,202
                )
                
                
                (2,202
                )
                
                
                (3,379
                )Net
      Increase (Decrease) in Cash
                
                
                (75
                )
                
                
                52
                
                
                
                46Cash
      at Beginning of Year
                
                
                108
                
                
                
                56
                
                
                
                10Cash
      at End of Year
                
                $
                33
                
                
                $
                108
                
                
                $
                56




F-28


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





On
October 1, 2009, the Company was notified that the audit practice of
Beard Miller Company, LLP (“Beard”), its independent registered public
accounting firm, was combined with ParenteRandolph, LLC to form ParenteBeard,
LLC (“Parente”). Beard resigned as the Company’s auditor and Parente was
engaged as its new independent registered public accounting firm, each effective
immediately. The Company filed a Current Report on Form 8-K in connection with
the change on October 2, 2009.





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, 2009. 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
Frameworkissued 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, 2009.





This
annual report does not include an attestation report of the Company’s registered
pubic accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this Annual Report.





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 2010
Proxy Statement, which will be filed with the Securities and Exchange Commission
within 120 days of the Company’s 2009 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 2010 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 2010 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 2010 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 2010 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 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 Form 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 Company




31.1
            Section
      302 Certification of Chief Executive
Officer




31.2
            Section
      302 Certification of Chief Financial
Officer




32.1
            906
      certification of Chief Executive
Officer




32.2
            906
      certification of Chief Financial
Officer




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




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 23, 2010
                  By:
                  /s/
      Wayne V. Zanetti
                  By:
                  /s/
      John A. RussellWayne
      V. Zanetti
                  
                  John
      A. RussellChief
      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
      23, 2010Kenneth
      C. Klein/s/
      Raymond Walter
            Vice
      Chairman–Director
            March
      23, 2010Raymond
      Walter/s/
      Wayne V. Zanetti
            Chief
      Executive Officer
            March
      23, 2010Wayne
      V. Zanetti
            President–Director/s/
      John K. Gempler
            Secretary–Director
            March
      23, 2010John
      K. Gempler/s/
      John W. Galligan
            Director
            March
      23, 2010John
      W. Galligan/s/
      Douglas A. Heinle
            Director
            March
      23, 2010Douglas
      A. Heinle/s/
      Donald L. Knack
            Director
            March
      23, 2010Donald
      L. Knack/s/
      James F. Roche
            Director
            March
      23, 2010James
      F. Roche/s/
      Edward T. Sykes
            Director
            March
      23, 2010Edward
      T. Sykes


31