UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-K





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




For the
fiscal year ended December 31, 2008





OR





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




For the
transition period from ____________ to ____________





Commission
file number:  0-19212





JEFFERSONVILLE
BANCORP


(Exact
name of registrant as specified in its charter)





New York
                          
                          22-2385448(State or other jurisdiction of incorporation or organization)
                          
                          (I.R.S. Employer Identification No.)4864 State Rt 52, Jeffersonville, New
      York
                          
                          12748(Address
      of principal executive offices)
                          
                          (Zip
      Code)




(845) 482-4000





(Registrant’s
telephone number, including area code)




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




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




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


Title of
Class: Common Stock, $0.50 Par Value





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes  ̈                                           No  x





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


Yes  ̈                                           No  x





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


Yes x                                           No   ̈





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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, 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  x   Smaller
reporting company  ̈





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, 2008 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,
    2009Common
      Stock, $0.50 par value per share
              
              4,234,321
      shares





DOCUMENTS
INCORPORATED BY REFERENCE





Document
                      
                      Parts Into Which
    IncorporatedProxy Statement for the Annual Meeting of Stockholders to be held
                      
                      Part
      III Items 10, 11, 12, 13 and 14April
      28, 2009 (Proxy Statement)





JEFFERSONVILLE
BANCORP INDEX TO FORM 10-K




PagePART
      IItem
      1.
                          Business
                          
                          
                          3Item
      1A.
                          Risk
      Factors
                          
                          
                          7Item
      1B.
                          Unresolved
      Staff Comments
                          
                          
                          9Item
      2.
                          Properties
                          
                          
                          10Item
      3.
                          Legal
      Proceedings
                          
                          
                          10Item
      4.
                          Submission
      of Matters to a Vote of Security Holders
                          
                          
                          10PART
      IIItem
      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
                          
                          
                          14Item
      7A.
                          Quantitative
      and Qualitative Disclosures about Market Risk
                          
                          
                          28Item
      8.
                          Financial
      Statements and Supplementary Data
                          
                          
                          29Item
      9.
                          Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                          
                          
                          30Item
      9A.
                          Controls
      and Procedures
                          
                          
                          30Item
      9B.
                          Other
      Information
                          
                          
                          30PART
      IIIItem
      10.
                          Directors,
      Executive Officers and Corporate Governance
                          
                          
                          31Item
      11.
                          Executive
      Compensation
                          
                          
                          31Item
      12.
                          Security
      Ownership of Certain Beneficial Owners and Management, and Related
      Stockholder Matters
                          
                          
                          31Item
      13.
                          Certain
      Relationships and Related Transactions and Director
      Independence
                          
                          
                          31Item
      14.
                          Principal
      Accountant and Fees and Services
                          
                          
                          31PART
      IVItem
      15.
                          Exhibits,
      Financial Statement Schedules
                          
                          
                          32Signatures
                          
                          
                          33


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, 2008 and 2007, the Company had total assets of $398.6 million and
$387.4 million, securities available for sale of $85.8 million and $92.1
million, securities held to maturity of $5.8 million and $6.3 million and net
loans receivable of $264.4 million and $249.6 million, respectively. At December
31, 2008 and 2007, total deposits were $296.7 million and $299.2 million,
respectively. At December 31, 2008 and 2007, stockholders’ equity was $42.6
million and $44.0 million, respectively.




The Bank
is based in Sullivan County, New York. In addition to its main office and
operations center in Jeffersonville, the Bank has nine additional branch office
locations in Eldred, Liberty, Loch Sheldrake, Monticello, Livingston Manor,
Narrowsburg, Callicoon, Wurtsboro and one in a Wal*Mart store in Monticello. The
Bank is a full service banking institution employing approximately 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,
2008, 2007 and 2006.




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




Please
see item 7, Results of Operations 2008 versus 2007 for a description of the loan
portfolio and recent loan loss experience. Additional information is set forth
below relating to the Bank’s loan products, including major loan categories,
general loan terms, credit underwriting criteria, and risks particular to each
category of loans. The Bank does not have a major loan concentration in any
individual industry.




Commercial Loans
and Commercial Real Estate Loans. The Bank offers a variety of commercial
credit products and services to its customers. These include secured and
unsecured loan products specifically tailored to the credit needs of the
customers, underwritten with terms and conditions reflective of risk profile
objectives and corporate earnings requirements. These products are offered at
all branch locations. All loans are governed by a commercial loan policy which
was developed to provide a clear framework for determining acceptable levels of
credit risk, underwriting criteria, monitoring existing credits, and managing
problem credit relationships. Credit risk control mechanisms have been
established and are monitored closely for compliance by the internal auditor and
an external loan review company.




3


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




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




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




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




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





SUPERVISION
AND REGULATION





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




On
November 28, 2006, the Bank entered into a formal written agreement with the
OCC. The agreement provided for a comprehensive action plan designed to enhance
the Board of Directors’ and management’s supervision of the Bank, credit risk
management and regulatory compliance, including compliance with the Bank Secrecy
Act and related anti-money laundering laws. The OCC determined that the
agreement was no longer needed and terminated the agreement on December 9,
2008.




The
Company is subject to capital adequacy guidelines of the Federal Reserve. The
guidelines apply on a consolidated basis and require bank holding companies
having the highest regulatory ratings for safety and soundness to maintain a
minimum ratio of Tier 1 capital to total average assets (or “leverage ratio”) of
3%. All other bank holding companies are required to maintain an additional
capital cushion of 100 to 200 basis points. The Federal Reserve capital adequacy
guidelines also require bank holding companies to maintain a minimum ratio of
Tier 1 capital to risk-weighted assets of 4% and a minimum ratio of qualifying
total capital to risk-weighted assets of 8%. As of December 31, 2008, the
Company’s leverage ratio was 10.9%, its ratio of Tier 1 capital to risk-weighted
assets was 15.9%, and its ratio of qualifying total capital to risk-weighted
assets was 17.1%. The Federal Reserve may set higher minimum capital
requirements for bank holding companies whose circumstances warrant it, such as
companies anticipating significant growth or facing unusual risks. The Federal
Reserve has not advised the Company of any special capital requirement
applicable to it.




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




The Bank
is subject to leverage and risk-based capital requirements and minimum capital
guidelines of the OCC. As of December 31, 2008, the Bank was in compliance with
all minimum capital requirements. The Bank’s leverage ratio was 10.9%, its ratio
of Tier 1 capital to risk-weighted assets were 15.9%, and its ratio of
qualifying total capital to risk-weighted assets was 17.1%.




Any bank
that is less than adequately-capitalized is subject to certain mandatory prompt
corrective actions by its primary federal regulatory agency, as well as other
discretionary actions, to resolve its capital deficiencies. The severity of the
actions required to be taken increases as the bank’s capital position
deteriorates. Among the actions that may be imposed on an undercapitalized bank
is the implementation of a capital restoration plan. A bank holding company must
guarantee that a subsidiary bank will meet its capital restoration plan, up to
an amount equal to 5% of the subsidiary bank’s assets or the amount required to
meet regulatory capital requirements, whichever is less. In addition, under
Federal Reserve policy, a bank holding company is expected to serve as a source
of financial strength, and to commit financial resources to support its
subsidiary banks. Any capital loans made by a bank holding company to a
subsidiary bank are subordinate to the claims of depositors in the bank and to
certain other indebtedness of the subsidiary bank. In the event of the
bankruptcy of a bank holding company, any commitment by the bank holding company
to a federal banking regulatory agency to maintain the capital of a subsidiary
bank would be assumed by the bankruptcy trustee and would be entitled to
priority of payment.




4


The Bank
also is subject to substantial regulatory restrictions on its ability to pay
dividends to the Company. Under OCC regulations, the Bank may not pay a
dividend, without prior OCC approval, if the total amount of all dividends
declared during the calendar year, including the proposed dividend, exceeds the
sum of its retained net income to date during the calendar year and its retained
net income over the preceding two years. As of December 31, 2008, the Bank had
approximately $1.2 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 banks and savings associations,
including the Bank, to pay for deposit insurance and in managing its deposit
insurance reserves. The FDIC has adopted regulations to implement its new
authority. Under these regulations, all insured depository institutions are
placed into one of four risk categories. As of January 1, 2009, all insured
institutions will pay 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. For institutions such as the
Bank, which do not have a long-term public debt rating, the individual risk
assessment is based on its supervisory ratings and certain financial ratios and
other measurements of its financial condition. For institutions that have a
long-term public debt rating, the individual risk assessment is based on its
supervisory ratings and its debt rating. On February 27, 2009, the
FDIC issued new rules to take effect April 1, 2009 that will change the way
the FDIC differentiates risk and appropriate assessment rates. Base assessment
rates set to take effect on April 1, 2009 will range from 12 to 45 basis points,
but giving effect to certain risk adjustments in the rule issued by the FDIC on
February 27, 2009, assessments may range from 7 to 77.5 basis points. In
addition, the FDIC also issued an interim rule on February 27, 2009 that, unless
amended during the public comment period, will impose an emergency special
assessment of 20 basis points in addition to its risk-based assessment. The
special emergency assessment, if imposed, will be charged on June 30, 2009 and
collected on September 30, 2009.The Reform Act
legislation also provided a credit to all insured depository institutions, based
on the amount of their insured deposits at year-end 1996, that may be used as an
offset to the premiums that are assessed. The Bank received a total credit of
approximately $239,000. This credit offset a substantial portion of its 2008
deposit insurance assessment. Due to the full utilization of the Bank’s credit,
the systemic increase in deposit insurance assessments, and the special
emergency assessment, the Bank will be subject to increased deposit premium
expenses in future periods. On October 14, 2008, the FDIC announced a new
program, the Temporary Liquidity Guarantee Program (“TLGP”) 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.
Participating institutions will be assessed a $0.10 surcharge per $100 of
deposits above the existing deposit insurance limit. The TLGP also provides that
the FDIC, for an additional fee, will guarantee qualifying senior unsecured debt
issued prior to October 2009 by participating banks and certain qualifying
holding companies. The Bank opted to remain in the transaction account guarantee
portion of the TLGP, but opted out of the debt guarantee portion.




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 2008, FDIC
assessments for purposes of funding FICO bond obligations ranged from an
annualized $0.0114 per $100 of deposits for the first quarter of 2008 to $0.0110
per $100 of deposits for the fourth quarter of 2008. The Bank paid
$119,083 of FICO assessments in 2008. For the first quarter of 2009, the
FICO assessment rate is $0.0114 per $100 of deposits.




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, 2008, the Bank
satisfied this requirement.




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




Under the
Gramm-Leach-Bliley Act (“GLB Act”), all financial institutions, including the
Company and the Bank, are required to adopt privacy policies to restrict the
sharing of nonpublic customer data with nonaffiliated parties at the customer’s
request, and establish procedures and practices to protect customer data from
unauthorized access. The Company has developed such policies and procedures for
itself and the Bank, and believes it is in compliance with all privacy
provisions of the GLB Act. In addition the Fair and Accurate Credit Transactions
Act (“FACT Act”) includes many provisions concerning national credit reporting
standards, and permits consumers, including customers of the Company and the
Bank, to opt out of information sharing among affiliated companies for marketing
purposes. The FACT Act also requires banks and other financial institutions to
notify their customers if they report negative information about them to a
credit bureau or if they are granted credit on terms less favorable than those
generally available. The Federal Reserve and the Federal Trade Commission
(“FTC”) have extensive rulemaking authority under the FACT Act, and the Company
and the Bank are subject to the rules that have been promulgated by the Federal
Reserve and FTC, including recent rules regarding limitations of affiliate
marketing and implementation of programs to identify, detect and mitigate
certain identity theft red flags.




5


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




Under
Title III of the USA PATRIOT Act, also known as the International Money
Laundering Abatement and Anti-Terrorism Financing Act of 2001, all financial
institutions, including the Company and the Bank, are required to take certain
measures to identify their customers, prevent money laundering, monitor certain
customer transactions and report suspicious activity to U.S. law enforcement
agencies, and scrutinize or prohibit altogether certain transactions of special
concern. Financial institutions also are required to respond to requests for
information from federal banking regulatory agencies and law enforcement
agencies concerning their customers and their transactions. Information-sharing
among financial institutions concerning terrorist or money laundering activities
is encouraged by an exemption provided from the privacy provisions of the GLB
Act and other laws. Financial institutions that hold correspondent accounts for
foreign banks or provide private banking services to foreign individuals are
required to take measures to avoid dealing with certain foreign individuals or
entities, including foreign banks with profiles that raise money laundering
concerns, and are prohibited altogether from dealing with foreign “shell banks”
and persons from jurisdictions of particular concern. All financial institutions
also are required to adopt internal anti-money laundering programs. The
effectiveness of a financial institution in combating money laundering
activities is a factor to be considered in any application submitted by the
financial institution under the Bank Merger Act, which applies to the Bank, or
the BHC Act, which applies to the Company. The Company and the Bank have in
place a Bank Secrecy Act and USA PATRIOT Act compliance program, and they engage
in very few transactions of any kind with foreign financial institutions or
foreign persons.




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




Beginning
in March 2005, home mortgage lenders, including banks, were required under the
Home Mortgage Disclosure Act (“HMDA”) to make available to the public expanded
information regarding the pricing of home mortgage loans, including the “rate
spread” between the interest rate on loans and certain Treasury securities and
other benchmarks. The availability of this information has led to increased
scrutiny of higher-priced loans at all financial 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, there have been several recent announcements of Federal programs
designed 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 authorizes 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 also increased the FDIC deposit insurance limit for most accounts from
$100,000 to $250,000 through December 31, 2009.




On
October 14, 2008, the U.S. Treasury announced that pursuant to its authority
under the EESA it will 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 will
make $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 will receive
warrants to purchase common stock with an aggregate market price equal to 15% of
the preferred investment. Participating financial institutions will be 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.


6





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:





2008
                  
                  
                  2007
                  
                  
                  2006(In
      thousands)Current
      tax expense:Federal
                  
                  $
                  1,135
                  
                  
                  $
                  1,302
                  
                  
                  $
                  1,428State
                  
                  
                  57
                  
                  
                  
                  43
                  
                  
                  
                  169Deferred
      tax (benefit)
                  
                  
                  (2,053
                  )
                  
                  
                  (76
                  )
                  
                  
                  (357
                  )Total
      income tax expense
                  
                  $
                  (861
                  )
                  
                  $
                  1,269
                  
                  
                  $
                  1,240





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





MONETARY
POLICY AND ECONOMIC CONDITIONS





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





COMPETITION





The Bank
faces strong competition for local business in the communities it serves from
other financial institutions. Throughout Sullivan County there are 37 branches
of commercial banks, savings banks, savings and loan associations and other
financial organizations.




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, 2008, 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 the common stock has been light. As a result, shareholders may not be able to
quickly and easily sell their common stock.





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





Our
common stock is not FDIC-insured.





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





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





Our
principal source of income consists of dividends, if any, from the Bank. Payment
of dividends by the Bank to us is subject to regulatory limitations imposed by
the Office of the Comptroller of the Currency (“OCC”) and the Bank must meet OCC
capital requirements before and after the payment of any dividends. In addition
the Bank also cannot pay a dividend, without prior OCC approval, if the total
amount of all dividends declared during a calendar year, including the proposed
dividend, exceeds the sum of its retained net income to date during the calendar
year. The OCC has discretion to prohibit any otherwise permitted capital
distribution on general safety and soundness grounds. As of December 31, 2008,
approximately $1.2 million was available for the payment of dividends without
prior OCC approval.




7


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




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





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





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





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 hurt 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.




2008 was
highlighted by significant disruption and volatility in the financial and
capital marketplaces. 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. 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. The impact of sub-prime lending 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 will have 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 is exercising 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 recently announced 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.


8


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, 2008, 66.3% of the total assets of the Company, or $264,393,000,
consisted of net loans. Of that amount, $227,377,000, or 86.0% 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, 2008 has fallen approximately 14% from the average residential real
estate sales price for the comparable quarter in 2007. 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.





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, 2008, the book value of these investment securities
was $5,765,000. 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.


9


ITEM
2. PROPERTIES





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





The
Company’s leases for Wal*Mart, Wurtsboro and Callicoon expire in 2009, 2010, and
2012 respectively. Renewal options exist at Wal*Mart for an additional 5 years
and for Callicoon, an additional 15 years. Future minimum lease payments are
disclosed under the title Contractual Obligations in Item 7.





The major
classifications of premises and equipment and the book value thereof were as
follows at December 31, 2008:





2008(In thousands)Land
                  
                  $
                  837Buildings
      and improvements
                  
                  
                  5,618Furniture
      and fixtures
                  
                  
                  191Equipment
                  
                  
                  4,26210,908Less
      accumulated depreciation and amortization
                  
                  
                  (6,596
                  )Total
      premises and equipment, net
                  
                  $
                  4,312





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.





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





Not
applicable.


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. The following investment firms are known to handle Jeffersonville Bancorp
stock transactions: Citigroup Global Markets, Inc.; Knight Equity Markets, L.P.;
Hill, Thompson, Magid and Co.; Susquehanna International Group, LLP; UBS
Securities, LLC. The following table shows the range of high and low sale prices
for the Company’s stock and cash dividends paid for the quarters
indicated.





Sales
                      low
                    
                    
                    Sales
                      high
                    
                    
                    Cash
                      Dividends
                      paidQuarter
      Ended:March
      31, 2008
                    
                    $
                    11.34
                    
                    
                    $
                    14.00
                    
                    
                    $
                    0.13June
      30, 2008
                    
                    $
                    11.01
                    
                    
                    $
                    14.35
                    
                    
                    $
                    0.13September
      30, 2008
                    
                    $
                    10.11
                    
                    
                    $
                    12.00
                    
                    
                    $
                    0.13December
      31, 2008
                    
                    $
                    8.82
                    
                    
                    $
                    11.00
                    
                    
                    $
                    0.13March
      31, 2007
                    
                    $
                    17.08
                    
                    
                    $
                    19.25
                    
                    
                    $
                    0.12June
      30, 2007
                    
                    $
                    18.01
                    
                    
                    $
                    19.00
                    
                    
                    $
                    0.12September
      30, 2007
                    
                    $
                    15.50
                    
                    
                    $
                    18.66
                    
                    
                    $
                    0.12December
      31, 2007
                    
                    $
                    13.04
                    
                    
                    $
                    16.35
                    
                    
                    $
                    0.14




Number of Holders
of Record.At the close of business on March 1, 2009, the Company had
1,350 stockholders of record of the 4,234,321 shares of common stock then
outstanding.





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





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





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,
2003 and the reinvestment of all dividends since that date to December 31, 2008
and is compared to the cumulative total return of the NASDAQ - Composite Index
and American Banker’s Association NASDAQ Community Bank 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, 2008


JEFFERSONVILLE
BANCORP










Period Ending12/31/03
                
                
                12/31/04
                
                
                12/31/05
                
                
                12/31/06
                
                
                12/31/07
                
                
                12/31/08Index:Jeffersonville
      Bancorp
                
                
                100.00
                
                
                
                105.85
                
                
                
                133.19
                
                
                
                108.92
                
                
                
                84.96
                
                
                
                64.12NASDAQ
      Composite
                
                
                100.00
                
                
                
                108.59
                
                
                
                110.08
                
                
                
                120.56
                
                
                
                132.39
                
                
                
                78.72ABA
      NASDAQ Community Bank Index
                
                
                100.00
                
                
                
                118.23
                
                
                
                117.77
                
                
                
                133.51
                
                
                
                103.00
                
                
                
                85.45





ITEM
6. SELECTED FINANCIAL DATA





FIVE-YEAR
SUMMARY





2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005
                    
                    
                    2004(Dollars
      in thousands, except share and per share data)RESULTS
      OF OPERATIONSInterest
      income
                    
                    $
                    22,953
                    
                    
                    $
                    23,479
                    
                    
                    $
                    23,881
                    
                    
                    $
                    22,170
                    
                    
                    $
                    20,820Interest
      expense
                    
                    
                    7,228
                    
                    
                    
                    8,615
                    
                    
                    
                    8,211
                    
                    
                    
                    5,402
                    
                    
                    
                    4,051Net
      interest income
                    
                    
                    15,725
                    
                    
                    
                    14,864
                    
                    
                    
                    15,670
                    
                    
                    
                    16,768
                    
                    
                    
                    16,769Provision
      (credit) for loan losses
                    
                    
                    265
                    
                    
                    
                    (370
                    )
                    
                    
                    90
                    
                    
                    
                    180
                    
                    
                    
                    360Net
      income
                    
                    
                    2,702
                    
                    
                    
                    4,275
                    
                    
                    
                    4,943
                    
                    
                    
                    5,725
                    
                    
                    
                    6,171FINANCIAL
      CONDITIONTotal
      assets
                    
                    $
                    398,567
                    
                    
                    $
                    387,430
                    
                    
                    $
                    397,291
                    
                    
                    $
                    387,343
                    
                    
                    $
                    365,523Total
      deposits
                    
                    
                    296,724
                    
                    
                    
                    299,242
                    
                    
                    
                    325,073
                    
                    
                    
                    312,096
                    
                    
                    
                    293,094Gross
      loans
                    
                    
                    267,563
                    
                    
                    
                    252,985
                    
                    
                    
                    250,760
                    
                    
                    
                    244,261
                    
                    
                    
                    224,236Stockholders’
      equity
                    
                    
                    42,662
                    
                    
                    
                    43,958
                    
                    
                    
                    41,275
                    
                    
                    
                    42,519
                    
                    
                    
                    39,646




12





2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004(Dollars
      in thousands, except share and per share data)AVERAGE
      BALANCESTotal
      assets
                
                $
                393,964
                
                
                $
                389,384
                
                
                $
                400,535
                
                
                $
                374,413
                
                
                $
                361,783Total
      deposits
                
                
                300,984
                
                
                
                315,941
                
                
                
                326,136
                
                
                
                297,643
                
                
                
                291,426Gross
      loans
                
                
                259,713
                
                
                
                250,277
                
                
                
                246,890
                
                
                
                238,993
                
                
                
                211,846Stockholders’
      equity
                
                
                43,929
                
                
                
                42,249
                
                
                
                42,272
                
                
                
                41,350
                
                
                
                37,149FINANCIAL
      RATIOSNet
      income to average total assets
                
                
                0.69
                %
                
                
                1.10
                %
                
                
                1.23
                %
                
                
                1.53
                %
                
                
                1.71
                %Net
      income to average stockholders’ equity
                
                
                6.15
                %
                
                
                10.12
                %
                
                
                11.69
                %
                
                
                13.85
                %
                
                
                16.61
                %Average
      stockholders’ equity to average  total assets
                
                
                11.15
                %
                
                
                10.85
                %
                
                
                10.55
                %
                
                
                11.04
                %
                
                
                10.27
                %SHARE AND PER SHARE
      DATABasic
      earnings per share
                
                $
                0.64
                
                
                $
                1.00
                
                
                $
                1.13
                
                
                $
                1.29
                
                
                $
                1.39Dividends
      per share
                
                $
                0.52
                
                
                $
                0.50
                
                
                $
                0.48
                
                
                $
                0.44
                
                
                $
                0.40Dividend
      payout ratio
                
                
                81.49
                %
                
                
                49.92
                %
                
                
                42.44
                %
                
                
                34.04
                %
                
                
                28.78
                %Book
      value at year end
                
                $
                10.08
                
                
                $
                10.38
                
                
                $
                9.59
                
                
                $
                9.59
                
                
                $
                8.94Total
      dividends paid
                
                $
                2,202,000
                
                
                $
                2,134,000
                
                
                $
                2,098,000
                
                
                $
                1,949,000
                
                
                $
                1,776,000Average
      number of shares outstanding
                
                
                4,234,321
                
                
                
                4,266,397
                
                
                
                4,376,494
                
                
                
                4,434,321
                
                
                
                4,434,321Shares
      outstanding at year end
                
                
                4,234,321
                
                
                
                4,234,321
                
                
                
                4,305,348
                
                
                
                4,434,321
                
                
                
                4,434,321





SUMMARY
OF QUARTERLY RESULTS OF OPERATIONS FOR 2008 AND 2007


31-Mar
                
                
                30-Jun
                
                
                30-Sep(1)
                
                
                31-Dec(1)
                
                
                Total(Dollars
      in thousands, except per share data)2008Interest
      income
                
                $
                5,839
                
                
                $
                5,715
                
                
                $
                5,757
                
                
                $
                5,642
                
                
                $
                22,953Interest
      expense
                
                
                (1,975
                )
                
                
                (1,776
                )
                
                
                (1,756
                )
                
                
                (1,721
                )
                
                
                (7,228
                )Net
      interest income
                
                
                3,864
                
                
                
                3,939
                
                
                
                4,001
                
                
                
                3,921
                
                
                
                15,725Provision
      for loan losses
                
                
                —
                
                
                
                (40
                )
                
                
                (100
                )
                
                
                (125
                )
                
                
                (265
                )Non-interest
      income
                
                
                822
                
                
                
                869
                
                
                
                (2,436
                )
                
                
                575
                
                
                
                (170
                )Non-interest
      expenses
                
                
                (3,375
                )
                
                
                (3,230
                )
                
                
                (3,288
                )
                
                
                (3,556
                )
                
                
                (13,449
                )Income
      before income taxes
                
                
                1,311
                
                
                
                1,538
                
                
                
                (1,823
                )
                
                
                815
                
                
                
                1,841Income
      tax (expense) benefit
                
                
                (257
                )
                
                
                (337
                )
                
                
                (363
                )
                
                
                1,818
                
                
                
                861Net
      income
                
                $
                1,054
                
                
                $
                1,201
                
                
                $
                (2,186
                )
                
                $
                2,633
                
                
                $
                2,702Basic
      earnings per share
                
                $
                0.25
                
                
                $
                0.28
                
                
                $
                (0.52
                )
                
                $
                0.63
                
                
                $
                0.642007Interest
      income
                
                $
                5,951
                
                
                $
                5,791
                
                
                $
                5,895
                
                
                $
                5,842
                
                
                $
                23,479Interest
      expense
                
                
                (2,197
                )
                
                
                (2,145
                )
                
                
                (2,122
                )
                
                
                (2,151
                )
                
                
                (8,615
                )Net
      interest income
                
                
                3,754
                
                
                
                3,646
                
                
                
                3,773
                
                
                
                3,691
                
                
                
                14,864Credit
      for loan losses
                
                
                370
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                370Non-interest
      income
                
                
                866
                
                
                
                800
                
                
                
                953
                
                
                
                851
                
                
                
                3,470Non-interest
      expenses
                
                
                (3,329
                )
                
                
                (3,094
                )
                
                
                (3,262
                )
                
                
                (3,475
                )
                
                
                (13,160
                )Income
      before income taxes
                
                
                1,661
                
                
                
                1,352
                
                
                
                1,464
                
                
                
                1,067
                
                
                
                5,544Income
      taxes
                
                
                (402
                )
                
                
                (364
                )
                
                
                (305
                )
                
                
                (198
                )
                
                
                (1,269
                )Net
      income
                
                $
                1,259
                
                
                $
                988
                
                
                $
                1,159
                
                
                $
                869
                
                
                $
                4,275Basic
      earnings per share
                
                $
                0.29
                
                
                $
                0.23
                
                
                $
                0.27
                
                
                $
                0.21
                
                
                $
                1.00


1
              In
      the quarter ended September 30, 2008, the Company recognized an impairment
      charge of $4.8 million on its FHLMC preferred stock. The related tax
      benefit of $1.1 million was recognized in the quarter ending December 31,
      2008 due to the loss being reclassified as ordinary for tax
      purposes.




13


ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS





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




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





GENERAL





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




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




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




National
economic performance deteriorated significantly in 2008. Subprime lending
problems battered large banks and investment companies, leading to the
disappearance of some and direct and indirect government support for others. The
past year witnessed a material drop in market values of new and existing homes.
Retail sales levels dropped despite heavy holiday discounting. Furthermore, the
U.S.-based automobile industry has asked for significant government funding to
stay afloat.




Locally,
our economy is also suffering. Real estate values are declining as the inventory
of unsold homes has increased. The construction industry is negatively affected
by the decline in real estate sales and growing inventory of existing housing.
Lack of commercial growth also impacts the construction industry, which in turn
creates a decline in demand from suppliers of building materials as well as for
construction workers. Nevertheless, there are reasons to believe that local
economic conditions and employment prospects may not be so severe. A proposed
“Entertainment City” development, a $1 billion dollar project that is expected
to incorporate the current “racino” and harness racing track in Monticello, is
currently under construction on the site of the former Concord Resort and may
create thousands of construction and permanent jobs in Sullivan County. In
addition, some Native American tribes have proposed casino gaming projects in
Sullivan County. The forthcoming completion of the Millennium natural gas
pipeline project will create a greatly expanded and bi-directional
transportation route for local natural gas production and storage. Energy
companies are exploring the possibility of drilling into previously unreachable
natural gas reserves in western Sullivan County thought to contain up to 516
trillion cubic feet of natural gas. This project is expected to promote economic
development in Sullivan County.




The
Company has underwritten loans using the same conservative standards that have
been the foundation of the Company since its inception. Our overall asset
quality remains strong. Management believes the Company will weather this
economic downturn, as it has survived many others in the past, with sound
financial decisions.





CRITICAL
ACCOUNTING POLICIES





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


14





RECENT
ACCOUNTING PRONOUNCEMENTS





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




In
December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about
Postretirement Benefit Plan Assets”. This FSP amends SFAS 132(R), “Employers’ Disclosures about
Pensions and Other Postretirement Benefits”, to provide guidance on an
employer’s disclosures about plan assets of a defined benefit pension or other
postretirement plan. The disclosures about plan assets required by this FSP
shall be provided for fiscal years ending after December 15, 2009. The Company
is currently reviewing the effect this new pronouncement will have on its
consolidated financial statements.





FINANCIAL
CONDITION





Total
assets increased by $11.2 million or 2.9% to $398.6 million at December 31, 2008
from $387.4 million at December 31, 2007. The increase was primarily due to a
$14.8 million or 5.9% increase in loans, net of allowance, from $249.6 million
at December 31, 2007 to $264.4 million at December 31, 2008 and a $3.3 million
or 62.3% increase in other assets from $5.3 million to $8.6 million at December
31, 2008. Partially reducing these increases was a decrease in securities
available for sale of $6.3 million or 6.8% from $92.1 at December 31, 2007 to
$85.8 at December 31, 2008. Loan growth was funded by calls and maturities of
securities available for sale and borrowings with the Federal Home Loan Bank
(FHLB). Deposits decreased $2.5 million or 0.8% from $299.2 million at December
31, 2007 to $296.7 million at December 31, 2008. The decrease in deposits was
due to $5.0 million of brokered deposits being paid off that were partially
replaced with core deposits. Time deposits increased $15.1 million or 12.5% from
$121.0 million at December 31, 2007 to $136.1 million at December 31, 2008.
Savings and insured money market accounts decreased $14.2 million or 16.1% to
$73.8 million at December 31, 2008 from $88.0 million at December 31, 2007.
Non-deposit liabilities increased by 33.8% in 2008 from $44.2 million at
December 31, 2007 to $59.2 million at December 31, 2008. The liabilities were
primarily long- and short-term borrowings from the Federal Home Loan Bank of New
York.




In 2008,
total gross loans increased $14.6 million or 5.8% from $253.0 million to $267.6
million. Within the loan portfolio, residential real estate, commercial real
estate and home equity loans increased by $6.6 million or 6.8%, $8.2 million or
9.6%, and $5.1 million or 19.7%, respectively. These increases were partially
offset by construction loans which decreased by $2.8 million or 50.5% and
decreases of $1.2 million and $1.4 million in commercial loans and consumer
installment loans respectively at December 31, 2008. 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
a $1.2 million increase in foreclosed real estate at December 31, 2008, from
$35,000 at December 31, 2007 as the result of a foreclosure on a commercial
loan. The commercial property is under a lease agreement, with lease payments
being recorded in income. Total nonperforming loans increased $1.5 million from
$4.6 million at December 31, 2007 to $6.1 million at December 31, 2008 as a
result of increases of $0.4 and $1.7 million in residential and commercial
mortgages, respectively, partially offset by a decrease of $0.6 million in
commercial loans, which includes a transfer of a $1.3 million commercial loan to
foreclosed real estate. Net loan (charge-offs) recoveries increased from
$206,000 in 2007 to $(447,000) in 2008 due to a recovery in 2007 as discussed
below in “Provision for Loan Losses”. At December 31, 2008, the allowance for
loan losses equaled $3.2 million representing 1.18% of total gross loans
outstanding and 51.8% of total nonperforming loans.




Total
stockholders’ equity was $42.6 million at December 31, 2008, a decrease of $1.3
million from December 31, 2007 of $44.0 million. This decrease was the result of
cash dividends of $2.2 million, the cumulative effect of adopting EITF 06-4,
Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements in the amount of $255,000
and an increase in accumulated other comprehensive loss of $1.5 million
partially offset by $2.7 million of net income.


15




RESULTS
OF OPERATIONS 2008 VERSUS 2007





Net
Income





Net
income for 2008 of $2.7 million decreased 36.8% or $1,573,000 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 of Freddie Mac 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 as discussed in the “Summary of Loan
Loss Experience” below. 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.





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.




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 38 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 as a result of a $441,000 recovery in 2007 on a
previously written-off loan and loans remaining well secured. 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 losses was also reduced in 2007 due to the
reduction in net charge-offs as noted below. While management uses available
information to recognize losses on loans, future additions to the allowance for
loan losses may be necessary based on changes in economic conditions,
particularly in Sullivan County. In addition, Federal regulatory agencies, as an
integral part of their examination process, periodically review the Company’s
allowance for loan losses and may require the Company to recognize additions to
the allowance based on their judgments about information available to them at
the time of their examination, which may not be currently available to
management. Based on management’s comprehensive analysis of the loan portfolio,
management believes the current level of the allowance for loan losses is
adequate.




16


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.





Summary
of Loan Loss Experience





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





ANALYSIS
OF THE CHANGES IN ALLOWANCE FOR LOAN LOSSES FOR YEARS 2004 THROUGH
2008





2008
                            
                            
                            2007
                            
                            
                            2006
                            
                            
                            2005
                            
                            
                            2004(Dollars
      in thousands)Balance
      at beginning of year
                            
                            $
                            3,352
                            
                            
                            $
                            3,516
                            
                            
                            $
                            3,615
                            
                            
                            $
                            3,645
                            
                            
                            3,569Charge-offs:Commercial,
      financial and agriculture
                            
                            
                            (294
                            )
                            
                            
                            (106
                            )
                            
                            
                            (208
                            )
                            
                            
                            (2
                            )
                            
                            
                            —Real
      estate – mortgage
                            
                            
                            (21
                            )
                            
                            
                            (5
                            )
                            
                            
                            (66
                            )
                            
                            
                            —
                            
                            
                            
                            (3
                            )Installment
      loans
                            
                            
                            (179
                            )
                            
                            
                            (118
                            )
                            
                            
                            (156
                            )
                            
                            
                            (308
                            )
                            
                            
                            (284
                            )Other
      loans
                            
                            
                            (153
                            )
                            
                            
                            (89
                            )
                            
                            
                            (103
                            )
                            
                            
                            (129
                            )
                            
                            
                            (146
                            )Total
      charge-offs
                            
                            
                            (647
                            )
                            
                            
                            (318
                            )
                            
                            
                            (533
                            )
                            
                            
                            (439
                            )
                            
                            
                            (433
                            )Recoveries:Commercial,
      financial and agriculture
                            
                            
                            80
                            
                            
                            
                            388
                            
                            
                            
                            187
                            
                            
                            
                            59
                            
                            
                            
                            1Real
      estate – mortgage
                            
                            
                            9
                            
                            
                            
                            5
                            
                            
                            
                            —
                            
                            
                            
                            8
                            
                            
                            
                            22Installment
      loans
                            
                            
                            47
                            
                            
                            
                            72
                            
                            
                            
                            98
                            
                            
                            
                            83
                            
                            
                            
                            59Other
      loans
                            
                            
                            64
                            
                            
                            
                            59
                            
                            
                            
                            59
                            
                            
                            
                            79
                            
                            
                            
                            67Total
      recoveries
                            
                            
                            200
                            
                            
                            
                            524
                            
                            
                            
                            344
                            
                            
                            
                            229
                            
                            
                            
                            149Net
      recoveries (charge-offs)
                            
                            
                            (447
                            )
                            
                            
                            206
                            
                            
                            
                            (189
                            )
                            
                            
                            (210
                            )
                            
                            
                            (284
                            )Provision
      charged (credited) to operations
                            
                            
                            265
                            
                            
                            
                            (370
                            )
                            
                            
                            90
                            
                            
                            
                            180
                            
                            
                            
                            360Balance
      at end of year
                            
                            $
                            3,170
                            
                            
                            $
                            3,352
                            
                            
                            $
                            3,516
                            
                            
                            $
                            3,615
                            
                            
                            $
                            3,645Ratio
      of net (recoveries) charge-offs  to average outstanding
      loans
                            
                            
                            0.17
                            %
                            
                            
                            (0.08
                            )%
                            
                            
                            0.08
                            %
                            
                            
                            0.09
                            %
                            
                            
                            0.13
                            %




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 (credit) for loan losses was $265,000 for the year ended December 31,
2008 compared to a credit of $(370,000) for 2007. As disclosed in the Company’s
2006 Form 10-K, the Company recovered $441,000 on a previously written-off loan.
This recovery was for a loan made in 2002. The loan turned out to be fraudulent
and the participants brought a legal suit against the Bank of New York. The
participating lenders prevailed and received their settlements in the first
quarter of 2007.




The
allowance for loan losses was $3.2 million at December 31, 2008, $3.4 million at
2007, and $3.5 million at 2006. The allowance as a percentage of total loans was
1.18% at December 31, 2008, compared to 1.32% and 1.40% at December 31, 2007 and
2006, respectively. The allowance’s coverage of nonperforming loans was 51.8% at
December 31, 2008 compared to 72.2% and 187.0% at December 31, 2007 and 2006
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. A specific reserve of $149,000 has been
established to help reduce the risk of nonperforming loans.




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




Commercial
nonperforming loans are evaluated individually for impairment in accordance with
FAS 114. As of December 31, 2008, there were $5,191,000 in loans, compared
to $3,394,000 as of December 31, 2007, which were considered to be impaired
under SFAS No. 114. On the remaining loan portfolios, the Company applies
reserve factors considering historical loan loss data and other subjective
factors.


17





DISTRIBUTION
OF ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31,





2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Percent
                
                
                
                
                
                Percent
                
                
                
                
                
                Percent
                
                
                
                
                
                Percent
                
                
                
                
                
                Percentof loans
                
                
                
                
                
                of loans
                
                
                
                
                
                of loans
                
                
                
                
                
                of loans
                
                
                
                
                
                of loansAmount of
                
                
                in each
                
                
                Amount of
                
                
                in each
                
                
                Amount of
                
                
                in each
                
                
                Amount of
                
                
                in each
                
                
                Amount of
                
                
                in eachallowance
                
                
                Category
                
                
                allowance
                
                
                category
                
                
                allowance
                
                
                category
                
                
                allowance
                
                
                category
                
                
                allowance
                
                
                categoryfor loan
                
                
                to total
                
                
                for loan
                
                
                to total
                
                
                for loan
                
                
                to total
                
                
                for loan
                
                
                to total
                
                
                for loan
                
                
                to totallosses
                
                
                loans
                
                
                losses
                
                
                loans
                
                
                losses
                
                
                loans
                
                
                losses
                
                
                loans
                
                
                losses
                
                
                loans(Dollars
      in thousands)Residential mortgages
      (1)
                
                $
                1,036
                
                
                
                51.2
                %
                
                $
                1,048
                
                
                
                51.4
                %
                
                $
                1,048
                
                
                
                50.2
                %
                
                $
                1,048
                
                
                
                48.5
                %
                
                $
                1,039
                
                
                
                48.4
                %Commercial
      mortgages
                
                
                285
                
                
                
                36.5
                
                
                
                285
                
                
                
                34.3
                
                
                
                285
                
                
                
                34.7
                
                
                
                351
                
                
                
                34.9
                
                
                
                351
                
                
                
                35.3Commercial
      loans
                
                
                1,314
                
                
                
                9.4
                
                
                
                1,263
                
                
                
                10.5
                
                
                
                1,353
                
                
                
                11.2
                
                
                
                1,343
                
                
                
                11.7
                
                
                
                1,286
                
                
                
                9.4Installment
      loans
                
                
                473
                
                
                
                2.8
                
                
                
                604
                
                
                
                3.7
                
                
                
                650
                
                
                
                3.9
                
                
                
                648
                
                
                
                4.8
                
                
                
                753
                
                
                
                6.3Other
      loans
                
                
                62
                
                
                
                0.1
                
                
                
                152
                
                
                
                0.1
                
                
                
                180
                
                
                
                0.0
                
                
                
                225
                
                
                
                0.1
                
                
                
                216
                
                
                
                0.6Total
                
                $
                3,170
                
                
                
                100.0
                %
                
                $
                3,352
                
                
                
                100.0
                %
                
                $
                3,516
                
                
                
                100.0
                %
                
                $
                3,615
                
                
                
                100.0
                %
                
                $
                3,645
                
                
                
                100.0
                %


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.





90
      days ormore,
      stillNonaccrual
                                          
                                          
                                          accruing
                                          
                                          
                                          Total
                                          
                                          
                                          Percentage(1)
                                          
                                          
                                          Percentage(2)(Dollars
      in thousands)December
      31, 2008Loan
      CategoryResidential
      mortgages (3)
                                          
                                          $
                                          769
                                          
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          769
                                          
                                          
                                          
                                          0.6
                                          %
                                          
                                          
                                          12.6
                                          %Commercial
      mortgages
                                          
                                          
                                          3,667
                                          
                                          
                                          
                                          686
                                          
                                          
                                          
                                          4,353
                                          
                                          
                                          
                                          4.5
                                          
                                          
                                          
                                          71.1Commercial
      loans
                                          
                                          
                                          998
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          998
                                          
                                          
                                          
                                          4.0
                                          
                                          
                                          
                                          16.3Installment
      loans
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          0.0
                                          
                                          
                                          
                                          0.0Total
                                          
                                          $
                                          5,434
                                          
                                          
                                          $
                                          686
                                          
                                          
                                          $
                                          6,120
                                          
                                          
                                          
                                          2.3
                                          %
                                          
                                          
                                          100.0
                                          %December
      31, 2007Loan
      CategoryResidential
      mortgages (3)
                                          
                                          $
                                          368
                                          
                                          
                                          $
                                          32
                                          
                                          
                                          $
                                          400
                                          
                                          
                                          
                                          0.3
                                          %
                                          
                                          
                                          8.6
                                          %Commercial
      mortgages
                                          
                                          
                                          1,819
                                          
                                          
                                          
                                          828
                                          
                                          
                                          
                                          2,647
                                          
                                          
                                          
                                          3.0
                                          
                                          
                                          
                                          57.0Commercial
      loans
                                          
                                          
                                          1,574
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          1,574
                                          
                                          
                                          
                                          6.0
                                          
                                          
                                          
                                          33.9Installment
      loans
                                          
                                          
                                          —
                                          
                                          
                                          
                                          23
                                          
                                          
                                          
                                          23
                                          
                                          
                                          
                                          0.3
                                          
                                          
                                          
                                          0.5Total
                                          
                                          $
                                          3,761
                                          
                                          
                                          $
                                          883
                                          
                                          
                                          $
                                          4,644
                                          
                                          
                                          
                                          1.8
                                          %
                                          
                                          
                                          100.0
                                          %December
      31, 2006Loan
      CategoryResidential
      mortgages (3)
                                          
                                          $
                                          347
                                          
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          347
                                          
                                          
                                          
                                          0.3
                                          %
                                          
                                          
                                          18.5
                                          %Commercial
      mortgages
                                          
                                          
                                          1,520
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          1,520
                                          
                                          
                                          
                                          1.7
                                          
                                          
                                          
                                          80.9Commercial
      loans
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          0.0
                                          
                                          
                                          
                                          0.0Installment
      loans
                                          
                                          
                                          —
                                          
                                          
                                          
                                          13
                                          
                                          
                                          
                                          13
                                          
                                          
                                          
                                          0.1
                                          
                                          
                                          
                                          0.6Total
                                          
                                          $
                                          1,867
                                          
                                          
                                          $
                                          13
                                          
                                          
                                          $
                                          1,880
                                          
                                          
                                          
                                          0.8
                                          %
                                          
                                          
                                          100.0
                                          %December
      31, 2005Loan
      CategoryResidential
      mortgages (3)
                                          
                                          $
                                          438
                                          
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          438
                                          
                                          
                                          
                                          0.4
                                          %
                                          
                                          
                                          15.0
                                          %Commercial
      mortgages
                                          
                                          
                                          2,484
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          2,484
                                          
                                          
                                          
                                          2.9
                                          
                                          
                                          
                                          85.0Commercial
      loans
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          0.0
                                          
                                          
                                          
                                          0.0Installment
      loans
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          0.0
                                          
                                          
                                          
                                          0.0Total
                                          
                                          $
                                          2,922
                                          
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          2,922
                                          
                                          
                                          
                                          1.2
                                          %
                                          
                                          
                                          100.0
                                          %




18





Nonaccrual
                  
                  
                  90 days or
                    more, still
                    accruing
                  
                  
                  Total
                  
                  
                  Percentage(1)
                  
                  
                  Percentage(2)(Dollars
      in thousands)December
      31, 2004Loan
      CategoryResidential
      mortgages (3)
                  
                  $
                  491
                  
                  
                  $
                  166
                  
                  
                  $
                  657
                  
                  
                  
                  0.6
                  %
                  
                  
                  30.8
                  %Commercial
      mortgages
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  0.0
                  
                  
                  
                  0.0Commercial
      loans
                  
                  
                  233
                  
                  
                  
                  1,230
                  
                  
                  
                  1,463
                  
                  
                  
                  6.9
                  
                  
                  
                  68.5Installment
      loans
                  
                  
                  —
                  
                  
                  
                  16
                  
                  
                  
                  16
                  
                  
                  
                  0.1
                  
                  
                  
                  0.7Total
                  
                  $
                  724
                  
                  
                  $
                  1,412
                  
                  
                  $
                  2,136
                  
                  
                  
                  0.9
                  %
                  
                  
                  100.0
                  %





1 Percentage
of gross loans outstanding for each loan category.


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


3 Includes
Home Equity Loans.





Total
nonperforming residential mortgage, commercial mortgage, commercial and
installment loans represent 0.6%, 4.5%, 4.0% and 0.0% of their respective
portfolio totals at December 31, 2008, compared to 0.3%, 3.0%, 6.0% and 0.3% at
December 31, 2007, respectively. The majority of the Company’s total nonaccrual
and past due loans are secured loans and, as such, management anticipates there
will be limited risk of loss in their ultimate resolution.




Nonaccrual
loans increased $1.6 million from $3.8 million at December 31, 2007 to $5.4
million at December 31, 2008. Except for a specific reserve of $149,000
allocated to certain nonaccrual 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 loans that were
considered to be trouble debt restructures as of December 31, 2008, 2007, and
2006.





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.




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





LOAN
PORTFOLIO COMPOSITION AT DECEMBER 31,




2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004Amount
                  
                  
                  Percent
                  
                  
                  Amount
                  
                  
                  Percent
                  
                  
                  Amount
                  
                  
                  Percent
                  
                  
                  Amount
                  
                  
                  Percent
                  
                  
                  Amount
                  
                  
                  Percent(Dollars
      in thousands)Real
      Estate LoansResidential (1)
                  
                  $
                  103,212
                  
                  
                  
                  38.6
                  %
                  
                  $
                  96,612
                  
                  
                  
                  38.2
                  %
                  
                  $
                  92,912
                  
                  
                  
                  37.1
                  %
                  
                  $
                  86,936
                  
                  
                  
                  33.6
                  %
                  
                  $
                  80,410
                  
                  
                  
                  35.8
                  %Commercial (1)
                  
                  
                  93,342
                  
                  
                  
                  34.9
                  
                  
                  
                  85,182
                  
                  
                  
                  33.7
                  
                  
                  
                  85,595
                  
                  
                  
                  34.1
                  
                  
                  
                  84,250
                  
                  
                  
                  34.5
                  
                  
                  
                  77,338
                  
                  
                  
                  34.5Home
      equity
                  
                  
                  31,096
                  
                  
                  
                  11.6
                  
                  
                  
                  25,977
                  
                  
                  
                  10.3
                  
                  
                  
                  24,195
                  
                  
                  
                  9.6
                  
                  
                  
                  22,697
                  
                  
                  
                  9.3
                  
                  
                  
                  21,127
                  
                  
                  
                  9.4Farm
      land
                  
                  
                  3,879
                  
                  
                  
                  1.4
                  
                  
                  
                  3,883
                  
                  
                  
                  1.5
                  
                  
                  
                  3,726
                  
                  
                  
                  1.5
                  
                  
                  
                  3,443
                  
                  
                  
                  1.4
                  
                  
                  
                  3,721
                  
                  
                  
                  1.7Construction
                  
                  
                  2,737
                  
                  
                  
                  1.0
                  
                  
                  
                  5,531
                  
                  
                  
                  2.2
                  
                  
                  
                  6,087
                  
                  
                  
                  2.4
                  
                  
                  
                  5,956
                  
                  
                  
                  2.4
                  
                  
                  
                  4,524
                  
                  
                  
                  2.0$
                  234,266
                  
                  
                  
                  87.5
                  %
                  
                  $
                  217,185
                  
                  
                  
                  85.9
                  %
                  
                  $
                  212,515
                  
                  
                  
                  84.7
                  %
                  
                  $
                  203,282
                  
                  
                  
                  83.2
                  %
                  
                  $
                  187,120
                  
                  
                  
                  83.4
                  %Other
      LoansCommercial
      loans
                  
                  $
                  25,183
                  
                  
                  
                  9.4
                  
                  
                  $
                  26,431
                  
                  
                  
                  10.4
                  %
                  
                  $
                  28,106
                  
                  
                  
                  11.3
                  %
                  
                  $
                  28,643
                  
                  
                  
                  11.7
                  %
                  
                  $
                  21,317
                  
                  
                  
                  9.5
                  %Consumer
      installment loans
                  
                  
                  7,511
                  
                  
                  
                  2.8
                  
                  
                  
                  8,948
                  
                  
                  
                  3.5
                  
                  
                  
                  9,773
                  
                  
                  
                  3.9
                  
                  
                  
                  11,673
                  
                  
                  
                  4.8
                  
                  
                  
                  14,116
                  
                  
                  
                  6.3Other
      consumer loans
                  
                  
                  173
                  
                  
                  
                  0.1
                  
                  
                  
                  148
                  
                  
                  
                  0.1
                  
                  
                  
                  118
                  
                  
                  
                  0.0
                  
                  
                  
                  128
                  
                  
                  
                  0.1
                  
                  
                  
                  1,345
                  
                  
                  
                  0.6Agricultural
      loans
                  
                  
                  430
                  
                  
                  
                  0.2
                  
                  
                  
                  273
                  
                  
                  
                  0.1
                  
                  
                  
                  248
                  
                  
                  
                  0.1
                  
                  
                  
                  535
                  
                  
                  
                  0.2
                  
                  
                  
                  338
                  
                  
                  
                  0.233,297
                  
                  
                  
                  12.5
                  
                  
                  
                  35,800
                  
                  
                  
                  14.1
                  
                  
                  
                  38,245
                  
                  
                  
                  15.3
                  
                  
                  
                  40,979
                  
                  
                  
                  16.8
                  
                  
                  
                  37,116
                  
                  
                  
                  16.6Total
      loans
                  
                  
                  267,563
                  
                  
                  
                  100.0
                  %
                  
                  
                  252,985
                  
                  
                  
                  100.0
                  %
                  
                  
                  250,760
                  
                  
                  
                  100.0
                  %
                  
                  
                  244,261
                  
                  
                  
                  100.0
                  %
                  
                  
                  224,236
                  
                  
                  
                  100.0
                  %Allowance
      for loan losses
                  
                  
                  (3,170
                  )
                  
                  
                  
                  
                  
                  
                  (3,352
                  )
                  
                  
                  
                  
                  
                  
                  (3,516
                  )
                  
                  
                  
                  
                  
                  
                  (3,615
                  )
                  
                  
                  
                  
                  
                  
                  (3,645
                  )Total
      loans, net
                  
                  $
                  264,393
                  
                  
                  
                  
                  
                  
                  $
                  249,633
                  
                  
                  
                  
                  
                  
                  $
                  247,244
                  
                  
                  
                  
                  
                  
                  $
                  240,646
                  
                  
                  
                  
                  
                  
                  $
                  220,591




1Historical data restated to conform
with current classification.


19


MATURITIES
AND SENSITIVITIES OF LOANS TO
 CHANGES
IN INTEREST RATES AT DECEMBER 31, 2008
 
 One
      yearOne
      year
                      
                      
                      through
                      
                      
                      Afteror less
                      
                      
                      five years
                      
                      
                      five years
                      
                      
                      Total(In
      thousands)Commercial
      and agricultural
                      
                      $
                      9,291
                      
                      
                      $
                      9,111
                      
                      
                      $
                      7,211
                      
                      
                      $
                      25,613Real
      estate construction
                      
                      
                      540
                      
                      
                      
                      2,154
                      
                      
                      
                      43
                      
                      
                      
                      2,737Total
                      
                      $
                      9,831
                      
                      
                      $
                      11,265
                      
                      
                      $
                      7,254
                      
                      
                      $
                      28,350Interest
      sensitivity of loans:Predetermined
      rate
                      
                      $
                      817
                      
                      
                      $
                      10,232
                      
                      
                      $
                      7,254
                      
                      
                      $
                      18,303Variable
      rate
                      
                      
                      9,014
                      
                      
                      
                      1,033
                      
                      
                      
                      —
                      
                      
                      
                      10,047Total
                      
                      $
                      9,831
                      
                      
                      $
                      11,265
                      
                      
                      $
                      7,254
                      
                      
                      $
                      28,350
 
 Investment
Securities
 
 The
carrying amount and the fair value of the Company’s available for sale and
investment securities and their expected maturities are outlined in the
following tables:
 
 SECURITIES
AVAILABLE FOR SALE AND INVESTMENT SECURITIES ANALYSIS
 
 Summary
      of Investment Securities at December 31,*2008
                  
                  
                  2007
                  
                  
                  2006Amortized
                  
                  
                  Fair
                  
                  
                  Amortized
                  
                  
                  Fair
                  
                  
                  Amortized
                  
                  
                  Faircost
                  
                  
                  value
                  
                  
                  cost
                  
                  
                  value
                  
                  
                  cost
                  
                  
                  value(In
      thousands)Government
      sponsored enterprises
                  
                  $
                  29,000
                  
                  
                  $
                  29,128
                  
                  
                  $
                  39,360
                  
                  
                  $
                  39,282
                  
                  
                  $
                  54,351
                  
                  
                  $
                  52,784Municipal
      securities
                  
                  
                  42,615
                  
                  
                  
                  43,520
                  
                  
                  
                  42,147
                  
                  
                  
                  42,755
                  
                  
                  
                  48,597
                  
                  
                  
                  49,122Mortgage
      backed securities and collateralized mortgage obligations
                  
                  
                  17,819
                  
                  
                  
                  18,059
                  
                  
                  
                  10,192
                  
                  
                  
                  10,237
                  
                  
                  
                  6,428
                  
                  
                  
                  6,393Equity
      securities
                  
                  
                  794
                  
                  
                  
                  896
                  
                  
                  
                  5,928
                  
                  
                  
                  6,167
                  
                  
                  
                  821
                  
                  
                  
                  1,059$
                  90,228
                  
                  
                  $
                  91,603
                  
                  
                  $
                  97,627
                  
                  
                  $
                  98,441
                  
                  
                  $
                  110,197
                  
                  
                  $
                  109,358
 
 *
              The
      analysis shown combines the Company’s Securities Available for Sale
      portfolio and the Securities Held to Maturity portfolio. 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 2006.
 
 ANALYSIS
BY TYPE AND BY PERIOD TO MATURITY
 
 Under 1
      year
                    
                    
                    1-5
      years
                    
                    
                    5-10
      years
                    
                    
                    After 10
      yearsDecember
      31, 2008
                    
                    Balance
                    
                    
                    Rate
                    
                    
                    Balance
                    
                    
                    Rate
                    
                    
                    Balance
                    
                    
                    Rate
                    
                    
                    Balance
                    
                    
                    Rate
                    
                    
                    Total(Dollars
      in thousands)Government
      sponsored enterprises
                    
                    $
                    3,000
                    
                    
                    
                    5.15
                    %
                    
                    $
                    2,000
                    
                    
                    
                    5.16
                    %
                    
                    $
                    20,000
                    
                    
                    
                    5.06
                    %
                    
                    $
                    4,000
                    
                    
                    
                    5.00
                    %
                    
                    $
                    29,000Municipal securities – tax exempt(1)
                    
                    
                    1,833
                    
                    
                    
                    4.09
                    
                    
                    
                    29,888
                    
                    
                    
                    3.96
                    
                    
                    
                    5,129
                    
                    
                    
                    4.02
                    
                    
                    
                    -
                    
                    
                    
                    0.00
                    
                    
                    
                    36,850Municipal
      securities – taxable
                    
                    
                    2,738
                    
                    
                    
                    3.01
                    
                    
                    
                    1,985
                    
                    
                    
                    3.92
                    
                    
                    
                    471
                    
                    
                    
                    4.97
                    
                    
                    
                    571
                    
                    
                    
                    5.93
                    
                    
                    
                    5,765Mortgage
      backed securities and collateralized  mortgage
      obligations
                    
                    
                    3,259
                    
                    
                    
                    5.06
                    
                    
                    
                    6,953
                    
                    
                    
                    5.04
                    
                    
                    
                    4,691
                    
                    
                    
                    5.02
                    
                    
                    
                    2,916
                    
                    
                    
                    4.87
                    
                    
                    
                    17,819$
                    10,830
                    
                    
                    
                    4.40
                    %
                    
                    $
                    40,826
                    
                    
                    
                    4.20
                    %
                    
                    $
                    30,291
                    
                    
                    
                    4.88
                    %
                    
                    $
                    7,487
                    
                    
                    
                    5.02
                    %
                    
                    $
                    89,434
 
 1
              Yields
      on tax exempt securities have not been stated on a tax equivalent
      basis.
  20
  Non-Interest
Income and Expense
 
 Non-interest
income primarily consists of service charges, commissions and fees for various
banking services, and securities gains and losses. Total non-interest income of
$(170,000) in 2008 was a decrease of 104.9% or $3,640,000 over 2007. This
decrease was due to an impairment charge on Freddie Mac preferred stock during
the 2008 third quarter of $4,829,000 partially offset by an insurance benefit on
a bank owned life insurance policy of $1,522,000 received during the third
quarter of 2008.
  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 FAS 91 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 (credit) 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 life insurance benefits, tax-exempt interest income and net earnings from
bank-owned life insurance.
 
 RESULTS
OF OPERATIONS 2007 VERSUS 2006
 
 Net
Income
 
 Net
income for 2007 of $4.3 million decreased 13.5% or $668,000 from the 2006 net
income of $4.9 million. The lower earnings level in 2007 reflects the
interaction of a number of factors. The most significant factor which reduced
2007 net income was an increase in deposit interest expense combined with lower
earnings on the investment portfolio. Net interest income decreased $0.8 million
from 2006 to 2007 to $14.9 million. Increases in loan interest and fees of
$311,000 to $18.6 million from $18.3 million or 1.7% was offset by decreased
security interest income of $725,000. Decreased holdings in both investment
securities and federal funds sold accounted for the bulk of the decrease in
earnings. Interest expense increased $404,000 primarily due to rising interest
rates on deposits as a result of market pressure. The provision (credit) for
loan losses decreased $460,000 to $(370,000) in 2007 primarily as a result of a
large recovery as discussed in the “Summary of Loan Loss” below. Salary and
employee benefit expense modestly decreased $4,000 or 0.5% as a result of lower
retirement benefit costs, partially offset by normal salary increases and new
staff positions. Occupancy and equipment expense increased $56,000. Other
non-interest expense increased $125,000 due to increased examination fees, FDIC
assessments and advertising costs associated with the opening of two new branch
locations.
 
 Interest
Income and Interest Expense
 
 Throughout
the following discussion, net interest income and its components are expressed
on a tax equivalent basis which means that, where appropriate, tax exempt income
is shown as if it were earned on a fully taxable basis.
  The
largest source of income for the Company is net interest income, which
represents interest earned on loans, securities and short-term investments, less
interest paid on deposits and other interest bearing liabilities. Tax equivalent
net interest income of $15.8 million for 2007 represented a decrease of 5.5%
over 2006. Net interest margin decreased 13 basis points to 4.42% in 2007
compared to 4.55% in 2006, due to overall increases in interest bearing
liability yields.
  Total
interest income for 2007 was $24.4 million, compared to $24.9 million in 2006.
The decrease in 2007 is largely the result of a decrease in the average balance
of interest earning assets from $367.5 million in 2006 to $357.3 million in
2007, a decrease of 2.8%. Total average securities (securities available for
sale and securities held to maturity) decreased $6.6 million or 6.0% in 2007 to
$104.7 million. The yield on total securities decreased 15 basis points to 5.40%
in 2007 from 5.55% in 2006. During 2007, total average securities decreased to
provide liquidity for several purposes. Average loans increased $3.4 million to
$250.3 million from $246.9 million in 2006, concurrently with a 3 basis point
increase in yields from 7.42% in 2006 to 7.45% in 2007. Loan growth in real
estate and fixed rate home equity loans amounted to $4.4 million and $1.3
million respectively. Time and demand loans, which are tied to prime, decreased
10 basis points in yield and $2.0 million in volume. In the second half of 2007,
variable rate time and demand loans decreased $2.0 million or 7.4% in volume.
Average residential and commercial real estate loans continued to make up a
major portion of the loan portfolio at 71.7% of total loans in
2007.
  Total
interest expense in 2007 increased $0.4 million to $8.6 million from $8.2
million in 2006 as a result of an increase in rates paid. The average balance of
interest bearing liabilities decreased from $282.7 million in 2006 to $272.0
million in 2007, a decrease of 3.8% as a result of $9.6 million decrease in
average deposits. Matured brokered deposits made up $6.9 million of the
reduction in deposits. During 2007, the average cost of total interest bearing
liabilities increased by 27 basis points from 2.90% to 3.17%. Average interest
bearing deposits decreased $9.6 million to $251.0 million in 2007, a decrease of
3.7%. Interest rates on interest bearing deposits increased by 26 basis points
from an average rate paid of 2.74% in 2006 to 3.00% in 2007. Savings and insured
money market interest rates increased 25 basis points and time deposits
increased 40 basis points in response to competition. In 2007, average demand
deposit balances decreased 0.9% over 2006.
  21
  Provision
for Loan Losses
 
 The
provision (credit) for loan losses was $(370,000) in 2007 as compared to $90,000
in 2006 largely as a result of a $441,000 recovery on a previously written-off
loan and loans remaining well secured. Provisions for loan losses are recorded
to maintain the allowance for loan losses at a level deemed adequate by
management based on an evaluation of such factors as economic conditions in the
Company’s market area, past loan loss experience, the financial condition of
individual borrowers, and underlying collateral values based on independent
appraisals. The provision for loan losses was reduced in 2007 due to the
reductions net charge-offs as noted above. While management uses available
information to recognize losses on loans, future additions to the allowance for
loan losses may be necessary based on changes in economic conditions,
particularly in Sullivan County. In addition, Federal regulatory agencies, as an
integral part of their examination process, periodically review the Company’s
allowance for loan losses and may require the Company to recognize additions to
the allowance based on their judgments about information available to them at
the time of their examination, which may not be currently available to
management. Based on management’s comprehensive analysis of the loan portfolio,
and that the company has no exposure to subprime loans, management believes that
the level of the allowance for loan losses at December 31, 2007 was
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 $2.7 million from $1.9 million at December 31,
2006 to $4.6 million at December 31, 2007. Net loan recoveries (charge-offs)
increased from $(189,000) in 2006 to $206,000 in 2007 and gross charge-offs
decreased from $533,000 in 2006 to $318,000 in 2007.
 
 Non-Interest
Income and Expense
 
 Non-interest
income primarily consists of service charges, commissions and fees for various
banking services, and securities gains and losses. Total non-interest income of
$3.5 million in 2007 was a decrease of 3.2% or $116,000 over 2006. The decrease
is primarily attributable to recognition of net security losses and less of a
gain on foreclosed real estate partially offset by earnings on bank-owned life
insurance.
  Non-interest
expense increased by $177,000 or 1.4% to $13.2 million in 2007. Salaries and
employee benefit expense decreased 0.5% to $7.7 million in 2007. Salaries and
employee benefits decreased slightly due to reduced retirement costs, partially
offset by normal salary increases and additional staffing. Other non-interest
expense increased $125,000 or 3.9% due to examination fees, FDIC assessments and
advertising of two new branch locations. Occupancy and equipment expenses
increased a net of $56,000.
 
 Income
Tax Expense
 
 Income
tax expense totaled $1.3 million in 2007 versus $1.2 million in 2006. The
effective tax rate approximated 22.9% in 2007 and 20.1% in 2006. These
relatively low effective tax rates reflect the favorable tax treatment received
on tax-exempt interest income and net earnings from bank-owned life
insurance.
  22
  OFF-BALANCE
SHEET ARRANGEMENTS
 
 In the
normal course of operations, the Company engages in a variety of financial
transactions that, in accordance with generally accepted accounting principles,
are not recorded in the financial statements, or are recorded in amounts that
differ from the notional amounts. These transactions involve, to varying
degrees, elements of credit, interest rate, and liquidity risk. Such
transactions are used by us for general corporate purposes or for customer
needs. Corporate purpose transactions are used to help manage credit, interest
rate, and liquidity risk or to optimize capital. Customer transactions are used
to manage customers’ requests for funding. See note 16 of Notes to Consolidated
Financial Statements contained elsewhere within this report for further
information concerning off-balance sheet arrangements.
 
 LIQUIDITY
 
 Liquidity
is the ability to provide sufficient cash flow to meet financial commitments
such as additional loan demand and withdrawals of existing deposits. The
Company’s primary sources of liquidity are its deposit base; FHLB borrowings;
repayments and maturities on loans; short-term assets such as federal funds and
short-term interest bearing deposits in banks; and maturities and sales of
securities available for sale. These sources are available in amounts sufficient
to provide liquidity to meet the Company’s ongoing funding requirements. The
Bank’s membership in the FHLB of New York enhances liquidity in the form of
overnight and 30 day lines of credit of approximately $39.1 million, which may
be used to meet unforeseen liquidity demands. There were $10,100,000 in
overnight borrowings at December 31, 2008. Six separate FHLB term advances
totaling $35.0 million at December 31, 2008 were being used to fund loan
growth.
  In 2008,
cash generated from operating activities amounted to $7.7 million and cash
generated from financing activities was $5.3 million. These amounts were offset
by cash used for investing activities in the amount of $14.5 million, resulting
in a net decrease in cash and cash equivalents of $1.5 million. See the
Consolidated Statements of Cash Flows for additional information.
  The
following table reflects the Maturities of Time Deposits of $100,000 or
more:
 
 MATURITY
SCHEDULE OF TIME DEPOSITS
 OF
$100,000 OR MORE AT DECEMBER 31, 2008
 
 Deposits(In thousands)Due
      three months or less
                      
                      $
                      14,233Over
      three months through six months
                      
                      
                      4,479Over
      six months through twelve months
                      
                      
                      10,226Over
      twelve months
                      
                      
                      14,560Total
                      
                      $
                      43,498
 
 Management
anticipates that much of these maturing deposits will rollover at maturity and
that liquidity will be adequate to meet funding requirements.
  23
 
 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 decreased $1.3 million or
0.3% in 2008 following an increase of 6.5% in 2007. The adoption of ETIF Issue
06-4 for split dollar plans partially contributed to the decrease by $0.3
million in 2008.
  The
Company retained $0.5 million from 2008 net income after the payment of
dividends which decreased stockholders’ equity by $2.2 million. In addition,
accumulated other comprehensive loss decreased stockholders’ equity by $1.5
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, 2008, the Bank’s Tier
I risk-based capital was 15.9 % and total risk-based capital was 17.1% of
risk-weighted assets. These risk-based capital ratios are well above the minimum
regulatory requirements of 4.0% for Tier I capital and 8.0% for total risk-based
capital. The Bank’s leverage ratio (Tier I capital to average assets) of 10.9%
is well above the 4.0% minimum regulatory requirement.
  The
following table shows the Bank’s actual capital measurements compared to the
minimum regulatory requirements.
 
 As of December 31,
                    
                    2008
                    
                    
                    2007(Dollars in thousands)TIER
      I CAPITALBanks’
      equity, excluding the after-tax net other comprehensive
    loss
                    
                    $
                    43,081
                    
                    
                    $
                    42,852TIER
      II CAPITALAllowance
      for loan losses (1)
                    
                    $
                    3,187
                    
                    
                    $
                    3,183Total
      risk-based capital
                    
                    $
                    46,268
                    
                    
                    $
                    46,035Risk-weighted
      assets (2)
                    
                    $
                    270,883
                    
                    
                    $
                    254,468Average
      assets
                    
                    $
                    393,958
                    
                    
                    $
                    387,337RATIOSTier
      I risk-based capital (minimum 4.0%)
                    
                    
                    15.9
                    %
                    
                    
                    16.8
                    %Total
      risk-based capital (minimum 8.0%)
                    
                    
                    17.1
                    %
                    
                    
                    18.1
                    %Leverage
      (minimum 4.0%)
                    
                    
                    10.9
                    %
                    
                    
                    11.1
                    %
  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.
 2
              Risk-weighted
      assets have been reduced for the portion allowance of loan losses excluded
      from total risk-based capital.
 
 CONTRACTUAL
OBLIGATIONS
 
 The
Company is contractually obligated to make the following payments on long-term
debt and leases as of December 31, 2008:
 
 Less than
                                              
                                              
                                              1
      to 3
                                              
                                              
                                              3
      to 5
                                              
                                              
                                              More than1 year
                                              
                                              
                                              years
                                              
                                              
                                              years
                                              
                                              
                                              5 years
                                              
                                              
                                              Total(In
      thousands)Federal
      Home Loan Bank borrowings
                                              
                                              $
                                              20,000
                                              
                                              
                                              $
                                              5,000
                                              
                                              
                                              $
                                              10,000
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              35,000Operating
      leases
                                              
                                              
                                              1,284
                                              
                                              
                                              
                                              1,565
                                              
                                              
                                              
                                              155
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              3,004Total
                                              
                                              $
                                              21,284
                                              
                                              
                                              $
                                              6,565
                                              
                                              
                                              $
                                              10,155
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              38,004
 
 In regard
to short-term borrowings, see note 8 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 2008, 2007, and 2006. The total dollar amount of interest income from
earning assets and the resultant yields are calculated on a tax equivalent
basis. The interest paid on interest-bearing liabilities, expressed in dollars
and rates, are also presented.
 
 CONSOLIDATED
AVERAGE BALANCE SHEET 2008
 
 Average
                  
                  
                  Interest
                  
                  
                  Averagebalance
                  
                  
                  earned/paid
                  
                  
                  yield/rateASSETSSecurities
      available for sale and held to maturity:(1)Taxable
      securities
                  
                  $
                  58,388,000
                  
                  
                  $
                  2,844,000
                  
                  
                  
                  4.87
                  %Tax-exempt
      securities(2)
                  
                  
                  42,675,000
                  
                  
                  
                  2,626,000
                  
                  
                  
                  6.15Total
      securities
                  
                  
                  101,063,000
                  
                  
                  
                  5,470,000
                  
                  
                  
                  5.41Short-term
      investments
                  
                  
                  1,106,000
                  
                  
                  
                  29,000
                  
                  
                  
                  2.62LoansReal
      estate mortgages
                  
                  
                  188,579,000
                  
                  
                  
                  13,196,000
                  
                  
                  
                  7.00Home
      equity loans
                  
                  
                  28,244,000
                  
                  
                  
                  1,799,000
                  
                  
                  
                  6.37Time
      and demand loans
                  
                  
                  24,849,000
                  
                  
                  
                  1,495,000
                  
                  
                  
                  6.02Installment
      and other loans
                  
                  
                  18,041,000
                  
                  
                  
                  1,848,000
                  
                  
                  
                  10.24Total
      loans(3)
                  
                  
                  259,713,000
                  
                  
                  
                  18,338,000
                  
                  
                  
                  7.06Total
      interest earning assets
                  
                  
                  361,882,000
                  
                  
                  
                  23,837,000
                  
                  
                  
                  6.59Other
      assets
                  
                  
                  32,082,000Total
      assets
                  
                  $
                  393,964,000LIABILITIES
      AND STOCKHOLDERS’ EQUITYNOW
      and Super NOW deposits
                  
                  $
                  30,731,000
                  
                  
                  
                  151,000
                  
                  
                  
                  0.50
                  %Savings
      and insured money market deposits
                  
                  
                  82,540,000
                  
                  
                  
                  863,000
                  
                  
                  
                  1.05Time
      deposits
                  
                  
                  125,460,000
                  
                  
                  
                  4,731,000
                  
                  
                  
                  3.77Total
      interest bearing deposits
                  
                  
                  238,731,000
                  
                  
                  
                  5,745,000
                  
                  
                  
                  2.41Federal
      funds purchased and other short-term debt
                  
                  
                  7,778,000
                  
                  
                  
                  123,000
                  
                  
                  
                  1.58Long-term
      debt
                  
                  
                  32,156,000
                  
                  
                  
                  1,360,000
                  
                  
                  
                  4.23Total
      interest bearing liabilities
                  
                  
                  278,665,000
                  
                  
                  
                  7,228,000
                  
                  
                  
                  2.59Demand
      deposits
                  
                  
                  62,253,000Other
      liabilities
                  
                  
                  9,117,000Total
      liabilities
                  
                  
                  350,035,000Stockholders’
      equity
                  
                  
                  43,929,000Total
      liabilities and stockholders’ equity
                  
                  $
                  393,964,000Net
      interest income – tax effected
                  
                  
                  
                  
                  
                  
                  16,609,000Less:
      Tax gross up on exempt securities
                  
                  
                  
                  
                  
                  
                  (884,000
                  )Net
      interest income per statement of income
                  
                  
                  
                  
                  
                  $
                  15,725,000Net
      interest spread
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4.00
                  %Net
      interest margin(4)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4.59
                  %
 
 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
  DISTRIBUTION
OF ASSETS, LIABILITIES & STOCKHOLDERS’ EQUITY:
 INTEREST
RATES & INTEREST DIFFERENTIAL
 
 CONSOLIDATED
AVERAGE BALANCE SHEET 2007
 
 Average
                    
                    
                    Interest
                    
                    
                    Averagebalance
                    
                    
                    earned/paid
                    
                    
                    yield/rateASSETSSecurities
      available for sale and held to maturity:(1)Taxable
      securities
                    
                    $
                    59,593,000
                    
                    
                    $
                    2,928,000
                    
                    
                    
                    4.91
                    %Tax-exempt
      securities(2)
                    
                    
                    45,112,000
                    
                    
                    
                    2,724,000
                    
                    
                    
                    6.04Total
      securities
                    
                    
                    104,705,000
                    
                    
                    
                    5,652,000
                    
                    
                    
                    5.40Short-term
      investments
                    
                    
                    2,309,000
                    
                    
                    
                    118,000
                    
                    
                    
                    5.11LoansReal
      estate mortgages
                    
                    
                    182,028,000
                    
                    
                    
                    12,797,000
                    
                    
                    
                    7.03Home
      equity loans
                    
                    
                    24,960,000
                    
                    
                    
                    1,704,000
                    
                    
                    
                    6.83Time
      and demand loans
                    
                    
                    25,163,000
                    
                    
                    
                    2,169,000
                    
                    
                    
                    8.62Installment
      and other loans
                    
                    
                    18,126,000
                    
                    
                    
                    1,965,000
                    
                    
                    
                    10.84Total
      loans(3)
                    
                    
                    250,277,000
                    
                    
                    
                    18,635,000
                    
                    
                    
                    7.45Total
      interest earning assets
                    
                    
                    357,291,000
                    
                    
                    
                    24,405,000
                    
                    
                    
                    6.83Other
      assets
                    
                    
                    32,093,000Total
      assets
                    
                    $
                    389,384,000LIABILITIES
      AND STOCKHOLDERS’ EQUITYNOW
      and Super NOW deposits
                    
                    $
                    32,099,000
                    
                    
                    
                    160,000
                    
                    
                    
                    0.50
                    %Savings
      and insured money market deposits
                    
                    
                    101,411,000
                    
                    
                    
                    2,422,000
                    
                    
                    
                    2.39Time
      deposits
                    
                    
                    117,539,000
                    
                    
                    
                    4,957,000
                    
                    
                    
                    4.22Total
      interest bearing deposits
                    
                    
                    251,049,000
                    
                    
                    
                    7,539,000
                    
                    
                    
                    3.00Federal
      funds purchased and other short-term debt
                    
                    
                    3,363,000
                    
                    
                    
                    171,000
                    
                    
                    
                    5.08Long-term
      debt
                    
                    
                    17,630,000
                    
                    
                    
                    905,000
                    
                    
                    
                    5.13Total
      interest bearing liabilities
                    
                    
                    272,042,000
                    
                    
                    
                    8,615,000
                    
                    
                    
                    3.17Demand
      deposits
                    
                    
                    64,892,000Other
      liabilities
                    
                    
                    10,201,000Total
      liabilities
                    
                    
                    347,135,000Stockholders’
      equity
                    
                    
                    42,249,000Total
      liabilities and stockholders’ equity
                    
                    $
                    389,384,000Net
      interest income – tax effected
                    
                    
                    
                    
                    
                    
                    15,790,000Less:
      Tax gross up on exempt securities
                    
                    
                    
                    
                    
                    
                    (926,000
                    )Net
      interest income per statement of income
                    
                    
                    
                    
                    
                    $
                    14,864,000Net
      interest spread
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.66
                    %Net
      interest margin(4)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    4.42
                    %
 
 1
              Yields
      on securities available for sale are based on amortized
    cost.
 2
              Tax
      exempt securities are affected using a 34% tax
  rate.
 3
              For
      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 net interest income by total interest earning
      assets.
  26
  DISTRIBUTION
OF ASSETS, LIABILITIES & STOCKHOLDERS’ EQUITY:
 INTEREST
RATES & INTEREST DIFFERENTIAL
 
 CONSOLIDATED
AVERAGE BALANCE SHEET 2006
 
 Average
                  
                  
                  Interest
                  
                  
                  Averagebalance
                  
                  
                  earned/paid
                  
                  
                  yield/rateASSETSSecurities
      available for sale and held to maturity:(1)Taxable
      securities
                  
                  $
                  61,988,000
                  
                  
                  $
                  3,127,000
                  
                  
                  
                  5.04
                  %Tax-exempt
      securities(2)
                  
                  
                  49,346,000
                  
                  
                  
                  3,047,000
                  
                  
                  
                  6.17Total
      securities
                  
                  
                  111,334,000
                  
                  
                  
                  6,174,000
                  
                  
                  
                  5.55Short-term
      investments
                  
                  
                  9,226,000
                  
                  
                  
                  419,000
                  
                  
                  
                  4.54LoansReal
      estate mortgages
                  
                  
                  177,571,000
                  
                  
                  
                  12,467,000
                  
                  
                  
                  7.02Home
      equity loans
                  
                  
                  23,615,000
                  
                  
                  
                  1,573,000
                  
                  
                  
                  6.66Time
      and demand loans
                  
                  
                  27,181,000
                  
                  
                  
                  2,370,000
                  
                  
                  
                  8.72Installment
      and other loans
                  
                  
                  18,523,000
                  
                  
                  
                  1,914,000
                  
                  
                  
                  10.33Total
      loans(3)
                  
                  
                  246,890,000
                  
                  
                  
                  18,324,000
                  
                  
                  
                  7.42Total
      interest earning assets
                  
                  
                  367,450,000
                  
                  
                  
                  24,917,000
                  
                  
                  
                  6.78Other
      assets
                  
                  
                  33,085,000Total
      assets
                  
                  $
                  400,535,000LIABILITIES
      AND STOCKHOLDERS’ EQUITYNOW
      and Super NOW deposits
                  
                  $
                  34,515,000
                  
                  
                  
                  172,000
                  
                  
                  
                  0.50
                  %Savings
      and insured money market deposits
                  
                  
                  99,364,000
                  
                  
                  
                  2,125,000
                  
                  
                  
                  2.14Time
      deposits
                  
                  
                  126,777,000
                  
                  
                  
                  4,837,000
                  
                  
                  
                  3.82Total
      interest bearing deposits
                  
                  
                  260,656,000
                  
                  
                  
                  7,134,000
                  
                  
                  
                  2.74Federal
      funds purchased and other short-term debt
                  
                  
                  503,000
                  
                  
                  
                  23,000
                  
                  
                  
                  4.57Long-term
      debt
                  
                  
                  21,548,000
                  
                  
                  
                  1,054,000
                  
                  
                  
                  4.89Total
      interest bearing liabilities
                  
                  
                  282,707,000
                  
                  
                  
                  8,211,000
                  
                  
                  
                  2.90Demand
      deposits
                  
                  
                  65,480,000Other
      liabilities
                  
                  
                  10,076,000Total
      liabilities
                  
                  
                  358,263,000Stockholders’
      equity
                  
                  
                  42,272,000Total
      liabilities and stockholders’ equity
                  
                  $
                  400,535,000Net
      interest income – tax effected
                  
                  
                  
                  
                  
                  
                  16,706,000Less:
      Tax gross up on exempt securities
                  
                  
                  
                  
                  
                  
                  (1,036,000
                  )Net
      interest income per statement of income
                  
                  
                  
                  
                  
                  $
                  15,670,000Net
      interest spread
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.88
                  %Net
      interest margin(4)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4.55
                  %
 
 1
              Yields
      on securities available for sale are based on amortized
    cost.
 2
              Tax
      exempt securities are affected using a 34% tax
  rate.
 3
              For
      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 net interest income by total interest earning
      assets.
  27
  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 2008 as compared to 2007, and 2007 as compared to 2006.
  The
increase and decrease in interest income and expense due to both rate and volume
have been allocated to the two categories of variances (volume and rate) based
on percentage relationships of such variance to each other.
 
 VOLUME
AND RATE ANALYSIS
 
 2008 compared to 2007
                  
                  
                  2007 compared to 2006increase (decrease)
                  
                  
                  increase (decrease)due to change in
                  
                  
                  due to change inVolume
                  
                  
                  Rate
                  
                  
                  Total
                  
                  
                  Volume
                  
                  
                  Rate
                  
                  
                  TotalInterest
      IncomeInvestment
      securities and securities available for sale
                  
                  $
                  (197,000
                  )
                  
                  $
                  15,000
                  
                  
                  $
                  (182,000
                  )
                  
                  $
                  (368,000
                  )
                  
                  $
                  (154,000
                  )
                  
                  $
                  (522,000
                  )Short-term
      investments
                  
                  
                  (61,000
                  )
                  
                  
                  (28,000
                  )
                  
                  
                  (89,000
                  )
                  
                  
                  (314,000
                  )
                  
                  
                  13,000
                  
                  
                  
                  (301,000
                  )Loans
                  
                  
                  703,000
                  
                  
                  
                  (1,000,000
                  )
                  
                  
                  (297,000
                  )
                  
                  
                  251,000
                  
                  
                  
                  60,000
                  
                  
                  
                  311,000Total
      interest income
                  
                  
                  445,000
                  
                  
                  
                  (1,013,000
                  )
                  
                  
                  (568,000
                  )
                  
                  
                  (431,000
                  )
                  
                  
                  (81,000
                  )
                  
                  
                  (512,000
                  )Interest
      ExpenseNOW
      and Super NOW deposits
                  
                  
                  (7,000
                  )
                  
                  
                  (2,000
                  )
                  
                  
                  (9,000
                  )
                  
                  
                  (12,000
                  )
                  
                  
                  —
                  
                  
                  
                  (12,000
                  )Savings
      and insured money market deposits
                  
                  
                  (451,000
                  )
                  
                  
                  (1,108,000
                  )
                  
                  
                  (1,559,000
                  )
                  
                  
                  44,000
                  
                  
                  
                  253,000
                  
                  
                  
                  297,000Time
      deposits
                  
                  
                  334,000
                  
                  
                  
                  (560,000
                  )
                  
                  
                  (226,000
                  )
                  
                  
                  (352,000
                  )
                  
                  
                  472,000
                  
                  
                  
                  120,000Federal
      funds purchased and other short-term debt
                  
                  
                  224,000
                  
                  
                  
                  (272,000
                  )
                  
                  
                  (48,000
                  )
                  
                  
                  131,000
                  
                  
                  
                  17,000
                  
                  
                  
                  148,000Long-term
      debt
                  
                  
                  746,000
                  
                  
                  
                  (291,000
                  )
                  
                  
                  455,000
                  
                  
                  
                  (192,000
                  )
                  
                  
                  43,000
                  
                  
                  
                  (149,000
                  )Total
      interest expense
                  
                  
                  846,000
                  
                  
                  
                  (2,233,000
                  )
                  
                  
                  (1,387,000
                  )
                  
                  
                  (381,000
                  )
                  
                  
                  785,000
                  
                  
                  
                  404,000Net
      interest income
                  
                  $
                  (401,000
                  )
                  
                  $
                  1,220,000
                  
                  
                  $
                  819,000
                  
                  
                  $
                  (50,000
                  )
                  
                  $
                  (866,000
                  )
                  
                  $
                  (916,000
                  )
 
 The
Company’s operating results are affected by inflation to the extent that
interest rates, loan demand and deposit levels adjust to inflation and impact
net interest income. Management can best counter the effect of inflation over
the long term by managing net interest income and controlling
expenses.
 
 ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 INTEREST
RATE RISK
 
 Measuring
and managing interest rate risk is a dynamic process that the Bank’s management
must continually perform to meet the objectives of maintaining stable net
interest income and net interest margin. 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, 2008 and
ending December 31, 2008 under instantaneous shock scenarios.
  28
  INTEREST
RATE SENSITIVITY TABLE
 (Dollars
in thousands)
 
 Interest Rate
                                Shock(1)
                              
                              Prime rate
                              
                              
                              Projected
                                annualized
                                net interest
                                income
                              
                              
                              Projected
                                dollar
                                change in
                                net interest
                                income
                              
                              
                              Projected
                                percentage
                                change in
                                net interest
                                income
                              
                              
                              Projected
                                change in net
                                interest
                                income as a
                                percent of
                                total
                                stockholders’
                                equity3.00%
                              
                              
                              6.25
                              %
                              
                              $
                              14,913
                              
                              
                              $
                              (522
                              )
                              
                              
                              -3.4
                              %
                              
                              
                              -1.2
                              %2.00%
                              
                              
                              5.25
                              %
                              
                              $
                              15,286
                              
                              
                              $
                              (149
                              )
                              
                              
                              -1.0
                              %
                              
                              
                              -0.3
                              %1.00%
                              
                              
                              4.25
                              %
                              
                              $
                              15,504
                              
                              
                              $
                              69
                              
                              
                              
                              0.4
                              %
                              
                              
                              0.2
                              %No
      change
                              
                              
                              3.25
                              %
                              
                              $
                              15,435
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              --1.00%
                              
                              
                              2.25
                              %
                              
                              $
                              15,925
                              
                              
                              $
                              490
                              
                              
                              
                              3.2
                              %
                              
                              
                              1.2
                              %-2.00%
                              
                              
                              1.25
                              %
                              
                              $
                              16,273
                              
                              
                              $
                              838
                              
                              
                              
                              5.4
                              %
                              
                              
                              2.0
                              %-3.00%
                              
                              
                              0.25
                              %
                              
                              $
                              16,258
                              
                              
                              $
                              823
                              
                              
                              
                              5.3
                              %
                              
                              
                              1.9
                              %
 
 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 $149,000 or -1.2% of total
stockholders’ equity in a +2.00% instantaneous interest rate shock and increase
by $838,000 or 2% of stockholders’ equity in a -2.00% instantaneous interest
rate shock. This is within our Asset and Liability Policy guideline which limits
the maximum projected decrease in net interest income in a +2.00% or -2.00%
instantaneous interest rate shock to +/-12% of the Company’s total net interest
income.
  Our
strategy for managing interest rate risk is impacted by general market
conditions and customer demand. Generally we try to limit the volume and term of
fixed-rate assets and fixed-rate liabilities, so that we can adjust 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 18% of the Bank’s assets at December 31, 2008 were
invested in adjustable rate loans and 2% in floating rate investment
securities.
 
 ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 Management’s
Report on the Financial Statements
  Report of
Independent Registered Public Accounting Firm
  Consolidated
Balance Sheets as of December 31, 2008 and December 31, 2007
  Consolidated
Statements of Income for the years ended December 31, 2008, December 31, 2007
and December 31, 2006
  Consolidated
Statements of Changes in Stockholders’ Equity for the years ended December 31,
2008, December 31, 2007 and December 31, 2006
  Consolidated
Statements of Cash flows for the years ended December 31, 2008, December 31,
2007 and December 31, 2006
  Notes to
Consolidated Financial Statement
  29
 
 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, 2008. 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. ZanettiWayne
      V. ZanettiPresident
      and Chief Executive Officer/s/John A.
      RussellJohn
      A. RussellTreasurer
      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, 2008 and 2007, 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, 2008.  Jeffersonville Bancorp’s
management is responsible for these 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 financial
statements referred to above present fairly, in all material respects, the
financial position of Jeffersonville Bancorp and Subsidiary as of December 31,
2008 and 2007, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of
America.
 
 /s/Beard Miller
      Company LLPBeard
      Miller Company LLPHarrisburg,
      PennsylvaniaMarch
      9, 2009
  F-2
  Jeffersonville
Bancorp and Subsidiary
 Consolidated
Balance Sheets
 (Dollars
in thousands, except share and per share data)
 
 December 31,
                        
                        
                        December 31,2008
                        
                        
                        2007ASSETSCash
      and cash equivalents
                        
                        $
                        8,953
                        
                        
                        $
                        10,428Securities
      available for sale, at fair value
                        
                        
                        85,805
                        
                        
                        
                        92,064Securities
      held to maturity, estimated fair value of $5,798 at December 31, 2008 and
      $6,377 at December 31, 2007
                        
                        
                        5,765
                        
                        
                        
                        6,320Loans,
      net of allowance for loan losses of $3,170 at December 31, 2008 and $3,352
      at December 31, 2007
                        
                        
                        264,393
                        
                        
                        
                        249,633Accrued
      interest receivable
                        
                        
                        1,858
                        
                        
                        
                        2,119Premises
      and equipment, net
                        
                        
                        4,312
                        
                        
                        
                        4,398Restricted
      investments
                        
                        
                        3,435
                        
                        
                        
                        2,998Bank-owned
      life insurance
                        
                        
                        14,127
                        
                        
                        
                        14,132Foreclosed
      real estate
                        
                        
                        1,278
                        
                        
                        
                        35Other
      assets
                        
                        
                        8,641
                        
                        
                        
                        5,303Total
      Assets
                        
                        $
                        398,567
                        
                        
                        $
                        387,430LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilitiesDeposits:Demand
      deposits (non-interest bearing)
                        
                        $
                        58,648
                        
                        
                        $
                        62,143NOW
      and super NOW accounts
                        
                        
                        28,137
                        
                        
                        
                        28,046Savings
      and insured money market deposits
                        
                        
                        73,814
                        
                        
                        
                        88,011Time
      deposits
                        
                        
                        136,125
                        
                        
                        
                        121,042Total
      Deposits
                        
                        
                        296,724
                        
                        
                        
                        299,242Federal
      Home Loan Bank borrowings
                        
                        
                        35,000
                        
                        
                        
                        30,000Short-term
      debt
                        
                        
                        10,524
                        
                        
                        
                        5,509Other
      liabilities
                        
                        
                        13,657
                        
                        
                        
                        8,721Total
      Liabilities
                        
                        
                        355,905
                        
                        
                        
                        343,472Commitments
      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
                        
                        
                        41,349
                        
                        
                        
                        41,104Accumulated
      other comprehensive loss
                        
                        
                        (2,587
                        )
                        
                        
                        (1,046
                        )Total
      Stockholders’ Equity
                        
                        
                        42,662
                        
                        
                        
                        43,958Total
      Liabilities and Stockholders’ Equity
                        
                        $
                        398,567
                        
                        
                        $
                        387,430
 
 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 31,2008
                          
                          
                          2007
                          
                          
                          2006INTEREST
      AND DIVIDEND INCOMELoan
      interest and fees
                          
                          $
                          18,338
                          
                          
                          $
                          18,635
                          
                          
                          $
                          18,324Securities:Taxable
                          
                          
                          2,844
                          
                          
                          
                          2,928
                          
                          
                          
                          3,127Tax-exempt
                          
                          
                          1,742
                          
                          
                          
                          1,798
                          
                          
                          
                          2,011Federal
      funds sold
                          
                          
                          29
                          
                          
                          
                          118
                          
                          
                          
                          419Total
      Interest and Dividend Income
                          
                          
                          22,953
                          
                          
                          
                          23,479
                          
                          
                          
                          23,881INTEREST
      EXPENSEDeposits
                          
                          
                          5,745
                          
                          
                          
                          7,539
                          
                          
                          
                          7,134Federal
      Home Loan Bank borrowings
                          
                          
                          1,360
                          
                          
                          
                          905
                          
                          
                          
                          1,054Other
                          
                          
                          123
                          
                          
                          
                          171
                          
                          
                          
                          23Total
      Interest Expense
                          
                          
                          7,228
                          
                          
                          
                          8,615
                          
                          
                          
                          8,211Net
      interest income
                          
                          
                          15,725
                          
                          
                          
                          14,864
                          
                          
                          
                          15,670Provision
      (credit) for loan losses
                          
                          
                          265
                          
                          
                          
                          (370
                          )
                          
                          
                          90Net
      Interest Income After Provision (Credit) for Loan Losses
                          
                          
                          15,460
                          
                          
                          
                          15,234
                          
                          
                          
                          15,580NON-INTEREST
      INCOMEService
      charges
                          
                          
                          1,774
                          
                          
                          
                          1,858
                          
                          
                          
                          1,892Earnings
      on bank-owned life insurance
                          
                          
                          529
                          
                          
                          
                          482
                          
                          
                          
                          424Gain
      (loss) on sale of securities
                          
                          
                          64
                          
                          
                          
                          (19
                          )
                          
                          
                          (4
                          )Impairment
      charge on securities
                          
                          
                          (5,162
                          )
                          
                          
                          (30
                          )
                          
                          
                          —Foreclosed
      real estate income (loss), net
                          
                          
                          (18
                          )
                          
                          
                          5
                          
                          
                          
                          72Life
      insurance benefit
                          
                          
                          1,522
                          
                          
                          
                          —
                          
                          
                          
                          —Other
      non-interest income
                          
                          
                          1,121
                          
                          
                          
                          1,174
                          
                          
                          
                          1,202Total
      Non-Interest Income (Loss)
                          
                          
                          (170
                          )
                          
                          
                          3,470
                          
                          
                          
                          3,586NON-INTEREST
      EXPENSESSalaries
      and employee benefits
                          
                          
                          7,801
                          
                          
                          
                          7,723
                          
                          
                          
                          7,727Occupancy
      and equipment expenses
                          
                          
                          2,119
                          
                          
                          
                          2,084
                          
                          
                          
                          2,028Other
      non-interest expenses
                          
                          
                          3,529
                          
                          
                          
                          3,353
                          
                          
                          
                          3,228Total
      Non-Interest Expenses
                          
                          
                          13,449
                          
                          
                          
                          13,160
                          
                          
                          
                          12,983Income
      before income tax expense
                          
                          
                          1,841
                          
                          
                          
                          5,544
                          
                          
                          
                          6,183Income
      tax expense (benefit)
                          
                          
                          (861
                          )
                          
                          
                          1,269
                          
                          
                          
                          1,240Net
      Income
                          
                          $
                          2,702
                          
                          
                          $
                          4,275
                          
                          
                          $
                          4,943Basic
      earnings per common share
                          
                          $
                          0.64
                          
                          
                          $
                          1.00
                          
                          
                          $
                          1.13Average
      common shares outstanding
                          
                          
                          4,234
                          
                          
                          
                          4,266
                          
                          
                          
                          4,376Cash
      dividends declared per share
                          
                          $
                          0.52
                          
                          
                          $
                          0.50
                          
                          
                          $
                          0.48
 
 See
accompanying notes to consolidated financial statements.
  F-4
  Jeffersonville
Bancorp and Subsidiary
 Consolidated
Statements of Changes in Stockholders’ Equity
 Years
ended December 31, 2008, 2007 and 2006
 (In
thousands, except per share data)
 
 CommonAccumulated
                                
                                
                                
                                
                                
                                sharesother
                                
                                
                                Total
                                
                                
                                issuedCommon
                                
                                
                                Paid-in
                                
                                
                                Treasury
                                
                                
                                Retained
                                
                                
                                comprehensive
                                
                                
                                stockholders’
                                
                                
                                andstock
                                
                                
                                capital
                                
                                
                                stock
                                
                                
                                earnings
                                
                                
                                loss
                                
                                
                                equity
                                
                                
                                outstandingBalance
      at December 31, 2005
                                
                                $
                                2,384
                                
                                
                                $
                                6,483
                                
                                
                                $
                                (1,108
                                )
                                
                                $
                                36,118
                                
                                
                                $
                                (1,358
                                )
                                
                                $
                                42,519
                                
                                
                                
                                4,434Net
      income
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                4,943
                                
                                
                                
                                —
                                
                                
                                
                                4,943Other
      comprehensive loss
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                (114
                                )
                                
                                
                                (114
                                )Comprehensive
      income
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                4,829Adjustment
      to initially apply SFAS No. 158, net of tax benefit of
$908
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                (1,361
                                )
                                
                                
                                (1,361
                                )Purchase
      of treasury stock
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                (2,614
                                )
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                (2,614
                                )
                                
                                
                                (129
                                )Cash
      dividends ($0.48 per share)
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                (2,098
                                )
                                
                                
                                —
                                
                                
                                
                                (2,098
                                )Balance
      at December 31, 2006
                                
                                
                                2,384
                                
                                
                                
                                6,483
                                
                                
                                
                                (3,722
                                )
                                
                                
                                38,963
                                
                                
                                
                                (2,833
                                )
                                
                                
                                41,275
                                
                                
                                
                                4,305Net
      income
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                4,275
                                
                                
                                
                                —
                                
                                
                                
                                4,275Other
      comprehensive income
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                1,787
                                
                                
                                
                                1,787Comprehensive
      income
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                6,062Purchase
      of treasury stock
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                (1,245
                                )
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                (1,245
                                )
                                
                                
                                (71
                                )Cash
      dividends ($0.50 per share)
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                (2,134
                                )
                                
                                
                                —
                                
                                
                                
                                (2,134
                                )Balance
      at December 31, 2007
                                
                                
                                2,384
                                
                                
                                
                                6,483
                                
                                
                                
                                (4,967
                                )
                                
                                
                                41,104
                                
                                
                                
                                (1,046
                                )
                                
                                
                                43,958
                                
                                
                                
                                4,234Net
      income
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                2,702
                                
                                
                                
                                —
                                
                                
                                
                                2,702Other
      comprehensive loss
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                (1,541
                                )
                                
                                
                                (1,541
                                )Comprehensive
      income
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                1,161Adjustment
      to initially apply EITF Issue 06-4
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                (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
                                
                                
                                
                                4,234
 
 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 31,2008
                          
                          
                          2007
                          
                          
                          2006OPERATING
      ACTIVITIES:Net
      income
                          
                          $
                          2,702
                          
                          
                          $
                          4,275
                          
                          
                          $
                          4,943Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      (credit) for loan losses
                          
                          
                          265
                          
                          
                          
                          (370
                          )
                          
                          
                          90Depreciation
      and amortization
                          
                          
                          655
                          
                          
                          
                          628
                          
                          
                          
                          635Net
      gain on sales of foreclosed real estate
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (43
                          )Write
      down of foreclosed real estate
                          
                          
                          11
                          
                          
                          
                          —
                          
                          
                          
                          —Net
      earnings on bank-owned life insurance
                          
                          
                          (529
                          )
                          
                          
                          (482
                          )
                          
                          
                          (424
                          )Life
      insurance benefit
                          
                          
                          (1,522
                          )
                          
                          
                          —
                          
                          
                          
                          —Deferred
      income tax benefit
                          
                          
                          (2,053
                          )
                          
                          
                          (76
                          )
                          
                          
                          (357
                          )Net
      security (gains) losses
                          
                          
                          (64
                          )
                          
                          
                          19
                          
                          
                          
                          4Impairment
      charge on securities
                          
                          
                          5,162
                          
                          
                          
                          30
                          
                          
                          
                          —(Increase)
      decrease in accrued interest receivable
                          
                          
                          261
                          
                          
                          
                          322
                          
                          
                          
                          (401
                          )(Increase)
      decrease in other assets
                          
                          
                          (257
                          )
                          
                          
                          664
                          
                          
                          
                          (1,369
                          )Increase
      (decrease) in other liabilities
                          
                          
                          1,529
                          
                          
                          
                          (63
                          )
                          
                          
                          470Net
      Cash Provided by Operating Activities
                          
                          
                          6,160
                          
                          
                          
                          4,947
                          
                          
                          
                          3,548INVESTING
      ACTIVITIES:Proceeds
      from maturities and calls:Securities
      available for sale
                          
                          
                          18,859
                          
                          
                          
                          10,009
                          
                          
                          
                          5,956Securities
      held to maturity
                          
                          
                          6,475
                          
                          
                          
                          5,962
                          
                          
                          
                          4,096Proceeds
      from sales of securities available for sale
                          
                          
                          4,145
                          
                          
                          
                          18,780
                          
                          
                          
                          1,713Purchases:Securities
      available for sale
                          
                          
                          (21,259
                          )
                          
                          
                          (19,392
                          )
                          
                          
                          (18,666
                          )Securities
      held to maturity
                          
                          
                          (5,920
                          )
                          
                          
                          (2,837
                          )
                          
                          
                          (5,346
                          )Disbursement
      for loan originations, net of principal collections
                          
                          
                          (16,279
                          )
                          
                          
                          (2,019
                          )
                          
                          
                          (7,079
                          )Proceeds
      from cash surrender value of bank owned life insurance
                          
                          
                          2,055
                          
                          
                          
                          —
                          
                          
                          
                          —Purchase
      of Federal Home Loan Bank stock
                          
                          
                          (3,821
                          )
                          
                          
                          (2,720
                          )
                          
                          
                          —Sale
      of Federal Home Loan Bank stock
                          
                          
                          3,384
                          
                          
                          
                          2,018
                          
                          
                          
                          200Net
      purchases of premises and equipment
                          
                          
                          (569
                          )
                          
                          
                          (1,986
                          )
                          
                          
                          (647
                          )Proceeds
      from sales of foreclosed real estate
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          562Net
      Cash Provided by (Used in) Investing Activities
                          
                          
                          (12,930
                          )
                          
                          
                          7,815
                          
                          
                          
                          (19,211
                          )FINANCING
      ACTIVITIES:Net
      increase (decrease) in deposits
                          
                          
                          (2,518
                          )
                          
                          
                          (25,831
                          )
                          
                          
                          12,977Proceeds
      from Federal Home Loan Bank borrowings
                          
                          
                          15,000
                          
                          
                          
                          15,000
                          
                          
                          
                          10,000Repayments
      of Federal Home Loan Bank borrowings
                          
                          
                          (10,000
                          )
                          
                          
                          (5,000
                          )
                          
                          
                          (15,000
                          )Net
      increase in short-term borrowings
                          
                          
                          5,015
                          
                          
                          
                          4,606
                          
                          
                          
                          476Purchases
      of treasury stock
                          
                          
                          —
                          
                          
                          
                          (1,245
                          )
                          
                          
                          (2,614
                          )Cash
      dividends paid
                          
                          
                          (2,202
                          )
                          
                          
                          (2,134
                          )
                          
                          
                          (2,098
                          )Net
      Cash Provided by (Used in) Financing Activities
                          
                          
                          5,295
                          
                          
                          
                          (14,604
                          )
                          
                          
                          3,741Net
      Decrease in Cash and Cash Equivalents
                          
                          
                          (1,475
                          )
                          
                          
                          (1,842
                          )
                          
                          
                          (11,922
                          )Cash
      and Cash Equivalents at Beginning of Year
                          
                          
                          10,428
                          
                          
                          
                          12,270
                          
                          
                          
                          24,192Cash
      and Cash Equivalents at End of Year
                          
                          $
                          8,953
                          
                          
                          $
                          10,428
                          
                          
                          $
                          12,270SUPPLEMENTAL
      INFORMATION:Cash
      paid for:Interest
                          
                          $
                          7,223
                          
                          
                          $
                          8,671
                          
                          
                          $
                          8,157Income
      taxes
                          
                          
                          875
                          
                          
                          
                          1,465
                          
                          
                          
                          1,614Transfer
      of loans to foreclosed real estate
                          
                          
                          1,254
                          
                          
                          
                          —
                          
                          
                          
                          391
 
 See
accompanying notes to consolidated financial statements.
  F-6
  Jeffersonville
Bancorp and Subsidiary
 Notes
to Consolidated Financial Statements
 December 31,
2008, 2007, and 2006
 
 (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 in Sullivan County, New York.
Management makes operating decisions and assesses performance based on an
ongoing review of the Bank’s community banking operations, which constitute the
Company’s only operating segment for financial reporting purposes.
  The
consolidated financial statements have been prepared, in all material respects,
in conformity with accounting principles generally accepted in the United States
of America. In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses. Material estimates that are
particularly susceptible to near-term change include the allowance for loan
losses and the evaluation of other than temporary impairment of investment
securities which are described below. Actual results could differ from these
estimates.
  For
purposes of the consolidated statements of cash flows, the Company considers
cash and due from banks and federal funds sold, if any, to be cash
equivalents.
  Reclassifications
are made to prior years’ consolidated financial statements whenever necessary to
conform to the current year’s presentation.
 
 Investment
      Securities
  Management
determines the appropriate classification of securities at the time of purchase.
If management has the positive intent and ability to hold debt securities to
maturity, they are classified as securities held to maturity and are stated at
amortized cost. If securities are purchased for the purpose of selling them in
the near term, they are classified as trading securities and are reported at
fair value with unrealized gains and losses reflected in current earnings. All
other debt and marketable equity securities are classified as securities
available for sale and are reported at fair value. Net unrealized gains or
losses on securities available for sale are reported (net of income taxes) in
stockholders’ equity as accumulated other comprehensive income (loss).
Nonmarketable equity securities are carried at cost. At December 31, 2008
and 2007, the Company had no trading securities.
  Gains and
losses on sales of securities are based on the net proceeds and the amortized
cost of the securities sold, using the specific identification method. The
amortization of premium and accretion of discount on debt securities is
calculated using the level-yield interest method over the period to the earlier
of the call date or maturity date. Unrealized losses on securities that reflect
a decline in value which is other than temporary, if any, are charged to
income.
 
 Securities
are evaluated on at least a quarterly basis, and more frequently when market
conditions warrant such an evaluation, to determine whether a decline in their
value is other-than-temporary. To determine whether a loss in value is
other-than-temporary, management utilizes criteria such as the reasons
underlying the decline, the magnitude and duration of the decline and the intent
and ability of the Company to retain its investment in the security for a period
of time sufficient to allow for an anticipated recovery in the fair value. The
term “other-than-temporary” is not intended to indicate that the decline is
permanent, but indicates that the prospects for a near-term recovery of value is
not necessarily favorable, or that there is a lack of evidence to support a
realizable value equal to or greater than the carrying value of the investment.
Once a decline in value is determined to be other-than-temporary, the value of
the security is reduced and a corresponding charge to earnings is recognized.
Impairment charges of $5,162,000 and $30,000 were recognized during the years
ended December 31, 2008 and 2007, respectively. No impairment charge was
recognized during the year ended December 31, 2006. For further discussion see
Footnote 3.
 
 Loans
  Loans are
stated at unpaid principal balances, less unearned discounts, deferred loan fees
and costs and the allowance for loan losses. Unearned discounts on certain
installment loans and deferred loan fees and costs are accreted into income
using a level-yield interest method. Interest income is recognized on the
accrual basis of accounting. When, in the opinion of management, the collection
of interest or principal is in doubt, the loan is classified as nonaccrual.
Generally, loans past due more than 90 days are classified as nonaccrual.
Thereafter, no interest is recognized as income until received in cash or until
such time as the borrower demonstrates the ability to make scheduled payments of
interest and principal.
  F-7
 
 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.
  The
Company identifies impaired loans and measures loan impairment in accordance
with Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for
Impairment of a Loan, as amended by SFAS No. 118. Under SFAS
No. 114, a loan is considered to be impaired when, based on current
information and events, it is probable that the creditor will be unable to
collect all principal and interest contractually due. SFAS No. 114 applies
to loans that are individually evaluated for 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.
 
 Federal
      Home Loan Bank Stock
  As a
member institution of the Federal Home Loan Bank of New York (FHLB), the Bank is
required to hold a certain amount of FHLB stock. This stock is considered to be
a nonmarketable equity security and, accordingly, is carried at
cost.
 
 Foreclosed
      Real Estate
  Foreclosed
real estate consists of properties acquired through foreclosure and is stated on
an individual-asset basis at the lower of (i) fair value less estimated
costs to sell or (ii) cost which represents the fair value at initial
foreclosure. When a property is acquired, the excess of the loan balance over
the fair value of the property is charged to the allowance for loan losses. If
necessary, subsequent write downs to reflect further declines in fair value are
included in non-interest expenses. Fair value estimates are based on independent
appraisals and other available information. While management estimates losses on
foreclosed real estate using the best available information, such as independent
appraisals, future write downs may be necessary based on changes in real estate
market conditions, particularly in Sullivan County, and the results of
regulatory examinations.
 
 Bank-Owned
      Life Insurance
  The
investment in bank-owned life insurance, which covers certain officers of the
Bank, is carried at the policies’ cash surrender value. Increases in the cash
surrender value of bank-owned life insurance, net of premiums paid, are included
in non-interest income.
  In
September 2006, the FASB ratified the consensus reached by the EITF in Issue
06-4, Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements. EITF 06-4 applies to life insurance arrangements
that provide an employee with a specified benefit that is not limited to the
employee’s active service period, including certain bank-owned life insurance
policies. EITF 06-4 requires an employer to recognize a liability and related
compensation costs for future benefits that extend to postretirement periods.
EITF 06-4 is effective for fiscal years beginning after December 15, 2007, with
earlier application permitted. The impact of its adoption 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 $10,000 effect
on earnings for the year ended December 31, 2008.
 
 Advertising
Costs
  Advertising
costs are expensed as incurred and are included in other
expenses.
  F-8
 
 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 (EPS) is
computed by dividing net income by the weighted average number of common shares
outstanding for the period.
 
 Recent
Accounting Pronouncements
  FASB
Statement No. 141 (R) “Business Combinations” was issued in December of 2007.
This Statement establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. The Statement also provides guidance for recognizing and measuring the
goodwill acquired in the business combination and determines what information to
disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. The guidance will become
effective as of the beginning of a company’s fiscal year beginning after
December 15, 2008. This new pronouncement will impact the Company’s accounting
for business combinations completed beginning January 1, 2009.
  In
December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about
Postretirement Benefit Plan Assets”.  This FSP amends SFAS
132(R), “Employers’
Disclosures about Pensions and Other Postretirement Benefits”, to provide
guidance on an employer’s disclosures about plan assets of a defined benefit
pension or other postretirement plan.  The disclosures about plan
assets required by this FSP shall be provided for fiscal years ending after
December 15, 2009.  The Company is currently reviewing the effect this
new pronouncement will have on its consolidated financial
statements.
 
 (2)
                  Cash
      and Due From Banks
 
 The Bank
is required to maintain certain reserves in the form of vault cash and/or
deposits with the Federal Reserve Bank. The amount of this reserve requirement,
which is included in cash and due from banks, was $285,000 at December 31,
2008 and $296,000 at December 31, 2007.
 
 (3)
                  Investment
      Securities
 
 The
amortized cost and estimated fair value of securities available for sale are as
follows:
 
 December 31, 2008Gross
                            
                            
                            GrossAmortized
                            
                            
                            unrealized
                            
                            
                            unrealized
                            
                            
                            Estimatedcost
                            
                            
                            gains
                            
                            
                            losses
                            
                            
                            fair value(In thousands)Government
      sponsored enterprises
                            
                            $
                            29,000
                            
                            
                            $
                            158
                            
                            
                            $
                            (30
                            )
                            
                            $
                            29,128Obligations
      of states and political subdivisions
                            
                            
                            36,850
                            
                            
                            
                            921
                            
                            
                            
                            (49
                            )
                            
                            
                            37,722Mortgage-backed
      securities and collateralized mortgage obligations
                            
                            
                            17,819
                            
                            
                            
                            303
                            
                            
                            
                            (63
                            )
                            
                            
                            18,059Total
      debt securities
                            
                            
                            83,669
                            
                            
                            
                            1,382
                            
                            
                            
                            (142
                            )
                            
                            
                            84,909Equity
      securities
                            
                            
                            794
                            
                            
                            
                            180
                            
                            
                            
                            (78
                            )
                            
                            
                            896Total
      securities available for sale
                            
                            $
                            84,463
                            
                            
                            $
                            1,562
                            
                            
                            $
                            (220
                            )
                            
                            $
                            85,805
  F-9
 
 December 31, 2007Gross
                            
                            
                            GrossAmortized
                            
                            
                            unrealized
                            
                            
                            unrealized
                            
                            
                            Estimatedcost
                            
                            
                            gains
                            
                            
                            losses
                            
                            
                            fair value(In thousands)Government
      sponsored enterprises
                            
                            $
                            39,360
                            
                            
                            $
                            113
                            
                            
                            $
                            (191
                            )
                            
                            $
                            39,282Obligations
      of states and political subdivisions
                            
                            
                            35,827
                            
                            
                            
                            646
                            
                            
                            
                            (95
                            )
                            
                            
                            36,378Mortgage-backed
      securities and collateralized mortgage obligations
                            
                            
                            10,192
                            
                            
                            
                            115
                            
                            
                            
                            (70
                            )
                            
                            
                            10,237Total
      debt securities
                            
                            
                            85,379
                            
                            
                            
                            874
                            
                            
                            
                            (356
                            )
                            
                            
                            85,897Equity
      securities
                            
                            
                            5,928
                            
                            
                            
                            262
                            
                            
                            
                            (23
                            )
                            
                            
                            6,167Total
      securities available for sale
                            
                            $
                            91,307
                            
                            
                            $
                            1,136
                            
                            
                            $
                            (379
                            )
                            
                            $
                            92,064
 
 In 2008
and 2007, impairment charges of $5,162,000 and $30,000 were recorded in income.
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 2008, 2007 and 2006 were $4,145,000, $18,780,000 and
$1,713,000 respectfully. Gross gains and gross losses realized on sales and
calls of securities were as follows:
 
 2008
                          
                          
                          2007
                          
                          
                          2006(In thousands)Gross
      realized gains
                          
                          $
                          102
                          
                          
                          $
                          21
                          
                          
                          $
                          12Gross
      realized losses
                          
                          
                          (38
                          )
                          
                          
                          (40
                          )
                          
                          
                          (16
                          )Impairment
      charge
                          
                          
                          (5,162
                          )
                          
                          
                          (30
                          )
                          
                          
                          —Net
      security gains (losses)
                          
                          $
                          (5,098
                          )
                          
                          $
                          (49
                          )
                          
                          $
                          (4
                          )
 
 The
amortized cost and estimated fair value of debt securities available for sale at
December 31, 2008, by remaining period to contractual maturity, are shown
in the following table. Actual maturities will differ from contractual
maturities because of security prepayments and the right of certain issuers to
call or prepay their obligations.
 
 Amortized
                            
                            
                            Estimatedcost
                            
                            
                            fair value(In thousands)Within
      one year
                            
                            $
                            8,093
                            
                            
                            $
                            8,131One
      to five years
                            
                            
                            39,840
                            
                            
                            
                            40,836Five
      to ten years
                            
                            
                            28,819
                            
                            
                            
                            28,912Over
      ten years
                            
                            
                            6,917
                            
                            
                            
                            7,030Total
      debt securities
                            
                            $
                            83,669
                            
                            
                            $
                            84,909
 
 Securities
included in government sponsored enterprises are securities of the Federal Home
Loan Bank, FNMA and FHLMC. These securities are not backed by the full faith of
the U.S. government. Substantially all mortgage-backed securities and
collateralized mortgage obligations are securities guaranteed by Freddie Mac or
Fannie Mae, which are U.S. government-sponsored entities. Securities available
for sale with an estimated fair value of $44,346,000, and $39,250,000 at
December 31, 2008 and 2007 respectively, were pledged to secure public
funds on deposit and for other purposes.
  The
amortized cost and estimated fair value of securities held to maturity are as
follows:
 
 Gross
                          
                          
                          GrossAmortized
                          
                          
                          unrealized
                          
                          
                          unrealized
                          
                          
                          Estimatedcost
                          
                          
                          gains
                          
                          
                          losses
                          
                          
                          fair value(In thousands)December 31, 2008:Obligations
      of states and political subdivisions
                          
                          $
                          5,765
                          
                          
                          $
                          68
                          
                          
                          $
                          (35
                          )
                          
                          $
                          5,798December
      31, 2007:Obligations
      of states and political subdivisions
                          
                          $
                          6,320
                          
                          
                          $
                          96
                          
                          
                          $
                          (39
                          )
                          
                          $
                          6,377
  F-10
  There
were no sales of securities held to maturity in 2008, 2007 or 2006.
  The
amortized cost and estimated fair value of these held to maturity securities at
December 31, 2008, by remaining period to contractual maturity, are shown
in the following table. Actual maturities will differ from contractual
maturities because certain issuers have the right to call or prepay their
obligations (in thousands).
 
 Amortized
                          
                          
                          Estimatedcost
                          
                          
                          fair valueWithin
      one year
                          
                          $
                          2,738
                          
                          
                          $
                          2,753One
      to five years
                          
                          
                          1,985
                          
                          
                          
                          1,998Five
      to ten years
                          
                          
                          471
                          
                          
                          
                          465Over
      ten years
                          
                          
                          571
                          
                          
                          
                          582Total
                          
                          $
                          5,765
                          
                          
                          $
                          5,798
 
 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, 2008 and 2007 were as follows
(in thousands):
  December
31, 2008:
 Less than 12 months
                          
                          
                          12 months or more
                          
                          
                          TotalEstimated
                          
                          
                          Unrealized
                          
                          
                          Estimated
                          
                          
                          Unrealized
                          
                          
                          Estimated
                          
                          
                          Unrealizedfair value
                          
                          
                          losses
                          
                          
                          fair value
                          
                          
                          losses
                          
                          
                          fair value
                          
                          
                          lossesAvailable
      for sale: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
                          
                          
                          
                          63$
                          8,726
                          
                          
                          $
                          112
                          
                          
                          $
                          1,504
                          
                          
                          $
                          30
                          
                          
                          $
                          10,230
                          
                          
                          $
                          142Equity
      securities
                          
                          $
                          253
                          
                          
                          $
                          78
                          
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          253
                          
                          
                          $
                          78Held
      to maturity:Obligations
      of states and political subdivisions
                          
                          $
                          1,115
                          
                          
                          $
                          35
                          
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          1,115
                          
                          
                          $
                          35
  December
31, 2007:
 Less than 12 months
                          
                          
                          12 months or more
                          
                          
                          TotalEstimated
                          
                          
                          Unrealized
                          
                          
                          Estimated
                          
                          
                          Unrealized
                          
                          
                          Estimated
                          
                          
                          Unrealizedfair value
                          
                          
                          losses
                          
                          
                          fair value
                          
                          
                          losses
                          
                          
                          fair value
                          
                          
                          lossesAvailable
      for sale:Government
      sponsored enterprises
                          
                          $
                          1,000
                          
                          
                          $
                          —
                          
                          
                          $
                          20,308
                          
                          
                          $
                          191
                          
                          
                          $
                          21,308
                          
                          
                          $
                          191Obligations
      of states and political subdivisions
                          
                          
                          766
                          
                          
                          
                          3
                          
                          
                          
                          6,054
                          
                          
                          
                          92
                          
                          
                          
                          6,820
                          
                          
                          
                          95Mortgage-backed
      securities and collateralized mortgage obligations
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          1,176
                          
                          
                          
                          70
                          
                          
                          
                          1,176
                          
                          
                          
                          70$
                          1,766
                          
                          
                          $
                          3
                          
                          
                          $
                          27,538
                          
                          
                          $
                          353
                          
                          
                          $
                          29,304
                          
                          
                          $
                          356Equity
      securities
                          
                          $
                          192
                          
                          
                          $
                          23
                          
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          192
                          
                          
                          $
                          23Held
      to maturity:Obligations
      of states and political subdivisions
                          
                          $
                          2,496
                          
                          
                          $
                          8
                          
                          
                          $
                          1,562
                          
                          
                          $
                          31
                          
                          
                          $
                          4,058
                          
                          
                          $
                          39
  F-11
  At
December 31, 2008 there were 24 securities in a continual loss position for less
than 12 months and five securities 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 is significant.
  The
reduction in unrealized losses on securities at December 31, 2008 was the result
of decreases in market interest rates. The contractual terms of the government
sponsored enterprise securities and the obligations of states and political
subdivisions require the issuer to settle the securities at par upon maturity of
the investment. The contractual cash flows of the mortgage backed securities and
collateralized mortgage obligations are guaranteed by various government
agencies or government sponsored enterprises such as GNMA, FNMA, and FHLMC.
Because the Company has the ability and intent to hold these securities until a
market price recovery or possibly to maturity, these investments are not
considered other-than-temporarily impaired at December 31, 2008 and 2007.
Impairment charges of $5,162,000 and $30,000 were recorded on equity securities
for the years ended December 31, 2008 and 2007.
 
 (4)
                  Loans
 
 The major
classifications of loans are as follows at December 31:
 
 2008
                          
                          
                          2007(In thousands)Real
      estate loans:Residential
                          
                          $
                          103,212
                          
                          
                          $
                          96,612Commercial
                          
                          
                          93,069
                          
                          
                          
                          85,175Home
      equity
                          
                          
                          31,096
                          
                          
                          
                          25,977Farm
      land
                          
                          
                          3,879
                          
                          
                          
                          3,883Construction
                          
                          
                          2,737
                          
                          
                          
                          5,531233,993
                          
                          
                          
                          217,178Other
      loans:Commercial
      loans
                          
                          
                          25,183
                          
                          
                          
                          26,431Consumer
      installment loans
                          
                          
                          7,511
                          
                          
                          
                          8,948Other
      consumer loans
                          
                          
                          173
                          
                          
                          
                          148Agricultural
      loans
                          
                          
                          430
                          
                          
                          
                          27333,297
                          
                          
                          
                          35,800Total
      loans
                          
                          
                          267,290
                          
                          
                          
                          252,978Unamortized
      deferred loan fees and origination costs
                          
                          
                          273
                          
                          
                          
                          7Allowance
      for loan losses
                          
                          
                          (3,170
                          )
                          
                          
                          (3,352
                          )Total
      loans, net
                          
                          $
                          264,393
                          
                          
                          $
                          249,633
 
 The
Company originates residential and commercial real estate loans, as well as
commercial, consumer and agricultural loans, to borrowers in Sullivan County,
New York. A substantial portion of the loan portfolio is secured by real estate
properties located primarily in that area. The ability of the Company’s
borrowers to make principal and interest payments is dependent upon, among other
things, the level of overall economic activity and the real estate market
conditions prevailing within the Company’s concentrated lending
area.
  Nonperforming
loans are summarized as follows at December 31:
 
 2008
                          
                          
                          2007
                          
                          
                          2006(In thousands)Nonaccrual
      loans
                          
                          $
                          5,434
                          
                          
                          $
                          3,761
                          
                          
                          $
                          1,867Loans
      past due 90 days or more and still accruing interest
                          
                          
                          686
                          
                          
                          
                          883
                          
                          
                          
                          13Total
      nonperforming loans
                          
                          $
                          6,120
                          
                          
                          $
                          4,644
                          
                          
                          $
                          1,880
  F-12
 
 Nonaccrual
loans had the following effect on interest income for the years ended
December 31:
 
 2008
                          
                          
                          2007
                          
                          
                          2006(In thousands)Interest
      contractually due at original rates
                          
                          $
                          135
                          
                          
                          $
                          162
                          
                          
                          $
                          178Interest
      income recognized
                          
                          
                          (56
                          )
                          
                          
                          (29
                          )
                          
                          
                          (15
                          )Interest
      income not recognized
                          
                          $
                          79
                          
                          
                          $
                          133
                          
                          
                          $
                          163
 
 Changes
in the allowance for loan losses are summarized as follows for the years ended
December 31:
 
 2008
                            
                            
                            2007
                            
                            
                            2006(In thousands)Balance
      at beginning of the year
                            
                            $
                            3,352
                            
                            
                            $
                            3,516
                            
                            
                            $
                            3,615Provision
      (credit) for loan losses
                            
                            
                            265
                            
                            
                            
                            (370
                            )
                            
                            
                            90Loans
      charged-off
                            
                            
                            (647
                            )
                            
                            
                            (318
                            )
                            
                            
                            (533
                            )Recoveries
                            
                            
                            200
                            
                            
                            
                            524
                            
                            
                            
                            344Balance
      at end of year
                            
                            $
                            3,170
                            
                            
                            $
                            3,352
                            
                            
                            $
                            3,516
 
 As of
December 31, 2008, there were $5,191,000 in loans which were considered to be
impaired under SFAS No. 114.  Of that amount, there were $795,000 in
impaired loans that received a $149,000 specific valuation
allowance.  As of December 31, 2007, there were $3,394,000 in loans
that were considered impaired under SFAS No. 114 with no valuation allowance.
Average impaired loans for the years ended December 31, 2008, 2007 and 2006 were
$6,095,000, $2,526,000 and $1,797,000 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
all these loans remain well collateralized. Based on management’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.
  The
provision (credit) for loan losses was $265,000 for the year ended December 31,
2008 compared to ($370,000) for 2007. The Company recovered $441,000 during 2007
on a previously written-off loan. This recovery was for a loan made in 2002. The
loan turned out to be fraudulent and the participants brought a legal suit
against the Bank of New York. The participating lenders prevailed and received
their settlements in the first quarter of 2007.
 
 (5)
                  Premises
      and Equipment
 
 The major
classifications of premises and equipment were as follows at
December 31:
 
 2008
                          
                          
                          2007(In thousands)Land
                          
                          $
                          837
                          
                          
                          $
                          837Buildings
      and improvements
                          
                          
                          5,618
                          
                          
                          
                          5,351Furniture
      and fixtures
                          
                          
                          191
                          
                          
                          
                          177Equipment
                          
                          
                          4,262
                          
                          
                          
                          4,00710,908
                          
                          
                          
                          10,372Less
      accumulated depreciation and amortization
                          
                          
                          (6,596
                          )
                          
                          
                          (5,974
                          )Total
      premises and equipment, net
                          
                          $
                          4,312
                          
                          
                          $
                          4,398
 
 Depreciation
and amortization expense was $655,000, $628,000, and $635,000 in 2008, 2007, and
2006, respectively.
 
 (6)
                  Time
      Deposits
 
 The
following is a summary of time deposits at December 31, 2008 by remaining
period to contractual maturity (in thousands):
 
 Within
      one year
                        
                        $
                        91,827One
      to two years
                        
                        
                        29,470Two
      to three years
                        
                        
                        6,105Three
      to four years
                        
                        
                        6,344Four
      to five years
                        
                        
                        2,379Total
      time deposits
                        
                        $
                        136,125
  F-13
  Time
deposits of $100,000 or more totaled $43,498,000, $37,813,000, and $46,054,000
at December 31, 2008, 2007 and 2006, respectively. Interest expense related to
time deposits over $100,000 was $1,634,000, $1,590,000 and $1,891,000 for 2008,
2007 and 2006, respectively.
  Total
time deposits include brokered time deposits obtained from the national market,
which during 2008 averaged $3,285,000, but these deposits amounted to none of
the total deposits at December 31, 2008. 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. Brokered time deposits in 2006 averaged $15,198,000 and amounted to
$16,332,000, or 5.03% of total deposits at December 31, 2006. The rates of
interest paid on time deposits obtained from the national market averaged 4.75%
during 2008, 4.73% during 2007 and 4.97% during 2006.
 
 (7)
                  Federal
      Home Loan Bank Borrowings
 
 The
following is a summary of Federal Home Loan Bank (FHLB) advances outstanding at
December 31:
  2008
                    
                    
                    2007Amount
                    
                    
                    Rate
                    
                    
                    Amount
                    
                    
                    Rate(Dollars
      in thousands)Fixed
      rate advances and securities sold underagreements
      to repurchase maturing in 2008
                    
                    $
                    —
                    
                    
                    
                    
                    
                    $
                    10,000
                    
                    
                    
                    4.98
                    %Securities
      sold underagreements
      to repurchase maturing in 2009
                    
                    
                    20,000
                    
                    
                    
                    4.41
                    %
                    
                    
                    20,000
                    
                    
                    
                    4.41Securities
      sold underagreements
      to repurchase maturing in 2012
                    
                    
                    5,000
                    
                    
                    
                    3.79
                    
                    
                    
                    —Securities
      sold underagreements
      to repurchase maturing in 2013
                    
                    
                    10,000
                    
                    
                    
                    4.14
                    
                    
                    
                    —Total
      FHLB advances and securities soldunder
      an agreement to repurchase
                    
                    $
                    35,000
                    
                    
                    
                    4.24
                    %
                    
                    $
                    30,000
                    
                    
                    
                    4.60
                    %
 
 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, 2008 and 2007 was $62.9 million and
$60.5 million respectively, which satisfied the collateral requirements of the
FHLB.
 
 (8)
                  Short-Term
      Borrowings
 
 Short-term
borrowings at December 31, 2008 and 2007 are primarily comprised of
overnight FHLB borrowings. The Bank, as a member of the FHLB, has access to a
line of credit program with a maximum borrowing capacity of $39.1 million and
$39.4 million as of December 31, 2008 and 2007, respectively. There
were $10,100,000 in borrowings under the overnight program at December 31,
2008 at a rate of 0.46%; at December 31, 2007 borrowings totaled $5,100,000 at a
rate of 3.63%. The Bank has pledged mortgage loans and FHLB stock as collateral
on these borrowings. 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%. During 2007, the maximum month-end balance was
$14.5 million, the average balance was $3.1 million, and the average
interest rate was 4.98%. Short-term borrowings at December 31, 2008 and
2007 also included $424,000 and $409,000, respectively of demand
notes.
 
 (9)
                  Income
      Taxes
 
 Income
taxes for the years ended December 31, 2008, 2007 and 2006 consisted of the
following:
  2008
                      
                      
                      2007
                      
                      
                      2006(In
      thousands)Current
      tax expense:Federal
                      
                      $
                      1,135
                      
                      
                      $
                      1,302
                      
                      
                      $
                      1,428State
                      
                      
                      57
                      
                      
                      
                      43
                      
                      
                      
                      169Deferred
      tax (benefit)
                      
                      
                      (2,053
                      )
                      
                      
                      (76
                      )
                      
                      
                      (357
                      )Total
      income tax expense (benefit)
                      
                      $
                      (861
                      )
                      
                      $
                      1,269
                      
                      
                      $
                      1,240
  F-14
 
 The
reasons for the differences between income tax expense and taxes computed by
applying the statutory Federal tax rate of 34% to income before income taxes are
as follows:
 
 2008
                                    
                                    
                                    2007
                                    
                                    
                                    2006% of
                                    
                                    
                                    
                                    
                                    
                                    % of
                                    
                                    
                                    
                                    
                                    
                                    % ofPre-tax
                                    
                                    
                                    
                                    
                                    
                                    Pre-tax
                                    
                                    
                                    
                                    
                                    
                                    Pre-taxAmount
                                    
                                    
                                    income
                                    
                                    
                                    Amount
                                    
                                    
                                    income
                                    
                                    
                                    Amount
                                    
                                    
                                    income(In
      thousands)Tax
      at statutory rate
                                    
                                    $
                                    626
                                    
                                    
                                    
                                    34
                                    %
                                    
                                    $
                                    1,885
                                    
                                    
                                    
                                    34
                                    %
                                    
                                    $
                                    2,102
                                    
                                    
                                    
                                    34
                                    %State
      taxes, net of Federaltax
      benefit
                                    
                                    
                                    (211
                                    )
                                    
                                    
                                    (11
                                    )
                                    
                                    
                                    34
                                    
                                    
                                    
                                    1
                                    
                                    
                                    
                                    66
                                    
                                    
                                    
                                    1Tax-exempt
      interest
                                    
                                    
                                    (570
                                    )
                                    
                                    
                                    (31
                                    )
                                    
                                    
                                    (611
                                    )
                                    
                                    
                                    (11
                                    )
                                    
                                    
                                    (684
                                    )
                                    
                                    
                                    (11
                                    )Interest
      expense allocated totax-exempt
      securities
                                    
                                    
                                    53
                                    
                                    
                                    
                                    3
                                    
                                    
                                    
                                    78
                                    
                                    
                                    
                                    1
                                    
                                    
                                    
                                    64
                                    
                                    
                                    
                                    1Bank-owned
      life insurance
                                    
                                    
                                    (697
                                    )
                                    
                                    
                                    (38
                                    )
                                    
                                    
                                    (164
                                    )
                                    
                                    
                                    (3
                                    )
                                    
                                    
                                    (144
                                    )
                                    
                                    
                                    (2
                                    )Other
      adjustments
                                    
                                    
                                    (62
                                    )
                                    
                                    
                                    (4
                                    )
                                    
                                    
                                    47
                                    
                                    
                                    
                                    1
                                    
                                    
                                    
                                    (164
                                    )
                                    
                                    
                                    (3
                                    )Income
      tax expense (benefit)
                                    
                                    $
                                    (861
                                    )
                                    
                                    
                                    (47
                                    )%
                                    
                                    $
                                    1,269
                                    
                                    
                                    
                                    23
                                    %
                                    
                                    $
                                    1,240
                                    
                                    
                                    
                                    20
                                    %
 
 The tax
effects of temporary differences that give rise to deferred tax assets and
liabilities at December 31 are presented below:
 
 2008
                              
                              
                              2007(In
      thousands)Deferred
      tax assets:Allowance
      for loan losses in excess of tax bad debt reserve
                              
                              $
                              1,079
                              
                              
                              $
                              1,149Impairment
      charge on securities
                              
                              
                              1,822
                              
                              
                              
                              —Retirement
      benefits
                              
                              
                              2,085
                              
                              
                              
                              1,788Deferred
      compensation
                              
                              
                              70
                              
                              
                              
                              94Depreciation
                              
                              
                              543
                              
                              
                              
                              502Other
                              
                              
                              10
                              
                              
                              
                              23Total
      deferred tax assets
                              
                              
                              5,609
                              
                              
                              
                              3,556Deferred
      tax liabilities:Prepaid
      expenses
                              
                              
                              (162
                              )
                              
                              
                              (162
                              )Total
      deferred tax liabilities
                              
                              
                              (162
                              )
                              
                              
                              (162
                              )Net
      deferred tax asset
                              
                              $
                              5,447
                              
                              
                              $
                              3,394
 
 In
addition to the table above, the Company had the following deferred tax assets
and liabilities in accumulated other comprehensive loss at
December 31:
  2008
                            
                            
                            2007(In
      thousands)Deferred
      tax assets:Pension
      benefits
                            
                            $
                            1,994
                            
                            
                            $
                            935Post
      retirement benefits
                            
                            
                            39
                            
                            
                            
                            —Other
      retirement benefits
                            
                            
                            228
                            
                            
                            
                            93Total
      deferred tax assets
                            
                            
                            2,261
                            
                            
                            
                            1,028Deferred
      tax liabilities:Post
      retirement benefits
                            
                            
                            —
                            
                            
                            
                            (27
                            )Unrealized
      gain on securities available for sale
                            
                            
                            (537
                            )
                            
                            
                            (303
                            )Total
      deferred tax liabilities
                            
                            
                            (537
                            )
                            
                            
                            (330
                            )Net
      deferred tax asset
                            
                            $
                            1,724
                            
                            
                            $
                            698
 
 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, 2008 and 2007.
  The
Company did not have any unrecognized tax benefits at December 31, 2007 and 2008
or during the years ended December 31, 2007 and 2008. No unrecognized tax
benefits are expected to arise within the next twelve months.
  F-15
  (10)
                  Other
      Non-Interest Expenses
 
 The major
components of other non-interest expenses are as follows for the years ended
December 31:
 
 2008
                          
                          
                          2007
                          
                          
                          2006(In
      thousands)Stationery
      and supplies
                          
                          $
                          285
                          
                          
                          $
                          254
                          
                          
                          $
                          293Advertising
      expense
                          
                          
                          247
                          
                          
                          
                          278
                          
                          
                          
                          227Director
      expenses
                          
                          
                          239
                          
                          
                          
                          261
                          
                          
                          
                          294ATM
      and credit card processing fees
                          
                          
                          532
                          
                          
                          
                          539
                          
                          
                          
                          622Professional
      services
                          
                          
                          824
                          
                          
                          
                          721
                          
                          
                          
                          623Other
      expenses
                          
                          
                          1,402
                          
                          
                          
                          1,300
                          
                          
                          
                          1,169Other
      non-interest expenses
                          
                          $
                          3,529
                          
                          
                          $
                          3,353
                          
                          
                          $
                          3,228
 
 (11)
                  Regulatory
      Capital Requirements
 
 National
banks are required to maintain minimum levels of regulatory capital in
accordance with regulations of the Office of the Comptroller of the Currency
(OCC). The OCC regulations require a minimum leverage ratio of Tier 1 capital to
total adjusted assets of 4.0%, and minimum ratios of Tier I and total capital to
risk-weighted assets of 4.0% and 8.0%, respectively.
  Under its
prompt corrective action regulations, the OCC is required to take certain
supervisory actions (and may take additional discretionary actions) with respect
to an undercapitalized bank. Such actions could have a direct material effect on
a 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 1 risk-based
capital ratio of at least 6.0%, and a total risk-based capital ratio of at least
10.0%.
  The
foregoing capital ratios are based in part on specific quantitative measures of
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by the regulators about capital components,
risk weightings and other factors.
  Management
believes that, as of December 31, 2008 and 2007, the Bank met all capital
adequacy requirements to which they are subject. Further, the most recent OCC
notification categorized the Bank as a well-capitalized bank under the prompt
corrective action regulations. There have been no conditions or events since
that notification that management believes have changed the Bank’s capital
classification.
  The
following is a summary of the actual capital amounts and ratios as of
December 31, 2008 and 2007 for the Bank compared to the required ratios for
minimum capital adequacy and for classification as
well-capitalized:
 
 Required RatiosMinimum
                                      
                                      
                                      ClassificationActual
                                      
                                      
                                      capital
                                      
                                      
                                      as wellAmount
                                      
                                      
                                      Ratio
                                      
                                      
                                      adequacy
                                      
                                      
                                      capitalized(Dollars
      in thousands)December
      31, 2008:Leverage
      (Tier 1) capital
                                      
                                      $
                                      43,081
                                      
                                      
                                      
                                      10.9
                                      %
                                      
                                      
                                      4.0
                                      %
                                      
                                      
                                      5.0
                                      %Risk-based
      capital:Tier
      1
                                      
                                      
                                      43,081
                                      
                                      
                                      
                                      15.9
                                      
                                      
                                      
                                      4.0
                                      
                                      
                                      
                                      6.0Total
                                      
                                      
                                      46,268
                                      
                                      
                                      
                                      17.1
                                      
                                      
                                      
                                      8.0
                                      
                                      
                                      
                                      10.0December
      31, 2007:Leverage
      (Tier 1) capital
                                      
                                      $
                                      42,852
                                      
                                      
                                      
                                      11.1
                                      %
                                      
                                      
                                      4.0
                                      %
                                      
                                      
                                      5.0
                                      %Risk-based
      capital:Tier
      1
                                      
                                      
                                      42,852
                                      
                                      
                                      
                                      16.8
                                      
                                      
                                      
                                      4.0
                                      
                                      
                                      
                                      6.0Total
                                      
                                      
                                      46,035
                                      
                                      
                                      
                                      18.1
                                      
                                      
                                      
                                      8.0
                                      
                                      
                                      
                                      10.0
 
 F-16
  (12)
                  Stockholders’
      Equity
 
 Dividend
      Restrictions
  Dividends
paid by the Bank are the primary source of funds available to the Company for
payment of dividends to its stockholders and for other working capital needs.
Applicable Federal statutes, regulations and guidelines impose restrictions on
the amount of dividends that may be declared by the Bank. Under these
restrictions, the dividends declared and paid by the Bank to the Company may not
exceed the total amount of the Bank’s net profit retained in the current year
plus its retained net profits, as defined, from the two preceding years. The
Bank’s retained net profits available for dividends at December 31, 2008 totaled
$1,230,000.
 
 (13)
                  Comprehensive
      (Loss) Income
 
 Comprehensive
(loss) income represents the sum of net income and items of “other comprehensive
(loss) income” which are reported directly in stockholders’ equity, such as the
net unrealized gain or loss on securities available for sale and unrecognized
deferred costs of the Company’s defined benefit pension plan, other
postretirement benefits plan, and the supplemental retirement plans. The Company
has reported its comprehensive (loss) income for 2008, 2007, and 2006 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:
 
 2008
                                        
                                        
                                        2007
                                        
                                        
                                        2006(In
      thousands)Net
      unrealized holding gains (losses) arisingduring
      the year, net of taxes (benefit) of $(1,806)in
      2008, $670 in 2007, and ($78) in 2006
                                        
                                        $
                                        (2,709
                                        )
                                        
                                        $
                                        1,005
                                        
                                        
                                        $
                                        (117
                                        )Reclassification
      adjustment for net realized losses(gains)
      included in income, net of taxes (benefit)of
      $26 in 2008, ($8) in 2007, and ($1) in 2006
                                        
                                        
                                        (38
                                        )
                                        
                                        
                                        11
                                        
                                        
                                        
                                        3Reclassification
      adjustment for impairment chargesincluded
      in income, net of tax benefit of$2,065
      in 2008, $12 in 2007, and $0 in 2006
                                        
                                        
                                        3,097
                                        
                                        
                                        
                                        18
                                        
                                        
                                        
                                        —Amortization
      of pension and post retirementliabilities’
      gains and losses, net of taxes (benefit)of
      ($1,261) in 2008, and $502 in 2007
                                        
                                        
                                        (1,891
                                        )
                                        
                                        
                                        753
                                        
                                        
                                        
                                        —Other
      comprehensive income (loss)
                                        
                                        $
                                        (1,541
                                        )
                                        
                                        $
                                        1,787
                                        
                                        
                                        $
                                        (114
                                        )
 
 At
December 31, 2008 and 2007, the components of accumulated other comprehensive
loss are as follows:
 
 2008
                                          
                                          
                                          2007(In
      thousands)Supplemental
      executive retirement plan,net
      of taxes of $228 in 2008 and $93 in 2007
                                          
                                          $
                                          (342
                                          )
                                          
                                          $
                                          (139
                                          )Postretirement
      benefits, net of tax (benefit)of
      $39 in 2008 and $(27) in 2007
                                          
                                          
                                          (59
                                          )
                                          
                                          
                                          40Defined
      benefit pension liability, net of taxesof
      $1,994 in 2008 and $935 in 2007
                                          
                                          
                                          (2,991
                                          )
                                          
                                          
                                          (1,402
                                          )Net
      unrealized holding gains (losses), net of tax benefitof
      $537 in 2008 and $303 in 2007
                                          
                                          
                                          805
                                          
                                          
                                          
                                          455Accumulated
      other comprehensive loss
                                          
                                          $
                                          (2,587
                                          )
                                          
                                          $
                                          (1,046
                                          )
 
 F-17
  (14)
                  Related
      Party Transactions
 
 Certain
directors and executive officers of the Company, as well as certain affiliates
of these directors and officers, have engaged in loan transactions with the
Company. Such loans were made in the ordinary course of business at the
Company’s normal terms, including interest rates and collateral requirements,
and do not represent more than normal risk of collection. Outstanding loans to
these related parties are summarized as follows at
December 31:
 
 2008
                          
                          
                          2007(In
      thousands)Directors
                          
                          $
                          2,467
                          
                          
                          $
                          2,151Executive
      officers (non-directors)
                          
                          
                          315
                          
                          
                          
                          533$
                          2,782
                          
                          
                          $
                          2,684
 
 During
2008, total advances to these directors and officers were $1,094,000 and total
payments made on these loans were $996,000. These directors and officers had
unused lines of credit with the Company of $412,000 and $450,000 at
December 31, 2008 and 2007, respectively.
 
 (15)
                  Employee
      Benefit Plans
 
 Pension
      and Other Postretirement Benefits
  The
Company has a noncontributory defined benefit pension plan covering
substantially all of its employees. The benefits are based on years of service
and the employee’s average compensation during the five consecutive years in the
last ten years of employment affording the highest such average. The Company’s
funding policy is to contribute annually an amount sufficient to satisfy the
minimum funding requirements of ERISA, but not greater than the maximum amount
that can be deducted for Federal income tax purposes. Contributions are intended
to provide not only for benefits attributed to service to date, but also for
benefits expected to be earned in the future.
  The
Company also sponsors a postretirement medical, dental and life insurance
benefit plan for retirees in the pension plan. Employees attaining age 55 or
later, and whose age plus service is greater than or equal to 85 are eligible
for medical benefits. The retirees pay a percentage of the medical benefit
costs. The plan is unfunded. The Company accounts for the cost of these
postretirement benefits in accordance with SFAS No. 106, Employers’ Accounting for
Postretirement Benefits Other Than Pensions. Accordingly, the cost of
these benefits is recognized on an accrual basis as employees perform services
to earn the benefits. The Company adopted SFAS No. 106 as of
January 1, 1993 and elected to amortize the accumulated benefit obligation
at that date (transition obligation) into expense over the allowed period of
20 years.
  In
December 2004, the Medicare Prescription Drug, Improvement and Modernization Act
of 2004 (Medicare Act) was signed into law. The Medicare Act introduced both a
Medicare prescription-drug benefit and a federal subsidy to sponsors of retiree
health-care plans that provide a benefit at least “actuarially equivalent” to
the Medicare benefit. These provisions of the Medicare Act will affect
accounting measurements under SFAS No. 106. Accordingly, the FASB staff has
issued guidance allowing companies to recognize or defer recognizing the effects
of the Medicare Act in annual financial statements for fiscal years ending after
enactment of the Medicare Act. The Company has elected to defer recognizing the
effects of the Medicare Act in its December 31, 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 $465,000 to its pension plan and $101,000 to its
other postretirement benefit plan in 2009. Benefits, which reflect estimated
future employee service, are expected to be paid as follows:
  Pension
                                      
                                      
                                      Postretirementbenefit
                                      
                                      
                                      benefit(In
      thousands)2009
                                      
                                      $
                                      398
                                      
                                      
                                      $
                                      1602010
                                      
                                      
                                      436
                                      
                                      
                                      
                                      1742011
                                      
                                      
                                      573
                                      
                                      
                                      
                                      1982012
                                      
                                      
                                      606
                                      
                                      
                                      
                                      2132013
                                      
                                      
                                      680
                                      
                                      
                                      
                                      237Years
      2014-2018
                                      
                                      
                                      4,304
                                      
                                      
                                      
                                      1,325
  F-18
  The
following is a summary of changes in the benefit obligations and plan assets for
the pension plan as of September 30, 2007 and December 31, 2008 measurement
dates and the other postretirement benefit plan as of a December 31, 2007 and
2008 measurement dates, together with a reconciliation of each plan’s funded
status to the amounts recognized in the consolidated balance sheet. 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.
 
 Obligations
and Funded Status
  Pension
      benefit
                                        
                                        
                                        Postretirement
      benefitFor
      the year ended
                                        
                                        2008
                                        
                                        
                                        2007
                                        
                                        
                                        2008
                                        
                                        
                                        2007(In
      thousands)Change
      in benefit obligation:Beginning
      of year
                                        
                                        $
                                        9,136
                                        
                                        
                                        $
                                        9,187
                                        
                                        
                                        $
                                        3,246
                                        
                                        
                                        $
                                        2,751Service
      cost
                                        
                                        
                                        372
                                        
                                        
                                        
                                        418
                                        
                                        
                                        
                                        147
                                        
                                        
                                        
                                        143Interest
      cost
                                        
                                        
                                        557
                                        
                                        
                                        
                                        521
                                        
                                        
                                        
                                        184
                                        
                                        
                                        
                                        156Actuarial
      (gain) loss
                                        
                                        
                                        (148
                                        )
                                        
                                        
                                        (616
                                        )
                                        
                                        
                                        133
                                        
                                        
                                        
                                        238Loss
      due to change in discount rate & mortality
                                        
                                        
                                        742
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Benefits
      paid
                                        
                                        
                                        (482
                                        )
                                        
                                        
                                        (374
                                        )
                                        
                                        
                                        (80
                                        )
                                        
                                        
                                        (63
                                        )Adjustment
      for change in measurement date
                                        
                                        
                                        232
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Contributions
      by plan participants
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        27
                                        
                                        
                                        
                                        21End
      of year
                                        
                                        
                                        10,410
                                        
                                        
                                        
                                        9,136
                                        
                                        
                                        
                                        3,656
                                        
                                        
                                        
                                        3,246Changes
      in fair value of plan assets:Beginning
      of year
                                        
                                        
                                        6,811
                                        
                                        
                                        
                                        5,877
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Actual
      return on plan assets
                                        
                                        
                                        (1,545
                                        )
                                        
                                        
                                        804
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Employer
      contributions
                                        
                                        
                                        502
                                        
                                        
                                        
                                        504
                                        
                                        
                                        
                                        53
                                        
                                        
                                        
                                        42Contributions
      by plan participants
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        27
                                        
                                        
                                        
                                        21Benefits
      paid
                                        
                                        
                                        (482
                                        )
                                        
                                        
                                        (374
                                        )
                                        
                                        
                                        (80
                                        )
                                        
                                        
                                        (63
                                        )End
      of year
                                        
                                        
                                        5,285
                                        
                                        
                                        
                                        6,811
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Unfunded
      status at end of year, recognized inOther
      liabilities on the balance sheet
                                        
                                        $
                                        (5,125
                                        )
                                        
                                        $
                                        (2,325
                                        )
                                        
                                        $
                                        (3,656
                                        )
                                        
                                        $
                                        (3,246
                                        )Amounts
      recognized in accumulated othercomprehensive
      loss consists of:Unrecognized
      actuarial (gain) loss
                                        
                                        $
                                        4,853
                                        
                                        
                                        $
                                        2,175
                                        
                                        
                                        $
                                        (678
                                        )
                                        
                                        $
                                        (557
                                        )Unrecognized
      prior service cost
                                        
                                        
                                        132
                                        
                                        
                                        
                                        162
                                        
                                        
                                        
                                        580
                                        
                                        
                                        
                                        625Net
      amount recognized
                                        
                                        $
                                        4,985
                                        
                                        
                                        $
                                        2,337
                                        
                                        
                                        $
                                        98
                                        
                                        
                                        $
                                        (68
                                        )
 
 The
accumulated benefit obligation for the pension plan was $8,159,000 and
$7,230,000 at September 30, 2008 and 2007, respectively.
  The
components of the net periodic benefit cost for these plans were as
follows:
  Pension
      benefit
                  
                  
                  Postretirement
      benefitFor
      the year ended December 31,
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006(In
      thousands)Net
      periodic benefit cost:Service
      cost
                  
                  $
                  372
                  
                  
                  $
                  418
                  
                  
                  $
                  437
                  
                  
                  $
                  147
                  
                  
                  $
                  143
                  
                  
                  $
                  174Interest
      cost
                  
                  
                  557
                  
                  
                  
                  521
                  
                  
                  
                  474
                  
                  
                  
                  184
                  
                  
                  
                  156
                  
                  
                  
                  169Expected
      return on plan assets
                  
                  
                  (511
                  )
                  
                  
                  (431
                  )
                  
                  
                  (402
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Amortization
      of unrecognizedtransition
      (obligation) asset
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (2
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Amortization
      of prior service cost
                  
                  
                  25
                  
                  
                  
                  25
                  
                  
                  
                  25
                  
                  
                  
                  (45
                  )
                  
                  
                  (45
                  )
                  
                  
                  (45
                  )Recognized
      net actuarial loss
                  
                  
                  80
                  
                  
                  
                  172
                  
                  
                  
                  196
                  
                  
                  
                  12
                  
                  
                  
                  2
                  
                  
                  
                  39Net
      amount recognized
                  
                  $
                  523
                  
                  
                  $
                  705
                  
                  
                  $
                  728
                  
                  
                  $
                  297
                  
                  
                  $
                  256
                  
                  
                  $
                  337
 
 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 $272,000 and $25,000,
respectively. The estimated prior service cost for the postretirement plan that
will be amortized from accumulated other comprehensive loss into net periodic
benefit cost over the next fiscal year is $45,000.
  F-19
  Assumptions
used to determine benefit obligations for the pension plan as of a
September 30 measurement date and for the other postretirement benefits
plan as of a December 31 measurement date were as follows:
 
 Pension
      benefits
                            
                            
                            Postretirement
      benefits2008
                            
                            
                            2007
                            
                            
                            2008
                            
                            
                            2007Discount
      rate
                            
                            
                            5.75
                            %
                            
                            
                            6.25
                            %
                            
                            
                            5.75
                            %
                            
                            
                            5.75
                            %Rate
      of compensation increase
                            
                            
                            5.00
                            
                            
                            
                            5.00
                            
                            
                            
                            —
                            
                            
                            
                            —
 
 Assumptions
used to determine net periodic benefit cost were as follows:
  Pension
      benefits
                  
                  
                  Postretirement
      benefits2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Discount
      rate
                  
                  
                  5.75
                  %
                  
                  
                  6.25
                  %
                  
                  
                  5.75
                  %
                  
                  
                  5.75
                  %Expected
      long-term rate of returnon
      plan assets
                  
                  
                  7.50
                  
                  
                  
                  7.50
                  
                  
                  
                  —
                  
                  
                  
                  —Rate
      of compensation increase
                  
                  
                  5.00
                  
                  
                  
                  5.00
                  
                  
                  
                  —
                  
                  
                  
                  —  The
Company’s expected long-term rate of return on plan assets reflects long-term
earnings expectations and was determined based on historical returns earned by
existing plan assets adjusted to reflect expectations of future returns as
applied to plan’s targeted allocation of assets.
  The
assumed health care cost trend rate for retirees under age 65 which was used to
determine the benefit obligation for the other postretirement benefits plan at
December 31, 2008 was 10.0%, declining gradually to 5.0% in 2014 and
remaining at that level thereafter. The assumed health care cost trend rate for
retirees over age 65 which was also used to determine the benefit obligation for
the other postretirement benefits plan at December 31, 2008 was 9.0%,
declining gradually to 4.0% in 2014 and remaining at that level thereafter.
Increasing the assumed health care cost trend rates by one percentage point in
each year would increase the benefit obligation at December 31, 2008 by
approximately $717,000 and the net periodic benefit cost for the year by
approximately $78,000; a one percentage point decrease would decrease the
benefit obligation and benefit cost by approximately $549,000 and $59,000,
respectively.
  The
Company’s pension plan asset allocation at December 31, 2008 and September 30,
2007, by asset category is as follows:
 
 2008
                                      
                                      
                                      2007Asset
      category:Equity
      securities
                                      
                                      
                                      46
                                      %
                                      
                                      
                                      64
                                      %Debt
      securities
                                      
                                      
                                      51
                                      
                                      
                                      
                                      35Other
                                      
                                      
                                      3
                                      
                                      
                                      
                                      1Total
                                      
                                      
                                      100
                                      %
                                      
                                      
                                      100
                                      %
  Plan
assets are invested in eleven diversified investment funds of Citizens Bank. The
investment funds include six equity funds, four bond funds and one money
market fund. Citizens Bank has been given discretion by the Company to determine
the appropriate strategic asset allocation as governed by the Company’s
Discretionary Asset Management Investment Policy Statement which provides
specific targeted asset allocations for each investment fund as
follows:
 
 Allocation RangeCitizens
      Bank Investment Funds:Large
      Cap Domestic Equity
                            
                            
                            30%
      - 40%Mid
      Cap Domestic Equity
                            
                            
                            5%
      - 15%Small
      Cap Domestic Equity
                            
                            
                            0%
      - 10%International
      Equity
                            
                            
                            5%
      - 20%Real
      Estate
                            
                            
                            0%
      - 10%Core
      Investment Grade Bonds
                            
                            
                            15%
      - 30%Mortgages
                            
                            
                            0%
      - 15%Money
      Market
                            
                            
                            0%
      - 10%
 
 The
actual asset allocations at December 31, 2008 are consistent with the table
above.
  F-20
  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 $182,000
at December 31, 2008 and $244,000 at December 31, 2007 and are unfunded. The
Company recorded an expense of $13,000, $24,000 and $22,000 relating to this
plan during the years ended December 31, 2008, 2007 and 2006
respectively.
 
 Bonus
Plan
  The
Company maintains a program for full time employees. The benefits accrued under
this plan totaled $40,000 at December 31, 2008 and $50,000 at December 31, 2007
and are unfunded. The Company recorded an expense of $427,000, $622,000 and
$582,000 relating to this plan during the years ended December 31, 2008, 2007
and 2006 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 $160,000, $150,000 and $145,000 in 2008, 2007 and 2006
respectively.
 
 Supplemental
      Executive Retirement Plan
  In 2004,
the Company established a Supplemental Executive Retirement Plan for certain
executive officers primarily to restore benefits cutback in certain employee
benefit plans due to Internal Revenue Service regulations. The benefits accrued
under this plan totaled $1,585,000 at December 31, 2008 and $1,131,000 at
December 31, 2007, and are unfunded. The Company recorded an expense of
$152,000, $191,000 and $185,000 relating to this plan during the years ended
December 31, 2008, 2007 and 2006 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 $658,000 and $635,000 at December 31, 2008 and 2007
respectively, and are unfunded. The Company recorded an expense of $74,000,
$104,000 and $224,000 relating to this plan during the years ended December 31,
2008, 2007 and 2006 respectively.
 
 (16)
                  Commitments
      and Contingent Liabilities
 
 Legal
      Proceedings
  The
Company and the Bank are, from time to time, defendants in legal proceedings
relating to the conduct of their business. In the best judgment of management,
the consolidated financial position and results of operations of the Company
will not be affected materially by the outcome of any pending legal
proceedings.
 
 Off-Balance-Sheet
      Financial Instruments
  The
Company is a party to certain financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These are limited to commitments to extend credit and standby letters of credit
which involve, to varying degrees, elements of credit risk in excess of the
amounts recognized in the consolidated balance sheets. The contract amounts of
these instruments reflect the extent of the Company’s involvement in particular
classes of financial instruments.
  The
Company’s maximum exposure to credit loss in the event of nonperformance by the
other party to these instruments represents the contract amounts, assuming that
they are fully funded at a later date and any collateral proves to be worthless.
The Company uses the same credit policies in making commitments as it does for
on-balance-sheet extensions of credit.
  F-21
  Contract
amounts of financial instruments that represent agreements to extend credit are
as follows at December 31:
 
 2008
                              
                              
                              2007(In
      thousands)Loan
      origination commitments and unused lines of credit:Mortgage
      loans
                              
                              $
                              14,414
                              
                              
                              $
                              12,740Commercial
      loans
                              
                              
                              18,978
                              
                              
                              
                              14,545Home
      equity lines
                              
                              
                              12,509
                              
                              
                              
                              10,938Other
      revolving credit
                              
                              
                              1,456
                              
                              
                              
                              2,56347,357
                              
                              
                              
                              40,786Standby
      letters of credit
                              
                              
                              1,241
                              
                              
                              
                              1,753$
                              48,598
                              
                              
                              $
                              42,539
 
 These
agreements to extend credit have been granted to customers within the Company’s
lending area described in note 4 and relate primarily to fixed-rate
loans.
  Loan
origination commitments and lines of credit are agreements to lend to a customer
as long as there is no violation of any condition established in the contract.
These agreements generally have fixed expiration dates or other termination
clauses and may require payment of a fee by the customer. Since commitments and
lines of credit may expire without being fully drawn upon, the total contract
amounts do not necessarily represent future cash requirements.
  The
Company evaluates each customer’s creditworthiness on a case-by-case basis. The
amount of collateral, if any, required by the Company upon the extension of
credit is based on management’s credit evaluation of the customer. Mortgage
commitments are secured by liens on real estate. Collateral on extensions of
credit for commercial loans varies but may include accounts receivable,
equipment, inventory, livestock, and income-producing commercial
property.
  The
Company does not issue any guarantees that would require liability-recognition
or disclosure, other than its standby letters of credit. The Company has issued
conditional commitments in the form of standby letters of credit to guarantee
payment on behalf of a customer and guarantee the performance of a customer to a
third party. Standby letters of credit generally arise in connection with
lending relationships. The credit risk involved in issuing these instruments is
essentially the same as that involved in extending loans to customers.
Contingent obligations under standby letters of credit totaled $1,241,000 and
$1,753,000 at December 31, 2008 and 2007, 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, 2008 and 2007 was not
significant.
 
 (17)
                  Fair
      Values of Financial Instruments
 
 Management
uses its best judgment in estimating the fair value of the Bank’s financial
instruments; however, there are inherent weaknesses in any estimation technique.
Therefore, for substantially all financial instruments, the fair value estimates
herein are not necessarily indicative of the amounts the Bank could have
realized in a sales transaction on the dates indicated. The estimated fair value
amounts have been measured as of their respective year-ends and have not been
re-evaluated or updated for purposes of these financial statements subsequent to
those respective dates. As such, the estimated fair values of these financial
instruments subsequent to the respective reporting dates may be different than
the amounts reported at each year-end.
  In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement No. 157, Fair
Value Measurements (“SFAS 157”), which defines fair value, establishes a
framework for measuring fair value under GAAP, and expands disclosures about
fair value measurements. SFAS 157 applies to other accounting pronouncements
that require or permit fair value measurements. The Company adopted SFAS 157
effective for its fiscal year beginning January 1, 2008.
  In
December 2007, the FASB issued FASB Staff Position 157-2, Effective Date of FASB Statement No.
157 (“FSP 157-2”). FSP 157-2 delays the effective date of SFAS 157 for
all non-financial assets and liabilities, except those that are recognized or
disclosed at fair value on a recurring basis (at least annually) to fiscal years
beginning after November 15, 2008 and interim periods within those fiscal
years. As such, the Company only partially adopted the provisions of SFAS 157,
and will begin to account and report for non-financial assets and liabilities in
2009. In October 2008, the FASB issued FASB Staff Position 157-3,Determining the Fair Value of a
Financial Asset When the Market for that Asset is Not Active
(“FSP 157-3”), to clarify the application of the provisions of
SFAS 157 in an inactive market and how an entity would determine fair value
in an inactive market. FSP 157-3 is effective immediately and applies to
the Company’s December 31, 2008 consolidated financial statements. The
adoption of SFAS 157 and FSP 157-3 had no impact on the amounts
reported in the financial statements.
  F-22
  SFAS 157
establishes 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 under SFAS 157
are as follows:
 
 Level 1: Unadjusted quoted
prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities.
  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).
 
 An
asset’s or liability’s level within the fair value hierarchy 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, 2008 are as follows, dollars in thousands:
 
 (Level 1)QuotedPrices in
                              
                              
                              (Level 2)Active
                              
                              
                              Significant
                              
                              
                              (Level 3)Markets for
                              
                              
                              Other
                              
                              
                              SignificantDecember 31,
                              
                              
                              Identical
                              
                              
                              Observable
                              
                              
                              Unobservable2008
                              
                              
                              Assets
                              
                              
                              Inputs
                              
                              
                              InputsRecurring:Securities
      available for sale
                              
                              $
                              85,805
                              
                              
                              $
                              564
                              
                              
                              $
                              85,241
                              
                              
                              $
                              —Non-recurring:Impaired
      loans
                              
                              $
                              646
                              
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              646
 
 The table
below presents a reconciliation and income statement classification of gains and
losses for all assets measured at fair value on a non-recurring basis using
significant unobservable inputs (Level 3) for the year ended December 31, 2008,
dollars in thousands:
 
 Impaired LoansBalance
      at January 1
                            
                            $
                            —Transfers
      in
                            
                            
                            795Sales
                            
                            
                            —Losses
      included in earnings
                            
                            
                            (149
                            )Balance
      at December 31
                            
                            $
                            646
 
 The
following information should not be interpreted as an estimate of the fair value
of the entire Comapny 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, 2008 and 2007:
 
 Cash
and Cash Equivalents (Carried at Cost)
  The
carrying amounts reported in the balance sheet for cash and short-term
instruments approximate those assets’ fair values.
 
 Securities
  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.
  F-23
  For
certain state and municipal securities which are not traded in active markets or
are subject to transfer restrictions, valuations are adjusted to reflect
illiquidity and/or non-transferability, and such adjustments are generally based
on available market evidence (Level 3). In the absence of such evidence,
management’s best estimate is used. Management’s best estimate consists of both
internal and external support on certain Level 3 investments. Internal cash flow
models using a present value formula that includes assumptions market
participants would use along with indicative exit pricing obtained from
broker/dealers (where available) were used to support fair values of certain
Level 3 investments. The Company has no securities where the fair value was
based on Level 3.
  Loans
(Carried at Fair Value)
  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.
 
 Impaired
Loans (Generally Carried at Fair Value)
  Impaired
loans are those that are accounted for under FASB Statement
No. 114 Accounting
by Creditors for Impairment of a Loan(“SFAS 114”), 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, 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. As of December 31,
2008, the fair value of collateral-dependent impaired loans was $646,000, net of
a valuation allowance of $149,000.
 
 Accrued
Interest Receivable and Payable (Carried at Cost)
  The
carrying amount of accrued interest receivable and accrued interest payable
approximates its fair value.
 
 Restricted
investments (Carried at Cost)
  The
carrying amount of restricted investments approximates fair value, and considers
the limited marketability of such securities.
 
 Deposit
Liabilities (Carried at Cost)
  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
Borrowings (Carried at Cost)
  The
carrying amounts of short-term borrowings are comprised of FHLB overnight
borrowings at cost which approximate their fair values.
 
 Long-Term
Debt (Carried at Cost)
  Fair
values of FHLB advances are estimated using discounted cash flow analysis, based
on quoted prices for new FHLB advances 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 (Disclosed at Cost)
  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, 2008
and 2007, the fair values of these financial instruments approximated the
related carrying values which were not significant.
  F-24
  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:
 
 2008
                            
                            
                            2007Net
                            
                            
                            
                            
                            
                            Netcarrying
                            
                            
                            Estimated
                            
                            
                            carrying
                            
                            
                            EstimatedAmount
                            
                            
                            fair
      value
                            
                            
                            Amount
                            
                            
                            fair
      value(In
      thousands)
                            
                            
                            (In
      thousands)Financial
      assets:Cash
      and cash equivalents
                            
                            $
                            8,953
                            
                            
                            $
                            8,953
                            
                            
                            $
                            10,428
                            
                            
                            $
                            10,428Securities
      available for sale
                            
                            
                            85,805
                            
                            
                            
                            85,805
                            
                            
                            
                            92,064
                            
                            
                            
                            92,064Securities
      held to maturity
                            
                            
                            5,765
                            
                            
                            
                            5,798
                            
                            
                            
                            6,320
                            
                            
                            
                            6,377Loans,
      net
                            
                            
                            264,393
                            
                            
                            
                            263,966
                            
                            
                            
                            249,633
                            
                            
                            
                            250,554Accrued
      interest receivable
                            
                            
                            1,858
                            
                            
                            
                            1,858
                            
                            
                            
                            2,119
                            
                            
                            
                            2,119Restricted
      investments
                            
                            
                            3,435
                            
                            
                            
                            3,435
                            
                            
                            
                            2,998
                            
                            
                            
                            2,998Financial
      liabilities:Demand
      deposits (non-interest-bearing)
                            
                            
                            58,648
                            
                            
                            
                            58,648
                            
                            
                            
                            62,143
                            
                            
                            
                            62,143Interest-bearing
      deposits
                            
                            
                            238,076
                            
                            
                            
                            240,039
                            
                            
                            
                            237,099
                            
                            
                            
                            236,764Short-term
      debt
                            
                            
                            10,524
                            
                            
                            
                            10,524
                            
                            
                            
                            5,509
                            
                            
                            
                            5,509Federal
      Home Loan Bank borrowings
                            
                            
                            35,000
                            
                            
                            
                            36,286
                            
                            
                            
                            30,000
                            
                            
                            
                            30,019Accrued
      interest payable
                            
                            
                            553
                            
                            
                            
                            553
                            
                            
                            
                            548
                            
                            
                            
                            548Off
      balance sheet financial instruments:Lending
      commitments
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Letters
      of credit
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
 
 (18)
                  Condensed
      Parent Company Financial Statements
 
 The
following are the condensed, parent company-only financial statements for
Jeffersonville Bancorp:
 
 Balance
Sheets
 
 December
      312008
                            
                            
                            2007(In
      thousands)AssetsCash
                            
                            $
                            108
                            
                            
                            $
                            56Securities
      available for sale
                            
                            
                            799
                            
                            
                            
                            977Investment
      in subsidiary
                            
                            
                            40,433
                            
                            
                            
                            41,662Premises
      and equipment, net
                            
                            
                            1,065
                            
                            
                            
                            1,127Other
      assets
                            
                            
                            298
                            
                            
                            
                            230Total
      Assets
                            
                            $
                            42,703
                            
                            
                            $
                            44,052Liabilities
      and Stockholders’ EquityLiabilities
                            
                            $
                            41
                            
                            
                            $
                            94Stockholders’
      equity
                            
                            
                            42,662
                            
                            
                            
                            43,958Total
      Liabilities and Stockholders’ Equity
                            
                            $
                            42,703
                            
                            
                            $
                            44,052
  F-25
  Statements
of Income
 
 Years
      ended December 312008
                                    
                                    
                                    2007
                                    
                                    
                                    2006(In
      thousands)Dividend
      income from subsidiary
                                    
                                    $
                                    2,475
                                    
                                    
                                    $
                                    4,175
                                    
                                    
                                    $
                                    4,787Dividend
      income on securities available for sale
                                    
                                    
                                    43
                                    
                                    
                                    
                                    34
                                    
                                    
                                    
                                    34Gain
      on sale of securities
                                    
                                    
                                    63
                                    
                                    
                                    
                                    1
                                    
                                    
                                    
                                    —Impairment
      charge on securities
                                    
                                    
                                    (101
                                    )
                                    
                                    
                                    (30
                                    )
                                    
                                    
                                    —Other
      non-interest income
                                    
                                    
                                    —
                                    
                                    
                                    
                                    2
                                    
                                    
                                    
                                    32,480
                                    
                                    
                                    
                                    4,182
                                    
                                    
                                    
                                    4,824Occupancy
      and equipment expenses
                                    
                                    
                                    116
                                    
                                    
                                    
                                    120
                                    
                                    
                                    
                                    121Other
      non-interest expenses
                                    
                                    
                                    146
                                    
                                    
                                    
                                    162
                                    
                                    
                                    
                                    131262
                                    
                                    
                                    
                                    282
                                    
                                    
                                    
                                    252Income
      before income taxes andundistributed
      income of subsidiary
                                    
                                    
                                    2,218
                                    
                                    
                                    
                                    3,900
                                    
                                    
                                    
                                    4,572Income
      tax expense
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Income
      before undistributedincome
      of subsidiary
                                    
                                    
                                    2,218
                                    
                                    
                                    
                                    3,900
                                    
                                    
                                    
                                    4,572Equity
      in undistributed income of subsidiary
                                    
                                    
                                    484
                                    
                                    
                                    
                                    375
                                    
                                    
                                    
                                    371Net
      Income
                                    
                                    $
                                    2,702
                                    
                                    
                                    $
                                    4,275
                                    
                                    
                                    $
                                    4,943
 
 Statements
of Cash Flows
 
 Years
      ended December 312008
                              
                              
                              2007
                              
                              
                              2006(In
      thousands)Operating
      activities:Net
      income
                              
                              $
                              2,702
                              
                              
                              $
                              4,275
                              
                              
                              $
                              4,943Equity
      in undistributed income of subsidiary
                              
                              
                              (484
                              )
                              
                              
                              (375
                              )
                              
                              
                              (371
                              )Depreciation
      and amortization
                              
                              
                              62
                              
                              
                              
                              62
                              
                              
                              
                              62(Gain)
      loss on sale of securities
                              
                              
                              (63
                              )
                              
                              
                              (1
                              )
                              
                              
                              —Impairment
      charge on securities
                              
                              
                              101
                              
                              
                              
                              30
                              
                              
                              
                              —Other
      adjustments, net
                              
                              
                              (66
                              )
                              
                              
                              (229
                              )
                              
                              
                              —Net
      Cash Provided by Operating Activities
                              
                              
                              2,252
                              
                              
                              
                              3,762
                              
                              
                              
                              4,634Investing
      activities:Proceeds
      from sale of securities available for sale
                              
                              
                              334
                              
                              
                              
                              13
                              
                              
                              
                              —Purchase
      of securities available for sale
                              
                              
                              (332
                              )
                              
                              
                              —
                              
                              
                              
                              —Purchases
      of premises and equipment
                              
                              
                              —
                              
                              
                              
                              (350
                              )
                              
                              
                              —Cash
      Provided by (Used in) Investing Activities
                              
                              
                              2
                              
                              
                              
                              (337
                              )
                              
                              
                              —Financing
      activities:Purchases
      of treasury stock
                              
                              
                              —
                              
                              
                              
                              (1,245
                              )
                              
                              
                              (2,614
                              )Cash
      dividends paid
                              
                              
                              (2,202
                              )
                              
                              
                              (2,134
                              )
                              
                              
                              (2,098
                              )Net
      Cash Used in Financing Activities
                              
                              
                              (2,202
                              )
                              
                              
                              (3,379
                              )
                              
                              
                              (4,712
                              )Net
      Increase (Decrease) in Cash
                              
                              
                              52
                              
                              
                              
                              46
                              
                              
                              
                              (78
                              )Cash
      at Beginning of Year
                              
                              
                              56
                              
                              
                              
                              10
                              
                              
                              
                              88Cash
      at End of Year
                              
                              $
                              108
                              
                              
                              $
                              56
                              
                              
                              $
                              10
  F-26
 ITEM
9          CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
  Nothing
to disclose.
 
 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, 2008. 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, 2008.
 
 ITEM
9B.      OTHER INFORMATION
 
 Nothing
to disclose.
  30
  PART
III
 
 ITEM
      10.
              DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
 
 Certain
portions of the information required by this Item will be included in the 2009
Proxy Statement, which will be filed with the Securities and Exchange Commission
within 120 days of the Company’s 2008 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 2009 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 2009 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 2009 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 2009 Proxy Statement
in the Report of the Audit Committee section, and is incorporated herein by
reference.
  31
  PART
IV
 
 ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
 (a)
      1.
                                        The
      consolidated financial statements and schedules of the Company and Bank
      are included in item 8 of Part II.(a)
      2.
                                        All
      schedules are omitted since the required information is either not
      applicable, not required or contained in the respective consolidated
      financial statements or in the notes thereto.(a)
      3.
                                        Exhibits
      (numbered in accordance with Item 601 of Regulation
  S-K).3.1
                                        Certificate
      of Incorporation of the Company (Incorporation by Reference to Exhibit
      3.1, 3.2, 3.3 and 3.4 to Form 8 Registration Statement, effective June 29,
      1991)3.2
                                        The
      Amended and Restated Bylaws of the Company (Incorporated by Reference to
      Exhibit 3.1 to 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 Company31.1
                                        Section
      302 Certification of Chief Executive Officer31.2
                                        Section
      302 Certification of Chief Financial Officer32.1
                                        906
      certification of Chief Executive Officer32.2
                                        906
      certification of Chief Financial Officer(b)
                                        Exhibits
      to this Form 10-K are attached or incorporated herein by
      reference.
  32
  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, 2009
                By:
                /s/
      Wayne V. Zanetti
                By:
                /s/
      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, 2009Kenneth
      C. Klein/s/
      Raymond Walter
              Vice
      Chairman–Director
              March
      23, 2009Raymond
      Walter/s/
      Wayne V. Zanetti
              Chief
      Executive Officer
              March
      23, 2009Wayne
      V. Zanetti
              President–Director/s/
      John K. Gempler
              Secretary–Director
              March
      23, 2009John
      K. Gempler/s/
      John W. Galligan
              Director
              March
      23, 2009John
      W. Galligan/s/
      Douglas A. Heinle
              Director
              March
      23, 2009Douglas
      A. Heinle/s/
      Donald L. Knack
              Director
              March
      23, 2009Donald
      L. Knack/s/
      James F. Roche
              Director
              March
      23, 2009James
      F. Roche/s/
      Edward T. Sykes
              Director
              March
      23, 2009Edward
      T. Sykes/s/
      Earle A. Wilde
              Director
              March
      23, 2009Earle
      A. Wilde