**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, 2006





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





(845)
      482-4000


(Registrant’s
      telephone number, including area code)





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




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




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


Title
      of
      Class: Common Stock, $0.50 Par Value





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


Yes
o  No
x





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


Yes
o  No
x





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


Yes
x  No
o





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





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


Large
                accelerated filer o
            Accelerated
                filer x
            Non-accelerated
                filer o





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


Yes
o  No
x





As
      of
      December 31, 2006 the aggregate market value of the registrant’s common stock
      held by non-affiliates of the registrant was $70,920,000 based on
      the closing price of $18.96 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 2, 2007Common
                Stock, $0.50 par value per share
            
            4,286,188
                shares





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Document
            
            Parts
                Into Which IncorporatedAnnual
                Report to Stockholders for the Fiscal Year Ended
            
            Parts
                I and IIDecember
                31, 2006 (Annual Report to stockholders)Proxy
                Statement for the Annual Meeting of Stockholders to be held
            
            Part
                III Items 10, 11, 12, 13 and 14April
                24, 2007 (Proxy Statement)


1


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




*Page***PART
                I**Item
                1.
            Business
            3Item
                1A.
            Risk
                Factors
            7Item
                1B.
            Unresolved
                Staff Comments
            8Item
                2.
            Properties
            8Item
                3.
            Legal
                Proceedings
            9Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            9**PART
                II**Item
                5.
            Market
                for the Registrant’s Common Equity,Related
                Stockholder Matters and Issuer Purchases of Equity
                Securities
            10Item
                6.
            Selected
                Financial Data
            11Item
                7.
            Management’s
                Discussion and Analysis ofFinancial
                Condition and Results of Operations
            12Item
                7A.
            Quantitative
                and Qualitative Disclosures about Market Risk
            26Item
                8.
            Financial
                Statements and Supplementary Data
            28Item
                9.
            Changes
                in and Disagreements with Accountantson
                Accounting and Financial Disclosure
            29Item
                9A.
            Controls
                and Procedures
            29Item
                9B.
            Other
                Information
            30**PART
                III**Item
                10.
            Directors,
                Executive Officers and Corporate Governance
            31Item
                11.
            Executive
                Compensation
            31Item
                12.
            Security
                Ownership of Certain Beneficial Ownersand
                Management, and Related Stockholder Matters
            31Item
                13.
            Certain
                Relationships and Related Transactions and Director
                Independence
            31Item
                14.
            Principal
                Accountant and Fees and Services
            31**PART
                IV**Item
                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, 2006 and 2005, the Company had total assets of $397.3 million
      and
      $387.3 million, securities available for sale of $99.8 million and $89.0
      million, securities held to maturity of $9.4 million and $8.2 million and net
      loans receivable of $247.2 million and $240.6 million, respectively. At December
      31, 2006 and 2005, total deposits were $325.1 million and $312.1 million,
      respectively. At December 31, 2006 and 2005, stockholders’ equity was $41.3
      million and $42.5 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 133 people
      and serving all of Sullivan County, New York as well as some areas of adjacent
      counties in New York and Pennsylvania.





**NARRATIVE
      DESCRIPTION OF BUSINESS**





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




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




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





**DEPOSIT
      AND LOAN PRODUCTS**





***Deposit
      Products.*** The Bank
      offers a variety of deposit products typical of commercial banks and has
      designed product offerings responsive to the needs of both individuals and
      businesses. Traditional demand deposit accounts, interest-bearing transaction
      accounts (NOW accounts) and savings accounts are offered on a competitive basis
      to meet customers’ basic banking needs. Money market accounts, time deposits in
      the form of certificates of deposit and IRA/KEOGH accounts provide customers
      with price competitive and flexible investment alternatives. The Bank does
      not
      have a single depositor or a small group of related depositors whose loss would
      have a material adverse effect upon the business of the Bank. See item 7,
      Distribution of Assets, Liabilities & Stockholders’ Equity for average
      balances of deposit products at December 31, 2006, 2005 and 2004.




***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 2006 versus 2005 for a description of the
      loan
      portfolio and recent loan loss experience. Additional information is set forth
      below relating to the Bank’s loan products, including major loan categories,
      general loan terms, credit underwriting criteria, and risks particular to each
      category of loans. The Bank does not have a major loan concentration in any
      individual industry.




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




3


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




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




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




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




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





**SUPERVISION
      AND REGULATION**





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




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




The
      Company is subject to capital adequacy guidelines of the Federal Reserve. The
      guidelines apply on a consolidated basis and require bank holding companies
      having the highest regulatory ratings for safety and soundness to maintain
      a
      minimum ratio of Tier 1 capital to total average assets (or “leverage ratio”) of
      3%. All other bank holding companies are required to maintain an additional
      capital cushion of 100 to 200 basis points. The Federal Reserve capital adequacy
      guidelines also require bank holding companies to maintain a minimum ratio
      of
      Tier 1 capital to risk-weighted assets of 4% and a minimum ratio of qualifying
      total capital to risk-weighted assets of 8%. As of December 31, 2006, the
      Company’s leverage ratio was
      11.0%, its
      ratio of Tier 1 capital to risk-weighted assets was
      16.7%, and its
      ratio of qualifying total capital to risk-weighted assets
      was 18.0%. The
      Federal Reserve may set higher minimum capital requirements for bank holding
      companies whose circumstances warrant it, such as companies anticipating
      significant growth or facing unusual risks. The Federal Reserve has not advised
      the Company of any special capital requirement applicable to it.




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




The
      Bank
      is subject to leverage and risk-based capital requirements and minimum capital
      guidelines of the OCC that are similar to those applicable to the Company.
      As of
      December 31, 2006, the Bank was in compliance with all minimum capital
      requirements. The Bank’s leverage ratio was 10.7%, its ratio of Tier 1 capital
      to risk-weighted assets were 16.2% and its ratio of qualifying total capital
      to
      risk-weighted assets was 17.5%




Any
      bank
      that is less than well-capitalized is subject to certain mandatory prompt
      corrective actions by its primary federal regulatory agency, as well as other
      discretionary actions, to resolve its capital deficiencies. The severity of
      the
      actions required to be taken increases as the bank’s capital position
      deteriorates. A bank holding company must guarantee that a subsidiary bank
      will
      meet its capital restoration plan, up to an amount equal to 5% of the subsidiary
      bank’s assets or the amount required to meet regulatory capital requirements,
      whichever is less. In addition, under Federal Reserve policy, a bank holding
      company is expected to serve as a source of financial strength, and to commit
      financial resources to support its subsidiary banks. Any capital loans made
      by a
      bank 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, 2006, the Bank
      had
      approximately $8.6 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, which was signed into law on
      February 8, 2006, gave the FDIC increased flexibility in assessing premiums
      on
      banks and savings associations, including the Bank, to pay for deposit insurance
      and in managing its deposit insurance reserves. 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. Approximately 95%
      of
      all insured institutions, including the Bank, are in Risk Category I, the most
      favorable category. Within this category, all insured institutions pay a base
      rate assessment of 5 basis points on all insured deposits (which rate may be
      adjusted annually by the FDIC by up to 3 basis points without public comment)
      and an additional assessment up to 2 basis points based on the risk of loss
      to
      the Depository Insurance Fund (“DIF”) posed by the particular institution. 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. The new
      law
      became effective on January 1, 2007, and the first premiums, payable quarterly
      after the end of each quarter, are payable by June 30, 2007. The reform
      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 estimates that it will
      receive a credit of approximately $239,000, which will reduce but not eliminate
      its 2007 deposit insurance assessment.




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 2006,
      FDIC-insured banks paid assessments to fund FICO bond obligations ranging from
      an annualized $0.0132 per $100 of deposits for the first quarter of 2006 to
      $0.0124 per $100 of deposits for the fourth quarter of 2006. The
      Bank
      paid $38,863 of FICO
      assessments during 2006. For the first quarter of 2007, the FICO assessment
      rate
      is $0.0122 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, 2006, 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 limiting the extent
      to
      which a bank or its subsidiaries may engage in covered transactions with any
      one
      affiliate and with all affiliates of the bank in the aggregate, and requiring
      that such transactions be on terms that are consistent with safe and sound
      banking practices. Sections 23A and 23B also regulate transactions by a bank
      with its financial subsidiaries, which it may operate under the expanded
      authority granted to national banks under the Gramm-Leach-Bliley Act (“GLB
      Act”).




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




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 discussed plans to conduct hearings on data
      security and related issues.




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 **.**




5


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 requires the SEC
      and
      securities exchanges to adopt extensive additional disclosure, corporate
      governance, and other related rules. SOA represents significant federal
      involvement in matters traditionally left to state regulatory systems, such
      as
      the regulation of the accounting profession, and to state corporate law, such
      as
      the relationship between a board of directors and management and between a
      board
      of directors and its committees. In addition, the federal banking regulators
      have adopted generally similar requirements concerning the certification of
      financial statements by bank officials.




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




The
      Bankruptcy Abuse Prevention and Consumer Protection Act amended the U.S.
      Bankruptcy Code, effective October 17, 2005. Under the new law, the ability
      of
      consumers to discharge their debts in bankruptcy is limited by a needs-based
      test, and more debtors than in the past are expected to enter into repayment
      programs with their creditors. The law also limits certain homestead exemptions,
      limits the discharge of debt incurred for the purchase of certain luxury items,
      and extends from 6 year to 8 years the minimum time between successive
      bankruptcy discharges.





**TAXATION**





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





**2006**
            
            **2005**
            
            **2004**Current
                tax expense:Federal
            
            $
            1,428,000
            
            $
            2,094,000
            
            $
            2,115,000State
            
            
            169,000
            
            
            302,000
            
            
            325,000Deferred
                tax benefit
            
            
            (357,000
            )
            
            (354,000
            )
            
            (223,000
            )Total
                income tax expense
            
            $
            1,240,000
            
            $
            2,042,000
            
            $
            2,217,000





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





The
      proposed 2007 New York State budget bill contains a provision that would
      disallow the exclusion of dividends paid by a real estate investment trust
      subsidiary (“REIT”). The bill, if enacted as proposed, would be effective for
      taxable years beginning on or after January 1, 2007 and the Company would lose
      the tax benefit associated with the REIT.





**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.


6


**COMPETITION**





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




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





**NUMBER
      OF PERSONNEL**





At
      December 31, 2006, there were 133 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, 2006,
      approximately $8.6 million was available for the payment of dividends without
      prior OCC approval.





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





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





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





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




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




7


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





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





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





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





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





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





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





At
      December 31, 2006, securities available for sale constituted 25% of our total
      assets, or $99,788,000. As interest rates have risen, the fair value of these
      securities have fallen below their carrying value. If interest rates continue
      to
      rise, as is predicted, the fair value of these securities will continue to
      decline and the amount of unrealized losses will rise. Such unrealized losses
      would be recognized if the Company sells the affected securities.





**Our
      growth and expansion may be limited by many factors.**





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





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





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





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





**ITEM
      1B. UNRESOLVED STAFF COMMENTS**





Not
      Applicable.





**ITEM
      2. PROPERTIES**





In
      addition to the main office of the Company and the Bank in Jeffersonville,
      New
      York, the Bank has nine branch locations and an operations center 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 five branches;
      Eldred, Liberty, Livingston Manor, Loch Sheldrake, and one location in
      Monticello. We occupy four branch locations pursuant with a lease arrangement
      in
      Callicoon, Narrowsburg, Wurtsboro and one located in a Wal*Mart store in
      Monticello.


8


The
      major
      classifications of premises and equipment and the book value thereof were as
      follows at December 31, 2006:





**2006**Land
            
            $
            387,000Buildings
                and improvements
            
            
            4,255,000Furniture
                and fixtures
            
            
            157,000Equipment
            
            
            3,703,0008,502,000Less
                accumulated depreciation and amortization
            
            
            (5,462,000
            )Total
                premises and equipment, net
            
            $
            3,040,000








**ITEM
      3. LEGAL PROCEEDINGS**





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








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





Not
      applicable.


9


**PART
      II**





**ITEM
              5.**
            **MARKET
                FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
                PURCHASES OF EQUITY SECURITIES**





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





**Cash****Sales**
            
            **Sales**
            
            **Dividends****Low**
            
            **High**
            
            **Paid**Quarter
                Ended:March
                31, 2005
            
            $
            17.94
            
            $
            20.43
            
            $
            0.10June
                30, 2005
            
            $
            20.15
            
            $
            25.99
            
            $
            0.10September
                30, 2005
            
            $
            21.92
            
            $
            26.15
            
            $
            0.10December
                31, 2005
            
            $
            21.15
            
            $
            24.00
            
            $
            0.14March
                31, 2006
            
            $
            21.49
            
            $
            24.00
            
            $
            0.11June
                30, 2006
            
            $
            20.33
            
            $
            21.90
            
            $
            0.11September
                30, 2006
            
            $
            18.32
            
            $
            21.00
            
            $
            0.11December
                31, 2006
            
            $
            17.48
            
            $
            20.00
            
            $
            0.15





***Number
      of Holders of Record.*** At
      the
      close of business on March
      16,
      2007, the Company had 1,413 stockholders of
      record of the 4,284,818 shares of common stock then outstanding.





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





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





***Stock
      Repurchase Plan*** *.* In
      April,
      2006 the Board of Directors approved a Stock Repurchase Program under which
      the
      Company could repurchase up to 100,000 shares of outstanding stock. In July
      2006, the Board of Directors approved an increase in the number of shares to
      150,000 under this program. During the year 2006, 128,973 shares were
      repurchased with a remaining balance of 21,027 authorized to be repurchased
      under this program. The following shares were purchased as a part of the
      repurchase program during the fourth quarter of 2006:





**Shares****Average**
            
            **Repurchased****Price**
            
            **as
                part of**
            
            **Capacity
                to****Shares**
            
            **Paid**
            
            **Repurchase**
            
            **Purchase****Purchased**
            
            **Per
                Share**
            
            **Program**
            
            **More
                Shares**10/1/2006
                - 10/31/06
            
            
            6,100
            
            $
            17.840
            
            
            6,10011/1/2006
                - 11/30/06
            
            
            5,000
            
            $
            18.500
            
            
            5,00012/1/2006
                - 12/31/06
            
            
            0
            
            $
            0
            
            
            0Total
            
            
            11,100
            
            $
            18.137
            
            
            11,100
            
            
            21,027


10


**ITEM
      6. SELECTED FINANCIAL DATA**





**FIVE-YEAR
      SUMMARY**





**2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****RESULTS
                OF OPERATIONS**Interest
                income
            
            $
            23,881,000
            
            $
            22,170,000
            
            $
            20,820,000
            
            $
            20,082,000
            
            $
            20,635,000Interest
                expense
            
            
            8,211,000
            
            
            5,402,000
            
            
            4,051,000
            
            
            4,037,000
            
            
            5,331,000Net
                interest income
            
            
            15,670,000
            
            
            16,768,000
            
            
            16,769,000
            
            
            16,045,000
            
            
            15,304,000Provision
                for loan losses
            
            
            90,000
            
            
            180,000
            
            
            360,000
            
            
            620,000
            
            
            900,000Net
                income
            
            
            4,943,000
            
            
            5,725,000
            
            
            6,171,000
            
            
            5,732,000
            
            
            5,242,000**FINANCIAL
                CONDITION**Total
                assets
            
            $
            397,291,000
            
            $
            387,343,000
            
            $
            365,523,000
            
            $
            352,204,000
            
            $
            325,025,000Deposits
            
            
            325,073,000
            
            
            312,096,000
            
            
            293,094,000
            
            
            280,227,000
            
            
            252,792,000Gross
                loans
            
            
            250,760,000
            
            
            244,261,000
            
            
            224,236,000
            
            
            196,675,000
            
            
            171,977,000Stockholders’
                equity
            
            
            41,275,000
            
            
            42,519,000
            
            
            39,646,000
            
            
            35,786,000
            
            
            32,497,000**AVERAGE
                BALANCES**Total
                assets
            
            $
            400,535,000
            
            $
            374,413,000
            
            $
            361,783,000
            
            $
            340,575,000
            
            $
            313,022,000Deposits
            
            
            260,656,000
            
            
            297,643,000
            
            
            291,426,000
            
            
            268,687,000
            
            
            247,953,000Gross
                loans
            
            
            246,890,000
            
            
            238,993,000
            
            
            211,846,000
            
            
            183,335,000
            
            
            165,607,000Stockholders’
                equity
            
            
            42,272,000
            
            
            41,350,000
            
            
            37,149,000
            
            
            33,561,000
            
            
            30,271,000**FINANCIAL
                RATIOS**Net
                income to average total assets
            
            
            1.23
            %
            
            1.53
            %
            
            1.71
            %
            
            1.68
            %
            
            1.67
            %Net
                income to average stockholders’ equity
            
            
            11.69
            %
            
            13.85
            %
            
            16.61
            %
            
            17.08
            %
            
            17.32
            %Average
                stockholders’ equity to averagetotal
                assets
            
            
            10.55
            %
            
            11.04
            %
            
            10.27
            %
            
            9.85
            %
            
            9.67
            %**SHARE
                AND PER SHARE DATA**(1)Basic
                earnings per share
            
            $
            1.13
            
            $
            1.29
            
            $
            1.39
            
            $
            1.29
            
            $
            1.18Dividends
                per share
            
            $
            0.48
            
            $
            0.44
            
            $
            0.40
            
            $
            0.33
            
            $
            0.30Dividend
                payout ratio
            
            
            42.44
            %
            
            34.04
            %
            
            28.78
            %
            
            25.28
            %
            
            25.39
            %Book
                value at year end
            
            $
            9.59
            
            $
            9.59
            
            $
            8.94
            
            $
            8.07
            
            $
            7.33Total
                dividends paid
            
            $
            2,098,000
            
            $
            1,949,000
            
            $
            1,776,000
            
            $
            1,449,000
            
            $
            1,331,000Average
                number of shares outstanding
            
            
            4,376,494
            
            
            4,434,321
            
            
            4,434,321
            
            
            4,434,321
            
            
            4,434,321Shares
                outstanding at year end
            
            
            4,305,348
            
            
            4,434,321
            
            
            4,434,321
            
            
            4,434,321
            
            
            4,434,321





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





**SUMMARY
      OF QUARTERLY RESULTS OF OPERATIONS FOR 2006 AND 2005**





**31-Mar**
            
            **30-Jun**
            
            **30-Sep**
            
            **31-Dec**
            
            **Total****2006**Interest
                income
            
            $
            5,767,000
            
            $
            5,996,000
            
            $
            6,089,000
            
            $
            6,029,000
            
            $
            23,881,000Interest
                expense
            
            
            (1,859,000
            )
            
            (2,044,000
            )
            
            (2,118,000
            )
            
            (2,190,000
            )
            
            (8,211,000
            )Net
                interest income
            
            
            3,908,000
            
            
            3,952,000
            
            
            3,971,000
            
            
            3,839,000
            
            
            15,670,000Provision
                for loan losses
            
            
            (90,000
            )
            
            0
            
            
            0
            
            
            0
            
            
            (90,000
            )Non-interest
                income
            
            
            795,000
            
            
            844,000
            
            
            1,027,000
            
            
            920,000
            
            
            3,586,000Non-interest
                expenses
            
            
            (3,370,000
            )
            
            (3,257,000
            )
            
            (3,231,000
            )
            
            (3,125,000
            )
            
            (12,983,000
            )Income
                before taxes
            
            
            1,243,000
            
            
            1,539,000
            
            
            1,767,000
            
            
            1,634,000
            
            
            6,183,000Income
                taxes
            
            
            270,000
            
            
            339,000
            
            
            409,000
            
            
            222,000
            
            
            1,240,000Net
                income
            
            $
            973,000
            
            $
            1,200,000
            
            $
            1,358,000
            
            $
            1,412,000
            
            $
            4,943,000Basic
                earnings per share
            
            $
            0.22
            
            $
            0.27
            
            $
            0.31
            
            $
            0.33
            
            $
            1.13**2005**Interest
                income
            
            $
            5,262,000
            
            $
            5,391,000
            
            $
            5,665,000
            
            $
            5,852,000
            
            $
            22,170,000Interest
                expense
            
            
            (1,088,000
            )
            
            (1,252,000
            )
            
            (1,438,000
            )
            
            (1,624,000
            )
            
            (5,402,000
            )Net
                interest income
            
            
            4,174,000
            
            
            4,139,000
            
            
            4,227,000
            
            
            4,228,000
            
            
            16,768,000Provision
                for loan losses
            
            
            (60,000
            )
            
            (60,000
            )
            
            (60,000
            )
            
            0
            
            
            (180,000
            )Non-interest
                income
            
            
            949,000
            
            
            964,000
            
            
            1,017,000
            
            
            1,133,000
            
            
            4,063,000Non-interest
                expenses
            
            
            (3,249,000
            )
            
            (3,149,000
            )
            
            (3,278,000
            )
            
            (3,208,000
            )
            
            (12,884,000
            )Income
                before taxes
            
            
            1,814,000
            
            
            1,894,000
            
            
            1,906,000
            
            
            2,153,000
            
            
            7,767,000Income
                taxes
            
            
            (454,000
            )
            
            (498,000
            )
            
            (497,000
            )
            
            (593,000
            )
            
            (2,042,000
            )Net
                income
            
            $
            1,360,000
            
            $
            1,396,000
            
            $
            1,409,000
            
            $
            1,560,000
            
            $
            5,725,000Basic
                earnings per share
            
            $
            0.31
            
            $
            0.31
            
            $
            0.32
            
            $
            0.35
            
            $
            1.29


11


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





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




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





**GENERAL**





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




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




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




National
      economic policies have caused interest rates to rise 17 times since June 2004.
      The Company’s yields on interest earning assets have fallen and the costs of
      interest bearing liabilities have risen, creating net interest margin
      compression. Locally, the economy began to weaken in 2006. While the local
      economic forecast has slowed somewhat, it should be acknowledged that the
      economy in most other areas of New York State continues to be less robust.
      Significant improvement in the local economy continues to be demonstrated in
      the
      Sullivan County real estate market. Several new housing projects continued
      to
      progress along. A permanent concert facility has opened on the original site
      of
      the Woodstock Festival in Bethel this year. Several Native American-run casinos
      are still on the horizon. However, real estate values have stabilized since
      2005. The success of these projects, tourism, real estate values and the
      availability of qualified labor is critical to the local economy and the
      Company .





**CRITICAL
      ACCOUNTING POLICIES**





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




12


**RECENT
      ACCOUNTING PRONOUNCEMENTS**





In
      July
      2006, the FASB issued FASB Interpretation (“FIN”) No. 48, *Accounting
      for Uncertainty in Income Taxes* .
      This
      Interpretation clarifies the accounting for uncertainty in income taxes
      recognized in an enterprise’s financial statements in accordance with SFAS No.
      109, *Accounting
      for Income Taxes* .
      This
      Interpretation prescribes a recognition threshold and measurement attribute
      for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. This Interpretation also provides guidance
      on derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition. This Interpretation is effective for fiscal
      years beginning after December 15, 2006. The Company has not taken any tax
      positions that would have a material impact on the Company’s consolidated
      financial statements due to the adoption of this pronouncement.




In
      September 2006, the Financial Accounting Standards Board issued FASB Statement
      No. 157, *Fair
      Value Measurements* ,
      which
      defines fair value, establishes a framework for measuring fair value under
      GAAP,
      and expands disclosures about fair value measurements. FASB Statement
      No. 157 applies to other accounting pronouncements that require or permit
      fair value measurements. The new guidance is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and for interim
      periods within those fiscal years. The Company is currently evaluating the
      impact this pronouncement will have on the Company’s consolidated financial
      statements.




In
      September 2006, the Financial Accounting Standards Board issued SFAS
      No. 158, *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement
      Plans* (“SFAS
      158”), which amends SFAS 87 and SFAS 106 to require recognition of the
      overfunded or underfunded status of pension and other postretirement benefit
      plans on the balance sheet. Under SFAS 158, gains and losses, prior service
      costs and credits, and any remaining transition amounts under SFAS 87 and SFAS
      106 that have not yet been recognized through net periodic benefit cost will
      be
      recognized in accumulated other comprehensive income, net of tax effects, until
      they are amortized as a component of net periodic cost. The measurement date
—
the date at which the benefit obligation and plan assets are measured — is
      required to be the company’s fiscal year end. SFAS 158 is effective for
      publicly-held companies for fiscal years ending after December 15, 2006,
      except for the measurement date provisions, which are effective for fiscal
      years
      ending after December 15, 2008. The Company has adopted SFAS 158, and the
      following table summarizes the impact of the initial adoption of SFAS No. 158
      for pension, postretirement and supplemental retirement plans (not tax effected,
      dollars in thousands).




**December
                31, 2006****Prior
                to**
            
            
            
            **December
                31, 2006****SFAS
                No. 158**
            
            
            
            **Post
                SFAS No. 158****Adjustments**
            
            **Adjustments**
            
            **Adjustments**(Dollars
                in thousands)Other
                assets
            
            $
            7,328
            
            $
            (212
            )
            $
            7,116Other
                liabilities
            
            
            7,983
            
            
            2,057
            
            
            10,040Accumulated
                other comprehensive loss
            
            
            (1,488
            )
            
            (2,269
            )
            
            (3,757
            )




In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* .
      This
      statement permits entities to choose to measure many financial instruments
      and
      certain other items at fair value. An entity shall report unrealized gains
      and
      losses on items for which the fair value option has been elected in earnings
      at
      each subsequent reporting date. This statement is effective as of the beginning
      of an entity’s first fiscal year that begins after November 15, 2007. Early
      adoption is permitted as of the beginning of a fiscal year that begins on or
      before November 15, 2007, provided the entity also elects to apply the
      provisions of SFAS No. 157. The Company is continuing to evaluate the impact
      of
      this statement.




In
      September 2006, the Securities and Exchange Commission (SEC) issued Staff
      Accounting Bulleting No. 108 (“SAB 108”). SAB 108 provides interpretive
      guidance on how the effects of the carryover or reversal of prior year
      misstatements should be considered in quantifying a potential current year
      misstatement. Prior to SAB 108, companies might evaluate the materiality of
      financial statement misstatements using either the income statement or balance
      sheet approach, with the income statement approach  focusing on new
      misstatements added in the current year, and the balance sheet approach focusing
      on the cumulative amount of misstatement present in a company’s balance sheet.
      Misstatements that would be material under one approach could be viewed as
      immaterial under another approach, and not be corrected. SAB 108 now requires
      that companies view financial statement misstatements as material if they are
      material according to either the income statement or balance sheet approach.
      The
      Company has adopted SAB 108, with no impact on the Company’s financial position
      or results of operations.





In
      September 2006, the FASB ratified the consensus reached by the Emerging Issues
      Task Force (“EITF”) in Issue 06-5, *Accounting
      for Purchases of Life Insurance - Determining the Amount That Could Be Realized
      in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases
      of
      Life Insurance* .
      Technical Bulletin No. 85-4 states that an entity should report as an asset
      in
      the statement of financial position the amount that could be realized under
      the
      insurance contract. EITF 06-5 clarifies certain factors that should be
      considered in the determination of the amount that could be realized. EITF
      06-5
      is effective for fiscal years beginning after December 15, 2006, with earlier
      application permitted under certain circumstances. The Company is currently
      evaluating the impact this pronouncement will have on the Company’s consolidated
      financial statements.


13


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 (“BOLI”) 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 Company is continuing to evaluate the impact of this consensus,
      which will require the Company to recognize an additional liability and
      compensation expense related to its BOLI policies.





**FINANCIAL
      CONDITION**





Total
      assets increased by $9.9 million or 2.6% to $397.3 million at December 31,
      2006
      from $387.3 million at December 31, 2005. The increase was primarily due to
      a
      $10.8 million or 12.1% increase in securities available for sale from $89.0
      million at December 31, 2005 to $99.8 million at December 31, 2006. A net
      decrease of $11.9 million in cash and cash equivalents for 2006, was a funding
      source for security investment growth. The overall assets increase was funded
      by
      a $13.0 million increase in total deposits from $312.1 million at December
      31,
      2005 to $325.1 million at December 31, 2006. A borrowing with the Federal Home
      Loan Bank (FHLB) totaling $5.0 million was repaid during the year and not
      replaced.




In
      2006,
      total gross loans increased $6.5 million or 2.7% from $244.3 million to $250.8
      million. Within the loan portfolio, residential
      real estate increased by $5.9 million, home equity loans increased $1.5 million,
      and commercial loans increased by $1.4 million at December 31, 2006. Consumer
      installment loans decreased $1.9 million or 16.3%. The growth in commercial
      real
      estate loans reflects the Company’s strategy to provide loans for local real
      estate projects where there is strong loan to value ratio (taking into
      consideration possible speculation regarding casino gambling proposals). The
      Company is well aware of the economic slow down in the area. Real estate sales
      and prices have stabilized. The Company remains committed to maintaining loan
      credit quality and sacrificing growth in the loan portfolio. The overall loan
      portfolio is structured in accordance with management’s belief that loans
      secured by residential and commercial real estate generally result in lower
      loan
      loss levels compared to other types of loans, because of the value of the
      underlying collateral. In the event that the casino gambling proposals do not
      progress, collateral underlying certain real estate projects could lose
      value.




There
      was
      a $40,000 increase in other foreclosed real estate at December 31, 2006, up
      from
      none at December 31, 2005. Total non-performing loans decreased from $2.9
      million at December 31, 2005 to $1.9 million at December 31, 2006. Net loan
      charge-offs decreased from $210,000 in 2005 to $189,000 in 2006. At December
      31,
      2006, the allowance for loan losses equaled $3.5 million representing 1.40%
      of
      total gross loans outstanding and 187.0% of total non-performing
      loans.




Total
      deposits increased $13.0 million to $325.1 million at December 31, 2006 from
      $312.1 million at December 31, 2005. Savings and insured money market accounts
      increased to $100.4 million at December 31, 2006 from $86.1 million at December
      31, 2005, an increase of $14.3 million or 16.6%. Decreases in demand and Now
      and
      super Now accounts totaling $6.5 million was a result of many customers taking
      advantage of the Banks CD offerings, giving rise to a $5.2 million increase
      in
      time deposits.




Total
      stockholders’ equity was $41.3 million at December 31, 2006, a decrease of
      $1,244,000 from December 31, 2005. The decrease was due primarily the stock
      repurchase program of $2.6 million, cash dividends of $2.1 million, and a
      increase in accumulated other comprehensive loss of $1,474,000, partially offset
      by net income of $4.9 million.





**RESULTS
      OF OPERATIONS 2006 VERSUS 2005**





***Net
      Income***




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





***Interest
      Income and Interest Expense***




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




The
      largest source of income for the Company is net interest income, which
      represents interest earned on loans, securities and short-term investments,
      less
      interest paid on deposits and other interest bearing liabilities. Tax equivalent
      net interest income of $16.7 million for 2006 represented a decrease of 6.0%
      over 2005. Net interest margin decreased 63 basis points to 4.55% in 2006
      compared to 5.18% in 2005, due to overall increases in interest bearing
      liability yields.




14


Total
      interest income for 2006 was $24.9 million, compared to $23.2 million in 2005.
      The increase in 2006 is the result of a 12 basis point increase in the earning
      asset percentage yield combined with an increase in the average balance of
      interest earning assets from $342.8 million in 2005 to $367.5 million in 2006,
      an increase of 7.2%. Total average securities (securities available for sale
      and
      securities held to maturity) increased $8.7 million or 8.5% in 2006 to $111.3
      million. The yield on total securities increased 11 basis points to 5.5% in
      2006
      from 5.4% in 2005. The increase in total average securities during 2006
      reflected the need to invest excess funds not needed to fund new loans. In
      2006,
      average loans increased $7.9 million to $246.9 million from $239.0 million
      in
      2005. Concurrently the average loan yield increased from 7.35% in 2005 to 7.42%
      in 2006 due to a consistent increase in time and demand and home equity loans
      tied to prime rate which increased in volume by 2.3% or $1.1 million. Average
      residential and commercial real estate loans continued to make up a major
      portion of the loan portfolio at 71.9% of total loans in 2006. In 2007, any
      increases in funding will continue to be allocated first to meet loan demand,
      as
      necessary, and then to the securities portfolios.




Total
      interest expense in 2006 increased $2.8 million to $8.2 million from $5.4 in
      2005. The average balance of interest bearing liabilities increased from $258.8
      million in 2005 to $282.7 million in 2006, an increase of 9.3% as a result
      of
      $14.1 million increase in average brokered deposits. During 2006, the average
      cost of total interest bearing liabilities increased by 81 basis points from
      2.09% to 2.90%. Average interest bearing deposits increased $30.2 million to
      reach $260.7 million in 2006, an increase of 13.1%. Interest rates on interest
      bearing deposits increased by 98 basis points from an average rate paid of
      1.76%
      in 2005 to 2.74% in 2006. A major component of the increased interest expense
      rate was due to a 41 basis point increase in average brokered deposits. The
      brokered deposits were purchased in anticipation of further interest rate
      increases. The proceeds were to be used to fund anticipated loan demand which
      never materialized. The Company expects to significantly reduce its reliance
      on
      these deposits during 2007. Savings and IMM interest rates increased 106 basis
      points in response to rising interest rate environment. In 2006, average demand
      deposit balances decreased 2.6% over 2005.





***Provision
      for Loan Losses***




The
      provision for loan losses was $90,000 in 2006 as compared to $180,000 in 2005
      as
      a result of improved asset quality. Provisions for loan losses are recorded
      to
      maintain the allowance for loan losses at a level deemed adequate by management
      based on an evaluation of such factors as economic conditions in the Company’s
      market area, past loan loss experience, the financial condition of individual
      borrowers, and underlying collateral values based on independent appraisals.
      The
      provision for loan losses was reduced in 2006 due to the reduction in both
      non-performing loans and 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.




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




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





15


***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 2002 THROUGH
      2006**





**2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002**Balance
                at beginning of year
            
            $
            3,615,000
            
            $
            3,645,000
            
            $
            3,569,000
            
            $
            3,068,000
            
            $
            2,614,000Charge-offs:Commercial,
                financial and agriculture
            
            
            (208,000
            )
            
            (2,000
            )
            
            0
            
            
            (141,000
            )
            
            (404,000
            )Real
                estate - mortgage
            
            
            (66,000
            )
            
            0
            
            
            (3,000
            )
            
            (5,000
            )
            
            (84,000
            )Installment
                loans
            
            
            (156,000
            )
            
            (308,000
            )
            
            (284,000
            )
            
            (240,000
            )
            
            (108,000
            )Other
                loans
            
            
            (103,000
            )
            
            (129,000
            )
            
            (146,000
            )
            
            (102,000
            )
            
            (66,000
            )Total
                charge-offs
            
            
            (533,000
            )
            
            (439,000
            )
            
            (433,000
            )
            
            (488,000
            )
            
            (662,000
            )Recoveries:Commercial,
                financial and agriculture
            
            
            187,000
            
            
            59,000
            
            
            1,000
            
            
            235,000
            
            
            17,000Real
                estate - mortgage
            
            
            0
            
            
            8,000
            
            
            22,000
            
            
            7,000
            
            
            97,000Installment
                loans
            
            
            98,000
            
            
            83,000
            
            
            59,000
            
            
            104,000
            
            
            84,000Other
                loans
            
            
            59,000
            
            
            79,000
            
            
            67,000
            
            
            23,000
            
            
            18,000Total
                recoveries
            
            
            344,000
            
            
            229,000
            
            
            149,000
            
            
            369,000
            
            
            216,000Net
                charge-offs
            
            
            (189,000
            )
            
            (210,000
            )
            
            (284,000
            )
            
            (119,000
            )
            
            (446,000
            )Provision
                charged to operations
            
            
            90,000
            
            
            180,000
            
            
            360,000
            
            
            620,000
            
            
            900,000Balance
                at end of year
            
            $
            3,516,000
            
            $
            3,615,000
            
            $
            3,645,000
            
            $
            3,569,000
            
            $
            3,068,000Ratio
                of net charge-offs to average outstanding loans
            
            
            0.08
            %
            
            0.09
            %
            
            0.13
            %
            
            0.06
            %
            
            0.27
            %





The
      Company manages asset quality with a review process which includes ongoing
      financial analysis of credits and both internal and external loan review of
      existing outstanding loans and delinquencies. Management strives to identify
      potential non-performing loans 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
      allowance for loan losses was $3.5 million at December 31, 2006 and $3.6 million
      at 2005 and 2004. The allowance as a percentage of total loans was 1.40% at
      December 31, 2006, compared to 1.48% and 1.62% at December 31, 2005 and 2004,
      respectively. The allowance’s coverage of non-performing loans was 187.0% at
      December 31, 2006 compared to 123.7% and 170.6% at December 31, 2005 and 2004
      respectively. In February 2007 the Bank recovered $441,000 on a loan loss that
      was charged off over several years.





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





Commercial
      non-performing loans are evaluated individually for impairment in accordance
      with FAS 114. As of December 31, 2006 there were $1,528,000, and no loans
      as of December 31, 2005 which were considered to be impaired under SFAS
      No. 114. A $100,000 specific valuation allowance impaired for loans was
      recorded as of December 31, 2006. On the remaining loan portfolios, the Company
      applies reserve factors considering historical loan loss data and other
      subjective factors.





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





**2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****Percent**
            
            
            
            **Percent**
            
            
            
            **Percent**
            
            
            
            **Percent**
            
            
            
            **Percent****Amount**
            
            **of
                Loans**
            
            **Amount**
            
            **of
                Loans**
            
            **Amount**
            
            **of
                Loans**
            
            **Amount**
            
            **of
                Loans**
            
            **Amount**
            
            **of
                Loans****of**
            
            **in
                Each**
            
            **of**
            
            **in
                Each**
            
            **of**
            
            **in
                Each**
            
            **of**
            
            **in
                Each**
            
            **of**
            
            **in
                Each****Allowance**
            
            **Category**
            
            **Allowance**
            
            **Category**
            
            **Allowance**
            
            **Category**
            
            **Allowance**
            
            **Category**
            
            **Allowance**
            
            **Category****for
                Loan**
            
            **to
                Total**
            
            **for
                Loan**
            
            **to
                Total**
            
            **for
                Loan**
            
            **to
                Total**
            
            **for
                Loan**
            
            **to
                Total**
            
            **for
                Loan**
            
            **to
                Total****Losses**
            
            **Loans**
            
            **Losses**
            
            **Loans**
            
            **Losses**
            
            **Loans**
            
            **Losses**
            
            **Loans**
            
            **Losses**
            
            **Loans**(Dollars
                in thousands)Residential
                mortgages(1)
            
            $
            1,048
            
            
            50.2
            %
            $
            1,048
            
            
            48.5
            %
            $
            1,039
            
            
            48.4
            %
            $
            1,011
            
            
            52.4
            %
            $
            890
            
            
            52.2
            %Commercial
                mortgages
            
            
            285
            
            
            34.7
            %
            
            351
            
            
            34.9
            %
            
            351
            
            
            35.3
            %
            
            300
            
            
            30.2
            
            
            300
            
            
            27.3Commercial
                loans
            
            
            1,353
            
            
            11.2
            %
            
            1,343
            
            
            11.7
            %
            
            1,286
            
            
            9.4
            %
            
            1,255
            
            
            8.7
            
            
            1,010
            
            
            8.1Installment
                loans
            
            
            650
            
            
            3.9
            %
            
            648
            
            
            4.8
            %
            
            753
            
            
            6.3
            %
            
            828
            
            
            7.8
            
            
            644
            
            
            11.0Other
                loans
            
            
            180
            
            
            0.0
            %
            
            225
            
            
            0.1
            %
            
            216
            
            
            0.6
            %
            
            175
            
            
            0.9
            
            
            224
            
            
            1.4Total
            
            $
            3,516
            
            
            100.0
            %
            $
            3,615
            
            
            100.0
            %
            $
            3,645
            
            
            100.0
            %
            $
            3,569
            
            
            100.0
            %
            $
            3,068
            
            
            100.0
            %


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





16


***Nonaccrual
      and Past Due Loans***




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





**90
                Days or****More,
                Still****Nonaccrual**
            
            **Accruing**
            
            **Total**
            
            **Percentage****(1)**
            
            **Percentage****(2)**December
                31, 2006Loan
                CategoryResidential
                mortgages (3)
            
            $
            347,000
            
            $
            0
            
            $
            347,000
            
            
            0.3
            %
            
            18.5Commercial
                mortgages
            
            
            1,520,000
            
            
            0
            
            
            1,520,000
            
            
            1.7
            
            
            80.9Commercial
                loans
            
            
            0
            
            
            0
            
            
            0
            
            
            0.0
            
            
            0.0Installment
                loans
            
            
            0
            
            
            13,000
            
            
            13,000
            
            
            0.1
            
            
            0.6Total
            
            $
            1,867,000
            
            $
            13,000
            
            $
            1,880,000
            
            
            0.8
            %
            
            100.0
            %December
                31, 2005Loan
                CategoryResidential
                mortgages (3)
            
            $
            438,000
            
            $
            0
            
            $
            438,000
            
            
            0.4
            %
            
            15.0
            %Commercial
                mortgages
            
            
            2,484,000
            
            
            0
            
            
            2,484,000
            
            
            2.9
            
            
            85.0Commercial
                loans
            
            
            0
            
            
            0
            
            
            0
            
            
            0.0
            
            
            0.0Installment
                loans
            
            
            0
            
            
            0
            
            
            0
            
            
            0.0
            
            
            0.0Total
            
            $
            2,922,000
            
            $
            0
            
            $
            2,922,000
            
            
            1.2
            %
            
            100.0
            %December
                31, 2004Loan
                CategoryResidential
                mortgages (3)
            
            $
            491,000
            
            $
            166,000
            
            $
            657,000
            
            
            0.6
            %
            
            30.8
            %Commercial
                mortgages
            
            
            0
            
            
            0
            
            
            0
            
            
            0.0
            
            
            0.0Commercial
                loans
            
            
            233,000
            
            
            1,230,000
            
            
            1,463,000
            
            
            6.9
            
            
            68.5Installment
                loans
            
            
            0
            
            
            16,000
            
            
            16,000
            
            
            0.1
            
            
            0.7Total
            
            $
            724,000
            
            $
            1,412,000
            
            $
            2,136,000
            
            
            0.9
            %
            
            100.0
            %December
                31, 2003Loan
                CategoryResidential
                mortgages (3)
            
            $
            411,000
            
            $
            379,000
            
            $
            790,000
            
            
            0.8
            %
            
            25.3
            %Commercial
                mortgages
            
            
            514,000
            
            
            1,364,000
            
            
            1,878,000
            
            
            3.1
            
            
            60.1Commercial
                loans
            
            
            434,000
            
            
            7,000
            
            
            441,000
            
            
            2.6
            
            
            14.1Installment
                loans
            
            
            —
            
            
            14,000
            
            
            14,000
            
            
            0.1
            
            
            0.5Total
            
            $
            1,359,000
            
            $
            1,764,000
            
            $
            3,123,000
            
            
            1.6
            %
            
            100.0
            %December
                31, 2002Loan
                CategoryResidential
                mortgages (3)
            
            $
            1,766,000
            
            $
            57,000
            
            $
            1,823,000
            
            
            2.5
            %
            
            56.6
            %Commercial
                mortgages
            
            
            367,000
            
            
            —
            
            
            367,000
            
            
            0.8
            
            
            11.4Commercial
                loans
            
            
            888,000
            
            
            —
            
            
            888,000
            
            
            5.1
            
            
            27.6Installment
                loans
            
            
            141,000
            
            
            —
            
            
            141,000
            
            
            0.8
            
            
            4.4Total
            
            $
            3,162,000
            
            $
            57,000
            
            $
            3,219,000
            
            
            1.9
            %
            
            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 and installment loans represent
      0.3%, 1.7 %,
      and
      0.1% of their
      respective portfolio totals at December 31, 2006, compared to 0.4%, 2.9% and
      0.0% at December 31, 2005, 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 .




17


Nonaccrual
      loans decreased $1.0 million from $2.9 million at December 31, 2005 to $1.9
      million at December 31, 2006. A number of loans came off nonaccrual status
      the
      largest of which arose from the transfer of $391,000 to foreclosed real estate,
      of which all but $40,000 was subsequently collected. All nonperforming loans
      are
      well collateralized with interest being recognized as received.




From
      time
      to time, loans may be renegotiated in a troubled debt restructuring when the
      Company determines that it will ultimately receive greater economic value under
      the new terms than through foreclosure, liquidation, or bankruptcy. Candidates
      for renegotiation must meet specific guidelines. There were no restructured
      loans as of December 31, 2006, 2005, and 2004.





***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,**





**2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent**(Dollars
                in Thousands)**REAL
                ESTATE LOANS**Residential
            
            $
            95,520
            
            
            38.1
            %
            $
            89,599
            
            
            36.7
            %
            $
            82,482
            
            
            36.7
            %
            $
            77,284
            
            
            39.3
            %
            $
            70,645
            
            
            41.1
            %Commercial
            
            
            82,987
            
            
            33.1
            
            
            81,587
            
            
            33.4
            
            
            75,266
            
            
            33.6
            
            
            59,682
            
            
            30.3
            %
            
            44,594
            
            
            25.9Home
                equity
            
            
            24,195
            
            
            9.6
            
            
            22,697
            
            
            9.3
            
            
            21,127
            
            
            9.4
            
            
            18,337
            
            
            9.3
            %
            
            14,825
            
            
            8.6Farm
                land
            
            
            3,726
            
            
            1.5
            
            
            3,443
            
            
            1.4
            
            
            3,721
            
            
            1.7
            
            
            2,872
            
            
            1.5
            %
            
            1,828
            
            
            1.1Construction
            
            
            6,087
            
            
            2.4
            
            
            5,956
            
            
            2.4
            
            
            4,524
            
            
            2.0
            
            
            4,102
            
            
            2.1
            %
            
            3,414
            
            
            2.0$
            212,515
            
            
            84.7
            
            $
            203,282
            
            
            83.2
            
            $
            187,120
            
            
            83.4
            
            $
            162,277
            
            
            82.5
            %
            $
            135,306
            
            
            78.7**OTHER
                LOANS**Commercial
                loans
            
            $
            28,106
            
            
            11.3
            %
            $
            28,643
            
            
            11.7
            %
            $
            21,317
            
            
            9.5
            %
            $
            17,157
            
            
            8.7
            %
            $
            17,445
            
            
            10.1
            %Consumer
                installment loans
            
            
            9,773
            
            
            3.9
            
            
            11,673
            
            
            4.8
            
            
            14,116
            
            
            6.3
            
            
            15,350
            
            
            7.8
            %
            
            17,314
            
            
            10.1Other
                consumer loans
            
            
            118
            
            
            0.0
            
            
            128
            
            
            0.1
            
            
            1,345
            
            
            0.6
            
            
            1,488
            
            
            0.8
            %
            
            1,537
            
            
            0.9Agricultural
                loans
            
            
            248
            
            
            0.1
            
            
            535
            
            
            0.2
            
            
            338
            
            
            0.2
            
            
            403
            
            
            0.2
            %
            
            375
            
            
            0.238,245
            
            
            15.3
            
            
            40,979
            
            
            16.8
            
            
            37,116
            
            
            16.6
            
            
            34,398
            
            
            17.5
            %
            
            36,671
            
            
            21.3Total
                loans
            
            
            250,760
            
            
            100.0
            %
            
            244,261
            
            
            100.0
            %
            
            224,236
            
            
            100.0
            %
            
            196,675
            
            
            100.0
            %
            
            171,977
            
            
            100.0
            %Allowance
                for loan loss
            
            
            (3,516
            )
            
            
            
            
            (3,615
            )
            
            
            
            
            (3,645
            )
            
            
            
            
            (3,569
            )
            
            
            
            
            (3,068
            )Total
                loans, net
            
            $
            247,244
            
            
            
            
            $
            240,646
            
            
            
            
            $
            220,591
            
            
            
            
            $
            193,106
            
            
            
            
            $
            168,909





**MATURITIES
      AND SENSITIVITIES OF LOANS TO**


**CHANGES
      IN INTEREST RATES AT DECEMBER 31, 2006**





**One
                Year****One
                Year**
            
            **Through**
            
            **After****or
                Less**
            
            **Five
                Years**
            
            **Five
                Years**
            
            **Total**Commercial
                and agricultural
            
            $
            15,990
            
            $
            7,607
            
            $
            4,757
            
            $
            28,354Real
                estate construction
            
            
            3,655
            
            
            2,376
            
            
            56
            
            
            6,087Total
            
            $
            19,645
            
            $
            9,983
            
            $
            4,813
            
            $
            34,441Interest
                sensitivity of loans:Predetermined
                rate
            
            $
            1,063
            
            $
            9,983
            
            $
            4,813
            
            $
            15,859Variable
                rate
            
            
            18,582
            
            
            0
            
            
            0
            
            
            18,582Total
            
            $
            19,645
            
            $
            9,983
            
            $
            4,813
            
            $
            34,441





18


***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,****2006**
            
            **2005**
            
            **2004**Carrying
            
            Fair
            
            Carrying
            
            Fair
            
            Carrying
            
            FairAmount
            
            Value
            
            Amount
            
            Value
            
            Amount
            
            Value(Dollars
                in thousands)Government
                sponsored Enterprises
            
            $
            54,351
            
            $
            52,784
            
            $
            45,323
            
            $
            44,011
            
            $
            51,351
            
            $
            50,461Municipal
                securities
            
            
            48,597
            
            
            49,122
            
            
            48,394
            
            
            48,861
            
            
            48,596
            
            
            49,875Mortgage
                backed securitiesand
                collateralized mortgage obligations
            
            
            6,428
            
            
            6,393
            
            
            3,416
            
            
            3,323
            
            
            5,585
            
            
            5,590$
            109,376
            
            $
            108,299
            
            $
            97,133
            
            $
            96,195
            
            $
            105,532
            
            $
            105,926





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





**Under
                1 Year**
            
            **1-5
                Years**
            
            **5-10
                Years**
            
            **After
                10 Years****December
                31, 2006**
            
            **Balance**
            
            **Rate**
            
            **Balance**
            
            **Rate**
            
            **Balance**
            
            **Rate**
            
            **Balance**
            
            **Rate**
            
            **Total**Government
                sponsoredEnterprises
            
            $
            6,994,000
            
            
            5.42
            %
            $
            10,000,000
            
            
            4.61
            %
            $
            17,357,000
            
            
            4.78
            %
            $
            20,000,000
            
            
            5.24
            %
            $
            54,351,000Municipal
                securities -tax
                exempt(1)
            
            
            3,527,000
            
            
            4.62
            
            
            11,435,000
            
            
            4.10
            
            
            22,344,000
            
            
            3.99
            
            
            1,846,000
            
            
            4.14
            
            
            39,152,000Municipal
                securities -taxable
            
            
            5,980,000
            
            
            3.87
            
            
            2,123,000
            
            
            4.38
            
            
            674,000
            
            
            4.80
            
            
            668,000
            
            
            5.89
            
            
            9,445,000Mortgage
                backed securitiesand
                collateralizedmortgage
                obligations
            
            
            2,339,000
            
            
            4.89
            
            
            3,065,000
            
            
            5.60
            
            
            672,000
            
            
            6.01
            
            
            352,000
            
            
            6.01
            
            
            6,428,000$
            18,840,000
            
            
            4.71
            %
            $
            26,623,000
            
            
            4.49
            %
            $
            41,047,000
            
            
            4.25
            %
            $
            22,866,000
            
            
            5.18
            %
            $
            109,376,000




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


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





***Non-Interest
      Income and Expense***




Non-interest
      income primarily consists of service charges, commissions and fees for various
      banking services, and securities gains and losses. Total non-interest income
      of
      $3.6 million in 2006 was a decrease of 11.7 % or $477,000 over 2005. The
      decrease is primarily attributable to the $234,000 gain in 2005 on the one
      time
      sale of the credit card portfolio. Other non-interest income decreased $116,000
      due to reduced income from bank owned life insurance and foreclosed real
      estate.




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





***Income
      Tax Expense***




Income
      tax expense totaled $1.2 million in 2006 versus $2.0 million in 2005. The
      effective tax rate approximated 20.1% in 2006 and 26.3% in 2005. These
      relatively low effective tax rates reflect the favorable tax treatment received
      on tax-exempt interest income and net earnings from bank-owned life insurance.


19


**RESULTS
      OF OPERATIONS 2005 VERSUS 2004**





***Net
      Income***




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





***Interest
      Income and Interest Expense***




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




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




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




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





***Provision
      for Loan Losses***




The
      provision for loan losses was $180,000 in 2005 as compared to $360,000 in 2004
      as a result of improved asset quality. Provisions for loan losses are recorded
      to maintain the allowance for loan losses at a level deemed adequate by
      management based on an evaluation of such factors as economic conditions in
      the
      Company’s market area, past loan loss experience, the financial condition of
      individual borrowers, and underlying collateral values based on independent
      appraisals. The provision for loan losses was reduced in 2005 due to the
      reduction in both non-performing loans and 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.




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




Total
      non-performing loans increased from $2.1 million at December 31, 2004 to $2.9
      million at December 31, 2005. Net loan charge-offs decreased from $284,000
      in
      2004 to $210,000 in 2005 while gross charge-offs increased from $433,000 in
      2004
      to $439,000 in 2005.




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




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




***Income
      Tax Expense***




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





**OFF-BALANCE
      SHEET ARRANGEMENTS**





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





**LIQUIDITY**





Liquidity
      is the ability to provide sufficient cash flow to meet financial commitments
      such as additional loan demand and withdrawals of existing deposits. The
      Company’s primary sources of liquidity are its deposit base; FHLB borrowings;
      repayments and maturities on loans; short-term assets such as federal funds
      and
      short-term interest bearing deposits in banks; and maturities and sales of
      securities available for sale. These sources are available in amounts sufficient
      to provide liquidity to meet the Company’s ongoing funding requirements. The
      Bank’s membership in the FHLB of New York enhances liquidity in the form of
      overnight and 30 day lines of credit of approximately $40.4 million, which
      may
      be used to meet unforeseen liquidity demands. There were $500,000 of overnight
      borrowings at December 31, 2006. Four separate FHLB term advances totaling
      $20.0
      million at December 31, 2006 were being used to fund loan growth and to leverage
      our excess capital position.




In
      2006,
      cash generated from operating activities amounted to $3.5 million and cash
      generated from financing activities amounted to $3.7 million. These amounts
      were
      offset by a use of cash in investing activities of $19.2 million, resulting
      in a
      net decrease in cash and cash equivalents of $11.9 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, 2006**





DepositsDue
                three months or less
            
            $
            12,218,000Over
                three months through six months
            
            
            12,293,000Over
                six months through twelve months
            
            
            9,634,000Over
                twelve months
            
            
            11,909,000Total
            
            $
            46,054,000





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


21


**CAPITAL
      ADEQUACY**





One
      of
      management’s primary objectives is to maintain a strong capital position to
      merit the confidence of depositors, the investing public, bank regulators and
      stockholders. A strong capital position should help the Company withstand
      unforeseen adverse
      developments and take advantage of profitable investment opportunities when
      they
      arise. Stockholders’ equity decreased $1.2 million or 2.9% in 2006 following an
      increase of 7.2% in 2005. The adoption of FAS 158 for pension and other
      retirement plans had contributed $1.4 million to that decrease.




The
      Company retained $2.8 million from 2006 earnings, while the 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 nor SFAS 158 other comprehensive items are not considered
      in
      the computation of regulatory capital ratios.




Under
      the
      Federal Reserve Bank’s risk-based capital rules at December 31, 2006, the
      Company’s Tier I risk-based capital was 16.7% and total risk-based capital was
      18.0% of risk-weighted assets. These risk-based capital ratios are well above
      the minimum regulatory requirements of 4.0% for Tier I capital and 8.0% for
      total capital. The Company’s leverage ratio (Tier I capital to average assets)
      of 11.0% is well above the 4.0% minimum regulatory requirement.




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





**As
                of December 31,**
            
            **2006**
            
            **2005**TIER
                I CAPITALStockholders’
                equity, excluding the after-tax net
            
            $
            44,108,000
            
            $
            42,984,000unrealized
                gain on securities available for saleTIER
                II CAPITALAllowance
                for loan losses (1)
            
            
            3,298,000
            
            
            3,156,000Total
                risk-based capital
            
            $
            47,406,000
            
            $
            46,140,000Risk-weighted
                assets (2)
            
            $
            263,611,000
            
            $
            253,911,000Average
                assets
            
            $
            400,534,000
            
            $
            374,413,000RATIOSTier
                I risk-based capital (minimum 4.0%)
            
            
            16.7
            %
            
            16.9
            %Total
                risk-based capital (minimum 8.0%)
            
            
            18.0
            %
            
            18.2
            %Leverage
                (minimum 4.0%)
            
            
            11.0
            %
            
            11.5
            %





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


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





**CONTRACTUAL
      OBLIGATIONS**





The
      Company is contractually obligated to make the following payments on long-term
      debt and leases as of December 31, 2006:








**Less
                Than**
            
            **1
                to 3**
            
            **3
                to 5**
            
            **More
                Than****1
                Year**
            
            **Years**
            
            **Years**
            
            **5
                Years**
            
            **Total**(Dollars
                in thousands)Federal
                Home LoanBank
                borrowings
            
            $
            5,000
            
            $
            15,000
            
            $
            0
            
            $
            0
            
            $
            20,000Operating
                leases
            
            
            57
            
            
            104
            
            
            4
            
            
            0
            
            
            165Total
            
            $
            5,057
            
            $
            15,104
            
            $
            4
            
            $
            0
            
            $
            20,165





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


22


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


**INTEREST
      RATES & INTEREST DIFFERENTIAL**





The
      following schedule presents the condensed average consolidated balance sheets
      for 2006, 2005 and 2004. 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 2006**





**Average**
            
            **Interest**
            
            **Average****Balance**
            
            **Earned/Paid**
            
            **Yield/Rate****ASSETS**Securities
                available for sale and held to maturity:(1)Taxable
                securities
            
            $
            61,988,000
            
            $
            3,127,000
            
            
            5.04
            %Tax
                exempt securities
            
            
            49,346,000
            
            
            3,047,000
            
            
            6.17
            %Total
                securities
            
            
            111,334,000
            
            
            6,174,000
            
            
            5.55
            %Short-term
                investments
            
            
            9,226,000
            
            
            419,000
            
            
            4.54
            %LoansReal
                estate mortgages
            
            
            177,571,000
            
            
            12,467,000
            
            
            7.02
            %Home
                equity loans
            
            
            23,615,000
            
            
            1,573,000
            
            
            6.66
            %Time
                and demand loans
            
            
            27,181,000
            
            
            2,370,000
            
            
            8.72
            %Installment
                and other loans
            
            
            18,523,000
            
            
            1,914,000
            
            
            10.33
            %Total
                loans(2)
            
            
            246,890,000
            
            
            18,324,000
            
            
            7.42
            %Total
                interest earning assets
            
            
            367,450,000
            
            
            24,917,000
            
            
            6.78
            %Other
                assets
            
            
            33,085,000Total
                assets
            
            $
            400,535,000**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**NOW
                and Super NOW deposits
            
            $
            34,515,000
            
            
            172,000
            
            
            0.50
            %Savings
                and insured money market deposits
            
            
            99,364,000
            
            
            2,125,000
            
            
            2.14
            %Time
                deposits
            
            
            126,777,000
            
            
            4,837,000
            
            
            3.82
            %Total
                interest bearing deposits
            
            
            260,656,000
            
            
            7,134,000
            
            
            2.74
            %Federal
                funds purchased and other short-term debt
            
            
            503,000
            
            
            23,000
            
            
            4.57
            %Long-term
                debt
            
            
            21,548,000
            
            
            1,054,000
            
            
            4.89
            %Total
                interest bearing liabilities
            
            
            282,707,000
            
            
            8,211,000
            
            
            2.90
            %Demand
                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(3)
            
            
            
            
            
            
            
            
            4.55
            %





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


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


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




23


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


**INTEREST
      RATES & INTEREST DIFFERENTIAL**





**CONSOLIDATED
      AVERAGE BALANCE SHEET 2005**





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





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


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


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


24


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


**INTEREST
      RATES & INTEREST DIFFERENTIAL**





**CONSOLIDATED
      AVERAGE BALANCE SHEET 2004**





**Average**
            
            **Interest**
            
            **Average****Balance**
            
            **Earned/Paid**
            
            **Yield/Rate****ASSETS**Securities
                available for sale and held to maturity:(1)Taxable
                securities
            
            $
            66,265,000
            
            $
            3,366,000
            
            
            5.08
            %Tax
                exempt securities
            
            
            49,467,000
            
            
            3,043,000
            
            
            6.15
            %Total
                securities
            
            
            115,732,000
            
            
            6,409,000
            
            
            5.54
            %Short-term
                investments
            
            
            2,079,000
            
            
            25,000
            
            
            1.20
            %LoansReal
                estate mortgages
            
            
            153,147,000
            
            
            10,920,000
            
            
            7.13
            %Home
                equity loans
            
            
            19,689,000
            
            
            1,207,000
            
            
            6.13
            %Time
                and demand loans
            
            
            18,855,000
            
            
            1,255,000
            
            
            6.66
            %Installment
                and other loans
            
            
            20,155,000
            
            
            2,039,000
            
            
            10.12
            %Total
                loans(2)
            
            
            211,846,000
            
            
            15,421,000
            
            
            7.28
            %Total
                interest earning assets
            
            
            329,657,000
            
            
            21,855,000
            
            
            6.63
            %Other
                assets
            
            
            32,126,000Total
                assets
            
            $
            361,783,000**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**NOW
                and Super NOW deposits
            
            $
            38,887,000
            
            
            102,000
            
            
            0.26
            %Savings
                and insured money market deposits
            
            
            85,134,000
            
            
            550,000
            
            
            0.65
            %Time
                deposits
            
            
            103,625,000
            
            
            2,237,000
            
            
            2.16
            %Total
                interest bearing deposits
            
            
            227,646,000
            
            
            2,889,000
            
            
            1.27
            %Federal
                funds purchased and other short-term debt
            
            
            1,411,000
            
            
            23,000
            
            
            1.63
            %Long-term
                debt
            
            
            24,836,000
            
            
            1,139,000
            
            
            4.59
            %Total
                interest bearing liabilities
            
            
            253,893,000
            
            
            4,051,000
            
            
            1.60
            %Demand
                deposits
            
            
            63,780,000Other
                liabilities
            
            
            6,961,000Total
                liabilities
            
            
            324,634,000Stockholders’
                equity
            
            
            37,149,000Total
                liabilities and stockholders’ equity
            
            $
            361,783,000Net
                interest income - tax effected
            
            
            
            
            $
            17,804,000Less:
                Tax gross up on exempt securities
            
            
            
            
            
            (1,035,000
            )Net
                interest income per statement of income
            
            
            
            
            $
            16,769,000Net
                interest spread
            
            
            
            
            
            
            
            
            5.03
            %Net
                interest margin(3)
            
            
            
            
            
            
            
            
            5.40
            %





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


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


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




25


The
      following schedule sets forth, for each major category of interest earning
      assets and interest bearing liabilities, the dollar amount of interest income
      (calculated on a tax equivalent basis) and interest expense, and changes therein
      for 2006 as compared to 2005, and 2005 as compared to 2004.




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**





**2006
                Compared to 2005**
            
            **2005
                Compared to 2004****Increase
                (Decrease)**
            
            **Increase
                (Decrease)****Due
                to Change In**
            
            **Due
                to Change In****Volume**
            
            **Rate**
            
            **Total**
            
            **Volume**
            
            **Rate**
            
            **Total****INTEREST
                INCOME**Investment
                securities andsecurities
                available for sale
            
            $
            630,000
            
            $
            (39,000
            )
            $
            591,000
            
            $
            (726,000
            )
            $
            (112,000
            )
            $
            (838,000
            )Short-term
                investments
            
            
            262,000
            
            
            140,000
            
            
            401,000
            
            
            (10,000
            )
            
            15,000
            
            
            5,000Loans
            
            
            774,000
            
            
            (21,000
            )
            
            754,000
            
            
            1,976,000
            
            
            173,000
            
            
            2,149,000Total
                interest income
            
            
            1,666,000
            
            
            80,000
            
            
            1,746,000
            
            
            1,240,000
            
            
            76,000
            
            
            1,316,000**INTEREST
                EXPENSE**NOW
                and Super NOW deposits
            
            
            (10,000
            )
            
            64,000
            
            
            54,000
            
            
            (6,000
            )
            
            22,000
            
            
            16,000Savings
                and insured money market deposits
            
            
            162,000
            
            
            1,016,000
            
            
            1,178,000
            
            
            19,000
            
            
            378,000
            
            
            397,000Time
                deposits
            
            
            802,000
            
            
            1,040,000
            
            
            1,842,000
            
            
            42,000
            
            
            716,000
            
            
            758,000Federal
                funds purchased and othershort-term
                debt
            
            
            (135,000
            )
            
            39,000
            
            
            (96,000
            )
            
            33,000
            
            
            63,000
            
            
            96,000Long-term
                debt
            
            
            (220,000
            )
            
            51,000
            
            
            (169,000
            )
            
            4,000
            
            
            80,000
            
            
            84,000Total
                interest expense
            
            
            599,000
            
            
            2,210,000
            
            
            2,809,000
            
            
            92,000
            
            
            1,259,000
            
            
            1,351,000Net
                interest income
            
            $
            1,067,000
            
            $
            (2,130,000
            )
            $
            (1,063,000
            )
            $
            1,148,000
            
            $
            (1,183,000
            )
            $
            (35,000
            )





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








**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





**INTEREST
      RATE RISK**





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





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





26


**INTEREST
      RATE SENSITIVITY TABLE**


(Dollars
      in thousands)





ProjectedChange
                in NetInterestProjected
            
            Projected
            
            Income
                as aProjected
            
            Dollar
            
            Percentage
            
            Percent
                ofAnnualized
            
            Change
                in
            
            Change
                in
            
            TotalInterest
                Rate
            
            
            
            Net
                Interest
            
            Net
                Interest
            
            Net
                Interest
            
            Stockholders’Shock(1)
            
            Prime
                Rate
            
            Income
            
            Income
            
            Income
            
            Equity3.00%
            
            
            11.25
            %
            $
            14,892
            
            $
            (82
            )
            
            -3.2
            %
            
            -1.2
            %2.00%
            
            
            10.25
            %
            $
            15,102
            
            $
            (14
            )
            
            -1.9
            %
            
            -0.7
            %1.00%
            
            
            9.25
            %
            $
            15,291
            
            $
            32
            
            
            -0.6
            %
            
            -0.3
            %No
                change
            
            
            8.25
            %
            $
            15,391
            
            
            –
            
            
            –
            
            
            –-1.00%
            
            
            7.25
            %
            $
            15,061
            
            $
            (309
            )
            
            -2.1
            %
            
            -0.8
            %-2.00%
            
            
            6.25
            %
            $
            13,799
            
            $
            (1,388
            )
            
            -10.3
            %
            
            -4.0
            %-3.00%
            
            
            5.25
            %
            $
            12,264
            
            $
            (2,801
            )
            
            -20.3
            %
            
            -7.8
            %





*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 $289,000 or -1.9% of total
      stockholders’ equity in a +2.00% instantaneous interest rate shock and decline
      by $1,592 million or -10.3% of stockholders’ equity in a -2.00% instantaneous
      interest rate shock. This is within our Asset and Liability Policy guideline
      which limits the maximum projected decrease in net interest income in a +2.00%
      or -2.00% instantaneous interest rate shock to +/-12% of the Company’s total net
      interest income.




Our
      strategy for managing interest rate risk is impacted by general market
      conditions and customer demand. Generally we try to limit the volume and term
      of
      fixed-rate assets and fixed-rate liabilities, so that we can adjust it and
      pricing of assets and liabilities to mitigate net interest income volatility.
      The Bank purchases investments for the securities portfolio and borrowings
      from
      the FHLB of NY to offset interest rate risk taken in the loan portfolio. The
      Bank also offers adjustable rate loan and deposit products that change as
      interest rates change. Approximately 12% of the Bank’s assets at December 31,
      2006 were invested in adjustable rate loans.





27


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





Management’s
      Report on the Financial Statements




Report
      of
      Independent Registered Public Accounting Firm




Report
      of
      Independent Registered Public Accounting Firm




Report
      of
      Independent Registered Public Accounting Firm




Consolidated
      Balance Sheets as of December 31, 2006 and December 31, 2005




Consolidated
      Statements of Income for the years ended December 31, 2006, December 31, 2005
      and December 31, 2004




Consolidated
      Statements of Changes in Stockholders’ Equity as of December 31, 2006, December
      31, 2005, and December 31, 2004




Consolidated
      Statements of Cash flows for the years ended as of December 31, 2006, December
      31, 2005 and December 31, 2004




Notes
      to
      Consolidated Financial Statement


28


**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 principals in the United States of America. These internal controls
      include the establishment and communication of policies and procedures, the
      selection and training of qualified personnel and an internal auditing program
      that evaluates the adequacy and effectiveness of such internal controls,
      policies and procedures. Management recognizes that even a highly effective
      internal control system has inherent risks, including the possibility of human
      error and the circumvention or overriding of controls, and that the
      effectiveness of an internal control system can change with circumstances.
      However management believes that the internal control system provides reasonable
      assurance that errors or irregularities that could be material to the
      consolidated financial statements are prevented or would be detected on a timely
      basis and corrected through the normal course of business.




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: and appropriate
      control environment; an adequate risk assessment process; sufficient control
      activities; satisfactory communication of pertinent information; and proper
      monitoring controls.




Management
      performed an assessment o 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, 2006. Furthermore, during the conduct
      of management’s assessment, no material weaknesses were identified in the
      financial reporting control system.





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





The
      independent accountants were engaged to perform an independent audit of the
      consolidated financial statements. They have conducted their audit in accordance
      with the standards of the Public Company Accounting Oversight Board (United
      States) as stated in their reports which appear on pages F-2 and
      F-3.








/s/
      Raymond Walter


Raymond
      Walter


President
      and Chief Executive Officer








/s/
      Charles E. Burnett


Charles
      E. Burnett


Treasurer
      and Chief Financial Officer


F-1




**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
        the
        Board of Directors and Stockholders
 Jeffersonville
        Bancorp
  We
        have
        audited management's assessment, included in the accompanying Management's
        Report on Internal Control, that Jeffersonville Bancorp maintained effective
        internal control over financial reporting as of December 31, 2006, based
        on
        criteria established in *Internal
        Control Integrated Framework* issued
        by
        the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
        Jeffersonville Bancorp's management is responsible for maintaining effective
        internal control over financial reporting and for its assessment of the
        effectiveness of internal control over financial reporting. Our responsibility
        is to express an opinion on management's assessment and an opinion on the
        effectiveness of the Company's internal control over financial reporting
        based
        on our audit.
  We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether effective
        internal control over financial reporting was maintained in all material
        respects. Our audit included obtaining an understanding of internal control
        over
        financial reporting, evaluating management's assessment, testing and evaluating
        the design and operating effectiveness of internal control, and performing
        such
        other procedures as we considered necessary in the circumstances. We believe
        that our audit provides-a reasonable basis for our opinion.
  A
        company's internal control over financial reporting is a process designed
        to
        provide reasonable assurance regarding the reliability of financial reporting
        and the preparation of financial statements for external purposes in accordance
        with generally accepted accounting principles. A company's internal control
        over
        financial reporting includes those policies and procedures that (1) pertain
        to
        the maintenance of records that, in reasonable detail, accurately and fairly
        reflect the transactions and dispositions of the assets of the company; (2)
        provide reasonable assurance that transactions are recorded as necessary
        to
        permit preparation of financial statements in accordance with generally accepted
        accounting principles, and that receipts and expenditures of the company
        are
        being made only in accordance with authorizations of management and directors
        of
        the company; and (3) provide reasonable assurance regarding prevention or
        timely
        detection of unauthorized acquisition, use, or disposition of the company's
        assets that could have a material effect on the financial
        statements.
  Because
        of its inherent limitations, internal control over financial reporting may
        not
        prevent or detect misstatements. Also, projections of any evaluation of
        effectiveness to future periods are subject to the risk that controls may
        become
        inadequate because of changes in conditions, or that the degree of compliance
        with the policies or procedures may deteriorate.
  In
        our
        opinion, management's assessment that Jeffersonville Bancorp maintained
        effective internal control over financial reporting as of December 31, 2006,
        is
        fairly stated, in all material respects, based on criteria established in *Internal
        Control-Integrated Framework* issued
        by
        the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
        Also in our opinion, Jeffersonville Bancorp maintained, in all material
        respects, effective internal control over financial reporting as of December
        31,
        2006, based on criteria established in *Internal
        Control Integrated Framework* issued
        by
        the Committee of Sponsoring Organizations of the Treadway Commission
        (COSO).
  We
        have
        also audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the consolidated financial statements of
        Jeffersonville Bancorp as of and for the year ended December 31, 2006, and
        our
        report dated March 5, 2007 expressed an unqualified opinion on those financial
        statements.
  
  /s/
        Beard
        Miller Company LLP
 Beard
        Miller Company LLP
 Harrisburg,
        Pennsylvania
 March
        5,
        2007




F-2








**Report
      of Independent Registered Public Accounting Firm**




The
      Board
      of Directors and Stockholders


Jeffersonville
      Bancorp




We
      have
      audited the accompanying consolidated balance sheet of Jeffersonville Bancorp
      and subsidiary (the Company) as of December 31, 2006, and the related
      consolidated statements of income, changes in stockholders' equity, and cash
      flows for the year then ended. These consolidated financial statements are
      the
      responsibility of the Company's management. Our responsibility is to express
      an
      opinion on these consolidated financial statements based on our audit. The
      financial statements for the years ended December 31, 2005 and 2004 were audited
      by other auditors whose report, dated March 15, 2006, expressed an unqualified
      opinion on those statements.




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




In
      our
      opinion, the 2006 consolidated financial statements referred to above present
      fairly, in all material respects, the financial position of Jeffersonville
      Bancorp and subsidiary as of December 31, 2006, and the results of their
      operations and their cash flows for the year then ended in conformity with
      accounting principles generally accepted in the United States of
      America.




As
      discussed in Note 1 to the consolidated financial statements, the Company
      changed its method of accounting for its defined benefit pension and other
      postretirement benefit plans in 2006.




We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of the Company's internal
      control over financial reporting as of December 31, 2006, based on criteria
      established in *Internal
      Control* *Integrated* ** *Framework* issued
      by
      the Committee of Sponsoring Organizations of the Treadway Commission
      (COSO), and our
      report dated March 5, 2007 expressed an unqualified opinion on management's
      assessment of internal control over financial reporting and an unqualified
      opinion on the effectiveness of internal control over financial
      reporting.






/s/
      Beard
      Miller Company LLP


Beard
      Miller Company LLP


Harrisburg,
      Pennsylvania


March
      5,
      2007




F-3




**Report
      of Independent Registered Public Accounting Firm**




The
      Board
      of Directors and Stockholders


Jeffersonville
      Bancorp




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




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




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




/s/
      KPMG
      LLP


KPMG
      LLP


Albany,
      New York


March
      15,
      2006


F-4


**Jeffersonville
      Bancorp and Subsidiary**


**Consolidated
      Balance Sheets**


(Dollars
      in thousands, except per share data)





**December
                31,**
            
            **December
                31,****2006**
            
            **2005****ASSETS**Cash
                and cash equivalents
            
            $
            12,270
            
            $
            24,192Securities
                available for sale, at fair value
            
            
            99,788
            
            
            88,984Securities
                held to maturity, estimated fair value of $9,570at
                December 31, 2006 and $8,233 at December 31, 2005
            
            
            9,445
            
            
            8,195Loans,
                net of allowance for loan losses of $3,516 atDecember
                31, 2006 and $3,615 at December 31, 2005
            
            
            247,244
            
            
            240,646Accrued
                interest receivable
            
            
            2,441
            
            
            2,040Premises
                and equipment, net
            
            
            3,040
            
            
            3,027Federal
                Home Loan Bank stock
            
            
            2,296
            
            
            2,496Bank-owned
                life insurance
            
            
            13,651
            
            
            13,217Other
                assets
            
            
            7,116
            
            
            4,546Total
                Assets
            
            $
            397,291
            
            $
            387,343**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**LiabilitiesDeposits:Demand
                deposits
            
            $
            64,974
            
            $
            65,266NOW
                and super NOW accounts
            
            
            31,276
            
            
            37,501Savings
                and insured money market deposits
            
            
            100,391
            
            
            86,094Time
                deposits
            
            
            128,432
            
            
            123,235Total
                Deposits
            
            
            325,073
            
            
            312,096Federal
                Home Loan Bank borrowings
            
            
            20,000
            
            
            25,000Short-term
                debt
            
            
            903
            
            
            427Other
                liabilities
            
            
            10,040
            
            
            7,301Total
                Liabilities
            
            
            356,016
            
            
            344,824Commitments
                and contingent liabilitiesStockholders’
                equity:Series
                A preferred stock, no par value;2,000,000
                shares authorized, none issued
            
            
            —
            
            
            —Common
                stock, $0.50 par value; 11,250,000 sharesauthorized,
                4,767,786 shares issued
            
            
            2,384
            
            
            2,384Paid-in
                capital
            
            
            6,483
            
            
            6,483Treasury
                stock, at cost; 462,438 shares at December 31, 2006and
                333,465 at December 31, 2005
            
            
            (3,722
            )
            
            (1,108
            )Retained
                earnings
            
            
            38,963
            
            
            36,118Accumulated
                other comprehensive loss
            
            
            (2,833
            )
            
            (1,358
            )Total
                Stockholders’ Equity
            
            
            41,275
            
            
            42,519Total
                Liabilities and Stockholders’ Equity
            
            $
            397,291
            
            $
            387,343





See
      accompanying notes to consolidated financial statements.





F-5





**Jeffersonville
      Bancorp and Subsidiary**


**Consolidated
      Statements of Income**


(In
      thousands, except for per share data)





**For
                the year ended December 31,****2006**
            
            **2005**
            
            **2004****INTEREST
                AND DIVIDEND INCOME**Loan
                interest and fees
            
            $
            18,324
            
            $
            17,570
            
            $
            15,421Securities:Taxable
            
            
            3,127
            
            
            2,627
            
            
            3,365Non-taxable
            
            
            2,011
            
            
            1,943
            
            
            2,009Federal
                funds sold
            
            
            419
            
            
            30
            
            
            25Total
                Interest and Dividend Income
            
            
            23,881
            
            
            22,170
            
            
            20,820**INTEREST
                EXPENSE**Deposits
            
            
            7,134
            
            
            4,060
            
            
            2,889Federal
                Home Loan Bank borrowings
            
            
            1,054
            
            
            1,223
            
            
            1,139Other
            
            
            23
            
            
            119
            
            
            23Total
                Interest Expense
            
            
            8,211
            
            
            5,402
            
            
            4,051Net
                interest income
            
            
            15,670
            
            
            16,768
            
            
            16,769Provision
                for loan losses
            
            
            90
            
            
            180
            
            
            360Net
                Interest Income After Provision for Loan Losses
            
            
            15,580
            
            
            16,588
            
            
            16,409**NON-INTEREST
                INCOME**Service
                charges
            
            
            1,892
            
            
            1,894
            
            
            2,198Earnings
                on bank-owned life insurance
            
            
            424
            
            
            470
            
            
            479Net
                security gains (losses)
            
            
            (4
            )
            
            6
            
            
            14Foreclosed
                real estate income, net
            
            
            72
            
            
            141
            
            
            5Gain
                on sale of credit card portfolio
            
            
            —
            
            
            234
            
            
            —Other
                non-interest income
            
            
            1,202
            
            
            1,318
            
            
            1,181Total
                Non-Interest Income
            
            
            3,586
            
            
            4,063
            
            
            3,877**NON-INTEREST
                EXPENSES**Salaries
                and employee benefits
            
            
            7,727
            
            
            7,636
            
            
            6,904Occupancy
                and equipment expenses
            
            
            2,028
            
            
            1,981
            
            
            1,803Other
                non-interest expenses
            
            
            3,228
            
            
            3,267
            
            
            3,191Total
                Non-Interest Expenses
            
            
            12,983
            
            
            12,884
            
            
            11,898Income
                before income tax expense
            
            
            6,183
            
            
            7,767
            
            
            8,388Income
                tax expense
            
            
            1,240
            
            
            2,042
            
            
            2,217Net
                Income
            
            $
            4,943
            
            $
            5,725
            
            $
            6,171Basic
                earnings per common share
            
            $
            1.13
            
            $
            1.29
            
            $
            1.39Average
                common shares outstanding
            
            
            4,376
            
            
            4,434
            
            
            4,434Cash
                dividend declared per share
            
            $
            0.48
            
            $
            0.44
            
            $
            0.40





See
      accompanying notes to consolidated financial statements.





F-6





**Jeffersonville
      Bancorp and Subsidiary**


**Consolidated
      Statements of Changes in Stockholders’ Equity**


**Years
      ended December 31, 2006, 2005 and 2004**


(In
      thousands, except per share amounts)





**Accumulated**
            
            
            
            **Common****other**
            
            
            
            **shares****comprehensive**
            
            **Total**
            
            **issued****Common**
            
            **Paid-in**
            
            **Treasury**
            
            **Retained**
            
            **income**
            
            **stockholders’**
            
            **and****stock**
            
            **capital**
            
            **stock**
            
            **earnings**
            
            **(loss)**
            
            **equity**
            
            **outstanding**Balance
                at December 31, 2003
            
            $
            2,384
            
            $
            6,483
            
            $
            (1,108
            )
            $
            27,947
            
            $
            80
            
            $
            35,786
            
            
            4,434Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            6,171
            
            
            —
            
            
            6,171Other
                comprehensive loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (535
            )
            
            (535
            )Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,636Cash
                dividends ($0.40 per share)
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,776
            )
            
            —
            
            
            (1,776
            )Balance
                at December 31, 2004
            
            
            2,384
            
            
            6,483
            
            
            (1,108
            )
            
            32,342
            
            
            (455
            )
            
            39,646
            
            
            4,434Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            5,725
            
            
            —
            
            
            5,725Other
                comprehensive loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (903
            )
            
            (903
            )Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,822Cash
                dividends ($0.44 per share)
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,949
            )
            
            —
            
            
            (1,949
            )Balance
                at December 31, 2005
            
            
            2,384
            
            
            6,483
            
            
            (1,108
            )
            
            36,118
            
            
            (1,358
            )
            
            42,519
            
            
            4,434Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            4,943
            
            
            —
            
            
            4,943Other
                comprehensive loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (114
            )
            
            (114
            )Comprehensive
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            4,829Adjustment
                to initially apply SFASNo.
                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
            
            
            4,305





See
      accompanying notes to consolidated financial statements.





F-7


**Jeffersonville
      Bancorp and Subsidiary**


**Consolidated
      Statements of Cash Flows**


(Dollars
      in thousands)





**For
                the year ended December 31,****2006**
            
            **2005**
            
            **2004****OPERATING
                ACTIVITIES:**Net
                income
            
            $
            4,943
            
            $
            5,725
            
            $
            6,171Adjustments
                to reconcile net income to netcash
                provided by operating activities:Provision
                for loan losses
            
            
            90
            
            
            180
            
            
            360Net
                gain on sales of foreclosed real estate
            
            
            (43
            )
            
            (125
            )
            
            (6
            )Depreciation
                and amortization
            
            
            635
            
            
            632
            
            
            640Net
                (gain) loss on disposal of premises and equipment
            
            
            (1
            )
            
            3
            
            
            (9
            )Net
                earnings on bank-owned life insurance
            
            
            (424
            )
            
            (470
            )
            
            (479
            )Deferred
                income tax benefit
            
            
            (357
            )
            
            (354
            )
            
            (223
            )Net
                security loss (gains)
            
            
            4
            
            
            (6
            )
            
            (14
            )Decrease
                (increase) in accrued interest receivable
            
            
            (401
            )
            
            45
            
            
            216Decrease
                (increase) in other assets
            
            
            (1,368
            )
            
            511
            
            
            209Increase
                in other liabilities
            
            
            470
            
            
            1,442
            
            
            490Net
                Cash Provided by Operating Activities
            
            
            3,548
            
            
            7,583
            
            
            7,355**INVESTING
                ACTIVITIES:**Proceeds
                from maturities and calls:Securities
                available for sale
            
            
            5,956
            
            
            10,626
            
            
            20,527Securities
                held to maturity
            
            
            4,096
            
            
            4,431
            
            
            3,182Proceeds
                from sales of securities available for sale
            
            
            1,713
            
            
            4,782
            
            
            —Purchases:Securities
                available for sale
            
            
            (18,666
            )
            
            (4,933
            )
            
            (6,479
            )Securities
                held to maturity
            
            
            (5,346
            )
            
            (6,669
            )
            
            (3,223
            )Proceeds
                from sale of credit card portfolio
            
            
            —
            
            
            1,468
            
            
            —Disbursement
                for loan originations, net of principal collections
            
            
            (7,079
            )
            
            (21,703
            )
            
            (27,845
            )Purchase
                of Federal Home Loan Bank stock
            
            
            —
            
            
            (5,147
            )
            
            (1,950
            )Sale
                of Federal Home Loan Bank stock
            
            
            200
            
            
            4,826
            
            
            1,375Net
                purchases of premises and equipment
            
            
            (647
            )
            
            (793
            )
            
            (437
            )Proceeds
                from sales of foreclosed real estate
            
            
            562
            
            
            125
            
            
            49Net
                Cash Used in Investing Activities
            
            
            (19,211
            )
            
            (12,987
            )
            
            (14,801
            )**FINANCING
                ACTIVITIES:**Net
                increase in deposits
            
            
            12,977
            
            
            19,002
            
            
            12,867Proceeds
                from Federal Home Loan Bank borrowings
            
            
            10,000
            
            
            10,000
            
            
            —Repayments
                of Federal Home Loan Bank borrowings
            
            
            (15,000
            )
            
            (3,500
            )
            
            (8,500
            )Net
                increase (decrease) in short-term borrowings
            
            
            476
            
            
            (7,997
            )
            
            2,903Purchases
                of treasury stock
            
            
            (2,614
            )
            
            —
            
            
            —Cash
                dividends paid
            
            
            (2,098
            )
            
            (1,949
            )
            
            (1,776
            )Net
                Cash Provided by Financing Activities
            
            
            3,741
            
            
            15,556
            
            
            5,494Net
                (Decrease) Increase in Cash and Cash Equivalents
            
            
            (11,922
            )
            
            10,152
            
            
            (1,952
            )Cash
                and Cash Equivalents at Beginning of Year
            
            
            24,192
            
            
            14,040
            
            
            15,992Cash
                and Cash Equivalents at End of Year
            
            $
            12,270
            
            $
            24,192
            
            $
            14,040**SUPPLEMENTAL
                INFORMATION:**Cash
                paid for:Interest
            
            $
            8,157
            
            $
            5,173
            
            $
            4,043Income
                taxes
            
            
            1,614
            
            
            1,668
            
            
            2,070Transfer
                of loans to foreclosed real estate
            
            
            391
            
            
            —
            
            
            —





See
      accompanying notes to consolidated financial statements.







F-8





**Jeffersonville
      Bancorp and Subsidiary**


**Notes
      to Consolidated Financial Statements**


**December 31,
      2006, 2005, and 2004**








**(1)**
            **Summary
                of Significant Accounting
                Policies**





***Basis
      of Presentation***




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




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




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




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




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





***Investment
      Securities***




Management
      determines the appropriate classification of securities at the time of purchase.
      If management has the positive intent and ability to hold debt securities to
      maturity, they are classified as securities held to maturity and are stated
      at
      amortized cost. If securities are purchased for the purpose of selling them
      in
      the near term, they are classified as trading securities and are reported at
      fair value with unrealized gains and losses reflected in current earnings.
      All
      other debt and marketable equity securities are classified as securities
      available for sale and are reported at fair value. Net unrealized gains or
      losses on securities available for sale are reported (net of income taxes)
      in
      stockholders’ equity as accumulated other comprehensive income (loss).
      Nonmarketable equity securities are carried at cost. At December 31, 2006
      and 2005, 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.
      No
      impairment charge was recognized during the years ended December 31, 2006,
      2005
      and 2004.





***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-9








***Allowance
      for Loan Losses***




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




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




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





***Premises
      and Equipment***




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





***Federal
      Home Loan Bank Stock***




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





***Foreclosed*** ***Real
      Estate***




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





***Bank-Owned
      Life Insurance***




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





***Advertising
      Costs***





Advertising
      costs are expensed as incurred and are included in other
      expenses.


F-10








***Income
      Taxes***




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





**Earnings****P** ***er**Common Share***




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




***Recent
      Accounting Pronouncements***




In
      July
      2006, the FASB issued FASB Interpretation (“FIN”) No. 48, *Accounting
      for Uncertainty in Income Taxes* .
      This
      Interpretation clarifies the accounting for uncertainty in income taxes
      recognized in an enterprise’s financial statements in accordance with SFAS No.
      109, *Accounting
      for Income Taxes* .
      This
      Interpretation prescribes a recognition threshold and measurement attribute
      for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. This Interpretation also provides guidance
      on derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition. This Interpretation is effective for fiscal
      years beginning after December 15, 2006. The Company has not taken any tax
      positions that would have a material impact on the Company’s consolidated
      financial statements due to the adoption of this pronouncement.




In
      September 2006, the Financial Accounting Standards Board issued FASB Statement
      No. 157, *Fair
      Value Measurements* ,
      which
      defines fair value, establishes a framework for measuring fair value under
      GAAP,
      and expands disclosures about fair value measurements. FASB Statement
      No. 157 applies to other accounting pronouncements that require or permit
      fair value measurements. The new guidance is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and for interim
      periods within those fiscal years The Company is currently evaluating the impact
      this pronouncement will have on the Company’s consolidated financial
      statements.




In
      September 2006, the Financial Accounting Standards Board issued SFAS
      No. 158, *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement
      Plans* (“SFAS
      158”), which amends SFAS 87 and SFAS 106 to require recognition of the
      overfunded or underfunded status of pension and other postretirement benefit
      plans on the balance sheet. Under SFAS 158, gains and losses, prior service
      costs and credits, and any remaining transition amounts under SFAS 87 and SFAS
      106 that have not yet been recognized through net periodic benefit cost will
      be
      recognized in accumulated other comprehensive income, net of tax effects, until
      they are amortized as a component of net periodic cost. The measurement date
—
the date at which the benefit obligation and plan assets are measured — is
      required to be the company’s fiscal year end. SFAS 158 is effective for
      publicly-held companies for fiscal years ending after December 15, 2006,
      except for the measurement date provisions, which are effective for fiscal
      years
      ending after December 15, 2008. The Company has adopted SFAS 158, and the
      following table summarizes the impact of the initial adoption of SFAS No. 158
      for pension, postretirement and supplemental retirement plans (not tax effected,
      dollars in thousands).




**December
                31, 2006**
            
            
            
            **December
                31, 2006****Prior
                to**
            
            
            
            **Post
                SFAS****SFAS
                No. 158**
            
            
            
            **No.
                158****Adjustments**
            
            **Adjustments**
            
            **Adjustments**(Dollars
                in thousands)Other
                assets
            
            $
            7,328
            
            $
            (212
            )
            $
            7,116Other
                liabilities
            
            
            7,983
            
            
            2,057
            
            
            10,040Accumulated
                other comprehensive loss
            
            
            (1,488
            )
            
            (2,269
            )
            
            (3,757
            )







In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* .
      This
      statement permits entities to choose to measure many financial instruments
      and
      certain other items at fair value. An entity shall report unrealized gains
      and
      losses on items for which the fair value option has been elected in earnings
      at
      each subsequent reporting date. This statement is effective as of the beginning
      of an entity’s first fiscal year that begins after November 15, 2007. Early
      adoption is permitted as of the beginning of a fiscal year that begins on or
      before November 15, 2007, provided the entity also elects to apply the
      provisions of SFAS No. 157. The Company is continuing to evaluate the impact
      of
      this statement.




F-11







In
      September 2006, the Securities and Exchange Commission (SEC) issued Staff
      Accounting Bulleting No. 108 (“SAB 108”). SAB 108 provides interpretive
      guidance on how the effects of the carryover or reversal of prior year
      misstatements should be considered in quantifying a potential current year
      misstatement. Prior to SAB 108, companies might evaluate the materiality of
      financial statement misstatements using either the income statement or balance
      sheet approach, with the income statement approach  focusing on new
      misstatements added in the current year, and the balance sheet approach focusing
      on the cumulative amount of misstatement present in a company’s balance sheet.
      Misstatements that would be material under one approach could be viewed as
      immaterial under another approach, and not be corrected. SAB 108 now requires
      that companies view financial statement misstatements as material if they are
      material according to either the income statement or balance sheet approach.
      The
      Company has adopted SAB 108, with no impact on the Company’s financial position
      or results of operations.





In
      September 2006, the FASB ratified the consensus reached by the Emerging Issues
      Task Force (“EITF”) in Issue 06-5, *Accounting
      for Purchases of Life Insurance - Determining the Amount That Could Be Realized
      in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases
      of
      Life Insurance* .
      Technical Bulletin No. 85-4 states that an entity should report as an asset
      in
      the balance sheet the amount that could be realized under the insurance
      contract. EITF 06-5 clarifies certain factors that should be considered in
      the
      determination of the amount that could be realized. EITF 06-5 is effective
      for
      fiscal years beginning after December 15, 2006, with earlier application
      permitted under certain circumstances. The Company is currently evaluating
      the
      impact this pronouncement will have on the Company’s consolidated financial
      statements.





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 (“BOLI”) 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 Company is continuing to evaluate the impact of this consensus,
      which will require the Company to recognize an additional liability and
      compensation expense related to its BOLI policies.





**(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 $5,652,000 at
      December 31, 2006 and $6,288,000 at December 31, 2005.





**(3)**
            **Investment
                Securities**





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





**December
                31, 2006****Gross**
            
            **Gross****Amortized**
            
            **unrealized**
            
            **unrealized**
            
            **Estimated****cost**
            
            **gains**
            
            **losses**
            
            **fair
                value**(In
                thousands)Government
                sponsored enterprises
            
            $
            54,351
            
            $
            1
            
            $
            (1,568
            )
            $
            52,784Obligations
                of states andpolitical
                subdivisions
            
            
            39,152
            
            
            629
            
            
            (229
            )
            
            39,552Mortgage-backed
                securities andcollateralized
                mortgage obligations
            
            
            6,428
            
            
            —
            
            
            (35
            )
            
            6,393Total
                debt securities
            
            
            99,931
            
            
            630
            
            
            (1,832
            )
            
            98,729Equity
                securities
            
            
            821
            
            
            272
            
            
            (35
            )
            
            1,059Total
                securities available for sale
            
            $
            100,752
            
            $
            902
            
            $
            (1,867
            )
            $
            99,788


F-12





**December
                31, 2005****Gross**
            
            **Gross****Amortized**
            
            **unrealized**
            
            **unrealized**
            
            **Estimated****cost**
            
            **gains**
            
            **losses**
            
            **fair
                value**(In
                thousands)Government
                sponsored enterprises
            
            $
            45,323
            
            $
            2
            
            $
            (1,314
            )
            $
            44,011Obligations
                of states andpolitical
                subdivisions
            
            
            40,199
            
            
            736
            
            
            (307
            )
            
            40,628Mortgage-backed
                securities andcollateralized
                mortgage obligations
            
            
            3,416
            
            
            37
            
            
            (130
            )
            
            3,323Total
                debt securities
            
            
            88,938
            
            
            775
            
            
            (1,751
            )
            
            87,962Equity
                securities
            
            
            820
            
            
            202
            
            
            —
            
            
            1,022Total
                securities available for sale
            
            $
            89,758
            
            $
            977
            
            $
            (1,751
            )
            $
            88,984





Proceeds
      from sales of securities available for sale during 2006 and 2005 were $1,713,000
      and $4,782,000 respectfully. No securities available for sale were sold in
      2004.
      Gross gains and gross losses realized on sales and calls of securities were
      as
      follows:





**2006**
            
            **2005**
            
            **2004**(In
                thousands)Gross
                realized gains
            
            $
            12
            
            $
            42
            
            $
            14Gross
                realized losses
            
            
            (16
            )
            
            (36
            )
            
            —Net
                security gains (losses)
            
            $
            (4
            )
            $
            6
            
            $
            14





The
      amortized cost and estimated fair value of debt securities available for sale
      at
      December 31, 2006, by remaining period to contractual maturity, are shown
      in the following table. Actual maturities will differ from contractual
      maturities because of security prepayments and the right of certain issuers
      to
      call or prepay their obligations.




**Amortized**
            
            **Estimated****cost**
            
            **fair
                value**(In
                thousands)Within
                one year
            
            $
            12,861
            
            $
            12,843One
                to five years
            
            
            24,500
            
            
            24,499Five
                to ten years
            
            
            40,372
            
            
            40,042Over
                ten years
            
            
            22,198
            
            
            21,345Total
                Debt Securities
            
            $
            99,931
            
            $
            98,729





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 $46,790,000, and $43,130,000 at
      December 31, 2006 and 2005 respectively, were pledged to secure public
      funds on deposit and for other purposes.




F-13







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





**Gross**
            
            **Gross****Amortized**
            
            **unrealized**
            
            **unrealized**
            
            **Estimated****cost**
            
            **gains**
            
            **losses**
            
            **fair
                value**(In
                thousands)December
                31, 2006:Obligations
                of states andpolitical
                subdivisions
            
            $
            9,445
            
            $
            173
            
            $
            (48
            )
            $
            9,570December
                31, 2005:Obligations
                of states andpolitical
                subdivisions
            
            $
            8,195
            
            $
            121
            
            $
            (83
            )
            $
            8,233







There
      were no sales of securities held to maturity in 2006, 2005, or
      2004.




The
      amortized cost and estimated fair value of these securities at December 31,
      2006, by remaining period to contractual maturity, are shown in the following
      table. Actual maturities will differ from contractual maturities because certain
      issuers have the right to call or prepay their obligations (in
      thousands).





**Amortized**
            
            **Estimated****cost**
            
            **fair
                value**Within
                one year
            
            $
            5,979
            
            $
            5,983One
                to five years
            
            
            2,123
            
            
            2,137Five
                to ten years
            
            
            675
            
            
            690Over
                ten years
            
            
            668
            
            
            760Total
            
            $
            9,445
            
            $
            9,570





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, 2006 and 2005 were as follows
      (in thousands):




December
                31, 2006:**Less
                than 12 months**
            
            **12
                months or more**
            
            **Total****Estimated**
            
            **Unrealized**
            
            **Estimated**
            
            **Unrealized**
            
            **Estimated**
            
            **Unrealized****fair
                value**
            
            **losses**
            
            **fair
                value**
            
            **losses**
            
            **fair
                value**
            
            **losses**Available
                for sale:Government
                sponsoredenterprises
            
            $
            6,966
            
            $
            29
            
            $
            44,817
            
            $
            1,539
            
            $
            51,783
            
            $
            1,568Obligations
                of states andpolitical
                subdivisions
            
            
            1,414
            
            
            4
            
            
            10,462
            
            
            225
            
            
            11,876
            
            
            229Mortgage-backed
                securitiesand
                collateralized mortgageobligations
            
            
            4,000
            
            
            12
            
            
            1,206
            
            
            23
            
            
            5,206
            
            
            35$
            12,380
            
            $
            45
            
            $
            56,485
            
            $
            1,787
            
            $
            68,865
            
            $
            1,832Equity
                securities
            
            $
            116
            
            $
            35
            
            $
            —
            
            $
            —
            
            $
            116
            
            $
            35Held
                to maturity:Obligations
                of states andpolitical
                subdivisions
            
            $
            3,600
            
            $
            7
            
            $
            1,626
            
            $
            41
            
            $
            5,226
            
            $
            48


F-14







December
                31, 2005:**Less
                than 12 months**
            
            **12
                months or more**
            
            **Total****Estimated**
            
            **Unrealized**
            
            **Estimated**
            
            **Unrealized**
            
            **Estimated**
            
            **Unrealized****fair
                value**
            
            **losses**
            
            **fair
                value**
            
            **losses**
            
            **fair
                value**
            
            **losses**Available
                for sale:Government
                sponsoredenterprises
            
            $
            25,438
            
            $
            1,054
            
            $
            17,570
            
            $
            260
            
            $
            43,008
            
            $
            1,314Obligations
                of states andpolitical
                subdivisions
            
            
            4,689
            
            
            188
            
            
            7,272
            
            
            119
            
            
            11,961
            
            
            307Mortgage-backed
                securitiesand
                collateralized mortgageobligations
            
            
            2,008
            
            
            130
            
            
            —
            
            
            —
            
            
            2,008
            
            
            130$
            32,135
            
            $
            1,372
            
            $
            24,842
            
            $
            379
            
            $
            56,977
            
            $
            1,751Held
                to maturity:Obligations
                of states andpolitical
                subdivisions
            
            $
            —
            
            $
            —
            
            $
            4,205
            
            $
            83
            
            $
            4,205
            
            $
            83







At
      December 31, 2006 there were 23 securities in a continual loss position for
      less
      than 12 months and 75 securities in a continual loss position for 12 months
      or
      more. Of the 23 securities in a continual loss position for less than 12 months,
      seven were from government sponsored enterprises, ten were obligations of states
      and political subdivisions and six were mortgage-backed securities. Of the
      75
      securities in a continual loss position for 12 months or more, 32 were from
      government sponsored enterprises, 41 were obligations of states and political
      subdivisions, and there was one security in the mortgage-backed security and
      equity security categories. None of the individual unrealized losses is
      significant.





The
      unrealized losses on securities at December 31, 2006 were caused by increases
      in
      market interest rates. The contractual terms of the government sponsored
      enterprise securities and the obligations of states and political subdivisions
      require the issuer to settle the securities at par upon maturity of the
      investment. The contractual cash flows of the mortgage backed securities and
      collateralized mortgage obligations are guaranteed by various government
      agencies or government sponsored enterprises such as GNMA, FNMA, and FHLMC.
      Because the Company has the ability and intent to hold these securities until
      a
      market price recovery or possibly to maturity, these investments are not
      considered other-than-temporarily impaired at December 31, 2006 and 2005.





**(4)**
              **Loans**





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





**2006**
            
            **2005**(In
                thousands)Real
                estate loans:Residential
            
            $
            95,520
            
            $
            89,598Commercial
            
            
            82,987
            
            
            81,587Home
                equity
            
            
            24,195
            
            
            22,697Farm
                land
            
            
            3,726
            
            
            3,443Construction
            
            
            6,087
            
            
            5,956212,515
            
            
            203,281Other
                loans:Commercial
                loans
            
            
            28,106
            
            
            28,644Consumer
                installment loans
            
            
            9,773
            
            
            11,673Other
                consumer loans
            
            
            118
            
            
            128Agricultural
                loans
            
            
            248
            
            
            53538,245
            
            
            40,980Total
                loans
            
            
            250,760
            
            
            244,261Allowance
                for loan losses
            
            
            (3,516
            )
            
            (3,615
            )Total
                loans, net
            
            $
            247,244
            
            $
            240,646





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.


F-15





Nonperforming
      loans are summarized as follows at December 31:





**2006**
            
            **2005**
            
            **2004**(In
                thousands)Nonaccrual
                loans
            
            $
            1,867
            
            $
            2,922
            
            $
            724Loans
                past due 90 days or more and stillaccruing
                interest
            
            
            13
            
            
            —
            
            
            1,412Total
                nonperforming loans
            
            $
            1,880
            
            $
            2,922
            
            $
            2,136





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


**2006**
            
            **2005**
            
            **2004**(In
                thousands)Interest
                contractually due at original rates
            
            $
            178
            
            $
            169
            
            $
            90Interest
                income recognized
            
            
            (15
            )
            
            (134
            )
            
            (29
            )Interest
                income not recognized
            
            $
            163
            
            $
            35
            
            $
            61





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





**2006**
            
            **2005**
            
            **2004**(In
                thousands)Balance
                at beginning of the year
            
            $
            3,615
            
            $
            3,645
            
            $
            3,569Provision
                for loan losses
            
            
            90
            
            
            180
            
            
            360Loans
                charged-off
            
            
            (533
            )
            
            (440
            )
            
            (433
            )Recoveries
            
            
            344
            
            
            230
            
            
            149Balance
                at end of year
            
            $
            3,516
            
            $
            3,615
            
            $
            3,645





As
      of
      December 31, 2006 there were $1,528,000 and no loans as of December 31,
      2005 which were considered to be impaired under SFAS No. 114. A $100,000
      specific valuation allowance on impaired loans was recorded as of December
      31,
      2006. Average impaired loans for the years ended December 31, 2006, 2005 and
      2004 were $1,797,000, $0 and $705,000 respectively. There are no commitments
      to
      lend additional funds on the above noted non-performing loans.





**(5)**
            **Premises
                and Equipment**





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





**2006**
            
            **2005**(In
                thousands)Land
            
            $
            387
            
            $
            387Buildings
                and improvements
            
            
            4,255
            
            
            4,142Furniture
                and fixtures
            
            
            157
            
            
            132Equipment
            
            
            3,703
            
            
            3,2078,502
            
            
            7,868Less
                accumulated depreciation and amortization
            
            
            (5,462
            )
            
            (4,841
            )Total
                premises and equipment, net
            
            $
            3,040
            
            $
            3,027





Depreciation
      and amortization expense was $635,000, $632,000, and $640,000 in 2006, 2005,
      and
      2004, respectively.


F-16





**(6)**
            **Time
                Deposits**





The
      following is a summary of time deposits at December 31, 2006 by remaining
      period to contractual maturity (in thousands):





Within
                one year
            
            $
            95,708One
                to two years
            
            
            19,170Two
                to three years
            
            
            3,486Three
                to four years
            
            
            4,619Four
                to five years
            
            
            5,447Over
                five years
            
            
            2Total
                time deposits
            
            $
            128,432





Time
      deposits of $100,000 or more totaled $46,054,000, $43,836,000 and $24,532,000
      at
      December 31, 2006, 2005 and 2004 respectively. Interest expense related to
      time
      deposits over $100,000 was $1,891,000, $812,000, and $514,000 for 2006, 2005,
      and 2004, respectively.




Total
      time deposits include brokered time deposits obtained from the national market,
      which during 2006 averaged $15,198,000 and amounted to $16,332,000, or 5.03%
      of
      total deposits at December 31, 2006. Brokered time deposits in 2005 averaged
      $1,110,000 and amounted to $15,034,000, or 4.82% of total deposits at December
      31, 2005. There was no brokered deposits in 2004. The rates of interest paid
      on
      time deposits obtained from the national market averaged 4.97% during 2006
      and
      4.56% during 2005.





**(7)**
            **Federal
                Home Loan Bank Borrowings**





The
      following is a summary of Federal Home Loan Bank (FHLB) advances outstanding
      at
      December 31:





**2006**
            
            **2005****Amount**
            
            **Rate**
            
            **Amount**
            
            **Rate**(Dollars
                in thousands)Fixed
                rate advances maturing in 2007
            
            $
            5,000
            
            
            4.12
            %
            $
            5,000
            
            
            4.12
            %Fixed
                rate advances and securities sold underagreements
                to repurchase maturing in 2008
            
            
            10,000
            
            
            4.98
            
            
            15,000
            
            
            4.80Securities
                sold underagreements
                to repurchase maturing in 2009
            
            
            5,000
            
            
            5.45
            
            
            5,000
            
            
            5.45Total
                FHLB advances and securities soldunder
                an agreement to repurchase
            
            $
            20,000
            
            
            4.88
            %
            $
            25,000
            
            
            4.79
            %





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, 2006 and 2005 were $55.0 million and
      $50.7 million respectively, which satisfied the collateral requirements of
      the
      FHLB.





**(8)**
            **Short-Term
                Borrowings**





Short-term
      borrowings at December 31, 2006 and 2005 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 $35.0 million and
      $36.7 million as of December 31, 2006 and 2005, respectively. There
      were no borrowings under the overnight program at December 31, 2005; at
      December 31, 2006 borrowings totaled $500,000 at a rate of 5.625%. The Bank
      has
      pledged mortgage loans and FHLB stock as collateral on these borrowings. During
      2006, the maximum month-end balance was $3.9 million, the average balance
      was $0.5 million, and the average interest rate was 5.74%. During 2005, the
      maximum month-end balance was $10.0 million, the average balance was
      $3.4 million, and the average interest rate was 3.39%. Short-term
      borrowings at December 31, 2006 and 2005 also included $403,000 and
      $427,000, respectively of demand notes.





F-17


**(9)**
            **Income
                Taxes**





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





**2006**
            
            **2005**
            
            **2004**(In
                thousands)Current
                tax expense:Federal
            
            $
            1,428
            
            $
            2,094
            
            $
            2,115State
            
            
            169
            
            
            302
            
            
            325Deferred
                tax benefit
            
            
            (357
            )
            
            (354
            )
            
            (223
            )Total
                income tax expense
            
            $
            1,240
            
            $
            2,042
            
            $
            2,217





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:





**2006**
            
            **2005**
            
            **2004****%
                of**
            
            
            
            **%
                of**
            
            
            
            **%
                of****Pre-Tax**
            
            
            
            **Pre-Tax**
            
            
            
            **Pre-Tax****Amount**
            
            **Income**
            
            **Amount**
            
            **Income**
            
            **Amount**
            
            **Income**(In
                thousands)Tax
                at statutory rate
            
            $
            2,102
            
            
            34%
            
            $
            2,641
            
            
            34%
            
            $
            2,852
            
            
            34%State
                taxes, net of Federaltax
                benefit
            
            
            66
            
            
            1
            
            
            158
            
            
            2
            
            
            186
            
            
            2Tax-exempt
                interest
            
            
            (684
            )
            
            (11)
            
            
            (661
            )
            
            (9)
            
            
            (683
            )
            
            (8)Interest
                expense allocated totax-exempt
                securities
            
            
            64
            
            
            1
            
            
            47
            
            
            1
            
            
            38
            
            
            0Net
                earnings frombank-owned
                life insurance
            
            
            (144
            )
            
            (2)
            
            
            (160
            )
            
            (2)
            
            
            (168
            )
            
            (2)Other
                adjustments
            
            
            (164
            )
            
            (3)
            
            
            17
            
            
            0
            
            
            (8
            )
            
            0Income
                tax expense
            
            $
            1,240
            
            
            20%
            
            $
            2,042
            
            
            26%
            
            $
            2,217
            
            
            26%





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





**2006**
            
            **2005**(In
                thousands)Deferred
                tax assets:Allowance
                for loan losses in excess of tax bad debt reserve
            
            $
            1,221
            
            $
            1,259Retirement
                benefits
            
            
            1,708
            
            
            1,456Deferred
                compensation
            
            
            115
            
            
            106Depreciation
            
            
            454
            
            
            420Other
            
            
            12
            
            
            1Total
                deferred tax assets
            
            
            3,510
            
            
            3,242Deferred
                tax liabilities:Prepaid
                expenses
            
            
            (192
            )
            
            (281
            )Total
                deferred tax liabilities
            
            
            (192
            )
            
            (281
            )Net
                deferred tax asset
            
            $
            3,318
            
            $
            2,961





In
      addition to the deferred tax assets and liabilities described above, the Company
      also has a deferred tax asset of $386,000 at December 31, 2006 related to
      the net unrealized loss on securities available for sale as of December 31,
      2006 and a deferred tax asset of $1,503,000 related to pension and other
      post-retirement liabilities as of December 31, 2006. In addition to the
      deferred tax assets described above, the Company also has a deferred tax asset
      of $310,000 at December 31, 2005 related to the net unrealized loss on
      securities available for sale as of December 31, 2005 and a deferred tax
      asset of $595,000 related to a minimum pension liability as of December 31,
      2005.




In
      assessing the realizability of the Company’s total deferred tax assets,
      management considers whether it is more likely than not that some portion or
      all
      of those assets will not be realized. Based upon management’s consideration of
      historical and anticipated future pre-tax income, as well as the reversal period
      for the items giving rise to the deferred tax assets and liabilities, a
      valuation allowance for deferred tax assets was not considered necessary at
      December 31, 2006 and 2005.




F-18







The
      proposed 2007 New York State budget bill contains a provision that would
      disallow the exclusion of dividends paid by a real estate investment trust
      subsidiary (“REIT”). The bill, if enacted as proposed, would be effective for
      taxable years beginning on or after January 1, 2007 and the Company would lose
      the tax benefit associated with the REIT.




**(10)**
              **Other
                  Non-****I****nterest
                  Expenses**
 
 The
        major
        components of other non-interest expenses are as follows for the years ended
        December 31:
 
 **2006**
              
              **2005**
              
              **2004**(In
                  thousands)Stationery
                  and supplies
              
              $
              293
              
              $
              237
              
              $
              287Director
                  expenses
              
              
              294
              
              
              286
              
              
              277ATM
                  and credit card processing fees
              
              
              622
              
              
              581
              
              
              582Professional
                  services
              
              
              623
              
              
              674
              
              
              601Other
                  expenses
              
              
              1,396
              
              
              1,489
              
              
              1,444Other non-interest expenses
              
              $
              3,228
              
              $
              3,267
              
              $
              3,191
 
 **(11)**
              **Regulatory
                  Capital Requirements**
 
 National
        banks are required to maintain minimum levels of regulatory capital in
        accordance with regulations of the Office of the Comptroller of the Currency
        (OCC). The Federal Reserve Board (FRB) imposes similar requirements for
        consolidated capital of bank holding companies. The OCC and FRB regulations
        require a minimum leverage ratio of Tier 1 capital to total adjusted assets
        of
        4.0%, and minimum ratios of Tier I and total capital to risk-weighted assets
        of
        4.0% and 8.0%, respectively.
  Under
        its
        prompt corrective action regulations, the OCC is required to take certain
        supervisory actions (and may take additional discretionary actions) with
        respect
        to an undercapitalized bank. Such actions could have a direct material effect
        on
        a bank’s financial statements. The regulations establish a framework for the
        classification of banks into five categories: well capitalized, adequately
        capitalized, undercapitalized, significantly undercapitalized, and critically
        undercapitalized. Generally, a bank is considered well capitalized if it
        has a
        leverage (Tier I) capital ratio of at least 5.0%, a Tier 1 risk-based
        capital ratio of at least 6.0%, and a total risk-based capital ratio of at
        least
        10.0%.
  The
        foregoing capital ratios are based in part on specific quantitative measures
        of
        assets, liabilities and certain off-balance-sheet items as calculated under
        regulatory accounting practices. Capital amounts and classifications are
        also
        subject to qualitative judgments by the regulators about capital components,
        risk weightings and other factors.
  Management
        believes that, as of December 31, 2006 and 2005, the Bank and the Company
        met all capital adequacy requirements to which they are subject. Further,
        the
        most recent OCC notification categorized the Bank as a well-capitalized bank
        under the prompt corrective action regulations. There have been no conditions
        or
        events since that notification that management believes have changed the
        Bank’s
        capital classification.
  F-19
  
 
 The
        following is a summary of the actual capital amounts and ratios as of
        December 31, 2006 and 2005 for the Bank and the Company (consolidated),
        compared to the required ratios for minimum capital adequacy and for
        classification as well-capitalized:
 
 **Required
                  Ratios****Minimum**
              
              **Classification****Actual**
              
              **capital**
              
              **as
                  well****Amount**
              
              **Ratio**
              
              **adequacy**
              
              **capitalized**(Dollars
                  in thousands)December
                  31, 2006:Bank:Leverage
                  (Tier 1) capital
              
              $
              42,477
              
              
              10.7
              %
              
              4.0
              %
              
              5.0
              %Risk-based
                  capital:Tier
                  1
              
              
              42,477
              
              
              16.2
              
              
              4.0
              
              
              6.0Total
              
              
              45,756
              
              
              17.5
              
              
              8.0
              
              
              10.0Consolidated:Leverage
                  (Tier 1) capital
              
              $
              44,108
              
              
              11.0
              %
              
              4.0
              %Risk-based
                  capital:Tier
                  1
              
              
              44,108
              
              
              16.7
              
              
              4.0Total
              
              
              47,406
              
              
              18.0
              
              
              8.0December
                  31, 2005:Bank:Leverage
                  (Tier 1) capital
              
              $
              41,113
              
              
              10.8
              %
              
              4.0
              %
              
              5.0
              %Risk-based
                  capital:Tier
                  1
              
              
              41,113
              
              
              16.3
              
              
              4.0
              
              
              6.0Total
              
              
              44,269
              
              
              17.5
              
              
              8.0
              
              
              10.0Consolidated:Leverage
                  (Tier 1) capital
              
              $
              42,984
              
              
              11.5
              %
              
              4.0
              %Risk-based
                  capital:Tier
                  1
              
              
              42,984
              
              
              16.9
              
              
              4.0Total
              
              
              46,140
              
              
              18.2
              
              
              8.0
 
 **(12)**
              **Stockholders’
                  Equity**
 
 ***Dividend
        Restrictions***
  Dividends
        paid by the Bank are the primary source of funds available to the Company
        for
        payment of dividends to its stockholders and for other working capital needs.
        Applicable Federal statutes, regulations and guidelines impose restrictions
        on
        the amount of dividends that may be declared by the Bank. Under these
        restrictions, the dividends declared and paid by the Bank to the Company
        may not
        exceed the total amount of the Bank’s net profit retained in the current year
        plus its retained net profits, as defined, from the two preceding years.
        The
        Bank’s retained net profits available for dividends at December 31, 2006 totaled
        $8,588,000.
  ***Stock
        Repurchase Plan***
  In
        April
        2006, the Board of Directors approved a Stock Repurchase Program under which
        the
        company could repurchase up to 100,000 shares of outstanding stock. In July
        2006, the Board of Directors approved an increase in the number of shares
        to
        150,000 under this program. During the year 2006, 128,973 shares were
        repurchased with a remaining balance of 21,027 authorized to be repurchased
        under this program.
 
 **(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 2006, 2005, and 2004 in
        the
        consolidated statements of changes in stockholders’ equity.
   F-20
  
  The
        Company’s other comprehensive loss consisted of the following components for the
        years ended December 31:
 **2006**
              
              **2005**
              
              **2004**(In
                  thousands)Net
                  unrealized holding losses arisingduring
                  the year, net of taxes (benefit) of ($78)in
                  2006, ($502) in 2005, and ($327) in 2004
              
              $
              (117
              )
              $
              (744
              )
              $
              (490
              )Reclassification
                  adjustment for net realized losses(gains)
                  included in income, net oftaxes
                  (benefit) of ($1) in 2006, $2 in 2005,and
                  $6 in 2004
              
              
              3
              
              
              (4
              )
              
              (8
              )Minimum
                  pension liability adjustment, net oftaxes
                  of $— in 2006, $103 in 2005 and$21
                  in 2004
              
              
              —
              
              
              (155
              )
              
              (37
              )Other
                  comprehensive loss
              
              $
              (114
              )
              $
              (903
              )
              $
              (535
              )
 
 
 At
        December 31, 2006, the components of accumulated other comprehensive loss
        are as
        follows:
 
 **2006**(In
                  thousands)Supplemental
                  executive retirement plan, net of taxes of $232
              
              $
              (348
              )Postretirement
                  benefits, net of tax benefit of $139
              
              
              209Defined
                  benefit pension liability, net of taxes of $1,410
              
              
              (2,115
              )Accumulated
                  other comprehensive loss due to the adoption of FAS 158
              
              
              (2,254
              )Net
                  unrealized holding losses, net of taxes of $386
              
              
              (579
              )Accumulated
                  other comprehensive loss
              
              $
              (2,833
              )
 
 As
        of
        December 31, 2005, the Company had accumulated other comprehensive loss on
        the
        net unrealized loss on securities available for sale of $465,000 and $893,000
        related to the minimum pension liability adjustment, net of taxes.
 
 **(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:
 
 **2006**
              
              **2005**(In
                  thousands)Directors
              
              $
              1,048
              
              $
              2,301Executive
                  officers (nondirectors)
              
              
              545
              
              
              373$
              1,593
              
              $
              2,674
 
 During
        2006, total advances to these directors and officers were $1,652,000 and
        total
        payments made on these loans were $2,733,000. These directors and officers
        had
        unused lines of credit with the Company of $919,000 and $892,000 at
        December 31, 2006 and 2005, 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.
   F-21
  
  The
        Company also sponsors a postretirement medical, dental and life insurance
        benefit plan for retirees in the pension plan. Effective in 2005, employees
        attaining age 55 or later, and whose age plus service is greater than or
        equal
        to 85 are eligible for medical benefits. The retirees pay a percentage of
        the
        medical benefit costs. 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, 2006 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 $472,000 to its pension plan and $72,000 to
        its
        other postretirement benefit plan in 2007. Benefits, which reflect estimated
        future employee service, are expected to be paid as follows:
  **Pension**
              
              **Postretirement****benefit**
              
              **benefit**(Dollars
                  in thousands)2007
              
              $
              288
              
              $
              1122008
              
              
              335
              
              
              1172009
              
              
              412
              
              
              1242010
              
              
              446
              
              
              1372011
              
              
              585
              
              
              167Years
                  2012-2016
              
              
              3,915
              
              
              1,105
 
 The
        following is a summary of changes in the benefit obligations and plan assets
        for
        the pension plan as of a September 30 measurement date and the other
        postretirement benefit plan as of a December 31 measurement date, together
        with
        a reconciliation of each plan’s funded status to the amounts recognized in the
        consolidated balance sheets:
 
 **Obligations
        and Funded Status**
  **Pension
                  benefit**
              
              **Postretirement
                  benefit****For
                  the year ended**
              
              **2006**
              
              **2005**
              
              **2006**
              
              **2005**(Dollars
                  in thousands)Change
                  in benefit obligationBeginning
                  of year
              
              $
              8,290
              
              $
              6,988
              
              $
              3,190
              
              $
              3,104Service
                  cost
              
              
              437
              
              
              298
              
              
              174
              
              
              166Interest
                  cost
              
              
              474
              
              
              408
              
              
              169
              
              
              176Actuarial
                  (gain) loss
              
              
              234
              
              
              846
              
              
              (741
              )
              
              (216
              )Benefits
                  paid
              
              
              (248
              )
              
              (250
              )
              
              (59
              )
              
              (56
              )Contributions
                  by plan participants
              
              
              —
              
              
              —
              
              
              18
              
              
              16End
                  of year
              
              
              9,187
              
              
              8,290
              
              
              2,751
              
              
              3,190Changes
                  in fair value of plan assets:Beginning
                  of year
              
              
              5,382
              
              
              4,877
              
              
              —
              
              
              —Actual
                  return on plan assets
              
              
              286
              
              
              414
              
              
              —
              
              
              —Employer
                  contributions
              
              
              457
              
              
              341
              
              
              41
              
              
              39
  F-22
  
 Contributions
                  by plan participants
              
              
              —
              
              
              —
              
              
              18
              
              
              16Benefits
                  paid
              
              
              (248
              )
              
              (250
              )
              
              (59
              )
              
              (55
              )End
                  of year
              
              
              5,877
              
              
              5,382
              
              
              —
              
              
              —Unfunded
                  status at end of year
              
              $
              (3,310
              )
              $
              (2,908
              )
              $
              (2,751
              )
              $
              (3,190
              )Unrecognized
                  net transition cost
              
              
              —
              
              
              (2
              )
              
              —
              
              
              —Unrecognized
                  net actuarial cost
              
              
              —
              
              
              3,183
              
              
              —
              
              
              1,101Unrecognized
                  prior service cost (benefit)
              
              
              —
              
              
              212
              
              
              —
              
              
              (714
              )Net
                  asset (liability) recognized
              
              $
              (3,310
              )
              $
              485
              
              $
              (2,751
              )
              $
              (2,803
              )Amounts
                  recognized in the consolidatedbalance
                  sheet consist of:Other
                  assets
              
              $
              —
              
              $
              697
              
              $
              —
              
              $
              —Other
                  liabilities
              
              
              (3,310
              )
              
              (1,699
              )
              
              (2,751
              )
              
              (2,803
              )Accumulated
                  other comprehensiveloss
                  (pre-tax basis)
              
              
              —
              
              
              1,487
              
              
              —
              
              
              —Net
                  amount recognized
              
              $
              (3,310
              )
              $
              485
              
              $
              (2,751
              )
              $
              (2,803
              )Amounts
                  recognized in accumulated othercomprehensive
                  loss consists of:Minimum
                  liability
              
              $
              —
              
              $
              1,699
              
              $
              —
              
              $
              —Unrecognized
                  actuarial (gain) loss
              
              
              3,338
              
              
              —
              
              
              (321
              )
              
              —Unrecognized
                  prior service cost
              
              
              187
              
              
              —
              
              
              669
              
              
              —Intangible
                  asset
              
              
              —
              
              
              (212
              )
              
              —
              
              
              —Net
                  amount recognized
              
              $
              3,525
              
              $
              1,487
              
              $
              348
              
              $
              —
 
 The
        accumulated benefit obligation for the pension plan was $7,147,000 and
        $6,597,000 at September 30, 2006 and 2005, respectively.
 
 The
        components of the net periodic benefit cost for these plans were as
        follows:
 
  
 **Pension
                  benefit**
              
              **Postretirement
                  benefit****For
                  the year ended December 31,**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2006**
              
              **2005**
              
              **2004**(Dollars
                in thousands)Net
                  periodic benefit cost:Service
                  cost
              
              $
              437
              
              $
              298
              
              $
              266
              
              $
              174
              
              $
              166
              
              $
              242Interest
                  cost
              
              
              474
              
              
              408
              
              
              375
              
              
              169
              
              
              176
              
              
              209Expected
                  return on plan assets
              
              
              (402
              )
              
              (366
              )
              
              (321
              )
              
              —
              
              
              —
              
              
              —Amortization
                  of unrecognizedtransition
                  (obligation) asset
              
              
              (2
              )
              
              (4
              )
              
              (4
              )
              
              —
              
              
              —
              
              
              18Amortization
                  of prior service cost
              
              
              25
              
              
              25
              
              
              25
              
              
              (45
              )
              
              (45
              )
              
              —Recognized
                  net actuarial loss
              
              
              196
              
              
              134
              
              
              135
              
              
              39
              
              
              53
              
              
              60Net
                  amount recognized
              
              $
              728
              
              $
              495
              
              $
              476
              
              $
              337
              
              $
              350
              
              $
              529
  F-23
   
 
 The
        estimated net loss and prior service cost for the defined benefit pension
        plans
        that will be amortized from accumulated other comprehensive loss into net
        periodic benefit cost over the next fiscal year are $173,000 and $25,000,
        respectively. The estimated prior service cost for the postretirement plan
        that
        will be amortized from accumulated other comprehensive loss into net periodic
        benefit cost over the next fiscal year is $45,000.
 
 Assumptions
        used to determine benefit obligations for the pension plan as of a
        September 30 measurement date and for the other postretirement benefits
        plan as of a December 31 measurement date were as follows:
 
 **Pension
                  benefits**
              
              **Postretirement
                  benefits****2006**
              
              **2005**
              
              **2006**
              
              **2005**Discount
                  rate
              
              
              5.65
              %
              
              5.35
              %
              
              5.75
              %
              
              5.35
              %Rate
                  of compensation increase
              
              
              5.00
              
              
              4.00
              
              
              —
              
              
              —
 
 Assumptions
        used to determine net periodic benefit cost were as follows:
 **Pension
                    benefits**
              
              **Postretirement
                  benefits****2006**
              
              **2005**
              
              **2006**
              
              **2005**Discount
                  rate
              
              
              5.65
              %
              
              5.75
              %
              
              5.35
              %
              
              5.75
              %Expected
                  long-term rate of returnon
                  plan assets
              
              
              7.50
              
              
              7.50
              
              
              —
              
              
              —Rate
                  of compensation increase
              
              
              5.00
              
              
              3.75
              
              
              —
              
              
              —
 
 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.
  Previous
        to the most recent change in 2005, the postretirement plan was amended in
        2004.
        It was altered from retiree eligibility for those at age 55 with a minimum
        of 10
        years of service, to age 55 with a minimum of 10 years of service and whose
        age
        plus service is greater than or equal to 85. This changed from the requirement
        that employees must retire after age 55 with at least 10 years of service
        to be
        eligible for medical benefits. In addition, retiree contributions for ages
        65
        and over changed to retiree pays 25% of the special Medicare Supplement premium
        if single coverage is selected and 40% of the special Medicare Supplement
        premium otherwise, from the previous provision of retiree pays 25% of the
        active
        premium or the special Medicare Supplement premium for any coverage
        selected.
  The
        assumed health care cost trend rate for retirees under age 65 which was used
        to
        determine the benefit obligation for the other postretirement benefits plan
        at
        December 31, 2006 was 8.0%, declining gradually to 5.0% in 2010 and
        remaining at that level thereafter. The assumed health care cost trend rate
        for
        retirees over age 65 which was also used to determine the benefit obligation
        for
        the other postretirement benefits plan at December 31, 2006 was 7.0%,
        declining gradually to 4.0% in 2010 and remaining at that level thereafter.
        Increasing the assumed health care cost trend rates by one percentage point
        in
        each year would increase the benefit obligation at December 31, 2006 by
        approximately $527,000 and the net periodic benefit cost for the year by
        approximately $87,000; a one percentage point decrease would decrease the
        benefit obligation and benefit cost by approximately $407,000 and $65,000,
        respectively.
  The
        Company’s pension plan asset allocation at September 30, 2006 and 2005, by asset
        category is as follows:
 
 **2006**
              
              **2005**Asset
                  category:Equity
                  securities
              
              
              60
              %
              
              63
              %Debt
                  securities
              
              
              31
              
              
              32Other
              
              
              9
              
              
              5Total
              
              
              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:
  F-24
  
 
 **Allocation
                  Range**Citizens
                  Bank Investment Funds:Large
                  Cap Domestic Equity
              30%
                  - 40%Mid
                  Cap Domestic Equity
              5%
                  - 15%Small
                  Cap Domestic Equity
              0%
                  - 10%International
                  Equity
              5%
                  - 20%Real
                  Estate
              0%
                  - 10%Core
                  Investment Grade Bonds
              15%
                  - 30%Mortgages
              0%
                  - 15%Money
                  Market
              0%
                  - 10%
 
 *The
        actual asset allocations at December 31, 2006 are consistent with the table
        above.*
 
 ***Directors
        Survival Insurance***
  The
        Company maintains a separate insurance program for Directors not insurable
        under
        the postretirement plan. The benefits accrued under this plan totaled $295,000
        at December 31, 2006 and $273,000 at December 31, 2005 and are unfunded.
        The
        Company recorded an expense of $22,000, $58,000 and $18,000 relating to this
        plan during the years ended December 31, 2006, 2005 and 2004
        respectively.
 
 ***Profit
        Sharing Plan***
  The
        Company maintains a program for full time employees. The benefits accrued
        under
        this plan totaled $50,000 at December 31, 2006 and $55,000 at December 31,
        2005
        and are unfunded. The Company recorded an expense of $582,000, $633,000 and
        $578,000 relating to this plan during the years ended December 31, 2006,
        2005
        and 2004 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 $145,000, $161,000 and $133,000 in 2006, 2005 and 2004
        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 $1,325,000 at December 31, 2006 and $596,000 at December
        31, 2005, and are unfunded. The Company recorded an expense of $185,000,
        $410,000 and $83,000 relating to this plan during the years ended December
        31,
        2006, 2005 and 2004 respectively. In addition to the current year expense
        of
        $185,000, the increase in accrued benefits from December 31, 2005 to 2006
        includes the effects of adopting SFAS No. 158 in the amount of
        $580,000.
 
 ***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 $563,000 and $339,000 at December 31, 2006 and 2005
        respectively, and are unfunded. The Company recorded an expense of $224,000,
        $152,000 and $107,000 relating to this plan during the years ended December
        31,
        2006, 2005 and 2004 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 of the Company will not be affected
        materially by the outcome of any pending legal proceedings.
  F-25
  
 
 ***Off-Balance-Sheet
        Financial Instruments***
  The
        Company is a party to certain financial instruments with off-balance-sheet
        risk
        in the normal course of business to meet the financing needs of its customers.
        These are limited to commitments to extend credit and standby letters of
        credit
        which involve, to varying degrees, elements of credit risk in excess of the
        amounts recognized in the consolidated balance sheets. The contract amounts
        of
        these instruments reflect the extent of the Company’s involvement in particular
        classes of financial instruments.
  The
        Company’s maximum exposure to credit loss in the event of nonperformance by the
        other party to these instruments represents the contract amounts, assuming
        that
        they are fully funded at a later date and any collateral proves to be worthless.
        The Company uses the same credit policies in making commitments as it does
        for
        on-balance-sheet extensions of credit.
  Contract
        amounts of financial instruments that represent agreements to extend credit
        are
        as follows at December 31:
 
 **2006**
              
              **2005**(In
                  thousands)Loan
                  origination commitments and unused lines of credit:Mortgage
                  loans
              
              $
              9,346
              
              $
              13,655Commercial
                  loans
              
              
              12,900
              
              
              12,540Home
                  equity lines
              
              
              12,383
              
              
              11,661Other
                  revolving credit
              
              
              3,432
              
              
              3,87538,061
              
              
              41,731Standby
                  letters of credit
              
              
              1,175
              
              
              1,691$
              39,236
              
              $
              43,422
 
 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 $1,175,000
        and
        $1,691,000 at December 31, 2006 and 2005, 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, 2006 and 2005 was not
        significant.
 
 **(17)**
              **Fair
                  Values of Financial
                  Instruments**
 
 SFAS
        No. 107, *Disclosures
        about Fair Value of Financial Instruments* ,
        requires that the Company disclose estimated fair values for its on- and
        off-balance-sheet financial instruments. SFAS No. 107 defines fair value as
        the amount at which a financial instrument could be exchanged in a current
        transaction between parties other than in a forced sale or
        liquidation.
  Fair
        value estimates are made at a specific point in time, based on relevant market
        information and information about the financial instrument. These estimates
        do
        not reflect any premium or discount that could result from offering for sale
        at
        one time the Company’s entire holding of a particular financial instrument, nor
        do they reflect possible tax ramifications or transaction costs. Because
        no
        market exists for a significant portion of the Company’s financial instruments,
        fair value estimates are based on judgments regarding future expected net
        cash
        flows, current economic conditions, risk characteristics of various financial
        instruments, and other factors. These estimates are subjective in nature
        and
        involve uncertainties and matters of significant judgment, and therefore
        cannot
        be determined with precision. Changes in assumptions could significantly
        affect
        the estimates.
   F-26
  
  Fair
        value estimates are based on existing on- and off-balance-sheet financial
        instruments without attempting to estimate the value of anticipated future
        business or the value of nonfinancial assets and liabilities. In addition,
        there
        are significant unrecognized intangible assets that are not included in these
        fair value estimates, such as the value of “core deposits” and the Company’s
        branch network.
  The
        following is a summary of the net carrying values and estimated fair values
        of
        the Company’s financial assets and liabilities (none of which were held for
        trading purposes) at December 31:
 
 **2006**
              
              **2005****Net**
              
              
              
              **Net****carrying**
              
              **Estimated**
              
              **carrying**
              
              **Estimated****amount**
              
              **fair
                  value**
              
              **amount**
              
              **fair
                  value**(In
                  thousands)
              
              (In
                  thousands)Financial
                  assets:Cash
                  and cash equivalents
              
              $
              12,270
              
              $
              12,270
              
              $
              24,192
              
              $
              24,192Securities
                  available for sale
              
              
              99,788
              
              
              99,788
              
              
              88,984
              
              
              88,984Securities
                  held to maturity
              
              
              9,445
              
              
              9,570
              
              
              8,195
              
              
              8,233Loans,
                  net
              
              
              247,244
              
              
              247,759
              
              
              240,646
              
              
              239,105Accrued
                  interest receivable
              
              
              2,441
              
              
              2,441
              
              
              2,040
              
              
              2,040FHLB
                  stock
              
              
              2,296
              
              
              2,296
              
              
              2,496
              
              
              2,496Financial
                  liabilities:Demand
                  deposits (non-interest-bearing)
              
              
              64,974
              
              
              64,974
              
              
              65,266
              
              
              65,266Interest-bearing
                  deposits
              
              
              260,099
              
              
              260,099
              
              
              246,830
              
              
              246,830FHLB
                  advances
              
              
              20,000
              
              
              19,930
              
              
              25,000
              
              
              24,908Short-term
                  borrowings
              
              
              903
              
              
              903
              
              
              427
              
              
              427Accrued
                  interest payable
              
              
              604
              
              
              604
              
              
              550
              
              
              550
 
 The
        specific estimation methods and assumptions used can have a substantial impact
        on the estimated fair values. The following is a summary of the significant
        methods and assumptions used by the Company to estimate the fair values shown
        in
        the preceding table:
  ***Securities***
  The
        carrying values for securities maturing within 90 days approximate fair values
        because there is little interest rate or credit risk associated with these
        instruments. The fair values of longer-term securities are estimated based
        on
        bid prices published in financial newspapers or bid quotations received from
        securities dealers. The fair values of certain state and municipal securities
        are not readily available through market sources; accordingly, fair value
        estimates are based on quoted market prices of similar instruments, adjusted
        for
        any significant differences between the quoted instruments and the instruments
        being valued.
 
 ***Loans***
  Fair
        values are estimated for portfolios of loans with similar financial
        characteristics. Loans are segregated by type such as commercial, consumer,
        real
        estate and other loans. Each loan category is further segregated into fixed
        and
        adjustable rate interest terms and by performing and nonperforming categories.
        The fair values of performing loans are calculated by discounting scheduled
        cash
        flows through estimated maturity using estimated market discount rates that
        reflect the credit and interest rate risks inherent in the loans. Estimated
        maturities are based on contractual terms and repricing
        opportunities.
  The
        fair
        values of nonperforming loans are based on recent external appraisals and
        discounted cash flow analyses. Estimated cash flows are discounted using
        a rate
        commensurate with the risk associated with the estimated cash flows. Assumptions
        regarding credit risk, cash flows and discount rates are judgmentally determined
        using available market information and specific borrower
        information.
  F-27
  
 
 ***Deposit
        Liabilities***
  The
        fair
        values of deposits with no stated maturity (such as checking, savings and
        money
        market deposits) equal the carrying amounts payable on demand. The fair values
        of time deposits are based on the discounted value of contractual cash flows.
        The discount rates are estimated based on the rates currently offered for
        time
        deposits with similar remaining maturities.
 
 ***FHLB
        Advances***
  The
        fair
        value was estimated by discounting scheduled cash flows through maturity
        using
        current market rates.
 
 ***Other
        Financial Instruments***
  The
        fair
        values of cash and cash equivalents, FHLB stock, accrued interest receivable,
        accrued interest payable and short-term debt approximated their carrying
        amounts
        at December 31, 2006 and 2005.
  The
        fair
        values of the agreements to extend credit described in note 16 are
        estimated based on the fees currently charged to enter into similar agreements,
        taking into account the remaining terms of the agreements and the present
        creditworthiness of the counterparties. For fixed rate loan commitments,
        fair
        value estimates also consider the difference between current market interest
        rates and the committed rates. At December 31, 2006 and 2005, the fair
        values of these financial instruments approximated the related carrying values
        which were not significant.
 
 **(18)**
              **Condensed
                  Parent Company Financial
                  Statements**
 
 The
        following are the condensed parent company only financial statements for
        Jeffersonville Bancorp:
 
 **Balance
        Sheets**
 
 **December
                  31****2006**
              
              **2005**(In
                  thousands)**Assets**Cash
              
              $
              10
              
              $
              88Securities
                  available for sale
              
              
              1,017
              
              
              982Investment
                  in subsidiary
              
              
              39,502
              
              
              40,094Premises
                  and equipment, net
              
              
              839
              
              
              901Other
                  assets
              
              
              4
              
              
              457Total
                  Assets
              
              $
              41,372
              
              $
              42,522**Liablities
                  and Stockholders’ Equity**Liabilities
              
              $
              97
              
              $
              3Stockholders’
                  equity
              
              
              41,275
              
              
              42,519Total
                  Liabilities and Stockholders’ Equity
              
              $
              41,372
              
              $
              42,522
  F-28
  
  **Statements
        of Income**
 
 **Years
                  ended December 31****2006**
              
              **2005**
              
              **2004**(In
                  thousands)Dividend
                  income from subsidiary
              
              $
              4,787
              
              $
              1,800
              
              $
              1,800Dividend
                  income on securities available for sale
              
              
              34
              
              
              29
              
              
              23Rental
                  income from subsidiary
              
              
              —
              
              
              235
              
              
              313Other
                  non-interest income
              
              
              3
              
              
              11
              
              
              74,824
              
              
              2,075
              
              
              2,143Occupancy
                  and equipment expenses
              
              
              121
              
              
              116
              
              
              110Other
                  non-interest expenses
              
              
              131
              
              
              108
              
              
              134252
              
              
              224
              
              
              244Income
                  before income taxes andundistributed
                  income of subsidiary
              
              
              4,572
              
              
              1,851
              
              
              1,899Income
                  tax expense
              
              
              —
              
              
              33
              
              
              38Income
                  before undistributedincome
                  of subsidiary
              
              
              4,572
              
              
              1,818
              
              
              1,861Equity
                  in undistributed income of subsidiary
              
              
              371
              
              
              3,907
              
              
              4,310Net
                  Income
              
              $
              4,943
              
              $
              5,725
              
              $
              6,171
 
 
 
 
 
 **Statements
        of Cash Flows**
  **Years
                  ended December 31****2006**
              
              **2005**
              
              **2004**(In
                  thousands)**Operating
                  activities:**Net
                  income
              
              $
              4,943
              
              $
              5,725
              
              $
              6,171Equity
                  in undistributed income of subsidiary
              
              
              (371
              )
              
              (3,907
              )
              
              (4,310
              )Depreciation
                  and amortization
              
              
              62
              
              
              62
              
              
              61Other
                  adjustments, net
              
              
              —
              
              
              32
              
              
              34Net
                  Cash Provided by Operating Activities4,634
              
              
              1,912
              
              
              1,956**Investing
                  activities:**Proceeds
                  from calls of securitiesavailable
                  for sale
              
              
              —
              
              
              3
              
              
              150Purchase
                  of securities available for sale
              
              
              —
              
              
              (170
              )
              
              (150
              )Cash
                  Provided (Used) by Investing Activities—
              
              
              (167
              )
              
              —**Financing
                  activities:**Purchases
                  of treasury stock
              
              
              (2,614
              )
              
              —
              
              
              —Cash
                  dividends paid
              
              
              (2,098
              )
              
              (1,949
              )
              
              (1,776
              )Net
                  Cash Used in Financing Activities
              
              
              (4,712
              )
              
              (1,949
              )
              
              (1,776
              )Net
                  (Decrease) Increase in Cash
              
              
              (78
              )
              
              (204
              )
              
              180Cash
                  at Beginning of Year
              
              
              88
              
              
              292
              
              
              112Cash
                  at End of Year
              
              $
              10
              
              $
              88
              
              $
              292


F-29




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





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





**ITEM
      9A.**  **CONTROLS
      AND PROCEDURES**





**EVALUATION
      OF DISCLOSURE CONTROLS AND PROCEDURES**





The
      Company’s principal executive officer and principal financial officer have
      evaluated the disclosure controls and procedures (as defined in Rules 13a-15(e)
      or 15d-15(e) under the Exchange Act as of December 31, 2006. Based on this
      evaluation, the principal executive officer and principal financial officer
      have
      concluded that the disclosure controls and procedures effectively ensure that
      information required to be disclosed in the Company’s filings and submissions
      with the Securities and Exchange Commission under the Exchange Act, is recorded,
      processed, summarized and reported within the time periods specified by the
      Securities and Exchange Commission. In addition, the Company has reviewed its
      internal controls and there have been no significant changes in its internal
      controls over financial reporting or in other factors during the Company’s most
      recent fiscal quarter that have or are likely to materially affect internal
      control over financial reporting.





**MANAGEMENT’S
      REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**





Management
      is responsible for establishing and maintaining adequate internal control over
      financial reporting, as such term is defined in Exchange Act Rule 13a-15(f)
      or
      15d-15(f). The Company’s internal control system was designed to provide
      reasonable assurance to the Company’s management and board of directors
      regarding the preparation and fair presentation of published financial
      statements. Under the supervision and with the participation of the Company’s
      management, including its principal executive officer and principal financial
      officer, an evaluation of the effectiveness of internal controls over financial
      reporting was conducted, based on the framework in *Internal
      Control - Integrated Framework* issued
      by
      the Committee of Sponsoring Organizations of the Treadway Commission. Based
      on
      the evaluation under the framework in Internal *Control - Integrated Framework* ,
      management concluded that the internal controls over financial reporting were
      effective as of December 31, 2006. Management’s assessment of the effectiveness
      of internal control over financial reporting as of December 31, 2006 has been
      audited by Beard Miller Company LLP, an independent registered public accounting
      firm, as stated in their report, which is included in Item 8
      herein.





29





**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 2006
      Proxy Statement, which will be filed the Securities and Exchange Commission
      within 120 days of the
      Company’s 2006 fiscal year end, in the Election of Directors section, the
      Mangement 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 2006 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 2006 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 2006 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 2006 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
                Bylaws of the Company (Incorporated by Reference to Exhibit 3.5 and
                3.6 to
                Form 8 Registration Statement, effective June 29,
                1991)




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




21.1
            Subsidiaries
                of the Company




31.1
            Section
                302 Certification of Chief Executive
                Officer




31.2
            Section
                302 Certification of Chief Financial
                Officer




32.1
            906
                certification of Chief Executive
                Officer




32.2
            906
                certification of Chief Financial
                Officer




99.1
            Written
                agreement between The First National Bank of Jeffersonville and the
                Office
                of the Comptroller of the Currency dated November 28, 2006 (Incorporated
                by Reference to Exhibit 99.1 to Form 8-K Current Report filed on
                November
                30, 2006).






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




(c)
            Not
                applicable




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
                15, 2007
            By:
                /s/ Raymond Walter
            By:
                /s/ Charles E. Burnett*Chief
                Executive Officer*
            *Chief
                Financial Officer*






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




**SIGNATURE**
            **TITLE**
            **DATE**/s/
                Arthur E. Keesler
            *Chairman-Director*
            March
                15, 2007Arthur
                E. Keesler/s/
                Wayne V. Zanetti
            *Vice
                President*
            March
                15, 2007Wayne
                V. Zanetti/s/
                John K. Gempler
            *Secretary-Director*
            March
                15, 2007John
                K. Gempler/s/
                Edward T. Sykes
            *Director*
            March
                15, 2007Edward
                T. Sykes/s/
                Raymond Walter
            *Chief
                Executive Officer*
            March
                15, 2007Raymond
                Walter
            *President-Director*/s/
                Earle A. Wilde
            *Director*
            March
                15, 2007Earle
                A. Wilde/s/
                James F. Roche
            *Director*
            March
                15, 2007James
                F. Roche/s/
                John W. Galligan
            Director
            March
                15, 2007John
                W. Galligan/s/
                Kenneth C. Klein
            Director
            March
                15, 2007Kenneth
                C. Klein/s/
                Douglas A. Heinle
            Director
            March
                15, 2007Douglas
                A. Heinle


33