Jeffersonville Bancorp (JFBC) 10-Q 2006 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the Quarter ended September 30, 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	(I.R.S. Employer
incorporation or organization)	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)

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 xNo 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 xNon-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 oNo x

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 November 9, 2006
Common Stock, $0.50 par value per share	4,310,348 shares

INDEX TO FORM 10-Q

		Page
Part 1	FINANCIAL INFORMATION
Item 1	Consolidated Interim Financial Statements (Unaudited)
	Consolidated Balance Sheets at
	September 30, 2006 and December 31, 2005	1
	Consolidated Statements of Income for the Three
	Months Ended September 30, 2006 and 2005	2
	Consolidated Statements of Income for the Nine
	Months Ended September 30, 2006 and 2005	3
	Consolidated Statements of Cash Flows for the Nine
	Months Ended September 30, 2006 and 2005	4
	Notes to Unaudited Consolidated Interim Financial Statements	5-9
Item 2	Management's Discussion and Analysis of Financial
	Condition and Results of Operations	10-24
Item 3	Quantitative and Qualitative Disclosures about Market Risk	24
Item 4	Controls and Procedures	24
Part 2	OTHER INFORMATION
Item 1	Legal Proceedings	25
Item 1A	Risk Factors	25
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3	Defaults Upon Senior Securities	26
Item 4	Submission of Matters to a Vote of Security Holders	26
Item 5	Other Information	26
Item 6	Exhibits	26
Signatures		27

Jeffersonville Bancorp and Subsidiary

Consolidated Balance Sheets

Unaudited

(Dollars in thousands, except per share data)

	September 30,			December 31,
	2006			2005
ASSETS
Cash and due from banks	$	14,309		$	15,392
Federal funds sold		0			8,800
Total cash and cash equivalents		14,309			24,192
Securities available for sale, at fair value		101,728			88,984
Securities held to maturity, estimated fair value of $10,611
at September 30, 2006 and $8,233 at December 31, 2005		10,510			8,195
Loans, net of allowance for loan losses of $3,550 at
September 30, 2006 and $3,615 at December 31, 2005		245,625			240,646
Accrued interest receivable		2,600			2,040
Premises and equipment, net		3,127			3,027
Federal Home Loan Bank stock		2,296			2,496
Foreclosed real estate		251			0
Cash surrender value of bank-owned life insurance		13,526			13,217
Other assets		5,490			4,546
Total Assets	$	399,462		$	387,343
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Demand deposits	$	65,333		$	65,266
NOW and super NOW accounts		32,174			37,501
Savings and insured money market deposits		101,435			86,094
Time deposits		125,862			123,235
Total deposits		324,804			312,096
Federal Home Loan Bank borrowings		20,000			25,000
Short-term debt		3,909			427
Accrued expenses and other liabilities		8,480			7,301
Total liabilities		357,193			344,824
Commitments and contingent liabilities
Stockholders' equity
Series A preferred stock, no par value;
2,000,000 shares authorized, none issued		0			0
Common stock, $0.50 par value; 11,250,000 shares
authorized, 4,767,786 shares issued		2,384			2,384
Paid-in capital		6,483			6,483
Treasury stock, at cost; 451,338 shares at September 30, 2006
and 333,465 at December 31, 2005		(3,521	)		(1,108	)
Retained earnings		38,198			36,118
Accumulated other comprehensive loss		(1,275	)		(1,358	)
Total stockholders' equity		42,269			42,519
Total liabilites and stockholders' equity	$	399,462		$	387,343

See accompanying notes to unaudited consolidated interim financial statements.

1

Jeffersonville Bancorp and Subsidiary

Consolidated Statements of Income

Unaudited

(In thousands, except for per share data)

	For the three months ended September 30,
	2006			2005
INTEREST  AND DIVIDEND INCOME
Loan interest and fees	$	4,699		$	4,528
Securities:
Taxable		826			643
Non-taxable		510			492
Federal funds sold		52			0
Other		2			2
TOTAL INTEREST AND DIVIDEND INCOME		6,089			5,665
INTEREST EXPENSE
Deposits		1,866			1,040
Federal Home Loan Bank borrowings		248			350
Other		4			48
TOTAL INTEREST EXPENSE		2,118			1,438
NET INTEREST INCOME		3,971			4,227
Provision for loan losses		0			60
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		3,971			4,167
NON-INTEREST INCOME
Service charges		469			470
Earnings from cash surrender value
of bank-owned life insurance		105			107
Net security losses		(4	)		0
Forecloesed real estate income, net		95			16
Other non-interest income		362			424
TOTAL NON-INTEREST INCOME		1,027			1,017
NON-INTEREST EXPENSES
Salaries and employee benefits		1,933			1,995
Occupancy and equipment expenses		543			467
Other non-interest expenses		755			816
TOTAL NON-INTEREST EXPENSES		3,231			3,278
Income before income tax expense		1,767			1,906
Income tax expense		409			497
NET INCOME	$	1,358		$	1,409
Basic earnings per common share	$	0.31		$	0.32
Average common shares outstanding		4,335			4,434
Cash dividend declared per share	$	0.11		$	0.10

See accompanying notes to unaudited consolidated interim financial statements.

2

Jeffersonville Bancorp and Subsidiary

Consolidated Statements of Income

Unaudited

(In thousands, except for per share data)

	For the nine months
	ended September 30,
	2006			2005
INTEREST  AND DIVIDEND INCOME
Loan interest and fees	$	13,621		$	12,874
Securities:
Taxable		2,309			1,976
Non-taxable		1,502			1,447
Federal funds sold		411			14
Other		9			7
TOTAL INTEREST AND DIVIDEND INCOME		17,852			16,318
INTEREST EXPENSE
Deposits		5,205			2,800
Federal Home Loan Bank borrowings		806			890
Other		10			88
TOTAL INTEREST EXPENSE		6,021			3,778
NET INTEREST INCOME		11,831			12,540
Provision for loan losses		90			180
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		11,741			12,360
NON-INTEREST INCOME
Service charges		1,361			1,418
Earnings from cash surrender value
of bank-owned life insurance		309			353
Net security gain (loss)		(4	)		6
Foreclosed real estate income, net		53			141
Other non-interest income		947			1,012
TOTAL NON-INTEREST INCOME		2,666			2,930
NON-INTEREST EXPENSES
Salaries and employee benefits		5,865			5,848
Occupancy and equipment expenses		1,540			1,445
Other non-interest expenses		2,453			2,383
TOTAL NON-INTEREST EXPENSES		9,858			9,676
Income before income tax expense		4,549			5,614
Income tax expense		1,018			1,449
NET INCOME	$	3,531		$	4,165
Basic earnings per common share	$	0.80		$	0.94
Average common shares outstanding		4,400			4,434
Cash dividend declared per share	$	0.33		$	0.30

See accompanying notes to unaudited consolidated interim financial statements.

3

Jeffersonville Bancorp and Subsidiary

Consolidated Statements of Cash Flows

Unaudited

(Dollars in thousands)

	For the nine months
	ended September 30,
	2006			2005
Operating activities:
Net income	$	3,531		$	4,165
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses		90			180
Write down of foreclosed real estate		7			-
Net gain on sales of other real estate owned		(48	)		(125	)
Depreciation and amortization		463			431
Net earnings from cash surrender value
of bank-owned life insurance		(309	)		(353	)
Net security loss (gains)		4			(6	)
Increase in accrued interest receivable		(560	)		(55	)
Increase in other assets		(1,112	)		(332	)
Increase in accrued expenses and other liabilities		1,179			1,857
Net cash provided by operating activities		3,245			5,762
Investing activities:
Proceeds from maturities and calls:
Securities available for sale		4,362			6,717
Securities held to maturity		1,100			2,842
Proceeds from sales of securities available for sale		1,713			4,782
Purchases:
Securities available for sale		(18,686	)		(2,954	)
Securities held to maturity		(3,415	)		(5,126	)
Net increase in loans		(5,460	)		(21,380	)
Purchase of Federal Home Loan Bank stock		-			(4,176	)
Sale of Federal Home Loan Bank stock		200			3,566
Net purchases of premises and equipment		(563	)		(500	)
Proceeds from sales of foreclosed real estate		295			125
Net cash used in investing activities		(20,454	)		(16,104	)
Financing activities:
Net increase in deposits		12,708			2,870
Proceeds from Federal Home Loan Bank borrowings		10,000			10,000
Repayments of Federal Home Loan Bank borrowings		(15,000	)		-
Net increase (decrease) in short-term borrowings		3,482			(791	)
Purchases of treasury stock		(2,413	)		-
Cash dividends paid		(1,451	)		(1,328	)
Net cash provided by financing activities		7,326			10,751
Net (decrease) increase in cash and cash equivalents		(9,883	)		409
Cash and cash equivalents at beginning of year		24,192			14,040
Cash and cash equivalents at end of period	$	14,309		$	14,449
Supplemental information:
Cash paid for:
Interest	$	5,720		$	3,668
Income taxes		1,179			1,198
Transfer of loans to foreclosed real estate		391			-

See accompanying notes to unaudited consolidated interim financial statements.

4

JEFFERSONVILLE BANCORP

AND SUBSIDIARY

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

September 30, 2006

(Unaudited)

A. Financial Statement Presentation

The accompanying unaudited interim consolidated financial statements include the accounts of Jeffersonville Bancorp and its wholly owned subsidiary, The First National Bank of Jeffersonville (collectively, Jeffersonville Bancorp and its subsidiary are referred to herein as the “Company”). In the opinion of Management of the Company, the accompanying unaudited consolidated interim financial statements contain all adjustments necessary to present the financial position as of September 30, 2006 and December 31, 2005, the results of operations for the three and nine month periods ended September 30, 2006 and 2005, and the cash flows for the nine month periods ended September 30, 2006 and 2005. Certain reclassifications have been made in order to conform with the current year’s presentation. All adjustments are normal and recurring. Third quarter results are not indicative of full year results. The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and should be read in conjunction with the Company's consolidated year-end financial statements, including notes thereto, which are included in the 2005 Annual Report on Form 10-K.

B.Earnings per Share

Basic earnings per share amounts were calculated based on weighted average common shares outstanding. For the three and nine month periods ended September 30, 2006 weighted average common shares outstanding were 4,332,490 and 4,399,132 and for the same periods in 2005 both were 4,434,321 respectively. There were no dilutive securities during any of the periods. Earnings per share were $0.31 for the quarter ended September 30, 2006, as compared to $0.32 per share for the same period in 2005. Earnings per share were $0.80 for the nine months ended September 30, 2006, as compared to $0.94 per share for the same period in 2005.

5

C.Comprehensive Income

The following tables show comprehensive income for the three-month and nine month periods ended September 30, 2006 and 2005, dollars shown in thousands.

Three Months Ended September 30, 2006:
Net Income	$	1,358
Other Comprehensive Income:
Net unrealized holding gains arising during the period,
net of tax (pre-tax amount of $2,415)		1,450
Reclassification adjustment for net losses realized in net
income during the period, net of tax (pre-tax amount of $6)		4
Other comprehensive income		1,454
Total comprehensive income	$	2,812
Three Months Ended September 30, 2005:
Net Income	$	1,409
Other Comprehensive Loss:
Net unrealized holding losses arising during the period,
net of tax (pre-tax amount of $1,148)		(659	)
Total comprehensive income	$	750
Nine Months Ended September 30, 2006:
Net Income	$	3,531
Other Comprehensive Income:
Net unrealized holding gains arising during the period,
net of tax (pre-tax amount of $131)		79
Reclassification adjustment for net losses realized in net
income during the period, net of tax (pre-tax amount of $6)		4
Other comprehensive income		83
Total comprehensive income	$	3,614
Nine Months Ended September 30, 2005:
Net Income	$	4,165
Other Comprehensive Loss:
Net unrealized holding losses arising during the period,
net of tax (pre-tax amount of $626)		(359	)

Reclassification adjustment for net gains realized in net
income during the period, net of tax (pre-tax amount of $6)		(4	)
Other comprehensive loss		(363	)
Total comprehensive income	$	3,802

6

D.New Accounting Pronouncements

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. We are currently evaluating the potential impact, if any, of the adoption of FASB Statement No. 157 on our consolidated financial position, results of operations and cash flows.

On September 29, 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 is currently analyzing the effects of SFAS 158 on the consolidated financial position, results of operations and cash flows.

On September 13, 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 is currently analyzing the effects of SAB 108 but does not expect its implementation will have a significant impact on the Company’s financial conditions or results of operations.

E.Pension and Other Postretirement Benefits

The Company has a noncontributory defined benefit pension plan covering substantially all of its employees. The Company also sponsors a postretirement medical, dental and life insurance benefit plan for qualifying pension plan retirees as disclosed in the 2005 Annual Report on Form 10-K. The components of the net periodic benefit cost for these plans were as follows for the nine and three month periods ended September 30:

7

For the nine months ended September 30, 2006 and 2005, dollars shown in thousands:

	Pension benefits						Postretirement benefits
	2006			2005			2006			2005
Service cost	$	327		$	223		$	132		$	124
Interest cost		357			306			126			132
Expected return on plan assets		(303	)		(275	)		-			-
Amortization of prior service cost		—			19			(33	)		(33	)
Amortization of transition (asset) obligation		18			(3	)		—			—
Recognized net actuarial loss		147			101			30			40
Net periodic benefit cost	$	546		$	371		$	255		$	263

8

For the three months ended September 30, 2006 and 2005, dollars shown in thousands:

Pension benefits		Postretirement benefits
2006	2005	2006	2005

Service cost	$	109		$	74		$	44		$	41
Interest cost		119			102			42			44
Expected return on plan assets		(101	)		(92	)		-			-
Amortization of prior service cost		—			7			(11	)		(11	)
Amortization of transition (asset) obligation		6			(1	)		—			—
Recognized net actuarial loss		49			34			10			14
Net periodic benefit cost	$	182		$	124		$	85		$	88

The Company expects to contribute an aggregate amount of $490,000 to its pension plan and $60,000 to its other postretirement benefits plan in 2006. As of September 30, 2006, a contribution of $482,000 was made to the pension plan and $45,000 of contributions had been made to the other postretirement benefits plan.

F.Guarantees

The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are conditional commitments issued by the Company to 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 approximately $1,235,000 at September 30, 2006 and $1,691,000 at December 31, 2005 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 September 30, 2006 was insignificant.

9

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

In addition to historical information, this report includes certain forward-looking statements with respect to the financial condition, results of operations and business of the Company based on current management’s expectations. Economic circumstances, the Company's operations and the Company’s actual results could differ significantly from those discussed in the forward-looking statements. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations, changes in interest rates, deposit flows, the cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of the Company’s loan and securities portfolios, changes in accounting principles, and other economic, competitive, governmental, and technological factors affecting the Company's operations, markets, products, services and prices. Some of these and other factors are discussed in the Company’s annual and quarterly reports filed with the Securities and Exchange Commission. Such developments could have an adverse impact on the Company’s financial position and results of operation.

A.Overview - Financial Condition

During the period from December 31, 2005 to September 30, 2006, total assets increased $12,119,000 or 3.1%. The decrease in cash and cash equivalents was offset by increases in available for sale and held to maturity securities and net loans. Cash and cash equivalents decreased from $24,192,000 at year end 2005 to $14,309,000 at September 30, 2006, a decrease of $9,883,000 or 40.9%. Securities available for sale increased from $88,984,000 at year end 2005 to $101,728,000 at September 30, 2006, an increase of $12,744,000 or 14.3%. Securities held to maturity increased from $8,195,000 at year end 2005 to $10,510,000 at September 30, 2006, an increase of $2,315,000 or 28.2%. Diminished loan demand was the primary reason for the increase in the Company’s investment portfolio. The Company’s unrealized losses associated with the available for sale investment portfolio, decreased by $41,000 from December 31, 2005 to September 30, 2006. The total unrealized losses as of September 30, 2006 were $1,710,000. Management considers this temporary impairment an acceptable risk in light of increased interest rates offset by the excellent credit quality of these agency securities. Net loans increased from $240,646,000 at year end 2005 to $245,625,000 at September 30, 2006, an increase of $4,979,000 or 2.1%.

10

Deposits increased from $312,096,000 at December 31, 2005 to $324,804,000 at September 30, 2006, an increase of $12,708,000 or 4.1%. Demand deposits increased from $65,266,000 at December 31, 2005 to $65,333,000 at September 30, 2006, an increase of $67,000 or 0.1%. These lower cost deposits are an important offset to the cost of higher priced funds. Savings deposits increased from $86,094,000 at December 31, 2005 to $101,435,000 at September 30, 2006, an increase of $15,341,000 or 17.8%. Time deposits increased $2,627,000 or 2.1% to $125,862,000 at September 30, 2006 from $123,235,000 at December 31, 2005. NOW and super NOW accounts decreased from $37,501,000 at December 31, 2005 by $5,327,000 or 14.2%, to $32,174,000 at September 30, 2006. The major increase in higher cost funds can be attributed to the addition of $15,000,000 of brokered deposits at the end of last year and the Federal Reserve Bank’s actions to increase interest rates. Non deposit liabilities decreased from $32,728,000 at December 31, 2005 to $32,389,000 at September 30, 2006, a decrease of $339,000 or 1.0%, largely due to a $5,000,000 or 20% repayment of Federal Home Loan Bank long-term borrowings, partially offset by short-term borrowings of $3,900,000 at September 30, 2006.

Total stockholders’ equity decreased $250,000 or 0.6% from $42,519,000 at December 31, 2005 to $42,269,000 at September 30, 2006. This decrease was the result of net income of $3,531,000 less cash dividends of $1,451,000, an $83,000 increase in accumulated other comprehensive loss, and company stock repurchases of $2,413,000.

Loan Portfolio Composition, dollars shown in thousands:

	September 30,					December 31,
	2006					2005
	Amount			Percent		Amount			Percent
REAL ESTATE LOANS
Residential	$	92,761			37.3%	$	89,598			36.7%
Commercial		84,240			33.8%		81,587			33.4%
Home Equity		23,988			9.6%		22,697			9.3%
Farm Land		3,770			1.5%		3,443			1.4%
Construction		6,072			2.4%		5,956			2.4%
		210,831			84.6%		203,281			83.2%
OTHER LOANS
Commercial Loans		27,101			10.9%		28,644			11.7%
Consumer Installment Loans		10,617			4.3%		11,673			4.8%
Other Consumer Loans		306			0.1%		128			0.1%
Agriculture Loans		320			0.1%		535			0.2%
		38,344			15.4%		40,980			16.8%
Total Loans		249,175			100.0%		244,261			100.0%
Allowance for Loan Losses		(3,550	)				(3,615	)
TOTAL LOANS, NET	$	245,625				$	240,646

11

B.Allowance for Loan Losses

The allowance for loan losses reflects management’s assessment of the risk inherent in the loan portfolio, which includes factors such as the general state of the economy and past loan experience. The provision for loan losses was $90,000 for the nine months ended September 30, 2006 compared to $180,000 for the nine months ended September 30, 2005. Total charge-offs for the nine month period ended September 30, 2006 were $463,000 compared to $301,000 for the same period in the prior year, recoveries also increased, from $185,000 for the 2005 period to $308,000 for the 2006 period. These amounts represent net charge-offs of $155,000 for the nine months ended 2006 versus net charge-offs of $116,000 for the same period in the prior year. Based on management’s analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.

Changes in the allowance for loan losses are summarized as follows for the periods ended, dollars shown in thousands:

	Nine months ended			Nine months ended			Year ended
	September 30,			September 30,			December 31,
	2006			2005			2005
Balance at beginning of period	$	3,615		$	3,645		$	3,645
Provision for loan losses		90			180			180
Loans charged-off		(463	)		(301	)		(440	)
Recoveries		308			185			230
Balance at end of period	$	3,550		$	3,709		$	3,615
Annualized net charge-offs as a percentage of average outstanding loans		0.08	%		0.07	%		0.09	%
Allowance for loan losses to:
Total loans		1.42	%		1.51	%		1.48	%
Total nonperforming loans		169.7	%		126.0	%		123.7	%

C.Nonaccrual and Past Due Loans

The Company places a loan on nonaccrual status when collectability of principal or interest in accordance with the provisions of the loan documents is doubtful, or when either principal or interest is 90 days or more past due, or if the loan is not in the process of collection. 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. Interest income on nonaccrual loans which are well secured, is recorded on a cash basis.

Nonperforming loans are summarized as follows at, dollars shown in thousands:

	September 30,			December 31,
	2006			2005
Nonaccrual loans	$	1,989		$	2,922
Loans past due 90 days or more and still accruing interest		103			0
Total nonperforming loans	$	2,092		$	2,922
Nonperforming loans as a percentage of total loans		0.84	%		1.19	%

12

As of September 30, 2006 and December 31, 2005, there were $1,628,000 and $2,922,000 in loans which were considered to be impaired under Statement of Financial Accounting Standards (“SFAS”) No.114. None of the impaired loans at September 30, 2006 or December 31, 2005 required a specific valuation allowance.

D.Capital

Under the Federal Reserve Bank’s risk-based capital rules, the Company’s Tier I risk-based capital was 16.5% and total risk-based capital was 17.8% of risk-weighted assets at September 30, 2006. 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 10.9% at September 30, 2006 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 at September 30, 2006, dollars shown in thousands.

TIER I CAPITAL
Stockholders’ equity, excluding accumulated other comprehensive loss	$	43,544
TIER II CAPITAL
Allowance for loan losses1		3,295
Total risk-based capital	$	46,839
Risk-weighted assets2	$	263,408
Average assets	$	399,808
RATIOS
Tier I risk-based capital (minimum 4.0%)		16.5	%
Total risk-based capital (minimum 8.0%)		17.8	%
Leverage (minimum 4.0%)		10.9	%

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 excess allowance for loan losses excluded from total risk-based capital

13

Consolidated Average Balance Sheet for the nine months ended September 30, 2006

(Fully Taxable Equivalent)

(Dollars in thousands)

	Average		Interest		Average
	Balance		Income/Expense		Yield/Rate
ASSETS
Investment securities (1)
Taxable securities	$	61,149	$	2,309		5.03	%
Tax exempt securities		49,422		2,276		6.14	%
TOTAL SECURITIES		110,571		4,585		5.53	%
Short term investments		12,053		420		4.65	%
Loans
Real estate mortgages		176,549		9,249		6.99	%
Home equity loans		23,431		1,157		6.58	%
Time and demand loans		27,578		1,780		8.61	%
Installment loans		16,778		1,269		10.08	%
Other loans		1,612		166		13.73	%
TOTAL LOANS (2)		245,948		13,621		7.38	%
TOTAL INTEREST EARNING ASSETS		368,572		18,626		6.74	%
Other assets		31,236
TOTAL ASSETS	$	399,808
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW and super NOW accounts	$	35,606		133		0.50	%
Savings and insured money market deposits		98,130		1,513		2.06	%
Time deposits		127,188		3,559		3.73	%
TOTAL INTEREST BEARING DEPOSITS		260,924		5,205		2.66	%
Short-term debt		327		10		4.08	%
Long-term debt		22,070		806		4.87	%
TOTAL INTEREST BEARING LIABILITIES		283,321		6,021		2.83	%
Demand deposits		66,063
Other liabilities		8,209
TOTAL LIABILITIES		357,593
STOCKHOLDERS' EQUITY		42,215
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	399,808
NET INTEREST INCOME - TAX EFFECTED				12,605
LESS: TAX GROSS UP ON EXEMPT SECURITIES				774
NET INTEREST INCOME PER STATEMENT OF INCOME			$	11,831
NET INTEREST SPREAD						3.90	%
NET INTEREST MARGIN (3)						4.56	%

1. Includes both held to maturity and available for sale securities. Yields on securities available for sale are based on amortized costs and tax exempt securities are tax effected at a rate of 34%.

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 average interest earning assets

14

Consolidated Average Balance Sheet for the nine months ended September 30, 2005

(Fully Taxable Equivalent)

(Dollars in thousands) 

	Average		Interest		Average
	Balance		Income/Expense		Yield/Rate
ASSETS
Investment securities (1)
Taxable securities	$	55,089	$	1,976		4.78	%
Tax exempt securities		48,022		2,192		6.09	%
TOTAL SECURITIES		103,111		4,168		5.39	%
Short term investments		1,059		21		2.64	%
Loans
Real estate mortgages		167,964		8,836		7.01	%
Home equity loans		21,396		964		6.01	%
Time and demand loans		27,122		1,554		7.64	%
Installment loans		17,099		1,289		10.05	%
Other loans		2,666		231		11.55	%
TOTAL LOANS (2)		236,247		12,874		7.27	%
TOTAL INTEREST EARNING ASSETS		340,417		17,063		6.68	%
Other assets		32,072
TOTAL ASSETS	$	372,489
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW and super NOW accounts	$	37,330		80		0.29	%
Savings and insured money market deposits		88,040		631		0.96	%
Time deposits		104,065		2,089		2.68	%
TOTAL INTEREST BEARING DEPOSITS		229,435		2,800		1.63	%
Short-term debt		3,575		88		3.28	%
Long-term debt		24,141		890		4.92	%
TOTAL INTEREST BEARING LIABILITIES		257,151		3,778		1.96	%
Demand deposits		67,258
Other liabilities		6,923
TOTAL LIABILITIES		331,332
STOCKHOLDERS' EQUITY		41,157
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	372,489
NET INTEREST INCOME - TAX EFFECTED				13,285
LESS: TAX GROSS UP ON EXEMPT SECURITIES				745
NET INTEREST INCOME PER STATEMENT OF INCOME			$	12,540
NET INTEREST SPREAD						4.72	%
NET INTEREST MARGIN (3)						5.20	%

1. Includes both held to maturity and available for sale securities. Yields on securities available for sale are based on amortized costs and tax exempt securities are tax effected at a rate of 34%.

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 average interest earning assets

15

Consolidated Average Balance Sheet for the three months ended September 30, 2006

(Fully Taxable Equivalent)

(Dollars in thousands)

	Average		Interest		Average
	Balance		Income/Expense		Yield/Rate
ASSETS
Investment securities (1)
Taxable securities	$	67,110	$	826		4.92	%
Tax exempt securities		50,691		775		6.12	%
TOTAL SECURITIES		117,801		1,601		5.44	%
Short term investments		4,142		54		5.22	%
Loans
Real estate mortgages		181,595		3,210		7.07	%
Home equity loans		24,212		410		6.77	%
Time and demand loans		26,970		604		8.96	%
Installment loans		17,072		428		10.03	%
Other loans		1,745		47		10.77	%
TOTAL LOANS (2)		251,594		4,699		7.47	%
TOTAL INTEREST EARNING ASSETS		373,537		6,354		6.80	%
Other assets		31,661
TOTAL ASSETS	$	405,198
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW and super NOW accounts	$	33,579		42		0.50	%
Savings and insured money market deposits		105,078		596		2.27	%
Time deposits		128,476		1,228		3.82	%
TOTAL INTEREST BEARING DEPOSITS		267,133		1,866		2.79	%
Short-term debt		416		4		3.85	%
Long-term debt		20,220		248		4.91	%
TOTAL INTEREST BEARING LIABILITIES		287,769		2,118		2.94	%
Demand deposits		66,512
Other liabilities		8,745
TOTAL LIABILITIES		363,026
STOCKHOLDERS' EQUITY		42,172
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	405,198
NET INTEREST INCOME - TAX EFFECTED				4,236
LESS: TAX GROSS UP ON EXEMPT SECURITIES				265
NET INTEREST INCOME PER STATEMENT OF INCOME			$	3,971
NET INTEREST SPREAD						3.86	%
NET INTEREST MARGIN (3)						4.54	%

1. Includes both held to maturity and available for sale securities. Yields on securities available for sale are based on amortized costs and tax exempt securities are tax effected at a rate of 34%.

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 average interest earning assets

16

Consolidated Average Balance Sheet for the three months ended September 30, 2005

(Fully Taxable Equivalent)

(Dollars in thousands)

	Average		Interest		Average
	Balance		Income/Expense		Yield/Rate
ASSETS
Investment securities (1)
Taxable securities	$	54,618	$	643		4.71	%
Tax exempt securities		49,186		745		6.06	%
TOTAL SECURITIES		103,804		1,388		5.35	%
Short term investments		176		2		4.56	%
Loans
Real estate mortgages		174,545		3,067		7.03	%
Home equity loans		22,210		339		6.11	%
Time and demand loans		30,913		608		7.87	%
Installment loans		17,364		433		9.97	%
Other loans		2,658		81		12.19	%
TOTAL LOANS (2)		247,690		4,528		7.31	%
TOTAL INTEREST EARNING ASSETS		351,670		5,918		6.73	%
Other assets		31,154
TOTAL ASSETS	$	382,824
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW and super NOW accounts	$	35,787		31		0.35	%
Savings and insured money market deposits		89,978		251		1.12	%
Time deposits		103,160		758		2.94	%
TOTAL INTEREST BEARING DEPOSITS		228,925		1,040		1.82	%
Short-term debt		5,279		48		3.64	%
Long-term debt		28,814		350		4.86	%
TOTAL INTEREST BEARING LIABILITIES		263,018		1,438		2.19	%
Demand deposits		71,777
Other liabilities		5,674
TOTAL LIABILITIES		340,469
STOCKHOLDERS' EQUITY		42,355
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	382,824
NET INTEREST INCOME - TAX EFFECTED				4,480
LESS: TAX GROSS UP ON EXEMPT SECURITIES				253
NET INTEREST INCOME PER STATEMENT OF INCOME			$	4,227
NET INTEREST SPREAD						4.54	%
NET INTEREST MARGIN (3)						5.10	%

1. Includes both held to maturity and available for sale securities. Yields on securities available for sale are based on amortized costs and tax exempt securities are tax effected at a rate of 34%.

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 average interest earning assets

17

VOLUME AND RATE ANALYSIS

Nine months ended September 30, 2006 compared to 2005

(Dollars in thousands)

	Increase (Decrease) Due to Change In
	Volume			Rate			Total
INTEREST INCOME
Investment securities	$	302		$	115		$	417
Short-term investments		218			181			399
Loans		529			218			747
Total interest income		1,049			514			1,563
INTEREST EXPENSE
NOW and
Super NOW deposits		(4	)		57			53
Savings and insured
money market deposits		72			810			882
Time deposits		464			1,006			1,470
Short-term debt		(80	)		2			(78	)
Long-term debt		(76	)		(8	)		(84	)
Total interest expense		376			1,867			2,243
Net interest income	$	673			($1,353	)		($680	)

Three months ended September 30, 2006 compared to 2005

(Dollars in thousands)

	Increase (Decrease) Due to Change In
	Volume			Rate			Total
INTEREST INCOME
Investment securities	$	189		$	24		$	213
Short-term investments		34			18			52
Loans		73			98			171
Total interest income		296			140			436
INTEREST EXPENSE
NOW and Super NOW deposits		(2	)		13			11
Savings and insured money market deposits		39			306			345
Time deposits		184			286			470
Short-term debt		(44	)		0			(44	)
Long-term debt		(105	)		3			(102	)
Total interest expense		72			608			680
Net interest income	$	224			($468	)		($244	)

18

Liquidity

The objective of maintaining adequate liquidity is to assure the ability of the Company and its subsidiary to meet their financial obligations. These obligations include the payment of interest on deposits, borrowings, withdrawal of deposits on demand or at their contractual maturity, and the repayment of borrowings as they mature, the ability to fund new and existing loan commitments and the ability to take advantage of new business opportunities. The Company and its subsidiary achieve liquidity by maintaining a strong base of core customer funds, maturing short-term assets, the ability to sell securities, the availability of lines of credit and access to capital markets.

Liquidity at the subsidiary bank level is managed through the monitoring of anticipated changes in loans, the investment portfolio, core deposits and wholesale funds. The strength of the subsidiary bank’s liquidity position is a result of its base of core customer deposits. These core deposits are supplemented by wholesale funding sources, including credit lines with the other banking institutions, and the Federal Home Loan Bank.

The primary source of liquidity for the parent company are dividends from the bank.

In 2006, cash generated from operating activities amounted to $3.2 million and cash provided by financing activities amounted to $7.3 million. These amounts were offset by amounts used in investing activities of $20.5 million, resulting in a net decrease in cash and cash equivalents of $9,883,000. See the Consolidated Statements of Cash Flows for additional information.

Maturity Schedule of Time Deposits of $100,000 or more at September 30, 2006, dollars in thousands:

Due three months or less	$	17,815
Over three months through nine months		7,208
Over nine months though twelve months		7,546
Over twelve months		12,110
	$	44,679

19

E. Result of Operations

Comparison of the three month periods September 30, 2006 and 2005

Net income for the quarter ended September 30, 2006 decreased by $51,000 to $1,358,000 compared to $1,409,000 for the corresponding period in 2005. The primary reason for this decrease is a $256,000 decrease in net interest income. An increase of $680,000 in deposit interest expense for the quarter ended September 30, 2006 compared to the same period in 2005, negated the $424,000 increase in interest and dividend income for the corresponding periods. The Company’s annualized return on average assets was 1.3% and 1.5% for the quarters ended September 30, 2006 and 2005, respectively. The annualized return on average stockholders’ equity was 12.9% and 13.4% for the third quarter of 2006 and 2005, respectively.

Total interest income for the third quarter of 2006 increased $424,000 or 7.5% from the corresponding period in 2005. Total interest expense increased $680,000 or 47.3% from the corresponding period in 2005. Net interest income decreased $256,000 or 6.1% from the prior year period. Non-interest income for the third quarter of 2006 increased $10,000 or 1.0% from the corresponding period in 2005. Total non-interest expenses decreased $47,000 or 1.4% from the third quarter of 2005 as compared to the third quarter of 2006.

Total interest income increased as did the overall yield on average interest earning assets. Total average interest earning assets were $373,537,000 for the three month period ended September 30, 2006 compared to $351,670,000 for the corresponding period in 2005, an increase of $21,867,000 or 6.2%. The yield on total average interest earning assets increased from 6.73% for the three months ended September 30, 2005 to 6.80% for the three months ended September 30, 2006 or 7 basis points due to rising interest rates. There was an increase of $3,904,000 or 1.6% on average loans, for the three months ended September 30, 2006 as compared to September 30, 2005. The yield on total average loans increased 16 basis points from 7.31% for the quarter ended September 30, 2005 to 7.47% for the respective period in 2006. Total average securities increased by $13,997,000 or 13.5% from September 30, 2005 to September 30, 2006.

Average loans increased a total of $3,904,000 and 16 basis points up to $251,594,000 for the three month period ended September 30, 2006 compared to the same period in the prior year. Real estate mortgages comprised $7,050,000 of the increase; up from $174,545,000 at September 30, 2005 to $181,595,000 for September 30, 2006 or a 4.0% increase. The average yield on real estate mortgages increased 4 basis points. Several of the remaining loan categories had yields increase for the quarter ended September 30, 2006 versus the same period in 2005. Home equity loans grew 9.0% for the quarter ended September 30, 2006 over 2005 with an increase in the average yield of 66 basis points rising from 6.11% in 2005 to 6.77% in 2006. Time and demand loans decreased $3,943,000 or 12.8% to $26,970,000 with an improvement of 109 basis points from 7.87% for the quarter ended September 30, 2005 to 8.96% in 2006. The increase in yields was due to variable rate pricing or the prevailing interest rates for this period.

20

Average short term investments increased $3,966,000 for the quarter ended September 2006 from the same period in 2005 with a 66 basis point increase due to rising interest rates. Average investment securities increased $13,997,000 with interest yield increasing 9 basis points from 5.35% to 5.44% for the quarter ended September 30, 2006 verses the same period in 2005.

Total interest expense increased as a result of higher overall rates paid on interest bearing liabilities. The total average balance for interest bearing liabilities was $287,769,000 for the quarter ended September 30, 2006 compared to $263,018,000 for the corresponding period in 2005, an increase of $24,751,000 or 9.4%. The rate paid on average interest bearing liabilities increased by 75 basis points from 2.19% for the quarter ended September 30, 2005 to 2.94% for the quarter period ended September 30, 2006. The 75 basis point increase in the rate paid on average interest bearing liabilities outpaced the 7 basis point increase in yield on average interest earning assets. This margin compression contributed significantly to the decrease in net interest income earned during the period.

The provision for loan losses was $60,000 for the three months ended September 30, 2005, versus no provision for the three months ended September 30, 2006.

Non-interest income was $1,027,000 for the three month period ended September 30, 2006 compared to $1,017,000 for the corresponding period in 2005, an increase of $10,000 or 1.0% concurrent on change in foreclosed real estate income and other non-interest income.

Non-interest expenses were $3,231,000 for the three month period ended September 30, 2006 compared to $3,278,000 for the corresponding period in 2005, a decrease of $47,000 or 1.4%. Salaries and employee benefits decreased $62,000 or 3.1% from 2005 to $1,933,000 due to FAS 91 deferrals offsetting normal salary increases. Other non-interest expense decreased $61,000 to $755,000 from 2005 which included a decrease in credit card processing fees due to the sale of the credit card portfolio, a decrease in telephone expense as a result of switching to a more cost effective carrier, and decrease in professional fees as the bank enters its second year with Sarbanes-Oxley compliance. These were partially offset by occupancy and equipment expense which increased $76,000 to $543,000 for the three months ended September 30, 2006 from the same period in 2005 due to rising energy cost and repairs made to several facilities.

Income tax expense was $409,000 for the three month period ended September 30, 2006 compared to $497,000 for the corresponding period in 2005, a decrease of $88,000 or 17.7%. This decrease was primarily due to a decrease in taxable income. The Company’s effective tax rates were 23.1% and 26.1% for the three month periods ended September 30, 2006 and 2005, respectively. This decrease was primarily due to an increase in the percentage of tax exempt investment security income of pre-tax income during the three month period ended September 30, 2006 compared to the corresponding period in 2005.

21

Comparison of the nine month periods September 30, 2006 and 2005

Net income for the first nine months of 2006 decreased by $634,000 to $3,531,000 compared to $4,165,000 for the same period in 2005. This overall decrease was primarily due to a decrease in net interest income of $709,000 or 5.7%, a decrease in non-interest income of $264,000 and an increase of $182,000 in non-interest expenses, partially offset by a decrease of $90,000 in the provision for loan losses and reduction of income tax expense of $431,000. The Company’s annualized return on average assets was 1.2% for the nine months ended September 30, 2006 compared to 1.5% in the same period last year. The annualized return on average stockholders’ equity was 11.2% and 13.5% for the first nine months of 2006 and 2005, respectively.

The total average balance for earning assets was $368,572,000 for the nine month period ended September 30, 2006 compared to $340,417,000 for the same nine month period in 2005, an increase of $28,155,000 or 8.3%. The overall yield on average interest earning assets increased 6 basis points from 6.68% in 2005 to 6.74% in 2006. There were increases in each category of average interest earning assets; short term investments increased $10,994,000, loans increased $9,701,000 or 4.1%, and total securities increased $7,460,000 or 7.2%. Tax equivalent interest income increased $1,563,000 in the first nine months of 2006 compared to the same period in 2005, primarily due to an increase in average earning assets. The yield on average investment securities increased 14 basis points from 5.39% in 2005 to 5.53% in 2006 due to the purchase of higher yielding securities. The yield on the total average loan portfolio increased by 11 basis points in the nine months ended September 30, 2006 compared to the first nine months of 2005. Average rates increased in several loan categories. The average yield on real estate mortgage loans, the major portion of the loan portfolio, decreased 2 basis points for the nine month period. There was an increase of $8,595,000 in the average balance of residential and commercial mortgage loans for the first nine months of 2006 representing a 5.1% increase in the average loan portfolio from December 31, 2005. The 2 basis point decrease in real estate mortgages is primarily due to an extremely competitive marketplace.

The increasing interest rate environment caused the Company to re-price its deposits which resulted in a 103 basis point increase in the rate paid on interest bearing deposits for the nine month period ended September 30, 2006 as compared to the same period in 2005. The overall net interest margin decreased 64 basis points from 5.20% in the first nine months of 2005 to 4.56% in the first nine months of 2006 due to the increase in rates paid on interest bearing liabilities contributing significantly to the decrease in net interest income earned during the period. The Company’s inability to increase earnings coupled with the significant increase in rates paid on liabilities resulted in the $634,000 decrease in net income.

The provision for loan losses was $90,000 for the nine months ended September 30, 2006, a decrease of $90,000 compared to $180,000 for the nine months ended September 30, 2005.

Non-interest income was $2,666,000 for the first nine months of 2006 compared to $2,930,000 for the same period in 2005, a decrease of $264,000 or 9.0%. This decrease was primarily due to reduced credit card fee income of $44,000 resulting from the sale of the portfolio in 2005, reduced service charge income of $57,000 due to a decrease in fees from insufficient funds and returned checks which were partially offset by an increase in foreclosed real estate income of $88,000. Bank owned life insurance earnings decreased $44,000 compared to 2005. This decrease reflects lower rates credited to the underlying policies.

22

Non-interest expenses were $8,858,000 for the first nine months of 2006 compared to $9,676,000 for the same period in 2005, an increase of $182,000 or 1.9%. This increase reflects a $17,000 increase in salaries and employee benefits costs due to normal salary increases of $48,000 and a $54,000 increases in retirement plan costs, offset by $95,000 in FAS 91 deferrals due to unearned loan origination costs. Occupancy and equipment costs increased $95,000 due to increases in equipment maintenance contract costs, building repairs, and equipment depreciation from the installation of new ATM’s. Other non-interest expense increased by $70,000 or 2.9% which was partially due to timing of professional fees in connection with the implementation of Sarbanes-Oxley regulations in 2006 versus 2005.

Income tax expense was $1,018,000 for the nine month period ended September 30, 2006 compared to $1,449,000 for the corresponding period in 2005, a decrease of $431,000 or 29.7%. The Company’s effective tax rates were 22.4% and 25.8% for the nine month periods ended September 30, 2006 and 2005, respectively. This decrease was primarily due to a larger percentage of income before taxes being generated by tax exempt securities and bank owned life insurance.

F. 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.

23

Investment securities are written down to their net realizable value when there is an impairment in value that is considered to be “other than temporary” in nature. The determination of whether or not “other than temporary” impairment exists is a matter of judgment. Management reviews its investment securities portfolio regularly for possible impairment that is “other than temporary” by analyzing the facts and circumstances of each investment and the expectations for that investment’s performance.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s most significant form of market risk is interest rate risk, as the majority of the assets and liabilities are sensitive to changes in interest rates. There have been no material changes in the Company’s interest rate risk position since December 31, 2005. Other types of market risk, such as foreign exchange rate risk and commodity price risk, do not arise in the normal course of the Company’s business activities.

ITEM 4. CONTROLS & PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES

The Company's management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of September 30, 2006. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes made in the Company's internal controls over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.

24

PART II - OTHER INFORMATION

Item 1.Legal Proceedings

There are no pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or which their property is subject.

Item 1A.Risk Factors

There have been no material changes from the risk factors as previously disclosed in response to Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

25

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

The Company did not sell any unregistered securities.

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 to increase the number of shares to 150,000 under this program. During the second and third quarter of 2006, the following shares were purchased as a part of the repurchase program:

					Shares
					Purchased
			Average Price		as part of		Capacity to
	Shares		Paid		Repurchase		Purchase
	Purchased		Per Share		Program		More Shares
7/1/2006 - 7/31/2006		74,718	$	20.500		74,718
8/1/2006 - 8/31/2006		7,725	$	20.500		7,725
9/1/2006 - 9/30/2006		5,250	$	19.924		5,250
Total		87,693	$	20.468		87,693		32,127

Item 3.Defaults Upon Senior Securities

Not Applicable

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

None

Item 5.Other Information

None

Item 6. Exhibits

31.1 Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley of 2002

31.2 Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002

32.1 Written Statement of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002

32.2 Written Statement of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

JEFFERSONVILLE BANCORP

(Registrant)

/s/ Raymond Walter

Raymond Walter

President and Chief Executive Officer

/s/ Charles E. Burnett

Charles E. Burnett

Chief Financial Officer and Treasurer

November 9, 2006

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