Jeffersonville Bancorp (JFBC) 10-Q 2007 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarter Ended September 30, 2007

OR

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

For the transition period from ____________ to ____________

Commission file number: 0-19212

JEFFERSONVILLE BANCORP

(Exact name of registrant as specified in its charter)

New York	22-2385448
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
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 registered
NONE	NONE

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

Title of Class: Common Stock, $0.50 Par Value

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 oAccelerated 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, 2007
Common Stock, $0.50 par value per share	4,249,007 shares

INDEX TO FORM 10-Q

		Page
PART I	Financial Information
Item 1.	Consolidated Interim Financial Statements (Unaudited) Consolidated Balance Sheets at September 30, 2007 and December 31, 2006	3
	Consolidated Statements of Income for the three months ended September 30, 2007 and 2006	4
	Consolidated Statements of Income for the nine months ended September 30, 2007 and 2006	5
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006	6
	Notes to Unaudited Consolidated Interim Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	20
Item 4.	Controls and Procedures	20
PART II	Other Information
Item 1.	Legal Proceedings	20
Item 1A.	Risk Factors	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3.	Defaults Upon Senior Securities	21
Item 4.	Submission of Matters to a Vote of Security Holders	21
Item 5.	Other Information	21
Item 6.	Exhibits	21
	Signatures	22

2

Jeffersonville Bancorp and Subsidiary

Consolidated Balance Sheets

Unaudited

(Dollars in thousands, except per share data)

	September 30, 2007			December 31, 2006
ASSETS
Cash and cash equivalents	$	9,787		$	12,270
Securities available for sale, at fair value		96,179			99,788
Securities held to maturity, estimated fair value of $6,429 at September 30, 2007 and $9,570 at December 31, 2006		6,375			9,445
Loans, net of allowance for loan losses of $3,498 at September 30, 2007 and $3,516 at December 31, 2006		246,769			247,244
Accrued interest receivable		2,490			2,441
Premises and equipment, net		3,986			3,040
Federal Home Loan Bank stock		2,584			2,296
Bank-owned life insurance		14,002			13,651
Other assets		6,178			7,116
Total Assets	$	388,350		$	397,291
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits:
Demand deposits	$	65,131		$	64,974
NOW and super NOW accounts		30,115			31,276
Savings and insured money market deposits		96,429			100,391
Time deposits		114,205			128,432
Total Deposits		305,880			325,073
Federal Home Loan Bank borrowings		15,000			20,000
Short-term debt		14,915			903
Other liabilities		9,749			10,040
Total Liabilities		345,544			356,016
Commitments and contingent liabilities
Stockholders’ equity:
Series A preferred stock, no par value; 2,000,000 shares authorized, none issued		—			—
Common stock, $0.50 par value; 11,250,000 shares authorized, 4,767,786 shares issued		2,384			2,384
Paid-in capital		6,483			6,483
Treasury stock, at cost; 517,679 shares at September 30, 2007 and 462,438 at December 31, 2006		(4,735	)		(3,722	)
Retained earnings		40,829			38,963
Accumulated other comprehensive loss		(2,155	)		(2,833	)
Total Stockholders’ Equity		42,806			41,275
Total Liabilities and Stockholders’ Equity	$	388,350		$	397,291

See accompanying notes to unaudited consolidated interim financial statements.

3

Jeffersonville Bancorp and Subsidiary

Consolidated Statements of Income

(Unaudited)

(In thousands, except per share data)

	For the three months ended September 30,
	2007			2006
INTEREST AND DIVIDEND INCOME
Loan interest and fees	$	4,660		$	4,699
Securities:
Taxable		772			826
Tax exempt		456			510
Federal funds sold		7			54
Total Interest and Dividend Income		5,895			6,089
INTEREST EXPENSE
Deposits		1,863			1,866
Federal Home Loan Bank borrowings		196			248
Other		63			4
Total Interest Expense		2,122			2,118
Net interest income		3,773			3,971
Provision (credit) for loan losses		—			—
Net Interest Income After Provision (Credit) for Loan Losses		3,773			3,971
NON-INTEREST INCOME
Service charges		470			469
Earnings on bank-owned life insurance		120			105
Net security losses		(1	)		(4	)
Foreclosed real estate income (loss), net		(6	)		95
Other non-interest income		370			362
Total Non-Interest Income		953			1,027
NON-INTEREST EXPENSES
Salaries and employee benefits		1,873			1,933
Occupancy and equipment expenses		520			543
Other non-interest expenses		869			755
Total Non-Interest Expenses		3,262			3,231
Income before income tax expense		1,464			1,767
Income tax expense		305			409
Net Income	$	1,159		$	1,358
Basic earnings per common share	$	0.27		$	0.31
Average common shares outstanding		4,256			4,332
Cash dividends declared per share	$	0.12		$	0.11

See accompanying notes to unaudited consolidated interim financial statements.

4

Jeffersonville Bancorp and Subsidiary

Consolidated Statements of Income

(Unaudited)

(In thousands, except per share data)

	For the nine months ended September 30,
	2007			2006
INTEREST AND DIVIDEND INCOME
Loan interest and fees	$	13,930		$	13,621
Securities:
Taxable		2,227			2,309
Tax exempt		1,367			1,502
Federal funds sold		113			420
Total Interest and Dividend Income		17,637			17,852
INTEREST EXPENSE
Deposits		5,722			5,205
Federal Home Loan Bank borrowings		663			806
Other		79			10
Total Interest Expense		6,464			6,021
Net interest income		11,173			11,831
Provision (credit) for loan losses		(370	)		90
Net Interest Income After Provision (Credit) for Loan Losses		11,543			11,741
NON-INTEREST INCOME
Service charges		1,389			1,361
Earnings on bank-owned life insurance		351			309
Net security losses		(39	)		(4	)
Foreclosed real estate income, net		2			53
Other non-interest income		916			947
Total Non-Interest Income		2,619			2,666
NON-INTEREST EXPENSES
Salaries and employee benefits		5,709			5,865
Occupancy and equipment expenses		1,542			1,540
Other non-interest expenses		2,434			2,453
Total Non-Interest Expenses		9,685			9,858
Income before income tax expense		4,477			4,549
Income tax expense		1,071			1,018
Net Income	$	3,406		$	3,531
Basic earnings per common share	$	0.80		$	0.80
Average common shares outstanding		4,274			4,399
Cash dividends declared per share	$	0.36		$	0.33

See accompanying notes to unaudited consolidated interim financial statements.

5

Jeffersonville Bancorp and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

	For the nine months ended September 30,
	2007			2006
OPERATING ACTIVITIES:
Net income	$	3,406		$	3,531
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (credit) for loan losses		(370	)		90
Depreciation and amortization		463			463
Write down of foreclosed real estate		5			7
Net gain on sales of foreclosed real estate		—			(48	)
Net earnings on bank-owned life insurance		(351	)		(309	)
Net security losses		39			4
Increase in accrued interest receivable		(49	)		(560	)
Decrease (increase) in other assets		481			(1,112	)
Increase in other liabilities		87			1,179
Net Cash Provided by Operating Activities		3,711			3,245
INVESTING ACTIVITIES:
Proceeds from maturities and calls:
Securities available for sale		9,113			4,362
Securities held to maturity		5,754			1,100
Proceeds from sales of securities available for sale		9,452			1,713
Purchases:
Securities available for sale		(14,243	)		(18,686	)
Securities held to maturity		(2,684	)		(3,415	)
Disbursement for (principal collections from) loan originations, net		845			(5,460	)
Net purchase (sale) of Federal Home Loan Bank stock		(288	)		200
Net purchases of premises and equipment		(1,409	)		(563	)
Proceeds from sales of foreclosed real estate		—			295
Net Cash Provided by (Used in) Investing Activities		6,540			(20,454	)
FINANCING ACTIVITIES:
Net increase (decrease) in deposits		(19,193	)		12,708
Proceeds from Federal Home Loan Bank borrowings		—			10,000
Repayments of Federal Home Loan Bank borrowings		(5,000	)		(15,000	)
Net increase in short-term borrowings		14,012			3,482
Purchases of treasury stock		(1,013	)		(2,413	)
Cash dividends paid		(1,540	)		(1,451	)
Net Cash (Used in) Provided by Financing Activities		(12,734	)		7,326
Net Decrease in Cash and Cash Equivalents		(2,483	)		(9,883	)
Cash and Cash Equivalents at Beginning of Year		12,270			24,192
Cash and Cash Equivalents at End of Period	$	9,787		$	14,309
SUPPLEMENTAL INFORMATION:
Cash paid for:
Interest	$	6,548		$	5,720
Income taxes		1,155			1,179
Transfer of loans to foreclosed real estate		—			391

 

See accompanying notes to unaudited consolidated interim financial statements.

6

JEFFERSONVILLE BANCORP

AND SUBSIDIARY

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

September 30, 2007

(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, 2007 and December 31, 2006, the results of operations for the three and nine month periods ended September 30, 2007 and 2006, and the cash flows for the nine month periods ended September 30, 2007 and 2006. Certain reclassifications have been made in order to conform to the current year’s presentation. All adjustments are normal and recurring. 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 2006 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 month periods ended September 30, 2007 and 2006, the weighted average common shares outstanding were 4,256,368 and 4,332,490 respectively. For the nine month periods ended September 30, 2007 and 2006, the weighted average common shares outstanding were 4,274,060 and 4,399,132 respectively. There were no dilutive securities during any of the periods.

C.Comprehensive Income

The following tables show comprehensive income for the three and nine month periods ended September 30, 2007 and 2006, dollars shown in thousands.

	Three Months Ended
	September 30, 2007		September 30, 2006
Net Income	$	1,159	$	1,358
Other Comprehensive Income:
Net unrealized holding gains arising during the period, net of tax (pretax amount of $1,778 for 2007 and $2417 in 2006)		1,066		1,452
Reclassification adjustment for net losses realized in net income during the period, net of tax (pretax amount of $1 for 2007 and $4 in 2006))		—		2
Minimum pension liability adjustment, net of tax (pretax amount of $50 for 2007)		30		—
Other comprehensive income on FAS 87 liabilities, net of tax (pretax amount of $77 for 2007)		46		—
Other comprehensive income		1,142		1,454
Total comprehensive income	$	2,301	$	2,812

7

	Nine Months Ended
	September 30, 2007		September 30, 2006
Net Income	$	3,406	$	3,531
Other Comprehensive Income:
Net unrealized holding gains arising during the period, net of tax (pretax amount of $713 for 2007 and $133 in 2006)		427		81
Reclassification adjustment for net losses realized in net income during the period, net of tax (pretax amount of $39 for 2007 and $4 for 2006)		23		2
Minimum pension liability adjustment, net of tax (pretax amount of $148 for 2007)		89		—
Other comprehensive income on FAS 87 liabilities, net of tax (pretax amount of $230)		138		—
Other comprehensive income		677		83
Total comprehensive income	$	4,083	$	3,614

The following table shows the components of accumulated other comprehensive loss at September 30, 2007 and December 31, 2006, dollars shown in thousands:

	September 30,  2007			December 31,  2006
Supplemental executive retirement plan, net of taxes of $128 in 2007, and $232 in 2006	$	(191	)	$	(348	)
Postretirement benefits, net of tax benefit of $127 in 2007, and $139 in 2006		190			209
Defined benefit pension liability, net of taxes of $1,350 in 2007, and $1,410 in 2006		(2,026	)		(2,115	)
Net unrealized holding losses, net of taxes of $85 in 2007, and $386 in 2006		(128	)		(579	)
Accumulated other comprehensive loss	$	(2,155	)	$	(2,833	)

D.New 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 adopted FIN No. 48 as reported in the 2006 Form 10-K. Management believes that there are no uncertain tax positions. Interest and penalties, if recorded, would be included in other income and expense. For the current fiscal year, there have not been any significant interest or penalties incurred.

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

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 and did not adopt this statement early.

In February 2007, the FASB issued FASB Staff Position (FSP) FAS 158-1, “Conforming Amendments to the Illustrations in FASB Statements No. 87, No. 88, and No 106 and to the Related Staff Implementation Guides.” This FSP makes conforming amendments to other FASB statements and staff implementation guides and provides technical corrections to SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” The conforming amendments in this FSP shall be applied upon adoption of SFAS No. 158. We believe our adoption of FSP FAS 158-1 will not have a material impact on our consolidated financial statements or disclosures.

8

In May 2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1 “Definition of Settlement in FASB Interpretation No. 48” (FSP FIN 48-1). FSP FIN 48-1 provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to January 1, 2007. The implementation of this standard did not have a material impact on our consolidated financial position 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 2006 Annual Report on Form 10-K. The components of the net periodic benefit cost for these plans follows:

For the three months ended September 30, 2007 and 2006, dollars shown in thousands:

	Pension benefit						Postretirement benefit
	2007			2006			2007			2006
Service cost	$	95		$	109		$	35		$	44
Interest cost		133			119			39			42
Expected return on plan assets		(97	)		(101	)		—			—
Amortization of prior service cost		7			6			(10	)		(11	)
Recognized net actuarial loss		42			49			—			10
Net periodic benefit cost	$	180		$	182		$	64		$	85

For the nine months ended September 30, 2007 and 2006, dollars shown in thousands:

	Pension benefit						Postretirement benefit
	2007			2006			2007			2006
Service cost	$	313		$	327		$	106		$	132
Interest cost		390			357			117			126
Expected return on plan assets		(322	)		(303	)		—			—
Amortization of prior service cost		19			18			(32	)		(33	)
Recognized net actuarial loss		129			147			1			30
Net periodic benefit cost	$	529		$	546		$	192		$	255

The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2006, that it expected to contribute $472,000 to its pension plan and $72,000 to its other postretirement benefits plan in 2007. As of September 30, 2007, contributions of $528,000 were made to the pension plan and $49,000 of contributions had been made to the other postretirement benefits plan. The additional pension contribution was made for tax purposes. The Company expects to make no additional contributions for 2007 to the pension plan. The contributions for the postretirement benefit will be made as expected.

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 $1,988,000 at September 30, 2007 and $1,175,000 at December 31, 2006 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, 2007 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 operations.

A.Overview – Financial Condition

During the period from December 31, 2006 to September 30, 2007, total assets decreased $8,941,000 or 2.3% due to decreases in cash and cash equivalents, investment securities and other assets. Cash decreased from $12,270,000 at December 31, 2006 to $9,787,000 at September 30, 2007 or 20.2%. Held to maturity securities decreased $3,070,000 or 32.5% to $6,375,000 at September 30, 2007 and available for sale securities decreased $3,609,000 or 3.6% to $96,179,000 at September 30, 2007 from December 31, 2006. The Company has no exposure to subprime mortgage backed securities in its investment portfolio. Other assets decreased $938,000 or 13.2% to $6,178,000 at September 30, 2007 from $7,116,000 at December 31, 2006.

During the same period, total liabilites decreased $10,472,000 or 2.9%, due to decreases in total deposits and Federal Home Loan Bank borrowings partially offset by an increase in short-term debt. Total deposits decreased from $325,073,000 at December 31, 2006 to $305,880,000 at September 30, 2007, a decrease of $19,193,000 or 5.9%. Time deposits decreased $14,227,000 or 11.1% to $114,205,000 at September 30, 2007 from December 31, 2006 due to $11,280,000 of brokered deposits coming due. Additionally, savings and insured money market deposit decreased $3,962,000 or 3.9% from $100,391,000 at December 31, 2006 to $96,429,000 at September 30, 2007. NOW and super NOW accounts decreased $1,161,000 from December 31, 2006 to $30,115,000 or 3.7% at September 30, 2007. A repayment of a Federal Home Loan Bank borrowing of $5,000,000 was replaced by short-term borrowings pending a rebalancing of the securities portfolio and other sources of liquidity.

Total stockholders’ equity increased $1,531,000 or 3.7% from $41,275,000 at December 31, 2006 to $42,806,000 at September 30, 2007. This increase was the result of net income of $3,406,000 plus a $677,000 decrease in accumulated other comprehensive loss, less cash dividends of $1,540,000, and the purchase of treasury stock of $1,012,000.

Loan Portfolio Composition, dollars in thousands:

	September 30, 2007						December 31, 2006
	Amount			Percent			Amount			Percent
REAL ESTATE LOANS
Residential	$	97,589			39.0	%	$	95,520			38.1	%
Commercial		80,745			32.3			82,987			33.1
Home Equity		25,610			10.2			24,195			9.6
Farm land		3,804			1.5			3,726			1.5
Construction		4,228			1.7			6,087			2.4
		211,976			84.7			212,515			84.7
OTHER LOANS
Commercial loans		28,629			11.4			28,106			11.3
Consumer installment loans		9,258			3.7			9,773			3.9
Other consumer loans		164			0.1			118			0.0
Agricultural loans		240			0.1			248			0.1
		38,291			15.3			38,245			15.3
Total loans		250,267			100.0	%		250,760			100.0	%
Allowance for loan losses		(3,498	)					(3,516	)
Total loans, net	$	246,769					$	247,244

10

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 (credit) for loan losses was ($370,000) for the nine months ended September 30, 2007 compared to $90,000 for the nine months ended September 30, 2006. As disclosed in the Company’s 10-K, the Company recovered $441,000 on a previously written-off loan. This recovery was for a loan made in 2002. The loan turned out to be fraudulent and the participants brought a legal suit against the Bank of New York. The participating lenders prevailed and received their settlements in the first quarter of 2007. Total charge-offs for the nine month period ended September 30, 2007 were $152,000 compared to $463,000 for the same period in the prior year, while recoveries increased from $308,000 for the 2006 period to $504,000 for the 2007 period. The amounts represent net recoveries of $352,000 in the nine months ended September 2007 and net charge-offs of $155,000 for the same period in the prior year. Despite the increase in the amount of non-performing loans, management has determined that all these loans remain well collateralized. Based on management’s comprehensive analysis of the loan portfolio, and that the company has no exposure to subprime loans, management believes the current level of the allowance for loan losses is adequate.

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

	Nine months ended September 30, 2007			Nine months ended September 30, 2006			Year ended December 31, 2006
Balance at beginning of period	$	3,516		$	3,615		$	3,615
Provision (credit) for loan losses		(370	)		90			90
Loans charged-off		(152	)		(463	)		(533	)
Recoveries		504			308			344
Balance at end of period	$	3,498		$	3,550		$	3,516
Annualized net charge-offs (recoveries) as a percentage of average outstanding loans		(0.19	)%		0.08	%		0.08	%
Allowance for loan losses to:
Total loans		1.40	%		1.42	%		1.40	%
Total non-performing loans		111.6	%		169.7	%		187.0	%

C.Nonaccrual and Past Due Loans

Nonperforming loans are summarized as follows at the following dates, dollars in thousands:

	September 30, 2007			December 31, 2006
Nonaccrual loans	$	3,076		$	1,867
Loans past due 90 days or more and still accruing interest		58			13
Total nonperforming loans	$	3,134		$	1,880
Non-performing loans as a percentage of total loans		1.25	%		0.75	%

As of September 30, 2007, there was $2,393,000 in loans, compared to $1,528,000 as of December 31, 2006, which were considered to be impaired under Statement of Financial Accounting Standards (“SFAS”) No.114. As non-performing loans are well collateralized and secured, management is comfortable that no specific reserves are necessary.

11

D.Capital

Under the Federal Reserve Bank’s risk-based capital rules, the Company’s Tier I risk-based capital was 17.4% and total risk-based capital was 18.7% of risk-weighted assets at September 30, 2007. 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 11.5% at September 30, 2007 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 September 30, 2007, dollars in thousands:

As of	September 30, 2007
TIER I CAPITAL
Stockholders’ equity, excluding accumulated other comprehensive loss	$	44,961
TIER II CAPITAL
Allowance for loan losses (1)		3,233
Total risk-based capital	$	48,194
Risk-weighted assets (2)	$	258,398
Average assets	$	391,075
RATIOS
Tier I risk-based capital (minimum 4.0%)		17.4	%
Total risk-based capital (minimum 8.0%)		18.7	%
Leverage (minimum 4.0%)		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.

12

Consolidated Average Balance Sheet for the nine months ended September 30, 2007, dollars in thousands:

(Fully Taxable Equivalent)

(Dollars in thousands)

	Average Balance		Interest Earned/Paid			Average Yield/Rate
ASSETS
Securities available for sale and held to maturity:(1)
Taxable securities	$	60,290	$	2,227			4.93	%
Tax exempt securities (2)		46,051		2,072			6.00	%
Total securities		106,341		4,299			5.39	%
Short-term investments		2,948		113			5.11	%
Loans
Real estate mortgages		181,772		9,545			7.00	%
Home equity loans		24,609		1,257			6.81	%
Time and demand loans		25,426		1,679			8.80	%
Installment and other loans		17,920		1,449			10.78	%
Total loans(3)		249,727		13,930			7.44	%
Total interest earning assets		359,016		18,342			6.81	%
Other assets		32,059
Total assets	$	391,075
LIABILITIES AND STOCKHOLDERS’ EQUITY
NOW and Super NOW deposits	$	33,085		123			0.50	%
Savings and insured money market deposits		103,996		1,956			2.51	%
Time deposits		117,238		3,643			4.14	%
Total interest bearing deposits		254,319		5,722			3.00	%
Federal funds purchased and other short-term debt		1,972		79			5.34	%
Long-term debt		17,070		663			5.18	%
Total interest bearing liabilities		273,361		6,464			3.15	%
Demand deposits		65,700
Other liabilities		10,168
Total liabilities		349,229
Stockholders’ equity		41,846
Total liabilities and stockholders’ equity	$	391,075
Net interest income – tax effected				11,878
Less: Tax gross up on exempt securities				(705	)
Net interest income per statement of income			$	11,173
Net interest spread							3.66	%
Net interest margin(4)							4.41	%

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

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

³For 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.

⁴Computed by dividing tax effected net interest income by total interest earning assets.

13

Consolidated Average Balance Sheet for the nine months ended September 30, 2006, dollars in thousands:

(Fully Taxable Equivalent)

(Dollars in thousands)

	Average Balance		Interest Earned/Paid			Average Yield/Rate
ASSETS
Securities available for sale and held to maturity:(1)
Taxable securities	$	61,149	$	2,309			5.03	%
Tax exempt securities(2)		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 and other loans		18,390		1,435			10.40	%
Total loans(3)		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 deposits	$	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	%
Federal funds purchased and other 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(4)							4.56	%

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

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

³For 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.

⁴Computed by dividing tax effected net interest income by total interest earning assets.

14

Consolidated Average Balance Sheet for the three months ended September 30, 2007, dollars in thousands:

(Fully Taxable Equivalent)

(Dollars in thousands)

	Average Balance		Interest Earned/Paid			Average Yield/Rate
ASSETS
Securities available for sale and held to maturity:(1)
Taxable securities	$	63,305	$	772			4.88	%
Tax exempt securities (2)		44,994		692			6.15	%
Total securities		108,299		1,464			5.41	%
Short-term investments		594		7			5.15	%
Loans
Real estate mortgages		182,220		3,199			7.02	%
Home equity loans		25,299		422			6.67	%
Time and demand loans		25,125		529			8.42	%
Installment and other loans		18,775		510			10.87	%
Total loans(3)		251,419		4,660			7.41	%
Total interest earning assets		360,312		6,131			6.81	%
Other assets		31,439
Total assets	$	391,751
LIABILITIES AND STOCKHOLDERS’ EQUITY
NOW and Super NOW deposits	$	31,609		39			0.49	%
Savings and insured money market deposits		106,396		645			2.42	%
Time deposits		112,567		1,179			4.19	%
Total interest bearing deposits		250,572		1,863			2.97	%
Federal funds purchased and other short-term debt		4,758		63			5.30	%
Long-term debt		15,165		196			5.17	%
Total interest bearing liabilities		270,495		2,122			3.14	%
Demand deposits		68,421
Other liabilities		10,077
Total liabilities		348,993
Stockholders’ equity		42,758
Total liabilities and stockholders’ equity	$	391,751
Net interest income – tax effected				4,009
Less: Tax gross up on exempt securities				(236	)
Net interest income per statement of income			$	3,773
Net interest spread							3.67	%
Net interest margin(4)							4.45	%

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

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

³For 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.

⁴Computed by dividing tax effected net interest income by total interest earning assets.

15

Consolidated Average Balance Sheet for the three months ended September 30, 2006, dollars in thousands:

(Fully Taxable Equivalent)

(Dollars in thousands)

	Average Balance		Interest Earned/Paid			Average Yield/Rate
ASSETS
Securities available for sale and held to maturity:(1)
Taxable securities	$	67,110	$	826			4.92	%
Tax exempt securities(2)		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 and other loans		18,817		475			10.10	%
Total loans(3)		251,594		4,699			7.47	%
Total interest earning assets		373,537		6,354			6.81	%
Other assets		31,661
Total assets	$	405,198
LIABILITIES AND STOCKHOLDERS’ EQUITY
NOW and Super NOW deposits	$	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	%
Federal funds purchased and other 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(4)							4.54	%

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

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

³For 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.

⁴Computed by dividing tax effected net interest income by total interest earning assets.

16

VOLUME AND RATE ANALYSIS

(Dollars in thousands)

	Nine months ended September 30,
	2007 compared to 2006
	Increase (Decrease) Due to Change In
	Volume			Rate			Total
INTEREST INCOME
Securities	$	(175	)	$	(111	)	$	(286	)
Short-term investments		(317	)		10			(307	)
Loans		209			100			309
Total interest income		(283	)		(1	)		(284	)
INTEREST EXPENSE
NOW and Super NOW deposits		(9	)		(1	)		(10	)
Savings and insured money market deposits		90			353			443
Time deposits		(278	)		362			84
Federal funds purchased and other short-term debt		50			19			69
Long-term debt		(183	)		40			(143	)
Total interest expense		(330	)		773			443
Net interest income	$	47		$	(774	)	$	(727	)

	Three months ended September 30, 2007 compared to 2006 Increase (Decrease) Due to Change In
	Volume			Rate			Total
INTEREST INCOME
Securities	$	(131	)	$	(6	)	$	(137	)
Short-term investments		(45	)		(2	)		(47	)
Loans		(2	)		(37	)		(39	)
Total interest income		(178	)		(45	)		(223	)
INTEREST EXPENSE									��
NOW and Super NOW deposits		(2	)		(1	)		(3	)
Savings and insured money market deposits		11			38			49
Time deposits		(150	)		101			(49	)
Federal funds purchased and other short-term debt		44			15			59
Long-term debt		(62	)		10			(52	)
Total interest expense		(159	)		163			4
Net interest income	$	(19	)	$	(208	)	$	(227	)

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 is dividends from the bank.

For the nine months ended September 30, 2007, cash generated from operating activities of $3.7 million along with cash provided from investing activities of $6.5 million were offset by cash used in financing activities of $12.7 million. The net decrease of $2.5 million in cash flow brought cash and cash equivalents down to $9.8 million. See the Consolidated Statements of Cash Flows for additional information.

17

Maturity Schedule of Time Deposits of $100,000 or More at September 30, 2007, dollars in thousands:

Deposits
Due three months or less	$	7,001
Over three months through six months		4,215
Over six months though twelve months		11,065
Over twelve months		11,369
	$	33,650

E. Results of Operations

Comparison of the three month periods ending September 30, 2007 and 2006

Net income for the quarter ended September 30, 2007 decreased $199,000 to $1,159,000 compared to $1,358,000 for the same period in 2006. This overall decrease was primarily due to lower net interest income of $198,000, a decrease of $74,000 in non-interest income, and higher non-interest expense of $31,000 partially offset by and $104,000 in lower tax expense.

Total interest income decreased $194,000 to $5,895,000 or 3.2%, with $132,000 or 9.8% of the decrease attributable to income on investments resulting from reduced holdings due to maturities, calls and sales. Lower invested funds in federal funds sold reduced interest earned by $47,000 to $5,000 for the three months ended September 2007 versus 2006. Loan interest and fees decreased $39,000 to $4,660,000. Total interest expense increased $4,000 or 0.2% from $2,118,000 for the three months ended September 30, 2006 compared to $2,122,000 for the three months ended September 30, 2007. The majority of the increase in the three months ended September 30, 2006 to September 30, 2007 came from a $59,000 increase in interest expense on overnight federal funds purchased partially offset by a $52,000 reduction of interest expense on Federal Home Loan Bank borrowings due to a $5,000,000 maturity. Total interest expense increased as a result of a 20 basis point increase in the overall rate paid on interest bearing liabilities held.

The Company’s annualized return on average assets was 1.2% for the three months ended September 30, 2007 as compared to 1.3% for the three months ended September 30, 2006. The annualized return on average stockholders’ equity was 10.8% and 12.9% for the three months ended September 30, of 2007 and 2006, respectively.

The overall yield on interest earning assets remained flat at 6.81% in 2007 and 2006. The total average balance for earning assets was $360,312,000 for the three month period ended September 30, 2007 compared to $373,537,000 for the same three month period in 2006, a decrease of $13,225,000 or 3.5%. The decrease from September 30, 2006 to September 30, 2007 was attributable to a $9,502,000 decrease in investment securities and a $3,548,000 decrease in federal funds sold with loans growth being flat.

Tax equivalent net interest income decreased $227,000 or 5.4% in the third quarter of 2007 compared to the same period in 2006, primarily due to interest rate compression. The yield on investment securities decreased 3 basis points from 5.44% in the third quarter of 2006 to 5.41% in the third quarter of 2007 as the result of calls and maturities of higher yielding securities. The yield on federal funds sold decreased by 7 basis points from 5.22% to 5.15 % for the quarter ended September 30, 2007 as compared to the prior year with a decrease of $3,548,000 or 85.7% from prior year levels. Funds were used to pay maturing notes and brokered deposits. The yield on the total loan portfolio decreased by 6 basis points in the quarter ended September 30, 2007 compared to the third quarter of 2006. The average yield on real estate mortgage loans, which comprise a major portion of the loan portfolio, decreased 5 basis points for the three month period primarily due to competition in the marketplace squeezing margins on the loan products. Falling interest rates and continued market pressure impacted time and demand loans with a decrease of 54 basis points. Time and demand loans decreased $1,845,000 or 6.8% to $25,125,000 for the quarter ended September 30, 2007, with a 54 basis points decrease in yield. Home equity loans had a 10 basis point decrease to 6.67% at September 30, 2007 on loan growth of $1,087,000 or 4.5%.

The total average balance for interest bearing liabilities was $270,495,000 for the third quarter of 2007 compared to $287,769,000 for the corresponding period in 2006, a decrease of $17,274,000 or 6.0 %. The decrease was primarily due to time deposits decreasing $15,909,000 or 12.4% from $128,476,000 at September 30, 2006 to $112,567,000 at September 30, 2007. A Federal Home Loan Bank borrowing of $5,000,000 was called in 2007 which was funded in part by an increase in short term and federal funds borrowings of $4,342,000. The rate paid on interest bearing liabilities increased by 20 basis points from 2.94% for the quarter ended September 30, 2006 to 3.14% for the quarter ended September 30, 2007 due to the rising interest rate environment.

The increased competition caused the Company to re-price its deposits which resulted in an 18 basis point increase in the cost on interest bearing deposits for the three month period ended September 30, 2007 as compared to the same period in 2006. The overall net interest margin decreased 9 basis points from 4.54% in the third quarter of 2006 to 4.45% in the third quarter of 2007.

There was no provision or credit for loan losses in the three months ended September 30, 2007 or 2006 due to the continuation of loans being well secured and no significant changes in the credit quality of the loan portfolio. The Company has no exposure to subprime loans..

Non-interest income was $953,000 for the third quarter of 2007 compared to $1,027,000 for the same period in 2006, a decrease of $74,000 or 7.2%. This decrease was primarily due to the gain (loss) on sale of foreclosed real estate in 2006 versus 2007 which contributed $101,000 to the decrease. Partially offsetting this was an increase in the earnings on bank-owned life insurance of $15,000.

18

Non-interest expenses were $3,262,000 for the third quarter of 2007 compared to $3,231,000 for the same period in 2006, an increase of $31,000, of which the largest component was an increase in other non-interest of $114,000 or 15.1% partially offset by salary and benefit reductions of $60,000 or 3.1%. Of the other non-interest increase, the largest components were an increase of $65,000 in OCC examination and FDIC assessment fees and an increase of $15,000 in accounting fees due to the start of year end audit and SOX procedures.

Income tax expense was $305,000 for the three month period ended September 30, 2007 compared to $409,000 for the corresponding period in 2006, a decrease of $104,000 or 25.4%. The Company’s effective tax rates were 20.8% and 23.1% for the three month periods ended September 30, 2007 and 2006, respectively. This decrease was primarily due to tax exempt income and earnings on bank-owned life insurance being a larger component of pretax income in 2007 versus 2006.

Comparison of the nine month periods ending September 30, 2007 and 2006

Net income for the first nine months of 2007 decreased by $125,000 to $3,406,000 compared to $3,531,000 for the same period in 2006. This overall decrease was primarily due to a decrease in net interest income after provision for loan losses of $198,000, a decrease in non-interest income of $47,000, and an increase in income taxes of $53,000 partially offset by a decrease in non-interest expense of $173,000. Net interest income decreased $658,000 or 5.6% to $11,173,000 for the first nine months of 2007 due to lower interest on investments and short term investments of $522,000, higher interest expense on deposits of $517,000 due to higher interest rates in 2007, partially offset by a $309,000 increase in loan interest and fees and a decrease of $74,000 in interest on short and long term borrowings. Partially offsetting the lower earnings was a decrease of $460,000 in provision for loan losses. Due to rising market interest rates, replacement of called securities was postponed awaiting for more favorable rates. During this time liquidity was financed by federal funds, reducing interest income from this source.

The Company’s annualized return on average assets was 1.2% for the nine months ended September 30, 2007 as well as for the same period last year. The annualized return on average stockholders’ equity was 10.9% and 11.2% for the first nine months of 2007 and 2006, respectively.

The total average balance for earning assets was $359,016,000 for the nine month period ended September 30, 2007 compared to $368,572,000 for the same nine month period in 2006, a decrease of $9,556,000 or 2.6%. The overall yield on average interest earning assets increased 7 basis points from 6.74% in 2006 to 6.81% in 2007. There was a decrease in the average balance of securities of $4,230,000 or 3.8%. Short term investments decreased $9,105,000 while loans increased $3,779,000 or 1.5%.

Tax equivalent net interest income decreased $728,000 in the first nine months of 2007 compared to the same period in 2006, primarily due to higher interest rates on interest earning deposits. The yield on average investment securities decreased 14 basis points from 5.53% in 2006 to 5.39% in 2007 due to higher yielding matured and called securities not being replaced until late September 2007 when rates improved. The yield on the total average loan portfolio increased by 6 basis points in the nine months ended September 30, 2007 compared to the first nine months of 2006. Several of the loan categories had an increase in the average yield. The average yield on real estate mortgage loans, the major portion of the loan portfolio, increased 1 basis point or $5,223,000 for the nine month period. Home equity loans increased $1,178,000 or 5.0% and 23 basis points. Average time, demand and installment loans decreased $2,622,000 for the nine month period partially offsetting increases in the other loan categories. Rates on interest earning assets for the nine months ended September 30, 2007 increased over the same period last year, which is reflected in the loan yields.

The increasing interest rate environment caused the Company to re-price its deposits which resulted in a 34 basis point increase in the rate paid on interest bearing deposits for the nine month period ended September 30, 2007 as compared to the same period in 2006. The overall net interest spread decreased 23 basis points from 3.90% in the first nine months of 2006 to 3.67% in the first nine months of 2007 due to the increase in rates paid on interest bearing liabilities.

The provision (credit) for loan losses was ($370,000) for the nine months ended September 30, 2007, a decrease of $460,000 compared to $90,000 for the nine months ended September 30, 2006. This decrease was principally due to the $441,000 recovery previously mentioned in our quarterly filing on Form 10-Q, for the quarter ended March 31, 2007, as well as a decrease in anticipated losses for 2007 as compared to 2006.

Non-interest income was $2,619,000 for the first nine months of 2007 compared to $2,666,000 for the same period in 2006, a decrease of $47,000 or 1.8%. This decrease was primarily due to a decrease in foreclosed real estate income of $51,000, an increase in net security losses of $35,000 and a $31,000 decrease in other non-interest income, partially offset by a $28,000 increase in service charges and an increase in the earnings on bank owned life insurance of $42,000.

Non-interest expenses were $9,685,000 for the first nine months of 2007 compared to $9,858,000 for the same period in 2006, a decrease of $173,000 or 1.8%. This decrease reflects a $156,000 decrease in salaries and employee benefits costs due to reduced pension, supplemental retirement and post retirement program costs, partially offset by normal salary and benefit increases. Other non-interest expense decreased by $19,000 or 0.8%.

Income tax expense was $1,071,000 for the nine month period ended September 30, 2007 compared to $1,018,000 for the corresponding period in 2006, an increase of $53,000 or 5.2%. The Company’s effective tax rates were 23.9% and 22.4% for the nine month periods ended September 30, 2007 and 2006, respectively. This increase in effective tax rates was primarily due to a smaller percentage of income before taxes being generated by tax exempt securities.

19

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 based on their judgments about information available to them at the time of their examination, which may not be currently available to management.

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, 2006. 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, 2007. 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.

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, 2006.

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

The Company did not sell any unregistered securities.

20

During 2006, the Board of Directors approved a Stock Repurchase Program under which the company could repurchase up to 150,000 shares of outstanding stock. In March 2007, the Board of Directors approved to increase the number of shares to 200,000 under this program. During the third quarter of 2007, 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
7/1/2007 – 7/31/2007		—	$	—		—
8/1/2007 – 8/31/2007		—	$	—		—
9/1/2007 – 9/30/2007		6,658	$	16.55		6,658
Total		6,658	$	16.55		6,658		15,786

Item 3.Defaults Upon Senior Securities

Not Applicable

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

(a)Not applicable

(b)Not applicable

(c)Not applicable

(d)Not applicable

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, 2007

22