Jeffersonville Bancorp 10Q 2010 Q2 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 June 30, 2010

¨ 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.)

4866 State Rte. 52, 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 x No ¨

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

Yes ¨ No ¨

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

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x

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

Yes ¨ No x

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 August 13, 2010
Common Stock, $0.50 par value per share		4,234,505 shares

INDEX TO FORM 10-Q

		Page

PART 1	Financial Information

Item 1.	Financial Statements

	Consolidated Interim Financial Statements (Unaudited) Consolidated Balance Sheets at June 30, 2010 and December 31, 2009	3

	Consolidated Statements of Income for the three months ended June 30, 2010 and 2009	4

	Consolidated Statements of Income for the six months ended June 30, 2010 and 2009	5

	Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009	6

	Notes to Consolidated Interim Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	28

Item 4.	Controls and Procedures	28

PART 2	Other Information

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 3.	Defaults Upon Senior Securities	29

Item 4.	(Removed and Reserved)	30

Item 5.	Other Information	30

Item 6.	Exhibits	30

	Signatures	31

Jeffersonville Bancorp and Subsidiary

Consolidated Balance Sheets

(In thousands, except share and per share data)

	June 30,			December 31,
As of	2010			2009
	(Unaudited)			(Unaudited)
ASSETS
Cash and cash equivalents	$	8,266		$	8,336
Federal funds sold		—			5,000
Total cash and cash equivalents		8,266			13,336
Securities available for sale, at fair value		116,359			91,320
Securities held to maturity, estimated fair value of $5,064 at June 30, 2010 and $8,578 at December 31, 2009		4,769			8,218
Loans, net of allowance for loan losses of $4,732 at June 30, 2010 and $3,988 at December 31, 2009		274,190			275,419
Accrued interest receivable		2,121			1,954
Premises and equipment, net		5,370			5,020
Restricted investments		2,509			2,341
Bank-owned life insurance		14,857			14,621
Foreclosed real estate		2,371			1,397
Other assets		8,271			9,058
Total Assets	$	439,083		$	422,684

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits:
Demand deposits (non-interest bearing)	$	65,512		$	64,266
NOW and super NOW accounts		36,019			33,503
Savings and insured money market deposits		96,643			79,905
Time deposits		166,970			174,531
Total Deposits		365,144			352,205

Short-term borrowings		2,601			212
Federal Home Loan Bank borrowings		15,000			15,000
Other liabilities		10,714			10,604
Total Liabilities		393,459			378,021

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 with 4,234,505 and 4,234,321 outstanding at June 30, 2010 and December 31, 2009, respectively		2,384			2,384
Paid-in capital		6,483			6,483
Treasury stock, at cost; 533,281 shares at June 30, 2010 and 533,465 shares at December 31, 2009		(4,965	)		(4,967	)
Retained earnings		42,550			42,231
Accumulated other comprehensive loss		(828	)		(1,468	)
Total Stockholders’ Equity		45,624			44,663
Total Liabilities and Stockholders’ Equity	$	439,083		$	422,684

See accompanying notes to unaudited consolidated interim financial statements.

Jeffersonville Bancorp and Subsidiary

Consolidated Statements of Income

(In thousands, except per share data)

For the three months ended June 30,	2010			2009
	(Unaudited)			(Unaudited)
INTEREST AND DIVIDEND INCOME
Loan interest and fees	$	4,412		$	4,342
Securities:
Taxable		559			571
Tax-exempt		601			491
Federal funds sold and other		—			3
Total Interest and Dividend Income		5,572			5,407

INTEREST EXPENSE
Deposits		1,003			1,189
Federal Home Loan Bank borrowings		150			350
Total Interest Expense		1,153			1,539

Net interest income		4,419			3,868
Provision for loan losses		800			—
Net Interest Income After Provision for Loan Losses		3,619			3,868

NON-INTEREST INCOME
Service charges		366			430
Fee income		227			281
Earnings on bank-owned life insurance		119			120
Net gain on sale of securities		—			2
Foreclosed real estate expense, net		(113	)		(33	)
Other non-interest income		55			54
Total Non-Interest Income		654			854

NON-INTEREST EXPENSES
Salaries and employee benefits		2,179			2,095
Occupancy and equipment expenses		552			537
Other non-interest expenses		945			1,013
Total Non-Interest Expenses		3,676			3,645

Income before income tax expense		597			1,077
Income tax (benefit) expense		(32	)		199
Net Income	$	629		$	878

Basic earnings per common share	$	0.15		$	0.21
Average common shares outstanding		4,234			4,234
Cash dividends declared per common share	$	0.13		$	0.13

See accompanying notes to unaudited consolidated interim financial statements.

Jeffersonville Bancorp and Subsidiary

Consolidated Statements of Income

(In thousands, except per share data)

For the six months ended June 30,	2010			2009
	(Unaudited)			(Unaudited)
INTEREST AND DIVIDEND INCOME
Loan interest and fees	$	8,777		$	8,706
Securities:
Taxable		1,039			1,151
Tax-exempt		1,148			918
Federal funds sold and other		1			5
Total Interest and Dividend Income		10,965			10,780

INTEREST EXPENSE
Deposits		1,998			2,414
Federal Home Loan Bank borrowings		299			716
Other		—			2
Total Interest Expense		2,297			3,132

Net interest income		8,668			7,648
Provision for loan losses		1,000			150
Net Interest Income After Provision for Loan Losses		7,668			7,498

NON-INTEREST INCOME
Service charges		750			817
Fee income		429			455
Earnings on bank-owned life insurance		236			249
Net gain on sale of securities		40			168
Foreclosed real estate expense, net		(87	)		(17	)
Other non-interest income		72			73
Total Non-Interest Income		1,440			1,745

NON-INTEREST EXPENSES
Salaries and employee benefits		4,339			4,267
Occupancy and equipment expenses		1,081			1,077
Other non-interest expenses		2,217			1,956
Total Non-Interest Expenses		7,637			7,300

Income before income tax expense		1,471			1,943
Income tax expense		51			311
Net Income	$	1,420		$	1,632

Basic earnings per common share	$	0.34		$	0.39
Average common shares outstanding		4,234			4,234
Cash dividends declared per common share	$	0.26		$	0.26

See accompanying notes to unaudited consolidated interim financial statements.

Jeffersonville Bancorp and Subsidiary

Consolidated Statements of Cash Flows

(In thousands)

For the six months ended June 30,	2010			2009
	(Unaudited)			(Unaudited)
OPERATING ACTIVITIES:
Net income	$	1,420		$	1,632
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,000			150
Depreciation and amortization		346			325
Valuation adjustment of foreclosed real estate		(16	)		—
Loss on sale of premise and equipment		22			7
Gain on sale of foreclosed real estate		(93	)		—
Earnings on bank-owned life insurance		(236	)		(249	)
Net gain on sale of securities		(40	)		(168	)
Deferred income taxes (benefit)		(173	)		1,441
(Increase) decrease in accrued interest receivable		(167	)		107
(Increase) decrease in other assets		530			(1,082	)
Increase (decrease) in other liabilities		207			(406	)
Net Cash Provided by Operating Activities		2,800			1,757

INVESTING ACTIVITIES:
Proceeds from maturities and calls:
Securities available for sale		21,455			25,389
Securities held to maturity		3,761			649
Proceeds from sales of securities available for sale		187			4,056
Purchases:
Securities available for sale		(45,710	)		(41,219	)
Securities held to maturity		(312	)		(4,015	)
Disbursement for loan originations, net of principal collections		(1,081	)		1,022
Net (purchase) redemption of restricted investments		(150	)		611
Net purchases of premises and equipment		(718	)		(213	)
Proceeds from sales of foreclosed real estate		471			24
Net Cash Used in Investing Activities		(22,097	)		(13,696	)

FINANCING ACTIVITIES:
Net increase in deposits		12,939			33,742
Repayment of Federal Home Loan Bank borrowings		—			(5,000	)
Net increase (decrease) in short-term borrowings		2,389			(10,093	)
Cash dividends paid		(1,101	)		(1,101	)
Net Cash Provided by Financing Activities		14,227			17,548

Net Increase (Decrease) in Cash and Cash Equivalents		(5,070	)		5,609
Cash and Cash Equivalents at Beginning of Year		13,336			8,953
Cash and Cash Equivalents at End of Period	$	8,266		$	14,562

SUPPLEMENTAL INFORMATION:
Cash paid for:
Interest	$	2,321		$	3,204
Income taxes		1			52
Transfer of loans to foreclosed real estate		1,310			177

See accompanying notes to unaudited consolidated interim financial statements.

Jeffersonville Bancorp and Subsidiary

Notes to Consolidated Interim Financial Statements

June 30, 2010

(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”), with all significant intercompany transactions having been eliminated. In the opinion of Management of the Company, the accompanying unaudited consolidated interim financial statements contain all adjustments necessary to present the financial position of the Company as of June 30, 2010 and December 31, 2009 as well as the results of operations for the three and six month periods ended June 30, 2010 and 2009 and the cash flows for the six months ended June 30, 2010 and 2009. Certain reclassifications of prior year amounts have been made, when necessary, in order to conform to the current year’s presentation. All adjustments are normal and recurring. Interim period results are not necessarily 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 2009 Annual Report on Form 10-K, as filed with the Securities Exchange Commission on March 23, 2010.

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

B. Earnings per Share

Basic earnings per share amounts were calculated based on weighted average common shares outstanding. For the six month periods ended June 30, 2010 and 2009, the weighted average common shares outstanding were 4,234,505 and 4,234,321 respectively. For the six month periods ended June 30, 2010 and 2009, the weighted average common shares outstanding were 4,234,414 and 4,234,321 respectively. There were no dilutive securities outstanding during either period.

C. Comprehensive Income

The following tables show comprehensive income for the three and six month periods ended June 30, 2010 and 2009, dollars shown in thousands.

For the three months ended	June 30,			June 30,
Other Comprehensive Income, Net of Tax	2010			2009
Net income	$	629		$	878
Other comprehensive income:
Securities available for sale:
Net unrealized holding gains arising during the period		897			608
Reclassification adjustment for net realized gains included in income		—			(2	)
Amortization of pension and post retirement liabilities’ gains and losses		39			1
Other comprehensive income, before tax		936			607
Income tax expense related to other comprehensive income		(375	)		(242	)
Other comprehensive income		561			365
Comprehensive income	$	1,190		$	1,243

For the six months ended	June 30,			June 30,
Other Comprehensive Income, Net of Tax	2010			2009
Net income	$	1,420		$	1,632
Other comprehensive income:
Securities available for sale:
Net unrealized holding gains arising during the period		971			558
Reclassification adjustment for net realized gains included in income		(40	)		(168	)
Amortization of pension and post retirement liabilities’ gains and losses		137			1
Other comprehensive income, before tax		1,068			391
Income tax expense related to other comprehensive income		(428	)		(156	)
Other comprehensive income		640			235
Comprehensive income	$	2,060		$	1,867

At June 30, 2010 and December 31, 2009, the components of accumulated other comprehensive loss are as follows, dollars in thousands:

	June 30,			December 31,
Accumulated Other Comprehensive Loss, Net of Tax	2010			2009
Supplemental executive retirement plan	$	(781	)	$	(834	)
Postretirement benefits		104			126
Defined benefit pension liability		(3,825	)		(3,933	)
Net unrealized holding gains on securities available for sale		3,123			2,194
Accumulated other comprehensive loss, before tax		(1,379	)		(2,447	)
Income tax benefit related to accumulated other comprehensive loss		551			979
	$	(828	)	$	(1,468	)

D. New Accounting Pronouncements

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

In July 2010, the FASB issued ASU 2010-20 Receivables (Topic 310), “Disclosures about the Credit Quality of Financing Receivables and Allowance for Credit Losses”. The main objective in developing this Update is to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. Financing receivables include loans and trade accounts receivable, however, short-term trade accounts receivable, receivables measured at fair value or lower of cost or fair value, and debt securities are exempt from these disclosure amendments. This Update is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. This ASU requires more information about the credit quality of financing receivables in the disclosures to financial statements, such as aging information and credit quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment or class. The disaggregation of information is based on how a company develops its allowance for credit losses and how it manages its credit exposure. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The Company is currently assessing the impact that this update would have on its consolidated financial statements.

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

E. Investment Securities

The amortized cost and estimated fair value of available for sale and held to maturity securities at June 30, 2010 and December 31, 2009 are as follows (in thousands):

			Gross
June 30, 2010	Amortized		unrealized				Estimated
Investment Securities	cost		Gains		Losses		fair value
Available for Sale Securities
Debt Securities:
Government sponsored enterprises (GSE)	$	20,597	$	235	$	—	$	20,832
Obligations of state and political subdivisions		54,613		1,703		41		56,275
Mortgage-backed securities and collateralized mortgage obligations - GSE residential		32,809		1,308		141		33,976
Corporate debt		4,547		37		15		4,569
Certificates of deposit		98		—		—		98
		112,664		3,283		197		115,750
Equity securities		570		43		4		609
	$	113,234	$	3,326	$	201	$	116,359

Held to Maturity Securities
Obligations of state and political subdivisions	$	4,769	$	295	$	—	$	5,064

			Gross
December 31, 2009	Amortized		unrealized				Estimated
Investment Securities	cost		Gains		Losses		fair value
Available for Sale Securities
Debt Securities:
Government sponsored enterprises (GSE)	$	9,478	$	64	$	71	$	9,471
Obligations of state and political subdivisions		48,729		1,516		65		50,180
Mortgage-backed securities and collateralized mortgage obligations - GSE residential		28,868		725		83		29,510
Corporate debt		1,404		46		—		1,450
Certificates of deposit		98		—		—		98
		88,577		2,351		219		90,709
Equity securities		549		67		5		611
	$	89,126	$	2,418	$	224	$	91,320
Held to Maturity Securities
Obligations of state and political subdivisions	$	8,218	$	360	$	—	$	8,578

There were no sales of securities held to maturity during the three or six months ended June 30, 2010 or June 30, 2009.

The amortized cost and estimated fair value of total available for sale and held to maturity securities at June 30, 2010, by remaining period of contractual maturity, are shown in the following table, in thousands. Actual maturities may differ from contractual maturities because of security prepayments and the right of certain issuers to call or prepay their obligations.

	Amortized		Estimated
Investment Securities	cost		fair value
Within one year	$	26,865	$	27,154
One to five years		41,014		42,455
Five to ten years		16,281		16,691
Over ten years		464		538
		84,624		86,838
Equity Securities		570		609
Mortgage-backed securities		32,809		33,976
Total Investment Securities	$	118,003	$	121,423

Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2010 and December 31, 2009 were as follows (in thousands):

	Less than 12 month				12 months or more				Total
June 30, 2010	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
Investment Securities	fair value		losses		fair value		losses		fair value		losses
Available for sale:
Debt Securities:
Obligations of state and political subdivisions	$	5,436		38	$	232	$	3	$	5,668	$	41
Mortgage-backed securities and collateralized mortgage obligations		5,595		141		—		—		5,595		141
Corporate debt		2,058		15		—		—		2,058		15
		13,089		194		232		3		13,321		197
Equity securities		293		4		—		—		293		4
	$	13,382	$	198	$	232	$	3	$	13,614	$	201

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

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

The contractual terms of the government sponsored enterprise securities and the obligations of state and political subdivisions require the issuer to settle the securities at par upon maturity of the investment. The contractual cash flows of the mortgage backed securities and collateralized mortgage obligations are guaranteed by various government agencies or government sponsored enterprises such as FHLMC, FNMA, and GNMA.

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. All of the Company’s investment securities classified as available for sale or held to maturity are evaluated for OTTI. Securities identified as other-than-temporarily impaired are written down to their current fair market value. For debt and equity securities that are intended to be sold, or that management believes will more-likely-than-not be required to be sold prior to recovery, the full impairment is recognized immediately in earnings. An impairment will also be recorded if there is a credit related impairment. There are numerous factors to be considered when estimating whether a credit loss exists and the period over which the debt security is expected to recover. Indicators of a possible credit impairment include the failure of the issuer of the security to make scheduled interest or principal payments, any changes to the rating of the security by a rating agency, additional declines in fair value after the balance sheet date. In determining whether a credit loss exists, an entity shall use its best estimate of the present value of expected cash flows expected to be collected from the debt security by discounting the expected cash flows at the effective interest rate implicit in the security at the date of acquisition.

There were no credit-related impairment charges recorded for the three or six month periods ended June 30, 2010 or June 30, 2009 as management believes the impairment on securities for both periods, did not represent an underlying credit quality impairment but instead are due to market fluctuation.

As of June 30, 2010, a total of 38 or $13,614,000 in available for sale securities had a $201,000 total unrealized loss which is included in accumulated other comprehensive loss on the consolidated balance sheet, net of tax. Two of these available for sale securities, totaling $232,000 with $3,000 of unrealized loss, were in a continual loss position for 12 months or more. These two securities were obligations of a state or political subdivision. Management believes that none of the unrealized losses on these non-equity securities at June 30, 2010 are due to the underlying credit quality of the issuers of the securities, but instead are primarily related to market interest rates, and the full value of the securities will be realized upon maturity. Additionally, the Company does not intend to sell the securities, and it is more-likely-than-not that the Company will not be required to sell the securities before recovery of their amortized cost. As such, only the credit loss component of the unrealized loss would be recognized in earnings, while the balance of the fair value loss is recognized in other comprehensive income. As there was no credit loss, no impairment charge was recorded on these securities for the period ended June 30, 2010.

As of June 30, 2010, 36 available for sale securities totaling $13,382,000 had $198,000 in unrealized losses and were in a loss position for less than 12 consecutive months. Eight securities totaling $5,595,000 with $141,000 in unrealized losses were mortgage-backed securities and collateralized mortgages, 23 securities totaling $5,436,000 with $38,000 in unrealized losses were obligations of state and political subdivisions, two were corporate debt instruments totaling $2,058,000 with a $15,000 unrealized loss, and two were equity securities totaling $293,000 with $4,000 in unrealized losses. There were no held to maturity securities in a loss position. Management believes that none of the unrealized losses on these securities at June 30, 2010 are due to the underlying credit quality of the issuers of the securities, but instead are primarily related to market interest rates, and the full value of the securities will be realized upon maturity. Additionally, the Company does not intend to sell the securities, and it is more-likely-than-not that the Company will not be required to sell the securities before recovery of their amortized cost. As such, only the credit loss component of the unrealized loss would be recognized in earnings, while the balance of the fair value loss is recognized in other comprehensive income. As there was no credit loss, no impairment charge was recorded on these securities for the period ended June 30, 2010.

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

As of December 31, 2009, 34 available for sale securities totaling $16,920,000 had $216,000 in unrealized losses and were in a loss position for less than 12 consecutive months. Seven of these available for sale securities, totaling $7,405,000 with $71,000 of unrealized losses, were government sponsored enterprises securities, three totaling $3,177,000 with $83,000 in unrealized losses were mortgage-backed securities and collateralized mortgages, and 23 totaling $6,338,000 with $62,000 in unrealized losses were obligations of state and political subdivisions. Held to maturity securities in a continual loss position for less than 12 months totaled $56,000 with an unrealized loss less than $1,000 and consisted of one obligation of a state or political subdivision. Management believes that none of the unrealized losses on these securities at December 31, 2009 are due to the underlying credit quality of the issuers of the securities, but instead are primarily related to market interest rates, and the full value of the securities will be realized upon maturity. Additionally, the Company does not intend to sell the securities, and it is more-likely-than-not that the Company will not be required to sell the securities before recovery of their amortized cost. As such, only the credit loss component of the unrealized loss would be recognized in earnings, while the balance of the fair value loss is recognized in other comprehensive income. As there was no credit loss, no impairment charge was recorded on these securities for the period ended December 31, 2009.

F. Restricted Investments

As a member of the Federal Home Loan Bank of New York (FHLB), the Company is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements. This stock is restricted in that it can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par value. As a result of these restrictions, FHLB stock is unlike the Company’s other investment securities insofar as there is no trading market for FHLB stock and the transfer price is determined by FHLB membership rules, not by market participants. As of June 30, 2010 and December 31, 2009, our FHLB stock totaled 1,299,000 shares for both periods, and is included as a part of restricted investments on the consolidated balance sheets.

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

its operating performance;

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

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

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

its liquidity and funding position.

After evaluating all of these considerations, the Company concluded that the par value of its investment in FHLB stock will be recovered. Accordingly, no impairment charge was recorded on these securities in the three or six months ended June 30, 2010 or 2009. Our evaluation of the factors described above in future periods could result in the recognition of impairment charges on FHLB stock.

G. 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 2009 Annual Report on Form 10-K.

The components of the net periodic benefit cost for the three and six months ended June 30, for these plans were as follows (in thousands):

Net Periodic Benefit Cost	Pension benefit						Postretirement benefit
For the three months ended June 30,	2010			2009			2010			2009
Net periodic benefit cost:
Service cost	$	109		$	110		$	37		$	40
Interest cost		147			146			52			51
Expected return on plan assets		(134	)		(95	)		—			—
Amortization of prior service cost		6			6			(11	)		(11	)
Recognized net actuarial loss		48			68			—			3
Net amount recognized	$	176		$	235		$	78		$	83

Net Periodic Benefit Cost	Pension benefit						Postretirement benefit
For the six months ended June 30,	2010			2009			2010			2009
Net periodic benefit cost:
Service cost	$	218		$	220		$	74		$	81
Interest cost		294			292			104			103
Expected return on plan assets		(268	)		(190	)		—			—
Amortization of prior service cost		12			12			(22	)		(22	)
Recognized net actuarial loss		96			136			—			7
Net amount recognized	$	352		$	470		$	156		$	169

The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2009, that it expected to contribute $750,000 to its pension plan and $126,000 to its other postretirement benefits plan in 2010. As of June 30, 2010, a contribution of $750,000 was made to the pension plan and $84,000 of contributions had been made to the other postretirement benefits plan. The Company revised its contribution estimate for the other postretirement benefit plan and now expects to contribute a total of $175,000 for 2010. The Company continues to expect that there will be no additional contributions to the pension plan in 2010.

H. Guarantees

The Company does not issue any guarantees that would possibly 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 $550,000 at June 30, 2010 and $858,000 at December 31, 2009 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 for 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 June 30, 2010 was insignificant.

I. Fair Values of Financial Instruments

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

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

Level 1:

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

Level 2:

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

Level 3:

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

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, an asset’s or liability’s level is based on the lowest level of input that is significant to the fair value measurement. A full discussion of Topic 820 may be found in the Company’s Annual Report on Form 10-K as filed with the SEC on March 23, 2010.

For financial assets measured at fair value on a recurring and non-recurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2010 and December 31, 2009 are as follows (dollars in thousands):

			(Level 1)
			Quoted
			Prices in		(Level 2)
			Active		Significant		(Level 3)
Fair Value Hierarchy			Markets for		Other		Significant
For Assets Valued on a			Identical		Observable		Unobservable
Recurring and Non-recurring Basis	Total		Assets		Inputs		Inputs
June 30, 2010:
Recurring:
Available for sale securities
Government sponsored enterprises (GSE) (1)	$	20,832	$	—	$	20,832	$	—
Obligations of state and political subdivisions – New York state (1)		56,275		—		56,275		—
Mortgage backed securities and collateralized mortgage obligations – GSE residential (1)		33,976		—		33,976		—
Corporate Debt – financial services industry		4,569		—		4,569		—
Certificates of deposit – financial services industry		98		98		—		—
Equity securities – financial services industry		609		609		—		—
	$	116,359	$	707	$	115,652	$	—
Non-recurring:
Impaired loans	$	5,809	$	—	$	—	$	5,809

December 31, 2009:
Recurring:
Available for sale securities
Government sponsored enterprises (GSE) (1)	$	9,471	$	—	$	9,471	$	—
Obligations of state and political subdivisions – New York state (1)		50,180		—		50,180		—
Mortgage backed securities and collateralized mortgage obligations – GSE residential (1)		29,510		—		29,510		—
Corporate Debt – financial services industry		1,450		—		1,450		—
Certificates of deposit – financial services industry		98		98		—		—
Equity securities – financial services industry		611		570		41		—
	$	91,320	$	668	$	90,652	$	—
Non-recurring:
Impaired loans	$	2,728	$	—	$	—	$	2,728

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

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

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

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

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial assets and liabilities (none of which were held for trading purposes) at June 30, 2010 and December 31, 2009, in thousands:

Cash and Cash Equivalents

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

Securities

For a description of securities held in each class, see note E. The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. The carrying values for securities maturing within 90 days approximate fair values because there is little interest rate or credit risk associated with these instruments.

Loans

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

Impaired Loans

Impaired loans, which are predominately commercial real estate loans, are those in which the Bank has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, liquidation value or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. Impaired loans are transferred out of the Level 3 fair value hierarchy when payments reduce the outstanding loan balance below the fair value of the loan’s collateral or the loan is foreclosed upon. As of June 30, 2010 and December 31, 2009, the fair values of collateral-dependent impaired loans were calculated using an outstanding balance of $7,452,000 and $3,590,000, less a valuation allowance of $1,643,000 and $862,000, respectively. Impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.

Accrued Interest Receivable and Payable

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

Restricted Investments

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

Deposit Liabilities

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

Short-Term Borrowings

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

Federal Home Loan Bank Borrowings

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

Off-Balance-Sheet Financial Instruments

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

For fixed rate loan commitments, fair value estimates also consider the difference between current market interest rates and the committed rates. The fair values of these financial instruments approximated the related carrying values which were not significant for both reporting dates.

The estimated fair values of the Company’s financial instruments were:

	June 30, 2010				December 31, 2009
	Net carrying		Estimated		Net carrying		Estimated
Financial Assets and Liabilities	amount		fair value		amount		fair value
Financial assets:
Cash and cash equivalents	$	8,266	$	8,266	$	13,336	$	13,336
Securities available for sale		116,359		116,359		91,320		91,320
Securities held to maturity		4,769		5,064		8,218		8,578
Loans, net		274,190		274,417		275,419		274,618
Accrued interest receivable		2,121		2,121		1,954		1,954
Restricted investments		2,509		2,509		2,341		2,341

Financial liabilities:
Demand deposits (non-interest-bearing)		65,512		65,512		64,266		64,266
Interest-bearing deposits		299,632		289,041		287,939		276,429
Accrued interest payable		354		354		378		378
Short-term debt		2,601		2,601		212		212
Federal Home Loan Bank borrowings		15,000		15,751		15,000		15,951

Off balance sheet financial instruments:
Lending commitments		—		—		—		—
Letters of credit		—		—		—		—

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, 2009 to June 30, 2010, total assets increased $16.4 million or 3.9% to $439.1 million. The increase was primarily due to a net $25.0 million or 27.4% increase in securities available for sale partially offset by a $3.4 million or 42.0% decrease in securities held to maturity, a $5.1 million or 38.0% decrease in cash and cash equivalents and a $1.2 million or 0.4% decrease in net loans. The net increase in total assets was primarily funded by deposit growth.

Total deposits increased $12.9 million or 3.7% from $352.2 million at December 31, 2009 to $365.1 million at June 30, 2010. Savings and insured money market deposits increased $16.7 million or 20.9%, NOW and super NOW accounts increased $2.5 million or 7.5% due to the Bank’s enhanced sales initiative. In addition, depositors have increasingly brought deposits to the Bank, possibly due to lack of other investment opportunities and uncertainty in the stock market. Non-interest bearing demand deposits increased during the same period by $1.2 million or 1.9%. Short-term debt, primarily consisting of overnight Federal Home Loan Bank borrowings at June 30, 2010, increased $2.4 million to $2.6 million from $212,000.Partially offsetting these increases was a decrease in time deposits of $7.6 million or 4.3% as a result of the seasonal influences of municipal time deposits.

Total stockholders’ equity increased $961,000 or 2.2% from $44.7 million at December 31, 2009 to $45.6 million at June 30, 2010. This increase was the result of net income of $1,420,000 plus a decrease of $640,000 in accumulated other comprehensive loss and the transfer of $2,000 in treasury stock to common stock, partially offset by the payment of cash dividends of $1,101,000.

The major classifications of loans are as follows at June 30, 2010 and December 31, 2009, in thousands:

	June 30, 2010					December 31, 2009
Major Classifications of Loans	Amount		Percent			Amount		Percent
Real estate loans:
Residential	$	103,109		37.0	%	$	102,963		36.9	%
Commercial		100,305		36.0			98,961		35.5
Home equity		32,737		11.8			33,034		11.8
Farm land		4,730		1.7			4,926		1.8
Construction		5,219		1.9			3,841		1.4
		246,100		88.4			243,725		87.4
Other loans:
Commercial loans		23,474		8.4			26,034		9.4
Consumer installment loans		7,441		2.7			7,769		2.8
Other consumer loans		482		0.2			386		0.1
Agricultural loans		772		0.3			882		0.3
		32,169		11.6			35,071		12.6
Total loans		278,269		100.0	%		278,796		100.0	%
Unamortized deferred loan fees and origination costs		653					611
Less allowance for loan losses		4,732					3,988
Total loans, net	$	274,190				$	275,419

B. Allowance for Loan Losses

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Changes in the allowance for loan losses are summarized as follows for the periods ended June 30, 2010 and 2009 and December 31, 2009 as follows, dollars in thousands:

	Six months			Six months
	ended			ended			Year ended
	June 30,			June 30,			December 31,
Allowance for Loan Losses	2010			2009			2009
Balance at beginning of period	$	3,988		$	3,170		$	3,170
Provision for loan losses		1,000			150			1,300
Loans charged-off		(333	)		(223	)		(648	)
Recoveries		77			101			166
Balance at end of period	$	4,732		$	3,198		$	3,988

Annualized net charge-offs as a percentage of
average outstanding loans		0.18	%		0.09	%		0.18	%
Allowance for loan losses to:
Total loans		1.70	%		1.20	%		1.43	%
Total non-performing loans		37.8	%		33.8	%		30.0	%

The allowance for loan losses was $4.7 million at June 30, 2010, $3.2 million at June 30, 2009 and $4.0 million at December 31, 2009. Total nonperforming loans were $12.5 million at June 30, 2010 and $13.3 million at December 31, 2009, a decrease of $804,000. Net loan charge-offs increased to $256,000 for the six months ended June 30, 2010 from $122,000 in the same period of 2009 and gross charge-offs increased to $333,000 in 2010 from $223,000 in 2009. The provision for loan losses was $1,000,000 for the six months ended June 30, 2010 as compared to $150,000 for the same period in 2009 as the Bank allocated additional loan loss reserves for specific mortgage loans. The allowance’s coverage on nonperforming loans was 37.8% at June 30, 2010, 30.0% at December 31, 2009 and 33.8% at June 30, 2009. The increase in the allowance for loan losses reflects the increasing risks in the loan portfolio. The Bank’s loans remain well collateralized, and based on management’s analysis of the loan portfolio, the Bank’s minimal loss history and low charge-offs, management believes the current level of the allowance for loan losses is adequate. However, Federal regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses and may require the Bank 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.

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. 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 upon their ultimate resolution. However, as inherent in estimates, the actual loss may vary. Interest income on nonaccrual loans that are well secured is recorded on a cash basis.

Nonperforming loans as of June 30, 2010 and December 31, 2009 are summarized as follows, dollars in thousands:

	June 30, 2010			December 31, 2009
Nonaccrual loans	$	11,646		$	12,037
Loans past due 90 days or more and still accruing interest		858			1,270
Total nonperforming loans	$	12,504		$	13,307
Non-performing loans as a percentage of total loans		4.5	%		4.8	%

Commercial nonperforming loans are evaluated individually for impairment. As of June 30, 2010, there were $10,732,000 in loans, compared to $11,824,000 at December 31, 2009, which were considered to be impaired. As of each reporting date, a specific reserve of $1,643,000 and $862,000, respectively, was established to offset potential losses on collateral dependant loans included in these nonperforming loans.

Capital

Under the Office of the Comptroller of the Currency’s (OCC) risk-based capital rules, a Bank is adequately capitalized if its leverage ratio (Tier I capital to average assets) and Tier I risk-based capital ratio are 4%, and its total risk-based capital is 8%. To be considered well capitalized, these ratios are 5%, 6% and 10% respectively. At June 30, 2010, the Bank’s leverage ratio was 10.0%, Tier I risk-based capital was 15.6% and total risk-based capital was 16.9%. These risk-based capital ratios are well above the minimum regulatory requirements for the Bank to be considered well capitalized.

The following table shows the Bank’s actual capital measurements compared to the minimum regulatory requirements as of June 30, 2010 and December 31, 2009, dollars in thousands.

Tier Capital	June 30, 2010			December 31, 2009
Tier I Capital
Banks’ equity, excluding the after-tax net accumulated other comprehensive loss	$	44,251		$	43,986
Tier II Capital
Allowance for loan losses (1)	$	3,554		$	3,580
Total risk-based capital	$	47,805		$	47,566
Risk-weighted assets (2)	$	283,160		$	285,946
Average assets	$	443,018		$	418,393
Ratios
Tier I risk-based capital (minimum 4.0%)		15.6	%		15.4	%
Total risk-based capital (minimum 8.0%)		16.9	%		16.6	%
Leverage (minimum 4.0%)		10.0	%		10.5	%

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

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

Jeffersonville Bancorp is a small bank holding company with pro forma consolidated assets of less than $500 million, and is exempt from regulatory capital requirements administered by the Federal Reserve System.

DISTRIBUTION OF ASSETS, LIABILITIES & STOCKHOLDERS’ EQUITY:

INTEREST RATES & INTEREST DIFFERENTIAL

The following schedule presents the condensed average consolidated balance sheets for three and six months ended June 30, 2010 and 2009. The total dollar amount of interest income from earning assets and the resultant yields are calculated on a tax equivalent basis. The interest paid on interest-bearing liabilities, expressed in dollars and rates, are also presented with dollars in thousands.

For the six months ended June 30,	2010							2009
					Average							Average
	Average		Interest		yield/			Average		Interest		yield/
	balance		earned		rate			balance		earned		rate
ASSETS
Securities available for sale and held to maturity: (1)
Taxable securities	$	57,188	$	1,039		3.63	%	$	52,048	$	1,151		4.42	%
Tax-exempt securities (2)		59,290		1,736		5.86			45,390		1,385		6.10
Total securities		116,478		2,775		4.76			97,438		2,536		5.21
Short-term investments		117		1		1.00			3,659		5		0.27
Loans
Real estate mortgages		200,518		6,422		6.41			192,561		6,335		6.58
Home equity loans		32,223		931		5.78			31,142		953		6.12
Time and demand loans		27,293		564		4.13			24,947		537		4.31
Installment and other loans		18,452		860		9.32			18,737		881		9.40
Total loans (3)		278,486		8,777		6.30			267,387		8,706		6.51
Total interest earning assets		395,081		11,553		5.85			368,484		11,247		6.10
Other non-interest bearing assets		44,874							39,685
Total assets	$	439,955						$	408,169

LIABILITIES AND STOCKHOLDERS’ EQUITY
NOW and Super NOW deposits	$	39,403	$	49		0.25	%	$	34,280	$	43		0.25	%
Savings and insured money market deposits		91,954		270		0.59			77,816		199		0.51
Time deposits		175,010		1,679		1.92			147,694		2,172		2.94
Total interest bearing deposits		306,367		1,998		1.30			259,790		2,414		1.86
Federal funds purchased and other short-term debt		436		—		0.39			998		2		0.40
Long-term debt		15,000		299		3.99			34,171		716		4.19
Total interest bearing liabilities		321,803		2,297		1.43			294,959		3,132		2.12
Demand deposits		62,756							57,287
Other non-interest bearing liabilities		9,813							12,672
Total liabilities		394,372							364,918
Stockholders’ equity		45,583							43,251
Total liabilities and stockholders’ equity	$	439,955						$	408,169
Net interest income – tax effected				9,256							8,115
Less tax gross up on exempt securities				588							467
Net interest income per statement of income			$	8,668						$	7,648
Net interest spread						4.42	%						3.98	%
Net interest margin (4)						4.69	%						4.40	%

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

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

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

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

For the three months ended June 30,	2010							2009
					Average							Average
	Average		Interest		yield/			Average		Interest		yield/
	balance		earned		rate			balance		earned		rate
ASSETS
Securities available for sale and held to maturity: (1)
Taxable securities	$	64,417	$	559		3.47	%	$	55,718	$	571		4.10	%
Tax-exempt securities (2)		59,298		909		6.13			48,562		740		6.10
Total securities		123,715		1,468		4.75			104,280		1,311		5.03
Short-term investments		42		—		0.06			4,363		3		0.28
Loans
Real estate mortgages		200,485		3,210		6.40			191,723		3,131		6.53
Home equity loans		32,066		464		5.79			31,420		484		6.16
Time and demand loans		27,180		307		4.52			24,694		273		4.42
Installment and other loans		18,188		431		9.48			19,408		454		9.36
Total loans (3)		277,919		4,412		6.35			267,245		4,342		6.50
Total interest earning assets		401,676		5,880		5.86			375,888		5,656		6.02
Other non-interest bearing assets		44,737							39,848
Total assets	$	446,413						$	415,736

LIABILITIES AND STOCKHOLDERS’ EQUITY
NOW and Super NOW deposits	$	38,152	$	24		0.25	%	$	32,747	$	21		0.25	%
Savings and insured money market deposits		99,782		152		0.61			82,706		105		0.51
Time deposits		174,201		827		1.90			152,789		1,063		2.78
Total interest bearing deposits		312,135		1,003		1.29			268,242		1,189		1.77
Federal funds purchased and other short-term debt		532		—		0.21			301		—		0.00
Long-term debt		15,000		150		4.00			33,342		350		4.20
Total interest bearing liabilities		327,667		1,153		1.41			301,885		1,539		2.04
Demand deposits		63,082							57,431
Other non-interest bearing liabilities		9,888							12,889
Total liabilities		400,637							372,205
Stockholders’ equity		45,776							43,531
Total liabilities and stockholders’ equity	$	446,413						$	415,736
Net interest income – tax effected				4,727							4,117
Less tax gross up on exempt securities				308							249
Net interest income per statement of income			$	4,419						$	3,868
Net interest spread						4.45	%						3.98	%
Net interest margin (4)						4.71	%						4.38	%

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

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

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

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

VOLUME AND RATE ANALYSIS

The following schedule sets forth, for each major category of interest earning assets and interest bearing liabilities, the dollar amount of interest income (calculated on a tax equivalent basis) and interest expense, and changes therein for the three and six months ended June 30, 2010 as compared to 2009. The increase and decrease in interest income and expense due to both rate and volume have been allocated to the two categories of variances (volume and rate) based on percentage relationships of such variance to each other, with dollars in thousands.

	June 30, 2010 compared to 2009
For the three months ended	increase (decrease) due to change in
	Average			Average
	Volume			Rate			Total
Interest Income
Securities available for sale and held to maturity (1)	$	244		$	(87	)	$	157
Loans		173			(103	)		70
Other		(3	)	��	—			(3	)
Total interest income		414			(190	)		224

Interest Expense
NOW and Super NOW deposits		3			—			3
Savings and insured money market deposits		22			25			47
Time deposits		144			(380	)		(236	)
Short-term debt		1			(1	)		—
Federal Home Loan Bank borrowings		(193	)		(7	)		(200	)
Total interest expense		(23	)		(363	)		(386	)
Net interest income	$	437		$	173		$	610

	June 30, 2010 compared to 2009
For the six months ended	increase (decrease) due to change in
	Average			Average
	Volume			Rate			Total
Interest Income
Securities available for sale and held to maturity (1)	$	496		$	(257	)	$	239
Loans		361			(290	)		71
Other		(5	)		1			(4	)
Total interest income		852			(546	)		306

Interest Expense
NOW and Super NOW deposits		6			—			6
Savings and insured money market deposits		36			35			71
Time deposits		402			(895	)		(493	)
Short-term debt		(1	)		(1	)		(2	)
Federal Home Loan Bank borrowings		(402	)		(15	)		(417	)
Total interest expense		41			(876	)		(835	)
Net interest income	$	811		$	330		$	1,141

1 Fully taxable-equivalent basis.

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

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. OCC regulations prohibit the Bank to pay a dividend without prior OCC approval if the total amount of all dividends declared during the calendar year, including the proposed dividend, exceeds the sum of its retained net income to date during the calendar year and its retained net income over the preceding two years. As of June 30, 2010, the Bank is permitted to pay a dividend without prior OCC approval.

For the six months ended June 30, 2010, cash generated from operating activities amounted to $2.8 million, and cash generated from financing activities was $14.2 million. These amounts were partially offset by cash used for investing activities in the amount of $22.1 million, resulting in a net decrease in cash and cash equivalents of $5.1 million. See the Consolidated Statements of Cash Flows for additional information.

The following table reflects the Maturities of Time Deposits of $100,000 or more for June 30, 2010 and December 31, 2009 and Federal Home Loan Bank (FHLB) borrowings, dollars in thousands:

	Maturity of Time Deposits
	Of $100,000 or More				FHLB Borrowings
As of	June 30, 2010		December 31, 2009		June 30, 2010
Due three months or less	$	30,190	$	28,751	$	—
Over three months through six months		16,830		24,809		—
Over six months through twelve months		9,367		15,622		—
Over twelve months		14,592		11,555		15,000
Total	$	70,979	$	80,737	$	15,000

E.	Results of Operations

Comparison of the three month periods ending June 30, 2010 and 2009

Net income for the three months ended June 30, 2010 decreased $249,000 or 28.4% to $629,000 from $878,000 for the same period in 2009. The decrease was comprised primarily of a decrease in net interest income after provision for loan losses of $249,000 to $3,619,000 and a $200,000 decrease in non-interest income, partially offset by a decrease in income tax expense of $231,000. The decrease in net interest income after provision for loan losses is primarily due to an $800,000 increase in the provision for loan losses, partially offset by a decrease in interest expense of $386,000 or 25.1% to $1,153,000 for the quarter ended June 30, 2010 and increased interest and dividend income of $165,000 or 3.1% to $5,572,000 the quarter ended June 30, 2010.The Company’s annualized return on average assets was 0.6% for the three months ended June 30, 2010, down from 0.8% for the same period last year. The annualized return on average stockholders’ equity was 5.5% for the three months ended June 30, 2010, down from 8.1% for the same period last year.

Total net interest income before provision for loan losses increased $551,000 or 14.2% to $4,419,000 for the quarter ended June 30, 2010 up from $3,868,000 from the same period in 2009, of which, $386,000 or 25.1% was the result of a decrease in interest expense from $1,539,000 for the three months ended June 30, 2009 to $1,153,000 for the same period in 2010. This decrease of $386,000 was attributable to a $186,000 or 15.6% decrease in interest expense on deposits and a $200,000 or 57.1% decrease in interest on fixed rate Federal Home Loan Bank (FHLB) borrowings for the three months ended June 30, 2010. The decrease in interest expense is primarily due to lower interest rates paid on time deposits and the maturity of $20.0 million in fixed rate FHLB borrowings. Interest income on investment securities increased $98,000 or 9.2% to $1,160,000 for the quarter ended June 30, 2010 from $1,062,000 for the same period in the prior year. The increase in interest on investment securities reflects an increase in security holdings partially offset by called securities being replaced by lower yielding investments. Loan interest and fee income increased $70,000 or 1.6% to $4,412,000 for the quarter ended June 30, 2010 from $4,342,000 for the same period in 2009.

The provision for loan losses was $800,000 for the three months ended June 30, 2010, an increase from no provision for the three months ended June 30, 2009. The increase in 2010 was primarily due to higher levels of criticized and classified loans as a result of a sluggish local economy.

Non-interest income decreased to $654,000 for the six months ended June 30, 2010 compared to $854,000 for the same period in 2009, a change of $200,000 or 23.4%. This decrease was primarily the result of a $118,000 or 16.6% decrease in services charges and fee income and an $80,000 increase in foreclosed real estate expense to $113,000 for the quarter ended June 30, 2010. Service charge and fee income decreased due to lower volume of overdraft fees and credit card activity. Foreclosed real estate expense increased due to the increased number of properties held by the Bank. Non-interest expense increased $31,000 or 0.9% to $3,676,000 primarily due to an $84,000 increase in salaries and employee benefits, partially offset by a $68,000 decrease in other non-interest expenses. The increase in salaries and employee benefits was mostly due to a the addition of two new branch locations and normal salary increases partially offset by a $69,000 decrease in pension expense as a result of market value recoveries. The decrease in other non-interest expense was the result of a decrease in FDIC insurance expense of $62,000.

Income tax expense for the three months ended June 30, 2009 of $199,000 decreased $231,000 to a tax (benefit) of $(32,000) for the same period in 2010. The Company’s effective tax (benefit) rates were (5.4)% and 18.5% for the three month periods ended June 30, 2010 and 2009, respectively. The reduction in effective tax rates was due to tax exempt interest and earnings on bank-owned life insurance being a higher percentage of income before income tax expense in 2010 as compared to 2009.

Throughout the following discussion, net interest income and its components are expressed on a tax equivalent basis which means that, where appropriate, tax exempt income is shown as if it were earned on a fully taxable basis. The discussion is based on the comparison of the three month average balance and yields, and year to date interest income and expense for the periods ended June 30, 2010 and 2009.

Tax equivalent net interest spread increased 47 basis points to 4.45% for the three months ended June 30, 2010 up from 3.98% for the same period in 2009. Net interest margin increased 33 basis points from 4.38% for the same period in 2009 to 4.71% in 2010. Tax equivalent net interest income increased $610,000 with interest income increasing $224,000 and interest expense decreasing $386,000. Yields on tax equivalent interest income decreased 16 basis points and yields on interest expense decreased 63 basis points. Tax equivalent interest income increased $224,000 primarily due to increased interest on average investment securities of $157,000 and a $70,000 increase in interest income on average loans. Interest income on average securities increased primarily due to increased holdings partially offset by a decrease in yield. Average tax-exempt securities increased $10,736,000 or 22.1% and average taxable securities increased $8,699,000. Yield on average tax-exempt securities increased 3 basis points and yield on average taxable securities decreased 63 basis points. Calls and maturities of higher yielding securities being replaced by lower yielding securities resulted in the decrease in yield. Yields on held to maturity tax-exempt securities increased slightly as competition for those offerings decreased. Interest income on loans increased $70,000 due to the $10,674,000 increase in average loans partially offset by a 15 basis point decrease in yield to 6.35% for the three months ended June 30, 2010. Real estate mortgages and home equity loans experienced a decrease due in part to the variable rate features in some of the loan products as well as the replacement of maturing loans with new, lower-yielding ones. The majority of the increase in interest income was on real estate loans which increased $79,000, primarily due to the increase in average loan balance of $8,762,000 partially offset by an average rate decrease of 13 basis points.

Interest expense on interest bearing liabilities decreased $386,000 and average yield of 2.04% for the three months ended June 30, 2009 decreased to 1.41% for the same period in 2010. Interest expense decreased $186,000 on interest bearing deposits and $200,000 on Federal Home Loan Bank borrowings. Interest expense of time deposits decreased $236,000 and were partially offset by a $50,000 increase in interest on saving and insured money market deposits and NOW and Super NOW deposits. Yields decreased 88 basis points on time deposits and 20 basis points on Federal Home Loan Bank borrowings. Although the average balance of time deposits increased $21,412,000, the lower interest rate environment resulted in the decreased interest expense. Interest on Federal Home Loan Bank borrowings decreased due to the repayment of $20 million in higher yielding fixed rate borrowings.

The total average balance for interest bearing assets was $401,676,000 for the three month period ended June 30, 2010 compared to $375,888,000 for the same three month period in 2009, an increase of $25,788,000. The overall yield on average interest earning assets decreased 16 basis points from 6.02% in 2009 to 5.86% in 2010. Average loans increased $10,674,000 to $277,919,000 and average investment securities increased $19,435,000 to $123,715,000 for the three months ended June 30, 2010. Partially offsetting these increases, average other interest earning assets, primarily consisting of federal funds sold, decreased $4,321,000 from $4,363,000 to $42,000 for the three months ended June 30, 2010. Total average interest bearing liabilities increased $25,782,000 from $301,885,000 for the three month period ended June 30, 2009 to $327,667,000 for the same three month period in 2010. Average interest bearing deposits increased $43,893,000 primarily due to an increase of $21,412,000 in average time deposits to $174,201,000, and an increase in savings and insured money market deposits of $17,076,000 to $99,782,000. Total average deposits increased as a result of increased sales efforts and competitive pricing. Average long-term debt, which is long-term fixed rate Federal Home Loan Bank borrowings, decreased $18,342,000 to $15,000,000 for the three months ended June 30, 2010 due to the repayment of $20 million borrowing which was not replaced.

Comparison of the six month periods ended June 30, 2010 and 2009

Net income for the six month ended June 30, 2010 decreased $212,000 or 13.0% to $1,420,000 compared to $1,632,000 for the same period in 2009. This overall decrease was primarily due to a $305,000 decrease in other non-interest income and a $337,000 increase in non-interest expenses partially offset by a $170,000 increase in net interest income after provision for loan losses and a $260,000 decrease in income tax expense. The Company’s annualized return on average assets was 0.6% for the six months ended June 30, 2010, down from 0.8% for the same period last year. The annualized return on average stockholders’ equity was 6.2% and 7.5% for the first six months of 2010 and 2009, respectively.

Net interest income after provision for loan losses increased $170,000 or 2.3% to $7,668,000, resulting from a $835,000 decrease in interest expense and an $185,000 increase in interest and dividend income partially offset by an $850,000 increase in provision for loan losses. Of the $835,000 or 26.7% decrease in total interest expense, interest expense on deposits decreased $416,000 or 17.2% from lower interest rates paid, primarily in time deposits partially offset by an increased level of time deposits. Interest expense on Federal Home Loan Bank borrowings decreased $417,000 or 58.2% due to the maturity of $20.0 million in fixed rate borrowings which were not replaced. Interest and dividend income increased $185,000 or 1.7% primarily resulting from increased tax-exempt security holdings partially offset by new, lower-yielding loans and investments replacing higher-yielding loans and investments.

The provision for loan losses was $1,000,000 for the six months ended June 30, 2010 and $150,000 for the six months ended June 30, 2009, an increase in the provision of $850,000. This increase was principally attributable to the increased risks in the loan portfolio as a result of a sluggish local economy.

Non-interest income decreased $305,000 or 17.5% for the six months ended June 30, 2010 to $1,440,000 from $1,745,000 for the same period in 2009. Service charges and fee income decreased $93,000, net gain on sale of securities decreased $128,000 and foreclosed real estate expense increased $70,000. Service charge and fee income decreased due to lower volume of overdraft fees and credit card activity. Foreclosed real estate expense increased as a result of an increase in property holdings.

Non-interest expenses equaled $7,637,000 for the six months ended June 30, 2010 compared to $7,300,000 for the same period in 2009, an increase of $337,000 or 4.6%. This increase reflects a $261,000 increase in other non-interest expenses primarily due to the payment of real estate taxes on pre-foreclosed properties to secure the Bank’s interest. Salaries and employee benefits increased primarily due to the opening of two new branches for $93,000 and normal salary increases less wage deferrals totaling $97,000 partially offset by $111,000 decrease in pension expense.

Income tax expense was $51,000 for the six month period ended June 30, 2010 compared to $311,000 for the corresponding period in 2009, a decrease of $260,000. The Company’s effective tax rates were 3.5% and 16.0% for the six month periods ended June 30, 2010 and 2009, respectively. The change in effective tax rates was due to tax exempt interest and earnings on bank-owned life insurance being a higher percentage of income before income tax expense in 2010 as compared to 2009.

Throughout the following discussion, net interest income and its components are expressed on a tax equivalent basis which means that, where appropriate, tax exempt income is shown as if it were earned on a fully taxable basis. The discussion is based on the comparison of the six month average balance and yields, and year to date interest income and expense for the periods ended June 30, 2010 and 2009.

Tax equivalent net interest spread increased 44 basis points to 4.42% for the six months ended June 30, 2010 from 3.98% for the same period in 2009. Net interest margin increased 29 basis points from 4.40% to 4.69% over that time. Tax equivalent interest income increased $306,000 and interest expense decreased $835,000. Yields on tax equivalent interest income decreased 25 basis points and interest expense decreased 69 basis points. Tax equivalent interest income increased $306,000 primarily due to increased interest on average investment securities of $239,000 and a $71,000 increase in interest income on average loans. Average tax-exempt security holdings increased $13,900,000 or 30.6% which resulted in an increase of $351,000 in tax equivalent net interest income, even though average yield was 24 basis points lower. This increase was partially offset by a decrease of $112,000 in interest income on taxable securities. Although the average balance of taxable securities increased $5,140,000, calls and maturities of higher yielding securities resulted in the decreased income. Although each loan category experienced a decrease in average rates for the six months ended June 30, 2010 versus the same period in 2009, loan growth at these lower yields resulted in a net increase in interest income on loans of $71,000. The average yield decreases were due in part to the variable rate features in some of the loan products as well as the replacement of maturing loans with new, lower-yielding ones. Real estate mortgages, the major portion of the loan portfolio, experienced an average rate decrease of 17 basis points. The majority of the increase in interest income was on real estate loans with an increase of $87,000, primarily due to the increase in average loan balance of $7,957,000 or 4.1%, partially offset by lower yields.

Interest expense on interest bearing liabilities decreased $835,000 and average yields decreased from 2.12% for the six months ended June 30, 2009 to 1.43% for the same period in 2010. Interest expense decreased $416,000 on interest bearing deposits and $417,000 on Federal Home Loan Bank borrowings. Yields on interest bearing deposits decreased 56 basis points and 20 basis points on Federal Home Loan Bank borrowings. Interest expense of time deposits decreased $493,000 and yields decreased 102 basis points to 1.92% for the six months ended June 30, 2010. Although the average balance of time deposits increased $27,316,000 or 18.5%, the lower interest rate environment resulted in the decreased interest expense. Interest on Federal Home Loan Bank borrowings decreased due to the repayment of $20 million in higher yielding fixed rate borrowings.

The total average balance for interest bearing assets was $395,081,000 for the six month period ended June 30, 2010 compared to $368,484,000 for the same six month period in 2009, an increase of $26,597,000 or 7.2%. The overall yield on average interest earning assets decreased 25 basis points from 6.10% in 2009 to 5.85% in 2010. Average loans increased $11,099,000 or 4.2% to $278,486,000 and average investment securities increased $19,040,000 or 19.5% to $116,478,000 for the six months ended June 30, 2010. Partially offsetting these increases, average other interest earning assets, primarily consisting of federal funds sold, decreased $3,542,000 or 96.8%, from $3,659,000 to $117,000 for the six months ended June 30, 2010. Total average interest bearing liabilities increased $26,844,000 or 9.1% from $294,959,000 for the six month period ended June 30, 2009 compared to $321,803,000 for the same six month period in 2010. Average interest bearing deposits increased $46,577,000 primarily due to an increase of $27,316,000 or 18.5% in average time deposits to $175,010,000, and an increase in savings and insured money market deposits of $14,138,000 or 18.2% to $91,954,000. Total average deposits increased as a result of increased sales efforts and competitive pricing. Average long-term debt, which is long-term fixed rate Federal Home Loan Bank borrowings, decreased $19,171,000 or 56.1% to $15,000,000 for the six months ended June 30, 2010 due to the repayment of $20 million borrowing which was not replaced.

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 and certain other factors. See Item 2.B. Management’s Discussion and Analysis/ Allowance for Loan Losses. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions and values of real estate particularly in Sullivan County. Collateral underlying certain real estate loans could lose value which could lead to future additions to the allowance for loan losses. In addition, Federal regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management.

Foreclosed real estate consists of properties acquired through foreclosure or by acceptance of a deed in lieu of foreclosure. At the time of initial foreclosure, or when foreclosure occurs in-substance, these assets are recorded at fair value less estimated costs to sell and the excess, if any, of the loan over the fair market value of the assets received, less estimated selling costs, is charged to the allowance for loan and lease losses. Any subsequent valuation adjustments are charged or credited to other non-interest income. Operating costs associated with the properties are charged to expense as incurred. Gains on the sale of foreclosed real estate are included in income when title has passed and the sale has met all the requirements prescribed by GAAP.

Impaired securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether the impairment is other-than-temporary. To determine whether an impairment is other-than-temporary, management utilizes criteria such as the reasons underlying the impairment, the magnitude and duration of the impairment and the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for an anticipated recovery in the fair value. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the security. In addition, the total impairment is separated into the amount of the impairment related to (a) credit loss and (b) the amount of the impairment related to all other factors, such as interest rate changes. The difference between the present value of the cash flows expected to be collected and the amortized cost basis of a security is considered to be the credit loss. Once an impairment is determined to be other-than-temporary, the impairment related to credit loss, if any, is charged to income and the amount of the impairment related to all other factors is recognized in other comprehensive income.

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, 2009. 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 June 30, 2010. 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

The following has been added to 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, 2009:

Compliance with the recently enacted Dodd-Frank Reform Act may adversely impact our earnings.

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Reform Act”) into law. The Dodd-Frank Reform Act represents a significant overhaul of many aspects of the regulation of the financial-services industry. Major elements in the Dodd-Frank Reform Act include the following:

The establishment of the Financial Stability Oversight Counsel, which will be responsible for identifying and monitoring systemic risks posed by financial firms, activities, and practices.

Enhanced supervision of large bank holding companies (i.e., those with over $50 billion in total consolidated assets), with more stringent supervisory standards to be applied to them.

The creation of a special regime to allow for the orderly liquidation of systemically important financial companies, including the establishment of an orderly liquidation fund.

The development of regulations to address derivatives markets, including clearing and exchange trading requirements and a framework for regulating derivatives-market participants.

Enhanced supervision of credit-rating agencies through the Office of Credit Ratings within the SEC.

Increased regulation of asset-backed securities, including a requirement that issuers of asset-backed securities retain at least 5% of the risk of the asset-backed securities.

The establishment of a Bureau of Consumer Financial Protection, within the Federal Reserve, to serve as a dedicated consumer-protection regulatory body.

Amendments to the Truth in Lending Act aimed at improving consumer protections with respect to mortgage originations, including originator compensation, minimum repayment standards, and prepayment considerations.

The majority of the provisions in the Dodd-Frank Reform Act are aimed at financial institutions that are significantly larger than the Company or the Bank. Nonetheless, there are provisions with which we will have to comply now that the Dodd-Frank Reform Bill is signed into law. As rules and regulations are promulgated by the federal agencies responsible for implementing and enforcing the provisions in the Dodd-Frank Reform Act, we will have to work to apply resources to ensure that we are in compliance with all applicable provisions, which may adversely impact the Company’s results of operations, financial condition or liquidity, any of which may impact the market price of the Company’s common stock.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not Applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

ITEM 4.

(Removed and Reserved)

Not Applicable

ITEM 5.

OTHER INFORMATION

Western Sullivan O.R.E. LLC (WSORE), was formed as a wholly owned subsidiary of the Bank to hold and thereby limit the liability on selected foreclosed properties of the Bank. As of June 30, 2010, WSORE exchanged stock for foreclosed property and cash valued at $640,000.

ITEM 6.		EXHIBITS

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

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/ Wayne V. Zanetti
	Wayne V. Zanetti
	President and Chief Executive Officer

	/s/ John A. Russell
	John A. Russell
	Treasurer and Chief Financial Officer

August 13, 2010

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Jeffersonville Bancorp (JFBC) Inactive 10-Q2010 Q2 Quarterly report

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