UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarter Ended September 30, 2011

OR

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

For the transition period from to _____

Commission file number:  0-19212

JEFFERSONVILLE BANCORP

(Exact name of registrant as specified in its charter)

New York	22-2385448
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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)

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

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

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

Title of Class: Common Stock, $0.50 Par Value

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

Yes           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           x           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 companyx

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 November 14, 2011
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 September 30, 2011 and December 31, 2010	3
		Consolidated Statements of Income for the three and nine months ended
		September 30, 2011 and 2010	4
		Consolidated Statements of Comprehensive Income for the three and nine months ended
		September 30, 2011 and 2010	5
		Consolidated Statements of Cash Flows for the nine months ended
		September 30, 2011 and 2010	6
		Notes to Unaudited Consolidated Interim Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
	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
	Item 5.	Other Information	29
	Item 6.	Exhibits	29
		Signatures	30

Jeffersonville Bancorp and Subsidiary

Consolidated Balance Sheets

(In thousands, except share and per share data)

	September 30,			December 31,
As of	2011			2010
	(Unaudited)			(Unaudited)
ASSETS
Cash and cash equivalents	$	14,802		$	7,518
Securities available for sale, at fair value		114,746			104,668
Securities held to maturity, estimated fair value of $7,025 at September 30, 2011 and $6,261 at December 31, 2010		6,625			6,021
Loans, net of allowance for loan losses of $4,830 at September 30, 2011 and $4,335 at December 31, 2010		274,315			277,812
Accrued interest receivable		2,041			2,034
Bank-owned life insurance		15,952			15,592
Foreclosed real estate		3,267			1,816
Premises and equipment, net		4,952			5,284
Restricted investments		2,420			2,806
Other assets		6,522			7,236
Total Assets	$	445,642		$	430,787
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits:
Demand deposits (non-interest bearing)	$	68,075		$	62,864
NOW and super NOW accounts		48,172			34,502
Savings and insured money market deposits		103,640			98,951
Time deposits		153,519			154,589
Total Deposits		373,406			350,906
Short-term debt		—			9,500
Federal Home Loan Bank long-term borrowings		15,000			15,000
Other liabilities		7,765			7,883
Total Liabilities		396,171			383,289
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 outstanding at September 30, 2011 and December 31, 2010		2,384			2,384
Paid-in capital		6,483			6,483
Treasury stock, at cost; 533,281 shares at September 30, 2011 and December 31, 2010		(4,965	)		(4,965	)
Retained earnings		44,341			43,158
Accumulated other comprehensive income		1,228			438
Total Stockholders’ Equity		49,471			47,498
Total Liabilities and Stockholders’ Equity	$	445,642		$	430,787

See accompanying notes to unaudited consolidated interim financial statements.

3

Jeffersonville Bancorp and Subsidiary

Consolidated Statements of Income

(In thousands, except per share data)

	Three months						Nine Months
For the periods ended September 30,	2011			2010			2011			2010
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
INTEREST AND DIVIDEND INCOME
Loan interest and fees	$	4,286		$	4,385		$	12,820		$	13,162
Securities:
Taxable		418			522			1,248			1,562
Tax-exempt		624			577			1,840			1,725
Total Interest and Dividend Income		5,328			5,484			15,908			16,449
INTEREST EXPENSE
Deposits		624			957			2,025			2,955
Federal Home Loan Bank borrowings		152			153			451			452
Total Interest Expense		776			1,110			2,476			3,407
Net interest income		4,552			4,374			13,432			13,042
Provision for loan losses		700			650			1,700			1,650
Net Interest Income after Provision for Loan Losses		3,852			3,724			11,732			11,392
NON-INTEREST INCOME
Service charges		382			371			1,125			1,121
Fee income		256			238			739			667
Earnings on bank-owned life insurance		122			118			360			354
Net gain on sale of securities		20			31			29			71
Net gain (loss) on revaluation and sale of foreclosed real estate		(58	)		(75	)		(171	)		34
Other non-interest income		87			81			175			153
Total Non-Interest Income		809			764			2,257			2,400
NON-INTEREST EXPENSES
Salaries and employee benefits		1,970			2,104			5,987			6,443
Occupancy and equipment expenses		495			508			1,607			1,589
Foreclosed real estate expense, net		70			91			337			287
Other non-interest expenses		733			928			2,821			3,145
Total Non-Interest Expenses		3,268			3,631			10,752			11,464
Income before income tax expense		1,393			857			3,237			2,328
Income tax expense		238			89			403			140
Net Income	$	1,155		$	768		$	2,834		$	2,188
Basic earnings per common share	$	0.27		$	0.18		$	0.67		$	0.52
Average common shares outstanding		4,235			4,235			4,235			4,234
Cash dividends declared per share	$	0.13		$	0.13		$	0.39		$	0.39

See accompanying notes to unaudited consolidated interim financial statements.

4

Jeffersonville Bancorp and Subsidiary

Consolidated Statements of Comprehensive Income

(In thousands)

	Three months						Nine Months
For the periods ended September 30,	2011			2010			2011			2010
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Net Income	$	1,155		$	768		$	2,834		$	2,188
Other comprehensive income, before tax:
Securities available for sale:
Net unrealized holding gains arising during the period		378			712			1,241			1,683
Reclassification adjustment for net realized gains included in income		(20	)		(31	)		(29	)		(71	)
Amortization of pension and post retirement liabilities’ gains and losses		36			66			106			203
		394			747			1,318			1,815
Income tax expense related to other comprehensive income		(158	)		(298	)		(528	)		(726	)
Other comprehensive income, net of tax		236			449			790			1,089
Comprehensive income	$	1,391		$	1,217		$	3,624		$	3,277

See accompanying notes to unaudited consolidated interim financial statements.

5

Jeffersonville Bancorp and Subsidiary

Consolidated Statements of Cash Flows

(In thousands)

For the nine months ended September 30,	2011			2010
	(Unaudited)			(Unaudited)
OPERATING ACTIVITIES:
Net income	$	2,834		$	2,188
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,700			1,650
Depreciation and amortization		555			530
Net (gain) loss on revaluation and sale of foreclosed real estate		171			(34	)
Loss on sale of premise and equipment		—			23
Earnings on bank-owned life insurance		(360	)		(354	)
Net gain on sale of securities		(29	)		(71	)
Deferred income tax benefit		(137	)		(345	)
Increase in accrued interest receivable		(7	)		(377	)
Decrease in other assets		323			536
Increase (decrease) in other liabilities		(12	)		459
Net Cash Provided by Operating Activities		5,038			4,205
INVESTING ACTIVITIES:
Proceeds from maturities and calls:
Securities available for sale		24,143			39,048
Securities held to maturity		3,436			4,148
Proceeds from sales of securities available for sale		1,896			1,737
Purchases:
Securities available for sale		(34,876	)		(58,729	)
Securities held to maturity		(4,040	)		(1,412	)
Disbursement for loan originations, net of principal collections		(354	)		(1,986	)
Net (purchase) redemption of restricted investments		386			(37	)
Net purchases of premises and equipment		(223	)		(787	)
Proceeds from sales of foreclosed real estate		529			615
Net Cash Used in Investing Activities		(9,103	)		(17,403	)
FINANCING ACTIVITIES:
Net increase in deposits		22,500			17,437
Net increase (decrease) in short-term debt		(9,500	)		55
Cash dividends paid		(1,651	)		(1,651	)
Net Cash Provided by Financing Activities		11,349			15,841
Net Increase in Cash and Cash Equivalents		7,284			2,643
Cash and Cash Equivalents at Beginning of Year		7,518			13,336
Cash and Cash Equivalents at End of Period	$	14,802		$	15,979
SUPPLEMENTAL INFORMATION:
Cash paid for interest	$	2,525		$	3,448
Cash paid for income taxes		431			101
Transfer of loans to foreclosed real estate		2,151			1,647

See accompanying notes to unaudited consolidated interim financial statements.

6

Jeffersonville Bancorp and Subsidiary

Notes to Consolidated Interim Financial Statements

September 30, 2011

(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 (“Bank”) (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 September 30, 2011 and December 31, 2010 as well as the results of operations for the three and nine month periods ended September 30, 2011 and 2010 and the cash flows for the nine months ended September 30, 2011 and 2010. All adjustments are normal and recurring. Certain reclassifications of prior year amounts have been made, when necessary, in order to conform to the current year’s presentation. 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 2010 Annual Report on Form 10-K, as filed with the Securities Exchange Commission on March 25, 2011.

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 three month periods ended September 30, 2011 and 2010, the weighted average common shares outstanding were 4,234,505 for both periods. For the nine month periods ended September 30, 2011 and 2010, the weighted average common shares outstanding were 4,234,505 and 4,234,444, respectively. There were no dilutive securities outstanding during either period.

C.           Accumulated Other Comprehensive Income

At September 30, 2011 and December 31, 2010 the components of accumulated other comprehensive income are as follows (in thousands):

	As of			As of
	September 30,			December 31,
Accumulated Other Comprehensive Income, Net of Tax	2011			2010
Supplemental executive retirement plan	$	(644	)	$	(765	)
Postretirement benefits		2,246			2,365
Defined benefit pension liability		(2,772	)		(2,876	)
Net unrealized holding gains on securities available for sale		3,216			2,005
Accumulated other comprehensive income, before tax		2,046			729
Income taxes related to accumulated other comprehensive income		(818	)		(291	)
Accumulated other comprehensive income	$	1,228		$	438

The effective marginal tax rate used for each component of other comprehensive income on the consolidated statements of income and the balance sheet is 40%.

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 May 2011, FASB issued ASU 2011-04 Fair Value Measurement (Topic 820),”Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS”. The FASB and International Accounting Standards Board have committed to creating a common set of high quality global accounting standards. To this end, the Boards’ developed common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRS which will improve the comparability in financial statements prepared in accordance with either U.S. GAAP or IFRS. The amendments in this update explain how to measure fair value, they do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The guidance in this ASU is effective for periods beginning after December 15, 2011, early adoption is not permitted. The Company is currently reviewing the impact of this ASU on its consolidated statements of financial position, income and cash flows.

7

In June 2011, FASB issued ASU 2011-05 Comprehensive Income (Topic 220),”Presentation of Other Comprehensive Income”. Under the amendments to Topic 220, Comprehensive Income, in this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. On October 21, 2011, an amendment to the guidance was drafted and is out for the public comment period. Currently the proposal has not been approved by the board, however should it be approved in its current format, the guidance does not change any reporting under the ASU, it only delays its effective dates for certain components. The guidance in this ASU is effective for periods beginning after December 15, 2011, early adoption is permitted. The Company adopted the provisions of this update in its consolidated statements of financial position, income and cash flows as of and for the period ended September 30, 2011.

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

E.            Loans

The major classifications of loans are as follows at September 30, 2011 and December 31, 2010, in thousands:

	September 30,			December 31,
Loans, Net	2011			2010
Commercial
Commercial real estate loans:
Commercial mortgage	$	99,043		$	99,606
Farm land		4,257			4,551
Construction		484			821
Total commercial real estate loans		103,784			104,978
Other commercial loans:
Commercial loans		26,560			25,864
Agricultural loans		968			878
Total other commercial loans		27,528			26,742
Total commercial loans		131,312			131,720
Consumer
Consumer real estate loans:
Residential mortgage		108,451			108,397
Home equity		31,417			31,968
Construction		1,193			2,304
Total consumer real estate loans		141,061			142,669
Other consumer loans:
Consumer installment loans		5,396			6,375
Other consumer loans		1,376			1,383
Total other consumer loans		6,772			7,758
Total consumer loans		147,833			150,427
Total gross loans		279,145			282,147
Allowance for loan losses		(4,830	)		(4,335	)
Total loans, net	$	274,315		$	277,812

Included in the above loan amounts are unearned discounts on installment loans as well as unamortized deferred loan fees and origination costs of $361,000 and $661,000 as of September 30, 2011 and December 31, 2010, respectively.

The Company originates residential and commercial loans primarily to borrowers in Sullivan County, New York. A substantial portion of the loan portfolio is secured by real estate properties located in that area. The ability of the Company’s borrowers to make principal and interest payments is primarily dependent upon the level of overall economic activity within the Company’s lending area.

Nonperforming and Impaired Loans

Nonperforming loans are loans where the collection of interest or principal is in doubt, except for residential mortgages that are well secured and in the process of collection, or loans that are past due more than 90 days and still considered an accruing loan. Impaired loan disclosures and classification apply to loans that are individually evaluated for collectability. A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans restructured under the guidelines of ASC 310-40 Receivables Troubled Debt Restructures by Creditors are classified as impaired.

8

Information on nonperforming loans is summarized as follows at September 30, 2011 and December 31, 2010 (in thousands):

			Commercial		Commercial		Consumer		Consumer
Nonperforming Loans	Total Loans		Real Estate		Other		Real Estate		Installment
September 30, 2011:
Nonaccrual loans	$	8,241	$	6,623	$	1,145	$	330	$	143
Nonaccrual troubled debt restructurings		998		411		108		479		—
Loans past due 90 days or more and still accruing interest		1,039		43		—		991		5
Total nonperforming loans	$	10,278	$	7,077	$	1,253	$	1,800	$	148
December 31, 2010:
Nonaccrual loans	$	11,399	$	9,150	$	1,310	$	939
Loans past due 90 days or more and still accruing interest		1,091		143		33		915
Total nonperforming loans	$	12,490	$	9,293	$	1,343	$	1,854

There were no nonperforming loans in the other consumer loans class at September 30, 2011 or December 31, 2010.

The nonaccrual loan income recognition policy of the Bank is that interest is not recognized as income until it is received in cash, and the loan’s collateral is adequate to support both the interest recognized plus the loan balance, or until the borrower demonstrates the ability to make scheduled payments of interest and principal, and the loan has remained current for a period of at least six months.

Impaired commercial loans are also included in nonperforming loans in the table above. The table below presents impaired loans including troubled debt restructurings, as of September 30, 2011 and December 31, 2010 and their effect on interest income for the periods there ended (in thousands).

			Commercial		Commercial		Consumer
Impaired Loans	Total Loans		Real Estate		Other		Real Estate
2011:
Unpaid principal balance	$	10,379	$	8,426	$	1,446	$	507
Recorded investment		8,865		7,134		1,253		478
Average balance		11,491		9,479		1,511		501
Interest income for the three months ended:
Interest contractually due at original rates		140		111		21		8
Interest income recognized		54		39		3		12
Interest income for the nine months ended:
Interest contractually due at original rates		472		410		49		13
Interest income recognized		299		246		41		12
Impaired loans:
Loans with no allowance		5,563		4,986		99		478
Loans with an allowance recorded		3,302		2,148		1,154		—
Related specific allowance		599		437		162		—
2010:
Unpaid principal balance	$	11,806	$	10,332	$	1,474		—
Recorded investment		10,216		8,906		1,310		—
Average balance		12,448		11,003		1,445		—
Interest income for the year ended:
Interest contractually due at original rates		750		701		49		—
Interest income recognized		229		178		51		—
Impaired loans:
Loans with no allowance		6,407		5,702		705		—
Loans with an allowance recorded		3,809		3,204		605		—
Related specific allowance		831		608		223		—

9

Loans restructured under the guidelines of ASC 310-40 Receivables Troubled Debt Restructures by Creditors are disclosed below as of September 30, 2011 and September 30, 2010 (in thousands):

	September 30, 2011								September 30, 2010
			Pre-Modification		Post-Modification		Current				Pre-Modification		Post-Modification		Current
			Recorded		recorded		recorded				recorded		recorded		recorded
Troubled Debt Restructure (TDR)	No.		investment		investment		investment		No.		investment		investment		investment
Commercial:
Real estate		2	$	417	$	430	$	411		—	$	—	$	—	$	—
Commercial loans		1		110		119		108		—		—		—		—
Consumer:
Real estate		2		445		509		479		—		—		—		—

The Bank evaluates TDRs that are over 60 days past due to determine whether or not they are in default. However, all TDRs over 90 days past due are reported as “in default." For the three and nine months ended September 30, 2011 and 2010, there were no TDRs considered to be in default.

A loan is classified as a troubled debt restructuring (“TDR”) when a concession that the Bank would not otherwise have considered is granted to a borrower experiencing financial difficulty. Most of the Bank’s TDRs involve the restructuring of loan terms to reduce the total payment amount in order to assist those borrowers who are experiencing temporary financial difficulty. In a TDR, the Bank may also increase loan balances for unpaid interest and fees or acquire additional collateral to secure its position. For the three and nine months ended September 30, 2011, the Bank allocated $41,000 in specific reserves, charged off $20,000 and recovered $10,000 from borrowers whose loan terms have been modified as TDRs with a $998,000 aggregate recorded investment. The Bank did not have any TDRs for the three or nine months ended September 30, 2010. The specific reserve component was determined by using fair value of the underlying collateral obtained through independent appraisals and internal evaluations, or by discounting the total expected future cash flows. The Bank has not committed to lend any funds to customers whose loans are classified as a TDR as of September 30, 2011. Additionally, no TDRs defaulted during the nine months ended September 30, 2011. As a result of adopting the amendments in Accounting Standards Update (“ASU”) No. 2011-02 Receivables (Topic 310), “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring”, the bank reassessed all restructurings that occurred on or after the beginning of the current fiscal year (January 1, 2011) for identification as troubled debt restructurings. The bank had no loans for which the allowance for loan losses had previously been measured under a general allowance for credit losses methodology that are now considered troubled debt restructurings in accordance with ASU 2011-02.

Loan Credit Quality

Management reviews risk ratings on a monthly basis and the following illustrates total loans by credit risk profiles based on internally assigned grades and categories as described in the 2010 Annual Report on Form 10-K, as filed with the Securities Exchange Commission for the periods ended September 30, 2011 and December 31, 2010 (in thousands):

			Commercial				Consumer
Loans by Risk Ratings	Total		Real Estate		Other		Real Estate		Installment		Other
September 30, 2011:
Pass	$	48,314	$	37,031	$	11,283
Pass watch		53,176		40,575		12,601
Special mention		6,381		5,873		508
Substandard		22,093		19,796		2,297
Doubtful		347		207		140
Non-reviewed		148,834		302		699	$	141,061	$	5,396	$	1,376
Total	$	279,145	$	103,784	$	27,528	$	141,061	$	5,396	$	1,376
December 31, 2010:
Pass	$	45,078	$	33,538	$	11,540
Pass watch		53,754		43,046		10,708
Special mention		6,008		5,026		982
Substandard		24,640		22,694		1,946
Doubtful		831		429		402
Non-reviewed		151,836		245		1,164	$	142,669	$	6,375	$	1,383
Total	$	282,147	$	104,978	$	26,742	$	142,669	$	6,375	$	1,383

10

The following table illustrates the aging of past due loans by category for the periods ended September 30, 2011 and December 31, 2010 (in thousands):

					Greater								Over 90
	30-59 Days		60-89 Days		than		Total				Total		and
Category of loans	past due		past due		90 Days		past due		Current		loans		accruing
2011:
Commercial real estate	$	1,917	$	1,030	$	3,432	$	6,379	$	97,405	$	103,784	$	43
Residential real estate		3,272		3,014		1,199		7,485		133,576		141,061		991
Commercial other		94		143		—		237		27,291		27,528		—
Consumer installment		124		226		5		355		5,040		5,396		5
Other consumer		1		—		—		1		1,375		1,376		—
Total	$	5,408	$	4,413	$	4,636	$	14,457	$	264,688	$	279,145	$	1,039
2010:
Commercial real estate	$	4,333	$	890	$	6,837	$	12,060	$	92,918	$	104,978	$	143
Residential real estate		2,840		1,946		1,723		6,509		136,160		142,669		915
Commercial other		176		67		95		338		26,404		26,742		33
Consumer installment		107		260		—		367		6,008		6,375		—
Other consumer		4		—		—		4		1,379		1,383		—
Total	$	7,460	$	3,163	$	8,655	$	19,278	$	262,869	$	282,147	$	1,091

As of September 30, 2011 and December 31, 2010, nonaccrual loans included $5.6 million and $3.8 million of loans, respectively, which are paying currently but have not met the specific criteria to be placed on accrual status.

F. Allowance for Loan Losses

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 real estate, other commercial loans, residential real estate loans, consumer installment, and other consumer loans. Reviewed and Pass-rated commercial mortgage/loan pool rates are determined based on adjusted pool rates, which include weighted three-year average loss percentages adjusted for the eight risk factors as discussed below.

Special mention and substandard pool rates are determined by the adjusted pool rates plus the greater of the Bank’s average historical loss rolling average of the prior eight quarters or the weighted three-year average loss percentages. The method used in this calculation collects all commercial loans from one year ago, observes their status and rating at the current time, and computes the average loss for these rating categories by comparing the losses experienced by those particular loans to the loans in the different rating categories from one year ago.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 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. Several specific 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 (25%) unless specifically reviewed and deemed impaired as described below. An unallocated component of the allowance for loan losses has been established to reflect the inherent imprecision involved in calculating the allowance for loan losses.

The commercial portfolio segment is comprised of commercial real estate and other commercial loans. This segment is subject to all of the risk factors considered in management’s assessment of the allowance. Examples of specific risks applicable to the entire segment include changes in economic conditions that reduce business and consumer spending leading to a loss of revenue, concentrations of credit in business categories that are disproportionately impacted by current economic conditions, the quality of the Bank’s loan review system and its ability to identify potential problem loans, and the availability of acceptable new loans to replace maturing, amortizing, and refinanced loans. In addition, risks specific to commercial mortgages and secured commercial loans would include economic conditions that lead to declines in property and other collateral values. Prior to applying the allowance pool rate, commercial real estate and other commercial loans in nonaccrual status or those with a minimum substandard rating and loan relationships of $500,000 or more and all troubled debt restructures (“TDR”) are individually considered for impairment. 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 guidance which dictates 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. An uncollectible loan is charged off after all reasonable means of collection are exhausted and the recovery of the principal through the disposal of the collateral is not reasonably expected to cover the costs. Commercial real estate and other 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.

11

The consumer portfolio segment is comprised of consumer real estate, consumer installment, and other consumer loans. This segment is also subject to all of the risk factors considered in management’s assessment of the allowance. Examples of specific risks applicable to the entire segment include changes in economic conditions that increase unemployment which reduces a consumer’s ability to repay their debt, changes in legal and regulatory requirements that make it more difficult to originate new loans and collect on existing loans, and competition from non-local lenders who originate loans in the Bank’s market area at lower rates than the Bank can profitably offer. In addition, risks specific to residential mortgages and secured consumer loans would include economic conditions that lead to declines in property and other collateral values. Residential real estate, consumer installment, and other consumer loans are considered homogenous pools and are generally not individually considered for impairment. Instead, the appropriate allowance pool rate is applied to the aggregate balance of these pools. Loans in the consumer segment restructured under a troubled debt restructuring are individually evaluated for impairment The other portfolio segment is comprised primarily of check-loans and loans in-process. These loans are considered homogenous pools and are not individually considered for impairment and a pool rating 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 principles or other factors.

Changes in the allowance for loan losses and the related loans evaluated for credit losses are summarized as follows for the periods ended September 30, 2011 and  December 31, 2010 along with summary information as of September 30, 2010 (in thousands):

				Commercial						Consumer
Allowance for Loan Losses	Total			Real Estate			Other			Real Estate			Installment			Other			Unallocated
Three months ended September 30, 2011:
Beginning balance July 1	$	4,514		$	2,335		$	531		$	1,212		$	82		$	74		$	280
Charge-offs		(407	)		(229	)		(32	)		(94	)		(27	)		(25	)		—
Recoveries		23			—			3			1			11			8			—
Provision		700			585			106			132			20			11			(154	)
Ending balance September 30	$	4,830		$	2,691		$	608		$	1,251		$	86		$	68		$	126
Nine months ended September 30, 2011:
Beginning balance January 1	$	4,335		$	2,160		$	622		$	1,213		$	106		$	61		$	173
Charge-offs		(1,297	)		(850	)		(107	)		(194	)		(59	)		(87	)		—
Recoveries		92			10			8			2			42			30			—
Provision		1,700			1,371			85			230			(3	)		64			(47	)
Ending balance September 30	$	4,830		$	2,691		$	608		$	1,251		$	86		$	68		$	126
Ending balance as related to loans:
Evaluated collectively
[general reserve]	$	4,231		$	2,254		$	446		$	1,251		$	86		$	68		$	126
Evaluated individually
[specific reserve]		599			437			162			—			—			—			—
Total loans	$	279,145		$	103,784		$	27,528		$	141,061		$	5,396		$	1,376
Loans evaluated for impairment
Loans evaluated collectively		270,280			96,650			26,275			140,583			5,396			1,376
Loans evaluated individually		8,865			7,134			1,253			478			—			—
Year ended December 31, 2010:
Beginning balance January 1	$	3,988		$	1,799		$	561		$	1,249		$	132		$	55		$	192
Charge-offs		(2,109	)		(1,458	)		(254	)		(220	)		(89	)		(88	)		—
Recoveries		156			—			51			3			47			55			—
Provision		2,300			1,819			264			181			16			39			(19	)
Ending balance December 31	$	4,335		$	2,160		$	622		$	1,213		$	106		$	61		$	173

12

				Commercial				Consumer
Allowance for Loan Losses, continued	Total			Real Estate		Other		Real Estate		Installment		Other		Unallocated
Ending balance as related to loans:
Evaluated collectively
[general reserve]	$	3,504		$	1,552	$	399	$	1,213	$	106	$	61	$	173
Evaluated individually
[specific reserve]		831			608		223		—		—		—		—
Total loans	$	282,147		$	104,978	$	26,742	$	142,669	$	6,375	$	1,383
Loans evaluated for impairment
Loans evaluated collectively		271,931			96,072		25,432		142,669		6,375		1,383
Loans evaluated individually		10,216			8,906		1,310		—		—		—
Three months ended September 30, 2010:
Beginning balance July 1	$	4,732
Charge-offs		(350	)
Recoveries		36
Provision		650
Ending balance September 30	$	5,068
Nine months ended September 30, 2010:
Beginning balance January 1	$	3,988
Charge-offs		(682	)
Recoveries		112
Provision		1,650
Ending balance September 30	$	5,068

There are no commitments to lend additional funds on the above noted non-performing loans. Despite the increase in the amount of non-performing loans, management has determined that the majority of these loans remain well collateralized. Based on its comprehensive analysis of the loan portfolio, and since the Company has no exposure to subprime loans, management believes the current level of the allowance for loan losses is adequate.

G. Investment Securities

The amortized cost and estimated fair value of available for sale and held to maturity securities at September 30, 2011 and December 31, 2010 are as follows (in thousands):

September 30, 2011	Amortized		Gross unrealized					Estimated
Investment Securities	cost		gains		losses			fair value
Available for Sale Securities:
Government Sponsored Enterprises (“GSE”)  (a)	$	9,276	$	11	$	(2	)	$	9,285
Obligations of states and political subdivisions – New York State		64,727		2,339		(14	)		67,052
Mortgage-backed securities and collateralized mortgage obligations - GSE residential (a)		29,051		1,281		(12	)		30,320
Corporate debt – financial services industry		7,854		24		(349	)		7,529
Certificates of deposit - financial services industry		98		—		—			98
		111,006		3,655		(377	)		114,284
Equity securities – financial services industry		523		14		(75	)		462
	$	111,529	$	3,669	$	(452	)	$	114,746
Held to Maturity Securities- Obligations of states and political subdivisions	$	6,625	$	400	$	—		$	7,025

13

December 31, 2010	Amortized		Gross unrealized					Estimated
Investment Securities, continued	cost		gains		losses			fair value
Available for Sale Securities:
Government Sponsored Enterprises (“GSE”)  (a)	$	8,570	$	105	$	(88	)	$	8,587
Obligations of states and political subdivisions – New York State		56,819		1,120		(276	)		57,663
Mortgage-backed securities and collateralized mortgage obligations - GSE residential (a)		32,117		1,130		(36	)		33,211
Corporate debt – financial services industry		4,518		49		—			4,567
Certificates of deposit - financial services industry		98		—		—			98
		102,122		2,404		(400	)		104,126
Equity securities – financial services industry		541		11		(10	)		542
	$	102,663	$	2,415	$	(410	)	$	104,668
Held to Maturity Securities- Obligations of states and political subdivisions	$	6,021	$	240	$	—		$	6,261

(a) 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.

The following table shows gross gains and losses for available for sale securities sold during the three and nine months periods ended September 30, 2011 and 2010. There were no sales of securities held to maturity during the periods ended September 30, 2011 or September 30, 2010.

For the periods ended September 30	Gross		Gross
Sale of Available for Sale Securities	Proceeds		Gains		Losses		Net Gain
Three months ended:
2011	$	1,245	$	20	$	—	$	20
2010	$	1,550	$	31	$	—	$	31
Nine months ended:
2011	$	1,896	$	29	$	—	$	29
2010	$	1,737	$	76	$	5	$	71

The amortized cost and estimated fair value of total available for sale and held to maturity securities at September 30, 2011, by remaining period of contractual maturity, are shown in the following table, in thousands. Amortized cost is comprised of the purchase cost adjusted for the amortization of premium and accretion of discount on debt securities which is calculated using the level-yield interest method to the earlier of the call date or maturity date. Actual maturities may differ from contractual maturities because of security prepayments and the right of certain issuers to call or prepay their obligations.

Investment Securities	Amortized cost		Estimated fair value
Within one year	$	34,402	$	34,814
One to five years		30,689		31,355
Five to ten years		22,578		23,813
Over ten years		911		1,007
		88,580		90,989
Mortgage-backed securities		29,051		30,320
Equity securities		523		462
Total Investment Securities	$	118,154	$	121,771

14

Investment securities in a continuous unrealized loss position are reflected in the following table which groups individual securities by length of time that they have been in a continuous unrealized loss position, and then details by investment category the number of instruments aggregated with their gross unrealized losses and the fair values at September 30, 2011 and December 31, 2010 (dollars in thousands):

	Less than 12 months						12 months or more						Total
September 30, 2011			Estimated		Unrealized				Estimated		Unrealized				Estimated		Unrealized
Investment Securities	No.		fair value		losses		No.		fair value		losses		No.		fair value		losses
Available for sale:
Debt Securities:
Government Sponsored Enterprises		2	$	1,259	$	2		—	$	—	$	—		2	$	1,259	$	2
Obligations of state and political subdivisions – NY State		5		1,237		14		—		—		—		5		1,237		14
Mortgage-backed securities and collateralized mortgage obligations		1		727		12		—		—		—		1		727		12
Corporate debt – financial services industry		7		6,508		349		—		—		—		7		6,508		349
Total debt securities		15		9,731		377		—		—		—		15		9,731		377
Equity securities – financial services industry		4		322		75		—		—		—		4		322		75
Total available for sale securities		19	$	10,053	$	452		—	$	—	$	—		19	$	10,053	$	452

	Less than 12 months						12 months or more						Total
December 31, 2010			Estimated		Unrealized				Estimated		Unrealized				Estimated		Unrealized
Investment Securities	No.		fair value		losses		No.		fair value		losses		No.		fair value		losses
Available for sale:
Debt Securities:
Government Sponsored Enterprises		3	$	2,433	$	88		—	$	—	$	—		3	$	2,433	$	88
Obligations of state and political subdivisions – NY State		68		12,389		276		—		—		—		68		12,389		276
Mortgage-backed securities and collateralized mortgage obligations		6		4,655		36		—		—		—		6		4,655		36
Total debt securities		77		19,477		400		—		—		—		77		19,477		400
Equity securities – financial services industry		3		313		10		—		—		—		3		313		10
Total available for sale securities		80	$	19,790	$	410		—	$	—	$	—		80	$	19,790	$	410

Included in available for sale securities are Government Sponsored Enterprises including securities of the Federal Home Loan Bank (“FHLB”), 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”). FHLB, FHLMC and FNMA securities are not backed by the full faith and credit of the U.S. government. Substantially all mortgage-backed securities and collateralized mortgage obligations consist of residential mortgage securities and are securities guaranteed by Ginnie Mae, 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 four investment grades (S&P “BBB-” or higher).

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.

Held to maturity securities consist of obligations of state and political subdivisions consisting of general obligation and revenue bonds of municipalities, which are local to the Company and are typically not rated by the NRSRO. In accordance with federal regulations, the Company performs an analysis of the finances of the municipalities to determine that the bonds are the credit equivalent of investment grade bonds.

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 in a loss position within the available for sale or held to maturity portfolios 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 charge will also be recorded if there is credit related loss. 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 loss 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. 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 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.

15

There were no credit-related impairment charges recorded for the three or nine month periods ended September 30, 2011 or September 30, 2010 as management believes the impairment on securities did not represent underlying credit quality impairment but instead are due to market fluctuation.

H. Restricted Investments

Restricted investments include stock held in correspondent banks, the Federal Reserve Bank and trust preferred stock. The trust preferred stock is valued at par of $1,000,000 and is fully secured by an investment grade bond. Financial statements for the issuer of this trust preferred stock are evaluated quarterly for impairment and the Company believes that there was no impairment on this trust preferred stock in 2011 or 2010. The investment in correspondent banks totaled $210,000 as of September 30, 2011 and December 31, 2010. 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 September 30, 2011 and December 31, 2010, FHLB stock totaled $1,210,000 and $1,596,000, respectively, and is included as a part of restricted investments on the consolidated balance sheets.

FHLB stock is held as a long-term investment, and impairment 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 2011 or 2010. Our evaluation of the factors described above in future periods could result in the recognition of impairment charges on FHLB stock.

I. 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 2010 Annual Report on Form 10-K. The components of the net periodic benefit cost for these plans follows:

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

Net Periodic Benefit Cost (Benefit)	Pension benefit						Postretirement benefit
For the three months ended September 30,	2011			2010			2011			2010
Net periodic benefit cost:
Service cost	$	86		$	109		$	15		$	37
Interest cost		141			146			23			53
Expected return on plan assets		(151	)		(134	)		—			—
Amortization of prior service cost		—			6			(40	)		(11	)
Recognized net actuarial loss		34			48			—			1
Net amount recognized	$	110		$	175		$	(2	)	$	80

Net Periodic Benefit Cost (Benefit)	Pension benefit						Postretirement benefit
For the nine months ended September 30,	2011			2010			2011			2010
Net periodic benefit cost:
Service cost	$	258		$	327		$	41		$	111
Interest cost		423			440			71			157
Expected return on plan assets		(453	)		(402	)		—			—
Amortization of prior service cost		—			18			(118	)		(33	)
Recognized net actuarial loss		104			144			—			1
Net amount recognized	$	332		$	527		$	(6	)	$	236

The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2010, that it expected to contribute $750,000 to its pension plan and $86,000 to its other postretirement benefits plan in 2011. As of September 30, 2011, an additional contribution of $25,000 for a total of $775,000 was made to the pension plan and $65,000 of contributions had been made to the other postretirement benefits plan. The Company does not expect to make any additional contributions to the pension plan in 2011.

16

J. Guarantees

The Company does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit. The Company has issued unconditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under standby letters of credit totaled approximately $593,000 at September 30, 2011 and $570,000 at December 31, 2010 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 September 30, 2011 and December 31, 2010 were insignificant.

K. 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 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.

For 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 September 30, 2011 and December 31, 2010, respectively are as follows (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
September 30, 2011:
Recurring:
Available for sale securities
Government sponsored enterprises (GSE) (a)	$	9,285	$	—	$	9,285	$	—
Obligations of state and political subdivisions – New York state (a)		67,052		—		67,052		—
Mortgage backed securities and collateralized mortgage obligations – GSE residential (a)		30,320		—		30,320		—
Corporate Debt – financial services industry		7,529		—		7,529		—
Certificates of deposit – financial services industry		98		98		—		—
Equity securities – financial services industry		462		462		—		—
	$	114,746	$	560	$	114,186	$	—
Non-recurring:
Foreclosed real estate	$	648	$	—	$	—	$	648
Impaired loans		2,703		—		—		2,703
	$	3,351	$	—	$	—	$	3,351

17

Fair Value Hierarchy, continued	Total		Level 1		Level 2		Level 3
December 31, 2010:
Recurring:
Available for sale securities
Government sponsored enterprises (GSE) (a)	$	8,587	$	—	$	8,587	$	—
Obligations of state and political subdivisions – New York state (a)		57,663		—		57,663		—
Mortgage backed securities and collateralized mortgage obligations – GSE residential (a)		33,211		—		33,211		—
Corporate Debt – financial services industry		4,567		—		4,567		—
Certificates of deposit – financial services industry		98		98		—		—
Equity securities – financial services industry		542		542		—		—
	$	104,668	$	640	$	104,028	$	—
Non-recurring:
Foreclosed real estate	$	40	$	—	$	—	$	40
Impaired loans		2,978		—		—		2,978
	$	3,018	$	—	$	—	$	3,018

(a)  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.

Foreclosed assets consist primarily of commercial real estate and are not revalued on a recurring basis. At the time of foreclosure, foreclosed real estate assets are adjusted to fair value less estimated costs to sell upon transfer of the loans, establishing a new cost basis. Occasionally, additional valuation adjustments are made based on updated appraisals and other factors and are recorded as recognized. At that time, they are reported in the Company’s fair value disclosures in the non-recurring table above.

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 instruments at September 30, 2011 and December 31, 2010:

Cash and Cash Equivalents

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

Securities

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

Loans

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

Impaired Loans

Impaired loans, which are predominately commercial real estate loans where it is probable that the Bank will be unable to collect all amounts due per the contractual terms of the loan agreement, 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. If the financial condition of the borrower improves such that collectability of all contractual amounts due is probable, and payments are current for six months, the loan is transferred out of impaired status. As of September 30, 2011 and December 31, 2010, the fair values of collateral-dependent impaired loans were calculated using outstanding balances of $3,302,000 and $3,809,000, less valuation allowances of $599,000 and $831,000, 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.

18

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 Debt

The carrying amounts of short-term debt 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. At September 30, 2011 and December 31, 2010, the fair values of these financial instruments approximated the related carrying values which were not significant.

	September 30, 2011				December 31, 2010
	Net carrying		Estimated		Net carrying		Estimated
Financial Assets and Liabilities (in thousands)	amount		fair value		amount		fair value
Financial assets:
Cash and cash equivalents	$	14,802	$	14,802	$	7,518	$	7,518
Securities available for sale		114,746		114,746		104,668		104,668
Securities held to maturity		6,625		7,025		6,021		6,261
Loans, net		274,315		273,065		277,812		277,134
Accrued interest receivable		2,041		2,041		2,034		2,034
Restricted investments		2,420		2,420		2,806		2,806
Financial liabilities:
Savings, money market and checking accounts		219,887		219,887		196,317		196,317
Time deposits		153,519		154,202		154,589		154,010
Accrued interest payable		224		224		273		273
Short-term debt		—		—		9,500		9,500
Federal Home Loan Bank borrowings		15,000		15,598		15,000		15,857
Off balance sheet financial instruments:
Lending commitments		—		—		—		—
Letters of credit		—		—		—		—

19

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, 2010 to September 30, 2011, total assets increased $14.9 million or 3.4%. The increase was primarily due to a $7.3 million increase in cash and cash equivalents to $14.8 million at September 30, 2011, a $10.1 million or 9.6% increase in available for sale securities, and a $1.5 million or 79.9% increase in foreclosed real estate to $3.3 million at September 30, 2011 partially offset by a $3.5 million or 1.3% decrease in net loans to $274.3 million at September 30, 2011. The net increase in total assets was funded by deposit growth.

Total deposits increased $22.5 million or 6.4% to $373.4 million at September 30, 2011. NOW and super NOW accounts increased $13.7 million or 39.6%, and savings and insured money market deposits increased $4.7 million or 4.7%. Core non-interest bearing deposits increased $5.2 million or 8.3% to $68.1 million at September 30, 2011. Partially offsetting these increases, time deposits decreased $1.1 million or 0.7%. Factors influencing deposit growth include seasonal influences, such as tax revenues received by government entities which hold deposits at the Bank, the Bank’s enhanced sales initiative, and customers increasing deposits in the Bank due to uncertainty in the stock market and a lack of other investment opportunities. Short-term debt decreased to zero from $9.5 million at December 31, 2010 as overnight borrowings from the Federal Home Loan Bank were replaced by deposits.

Total stockholders’ equity increased $2.0 million or 4.3% from $47.5 million at December 31, 2010 to $49.5 million at September 30, 2011. This increase was the result of net income of $2.8 million plus an increase of $790,000 in accumulated other comprehensive income, partially offset by the payment of cash dividends of $1.7 million.

Loans

Various statistics follow for the periods ended September 30, 2011, September 30, 2010 and December 31, 2010:

	Nine months ended						Year ended
	September 30,			September 30,			December 31,
	2011			2010			2010
Annualized net charge-offs as a percentage of average outstanding loans		0.57	%		0.27	%		0.70	%
Allowance for loan losses to:
Total loans		1.73	%		1.82	%		1.54	%
Total non-performing loans		47.0	%		35.1	%		34.7	%

The allowance for loan losses was $4.8 million at September 30, 2011, $5.1 million at September 30, 2010 and $4.3 million at December 31, 2010. Total nonperforming loans were $10.3 million at September 30, 2011 and $12.5 million at December 31, 2010, a decrease of $2.2 million. Net loan charge-offs increased to $1,205,000 for the nine months ended September 30, 2011 from $570,000 in the same period of 2010 and gross charge-offs increased to $1,297,000 in 2011 from $682,000 in 2010. The provision for loan losses was $1.7 million both the nine month periods ended September 30, 2011 and 2010. The allowance’s coverage of nonperforming loans was 47.0% at September 30, 2011, 34.7% at December 31, 2010 and 35.1% at September 30, 2010. Based on management’s analysis of the loan portfolio, 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 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.

20

B. Capital

The Bank’s Tier I risk-based capital was 16.0% and total risk-based capital was 17.3% of risk-weighted assets as of September 30, 2011. These risk-based capital ratios are well above the minimum regulatory requirements of 4.0% for Tier I capital and 8.0% for total risk-based capital. The Bank’s leverage ratio (Tier I capital to average assets) of 10.5% is well above the 4.0% minimum regulatory requirement.

The following table shows the Bank’s actual capital measurements compared to the minimum regulatory requirements (dollars in thousands).

	September 30, 2011			December 31, 2010
Tier I Capital
Banks’ equity, excluding the after-tax net of accumulated other comprehensive income	$	45,952		$	44,786
Tier II Capital
Allowance for loan losses (1)	$	3,599		$	3,570
Total risk-based capital	$	49,551		$	48,356
Risk-weighted assets (2)	$	286,694		$	284,821
Average assets	$	439,726		$	430,433
Ratios
Tier I risk-based capital (minimum 4.0%)		16.0	%		15.7	%
Total risk-based capital (minimum 8.0%)		17.3	%		17.0	%
Leverage (minimum 4.0%)		10.5	%		10.4	%

1 For Federal Reserve risk-based capital rule purposes, the allowance for loan losses includes allowance for credit losses on off-balance sheet letters of credit 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.

21

DISTRIBUTION OF ASSETS, LIABILITIES & STOCKHOLDERS’ EQUITY:

INTEREST RATES & INTEREST DIFFERENTIAL

The following schedule presents the condensed average consolidated balance sheets for three and nine months ended September 30, 2011 and 2010. 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 three months ended September 30,	2011							2010
					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	$	45,256	$	418		3.68	%	$	50,888	$	522		4.10	%
Tax-exempt securities (2)		73,210		946		5.17			64,306		870		5.41
Total securities		118,466		1,364		4.61			115,194		1,392		4.83
Short-term investments		73		—		0.03			189		—		0.01
Loans
Real estate mortgages		199,954		3,127		6.26			199,873		3,193		6.39
Home equity loans		31,133		448		5.76			32,532		470		5.78
Time and demand loans		27,288		305		4.47			27,383		296		4.32
Installment and other loans		18,982		406		8.56			18,347		426		9.29
Total loans (3)		277,357		4,286		6.18			278,135		4,385		6.31
Total interest earning assets		395,896		5,650		5.71			393,518		5,777		5.87
Other non-interest bearing assets		47,156							48,156
Total assets	$	443,052						$	441,674
LIABILITIES AND STOCKHOLDERS’ EQUITY
NOW and Super NOW deposits	$	45,246	$	16		0.14	%	$	37,315	$	23		0.25	%
Savings and insured money market deposits		102,857		100		0.39			99,433		152		0.61
Time deposits		156,851		508		1.30			164,447		782		1.90
Total interest bearing deposits		304,954		624		0.82			301,195		957		1.27
Federal funds purchased and other short-term debt		71		—		0.00			358		—		0.01
Long-term debt		15,000		152		4.02			15,000		153		4.02
Total interest bearing liabilities		320,025		776		0.97			316,553		1,110		1.40
Demand deposits		65,745							66,602
Other non-interest bearing liabilities		7,677							10,641
Total liabilities		393,447							393,796
Stockholders’ equity		49,605							47,878
Total liabilities and stockholders’ equity	$	443,052						$	441,674
Net interest income – tax effected				4,874							4,667
Less tax gross up on exempt securities				322							293
Net interest income per statement of income			$	4,552						$	4,374
Net interest spread						4.74	%						4.47	%
Net interest margin (4)						4.92	%						4.74	%

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.

22

For the nine months ended September 30,	2011							2010
					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	$	45,194	$	1,248		3.68	%	$	55,088	$	1,561		3.78	%
Tax-exempt securities (2)		69,240		2,779		5.35			60,962		2,606		5.70
Total securities		114,434		4,027		4.69			116,050		4,167		4.79
Short-term investments		53		—		0.05			141		1		0.95
Loans
Real estate mortgages		199,430		9,281		6.21			200,303		9,615		6.40
Home equity loans		31,225		1,336		5.70			32,326		1,401		5.78
Time and demand loans		28,340		953		4.48			27,323		860		4.20
Installment and other loans		18,688		1,250		8.92			18,417		1,286		9.31
Total loans (3)		277,683		12,820		6.16			278,369		13,162		6.30
Total interest earning assets		392,170		16,847		5.73			394,560		17,330		5.86
Other non-interest bearing assets		49,908							45,968
Total assets	$	442,078						$	440,528
LIABILITIES AND STOCKHOLDERS’ EQUITY
NOW and Super NOW deposits	$	44,290	$	70		0.21	%	$	38,707	$	72		0.25	%
Savings and insured money market deposits		101,357		345		0.45			94,447		422		0.60
Time deposits		158,971		1,610		1.35			171,489		2,461		1.91
Total interest bearing deposits		304,618		2,025		0.89			304,643		2,955		1.29
Federal funds purchased and other short-term debt		535		0		0.28			410		—		0.01
Long-term debt		15,000		451		4.02			15,000		452		4.02
Total interest bearing liabilities		320,153		2,476		1.03			320,053		3,407		1.42
Demand deposits		65,653							64,038
Other non-interest bearing liabilities		7,473							10,089
Total liabilities		393,279							394,180
Stockholders’ equity		48,799							46,348
Total liabilities and stockholders’ equity	$	442,078						$	440,528
Net interest income – tax effected				14,371							13,923
Less tax gross up on exempt securities				939							881
Net interest income per statement of income			$	13,432						$	13,042
Net interest spread						4.70	%						4.44	%
Net interest margin (4)						4.89	%						4.70	%

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.

23

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 nine months ended September 30, 2011 as compared to 2010. 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.

	September 30, 2011 compared to 2010
For the three months ended	increase (decrease) due to change in
	Average			Average
	Volume			Rate			Total
Interest Income
Total securities(1)	$	39		$	(67	)	$	(28	)
Short-term investments		—			—			—
Loans		(12	)		(87	)		(99	)
Total interest income		27			(154	)		(127	)
Interest Expense
NOW and Super NOW deposits		5			(12	)		(7	)
Savings and insured money market deposits		6			(58	)		(52	)
Time deposits		(36	)		(238	)		(274	)
Long-term debt		—			(1	)		(1	)
Total interest expense		(25	)		(309	)		(334	)
Net interest income	$	52		$	155		$	207

	September 30, 2011 compared to 2010
For the nine months ended	increase (decrease) due to change in
	Average			Average
	Volume			Rate			Total
Interest Income
Total securities(1)	$	(58	)	$	(82	)	$	(140	)
Short-term investments		(1	)		—			(1	)
Loans		(32	)		(310	)		(342	)
Total interest income		(91	)		(392	)		(483	)
Interest Expense
NOW and Super NOW deposits		10			(12	)		(2	)
Savings and insured money market deposits		31			(108	)		(77	)
Time deposits		(180	)		(671	)		(851	)
Long-term debt		—			(1	)		(1	)
Total interest expense		(139	)		(792	)		(931	)
Net interest income	$	( 48	)	$	400		$	448

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.

24

The primary source of liquidity for the parent Company is dividends from the Bank. Office of the Comptroller of the Currency (“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 the Bank’s retained net income to date during the calendar year and the Bank’s retained net income over the preceding two years. As of September 30, 2011, the Bank is permitted to pay a dividend without prior OCC approval.

For the nine months ended September 30, 2011, cash generated from operating activities amounted to $5.0 million, cash provided by financing activities was $11.3 million and cash used in investing activities amounted to $9.1 million, resulting in a net increase in cash and cash equivalents of $7.2 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 September 30, 2011 and December 31, 2010 and Federal Home Loan Bank (“FHLB”) borrowings, dollars in thousands:

	Maturity of Time Deposits of $100,000 or More				FHLB Borrowings
As of	September 30, 2011		December 31, 2010		September 30, 2011
Due three months or less	$	20,430	$	19,854	$	—
Over three months through nine months		16,675		12,730		5,000
Over nine months through twelve months		12,766		13,270		—
Over twelve months		14,060		18,656		10,000
Total	$	63,931	$	64,510	$	15,000

C.         Results of Operations

Comparison of the three month periods ending September 30, 2011 and 2010

Net income for the three months ended September 30, 2011 increased $387,000 or 50.4% to $1,155,000 from $768,000 for the same period in 2010. The increase was comprised primarily of a $128,000 increase in net interest income after provision for loan losses from $3,724,000 to $3,852,000 for the three months ended September 30, 2011 and a $363,000 decrease in non-interest expense, partially offset by an increase in income taxes of $149,000. The increase in net interest income after provision for loan losses is primarily due to a $333,000 decrease in interest expense on deposits, partially offset by a decrease in total interest and dividend income of $156,000. The Company’s annualized return on average assets was 1.0% for the three months ended September 30, 2011, up from 0.7% for the same period last year. The annualized return on average stockholders’ equity was 9.3% for the three months ended September 30, 2011, up from 6.4% for the same period last year.

Total net interest income before provision for loan losses increased $178,000 or 4.1% to $4,552,000 for the quarter ended September 30, 2011 up from $4,374,000 from the same period in 2010, of which $333,000 was the result of a decrease in interest expense on deposits from $957,000 for the three months ended September 30, 2010 to $624,000 for the same period in 2011. This decrease of $333,000 was attributable to higher yielding time deposits having been replaced at lower current market rates and lower yields on time, savings and insured money market deposits. Partially offsetting this, interest income on loans decreased $99,000 or 2.3% to $4,286,000 and investment income on taxable securities decreased $104,000 or 19.9% to $418,000 for the quarter ended September 30, 2011. The decrease in interest income on taxable securities was due to maturing and called securities being replaced by lower yielding securities despite the increase in the average balance of these securities.

The provision for loan losses was $700,000 for the three months ended September 30, 2011, an increase of $50,000 from $650,000 for the three months ended September 30, 2010.

Non-interest income increased to $809,000 for the third quarter of 2011 compared to $764,000 for the same period in 2010, an increase of $45,000 or 5.9%. This increase was primarily the result an increase in fee income of $18,000 or 7.6% to $256,000 for the three months ended September 30, 2011, and net gain (loss) on the sale and revaluation of foreclosed real estate whose losses decreased $17,000. Non-interest expense decreased $363,000 or 10.0% primarily due to a $134,000 decrease in salaries and employee benefits and a $195,000 decrease in other non-interest expenses. The decrease in salaries and employee benefits was primarily due to a $160,000 reduction in pension and post-retirement costs associated with plan amendments as discussed in the Company’s 2010 Annual Report on Form 10-K. Other non-interest expenses decreased $195,000 or 21.0% primarily as a result of a $127,000 reduction in FDIC assessments and a reduction in auditing fees of $27,000.

Income tax expense was $238,000 for the three month period ended September 30, 2011 compared to  $89,000 for the corresponding period in 2010, an increase of $149,000. The Company’s effective tax rates were 17.1% and 10.4% for the three month periods ended September 30, 2011 and 2010, respectively. The increase in effective tax rates was due to tax exempt interest and earnings on bank-owned life insurance being a lower percentage of income before income tax expense in 2011 as compared to 2010.

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 September 30, 2011 and 2010.

 

25

Tax equivalent net interest spread increased 27 basis points to 4.74% for the three months ended September 30, 2011 from 4.47% for the same period in 2010. Net interest margin increased 18 basis points from 4.74% to 4.92% over that time. Tax equivalent net interest income increased $207,000 as a result of a $334,000 decrease in interest expense partially offset by a $127,000 decrease in tax equivalent interest income. Yields on average interest-bearing liabilities and interest earning assets decreased 43 basis points and 16 basis points respectively from 2010 to 2011. Tax equivalent interest income decreased $127,000 primarily due to a $99,000 decrease in loan interest and a $104,000 decrease in interest on average taxable securities, partially offset by a $76,000 increase in interest income on average tax-exempt securities. Interest earned on loans decreased $99,000 or 0.3%, with average yields decreasing 13 basis points from 6.31% to 6.18% for the three months ended September 30, 2011. Most loan categories experienced a decrease in average yields for the three months ended September 30, 2011 versus the same period in 2010. The yield on real estate mortgages decreased 13 basis points and home equities decreased 2 basis points due to the maturing or replacement of existing loans with lower-yielding products. Time and demand loans partially offset these decreases, with a 15 basis point increase in yield. Total tax-equivalent interest income on securities decreased $28,000 with a 22 basis point decrease in yield. Interest income on taxable securities decreased $104,000  which was partially offset by a $76,000 increase on tax-exempt interest income. The yield on taxable securities decreased 42 basis points to 3.68% as lower yielding callable securities were replaced with higher yielding securities. The yield on tax-exempt securities decreased 24 basis points to 5.17% as higher yielding securities matured or were called and were replaced by lower yielding ones. The total average balance for interest bearing assets was $395,896,000 for the three month period ended September 30, 2011 compared to $393,518,000 for the same three month period in 2010, an increase of $2,378,000 or 0.6%. Average investment securities increased $3,272,000 or 2.8% to $118,466,000 and average loans decreased $778,000 or 0.3% to $277,357,000 for the three months ended September 30, 2011. Average taxable security holdings decreased $5,632,000 or 11.1% partially offset by an $8,904,000 or 13.8% increase in average tax-exempt securities. As yields on municipal securities outperform agency securities, the Bank increased its holdings while allowing taxable securities to drop off as they matured or were called. Average home equity loans decreased $1,399,000 or 4.3% as borrowers refinance for more competitive rates in the marketplace. Partially offsetting this average installment loans increased $635,000 or 3.5%.

Interest expense on total average interest bearing liabilities decreased $334,000 and average yields decreased 43 basis points from 1.40% for the three months ended September 30, 2010 to 0.97% for the same period in 2011. Interest expense on deposits decreased $333,000 primarily on time deposits. Interest expense on time deposits decreased $274,000 and yields decreased 60 basis points to 1.30% for the three months ended September 30, 2011. The low interest rate environment caused by government monetary policy resulted in the decreased interest expense. Total average interest bearing liabilities decreased $3,472,000 or 1.1% from $316,553,000 for the three month period ended September 30, 2010 compared to $320,025,000 for the same three month period in 2011. Average interest bearing deposits decreased $3,759,000 due to a decrease of $7,596,000 or 4.6% in average time deposits to $156,851,000, partially offset by an increase in NOW and super NOW deposits of $7,931,000 or 21.3% to $45,246,000 and an increase in savings and insured money market deposits of $3,424,000 or 3.4% to $102,857,000. As higher yielding, longer term time deposits matured, the low rates available in the current market caused some customers to switch to non-maturity deposit products. Total average deposits decreased as a result of seasonal fluctuations of municipal deposits partially offset by gains made from the Banks increased sales effort.

Comparison of the nine month periods ended September 30, 2011 and 2010

Net income for the nine months ended September 30, 2011 increased $646,000 or 29.5% to $2,834,000 compared to $2,188,000 for the same period in 2010. This overall increase was primarily due to a $340,000 increase in net interest income after provision for loan losses and a $712,000 decrease in non-interest expense partially offset by a decrease of $143,000 in non-interest income and a $263,000 increase in income tax expense. The Company’s annualized return on average assets was 0.9% for the nine months ended September 30, 2011, up from 0.7% for the same period last year. The annualized return on average stockholders’ equity was 7.7%, up from 6.3% for the nine months ended September 30, 2011 and 2010, respectively.

Net interest income after provision for loan losses increased $340,000 or 3.0% to $11,732,000, resulting from a $930,000 decrease in interest expense on deposits partially offset by a decrease of $342,000 in interest income on loans and a decrease of $314,000 in interest on taxable securities. Interest expense on deposits decreased $930,000 or 31.5% primarily due to lower interest rates paid on time deposits. Interest on taxable securities decreased $314,000 or 20.1% primarily resulting from maturity and calls of agency securities being replaced by lower yielding investments.  Interest income on loans decreased $342,000 or 2.6% due to maturing higher yielding loans being replaced at lower rates.

The provision for loan losses was $1,700,000 and $1,650,000 for the nine months periods ended September 30, 2011 and 2010, respectively. Management believes the allowance is adequate.

Non-interest income decreased $143,000 or 6.0% for the nine months ended September 30, 2011 to $2,257,000 from $2,400,000 for the same period in 2010. Net loss on sale and revaluation of foreclosed real estate expense increased $205,000 as revised valuations were received. Gains from the sale of securities decreased $42,000 from the prior year. These decreases were partially offset by an increase in fee income of $72,000 or 10.8% as the Bank expanded its customer deposit base. Non-interest expenses totaled $10,752,000 for the nine months ended September 30, 2011 compared to $11,464,000 for the same period in 2010, a decrease of $712,000 or 6.2%. This decrease reflects a $456,000 decrease in salary and employee benefits resulting primarily from a decrease of $446,000 from pension and post-retirement plan expense due to plan amendments that were disclosed in the Company’s Annual Report on Form 10-K as filed on March 25, 2011.  Other non-interest expenses decreased $324,000 primarily due to a $76,000 decrease in information technology consulting fees, a $176,000 decrease in FDIC assessments, and $40,000 less in advertising costs in 2011. Partially offsetting these decreases, foreclosed real estate expenses increased $50,000 due to the increased activity in foreclosed properties.

Income tax expense was $403,000 for the nine month period ended September 30, 2011 compared to $140,000 for the corresponding period in 2010, an increase of $263,000. The Company’s effective tax rates were 12.4% and 6.0% for the nine month periods ended September 30, 2011 and 2010, respectively. The change in effective tax rates was due to tax exempt interest and earnings on bank-owned life insurance being a lower percentage of income before income tax expense in 2011 as compared to 2010.

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 nine month average balance and yields, and year to date interest income and expense for the periods ended September 30, 2011 and 2010.

 

26

Tax equivalent net interest spread increased 26 basis points to 4.70% for the nine months ended September 30, 2011 from 4.44% for the same period in 2010. Net interest margin increased 19 basis points from 4.70% to 4.89% over that time. Tax equivalent net interest income increased $448,000 as a result of interest expense decreasing $931,000 partially offset by tax equivalent interest income decreasing $483,000. Yields on average interest-bearing liabilities decreased 39 basis points to 1.03% and yields on interest earning assets decreased 13 basis points from 5.86% in 2010 to 5.73% in 2011. Tax equivalent interest income decreased $483,000 primarily due to a $342,000 decrease in loan interest and a $313,000 decrease in interest on average taxable securities partially offset by a $173,000 increase in interest income on average tax-exempt securities. Interest earned on loans decreased $342,000 with average yields decreasing 14 basis points from 6.30% to 6.16% for the nine months ended September 30, 2011. Most loan categories experienced a decrease in average yields for the nine months ended September 30, 2011 versus the same period in 2010. The yield on real estate mortgages decreased 19 basis points and home equities decreased 8 basis points due to the maturing or replacement of loans with new lower-yielding products. Time and demand loans partially offset these decreases, with a 28 basis point increase in yield as a result of the seasonal usage of commercial lines of credit. Total tax-equivalent interest income on securities decreased $140,000 or 10 basis points. Interest income on taxable securities decreased $313,000 which was partially offset by a $173,000 increase in tax-exempt interest income. The yield on taxable securities decreased 10 basis points to 3.68% as higher yielding securities are called and replaced by lower yielding securities. The yield on tax-exempt securities decreased 35 basis points to 5.35% as higher yielding securities mature which were replaced by lower yielding ones. The total average balance for interest bearing assets was $392,170,000 for the nine month period ended September 30, 2011 compared to $394,560,000 for the same nine month period in 2010, a decrease of $2,390,000 or 0.6%. Average investment securities decreased $1,616,000 or 1.4% to $114,434,000 and average loans decreased $686,000 or 0.2% to $277,683,000 for the nine months ended September 30, 2011. Average taxable security holdings decreased $9,894,000 or 18.0% partially offset by a $8,278,000 or 13.6% increase in average tax-exempt securities. As yields on municipal securities outperform agency securities, the Bank increased its holdings while allowing taxable securities to drop off as they are not replaced on maturity or call. Average real estate mortgages and home equity loans decreased $873,000 and $1,101,000, respectively, as borrowers refinance for more competitive rates in the marketplace partially offset by an increase in average time and demand of $1,017,000.

Interest expense on total average interest bearing liabilities decreased $931,000 and average yields decreased 39 basis points from 1.42% for the nine months ended September 30, 2010 to 1.03% for the same period in 2011. Interest expense on deposits decreased $930,000 primarily on time deposits. Interest expense on time deposits decreased $851,000 and the yield decreased 56 basis points to 1.35% for the nine months ended September 30, 2011. The low interest rate environment caused by government monetary policy resulted in the decreased interest expense. Total average interest bearing liabilities increased $100,000 from $320,053,000 for the nine month period ended September 30, 2010 compared to $320,153,000 for the same nine month period in 2011. Average interest bearing deposits decreased $25,000 due to a decrease of $12,518,000 or 7.3% in average time deposits to $158,971,000, partially offset by an increase in savings and insured money market deposits of $6,910,000 or 7.3% to $101,357,000 and increase in NOW and super NOW deposits of $5,583,000 or 14.4% to $44,290,000. As higher yielding, longer term time deposits matured, the low rates available in the current market caused some customers to switch to non-maturity deposit products. Total average deposits decreased as a result of seasonal fluctuations of municipal deposits partially offset by gains made from the Banks increased sales effort.

D.         Critical Accounting Policies

Management of the Company considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the inherent uncertainty in evaluating the levels of the allowance required to cover credit losses in the portfolio and the material effect that such judgments can have on the results of operations. The allowance for loan losses is maintained at a level deemed adequate by management based on an evaluation of such factors as economic conditions in the Company’s market area, past loan loss experience, the financial condition of individual borrowers, and underlying collateral values based on independent appraisals. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions and values of real estate particularly in Sullivan County. Collateral underlying certain real estate loans could lose value which could lead to future additions to the allowance for loan losses. See Item 1 Financial Statements Notes to Unaudited Consolidated Interim Financial Statements note F, Allowance for Loan Losses, for further discussion. 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 net of rental income 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 US 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 (loss).

 

27

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, 2010. 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

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) or 15d-15(f). The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements. Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, an evaluation of the effectiveness of internal controls over financial reporting was conducted, based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the evaluation under the framework in Internal Control – Integrated Framework, management concluded that the internal controls over financial reporting were effective as of September 30, 2011.

No change in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

28

PART II - OTHER INFORMATION

ITEM 1.       LEGAL PROCEEDINGS

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

ITEM 1A.    RISK FACTORS

There have been no material changes from the risk factors as previously disclosed in response to Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

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

Not Applicable

ITEM 3.       DEFAULTS UPON SENIOR SECURITIES

Not Applicable

ITEM 5.       OTHER INFORMATION

Not Applicable.

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

 

29

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

November 14, 2011

30