PINX:JFBC Jeffersonville Bancorp NY Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

For the Quarter Ended June 30, 2012

OR

 

¨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 class   Name of each exchange on which registered
Common Stock, par value $0.50 per share   The NASDAQ Capital Market

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

None

 

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 company     x

 

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

Yes     ¨     No     x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class   Outstanding at August 13, 2012
Common Stock, $0.50 par value per share   4,234,505 shares

 

 
 

 

INDEX TO FORM 10-Q

 

      Page
       
PART 1   Financial Information  
       
  Item 1. Financial Statements  
       
    Consolidated Interim Financial Statements (Unaudited)  
       
    Consolidated Balance Sheets at June 30, 2012 and December 31, 2011 3
       
    Consolidated Statements of Income for the three months ended June 30, 2012 and 2011 4
       
    Consolidated Statements of Other Comprehensive Income for the three months ended June 30, 2012 and 2011 5
       
    Consolidated Statements of Income for the six months ended June 30, 2012 and 2011 6
       
    Consolidated Statements of Other Comprehensive Income for the six months ended June 30, 2012 and 2011 7
       
    Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 8
       
    Notes to Unaudited Consolidated Interim Financial Statements 9
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
       
  Item 3. Quantitative and Qualitative Disclosures about Market Risk 31
       
  Item 4T. Controls and Procedures 31
       
PART 2   Other Information  
       
  Item 1. Legal Proceedings 32
       
  Item 1A. Risk Factors 32
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
       
  Item 3. Defaults Upon Senior Securities 32
       
  Item 4. Mine Safety Disclosure 32
       
  Item 5. Other Information 32
       
  Item 6. Exhibits 32
       
    Signatures 33

 

 
 

 

Jeffersonville Bancorp and Subsidiary

Consolidated Balance Sheets

(In thousands, except share and per share data)

 

   As of June 30,   As of December 31, 
   2012   2011 
   (Unaudited)   (Unaudited) 
ASSETS          
Cash and cash equivalents  $37,773   $11,776 
Securities available for sale, at fair value   114,316    107,428 
Securities held to maturity, estimated fair value of $4,808 at June 30, 2012 and $6,989 at December 31, 2011   4,471    6,613 
Loans, net of allowance for loan losses of $5,154 at June 30, 2012 and $4,712 at December 31, 2011   262,520    271,926 
Accrued interest receivable   1,746    1,797 
Bank-owned life insurance   14,905    15,342 
Foreclosed real estate   1,874    2,954 
Premises and equipment, net   5,306    5,500 
Restricted investments   2,159    2,420 
Other assets   6,507    7,756 
Total Assets  $451,577   $433,512 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Liabilities          
Deposits:          
Demand deposits (non-interest bearing)  $72,295   $61,441 
NOW and super NOW accounts   51,614    45,693 
Savings and insured money market deposits   112,334    102,180 
Time deposits   146,841    150,395 
Total Deposits   383,084    359,709 
           
Federal Home Loan Bank long-term borrowings   10,000    15,000 
Other liabilities   8,150    9,388 
Total Liabilities   401,234    384,097 
           
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 both June 30, 2012 and December 31, 2011   2,384    2,384 
Paid-in capital   6,483    6,483 
Treasury stock, at cost; 533,281 shares at both June 30, 2012 and December 31, 2011   (4,965)   (4,965)
Retained earnings   45,942    44,862 
Accumulated other comprehensive income   499    651 
Total Stockholders’ Equity   50,343    49,415 
Total Liabilities and Stockholders’ Equity  $451,577   $433,512 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

3
 

 

Jeffersonville Bancorp and Subsidiary

Consolidated Statements of Income

(In thousands, except per share data)

 


 

For the three months ended June 30,  2012   2011 
   (Unaudited)   (Unaudited) 
INTEREST AND DIVIDEND INCOME          
Loan interest and fees  $4,081   $4,226 
Securities:          
Taxable   381    424 
Tax-exempt   669    627 
Interest bearing deposits   15    8 
Total Interest and Dividend Income   5,146    5,285 
           
INTEREST EXPENSE          
Deposits   451    691 
Federal Home Loan Bank borrowings   125    150 
Total Interest Expense   576    841 
           
Net interest income   4,570    4,444 
Provision for loan losses   450    400 
Net Interest Income after Provision for Loan Losses   4,120    4,044 
           
NON-INTEREST INCOME          
Service charges   352    382 
Fee income   259    244 
Earnings on bank-owned life insurance   123    124 
Net gain on sale of securities   1    9 
Other non-interest income   62    60 
Total Non-Interest Income   797    819 
           
NON-INTEREST EXPENSES          
Salaries and employee benefits   1,952    2,007 
Occupancy and equipment expenses   518    533 
Foreclosed real estate expense, net   365    341 
Other non-interest expenses   823    856 
Total Non-Interest Expenses   3,658    3,737 
           
Income before income tax expense   1,259    1,126 
Income tax expense   214    151 
Net Income  $1,045   $975 
           
Basic earnings per common share  $0.25   $0.23 
Average common shares outstanding   4,235    4,235 
Cash dividends declared per share  $0.13   $0.13 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

4
 

 

Jeffersonville Bancorp and Subsidiary

Consolidated Statements of Comprehensive Income

(In thousands)

 

For the three months ended June 30,      2012       2011 
       (Unaudited)       (Unaudited) 
                 
Net Income       $1,045        $975 
                     
Other comprehensive income (loss):                    
Securities available for sale:                    
Net unrealized holding gains (losses) arising during the period  $(319)       $683      
Income tax (expense) benefit   128         (274)     
Net unrealized holding gains (losses) arising during the period, net of tax        (191)        409 
                     
Reclassification adjustment for net realized gains included in income   (1)        (9)     
Income tax expense            4      
Reclassification adjustment for net realized gains included in income, net of tax        (1)        (5)
                     
Amortization of pension and post retirement liabilities’ gains   43         48      
Income tax expense   (17)        (19)     
Amortization of pension and post retirement liabilities’ gains, net of tax        26         29 
                     
Other comprehensive income (loss), net of tax        (166)        433 
Comprehensive income       $879        $1,408 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

5
 

 

Jeffersonville Bancorp and Subsidiary

Consolidated Statements of Income

(In thousands, except per share data)

 


 

For the six months ended June 30,  2012   2011 
   (Unaudited)   (Unaudited) 
INTEREST AND DIVIDEND INCOME          
Loan interest and fees  $8,361   $8,534 
Securities:          
Taxable   716    815 
Tax-exempt   1,310    1,216 
Interest bearing deposits   23    15 
Total Interest and Dividend Income   10,410    10,580 
           
INTEREST EXPENSE          
Deposits   939    1,400 
Federal Home Loan Bank borrowings   275    299 
Other       1 
Total Interest Expense   1,214    1,700 
           
Net interest income   9,196    8,880 
Provision for loan losses   1,050    1,000 
Net Interest Income after Provision for Loan Losses   8,146    7,880 
           
NON-INTEREST INCOME          
Service charges   697    743 
Fee income   502    483 
Earnings on bank-owned life insurance   213    238 
Life insurance benefit   93     
Net gain on sale of securities   34    9 
Other non-interest income   91    88 
Total Non-Interest Income   1,630    1,561 
           
NON-INTEREST EXPENSES          
Salaries and employee benefits   3,947    4,017 
Occupancy and equipment expenses   1,014    1,112 
Foreclosed real estate expense, net   418    380 
Other non-interest expenses   1,859    2,088 
Total Non-Interest Expenses   7,238    7,597 
           
Income before income tax expense   2,538    1,844 
Income tax expense   358    165 
Net Income  $2,180   $1,679 
           
Basic earnings per common share  $0.51   $0.40 
Average common shares outstanding   4,235    4,235 
Cash dividends declared per share  $0.26   $0.26 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

6
 

 

Jeffersonville Bancorp and Subsidiary

Consolidated Statements of Comprehensive Income

(In thousands)

 

For the six months ended June 30,      2012       2011 
       (Unaudited)       (Unaudited) 
                 
Net Income       $2,180        $1,679 
                     
Other comprehensive income (loss):                    
Securities available for sale:                    
Net unrealized holding gains (losses) arising during the period  $(303)       $863      
Income tax (expense) benefit   122         (346)     
Net unrealized holding gains (losses) arising during the period, net of tax        (181)        517 
                     
Reclassification adjustment for net realized gains included in income   (34)        (9)     
Income tax expense   13         4      
Reclassification adjustment for net realized gains included in income, net of tax        (21)        (5)
                     
Amortization of pension and post retirement liabilities’ gains   83         70      
Income tax expense   (33)        (28)     
Amortization of pension and post retirement liabilities’ gains, net of tax        50         42 
                     
Other comprehensive income (loss), net of tax        (152)        554 
Comprehensive income       $2,028        $2,233 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

7
 

 

Jeffersonville Bancorp and Subsidiary

Consolidated Statements of Cash Flows

(In thousands)

 


 

For the six months ended June 30,  2012   2011 
   (Unaudited)   (Unaudited) 
OPERATING ACTIVITIES:          
Net income  $2,180   $1,679 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   1,050    1,000 
Depreciation and amortization   374    371 
Net loss on revaluation and sale of foreclosed real estate   188    113 
Earnings on bank-owned life insurance   (213)   (238)
Life insurance benefit   (93)    
Net gain on sale of securities   (34)   (9)
(Benefit) expense deferred income tax   (18)   325 
Decrease in accrued interest receivable   51    113 
Decrease in other assets   1,347    104 
Decrease in other liabilities   (1,155)   (471)
Net Cash Provided by Operating Activities   3,677    2,987 
           
INVESTING ACTIVITIES:          
Proceeds from maturities and calls:          
Securities available for sale   18,520    16,605 
Securities held to maturity   2,357    1,195 
Proceeds from sales of securities available for sale   348    651 
Purchases:          
Securities available for sale   (26,059)   (25,062)
Securities held to maturity   (215)   (2,539)
Principal collections, net of disbursement for loans   7,329    3,674 
Proceeds from cash surrender value of bank-owned life insurance   1,078     
Purchase of bank owned life insurance   (335)    
Purchase of restricted investments       (230)
Redemption of restricted investments   261    616 
Purchases of premises and equipment   (180)   (100)
Proceeds from sales of foreclosed real estate   1,941    529 
Net Cash Provided by (Used in) Investing Activities   5,045    (4,661)
           
FINANCING ACTIVITIES:          
Net increase in deposits   23,375    20,449 
Net decrease in short-term debt       (9,303)
Repayments of Federal Home Loan Bank borrowings   (5,000)    
Cash dividends paid   (1,100)   (1,101)
Net Cash Provided by Financing Activities   17,275    10,045 
           
Net Increase in Cash and Cash Equivalents   25,997    8,371 
Cash and Cash Equivalents at Beginning of Year   11,776    7,518 
Cash and Cash Equivalents at End of Period  $37,773   $15,889 
           
SUPPLEMENTAL INFORMATION:          
Cash paid for interest  $1,264   $1,727 
Cash paid for income taxes   470    131 
Transfer of loans to foreclosed real estate   1,027    2,000 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

8
 

 

Jeffersonville Bancorp and Subsidiary

Notes to Consolidated Interim Financial Statements

June 30, 2012

(Unaudited)

 

A.Financial Statement Presentation

 

The accompanying unaudited interim consolidated financial statements include the accounts of Jeffersonville Bancorp and its wholly owned subsidiary, The First National Bank of Jeffersonville (collectively, Jeffersonville Bancorp and its subsidiary are referred to herein as the “Company”), with all significant intercompany transactions having been eliminated. In the opinion of management of the Company, the accompanying unaudited consolidated interim financial statements contain all adjustments necessary to present the financial position of the Company as of June 30, 2012 and December 31, 2011, the results of operations for the three and six month periods ended June 30, 2012 and 2011, and the cash flows for the six month periods ended June 30, 2012 and 2011. Certain reclassifications have been made, when necessary, in order to conform to the current year’s presentation. All adjustments are normal and recurring. Interim period results are not necessarily indicative of full year results. The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and should be read in conjunction with the Company's consolidated year-end financial statements, including notes thereto, which are included in the 2011 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on March 29, 2012.

 

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 and six month periods ended June 30, 2012 and 2011, the weighted average common shares outstanding were 4,234,505. There were no dilutive securities outstanding during either period.

 

C.Accumulated Other Comprehensive Income

 

At June 30, 2012 and December 31, 2011, the components of accumulated other comprehensive income are as follows (in thousands):

 

   June 30,   December 31, 
Accumulated Other Comprehensive Income, Net of Tax  2012   2011 
Supplemental executive retirement plan  $(557)  $(604)
Postretirement benefits   2,430    2,512 
Defined benefit pension liability   (4,302)   (4,420)
Net unrealized holding gains on securities available for sale   3,260    3,597 
Accumulated other comprehensive income, before tax   831    1,085 
Income taxes related to accumulated other comprehensive income   (332)   (434)
Total  $499   $651 

 

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”) and is being worked on in a joint project with the Financial Accounting Standards board (FASB). The joint project currently has several items out in Exposure Drafts of which the proposed provisions for accounting for leases may impact the Company. At this time the impact of the proposed lease accounting would be to treat qualifying leased property as a right-of-use asset and a liability representing an obligation to make lease payments. 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.

 

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

 

E.Loans

 

The major classifications of loans are as follows at June 30, 2012 and December 31, 2011 (in thousands):

 

9
 

 

Loans, Net  2012   2011 
Commercial          
Commercial real estate loans:          
Commercial mortgage  $91,643   $94,799 
Farm land   5,937    6,336 
Construction   1,851    1,873 
Total commercial real estate loans   99,431    103,008 
Other commercial loans:          
Commercial loans   24,533    24,715 
Agricultural loans   1,999    1,806 
Total other commercial loans   26,532    26,521 
Total commercial loans   125,963    129,529 
Consumer          
Consumer real estate loans:          
Residential mortgage   103,656    107,316 
Home equity   29,799    31,081 
Construction   2,449    2,107 
Total residential real estate loans   135,904    140,504 
Other consumer loans:          
Consumer installment loans   4,540    5,250 
Other consumer loans   1,267    1,355 
Total other loans   5,807    6,605 
Total consumer loans   141,711    147,109 
Total gross loans   267,674    276,638 
Allowance for loan losses   (5,154)   (4,712)
Total loans, net  $262,520   $271,926 

 

Included in the above loan amounts are deferred loan fees and origination costs of $305,000 and $313,000 as of June 30, 2012 and December 31, 2011, respectively.

 

The Company originates consumer 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 dependent upon, among other things, the level of overall economic activity and the real estate market conditions prevailing within the Company’s concentrated lending area.

 

Nonperforming 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.

 

Information on nonperforming loans is summarized as follows at June 30, 2012 and December 31, 2011 (in thousands):

 

      Commercial   Commercial   Residential   Consumer 
Nonperforming Loans  Total Loans   Real Estate   Other   Real Estate   Other 
June 30, 2012:                         
Nonaccrual loans  $7,771   $4,742   $1,025   $1,861   $143 
Trouble debt restructures   1,163    409    66    688     
Total nonaccrual loans   8,934    5,151    1,091    2,549    143 
Loans past due 90 days or more and still accruing interest   1,388    206    218    961    3 
Total nonperforming loans  $10,322   $5,357   $1,309   $3,510   $146 
                          
December 31, 2011:                         
Nonaccrual loans  $7,950   $5,221   $1,109   $1,477   $143 
Trouble debt restructures   1,132    412    106    614     
Total nonaccrual loans   9,082    5,633    1,215    2,091    143 
Loans past due 90 days or more and still accruing interest   1,148    135    8    1,004    1 
Total nonperforming loans  $10,230   $5,768   $1,223   $3,095   $144 

 

10
 

 

There were no nonperforming loans in the consumer installment class at June 30, 2012 or December 31, 2011.

 

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. Until such time, these cash payments are applied to the principal balance of the loan.

 

Impaired commercial loans are also included in nonperforming loans in the table above. The table below presents impaired loans, including trouble debt restructurings, as of June 30, 2012 and December 31, 2011 and their effect on interest income for the three and six months ended June 30, 2012 and June 30, 2011 (in thousands).

 

      Commercial   Commercial   Residential  
Impaired Loans  Total Loans   Real Estate   Other   Real Estate 
June 30, 2012:                    
Unpaid principal balance  $8,732   $6,590   $1,356   $786 
Recorded investment   7,858    6,079    1,091    688 
Average balance   8,292    6,502    1,100    690 
Interest income for the three months ended:                    
Interest contractually due at original rates   119    99    19    1 
Interest income recognized   112    86    15    11 
Interest income for the six months ended:                    
Interest contractually due at original rates   219    177    39    3 
Interest income recognized   191    141    30    20 
                     
Impaired loans:                    
Loans with no allowance  $6,556   $5,268   $689   $599 
Loans with an allowance recorded   1,302    811    402    89 
Related specific allowance  $387   $161   $210   $16 
                     
June 30, 2011:                    
Unpaid principal balance  $10,319   $8,331   $1,480   $508 
Recorded investment   8,632    6,853    1,299    480 
Average balance   11,658    9,627    1,534    497 
Interest income for the three months ended:                    
Interest contractually due at original rates   150    134    11    5 
Interest income recognized   59    48    11     
Interest income for the six months ended:                    
Interest contractually due at original rates   332    299    28    5 
Interest income recognized   245    207    38     
                     
Impaired loans:                    
Loans with no allowance  $5,551   $4,368   $703   $480 
Loans with an allowance recorded   3,081    2,485    596     
Related specific allowance  $362   $274   $88   $ 
                     
December 31, 2011:                    
Unpaid principal balance  $9,513   $7,328   $1,416   $769 
Recorded investment   8,147    6,271    1,201    675 
Average balance   11,493    9,238    1,491    764 
                     
Impaired loans:                    
Loans with no allowance  $6,342   $4,978   $689   $675 
Loans with an allowance recorded   1,805    1,293    512     
Related specific allowance  $328   $205   $123   $ 

 

Loans restructured under the guidelines of ASC 310-40 Receivables Troubled Debt Restructures by Creditors are disclosed below as of June 30, 2012 and 2011 (in thousands):

 

11
 

 

   As of June 30, 2012   As of December 31, 2012 
       Pre-Mod-   Post-Mod-           Pre-Mod-   Post-Mod-     
       ification   ification   Current       ification   ification   Current 
Trouble Debt      Recorded   recorded   recorded       recorded   recorded   recorded 
Restructure  No.   investment   investment   investment   No.   investment   investment   investment 
Commercial:                                        
Real estate   2   $417   $430   $409    2   $417   $430   $412 
Commercial loans   1    110    119    66    1    110    119    106 
Consumer:                                        
Real estate   3    702    792    689    3    580    649    614 

 

   For the three months ended June 30, 2012   For the six months ended June 30, 2012 
       Pre-Mod-   Post-Mod-           Pre-Mod-   Post-Mod-     
       ification   ification   Current       ification   ification   Current 
Trouble Debt      Recorded   recorded   recorded       recorded   recorded   recorded 
Restructure  No.   investment   investment   investment   No.   investment   investment   investment 
Consumer:                                        
Real estate   1    122    143    89    1    122    143    89 

 

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 six months ended June 30, 2011, the Bank had no new loans that qualified as a TDR. During the first six months of 2012, the Bank had one consumer real estate loan that qualified as a TDR. As of June 30, 2012, the Bank had $59,000 allocated in specific reserves on TDRs with a recorded investment of $155,000 and had charged off $91,000 to borrowers whose loan terms have been modified as TDRs. At June 30, 2012 and December 31, 2011, the Bank had a total of $1,009,000 and $1,003,000, respectively, in TDRs which did not require a specific reserve. 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 additional funds to customers whose loans are classified as a TDR as of June 30, 2012. 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 periods ended June 30, 2012, there were no TDRs considered to be in default for loans restructured in the preceding twelve months.

 

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 of June 30, 2012 and December 31, 2011 (in thousands):

 

       Commercial   Consumer 
Loans by Risk Ratings  Total   Real Estate   Other   Real Estate   Installment   Other 
                         
June 30, 2012:                              
Pass  $46,494   $36,531   $9,963                
Pass watch   47,266    36,167    11,099                
Special mention   9,334    7,650    1,684                
Substandard   21,071    18,662    2,409                
Doubtful   401    120    281                
Non-reviewed   143,108    301    1,096   $135,904   $4,540   $1,267 
Total  $267,674   $99,431   $26,532   $135,904   $4,540   $1,267 
                               
December 31, 2011:                              
Pass  $49,110   $37,683   $11,427                
Pass watch   49,170    38,391    10,779                
Special mention   8,408    7,197    1,211                
Substandard   21,495    19,209    2,286                
Doubtful   190    142    48                
Non-reviewed   148,265    386    770   $140,504   $5,250   $1,355 
Total  $276,638   $103,008   $26,521   $140,504   $5,250   $1,355 

 

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The following table illustrates the aging of past due loans by category as at June 30, 2012 and December 31, 2011 (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 
                             
June 30, 2012:                                   
Commercial real estate  $1,369   $4,426   $2,839   $8,634   $90,797   $99,431   $206 
Commercial other   148    316    217    681    25,851    26,532     
Residential real estate   2,428    3,138    1,855    7,421    128,483    135,904    961 
Consumer installment   234    30    3    267    4,273    4,540    218 
Other consumer   4            4    1,263    1,267    3 
Total  $4,183   $7,910   $4,914   $17,007   $250,667   $267,674   $1,388 
                                    
December 31, 2011:                                   
Commercial real estate  $1,858   $1,736   $3,250   $6,844   $96,164   $103,008   $135 
Commercial other   435    203    131    769    25,752    26,521    8 
Residential real estate   3,700    2,210    1,335    7,245    133,259    140,504    1,004 
Consumer installment   121    103    145    369    4,881    5,250    1 
Other consumer   5            5    1,350    1,355     
Total  $6,119   $4,252   $4,861   $15,232   $261,406   $276,638   $1,148 

 

As of June 30, 2012 and December 31, 2011, nonaccrual loans included $5.4 million as of both dates 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 greater of the Bank’s weighted three-year average loss percentages or historical loss rolling average of the prior eight quarters. The method used in this calculation collects all commercial loans and mortgages from one year ago, observes their status and rating at the current time, and computes the historical loss rolling average for these rating categories by using the losses experienced by those particular loans over the past year. 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.

 

13
 

 

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 trouble 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 for impairment. Instead, the appropriate allowance pool rate is applied to the aggregate balance of these pools.

 

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. 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. A pool rating is applied to the aggregate balance of these pools. Loans restructured under a trouble debt restructuring are individually evaluated for impairment.

 

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 generally 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 June 30, 2012 and 2011 and December 31, 2011 (in thousands):

 

14
 

 

       Commercial   Consumer     
Allowance for Loan Losses  Total   Real Estate   Other   Real Estate   Installment   Other   Unallocated 
Three months ended June 30, 2012:                                   
Beginning balance April 1  $5,056   $2,693   $629   $1,289   $83   $68   $294 
Charge-offs   (378)   (40)   (93)   (198)   (31)   (16)    
Recoveries   26        5        11    10     
Provision   450    72    185    291    29    (12)   (115)
Ending balance June 30  $5,154   $2,725   $726   $1,382   $92   $50   $179 
                                    
Six months ended June 30, 2012:                                   
Beginning balance January 1  $4,712   $2,646   $557   $1,244   $70   $61   $134 
Charge-offs   (676)   (61)   (93)   (385)   (98)   (39)    
Recoveries   68    1    12    6    23    26     
Provision   1,050    139    250    517    97    2    45 
Ending balance June 30  $5,154   $2,725   $726   $1,382   $92   $50   $179 
                                    
Ending balance as related to loans:                                   
Evaluated collectively                                   
[general reserve]  $4,767   $2,564   $516   $1,366   $92   $50   $179 
Evaluated individually                                   
[specific reserve]   387    161    210    16             
                                    
Total loans  $267,674   $99,431   $26,532   $135,904   $4,540   $1,267      
Loans evaluated for impairment                                   
Loans evaluated collectively   259,816    93,352    25,441    135,216    4,540    1,267      
Loans evaluated individually   7,858    6,079    1,091    688              
                                    
Three months ended June 30, 2011:                                   
Beginning balance April 1  $4,146   $2,153   $512   $1,232   $94   $64   $91 
Charge-offs   (59)   6    (13)       (13)   (39)    
Recoveries   27        2    1    13    11     
Provision   400    176    30    (21)   (12)   38    189 
Ending balance June 30  $4,514   $2,335   $531   $1,212   $82   $74   $280 
                                    
Six months ended June 30, 2011:                                   
Beginning balance January 1  $4,335   $2,160   $622   $1,213   $106   $61   $173 
Charge-offs   (890)   (621)   (75)   (100)   (32)   (62)    
Recoveries   69    10    5    1    31    22     
Provision   1,000    786    (21)   98    (23)   53    107 
Ending balance June 30  $4,514   $2,335   $531   $1,212   $82   $74   $280 
                                    
Ending balance as related to loans:                                   
Evaluated collectively                                   
[general reserve]  $4,152   $2,061   $443   $1,212   $82   $74   $280 
Evaluated individually                                   
[specific reserve]   362    274    88                 
                                    
Total loans  $275,652   $103,340   $25,387   $139,827   $5,708   $1,390      
Loans evaluated for impairment                                   
Loans evaluated collectively   267,020    96,487    24,088    139,347    5,708    1,390      
Loans evaluated individually   8,632    6,853    1,299    480              
                                    
For the year ended December 31, 2011:                                   
Beginning balance January 1  $4,335   $2,160   $622   $1,213   $106   $61   $173 
Charge-offs   (1,943)   (1,404)   (129)   (223)   (80)   (107)    
Recoveries   120    10    13    7    51    39     
Provision   2,200    1,880    51    247    (7)   68    (39)
Ending balance December 31  $4,712   $2,646   $557   $1,244   $70   $61   $134 
                                    
Ending balance as related to loans:                                   
Evaluated collectively                                   
[general reserve]  $4,384   $2,441   $434   $1,244   $70   $61   $134 
Evaluated individually                                   
[specific reserve]   328    205    123                 
                                    
Total loans  $276,638   $103,008   $26,521   $140,504   $5,250   $1,355      
Loans evaluated for impairment                                   
Loans evaluated collectively   268,491    96,737    25,320    139,829    5,250    1,355      
Loans evaluated individually   8,147    6,271    1,201    675              

 

There are no commitments to lend additional funds on the above noted non-performing loans. Management has determined that the majority of these non-performing 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. 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.

 

15
 

 

G.Investment Securities

 

The amortized cost and estimated fair value of available for sale and held to maturity securities at June 30, 2012 and December 31, 2011 are as follows (in thousands):

 

June 30, 2012  Amortized   Gross unrealized   Estimated 
Investment Securities  cost   gains   losses   fair value 
Securities Available for Sale:                    
Government Sponsored Enterprises (GSE)  $3,464   $1   $(1)  $3,464 
Obligations of states and political subdivisions – New York State   67,518    2,500    (98)   69,920 
Mortgage-backed securities and collateralized mortgage obligations – GSE residential   28,157    909    (14)   29,052 
Corporate debt – financial services industry   11,189    54    (106)   11,137 
Certificates of deposit – financial services industry   98            98 
    110,426    3,464    (219)   113,671 
Equity securities – financial services industry   630    18    (3)   645 
Total securities available for sale  $111,056   $3,482   $(222)  $114,316 
                     
Securities Held to Maturity – Obligations of states and political subdivisions  $4,471   $337   $   $4,808 

 

December 31, 2011  Amortized   Gross unrealized   Estimated 
Investment Securities  cost   gains   losses   fair value 
Securities Available for Sale:                    
Government Sponsored Enterprises (GSE)  $2,260   $1   $   $2,261 
Obligations of states and political subdivisions – New York State   65,591    2,856        68,447 
Mortgage-backed securities and collateralized mortgage obligations – GSE residential   27,536    1,119    (20)   28,635 
Corporate debt – financial services industry   7,822    7    (300)   7,529 
Certificates of deposit – financial services industry   98            98 
    103,307    3,983    (320)   106,970 
Equity securities – financial services industry   524    6    (72)   458 
Total securities available for sale  $103,831   $3,989   $(392)  $107,428 
                     
Securities Held to Maturity – Obligations of states and political subdivisions  $6,613   $376   $   $6,989 

 

Proceeds from sale, gross gains and gross losses realized on sales of securities available for sale were as follows for the three and six months ended June 30, 2012 and 2011 (in thousands). There were no sales of securities held to maturity during the three or six months ended June 30, 2012 or June 30, 2011.

 

16
 

 

For the periods ended June 30  Gross   Gross     
Sale of Available for Sale Securities  Proceeds   Gains   Losses   Net Gain 
                 
Three months ended:                    
2012  $113   $1   $   $1 
2011  $651   $9   $   $9 
                     
Six months ended:                    
2012  $348   $34   $   $34 
2011  $651   $9   $   $9 

 

The amortized cost and estimated fair value of securities available for sale and held to maturity at June 30, 2012, by remaining period to contractual maturity, are shown in the following table (in thousands). Actual maturities will differ from contractual maturities because of security prepayments and the right of certain issuers to call or prepay their obligations.

 

   Amortized   Estimated 
Investment Securities  cost   fair value 
Within one year  $24,392   $24,662 
One to five years   34,703    35,813 
Five to ten years   26,943    28,231 
Over ten years   702    721 
    86,740    89,427 
Mortgage-backed securities   28,157    29,052 
Equity securities   630    645 
Total Investment Securities  $115,527   $119,124 

 

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 June 30, 2012 and December 31, 2011 (dollars in thousands):

 

   Less than 12 months   12 months or more   Total 
June 30, 2012      Estimated   Unrealized       Estimated   Unrealized       Estimated   Unrealized 
Investment Securities  No.   fair value   losses   No.   fair value   losses   No.   fair value   losses 
Securities Available for Sale:                                             
Debt Securities:                                             
Government Sponsored Enterprises (GSE)   1   $2,011   $1       $   $    1   $2,011   $1 
Obligations of states and political subdivisions – New York State   47    8,412    98                47    8,412   $98 
Mortgage-backed securities and collateralized mortgage obligations – GSE residential   4    3,790    6    1    472    8    5    4,262   $14 
Corporate debt – financial services industry   8    6,508    106                8    6,508    106 
Total debt securities   60    20,721    211    1    472    8    61    21,193    219 
Equity securities – financial services industry   2    281    3                2    281    3 
Total securities available for sale   62   $21,002   $214    1   $472   $8    63   $21,474   $222 

 

   Less than 12 months   12 months or more   Total 
December 31, 2011      Estimated   Unrealized       Estimated   Unrealized       Estimated   Unrealized 
Investment Securities  No.   fair value   losses   No.   fair value   losses   No.   fair value   losses 
Securities Available for Sale:                                             
Debt Securities:                                             
Mortgage-backed securities and collateralized mortgage obligations – GSE residential   3   $2,166   $20       $   $    3   $2,166   $20 
Corporate debt – financial services industry   7    6,526    300                7    6,526    300 
Total debt securities   10    8,692    320                10    8,692    320 
Equity securities – financial services industry   4    325    72                4    325    72 
Total securities available for sale   14   $9,017   $392       $   $    14   $9,017   $392 

 

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Included in securities available for sale 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 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. 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.

 

Securities held to maturity consist of obligations of state and political subdivisions which are general obligation bonds of municipalities 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 classified as available for sale or held to maturity are evaluated for OTTI. Securities identified as other-than-temporarily impaired are written down to their current fair market value. For debt and equity securities that are intended to be sold, or that management believes will more-likely-than-not be required to be sold prior to recovery, the full impairment is recognized immediately in earnings. An impairment charge will also be recorded if there is credit related loss regardless of whether or not there is the intent to sell the securities. 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, but are not limited to: 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, the Company uses its best estimate of the present value of 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 deficiencies 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).

 

As of June 30, 2012, management believes that none of the unrealized losses on debt securities at June 30, 2012 are due to the underlying credit quality of the issuers of the securities, but instead are primarily related to market interest rates, and the full value of the securities will be realized upon maturity. Additionally, the Company does not intend to sell the securities and it is more-likely-than-not that the Company will not be required to sell the securities before recovery of their amortized cost. Therefore, no impairment was recognized on these securities. As there was no credit loss, no impairment charge was recorded for the six month periods ended June 30, 2012 or June 30, 2011. Management believes the unrealized losses related to the three equity securities held at June 30, 2012 do not represent other-than-temporary impairment as losses are believed to be due to market fluctuations and not credit concerns with regard to the issuers.

 

H.Restricted Investments

 

Restricted investments include stock held in correspondent banks, the Federal Reserve Bank, and trust preferred stock. The trust preferred stock represents the Bank’s investment in the Sullivan County Senior Housing partnership and cannot be sold to a third party. The stock is valued at par of $1,000,000 and is fully secured by an investment grade bond. The trust preferred stock is evaluated quarterly for impairment and the Company believes that there was no impairment on this trust preferred stock for the periods ended June 30, 2012 or June 30, 2011. The investment in the stock of the correspondent banks totaled $210,000 as of June 30, 2012 and December 31, 2011. As a member of the Federal Home Loan Bank of New York (FHLB), the Company is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements. This stock is restricted in that it can only be sold to the FHLB or to another member institution and all sales of FHLB stock must be at par value. As a result of these restrictions, FHLB stock is unlike the Company’s other investment securities insofar as there is no trading market for FHLB stock and the transfer price is determined by FHLB membership rules, not by market participants. As of June 30, 2012 and December 31, 2011, our FHLB stock totaled $949,000 and $1,210,000, 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 its value is determined based on the ultimate recoverability of the par value. The Company evaluates impairment quarterly. The decision of whether impairment exists is a matter of judgment that reflects our view of the FHLB’s long-term performance, which includes factors such as:

·its operating performance;
·the severity and duration of declines in the fair value of its net assets related to its capital stock amount;
·its commitment to make payments required by law or regulation and the level of such payments in relation to its operating performance;
·the impact of legislative and regulatory changes on the FHLB, and accordingly, on the members of FHLB; and

 

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·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 during the three or six months ended June 30, 2012 or 2011. 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 2011 Annual Report on Form 10-K.

 

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

 

Net Periodic Benefit Cost (Benefit)  Pension benefit   Postretirement benefit 
For the three months ended June 30,  2012   2011   2012   2011 
Net periodic benefit cost:                    
Service cost  $82   $86   $11   $13 
Interest cost   138    141    17    24 
Expected return on plan assets   (156)   (151)        
Amortization of prior service cost           (39)   (39)
Recognized net actuarial loss   59    35   (1)    
Net amount recognized  $123   $111   $(12)  $(2)

 

Net Periodic Benefit Cost (Benefit)  Pension benefit   Postretirement benefit 
For the six months ended June 30,  2012   2011   2012   2011 
Net periodic benefit cost:                    
Service cost  $164   $172   $22   $26 
Interest cost   276    282    34    48 
Expected return on plan assets   (312)   (302)        
Amortization of prior service cost           (78)   (78)
Recognized net actuarial loss   118    70    (2)    
Net amount recognized  $246   $222   $(24)  $(4)

 

The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2011, that it expected to contribute $852,000 to its pension plan and $92,000 to its other postretirement benefits plan in 2012. As of June 30, 2012, a contribution of $852,000 was made to the pension plan and $44,000 of contributions had been made to the other postretirement benefits plan. It is expected that the Company will make the full $92,000 contribution this year to the other postretirement benefits plan. No further contributions to the pension plan are expected this year.

 

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 $557,000 and $693,000 at June 30, 2012 and December 31, 2011, respectively, and represent the maximum potential future payments the Company could be required to make. Typically, these instruments have terms of twelve months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on-balance-sheet instruments. Company policies governing loan collateral apply to standby letters of credit at the time of credit extension. Loan-to-value ratios are generally consistent with loan-to-value requirements for other commercial loans secured by similar types of collateral. The fair value of the Company’s standby letters of credit at June 30, 2012 and December 31, 2011 was not significant.

 

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).

 

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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 June 30, 2012 and December 31, 2011, 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 
June 30, 2012:                    
Recurring:                    
Available for sale securities                    
Government sponsored enterprises (“GSE”) (a)  $3,464   $   $3,464   $ 
Obligations of state and political subdivisions – New York state (a)   69,920        69,920     
Mortgage backed securities and collateralized mortgage obligations – GSE residential (a)   29,052        29,052     
Corporate debt – financial services industry   11,137        11,137     
Certificates of deposit – financial services industry   98    98         
Equity securities – financial services industry   645    645         
   $114,316   $743   $113,573   $ 
Non-recurring:                    
Foreclosed real estate  $74   $   $   $74 
Impaired loans   915            915 
   $989   $   $   $989 
December 31, 2011:                    
Recurring:                    
Available for sale securities                    
Government sponsored enterprises (“GSE”) (a)  $2,261   $   $2,261   $ 
Obligations of state and political subdivisions – New York state (a)   68,447        68,447     
Mortgage backed securities and collateralized mortgage obligations – GSE residential (a)   28,635        28,635     
Corporate debt – financial services industry   7,529        7,529     
Certificates of deposit – financial services industry   98    98         
Equity securities – financial services industry   458    458         
   $107,428   $556   $106,872   $ 
Non-recurring:                    
Foreclosed real estate  $831   $   $   $831 
Impaired loans   1,477            1,477 
   $2,308   $   $   $2,308 

 

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(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 June 30, 2012 and December 31, 2011:

 

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 nine months, the loan is transferred out of impaired status. As of June 30, 2012 and December 31, 2011, the fair values of collateral-dependent impaired loans were calculated using an outstanding balance of $1,302,000 and $1,805,000, less a valuation allowance of $387,000 and $328,000, 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.

 

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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 June 30, 2012 and December 31, 2011, the fair values of these financial instruments approximated the related carrying values which were not significant.

 

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis for which the Company has computed fair value based on Level 3 values:

 

    Fair value     Valuation     Unobservable        
Nonrecurring Assets   estimate     techniques     input     Range  
Foreclosed real estate   $ 74        Appraisal of collateral (a)      Appraisal adjustments (b)   0% to -10%  
                  Liquidation expenses (b)   0% to -20%  
Impaired loans   $ 915     Appraisal of collateral (a)   Appraisal adjustments (b)   0% to -10%  
                  Liquidation expenses (b)   0% to -20%  

 

Note a: Fair value is generally determined through independent appraisals of the underlying collateral, which generally includes various level 3 inputs which are not identifiable.

 

Note b: Appraisals may be adjusted by management for qualitative factors such as economic conditions and desired turn-over rate. Liquidation expenses are determined on an asset by asset basis and include expenses such as realtor fees, legal fees, transfer tax and other costs.

 

The following is a summary of the net carrying amounts and estimated fair values of the Company’s financial assets and liabilities (none of which were held for trading purposes) at June 30, 2012 and December 31, 2011 (in thousands):

 

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   June 30, 2012   December 31, 2011 
   Net carrying   Estimated   Net carrying   Estimated 
Financial Assets and Liabilities (in thousands)  amount   fair value   amount   fair value 
Financial assets:                    
Cash and cash equivalents  $37,773   $37,773   $11,776   $11,776 
Securities available for sale   114,316    114,316    107,428    107,428 
Securities held to maturity   4,471    4,808    6,613    6,989 
Loans, net   262,520    262,904    271,926    270,801 
Accrued interest receivable   1,746    1,746    1,797    1,797 
Restricted investments   2,159    2,159    2,420    2,420 
Financial liabilities:                    
Savings, money market and checking accounts   236,243    236,243    209,314    209,314 
Time deposits   146,841    147,296    150,395    150,922 
Accrued interest payable   160    160    210    210 
Federal Home Loan Bank borrowings   10,000    10,304    15,000    15,489 
                     
Off balance sheet financial instruments:                    
Lending commitments                
Letters of credit                

 

The following table presents financial assets and financial liabilities that were measured or disclosed at fair value on a recurring and nonrecurring basis by level within the fair value hierarchy as of June 30, 2012.

 

       (Level 1)         
       Quoted         
       Prices in   (Level 2)     
       Active   Significant   (Level 3) 
       Markets for   Other   Significant 
   Fair   Identical   Observable   Unobservable 
Financial Assets and Liabilities (in thousands)  Value   Assets   Inputs   Inputs 
Financial assets:                    
Cash and cash equivalents  $37,773   $37,773   $   $ 
Securities available for sale   114,316    743    113,473     
Securities held to maturity   4,808        4,808     
Loans, net   262,904            262,904 
Accrued interest receivable   1,746    1,746         
Restricted investments   2,159    2,159         
Financial liabilities:                    
Savings, money market and checking accounts   236,243    236,243         
Time deposits   147,296        147,296     
Accrued interest payable   160    160         
Federal Home Loan Bank borrowings   10,304        10,304     

 

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.

 

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A.                 Overview – Financial Condition

 

During the period from December 31, 2011 to June 30, 2012, total assets increased $18.0 million or 4.2%. The increase was primarily due to a net $26.0 million increase in cash and cash equivalents to $37.8 million and a $6.9 million or 6.4% increase to $114.3 million in available for sale securities partially offset by a $9.4 million or 3.5% decrease in net loans to $262.5 million at June 30, 2012 and a $2.1 million or 32.4% decrease in securities held to maturity. The net increase in total assets was funded by deposit growth.

 

Total deposits increased $23.4 million or 6.5% to $383.1 million at June 30, 2012. NOW and super NOW accounts increased $5.9 million or 13.0% to $51.6 million, and savings and insured money market deposits increased $10.2 million or 9.9% to $112.3 million all due to the Bank’s enhanced sales initiative and the continued shift of customer money to safer investments. Core non-interest bearing deposits increased $10.9 million or 17.7% to $72.3 million at June 30, 2012. In addition, depositors have increasingly brought deposits to the Bank, due to a lack of other investment opportunities and economic uncertainty. Time deposits decreased $3.6 million or 2.4% to $146.8 million at June 30, 2012 as high yielding deposits were not replaced. Long-term borrowings consisting of loans from the Federal Home Loan Bank were repaid in the amount of $5.0 million and not replaced.

 

Total stockholders’ equity increased $928,000 or 1.9% from $49.4 million at December 31, 2011 to $50.3 million at June 30, 2012. This increase was the result of net income of $2,180,000 plus a decrease of $152,000 in accumulated other comprehensive income, partially offset by the payment of cash dividends of $1,100,000.

 

Loans

 

Various statistics follow as of and for the periods ended June 30, 2012 and 2011 and as of and for the year ended December 31, 2011:

 

   June 30,   June 30,   December 31, 
   2012   2011   2011 
Annualized net charge-offs as a percentage of average outstanding loans   0.45%   0.59%   0.66%
Allowance for loan losses to:               
Total loans   1.93%   1.64%   1.70%
Total non-performing loans   49.9%   40.8%   46.1%

 

The allowance for loan losses was $5.2 million at June 30, 2012, $4.5 million at June 30, 2011 and $4.7 million at December 31, 2011. Total nonperforming loans were $10.3 million at June 30, 2012 and $10.2 million at December 31, 2011, an increase of $92,000. Net loan charge-offs decreased to $608,000 for the six months ended June 30, 2012 from $821,000 in the same period of 2011, and gross charge-offs decreased to $676,000 in 2012 from $890,000 in 2011. The provision for loan losses was $1,050,000 and $1,000,000 for the six months ended June 30, 2012 and June 30, 2011, respectively. The allowance’s coverage on nonperforming loans was 49.9% at June 30, 2012, 46.1% at December 31, 2011 and 40.8% at June 30, 2011. The increase in the allowance for loan losses reflects the increased average historical rolling loss due to the timing of historical charge-offs, which factors into the allowance calculations. The Bank’s loans remain well collateralized, and 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.

 

B.                    Capital

Under the Federal Reserve’s risk-based capital rules at June 30, 2012, the Bank’s Tier I risk-based capital was 17.2 % and total risk-based capital was 18.5% of risk-weighted assets. These risk-based capital ratios are well above the minimum regulatory requirements of 4.0% for Tier I capital and 8.0% for total risk-based capital. The Bank’s leverage ratio (Tier I capital to average assets) of 10.7% 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).

 

   June 30,   December 31, 
   2012   2011 
Tier I Capital          
Banks’ equity, excluding the after-tax net of accumulated other comprehensive income  $47,627   $46,476 
Tier II Capital          
Allowance for loan losses (1)  $3,481   $3,557 
Total risk-based capital  $51,108   $50,033 
Risk-weighted assets (2)  $276,829   $283,369 
Average assets  $446,943   $434,113 
Ratios          
Tier I risk-based capital (minimum 4.0%)   17.2%   16.4%
Total risk-based capital (minimum 8.0%)   18.5%   17.7%
Leverage (minimum 4.0%)   10.7%   10.7%

 

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.

 

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DISTRIBUTION OF ASSETS, LIABILITIES & STOCKHOLDERS’ EQUITY:

INTEREST RATES & INTEREST DIFFERENTIAL

 

The following schedule presents the condensed average consolidated balance sheets for quarters ended June 30, 2012 and 2011. 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 June 30,  2012   2011 
      Interest   Average      Interest   Average 
   Average   Earned   yield/   Average   Earned   yield/ 
   balance   paid   rate   balance   paid   rate 
ASSETS                              
Interest bearing deposits  $22,872   $15    0.25%  $13,048   $8    0.25%
Securities available for sale and held to maturity: (1)                              
Taxable securities   42,775    381    3.56    45,683    424    3.71 
Tax-exempt securities (2)   76,152    1,007    5.29    69,062    943    5.46 
Total securities   118,927    1,388    4.67    114,745    1,367    4.77 
Short-term investments   50        0.02    46        0.01 
Loans                              
Real estate mortgages   196,877    3,003    6.10    198,564    3,059    6.16 
Home equity loans   29,812    411    5.51    31,031    444    5.72 
Time and demand loans   24,995    306    4.90    27,883    320    4.59 
Installment and other loans   17,200    361    8.40    19,257    403    8.37 
Total loans (3)   268,884    4,081    6.07    276,735    4,226    6.11 
Total interest earning assets   410,733    5,484    5.34    404,574    5,601    5.54 
Other non-interest bearing assets   39,827              38,594           
Total assets  $450,560             $443,168           
                               
LIABILITIES AND STOCKHOLDERS’ EQUITY                              
NOW and Super NOW deposits  $51,469    12    0.09%  $42,282   $26    0.25%
Savings and insured money market deposits   111,834    66    0.24    102,697    124    0.48 
Time deposits   149,032    373    1.00    161,595    541    1.34 
Total interest bearing deposits   312,335    451    0.58    306,574    691    0.90 
Federal funds purchased and other short-term debt   4        1.12    274        0.28 
Long-term debt   12,418    125    3.98    15,000    150    3.99 
Total interest bearing liabilities   324,757    576    0.71    321,848    841    1.05 
Demand deposits   67,263              66,203           
Other non-interest bearing liabilities   8,098              8,027           
Total liabilities   400,118              396,078           
Stockholders’ equity   50,442              47,090           
Total liabilities and stockholders’ equity  $450,560             $443,168           
Net interest bearing assets  $85,976             $82,726           
Net interest income – tax effected        4,908              4,760      
Less: Tax gross up on exempt securities        338              316      
Net interest income per statement of income       $4,570             $4,444      
Net interest spread             4.63%             4.49%
Net interest margin (4)             4.78%             4.71%

 

1Yields on securities available for sale are based on amortized cost.
2Tax exempt securities are affected using a 34% tax rate for fully tax exempt municipals and 24% for dividends.
3For 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.
4Computed by dividing tax effected net interest income by total interest earning assets.

 

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For the six months Ended June 30,  2012   2011 
      Interest   Average      Interest   Average 
   Average   Earned   yield/   Average   Earned   yield/ 
   balance   paid   rate   balance   paid   rate 
ASSETS                              
Interest bearing deposits  $20,306   $23    0.25%  $12,035   $15    0.25%
Securities available for sale and held to maturity: (1)                              
Taxable securities   41,313    716    3.47    45,163    815    3.61 
Tax-exempt securities (2)   75,483    1,977    5.24    67,255    1,833    5.45 
Total securities   116,796    2,693    4.61    112,418    2,648    4.71 
Short-term investments   46        0.03    43        0.01 
Loans                              
Real estate mortgages   197,828    6,146    6.21    199,168    6,154    6.18 
Home equity loans   30,148    838    5.56    31,271    888    5.68 
Time and demand loans   25,504    626    4.91    28,866    648    4.49 
Installment and other loans   17,723    751    8.47    18,541    844    9.10 
Total loans (3)   271,203    8,361    6.17    277,846    8,534    6.14 
Total interest earning assets   408,351    11,077    5.43    402,342    11,197    5.57 
Other non-interest bearing assets   41,139              39,249           
Total assets  $449,490             $441,591           
                               
LIABILITIES AND STOCKHOLDERS’ EQUITY                              
NOW and Super NOW deposits  $55,045    25    0.09%  $43,812   $54    0.25%
Savings and insured money market deposits   107,879    133    0.25    100,607    244    0.49 
Time deposits   149,514    781    1.04    160,031    1,102    1.38 
Total interest bearing deposits   312,438    939    0.60    304,450    1,400    0.92 
Federal funds purchased and other short-term debt   10        1.12    767    1    0.30 
Long-term debt   13,709    275    3.99    15,000    299    3.99 
Total interest bearing liabilities   326,157    1,214    0.74    320,217    1,700    1.06 
Demand deposits   64,744              65,607           
Other non-interest bearing liabilities   8,203              7,371           
Total liabilities   399,104              393,195           
Stockholders’ equity   50,386              48,396           
Total liabilities and stockholders’ equity  $449,490             $441,591           
Net interest bearing assets  $82,194             $82,125           
Net interest income – tax effected        9,863              9,497      
Less: Tax gross up on exempt securities        667              617      
Net interest income per statement of income       $9,196             $8,880      
Net interest spread             4.69%             4.51%
Net interest margin (4)             4.83%             4.72%

 

1Yields on securities available for sale are based on amortized cost.
2Tax exempt securities are affected using a 34% tax rate for fully tax exempt municipals and 24% for dividends.
3For 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.
4Computed by dividing tax effected net interest income by total interest earning assets.

 

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VOLUME AND RATE ANALYSIS

 

The following schedule sets forth, for each major category of interest earning assets and interest bearing liabilities, the dollar amount of interest income (calculated on a tax equivalent basis) and interest expense, and changes therein for the three and six months ended June 30, 2012 as compared to 2011. The increase and decrease in interest income and expense due to both rate and volume have been allocated to the two categories of variances (volume and rate) based on percentage relationships of such variance to each other, with dollars in thousands.

 

   June 30, 2012 compared to 2011 
   increase (decrease) due to change in 
   Average   Average     
For the three months ended  Volume   Rate   Total 
             
Interest Income               
Interest bearing deposits  $7   $   $7 
Total securities (1)   50    (29)   21 
Loans   (156)   11    (145)
Total interest income   (99)   (18)   (117)
                
Interest Expense               
NOW and Super NOW deposits   6    (20)   (14)
Savings and insured money market deposits   11    (69)   (58)
Time deposits   (42)   (126)   (168)
Long-term debt   (26)   1    (25)
Total interest expense   (51)   (214)   (265)
Net interest income  $(48)  $196   $148 

 

   June 30, 2012 compared to 2011 
   increase (decrease) due to change in 
   Average   Average     
For the six months ended  Volume   Rate   Total 
Interest Income               
Interest bearing deposits  $8   $   $8 
Total securities (1)   103    (58)   45 
Loans   (255)   82    (173)
Total interest income   (144)   24    (120)
                
Interest Expense               
NOW and Super NOW deposits   14    (43)   (29)
Savings and insured money market deposits   18    (129)   (111)
Time deposits   (72)   (249)   (321)
Federal funds purchased and other short-term debt   (1)       (1)
Long-term debt   (26)   2    (24)
Total interest expense   (67)   (419)   (486)
Net interest income  $(77)  $443   $366 

 

1Fully taxable-equivalent basis.

 

The Company’s operating results are affected by inflation in the long term and government monetary policy in the short term to the extent that interest rates, loan demand and deposit levels adjust to inflation and Federal Reserve Bank policies, and impact net interest income. Management can best counter the effect of inflation over the long term by controlling expenses and government monetary policies in the short term by managing net interest income through asset and liability allocations.

 

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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, the repayment of borrowings as they mature, the ability to fund new and existing loan commitments, and the ability to take advantage of new business opportunities. The Company and its subsidiary achieve liquidity by maintaining a strong base of core customer funds, maturing short-term assets, the ability to sell securities, the availability of lines of credit, and access to capital markets.

 

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

 

The primary source of liquidity for the parent Company is dividends from the Bank. OCC regulations prohibit the Bank to pay a dividend without prior OCC approval if the total amount of all dividends declared during the calendar year, including the proposed dividend, exceeds the sum of its retained net income to date during the calendar year and its retained net income over the preceding two years. As of June 30, 2012, the Bank is permitted to pay a dividend without prior OCC approval.

 

For the six months ended June 30, 2012, cash used in operating activities amounted to $3.7 million, cash provided by financing activities was $17.3 million and cash provided by investing activities amounted to $5.0 million, resulting in a net increase in cash and cash equivalents of $26.0 million to $37.8 million at June 30, 2012. See the Consolidated Statements of Cash Flows for additional information.

The following table reflects the Maturities of Time Deposits of $100,000 or more for June 30, 2012 and December 31, 2011 and Federal Home Loan Bank (FHLB) borrowings for both periods, dollars in thousands:

 

   Maturity of Time Deposits     
   Of $100,000 or More   FHLB Borrowings 
As of  June 30, 2012   December 31, 2011   June 30, 2012   December 31, 2011 
Due three months or less  $21,880   $21,641   $   $ 
Over three months through six months   13,483    15,350        5,000 
Over six months through twelve months   8,249    12,360    5,000    5,000 
Over twelve months   18,311    13,983    5,000    5,000 
Total  $61,923   $63,334   $10,000   $15,000 

 

Management anticipates that most of these maturing deposits will be retained at maturity and that liquidity will be adequate to meet funding requirements.

 

C.Results of Operations

 

Comparison of the three month periods ending June 30, 2012 and 2011

 

Net income for the second three months of 2012 increased $70,000 or 7.2% to $1,045,000 from $975,000 for the same period in 2011. Net interest income after provision for loan losses increased $76,000 or 1.9% to $4,120,000. This increase is primarily due to a $240,000 decrease in interest expense on deposits partially offset by a $145,000 decrease in interest and fees on loans. Non-interest income decreased $22,000 and non-interest expenses decreased $79,000 resulting in an increase in income before income tax expense of $133,000. In income tax expense increased $63,000. The Company’s annualized return on average assets was 0.9% for both the three months ended June 30, 2012 and 2011. The annualized return on average stockholders’ equity was 8.3% for both the three months ended June 30, 2012 and 2011.

 

Total net interest income after provision for loan losses increased $76,000 or 1.9% to $4,120,000 for the quarter ended June 30, 2012 up from $4,044,000 from the same period in 2011, of which $240,000 was the result of a decrease in interest expense on deposits from $691,000 for the three months ended June 30, 2011 to $451,000 for the same period in 2012, partially offset by a $145,000 or 3.4% decrease in interest and fees on loans. The decrease in interest on deposits was attributable to higher yielding time deposits having been replaced at lower current market rates and lower yields on savings and insured money market deposits. Loan interest and fees decreased as loan repayments continue to outpace loan origination.

 

The provision for loan losses was $450,000 for the three months ended June 30, 2012, an increase of $50,000 over the same period in 2011. Management believes the provision to be adequate.

 

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Non-interest income decreased to $797,000 for the second three months of 2012 compared to $819,000 for the same period in 2011, a change of $22,000 or 2.7%. This decrease was primarily the result of a $30,000 decrease in service charges on deposit accounts. Non-interest expenses decreased $79,000 or 2.1% from $3,737,000 for the three month period in 2011 to $3,658,000 for the same period in 2012 primarily due to a $55,000 decrease in salaries and employee benefits and a $33,000 decrease in other non-interest expenses.

 

Income tax expense was $214,000 for the three month period ended June 30, 2012 compared to $151,000 for the corresponding period in 2011, an increase of $63,000. The Company’s effective tax rates were 17.0% and 13.4% for the three month periods ended June 30, 2012 and 2011, 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 2012 as compared to 2011.

 

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 balances, yields, and interest income and expense for the periods ended June 30, 2012 and 2011. Tax equivalent net interest spread increased 14 basis points to 4.63% at June 30, 2012 from 4.49% at June 30, 2011. Net interest margin increased 7 basis points, to 4.78% in the second quarter of 2012 from 4.71% in the same quarter of 2011. Tax equivalent net interest income increased $148,000 to $4,908,000 for the second three months of 2012 compared to $4,760,000 for the same period in 2011. The total average balance for net interest earning assets was $85,976,000 for the three month period ended June 30, 2012 compared to $82,726,000 for the same three month period in 2011, an increase of $3,250,000 or 3.9%. Average interest bearing earning assets increasing by $6,159,000 or 1.5% with a 20 basis point decrease in yield, which was partially offset by average interest liabilities increasing $2,909,000 or 0.9% with a 34 basis point decrease in yield for the three months ended June 30, 2012 versus the same period in 2011. The increase in average interest bearing liabilities was primarily due to average total deposits increasing $5,761,000 or 1.9% to $312,335,000 for the three months ended June 30, 2012 with a corresponding decrease in yield of 32 basis points. This increase was primarily in average savings and insured money market which increased $9,137,000 or 8.9% and average deposits NOW and Super NOW accounts which increased $9,187,000 or 21.7% from the three months ended June 30, 2011 to the same period in 2012. Partially offsetting these increases, average time deposits decreased $12,563,000 or 7.8% for the same periods. The increase in deposits was due in part to our continued sales initiative and deposit gains in our most recently open branches as they continue to gain momentum in their respective communities. The yields on all deposit products decreased as higher yielding deposits matured and were replaced with lower yielding products. Average interest earning assets increased primarily in deposits held in an interest bearing account at the Federal Reserve Bank [“FED”] by $9,824,000 or 75.3% and average tax-exempt securities of $7,090,000 or 10.3% with a 17 basis point decrease in yield. Partially offsetting these increases, average taxable securities decreased $2,908,000 or 6.4% with a decrease of 15 basis points in yield. As tax-exempt securities continue to provide better returns in this low yield environment, the Bank continues to shift investments to this market. Deposits held at the “FED” will be used for liquidity in the coming months to repay maturing Federal Home Loan Bank advances and to fund future loan growth as market conditions improve. Average total loans decreased $7,851,000 or 2.8% with a net decrease in yield of 4 basis points. Average loans decreased $2,057,000, $2,888,000, $1,219,000 and $1,687,000 in installment loans, time and demand loans, home equity loans and real estate mortgages respectively. Average loans decreased as demand was down and customers refinanced and paid down loans. The yields on time and demand loans increased 31 basis points while the yield on home equity loans decreased 21 basis points. The yield on home equity loans decreased in response to market pressure. The increase in yield on time and demand loans was due to increased use of higher yielding commercial lines of credit.

 

Comparison of the six month periods ending June 30, 2012 and 2011

 

Net income for the first six months of 2012 increased $501,000 or 29.8% to $2,180,000 from $1,679,000 for the same period in 2011. Net interest income after provision for loan losses increased $266,000 or 3.4% to $8,146,000. This increase is primarily due to a $461,000 decrease in interest expense on deposits. Non-interest income increased $69,000 and non-interest expenses decreased $359,000, resulting in an increase in income before income tax expense of $694,000. In addition income tax expense increased $193,000. The Company’s annualized return on average assets was 1.0% for the six months ended June 30, 2012, up from 0.8% for the same period last year. The annualized return on average stockholders’ equity was 8.7% for the six months ended June 30, 2012 and 6.9% for the same period in 2011.

 

Total net interest income after provision for loan losses increased $266,000 or 3.4% to $8,146,000 for the six months ended June 30, 2012, up from $7,880,000 from the same period in 2011, of which $461,000 was the result of a decrease in interest expense on deposits from $1,400,000 for the six months ended June 30, 2011 to $939,000 for the same period in 2012. This decrease was attributable to higher yielding time deposits having been replaced at lower current market rates and lower yields on savings and insured money market deposits. In addition, interest income on tax-exempt securities increased $94,000 or 7.7% to $1,310,000 for the six months ended June 30, 2012. Partially offsetting the increases, interest income on taxable investment securities decreased $99,000 or 12.1% to $716,000 and interest on loans decreased $173,000 or 2.0% to $8,361,000 for the six months ended June 30, 2012. The shift in interest income on taxable versus tax-exempt investment securities was due to slightly higher yields in the municipal market.

 

The provision for loan losses was $1,050,000 and $1,000,000 for the six months ended June 30, 2012 and 2011, respectively. Management believes the provision to be adequate.

 

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Non-interest income increased to $1,630,000 for the first six months of 2012 compared to $1,561,000 for the same period in 2011, a change of $69,000 or 4.4%. This increase was primarily the result of a $93,000 life insurance benefit and a $25,000 increase in net security gains. Partially offsetting these increases was a decrease of $46,000 or 6.2% in income on service charges. Non-interest expenses decreased $359,000 or 4.7% primarily due to a $229,000 decrease in other non-interest expense, a $98,000 decrease in occupancy and equipment expenses and a $70,000 decrease in salaries and employee benefits partially offset by a $38,000 increase in foreclosed real estate expense. The $98,000 decrease in occupancy and equipment expense was primarily due to the full year benefit from cost reduction programs, with savings of $24,000 in insurance, $28,000 in equipment expense, and $18,000 in utility costs. The $229,000 decrease in other non-interest expense was primarily due to a $130,000 decrease in pre-foreclosure costs and a $97,000 decrease in FDIC charges.

 

Income tax expense was $358,000 for the six month period ended June 30, 2012 compared to $165,000 for the corresponding period in 2011, an increase of $193,000. The Company’s effective tax rates were 14.1% and 8.9% for the six month periods ended June 30, 2012 and 2011, 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 2012 as compared to 2011.

 

Throughout the following discussion, net interest income and its components are expressed on a tax equivalent basis which means that, where appropriate, tax exempt income is shown as if it were earned on a fully taxable basis. The discussion is based on the comparison of the six month average balance and yields, and year to date interest income and expense for the periods ended June 30, 2012 and 2011. Tax equivalent net interest spread increased 18 basis points to 4.69% at June 30, 2012 from 4.51% at June 30, 2011. Net interest margin increased 11 basis points, to 4.83% in the first six months of 2012 from 4.72% in the same period of 2011. Tax equivalent net interest income increased $366,000 to $9,863,000 for the first six months of 2012 compared to $9,497,000 for the same period in 2011. The total average balance for net interest earning assets was $82,194,000 for the six month period ended June 30, 2012 compared to $82,125,000 for the same six month period in 2011, an increase of $69,000. Average interest earning assets increased by $6,009,000 or 1.5% with a 14 basis point decrease in yield, which was partially offset by average interest bearing liabilities which increased $5,940,000 or 1.9% with a 32 basis point decrease in yield for the six months ended June 30, 2012 versus the same period in 2011. Average interest earning assets increased primarily in deposits held in an interest bearing account at the Federal Reserve Bank [“FED”] by $8,271,000 or 68.7% and average tax-exempt securities of $8,228,000 or 12.2% with a 21 basis point decrease in yield. Partially offsetting these increases, average taxable securities decreased $3,850,000 or 8.5% with a decrease of 14 basis points in yield. As tax-exempt securities continue to provide better returns in this low yield environment, the Bank continues to shift investments to this market. Deposits held at the “FED” will be used for liquidity in the coming months to repay maturing Federal Home Loan Bank advances and to fund future loan growth as market conditions improve. Average total loans decreased $6,643,000 or 2.4% with a net increase in yield of 3 basis points. Average loans decreased $3,362,000, $1,123,000 and $1,340,000 in time and demand loans, home equity loans and real estate mortgages respectively all as a result of low demand. The yields on time and demand loans increased 42 basis points while the yield on home equity loans decreased 12 basis points and installment loans decreased 63 basis points. The yield on home equity loans decreased in response to market pressure. The increase in yield on time and demand loans was due to increased use of higher yielding commercial lines of credit. Installment loan rates increased due to product mix. The increase in average interest bearing liabilities was primarily due to average total deposits increasing $7,988,000 or 2.6% to $312,438,000 for the six months ended June 30, 2012 with a corresponding decrease in yield of 32 basis points. This increase was primarily in average NOW and Super NOW accounts which increased $11,233,000 or 25.6% and average savings and insured money market deposits which increased $7,272,000 or 7.2% from the six months ended June 30, 2011 to the same period in 2012. Partially offsetting this increase, average time deposits decreased $10,517,000 or 6.6% for the same periods. The increase in deposits was due in part to our continued sales initiative and deposit gains in our most recently open branches as they continue to gain momentum in their respective communities. The yields on all deposit products decreased as higher yielding deposits matured and were replaced with lower yielding products.

 

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 2B Management’s Discussion and Analysis/ 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 associated with the properties are charged to expense as incurred. Gains on the sale of foreclosed real estate are recorded when title has passed and the sale has met all the requirements prescribed by US GAAP.

 

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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).

 

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

 

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, 2011. 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 4T.           CONTROLS AND 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 June 30, 2012.

 

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.

 

31
 

 

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, 2011.

 

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

 

Not Applicable

 

ITEM 3.          DEFAULTS UPON SENIOR SECURITIES

 

Not Applicable

 

ITEM 4.          MINE SAFETY DISCLOSURE

 

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

 

32
 

 

SIGNATURES

 

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

 

  JEFFERSONVILLE BANCORP  
  (Registrant)  
     
  /s/ Wayne V. Zanetti  
  Wayne V. Zanetti  
President and Chief Executive Officer
     
  /s/ John A. Russell  
  John A. Russell  
Treasurer and Chief Financial Officer

 

August 14, 2012

 

33

 

PINX:JFBC Jeffersonville Bancorp NY Quarterly Report 10-Q Filling

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