Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004 Commission File Number: 0-19212
JEFFERSONVILLE BANCORP
(Exact name of Registrant as specified in its charter)
New York 22-2385448
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
P.O. Box 398, Jeffersonville, New York 12748
(Address of principal executive offices)
Registrant's telephone number, including area code: (845) 482-4000
Securities registered pursuant to Section
12(b) of the Act:
Title of each class Name of exchange on which registered
NONE NONE
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $0.50 Par Value
(Title of Class)
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 report(s), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [ X ]
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common
equity, as of the last business day of the Registrant's most recently
completed second fiscal quarter. $63,818,422
Indicate the number of shares outstanding in each of the issuer's classes of
common stock:
Number of Shares Outstanding
Class of Common Stock as of March 29, 2005
$0.50 Par Value 4,434,321
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held on April 26, 2005.
Jeffersonville Bancorp Index to Form 10-K
Part I Page
Item 1. Business 1
Item 2. Properties 5
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a
Vote of Security Holders 6
Part II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 7A. Quantitative & Qualitative Disclosures about Market Risk 24
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 25
Item 9A. Controls and Procedures 25
Item 9B. Other Information 25
Part III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial
Owners and Management 26
Item 13. Certain Relationships and Related Transactions 26
Item 14. Principal Accountant and Fees and Services 26
Part IV
Item 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 27
Signatures 28
Part I
Item 1. Business
GENERAL
Jeffersonville Bancorp (the "Company") was organized as a New York
corporation on January 12, 1982, for the purpose of becoming a registered
bank holding company under the Bank Holding Company Act of 1956, as amended
(the "BHC Act"). Effective June 30, 1982, the Company became the registered
bank holding company for The First National Bank of Jeffersonville, a bank
chartered in 1913 and organized under the national banking laws of the United
States (the "Bank"). The Company is engaged in the business of managing or
controlling its subsidiary bank and such other business related to banking as
may be authorized under the BHC Act.
At December 31, 2004 and 2003, the Company had total assets of $363.9
million and $352.2 million, securities available for sale of $100.7 million
and $115.6 million, securities held to maturity of $6.0 million and $5.9
million and net loans receivable of $220.6 million and $193.1 million,
respectively. At December 31, 2004 and 2003, total deposits were $293.1
million and $280.2 million, respectively. At December 31, 2004 and 2003,
stockholders' equity was $39.6 million and $35.8 million, respectively.
The Bank is based in Sullivan County, New York. In addition to its main
office and operations center in Jeffersonville, the Bank has nine additional
branch office locations in Eldred, Liberty, Loch Sheldrake, Monticello,
Livingston Manor, Narrowsburg, Callicoon, Wurtsboro and one in a Wal*Mart
store in Monticello. The Bank is a full service banking institution employing
approximately 126 people and serving all of Sullivan County, New York as well
as some areas of adjacent counties in New York and Pennsylvania.
NARRATIVE DESCRIPTION OF BUSINESS
Through its community bank subsidiary, The First National Bank of
Jeffersonville, the Company provides traditional banking related services,
which constitute the Company's only business segment. Banking services
consist primarily of attracting deposits from the areas served by its banking
offices and using those deposits to originate a variety of commercial,
consumer, and real estate loans. The Company's primary sources of liquidity
are its deposit base; Federal Home Loan Bank ("FHLB") borrowings; repayments
and maturities on loans; short-term assets such as federal funds and
short-term interest bearing deposits in banks; and maturities and sales of
securities available for sale.
The Bank has one subsidiary, FNBJ Holding Corporation, which is a Real
Estate Investment Trust (REIT) and is wholly-owned by the Bank.
The Company's filings with the Securities and Exchange Commission,
including this Annual Report on Form 10-K, are available on the Company's
website, www.jeffbank.com or upon request submitted to Charles E. Burnett,
P.O. Box 398, Jeffersonville, New York 12748.
DEPOSIT AND LOAN PRODUCTS
Deposit Products. The Bank offers a variety of deposit products typical
of commercial banks and has designed product offerings responsive to the
needs of both individuals and businesses. Traditional demand deposit
accounts, interest-bearing transaction accounts (NOW accounts) and savings
accounts are offered on a competitive basis to meet customers' basic banking
needs. Money market accounts, time deposits in the form of certificates of
deposit and IRA/KEOGH accounts provide customers with price competitive and
flexible investment alternatives. The Bank does not have a single depositor
or a small group of related depositors whose loss would have a material
adverse effect upon the business of the Bank. See item 7, Distribution of
Assets, Liabilities & Stockholders' Equity for average balances of deposit
products at December 31, 2004, 2003 and 2002.
Loan Products. The Company originates residential and commercial real
estate loans, as well as commercial, consumer and agricultural loans, to
borrowers in Sullivan County, New York designed to meet the banking needs of
individual customers, businesses and municipalities. 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. Periodically, the Company purchases
loans from other financial institutions that are in markets outside of
Sullivan County.
Please see item 7, Results of Operations 2004 versus 2003 for a
description of the loan portfolio and recent loan loss experience. Additional
information is set forth below relating to the Bank's loan products,
including major loan categories, general loan terms, credit underwriting
criteria, and risks particular to each category of loans. The Bank does not
have a major loan concentration in any individual industry.
Commercial Loans and Commercial Real Estate Loans. The Bank offers a
variety of commercial credit products and services to its customers. These
include secured and unsecured loan products specifically tailored to the
credit needs of the customers, underwritten with terms and conditions
reflective
1
of risk profile objectives and corporate earnings requirements. These
products are offered at all branch locations. All loans are governed by a
commercial loan policy which was developed to provide a clear framework for
determining acceptable levels of credit risk, underwriting criteria,
monitoring existing credits, and managing problem credit relationships.
Credit risk control mechanisms have been established and are monitored
closely for compliance by the internal auditor and an external loan review
company.
Risks particular to commercial loans include borrowers' capacities to
perform according to contractual terms of loan agreements during periods of
unfavorable economic conditions and changing competitive environments.
Management expertise and competency are critical factors affecting the
customers' performance and ultimate ability to repay their debt obligations.
Commercial real estate loans are exposed to fluctuations in collateral value.
Consumer Loans. The Bank also offers a variety of consumer loan products.
These products include both open-end credit (credit cards, home equity lines
of credit, unsecured revolving lines of credit) and closed-end credit secured
and unsecured direct and indirect installment loans. Most of these loans are
originated at the branch level. This delivery mechanism is supported by an
automated loan platform delivery system and a decentralized underwriting
process. The lending process is designed to ensure not only the efficient
delivery of credit products, but also compliance with applicable consumer
regulations while minimizing credit risk exposure.
Credit decisions are made under the guidance of a standard consumer loan
policy, with the assistance of senior credit managers. The loan policy was
developed to provide definitive guidance encompassing credit underwriting,
monitoring and management. The quality and condition of the consumer loan
portfolio, as well as compliance with established standards, is also
monitored closely.
A borrower's ability to repay consumer debt is generally dependent upon
the stability of the income stream necessary to service the debt. Adverse
changes in economic conditions resulting in higher levels of unemployment
increase the risk of consumer defaults. Risk of default is also impacted by a
customer's total debt obligation. While the Bank can analyze a borrower's
capacity to repay at the time a credit decision is made, subsequent
extensions of credit by other financial institutions may cause the customer
to become over-extended, thereby increasing the risk of default.
Residential Real Estate Loans. The Company originates a variety of
mortgage loan products including balloon mortgages, adjustable rate mortgages
and fixed rate mortgages. All mortgage loans originated are held in the
Bank's portfolio. Residential real estate loans possess risk characteristics
much the same as consumer loans. Stability of the borrower's employment is a
critical factor in determining the likelihood of repayment. Mortgage loans
are also subject to the risk that the value of the underlying collateral will
decline due to economic conditions or other factors.
SUPERVISION AND REGULATION
The Company is a bank holding company, registered with the Board of Governors
of the Federal Reserve System ("Federal Reserve") under the Bank Holding
Company Act ("BHC Act"). As such, the Federal Reserve is the Company's
primary federal regulator, and the Company is subject to extensive
regulation, examination, and supervision by the Federal Reserve. The Bank is
a national association, chartered by the Office of the Comptroller of the
Currency ("OCC"). The OCC is the Bank's primary federal regulator, and the
Bank is subject to extensive regulation, examination, and supervision by the
OCC. In addition, as to certain matters, the Bank is subject to regulation by
the Federal Reserve and the Federal Deposit Insurance Corporation ("FDIC").
The Company is subject to capital adequacy guidelines of the Federal
Reserve. The guidelines apply on a consolidated basis and require bank
holding companies having the highest regulatory ratings for safety and
soundness to maintain a minimum ratio of Tier 1 capital to total average
assets (or "leverage ratio") of 3%. All other bank holding companies are
required to maintain an additional capital cushion of 100 to 200 basis
points. The Federal Reserve capital adequacy guidelines also require bank
holding companies to maintain a minimum ratio of Tier 1 capital to
risk-weighted assets of 4% and a minimum ratio of qualifying total capital to
risk-weighted assets of 8%. As of December 31, 2004, the Company's leverage
ratio was 10.9%, its ratio of Tier 1 capital to risk-weighted assets was
16.9%, and its ratio of qualifying total capital to risk-weighted assets was
18.2%. The Federal Reserve may set higher minimum capital requirements for
bank holding companies whose circumstances warrant it, such as companies
anticipating significant growth or facing unusual risks. The Federal Reserve
has not advised the Company of any special capital requirement applicable to
it.
Any bank holding company whose capital does not meet the minimum capital
adequacy guidelines is considered to be undercapitalized and is required to
submit an acceptable plan to the Federal Reserve for achieving capital
adequacy. Such a company's ability to pay dividends to its stockholders could
be restricted. In addition, the Federal Reserve has indicated that it will
consider a bank holding company's capital ratios and other indications of its
capital strength in evaluating any proposal to expand its banking or
nonbanking activities.
The Bank is subject to leverage and risk-based capital requirements and
minimum capital guidelines of the OCC that are similar to those applicable to
the Company. As of December 31, 2004, the Bank was in compliance with all
minimum capital requirements. The Bank's leverage ratio was 10.2%, its ratio
2
of Tier 1 capital to risk-weighted assets was 16.0%, and its ratio of
qualifying total capital to risk-weighted assets was 17.3%.
Any bank that is less than well-capitalized is subject to certain
mandatory prompt corrective actions by its primary federal regulatory agency,
as well as other discretionary actions, to resolve its capital deficiencies.
The severity of the actions required to be taken increases as the bank's
capital position deteriorates. A bank holding company must guarantee that a
subsidiary bank will meet its capital restoration plan, up to an amount equal
to 5% of the subsidiary bank's assets or the amount required to meet
regulatory capital requirements, whichever is less. In addition, under
Federal Reserve policy, a bank holding company is expected to serve as a
source of financial strength, and to commit financial resources to support
its subsidiary banks. Any capital loans made by a bank holding company to a
subsidiary bank are subordinate to the claims of depositors in the bank and
to certain other indebtedness of the subsidiary bank. In the event of the
bankruptcy of a bank holding company, any commitment by the bank holding
company to a federal banking regulatory agency to maintain the capital of a
subsidiary bank would be assumed by the bankruptcy trustee and would be
entitled to priority of payment.
The Bank also is subject to substantial regulatory restrictions on its
ability to pay dividends to the Company. Under OCC regulations, the Bank may
not 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 December 31,
2004, approximately $13.3 million was available for the payment of dividends
without prior OCC approval. The Bank's ability to pay dividends also is
subject to the Bank being in compliance with the regulatory capital
requirements described above. The Bank is currently in compliance with these
requirements.
The deposits of the Bank are insured up to regulatory limits by the FDIC
and, accordingly, are subject to deposit insurance assessments to maintain
the insurance funds administered by the FDIC. The deposits of the Bank
historically have been subject to deposit insurance assessments to maintain
the Bank Insurance Fund ("BIF"). The FDIC has adopted regulations
establishing a permanent risk-related deposit insurance assessment system.
Under this system, the FDIC places each insured bank in one of three
capitalization categories and one of three supervisory categories, based on
evaluations provided by the institution's primary federal regulator. Each
insured bank's insurance assessment rate is determined by its combined risk
rating. Since January 1, 1997, the annual insurance premiums on bank deposits
insured by the BIF have varied between $0.00 per $100 of deposits for banks
classified in the highest capital and supervisory evaluation categories to
$0.27 per $100 of deposits for banks classified in the lowest categories. BIF
assessment rates are subject to semi-annual adjustment by the FDIC within a
range of five basis points without public comment. The FDIC also possesses
authority to impose special assessments from time to time.
The Federal Deposit Insurance Act provides for additional assessments to
be imposed on insured depository institutions to pay for the cost of
Financing Corporation ("FICO") funding. The FICO assessments are adjusted
quarterly to reflect changes in the assessment bases of the FDIC insurance
funds and do not vary depending upon a depository institution's
capitalization or supervisory evaluation. During 2004, FDIC-insured banks
paid an average rate of approximately $0.017 per $100 for purposes of funding
FICO bond obligations. The assessment rate has been retained at this rate for
the first and second quarters of 2005.
Transactions between the Bank and any affiliate, which includes the
Company, are governed by sections 23A and 23B of the Federal Reserve Act
which are implemented in Federal Reserve Regulation W. Generally, Regulation
W is intended to protect insured depository institutions from suffering
losses arising from transactions with non-insured affiliates by limiting the
extent to which a bank or its subsidiaries may engage in covered transactions
with any one affiliate and with all affiliates of the bank in the aggregate,
and requiring that such transactions be on terms that are consistent with
safe and sound banking practices. Regulation W also addresses new issues
arising as a result of the expanded scope of nonbanking activities engaged in
by banks and bank holding companies in recent years and authorized for
financial holding companies under the Gramm-Leach-Bliley Act ("GLB Act").
Under the GLB Act, all financial institutions, including the Company and
the Bank, are required to adopt privacy policies to restrict the sharing of
nonpublic customer data with nonaffiliated parties at the customer's request,
and establish procedures and practices to protect customer data from
unauthorized access. The Company has developed such policies and procedures
for itself and the Bank, and believes it is in compliance with all privacy
provisions of the GLB Act. On December 4, 2003, the Fair and Accurate Credit
Transactions Act of 2003 ("FACT Act") was signed into law. The FACT Act
includes many provisions concerning national credit reporting standards, and
permits consumers, including customers of the Company and the Bank, to opt
out of information sharing among affiliated companies for marketing purposes.
The FACT Act also requires banks and other financial institutions to notify
their customers if they report negative information about them to a credit
bureau or if they are granted credit on terms less favorable than those
generally available. The Federal Reserve and the Federal Trade Commission are
granted extensive rulemaking authority under the FACT Act, and the Company
and the Bank will be subject to those provisions after they are adopted.
Under Title III of the USA PATRIOT Act, also known as the International
Money Laundering Abatement and Anti-Terrorism Financing Act of 2001, all
financial institutions,
3
including the Company and the Bank, are required to take certain measures
to identify their customers, prevent money laundering, monitor certain
customer transactions and report suspicious activity to U.S. law enforcement
agencies, and scrutinize or prohibit altogether certain transactions of
special concern. Financial institutions also are required to respond to
requests for information from federal banking regulatory agencies and law
enforcement agencies concerning their customers and their transactions.
Information-sharing among financial institutions concerning terrorist or
money laundering activities is encouraged by an exemption provided from the
privacy provisions of the GLB Act and other laws. Financial institutions that
hold correspondent accounts for foreign banks or provide private banking
services to foreign individuals are required to take measures to avoid
dealing with certain foreign individuals or entities, including foreign banks
with profiles that raise money laundering concerns, and are prohibited
altogether from dealing with foreign "shell banks" and persons from
jurisdictions of particular concern. The federal banking regulators and the
Secretary of the Treasury have adopted regulations to implement several of
these provisions. All financial institutions also are required to adopt
internal anti-money laundering programs. The effectiveness of a financial
institution in combating money laundering activities is a factor to be
considered in any application submitted by the financial institution under
the Bank Merger Act, which applies to the Bank, or the BHC Act, which applies
to the Company. The Company and the Bank have in place a Bank Secrecy Act and
USA PATRIOT Act compliance program, and they engage in very few transactions
of any kind with foreign financial institutions or foreign persons.
The Sarbanes-Oxley Act ("SOA"), signed into law on July 30, 2002, was
intended to increase corporate responsibility, enhance penalties for
accounting and auditing improprieties at publicly traded companies, and
protects investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws. SOA applies generally to all
companies that file or are required to file periodic reports with the SEC
under the Securities Exchange Act of 1934 ("Exchange Act"), including the
Company. SOA includes very specific disclosure requirements and corporate
governance rules and requires the SEC and securities exchanges to adopt
extensive additional disclosure, corporate governance, and other related
rules. SOA represents significant federal involvement in matters
traditionally left to state regulatory systems, such as the regulation of the
accounting profession, and to state corporate law, such as the relationship
between a board of directors and management and between a board of directors
and its committees. The SEC has been delegated the task of enacting rules to
implement various provisions with respect to, among other matters, disclosure
in periodic filings pursuant to the Exchange Act. In addition, the federal
banking regulators have adopted generally similar requirements concerning the
certification of financial statements by bank officials.
TAXATION
Except for the Bank's REIT subsidiary, the Company files a calendar year
consolidated federal income tax return on behalf of itself and its
subsidiaries. The Company reports its income and deductions using the accrual
method of accounting. The components of income tax expense are as follows for
the years ended December 31:
2004 2003 2002
Current tax expenses:
Federal $2,115,000 $2,159,000 $2,068,000
State 325,000 327,000 339,000
Deferred tax benefit (223,000) (502,000) (184,000)
Total income tax expense $2,217,000 $1,984,000 $2,223,000
For a detailed discussion of income taxes please refer to note 9 in the
Notes to Consolidated Financial Statements.
MONETARY POLICY AND ECONOMIC CONDITIONS
The earnings of the Company and the Bank are affected by the policies of
regulatory authorities, including the Federal Reserve System. Federal Reserve
System monetary policies have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so
in the future. Because of the changing conditions in the national economy and
in the money markets, as a result of actions by monetary and fiscal
authorities, interest rates, credit availability and deposit levels may
change due to circumstances beyond the control of the Company and the Bank.
COMPETITION
The Bank faces strong competition for local business in the communities it
serves from other financial institutions. Throughout Sullivan County there
are 35 branches of commercial banks, savings banks, savings and loan
associations and other financial organizations.
With respect to most of the services that the Bank performs, there is
increasing competition from financial institutions other than commercial
banks due to the relaxation of regulatory restrictions. Money market funds
actively compete with banks for deposits. Savings banks, savings and
4
loan associations and credit institutions, as well as consumer finance
companies, insurance companies and pension trusts are important competitors.
The Bank's ability to maintain profitability is also affected by competition
for loans.
NUMBER OF PERSONNEL
At December 31, 2004, there were 126 persons employed by the Company and the
Bank.
Item 2. Properties
In addition to the main office of the Company and the Bank in Jeffersonville,
New York, the Bank has nine branch locations and an operations center. Set
forth below is a description of the offices of the Company and the Bank.
MAIN OFFICE
The main office of the Bank is located at 4864 State Route 52,
Jeffersonville, New York. The premises occupied by the Bank consists of
approximately 6,700 total square feet of office space in a two-story office
building. The Bank owns the building and underlying land.
ELDRED BRANCH
The Eldred Branch of the Bank is located at 561 Route 55, Eldred, New York.
The premises consists of approximately 2,016 total square feet of office
space in a 1-story office building. The Bank owns the building and underlying
land.
LIBERTY BRANCH
The Liberty Branch of the Bank is located at 19 Church Street, Liberty, New
York. The premises consists of approximately 4,320 total square feet of
office space in a two-story office building. The Company owns the building
and underlying land.
LIVINGSTON MANOR BRANCH
The Livingston Manor Branch of the Bank is located at 33 Main Street,
Livingston Manor, New York. The premises consists of approximately 2,325
total square feet of office space. The Company owns the building and
underlying land.
LOCH SHELDRAKE BRANCH
The Loch Sheldrake Branch of the Bank is located on 1278 State Route 52, Loch
Sheldrake, New York. The premises consists of approximately 1,440 total
square feet of office space. The Company owns the building and underlying
land.
MONTICELLO BRANCH
The Monticello Branch of the Bank is located at 19 Forestburgh Road,
Monticello, New York. The premises consists of approximately 2,500 square
feet of office space. The Company owns the building and underlying land.
OPERATIONS CENTER
The Operations Center is located on 4866 State Route 52, Jeffersonville, New
York. The premises consists of approximately 10,788 square feet in a
two-story office building. The Company owns the building and underlying land.
SUPERMARKET BRANCHES
The Bank leases space in Peck's Supermarkets in Narrowsburg and Callicoon and
the IGA in Wurtsboro, New York. The branch facilities occupy between 650 and
1,000 square feet each and the lease payments range from approximately
$13,100 to $42,000 per year. The Bank leases space in Wal*Mart in Monticello
occupying 643 square feet with lease payments of $2,650 monthly.
5
The major classifications of premises and equipment and the book value
thereof were as follows at December 31, 2004:
2004
Land $ 387,000
Buildings 2,790,000
Furniture and fixtures 116,000
Equipment 2,739,000
Building and leasehold improvements 1,099,000
7,131,000
Less accumulated depreciation and amortization (4,262,000)
Total premises and equipment, net $ 2,869,000
Item 3. Legal Proceedings
The Company and the Bank are not parties to any material legal proceedings
other than ordinary routine litigation incidental to business to which the
Company or any of its subsidiaries is a party or of which and of their
property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
6
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's common stock is traded on the NASDAQ Small Cap Market under the
symbol JFBC. The following investment firms are known to handle
Jeffersonville Bancorp stock transactions: Knight Equity Markets L.P., UBS
Capital Markets L.P., Ryan Beck & Co. Inc., National Stock Exchange, The
Archipelago Exchange and Hill, Thompson, Magid and Co. The following table
shows the range of high and low bid prices for the Company's stock and cash
dividends paid for the quarters indicated.
Market Price Cash
Dividends
Quarter Ended(1) Low High Paid
March 31, 2003 $15.34 $18.33 $0.073
June 30, 2003 $14.83 $21.50 $0.073
September 30, 2003 $17.00 $20.50 $0.080
December 31, 2003 $16.51 $19.01 $0.100
March 31, 2004 $17.00 $17.50 $0.090
June 30, 2004 $17.50 $17.61 $0.090
September 30, 2004 $17.00 $17.00 $0.090
December 31, 2004 $19.31 $19.31 $0.130
(1) Data has been restated for a 3 for 1 stock split in 2003.
Number of Holders of Record. At the close of business on March 17, 2005,
the Company had 1,277 stockholders of record of the 4,434,321 shares of
common stock then outstanding.
Securities Authorized for Issuance Under Equity Compensation Plan. The
Company has no equity compensation plans under which options may be issued.
Payment of Dividends. Applicable laws and regulations restrict the
ability of the Bank to pay dividends to the Company, and the ability of the
Company to pay dividends to stockholders. Payment of dividends in the future
will be at the sole discretion of the Company's board of directors and will
depend on a variety of factors deemed relevant by the board of directors,
including, but not limited to, earnings, capital requirements and financial
condition. See "Item 1. Business -- Supervision and Regulation."
7
Item 6. Selected Financial Data
FIVE-YEAR SUMMARY
2004 2003 2002 2001 2000
RESULTS OF OPERATIONS
Interest income $ 20,820,000 $ 20,082,000 $ 20,635,000 $ 20,230,000 $ 19,379,000
Interest expense 4,051,000 4,037,000 5,331,000 7,627,000 8,295,000
Net interest income 16,769,000 16,045,000 15,304,000 12,603,000 11,084,000
Provision for loan losses 360,000 620,000 900,000 300,000 300,000
Net income 6,171,000 5,732,000 5,242,000 3,625,000 2,823,000
FINANCIAL CONDITION
Total assets $363,867,000 $352,204,000 $325,025,000 $298,110,000 $273,464,000
Deposits 293,094,000 280,227,000 252,792,000 238,029,000 223,278,000
Gross loans 224,236,000 196,675,000 171,977,000 162,711,000 147,456,000
Stockholders' equity 39,646,000 35,786,000 32,497,000 27,313,000 25,109,000
AVERAGE BALANCES
Total assets $361,783,000 $340,575,000 $313,022,000 $286,823,000 $268,967,000
Deposits 291,426,000 268,687,000 247,953,000 234,431,000 218,671,000
Gross loans 211,846,000 183,335,000 165,607,000 157,165,000 143,954,000
Stockholders' equity 37,149,000 33,561,000 30,271,000 28,139,000 24,261,000
FINANCIAL RATIOS
Net income to average total assets 1.71% 1.68% 1.67% 1.26% 1.05%
Net income to average
stockholders' equity 16.61% 17.08% 17.32% 12.88% 11.64%
Average stockholders' equity
to average total assets 10.27% 9.85% 9.67% 9.81% 9.02%
SHARE AND PER SHARE DATA(1)
Basic earnings per share $ 1.39 $ 1.29 $ 1.18 $ 0.81 $ 0.62
Dividends per share $ 0.40 $ 0.33 $ 0.30 $ 0.25 $ 0.24
Dividend payout ratio 28.78% 25.28% 25.39% 30.40% 38.72%
Book value at year end $ 8.94 $ 8.07 $ 7.33 $ 6.16 $ 5.56
Total dividends paid $ 1,776,000 $ 1,449,000 $ 1,331,000 $ 1,102,000 $ 1,093,000
Average number of
shares outstanding 4,434,321 4,434,321 4,434,321 4,472,664 4,551,777
Shares outstanding at year end 4,434,321 4,434,321 4,434,321 4,434,321 4,512,255
(1) Share and per share data has been restated for a 3 for 1 stock split in
2003.
8
SUMMARY OF QUARTERLY RESULTS
OF OPERATIONS FOR 2004 AND 2003
2004 March 31 June 30 September 30 December 31 Total
Interest income $ 5,137,000 $ 5,109,000 $ 5,261,000 $ 5,313,000 $ 20,820,000
Interest expense (990,000) (975,000) (1,031,000) (1,055,000) (4,051,000)
Net interest income 4,147,000 4,134,000 4,230,000 4,258,000 16,769,000
Provision for loan losses (90,000) (90,000) (90,000) (90,000) (360,000)
Non-interest income 860,000 1,030,000 1,046,000 936,000 3,872,000
Non-interest expenses (2,784,000) (3,064,000) (3,110,000) (2,935,000) (11,893,000)
Income before taxes 2,133,000 2,010,000 2,076,000 2,169,000 8,388,000
Income taxes (573,000) (525,000) (544,000) (575,000) (2,217,000)
Net income $ 1,560,000 $ 1,485,000 $ 1,532,000 $ 1,594,000 $ 6,171,000
Basic earnings per share $ 0.35 $ 0.33 $ 0.35 $ 0.36 $ 1.39
2003 March 31 June 30 September 30 December 31 Total
Interest income $ 4,930,000 $ 4,933,000 $ 5,103,000 $ 5,116,000 $ 20,082,000
Interest expense (1,058,000) (1,023,000) (1,014,000) (942,000) (4,037,000)
Net interest income 3,872,000 3,910,000 4,089,000 4,174,000 16,045,000
Provision for loan losses (150,000) (110,000) (30,000) (330,000) (620,000)
Non-interest income 994,000 920,000 907,000 1,134,000 3,955,000
Non-interest expenses (2,689,000) (2,903,000) (2,875,000) (3,197,000) (11,664,000)
Income before taxes 2,027,000 1,817,000 2,091,000 1,781,000 7,716,000
Income taxes (601,000) (422,000) (545,000) (416,000) (1,984,000)
Net income $ 1,426,000 $ 1,395,000 $ 1,546,000 $ 1,365,000 $ 5,732,000
Basic earnings per share(1) $ 0.32 $ 0.31 $ 0.35 $ 0.31 $ 1.29
(1) Share and per share data has been restated for a 3 for 1 stock split in
2003.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following is a discussion of the factors which significantly affected the
consolidated results of operations and financial condition of Jeffersonville
Bancorp ("the Parent Company") and its wholly-owned subsidiary, The First
National Bank of Jeffersonville ("the Bank"). For purposes of this
discussion, references to the Company include both the Bank and Parent
Company, as the Bank is the Parent Company's only subsidiary. This discussion
should be read in conjunction with the consolidated financial statements and
notes thereto, and the other financial information appearing elsewhere in
this annual report.
This document contains forward-looking statements, which are based on
assumptions and describe future plans, strategies and expectations of the
Company. These forward-looking statements are generally identified by use of
the words "believe," "expect," "intend," "anticipate," "estimate," "project,"
or similar words. The Company's ability to predict results and the actual
effect of future plans or strategies is uncertain. Factors which could have a
material adverse effect on operations include, but are not limited to,
changes in interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and Federal Reserve
Board, the quality or composition of the loan or investment portfolios,
demand for loan products, deposit flows, competition, demand for financial
services in the Company's market areas and accounting principles and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements. Actual results could differ materially from
forward-looking statements.
GENERAL
The Parent Company is a bank holding company founded in 1982 and
headquartered in Jeffersonville, New York. The Parent Company owns 100% of
the outstanding shares of the Bank's common stock and derives substantially
all of its income from the Bank's operations in the form of dividends paid to
the Parent Company. The Bank is a New York commercial bank chartered in 1913
serving Sullivan County, New York with branch offices in Jeffersonville,
Eldred, Liberty, Loch Sheldrake,
9
Monticello (2), Livingston Manor, Narrowsburg, Callicoon and Wurtsboro. The
Bank's administrative offices are located in Jeffersonville, New York.
The Company's mission is to serve the community banking needs of its
borrowers and depositors, who predominantly are individuals, small businesses
and local municipal governments. The Company believes it understands its
local customer needs and provides quality service with a personal touch.
The financial results of the Company are influenced by economic events
that affect the communities we serve as well as national economic trends,
primarily interest rates, affecting the entire banking industry. Changes in
net interest income have the greatest impact on the Company's net income.
National economic policies have caused interest rates to begin a slow
rise in the Company's marketplace over the past six months. Despite this, the
Company's yields on interest earning assets and the costs of interest bearing
liabilities are not responding accordingly and fell in 2004. Locally, the
economy continued to exhibit strength in 2004. While the local economic
forecast has been bright, it should be acknowledged that the economy in most
other areas of New York State continues to be sluggish. Significant
improvement in the local economy continues to be demonstrated in the Sullivan
County real estate market. Several major projects continued to progress along
with a vibrant real estate market, which increase optimism in the county's
future. A permanent concert facility has begun construction on the original
site of the Woodstock Festival in Bethel this year. A major health care
facility employing 300 people opened in 2004. Monticello Raceway has opened a
video slots gaming center in the summer of 2004. Several Native American run
casinos are still on the horizon. The success of these projects, tourism,
real estate values and the availability of qualified labor is critical to the
local economy and the Company.
CRITICAL ACCOUNTING POLICIES
Management of the Company considers the accounting policy relating to the
allowance for loan losses to be a critical accounting policy given the
inherent uncertainty in evaluating the levels of the allowance required to
cover credit losses in the portfolio and the material effect that such
judgments can have on the results of operations. The allowance for loan
losses is maintained at a level deemed adequate by management based on an
evaluation of such factors as economic conditions in the Company's market
area, past loan loss experience, the financial condition of individual
borrowers, and underlying collateral values based on independent appraisals.
While management uses available information to recognize losses on loans,
future additions to the allowance for loan losses may be necessary based on
changes in economic conditions and values of real estate particularly in
Sullivan County. Collateral underlying certain real estate loans could lose
value which could lead to future additions to the allowance for loan losses.
In addition, Federal regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan
losses and may require the Company to recognize additions to the allowance
based on their judgments about information available to them at the time of
their examination, which may not be currently available to management.
FINANCIAL CONDITION
Total assets increased by $11.7 million or 3.3% to $363.9 million at December
31, 2004 from $352.2 million at December 31, 2003. The increase was primarily
due to a $27.5 million or 14.2% increase in net loans from $193.1 million at
December 31, 2003 to $220.6 million at December 31, 2004. A net decrease of
$14.9 million in the portfolio of securities available for sale for 2004, due
to maturities and calls, was the main funding source for new loan growth. The
overall assets increase was funded by a $12.9 million increase in total
deposits from $280.2 million at December 31, 2003 to $293.1 million at
December 31, 2004. Much of the securities portfolio remains funded with long
term borrowings from the Federal Home Loan Bank, a leveraging strategy
implemented since 1997 in which the Company funded security purchases with
FHLB borrowings at a positive interest rate spread.
In 2004, total gross loans increased $27.5 million or 14.0% from $196.7
million to $224.2 million. Within the loan portfolio, commercial real estate
loans increased $15.6 million to $75.4 million at December 31, 2004,
residential real estate increased by $5.0 million to $83.3 million, home
equity loans increased $2.9 million to $21.2 million, commercial loans
increased by $4.1 million while consumer installment loans decreased $1.3
million to $14.1 million. The growth in commercial real estate loans reflects
the Company's strategy to provide loans for local real estate projects where
there is strong loan to value ratio (taking into consideration possible
speculation regarding casino gambling proposals). The growth in residential
mortgages reflects new products to meet the highly competitive nature of this
market. As a result of casino gambling proposals and related local economic
improvement, the Company anticipates continued residential and commercial
real estate loan opportunities. Accordingly, additional growth is anticipated
in real estate loans during 2005. The growth in the non-real estate
commercial loan portfolio reflects continued business growth in the county.
The overall loan portfolio is structured in accordance with management's
belief that loans secured by residential and commercial real estate generally
result in lower loan loss levels compared to other types of loans, because of
the value of the underlying collateral. In the event that the casino gambling
proposals do not progress, collateral underlying certain real estate projects
could lose value.
There was no other real estate owned at December 31, 2004 as compared to
$43,000 at December 31, 2003. Total non-performing loans decreased from $3.1
million at
10
December 31, 2003 to $2.1 million at December 31, 2004. Net loan
charge-offs increased from $119,000 in 2003 to $284,000 in 2004. At December
31, 2004, the allowance for loan losses equaled $3.6 million representing
1.62% of total gross loans outstanding and 170.6% of total non-performing
loans.
Total deposits increased $12.9 million to $293.1 million at December 31,
2004 from $280.2 million at December 31, 2003. Within the deposit mix, lower
costing core deposits increased as did higher costing time deposits. Much of
the increase in deposits was caused by the continued growth of newer branches
and the attraction of new customers from larger regional banks. The Company
continues to be successful in increasing demand deposit balances, which
provides a pool of low cost funds for reinvestment opportunities. Demand
deposits increased from $59.2 million at December 31, 2003 to $65.2 million
at December 31, 2004, an increase of $6.0 million or 10.2%. Time deposits
increased from $102.0 million at December 31, 2003 to $104.2 million at
December 31, 2004, an increase of $2.2 million or 2.2%.
Total stockholders' equity was $39.6 million at December 31, 2004, an
increase of $3.8 million from December 31, 2003. The increase was due
primarily to net income of $6.2 million partially offset by cash dividends of
$1.8 million and a reduction in accumulated other comprehensive income of
$535,000.
RESULTS OF OPERATIONS 2004 VERSUS 2003
Net Income
Net income for 2004 of $6.2 million increased 7.7% or $439,000 from the 2003
net income of $5.7 million. The higher level of earnings in 2004 reflects the
interaction of a number of factors. The most significant factor which
increased 2004 net income was the increase in loan interest and fees of $1.2
million to $15.4 million from $14.2 million or 8.4%. The increase in interest
income on loans was partially offset by a decrease in interest income on
securities which went down from $5.8 million in 2003 to $5.4 million in 2004.
The provision for loan losses decreased 41.9% or $260,000 from $620,000 in
2003 to $360,000 in 2004. Salary and employee benefit expense increased
$356,000 or 5.4% primarily due to the addition of new employees, normal
salary increases and the increased costs of providing pension and health care
benefits. Occupancy and equipment expense decreased $394,000 or 17.9%,
primarily due to increase focus on reducing building and equipment
maintenance expenses.
Interest Income and Interest Expense
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 largest source of income for the Company is net interest income,
which represents interest earned on loans, securities and short-term
investments, less interest paid on deposits and other interest bearing
liabilities. Tax equivalent net interest income of $17.8 million for 2004
represented an increase of 4.7% compared to $17.0 million for 2003. Net
interest margin decreased to 5.40% in 2004 compared to 5.56% in 2003, due to
overall decreases in earning asset yields.
Total interest income for 2004 was $21.9 million, compared to $21.1
million in 2003. The increase in 2004 is the result of a 25 basis point
decrease in the earning asset yield which was offset by an increase in the
average balance of interest earning assets from $306.3 million in 2003 to
$329.7 million in 2004, an increase of 7.6%. Total average securities
(securities available for sale and securities held to maturity) decreased
$5.4 million or 4.4% in 2004 to $115.7 million. The yield on total securities
decreased to 5.5% in 2004 from 5.6% in 2003. The decrease in total average
securities during 2004 reflected the need to fund new loans. In 2004, average
loans increased $28.5 million to $211.8 million from $183.3 million in 2003.
Concurrently the average loan yield decreased from 7.76% in 2003 to 7.28% in
2004 due to a consistent decline in interest rates coupled with a significant
volume of refinanced mortgage loans. Average residential and commercial real
estate loans continued to make up a major portion of the loan portfolio at
72.3% of total loans in 2004. In 2005, any increases in funding will continue
to be allocated first to meet loan demand, as necessary, and then to the
securities portfolios.
Total interest expense in 2004 was consistent with 2003. The average
balance of interest bearing liabilities increased from $248.3 million in 2003
to $253.9 million in 2004, an increase of 2.2%. During 2004, the average cost
of total interest bearing liabilities decreased by 2 basis points.
Average interest bearing deposits increased $13.9 million to reach $227.6
million in 2004, an increase of 6.5%. Overall interest rates paid on all
deposit accounts only dropped one basis point from 2003 to 2004. Interest
rates on interest bearing deposits decreased from an average rate paid of
1.30% in 2003 to 1.27% in 2004. In 2004, average demand deposit balances
increased 16.1% over 2003.
Provision for Loan Losses
The provision for loan losses was $360,000 in 2004 as compared to $620,000 in
2003 as a result of improved asset quality. Provisions for loan losses are
recorded to maintain the allowance for loan losses at a level deemed adequate
by management based on an evaluation of such factors as economic conditions
in the Company's market area, past loan loss experience, the financial
condition of individual borrowers, and underlying collateral values based on
independent appraisals. The provision for loan losses was reduced in 2004 due
to the reduction in both non-performing loans and net charge-offs as noted
below. While management uses available information to recognize losses on
loans, future additions to the allowance for loan losses may be
11
necessary based on changes in economic conditions, particularly in Sullivan
County. In addition, Federal regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for
loan losses and may require the Company to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination, which may not be currently available to
management.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged-off against the allowance when
management believes that the collectibility of all or a portion of the
principal is unlikely. Recoveries of loans previously charged-off are
credited to the allowance when realized.
Total non-performing loans decreased from $3.1 million at December 31,
2003 to $2.1 million at December 31, 2004. Net loan charge-offs increased
from $119,000 in 2003 to $284,000 in 2004 while gross charge-offs decreased
from $488,000 in 2003 to $433,000 in 2004.
Summary of Loan Loss Experience
The following table indicates the amount of charge-offs and recoveries in the
loan portfolio by category.
ANALYSIS OF THE CHANGES IN ALLOWANCE FOR
LOAN LOSSES FOR YEARS 2000 THROUGH 2004
2004 2003 2002 2001 2000
Balance at beginning of year $3,569,000 $3,068,000 $2,614,000 $2,435,000 $2,336,000
Charge-offs:
Commercial, financial
and agriculture -- (141,000) (404,000) (29,000) (9,000)
Real estate-- mortgage -- (5,000) (84,000) (35,000) (28,000)
Installment loans (284,000) (240,000) (108,000) (179,000) (214,000)
Other loans (149,000) (102,000) (66,000) (76,000) (95,000)
Total charge-offs (433,000) (488,000) (662,000) (319,000) (346,000)
Recoveries:
Commercial, financial
and agriculture 1,000 235,000 17,000 43,000 31,000
Real estate -- mortgage 21,000 7,000 97,000 38,000 16,000
Installment loans 59,000 104,000 84,000 95,000 71,000
Other loans 68,000 23,000 18,000 22,000 27,000
Total recoveries 149,000 369,000 216,000 198,000 145,000
Net charge-offs (284,000) (119,000) (446,000) (121,000) (201,000)
Provision charged to operations 360,000 620,000 900,000 300,000 300,000
Balance at end of year $3,645,000 $3,569,000 $3,068,000 $2,614,000 $2,435,000
Ratio of net charge-offs to
average outstanding loans 0.13% 0.06% 0.27% 0.08% 0.14%
The Company manages asset quality with a review process which includes
ongoing financial analysis of credits and both internal and external loan
review of existing outstanding loans and delinquencies. Management strives to
identify potential non-performing loans early; take charge-offs promptly
based on a realistic assessment of probable losses; and maintain an adequate
allowance for loan losses based on the inherent risk of loss in the existing
portfolio.
The allowance for loan losses was $3.6 million at December 31, 2004
compared to $3.6 million and $3.1 million at December 31, 2003 and 2002,
respectively. The allowance as a percentage of total loans was 1.60% at
December 31, 2004, compared to 1.81% and 1.78% at December 31, 2003 and 2002,
respectively. The allowance's coverage of non-performing loans was 170.6% at
December 31, 2004 compared to 114.3% and 95.3% at December 31, 2003 and 2002
respectively.
12
No portion of the allowance for loan losses is restricted to any loan or
group of loans, as the entire allowance is available to absorb charge-offs in
any loan category. The amount and timing of future charge-offs and allowance
allocations may vary from current estimates and will depend on local economic
conditions. The following table shows the allocation of the allowance for
loan losses to major portfolio categories and the percentage of each loan
category to total loans outstanding.
Commercial non-performing loans are evaluated individually for impairment
in accordance with FAS 114. On the remaining loan portfolios, the Company
applies reserve factors considering historical loan loss data and other
subjective factors.
DISTRIBUTION OF ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31,
2004 2003 2002 2001 2000
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
Amount of in Each Amount of in Each Amount of in Each Amount of in Each Amount of in Each
Allowance Category Allowance Category Allowance Category Allowance Category Allowance Category
for Loan to Total for Loan to Total for Loan to Total for Loan to Total for Loan to Total
(Dollars in Thousands) Losses Loans Losses Loans Losses Loans Losses Loans Losses Loans
Residential mortgages(1) $1,039 48.4% $1,011 52.4% $ 890 52.2% $ 848 55.1% $ 802 56.0%
Commercial mortgages 351 35.3 300 30.2 300 27.3 300 21.6 500 21.4
Commercial loans 1,286 9.4 1,255 8.7 1,010 8.1 630 7.0 381 7.2
Installment loans 753 6.3 828 7.8 644 11.0 603 13.4 542 13.9
Other loans 216 0.6 175 0.9 224 1.4 233 2.9 210 1.5
Total $3,645 100.0% $3,569 100.0% $3,068 100.0% $2,614 100.0% $2,435 100.0%
(1) Includes home equity loans.
Nonaccrual and Past Due Loans
The Company places a loan on nonaccrual status when collectability of
principal or interest is doubtful, or when either principal or interest is 90
days or more past due and the loan is not well secured and in the process of
collection. Interest payments received on nonaccrual loans are applied as a
reduction of the principal balance when concern exists as to the ultimate
collection of principal. A distribution of nonaccrual loans and loans 90 days
or more past due and still accruing interest is shown in the following table.
DECEMBER 31, 2004
90 Days or
More, Still
Loan Category Nonaccrual Accruing Total Percentage(1) Percentage(2)
Residential mortgages(3) $491,000 $ 166,000 $ 657,000 0.6% 30.8%
Commercial mortgages -- -- -- -- --
Commercial loans 233,000 1,230,000 1,463,000 6.9 68.5
Installment loans -- 16,000 16,000 0.1 0.7
Total $724,000 $1,412,000 $2,136,000 0.9% 100.0%
DECEMBER 31, 2003
90 Days or
More, Still
Loan Category Nonaccrual Accruing Total Percentage(1) Percentage(2)
Residential mortgages(3) $ 411,000 $ 379,000 $ 790,000 0.8% 25.3%
Commercial mortgages 514,000 1,364,000 1,878,000 3.1 60.1
Commercial loans 434,000 7,000 441,000 2.6 14.1
Installment loans -- 14,000 14,000 0.1 0.5
Total $1,359,000 $1,764,000 $3,123,000 1.6% 100.0%
13
DECEMBER 31, 2002
90 Days or
More, Still
Loan Category Nonaccrual Accruing Total Percentage(1) Percentage(2)
Residential mortgages(3) $1,766,000 $57,000 $1,823,000 2.5% 56.6%
Commercial mortgages 367,000 -- 367,000 0.8 11.4
Commercial loans 888,000 -- 888,000 5.1 27.6
Installment loans 141,000 -- 141,000 0.8 4.4
Total $3,162,000 $57,000 $3,219,000 1.9% 100.0%
DECEMBER 31, 2001
90 Days or
More, Still
Loan Category Nonaccrual Accruing Total Percentage(1) Percentage(2)
Residential mortgages(3) $126,000 $539,000 $ 665,000 1.0% 40.1%
Commercial mortgages 439,000 95,000 534,000 1.3 32.2
Commercial loans 269,000 167,000 436,000 2.4 26.3
Installment loans 15,000 8,000 23,000 0.1 1.4
Total $849,000 $809,000 $1,658,000 1.0% 100.0%
DECEMBER 31, 2000
90 Days or
More, Still
Loan Category Nonaccrual Accruing Total Percentage(1) Percentage(2)
Residential mortgages(3) $718,000 $1,006,000 $1,724,000 2.3% 70.7%
Commercial mortgages 42,000 629,000 671,000 2.0 27.5
Commercial loans -- -- -- -- --
Installment loans 15,000 29,000 44,000 0.2 1.8
Total $775,000 $1,664,000 $2,439,000 1.7% 100.0%
(1) Percentage of gross loans outstanding for each loan category.
(2) Percentage of total nonaccrual and 90 day past due loans.
(3) Includes home equity loans.
Total nonperforming residential mortgage, commercial mortgage and
commercial loans represent 0.6%, 0.0%, and 6.9% of their respective portfolio
totals at December 31, 2004, compared to 0.8%, 3.1%, and 2.6% at December 31,
2003, respectively. The majority of the Company's total nonaccrual and past
due loans are secured loans and, as such, management anticipates there will
be limited risk of loss in their ultimate resolution.
From time to time, loans may be renegotiated in a troubled debt
restructuring when the Company determines that it will ultimately receive
greater economic value under the new terms than through foreclosure,
liquidation, or bankruptcy. Candidates for renegotiation must meet specific
guidelines. There were no restructured loans as of December 31, 2004, 2003,
and 2002.
14
Loan Portfolio
Set forth below is selected information concerning the composition of our
loan portfolio in dollar amounts and in percentages as of the dates
indicated.
LOAN PORTFOLIO COMPOSITION
At December 31, 2004 2003 2002 2001 2000
(Dollars in Thousands) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
REAL ESTATE LOANS
Residential $ 83,340 37.0% $ 78,339 39.6% $ 72,559 41.7% $ 67,246 40.3% $ 64,933 42.6%
Commercial 75,357 33.4 59,799 30.2 44,807 25.7 39,940 23.9 33,638 22.1
Home equity 21,127 9.4 18,337 9.3 14,825 8.5 12,756 7.6 11,496 7.6
Farm land 3,727 1.7 2,872 1.4 1,828 1.1 2,009 1.2 1,537 1.0
Construction 4,524 2.0 4,102 2.1 3,414 2.0 5,570 3.3 1,416 0.9
$188,075 83.5 $163,449 82.6 $137,433 79.0 $127,521 76.3 $113,070 74.2
OTHER LOANS
Commercial loans $ 21,317 9.5% $ 17,157 8.7% $ 17,445 10.0% $ 18,111 10.9% $ 17,822 11.7%
Consumer installment loans 14,116 6.3 15,350 7.7 17,314 9.9 19,222 11.5 19,685 12.9
Other consumer loans 1,345 0.6 1,488 0.8 1,537 0.9 1,504 0.9 1,409 0.9
Agricultural loans 338 0.1 403 0.2 375 0.2 667 0.4 421 0.3
37,116 16.5 34,398 17.4 36,671 21.0 39,504 23.7 39,337 25.8
Total loans 225,191 100.0% 197,847 100.0% 174,104 100.0% 167,025 100.0% 152,357 100.0%
Unearned discounts (955) (1,172) (2,127) (4,314) (4,901)
Allowance for loan loss (3,645) (3,569) (3,068) (2,614) (2,435)
Total loans, net $220,591 $193,106 $168,909 $160,097 $145,021
The following table indicates the amount of loans in portfolio categories
according to their period to maturity. The table also indicates the dollar
amount of these loans that have predetermined or fixed rates versus variable
or adjustable rates.
MATURITIES AND SENSITIVITIES OF LOANS TO
CHANGES IN INTEREST RATES AT DECEMBER 31, 2004
One Year
One Year Through After
or Less Five Years Five Years Total
Commercial and agricultural $10,943 $ 8,373 $2,339 $21,655
Real estate construction 709 3,747 68 4,524
Total $11,652 $12,120 $2,407 $26,179
Interest sensitivity of loans:
Predetermined rate $ 1,551 $11,870 $2,407 $15,828
Variable rate 10,101 250 -- 10,351
Total $11,652 $12,120 $2,407 $26,179
15
Other Real Estate Owned
Other real estate owned represents properties acquired through foreclosure
and is recorded on an individual-asset basis at the lower of (1) fair value
less estimated costs to sell or (2) cost, which represents the loan balance
at initial foreclosure. When a property is acquired, the excess of the loan
balance over the fair value of the property is charged to the allowance for
loan losses. Subsequent write downs to reflect further declines in fair value
are included in non-interest expense.
The following are the changes in other real estate owned during the last
two years:
Years Ended December 31, 2004 2003
Beginning balance $ 43,000 $ 126,000
Additions (includes
costs capitalized) -- 176,000
Sales (43,000) (230,000)
Write downs -- (29,000)
Ending balance $ -- $ 43,000
Non-Interest Income and Expense
Non-interest income primarily consists of service charges, commissions and
fees for various banking services, and securities gains and losses. Total
non-interest income of $3.9 million in 2004 was a decrease of 2.1% or $83,000
over 2003. The decrease is attributable to lower securities gains, a decrease
in income from the cash surrender value of bank owned life insurance
partially offset by higher service charges for checking accounts and an
increase in other non-interest income.
Non-interest expense increased by $229,000 or 2.0% to $11.9 million in
2004. Salaries and employee benefit expense increased 5.4% to $6.9 million in
2004. This increase was caused by increased expenses for normal salary
increases and increased costs of providing pension and healthcare benefits.
Occupancy and equipment expense decreased 17.9% to $1.8 million in 2004, due
to increases in insurance premiums, offset by tighter control over
maintenance expense. Net other real estate owned (income) expense decreased
$88,000 to ($5,000) in 2004 from $83,000 of expense in 2004 primarily due to
reduced maintenance expenses at Grandview Palace. Other non-interest expense
increased by $355,000 or 12.5% in 2004 to $3.2 million from $2.8 million in
2003.
Income Tax Expense
Income tax expense totaled $2.2 million in 2004 versus $2.0 million in 2003.
The effective tax rate approximated 26.4% in 2004 and 25.7% in 2003. These
relatively low effective tax rates reflects the favorable tax treatment
received on tax-exempt interest income and net earnings from bank-owned life
insurance.
Our income tax and effective tax rate were reduced in 2004 (as well as,
in prior years) as current New York State tax law allows a 60% dividend paid
reduction for dividends paid to the Bank by its subsidiary, FNBJ REIT Holding
Corporation. Legislation has been proposed at the New York State level, which
would disallow the dividends paid deduction on dividends paid by real estate
investment trusts, such as FNBJ REIT Holding Corporation.
RESULTS OF OPERATIONS 2003 VERSUS 2002
Net Income
Net income for 2003 of $5.7 million increased 9.3% or $490,000 from the 2002
net income of $5.2 million. The higher level of earnings in 2003 reflects the
interaction of a number of factors. The most significant factor which
increased 2003 net income was the decrease in interest expense, primarily
because of lower rates, to $4.0 million from $5.3 million in 2002, a decrease
of $1.3 million or 24.3%. An additional factor was the increase in
non-interest income, primarily as a result of service charge income and gains
on the sale of securities, to $4.0 million from $3.1 million in 2002, an
increase of $807,000 or 25.6%. Salary and employee benefit expense increased
$464,000 or 7.6% primarily due to the addition of new employees, normal
salary increases and the increased costs of providing pension and health care
benefits. Occupancy and equipment expense increased $500,000 or 29.5%,
primarily due to increases in insurance premiums, building and equipment
depreciation expense and maintenance expense.
Interest Income and Interest Expense
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 largest source of income for the Company is net interest income,
which represents interest earned on loans, securities and short-term
investments, less interest paid on deposits and other interest bearing
liabilities. Tax equivalent net interest income of $17.0 million for 2003
represented an increase of 6.7% compared to $15.9 million for 2002. Net
interest margin increased to 5.56% in 2003 compared to 5.55% in 2002, as
decreases in cost of deposits and borrowings exceeded decreases in earning
asset yields.
Total interest income for 2003 was $21.1 million, compared to $21.3
million in 2002. The decrease in 2003 is the result of a 53 basis point
decrease in the earning asset yield which was partially offset by an increase
in the average balance of interest earning assets from $287.5 million in 2002
to $306.3 million in 2003, an increase of 6.5%. Interest income from the
increase in earning assets was offset by an overall decrease in average yield
on earning assets of 53 basis points in 2003. Total average securities
(securities available for sale and securities held to maturity) increased
$2.8 million or 2.3% in 2003 to $121.1 million. The increase in 2003 reflects
the investment of excess funds from increased deposits, which were not needed
to fund new loans. The increase in average security balances was offset
16
by a lower yield on total securities which decreased from 6.27% in 2002
to 5.62% in 2003 due to the overall decline in interest rates. In 2003,
average loans increased $17.7 million to $183.3 million from $165.6 million
in 2002. Concurrently the average loan yield decreased from 8.32% in 2002 to
7.76% in 2003. Average residential and commercial real estate loans continued
to make up a major portion of the loan portfolio at 72.0% of total loans in
2003. In 2004, any increases in funding will continue to be allocated first
to meet loan demand, as necessary, and then to the securities portfolios.
Total interest expense in 2003 decreased $1.3 million or 24.3% over 2002.
The average balance of interest bearing liabilities increased from $230.4
million in 2002 to $248.3 million in 2003, an increase of 7.8%. During 2003,
the average cost of total interest bearing liabilities decreased by 68 basis
points, reflecting the lower overall market interest rates during the year.
Average interest bearing deposits increased $14.3 million to reach $213.8
million in 2003, an increase of 7.2%. The lower interest rates paid on time
deposits resulted from general market conditions in 2003 as compared to 2002,
a reduction of 92 basis points from 3.21% in 2002 to 2.29%. Interest rates on
interest bearing deposits decreased from an average rate paid of 2.01% in
2002 to 1.30% in 2003. In 2003, average demand deposit balances increased
13.3% over 2002.
Provision for Loan Losses
The provision for loan losses was $620,000 in 2003 as compared to $900,000 in
2002 as a result of improved asset quality. Provisions for loan losses are
recorded to maintain the allowance for loan losses at a level deemed adequate
by management based on an evaluation of such factors as economic conditions
in the Company's market area, past loan loss experience, the financial
condition of individual borrowers, and underlying collateral values based on
independent appraisals. While management uses available information to
recognize losses on loans, future additions to the allowance for loan losses
may be necessary based on changes in economic conditions, particularly in
Sullivan County. In addition, Federal regulatory agencies, as an integral
part of their examination process, periodically review the Company's
allowance for loan losses and may require the Company to recognize additions
to the allowance based on their judgments about information available to them
at the time of their examination, which may not be currently available to
management.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged-off against the allowance when
management believes that the collectibility of all or a portion of the
principal is unlikely. Recoveries of loans previously charged-off are
credited to the allowance when realized.
Total non-performing loans decreased slightly from $3.2 million at
December 31, 2002 to $3.1 million at December 31, 2003. Net loan charge-offs
decreased from $446,000 in 2002 to $119,000 in 2003 while gross charge-offs
decreased from $662,000 in 2002 to $488,000 in 2003.
Non-Interest Income and Expense
Non-interest income primarily consists of service charges, commissions and
fees for various banking services, and securities gains and losses. Total
non-interest income in 2003 increased 25.6% or $807,000 over 2002. The
increase is attributable to securities gains, higher monthly service charges
for checking accounts, and income recorded for the increase in cash surrender
value of bank-owned life insurance.
Non-interest expense increased by $1.6 million or 15.6% in 2003. Salaries
and employee benefit expense increased 7.6% to $6.5 million in 2003. This
increase was caused by increased expenses for normal salary increases and
increased costs of providing pension and healthcare benefits. Occupancy and
equipment expense increased 29.5% to reach $2.2 million in 2003, due to
increases in insurance premiums, building and equipment depreciation expense
and maintenance expense. Net other real estate owned expense (income)
increased $391,000 to $83,000 in 2003 from $308,000 of income in 2003
primarily due to the lack of gains on sales. Other non-interest expense
increased by $222,000 or 8.5% in 2003 to $2.8 million from $2.6 million in
2002.
Income Tax Expense
Income tax expense totaled $2.0 million in 2003 versus $2.2 million in 2002.
The effective tax rate approximated 25.7% in 2003 and 29.8% in 2002. These
relatively low effective tax rates reflects the favorable tax treatment
received on tax-exempt interest income and net earnings from bank-owned life
insurance.
OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of operations, the Company engages in a variety of
financial transactions that, in accordance with generally accepted accounting
principles, are not recorded in the financial statements, or are recorded in
amounts that differ from the notional amounts. These transactions involve, to
varying degrees, elements of credit, interest rate, and liquidity risk. Such
transactions are used by us for general corporate purposes or for customer
needs. Corporate purpose transactions are used to help manage credit,
interest rate, and liquidity risk or to optimize capital. Customer
transactions are used to manage customers' requests for funding. See note 16
of Notes to Consolidated Financial Statements contained elsewhere within this
report for further information concerning off-balance sheet arrangements.
LIQUIDITY
Liquidity is the ability to provide sufficient cash flow to meet financial
commitments such as additional loan demand and withdrawals of existing
deposits. The Company's primary sources of liquidity are its deposit base;
FHLB borrowings; repayments and maturities on loans; short-term assets such
as
17
federal funds and short-term interest bearing deposits in banks; and
maturities and sales of securities available for sale. These sources are
available in amounts sufficient to provide liquidity to meet the Company's
ongoing funding requirements. The Bank's membership in the FHLB of New York
enhances liquidity in the form of overnight and 30 day lines of credit of
approximately $35.6 million, which may be used to meet unforeseen liquidity
demands. There were overnight borrowings of $8 million at a rate of 2.58%
being used at December 31, 2004. Four separate FHLB term advances totaling
$18.5 million at December 31, 2004 were being used to fund securities
leverage transactions.
In 2004, cash generated from operating activities amounted to $7.4
million and cash generated from financing activities amounted to $5.5
million. These amounts were offset by a use of cash in investing activities
of $14.8 million, resulting in a net decrease in cash and cash equivalents of
$1.9 million. See the Consolidated Statements of Cash Flows for additional
information.
The following table reflects the Maturities of Time Deposits of $100,000
or more:
MATURITY SCHEDULE OF TIME DEPOSITS
OF $100,000 OR MORE AT DECEMBER 31, 2004
Deposits
Due three months or less $ 7,810,000
Over three months through six months 7,388,000
Over six months through twelve months 3,569,000
Over twelve months 5,765,000
$24,532,000
Management anticipates much of these maturing deposits to rollover at
maturity, and that liquidity will be adequate to meet funding requirements.
CAPITAL ADEQUACY
One of management's primary objectives is to maintain a strong capital
position to merit the confidence of depositors, the investing public, bank
regulators and stockholders. A strong capital position should help the
Company withstand unforeseen adverse developments and take advantage of
profitable investment opportunities when they arise. Stockholders' equity
increased $3.9 million or 10.8% in 2004 following an increase of 10.1% in
2003.
The Company retained $4.4 million from 2004 earnings, while an other
comprehensive loss decreased stockholders' equity by $535,000. In accordance
with regulatory capital rules, the adjustment for the after tax net
unrealized gain or loss on securities available for sale is not considered in
the computation of regulatory capital ratios.
Under the Federal Reserve Bank's risk-based capital rules, the Company's
Tier I risk-based capital was 16.9% and total risk-based capital was 18.2% 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
capital. The Company's leverage ratio (Tier I capital to average assets) of
10.9% is well above the 4.0% minimum regulatory requirement.
The following table shows the Company's actual capital measurements
compared to the minimum regulatory requirements.
As of December 31, 2004 2003
TIER I CAPITAL
Stockholders' equity, excluding the after-tax net
unrealized gain on securities available for sale $ 39,370,000 $ 35,013,000
TIER II CAPITAL
Allowance for loan losses(1) 2,891,000 2,604,000
Total risk-based capital $ 42,261,000 $ 37,617,000
Risk-weighted assets(2) $232,679,000 $209,678,000
Average assets $361,783,000 $340,575,000
RATIOS
Tier I risk-based capital (minimum 4.0%) 16.9% 16.7%
Total risk-based capital (minimum 8.0%) 18.2% 17.9%
Leverage (minimum 4.0%) 10.9% 10.3%
(1) The allowance for loan losses is limited to 1.25% of risk-weighted
assets for the purpose of this calculation.
(2) Risk-weighted assets have been reduced for the portion allowance for
loan losses excluded from total risk-based capital.
18
CONTRACTUAL OBLIGATIONS
The Company is contractually obligated to make the following payments on
long-term debt and leases as of December 31, 2004:
Less Than 1 to 3 3 to 5 More Than
1 Year Years Years 5 Years Total
Federal Home Loan
Bank borrowings $ -- $3,500,000 $15,000,000 $ -- $18,500,000
Operating leases 120,000 240,000 78,000 13,000 451,000
Total $120,000 $3,740,000 $15,078,000 $13,000 $18,951,000
In regards for short-term borrowings, see note 8 in consolidating
financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
The Emerging Issues Task Force (EITF) has provided guidance for the
determination and recognition of other-than-temporary impairment on
investment securities in EITF 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." EITF 03-1 provides
guidance for determining when an investment is considered impaired, whether
impairment is other-than-temporary, and measurement of an impairment loss. An
investment is considered impaired if the fair value of the investment is less
than its cost. Generally, an impairment is considered other-than-temporary
unless: (i) the investor has the ability and intent to hold an investment for
a reasonable period of time sufficient for an anticipated recovery of fair
value up to (or beyond) the cost of the investment; and (ii) evidence
indicating that the cost of the investment is recoverable within a reasonable
period of time outweighs evidence to the contrary. If impairment is
determined to be other-than-temporary, then an impairment loss should be
recognized equal to the difference between the investment's cost and its fair
value. Certain disclosure requirements of EITF were adopted in 2003 and the
Company has presented the new disclosure requirements in its consolidated
financial statements for the years ended December 31, 2004 and 2003. The
recognition and measurement provisions were initially effective for
other-than-temporary impairment evaluations in reporting periods beginning
after June 15, 2004. However, in September 2004, the effective date of these
provisions was delayed until the finalization of a FASB Staff Position to
provide addition implementation guidance. Upon finalization of the FASB Staff
Position, management will evaluate the impact on the Company's consolidated
financial statements.
19
DISTRIBUTION OF ASSETS, LIABILITIES & STOCKHOLDERS' EQUITY:
INTEREST RATES & INTEREST DIFFERENTIAL
The following schedule presents the condensed average consolidated balance
sheets for 2004, 2003 and 2002. 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.
CONSOLIDATED AVERAGE BALANCE SHEET 2004
Percentage
of Total
Average Average Interest Average
Balance Assets Earned/Paid Yield/Rate
ASSETS
Securities available for sale and held to maturity:(1)
Taxable securities $ 66,265,000 18.32% $ 3,366,000 5.08%
Tax exempt securities 49,467,000 13.67 3,043,000 6.15%
Total securities 115,732,000 31.99 6,409,000 5.54%
Short-term investments 2,079,000 0.57 25,000 1.20%
Loans (net of unearned discount)
Real estate mortgages 153,147,000 42.33 10,920,000 7.13%
Home equity loans 19,689,000 5.44 1,207,000 6.13%
Time and demand loans 18,855,000 5.21 1,255,000 6.66%
Installment and other loans 20,155,000 5.57 2,039,000 20.02%
Total loans(2) 211,846,000 58.56 15,421,000 7.28%
Total interest earning assets 329,657,000 91.12 21,855,000 6.63%
Allowance for loan losses (3,554,000) (0.98)
Unrealized gains and losses on portfolio 390,000 0.11
Cash and due from banks (demand) 12,816,000 3.54
Fixed assets (net) 3,037,000 0.84
Bank owned life insurance 12,488,000 3.45
Other assets 6,949,000 1.92
Total assets $361,783,000 100.00%
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW and Super NOW deposits $ 38,887,000 10.75% 102,000 26.00%
Savings and insured money market deposits 85,134,000 23.53 550,000 0.65
Time deposits 103,625,000 28.64 2,237,000 2.16
Total interest bearing deposits 227,646,000 62.92 2,889,000 1.27
Federal funds purchased and other short-term debt 1,411,000 0.39 23,000 1.63
Long-term debt 24,836,000 6.86 1,139,000 4.59
Total interest bearing liabilities 253,893,000 70.18 4,051,000 1.60
Demand deposits 63,780,000 17.63
Other liabilities 6,961,000 1.92
Total liabilities 324,634,000 89.73
Stockholders' equity 37,149,000 10.27
Total liabilities and stockholders' equity $361,783,000 100.00%
Net interest income $17,804,000
Net interest spread 5.03%
Net interest margin(3) 5.40%
(1) Yields on securities available for sale are based on amortized cost.
(2) For purpose of this schedule, interest in nonaccruing loans has been
included only to the extent reflected in the consolidated income
statement. However, the nonaccrual loan balances are included in the
average amount outstanding.
(3) Computed by dividing net interest income by total interest earning assets.
20
DISTRIBUTION OF ASSETS, LIABILITIES & STOCKHOLDERS' EQUITY:
INTEREST RATES & INTEREST DIFFERENTIAL
CONSOLIDATED AVERAGE BALANCE SHEET 2003
Percentage
of Total
Average Average Interest Average
Balance Assets Earned/Paid Yield/Rate
ASSETS
Securities available for sale and held to maturity:(1)
Taxable securities $ 75,504,000 22.17% $ 3,893,000 5.16%
Tax exempt securities 45,579,000 13.38 2,913,000 6.39%
Total securities 121,083,000 35.55 6,806,000 5.62%
Short-term investments 1,871,000 0.55 23,000 1.23%
Loans (net of unearned discount)
Real estate mortgages 131,978,000 38.75 10,108,000 7.66%
Home equity loans 16,826,000 4.94 1,073,000 6.38%
Time and demand loans 14,387,000 4.22 947,000 6.58%
Installment and other loans 20,144,000 5.92 2,098,000 10.42%
Total loans(2) 183,335,000 53.83 14,226,000 7.76%
Total interest earning assets 306,289,000 89.93 21,055,000 6.87%
Allowance for loan losses (3,149,000) (0.92)
Unrealized gains and losses on portfolio 1,924,000 0.57
Cash and due from banks (demand) 12,436,000 3.65
Fixed assets (net) 3,206,000 0.94
Bank owned life insurance 12,005,000 3.52
Other assets 7,864,000 2.31
Total assets $340,575,000 100.00%
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW and Super NOW deposits $ 37,363,000 10.97% 169,000 0.45%
Savings and insured money market deposits 86,323,000 25.34 542,000 0.63
Time deposits 90,067,000 26.45 2,067,000 2.29
Total interest bearing deposits 213,753,000 62.76 2,778,000 1.30
Federal funds purchased and other short-term debt 4,808,000 1.41 56,000 1.16
Long-term debt 29,753,000 8.74 1,203,000 4.04
Total interest bearing liabilities 248,314,000 72.91 4,037,000 1.63
Demand deposits 54,934,000 16.13
Other liabilities 3,766,000 1.11
Total liabilities 307,014,000 90.15
Stockholders' equity 33,561,000 9.85
Total liabilities and stockholders' equity $340,575,000 100.00%
Net interest income $17,018,000
Net interest spread 5.24%
Net interest margin(3) 5.56%
(1) Yields on securities available for sale are based on amortized cost.
(2) For purpose of this schedule, interest in nonaccruing loans has been
included only to the extent reflected in the consolidated income
statement. However, the nonaccrual loan balances are included in the
average amount outstanding.
(3) Computed by dividing net interest income by total interest earning
assets.
21
DISTRIBUTION OF ASSETS, LIABILITIES & STOCKHOLDERS' EQUITY:
INTEREST RATES & INTEREST DIFFERENTIAL
CONSOLIDATED AVERAGE BALANCE SHEET 2002
Percentage
of Total
Average Average Interest Average
Balance Assets Earned/Paid Yield/Rate
ASSETS
Securities available for sale and held to maturity:(1)
Taxable securities $ 92,083,000 29.42% $ 5,542,000 6.02%
Tax exempt securities 26,241,000 8.38 1,873,000 0.07
Total securities 118,324,000 37.80 7,415,000 0.06
Short-term investments 3,550,000 1.13 78,000 0.02
Loans (net of unearned discount)
Real estate mortgages 117,744,000 37.62 9,619,000 0.08
Home equity loans 13,973,000 4.46 981,000 0.07
Time and demand loans 13,370,000 4.27 903,000 0.07
Installment and other loans 20,520,000 6.56 2,283,000 0.11
Total loans(2) 165,607,000 52.91 13,786,000 0.08
Total interest earning assets 287,481,000 91.84 21,279,000 7.40%
Allowance for loan losses (2,666,000) (1.00)
Unrealized gains and losses on portfolio 1,593,000 0.51
Cash and due from banks (demand) 10,299,000 3.29
Fixed assets (net) 3,106,000 0.99
Bank owned life insurance 7,666,000 2.45
Other assets 5,543,000 1.77
Total assets $313,022,000 100.00%
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW and Super NOW deposits $ 33,799,000 10.80% 241,000 71.00%
Savings and insured money market deposits 73,379,000 23.44 806,000 1.10
Time deposits 92,309,000 29.49 2,960,000 3.21
Total interest bearing deposits 199,487,000 63.73 4,007,000 2.01
Federal funds purchased and other short-term debt 927,000 0.30 20,000 2.16
Long-term debt 30,000,000 9.58 1,304,000 4.35
Total interest bearing liabilities 230,414,000 73.61 5,331,000 2.31
Demand deposits 48,466,000 15.48
Other liabilities 3,871,000 1.24
Total liabilities 282,751,000 90.33
Stockholders' equity 30,271,000 9.67
Total liabilities and stockholders' equity $313,022,000 100.00%
Net interest income $15,948,000
Net interest spread 5.09%
Net interest margin(3) 5.55%
(1) Yields on securities available for sale are based on amortized cost.
(2) For purpose of this schedule, interest in nonaccruing loans has been
included only to the extent reflected in the consolidated income
statement. However, the nonaccrual loan balances are included in the
average amount outstanding.
(3) Computed by dividing net interest income by total interest earning
assets.
22
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 2004 as compared to 2003, and 2003 as compared to
2002.
The changes in interest income and expense attributable to both rate and
volume have been allocated to rate on a consistent basis.
VOLUME AND RATE ANALYSIS
2004 Compared to 2003 2003 Compared to 2002
Increase (Decrease) Increase (Decrease)
Due to Change In Due to Change In
Volume Rate Total Volume Rate Total
INTEREST INCOME
Investment securities and
securities available for sale $ (301,000) $ (96,000) $ (397,000) $ 173,000 $ (782,000) $ (609,000)
Short-term investments 3,000 (1,000) 2,000 (37,000) (18,000) (55,000)
Loans 2,212,000 (1,017,000) 1,195,000 1,477,000 (1,037,000) 440,000
Total interest income 1,914,000 (1,114,000) 800,000 1,613,000 (1,837,000) (224,000)
INTEREST EXPENSE
NOW and
Super NOW deposits 7,000 (74,000) (67,000) 2,530,000 (2,602,000) (72,000)
Savings and insured
money market deposits (75,000) 83,000 8,000 137,000 (401,000) (264,000)
Time deposits 311,000 (141,000) 170,000 (72,000) (821,000) (893,000)
Federal funds purchased
and other short-term debt (39,000) 6,000 (33,000) 205,000 (169,000) 36,000
Long-term debt (199,000) 135,000 (64,000) (11,000) (90,000) (101,000)
Total interest expense 5,000 9,000 14,000 2,789,000 (4,083,000) (1,294,000)
Net interest income $1,909,000 $(1,123,000) $ 786,000 $(1,176,000) $ 2,246,000 $ 1,070,000
INFLATION
The Company's operating results are affected by inflation to the extent that
interest rates, loan demand and deposit levels adjust to inflation and impact
net interest income. Management can best counter the effect of inflation over
the long term by managing net interest income and controlling expenses.
SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES ANALYSIS*
SUMMARY OF INVESTMENT SECURITIES
At December 31, 2004 2003 2002
Carrying Value Fair Value Carrying Value Fair Value Carrying Value Fair Value
U.S. Government Agency $ 51,352,000 $ 50,461,000 $ 59,837,000 $ 59,415,000 $ 41,527,000 $ 42,565,000
Municipal securities 48,595,000 49,875,000 50,248,000 51,748,000 37,548,000 38,776,000
Mortgage backed
securities and
collateralized
mortgage obligations 5,585,000 5,590,000 9,434,000 9,596,000 38,352,000 39,434,000
Other securities -- -- -- -- 1,012,000 1,072,000
$105,532,000 $105,926,000 $119,519,000 $120,759,000 $118,439,000 $121,847,000
23
ANALYSIS BY TYPE AND BY PERIOD TO MATURITY
Under 1 Year 1-5 Years 5-10 Years After 10 Years
December 31, 2004 Balance Rate Balance Rate Balance Rate Balance Rate Total
U.S. Government Agency $ 6,528,000 4.88% $ 4,975,000 4.68% $ 9,849,000 4.54% $30,000,000 5.19% $ 51,352,000
Municipal securities--
tax exempt(1) 5,123,000 3.33 9,715,000 4.36 30,503,000 3.94 3,254,000 4.13 48,595,000
Mortgage backed securities
and collateralized
mortgage obligations 2,518,000 5.83 3,014,000 5.08 53,000 4.57 -- -- 5,585,000
$14,169,000 4.49% $17,704,000 4.57% $40,405,000 4.09% $33,254,000 5.09% $105,532,000
* The analysis shown above combines the Company's Securities Available for
Sale portfolio and the Investment Securities portfolio, excluding equity
securities. All securities are included above at their amortized cost.
(1) Yields on tax exempt securities have not been stated on a tax equivalent
basis.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
INTEREST RATE RISK
Management of interest rate risk involves continual monitoring of the
relative sensitivity of asset and liability portfolios to changes in rates
due to maturities or repricing. Interest rate sensitivity is a function of
the repricing of assets and liabilities through maturity and interest rate
changes. The objective of interest rate risk management is to maintain an
appropriate balance between income growth and the risks associated with
maximizing income through the mismatch of the timing of interest rate changes
between assets and liabilities. Perfectly matching the repricing of assets
and liabilities can eliminate interest rate risk, but net interest income is
not always enhanced. One measure of interest rate risk, the so-called "gap,"
is illustrated in the table below as of December 31, 2004. This table
measures the incremental and cumulative gap, or difference between assets and
liabilities subject to repricing during the periods indicated. The dollar
amounts presented are stated on the basis of "contractual gap" which measures
the stated repricing and maturity of assets and liabilities. The data
presented indicates that rate sensitive liabilities are generally subject to
repricing sooner than rate sensitive assets. Management retains the ability
to change, or not change, interest rates on certain deposit products as
general market rates change in the future, and is also in the position to
liquidate a portion of its securities available for sale should conditions
warrant such action. The following is one of several different analysis tools
management utilizes in managing interest rate risk.
0 to 3 3 to 12 1 to 5 Over 5
Maturity Months Months Years Years Total
Loans, net(1) $30,772,000 $70,371,000 $119,223,000 $ 225,000 $220,591,000
Taxable securities(1) 3,628,000 6,250,000 8,281,000 37,778,000 55,937,000
Non taxable securities(1) -- 4,477,000 11,007,000 34,764,000 50,248,000
Total interest earning assets $34,400,000 $81,098,000 $138,511,000 $72,767,000 $326,776,000
NOW and Super NOW accounts $1,098,000 $3,294,000 $ 16,101,000 $16,101,000 $ 36,594,000
Savings and insured
money market deposits(2,3) 4,359,000 13,074,000 3,502,600 34,656,000 87,115,000
Time deposits(3) 25,365,000 53,831,000 24,801,000 180,000 104,177,000
Long term borrowings(2) -- 3,500,000 15,000,000 -- 18,500,000
Short term borrowings(2) 8,424,000 -- -- -- 8,424,000
Total interest bearing liabilities $ 39,246,000 $73,699,000 $ 90,928,000 $50,937,000 $254,810,000
Gap $ (4,846,000) $ 7,399,000 $ 47,583,000 $21,830,000 $ 71,966,000
Cumulative gap (4,846,000) 2,553,000 50,136,000 71,966,000
Cumulative gap as a percentage
of total interest earning assets (1.48)% 0.78% 15.34% 22.02%
(1) Based on anticipated maturity. Includes Securities Available for Sale
and Securities Held to Maturity, at their amortized cost.
(2) Based on contractual maturity or period to repricing.
(3) Fixed rate deposits and deposits with fixed pricing intervals are
included in the period of contractual maturity. Deposits withdrawable on
demand or within short notice periods (such as NOW and savings accounts)
are shown in repricing periods based on management's estimate of the
interest rate sensitivity of these accounts, based in part on the
Company's favorable historical experience of a substantial portion of
these balances during periods of changing interest rates.
24
There are several significant shortcomings inherent in the gap analysis. For
example, although certain assets and liabilities have similar periods to
maturity or to repricing, they may react in different degrees to changes in
market interest rates. Also, the interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while other interest rates may lag behind changes in market interest rates.
Management takes these factors, and others, into consideration when reviewing
the Company's gap position and establishing its asset/liability strategy.
Item 8. Financial Statements and Supplementary Data
Consolidated financial statements and supplementary data are found on pages 3
to 27 of this report.
Item 9. Changes In and Disagreements With Accountants On Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
the Company's disclosure controls and procedures as defined in Rule 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") as of December 31, 2004. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective in ensuring that
information required to be disclosed by the Company in reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes made in the Company's internal controls over financial
reporting that occurred during the most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal controls over financial reporting.
Item 9B. Other Information
Nothing to disclose.
25
Part III
Item 10. Directors and Executive Officers of the Registrant
See "Nomination of Directors and Election of Directors" on page 3 of the
proxy statement ("Proxy Statement") for the Company's 2005 annual meeting
which will be filed with the Securities and Exchange Commission within 120
days of the Company's 2004 fiscal year end, which is incorporated herein by
reference.
Item 11. Executive Compensation
See "Executive Compensation" on page 12 of the Proxy Statement, which is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
See "Security Ownership of Certain Beneficial Owners and of Management" on
page 9 of the Proxy Statement, which is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
See "Director and Executive Officer Information" on pages 3-5, "Transactions
with Management" on page 17 and "Remuneration of Management and Others" on
pages 6, 12-15 and 17 of the Proxy Statement, which are incorporated herein
by reference.
Item 14. Principal Accountant Fees and Services
See "Audit Fees" on page 16 of the Proxy Statement, which is incorporated
herein by reference.
26
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Consolidated financial statements and schedules of the Company and
Bank.
Independent Auditors' Report
Consolidated Balance Sheets -- December 31, 2004 and 2003
Consolidated Statements of Income
Years Ended December 31, 2004, 2003 and 2002 Consolidated
Statements of Changes in Stockholders' Equity
Years Ended December 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows
Years Ended December 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
(a) 2. All schedules are omitted since the required information is either
not applicable, not required or contained in the respective
consolidated financial statements or in the notes thereto.
(a) 3. Exhibits (numbered in accordance with Item 601 of Regulation S-K)
Exhibits not indicated below are omitted because the information is
not applicable or is contained elsewhere within this report.
3.1 Certificate of Incorporation of the Company (Incorporation by
Reference to Exhibit 3.1, 3.2, 3.3 and 3.4 to Form 8
Registration Statement, effective June 29, 1991)
3.2 The Bylaws of the Company (Incorporated by Reference to
Exhibit 3.5 and 3.6 to Form 8 Registration Statement,
effective June 29, 1991)
4.1 Instruments defining the Rights of Security Holders.
(Incorporated by Reference to Exhibit 4 to Form 8 Registration
Statement, effective June 29, 1991)
21.1 Subsidiaries of the Company
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Chief Financial Officer
32.1 906 certification of Chief Executive Officer
32.2 906 certification of Chief Financial Officer
(b) Exhibits to this Form 10-K are attached or incorporated herein by
reference.
(c) Not applicable
27
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: March 29, 2005 By: /s/ Raymond Walter By: /s/ Charles E Burnett
Chief Executive Officer Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Arthur E. Keesler Chairman-Director March 29, 2005
Arthur E. Keesler
/s/ John M. Riley Vice President March 29, 2005
John M. Riley
/s/ John K. Gempler Secretary-Director March 29, 2005
John K. Gempler
/s/ Edward T. Sykes Director March 29, 2005
Edward T. Sykes
/s/ Raymond Walter Chief Executive Officer March 29, 2005
Raymond Walter President-Director
/s/ Earle A. Wilde Director March 29, 2005
Earle A. Wilde
/s/ James F. Roche Director March 29, 2005
James F. Roche
/s/ John W. Galligan Director March 29, 2005
John W. Galligan
/s/ Kenneth C. Klein Director March 29, 2005
Kenneth C. Klein
/s/ Gibson E. McKean Director March 29, 2005
Gibson E. McKean
/s/ Douglas A. Heinle Director March 29, 2005
Douglas A. Heinle
28
Report of Independent Registered Public Accounting Firm
[LOGO] KPMG
The Board of Directors and Stockholders
Jeffersonville Bancorp:
We have audited the accompanying consolidated balance sheets of
Jeffersonville Bancorp and subsidiary (the Company) as of December 31, 2004
and 2003, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2004. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Jeffersonville Bancorp and subsidiary as of December 31, 2004 and 2003, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2004 in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Albany, New York
February 18, 2005
F-1
Consolidated Balance Sheets
December 31, 2004 2003
ASSETS
Cash and due from banks (note 2) $ 14,040,000 $ 15,992,000
Securities available for sale, at fair value (notes 3 and 7) 100,705,000 115,564,000
Securities held to maturity (estimated fair value of $5,998 at
December 31, 2004 and $5,947 at December 31, 2003) (note 3) 5,957,000 5,916,000
Loans, net of allowance for loan losses of $3,645 at December 31, 2004
and $3,569 at December 31, 2003 (notes 4, 7, and 8) 220,591,000 193,106,000
Accrued interest receivable 2,085,000 2,301,000
Premises and equipment, net (note 5) 2,869,000 3,063,000
Federal Home Loan Bank stock (notes 7 and 8) 2,175,000 1,600,000
Other real estate owned -- 43,000
Cash surrender value of bank-owned life insurance 12,747,000 12,268,000
Other assets 2,698,000 2,351,000
Total assets $363,867,000 $352,204,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand deposits $ 65,208,000 $ 59,189,000
NOW and Super NOW accounts 36,594,000 38,290,000
Savings and money market deposits 87,115,000 80,768,000
Time deposits (note 6) 104,177,000 101,980,000
Total deposits 293,094,000 280,227,000
Federal Home Loan Bank borrowings (note 7) 18,500,000 27,000,000
Short-term borrowings (note 8) 8,424,000 5,521,000
Accrued expenses and other liabilities 4,203,000 3,670,000
Total liabilities 324,221,000 316,418,000
Commitments and contingent liabilities (note 16)
Stockholders' equity (notes 11, 12, and 13):
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 at December 31, 2004 and at December 31, 2003 2,384,000 2,384,000
Paid-in capital 6,483,000 6,483,000
Treasury stock, at cost; 333,465 shares at December 31, 2004
and at December 31, 2003 (1,108,000) (1,108,000)
Retained earnings 32,342,000 27,947,000
Accumulated other comprehensive (loss) income, net of taxes
of $297 at December 31, 2004 and $57 at December 31, 2003 (455,000) 80,000
Total stockholders' equity 39,646,000 35,786,000
Total liabilities and stockholders' equity $363,867,000 $352,204,000
See accompanying notes to consolidated financial statements.
F-2
Consolidated Statements of Income
Years Ended December 31, 2004 2003 2002
INTEREST INCOME
Loan interest and fees $15,421,000 $14,226,000 $13,786,000
Securities:
Taxable 3,365,000 3,893,000 5,542,000
Nontaxable 2,009,000 1,940,000 1,229,000
Federal funds sold 25,000 23,000 78,000
Total interest income 20,820,000 20,082,000 20,635,000
INTEREST EXPENSE
Deposits 2,889,000 2,778,000 4,007,000
Federal Home Loan Bank borrowings 1,139,000 1,203,000 1,304,000
Other 23,000 56,000 20,000
Total interest expense 4,051,000 4,037,000 5,331,000
Net interest income 16,769,000 16,045,000 15,304,000
Provision for loan losses (note 4) 360,000 620,000 900,000
Net interest income after provision for loan losses 16,409,000 15,425,000 14,404,000
NON-INTEREST INCOME
Service charges 2,198,000 2,054,000 1,777,000
Earnings from cash surrender value
of bank-owned life insurance 479,000 534,000 379,000
Net security gains (losses) (note 3) 14,000 307,000 (1,000)
Other non-interest income 1,181,000 1,060,000 993,000
Total non-interest income 3,872,000 3,955,000 3,148,000
NON-INTEREST EXPENSES
Salaries and employee benefits 6,904,000 6,548,000 6,084,000
Occupancy and equipment expenses 1,803,000 2,197,000 1,697,000
Other real estate owned (income) expenses, net (5,000) 83,000 (308,000)
Other non-interest expenses (note 10) 3,191,000 2,836,000 2,614,000
Total non-interest expenses 11,893,000 11,664,000 10,087,000
Income before income tax expense 8,388,000 7,716,000 7,465,000
Income tax expense (note 9) 2,217,000 1,984,000 2,223,000
Net income $ 6,171,000 $ 5,732,000 $ 5,242,000
Basic earnings per common share $ 1.39 $ 1.29 $ 1.18
Per share data has been restated for a 3 for 1 stock split in 2003.
See accompanying notes to consolidated financial statements.
F-3
Consolidated Statements of
Changes in Stockholders' Equity
Accumulated
Other Total
Years Ended December 31, Common Paid-in Treasury Retained Comprehensive Stockholders'
2004, 2003, and 2002 Stock Capital Stock Earnings (Loss) Income Equity
BALANCE AT
DECEMBER 31, 2001 $ 795,000 $ 8,072,000 $(1,108,000) $19,753,000 $ (199,000) $27,313,000
Net income -- -- -- 5,242,000 -- 5,242,000
Other comprehensive income -- -- -- -- 1,273,000 1,273,000
Comprehensive income 6,515,000
Cash dividends ($0.30 per share) -- -- -- (1,331,000) -- (1,331,000)
BALANCE AT
DECEMBER 31, 2002 795,000 8,072,000 (1,108,000) 23,664,000 1,074,000 32,497,000
Net income -- -- -- 5,732,000 -- 5,732,000
Other comprehensive loss -- -- -- -- (994,000) (994,000)
Comprehensive income 4,738,000
Cash dividends ($0.33 per share) -- -- -- (1,449,000) -- (1,449,000)
3 for 1 stock split
(3,178,524 shares) 1,589,000 (1,589,000) -- -- -- --
BALANCE AT
DECEMBER 31, 2003 2,384,000 6,483,000 (1,108,000) 27,947,000 80,000 35,786,000
Net income -- -- -- 6,171,000 -- 6,171,000
Other comprehensive loss -- -- -- -- (535,000) (535,000)
Comprehensive income 5,636,000
Cash dividends ($0.40 per share) -- -- -- (1,776,000) -- (1,776,000)
BALANCE AT
DECEMBER 31, 2004 $2,384,000 $ 6,483,000 $(1,108,000) $32,342,000 $ (455,000) $39,646,000
Per share data has been restated for a 3 for 1 stock split in 2003.
See accompanying notes to consolidated financial statements.
F-4
Consolidated Statements of Cash Flows
Years Ended December 31, 2004 2003 2002
OPERATING ACTIVITIES
Net income $ 6,171,000 $ 5,732,000 $ 5,242,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 360,000 620,000 900,000
Write down of other real estate owned -- 29,000 10,000
Net gain on sales of other real estate owned (6,000) (108,000) (791,000)
Depreciation and amortization 640,000 730,000 781,000
Net (gain) loss on disposal of premises and equipment (9,000) 29,000 20,000
Net earnings from cash surrender value of bank-owned
life insurance (479,000) (534,000) (379,000)
Deferred income tax benefit (223,000) (502,000) (184,000)
Net security (gains) losses (14,000) (307,000) 1,000
Increase (decrease) in accrued interest receivable 216,000 (172,000) (96,000)
Decrease (increase) in other assets 209,000 471,000 (937,000)
Increase in accrued expenses and other liabilities 490,000 554,000 573,000
Net cash provided by operating activities 7,355,000 6,542,000 5,140,000
INVESTING ACTIVITIES
Proceeds from maturities and calls:
Securities available for sale 20,527,000 56,207,000 64,694,000
Securities held to maturity 3,182,000 1,741,000 3,359,000
Proceeds from sales of securities available for sale -- 20,343,000 10,336,000
Purchases:
Securities available for sale (6,479,000) (75,858,000) (85,744,000)
Securities held to maturity (3,223,000) (2,984,000) (2,246,000)
Disbursements for loan originations, net of principal collections (27,845,000) (24,993,000) (9,889,000)
Net (purchase) sale of Federal Home Loan Bank stock (575,000) 300,000 (250,000)
Purchase of bank-owned life insurance -- -- (4,000,000)
Net purchases of premises and equipment (437,000) (592,000) (1,266,000)
Capital improvements made on other real estate -- -- (237,000)
Proceeds from sales of other real estate owned 49,000 338,000 2,306,000
Net cash used in investing activities (14,801,000) (25,498,000) (22,937,000)
FINANCING ACTIVITIES
Net increase in deposits 12,867,000 27,435,000 14,763,000
Proceeds from Federal Home Loan Bank borrowings -- 5,000,000 5,000,000
Repayments of Federal Home Loan Bank borrowings (8,500,000) (8,000,000) (5,000,000)
Net increase (decrease) in short-term borrowings 2,903,000 (912,000) 6,395,000
Cash dividends paid (1,776,000) (1,449,000) (1,331,000)
Net cash provided by financing activities 5,494,000 22,074,000 19,827,000
Net (decrease) increase in cash and cash equivalents (1,952,000) 3,118,000 2,030,000
Cash and cash equivalents at beginning of year 15,992,000 12,874,000 10,844,000
Cash and cash equivalents at end of year $ 14,040,000 $ 15,992,000 $ 12,874,000
SUPPLEMENTAL INFORMATION
Cash paid for:
Interest $ 4,043,000 $ 4,183,000 $ 5,490,000
Income taxes 2,070,000 2,128,000 3,251,000
Transfers of loans to other real estate owned -- 176,000 177,000
See accompanying notes to consolidated financial statements.
F-5
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The consolidated financial statements of Jeffersonville Bancorp (the Parent
Company) include its wholly owned subsidiary, The First National Bank of
Jeffersonville (the Bank). Collectively, these entities are referred to
herein as the "Company". All significant intercompany transactions have been
eliminated in consolidation.
The Parent Company is a bank holding company whose principal activity is
the ownership of all outstanding shares of the Bank's stock. The Bank is a
commercial bank providing community banking services to individuals, small
businesses and local municipal governments in Sullivan County, New York.
Management makes operating decisions and assesses performance based on an
ongoing review of the Bank's community banking operations, which constitute
the Company's only operating segment for financial reporting purposes.
The consolidated financial statements have been prepared, in all material
respects, in conformity with accounting principles generally accepted in the
United States of America. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses. Material
estimates that are particularly susceptible to near-term change include the
allowance for loan losses and the valuation of other real estate owned, which
are described below. Actual results could differ from these estimates.
For purposes of the consolidated statements of cash flows, the Company
considers cash and due from banks and federal funds sold, if any, to be cash
equivalents.
Reclassifications are made to prior years' consolidated financial
statements whenever necessary to conform to the current year's presentation.
INVESTMENT SECURITIES
Management determines the appropriate classification of securities at the
time of purchase. If management has the positive intent and ability to hold
debt securities to maturity, they are classified as securities held to
maturity and are stated at amortized cost. If securities are purchased for
the purpose of selling them in the near term, they are classified as trading
securities and are reported at fair value with unrealized gains and losses
reflected in current earnings. All other debt and marketable equity
securities are classified as securities available for sale and are reported
at fair value. Net unrealized gains or losses on securities available for
sale are reported (net of income taxes) in stockholders' equity as
accumulated other comprehensive (loss) income. Nonmarketable equity
securities are carried at cost. At December 31, 2004 and 2003, the Company
had no trading securities.
Gains and losses on sales of securities are based on the net proceeds and
the amortized cost of the securities sold, using the specific identification
method. The amortization of premium and accretion of discount on debt
securities is calculated using the level-yield interest method over the
period to the earlier of the call date or maturity date. Unrealized losses on
securities that reflect a decline in value which is other than temporary, if
any, are charged to income.
LOANS
Loans are stated at unpaid principal balances, less unearned discounts and
the allowance for loan losses. Unearned discounts on certain installment
loans are accreted into income using a level-yield interest method. Interest
income is recognized on the accrual basis of accounting. When, in the opinion
of management, the collection of interest is in doubt, the loan is classified
as nonaccrual. Generally, loans past due more than 90 days are classified as
nonaccrual. Thereafter, no interest is recognized as income until received in
cash or until such time as the borrower demonstrates the ability to make
scheduled payments of interest and principal.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged-off against the allowance when
management believes that the collectibility of all or a portion of the
principal is unlikely. Recoveries of loans previously charged-off are
credited to the allowance when realized.
The Company identifies impaired loans and measures loan impairment in
accordance with Statement of Financial Accounting Standards (SFAS) No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118.
Under SFAS No. 114, a loan is considered to be impaired when, based on
current information and events, it is probable that the creditor will be
unable to collect all principal and interest contractually due. SFAS No. 114
applies to loans that are individually evaluated for collectibility in
accordance with the Company's ongoing loan review procedure, principally
commercial mortgage loans and commercial loans. Smaller balance, homogeneous
loans which are collectively evaluated, such as consumer and smaller balance
residential mortgage loans are specifically excluded from the classification
of impaired loans. Creditors are permitted to measure impaired loans based on
(i) the present value of expected future cash
F-6
Notes to Consolidated Financial Statements
flows discounted at the loan's effective interest rate, (ii) the loan's
observable market price or (iii) the fair value of the collateral if the loan
is collateral dependent. If the approach used results in a measurement that
is less than an impaired loan's recorded investment, an impairment loss is
recognized as part of the allowance for loan losses.
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, particularly in
Sullivan County. In addition, Federal regulatory agencies, as an integral
part of their examination process, periodically review the Company's
allowance for loan losses and may require the Company to recognize additions
to the allowance based on their judgments about information available to them
at the time of their examination, which may not be currently available to
management.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are provided over the estimated
useful lives of the assets using straight-line or accelerated methods.
FEDERAL HOME LOAN BANK STOCK
As a member institution of the Federal Home Loan Bank (FHLB), the Bank is
required to hold a certain amount of FHLB stock. This stock is considered to
be a nonmarketable equity security and, accordingly, is carried at cost.
OTHER REAL ESTATE OWNED
Other real estate owned consists of properties acquired through foreclosure
and is stated on an individual-asset basis at the lower of (i) fair value
less estimated costs to sell or (ii) cost which represents the fair value at
initial foreclosure. When a property is acquired, the excess of the loan
balance over the fair value of the property is charged to the allowance for
loan losses. If necessary, subsequent write downs to reflect further declines
in fair value are included in non-interest expenses. Fair value estimates are
based on independent appraisals and other available information. While
management estimates losses on other real estate owned using the best
available information, such as independent appraisals, future write downs may
be necessary based on changes in real estate market conditions, particularly
in Sullivan County, and the results of regulatory examinations.
BANK-OWNED LIFE INSURANCE
The investment in bank-owned life insurance, which covers certain officers of
the Bank, is carried at the policies' cash surrender value. Increases in the
cash surrender value of bank-owned life insurance, net of premiums paid, are
included in non-interest income.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets are reduced by a valuation
allowance when management determines that it is more likely than not that all
or a portion of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date.
EARNINGS PER COMMON SHARE
Basic earnings per share (EPS) is computed by dividing income available to
common stockholders (net income less dividends on preferred stock, if any) by
the weighted average number of common shares outstanding for the period.
Entities with complex capital structures must also present diluted EPS which
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
shares. The Company does not have a complex capital structure and,
accordingly, has presented only basic EPS. All per share amounts have been
adjusted to give effect to the 3 for 1 stock split distributed on June 17,
2003.
Basic earnings per common share was computed based on average outstanding
common shares (adjusted for the 3 for 1 stock split in 2003) of 4,434,000 in
2004, 2003, and 2002. Income available to common stockholders equaled net
income for each of these years.
RECENT ACCOUNTING PRONOUNCEMENTS
The Emerging Issues Task Force (EITF) has provided guidance for the
determination and recognition of other-than-temporary impairment on
investment securities in EITF 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." EITF 03-1 provides
guidance for determining when an investment is considered impaired, whether
impairment is other-than-temporary, and measurement of an impairment loss. An
investment is considered impaired
F-7
Notes to Consolidated Financial Statements
if the fair value of the investment is less than its cost. Generally, an
impairment is considered other-than-temporary unless: (i) the investor has
the ability and intent to hold an investment for a reasonable period of time
sufficient for an anticipated recovery of fair value up to (or beyond) the
cost of the investment; and (ii) evidence indicating that the cost of the
investment is recoverable within a reasonable period of time outweighs
evidence to the contrary. If impairment is determined to be
other-than-temporary, then an impairment loss should be recognized equal to
the difference between the investment's cost and its fair value. Certain
disclosure requirements of EITF were adopted in 2003 and the Company has
presented the new disclosure requirements in its consolidated financial
statements for the years ended December 31, 2004 and 2003. The recognition
and measurement provisions were initially effective for other-than-temporary
impairment evaluations in reporting periods beginning after June 15, 2004.
However, in September 2004, the effective date of these provisions was
delayed until the finalization of a FASB Staff Position to provide additional
implementation guidance. Upon finalization of the FASB Staff Position,
management will evaluate the impact on the Company's consolidated financial
statements.
2. Cash and Due From Banks
The Bank is required to maintain certain reserves in the form of vault cash
and/or deposits with the Federal Reserve Bank. The amount of this reserve
requirement, which is included in cash and due from banks, was $6,418,000 at
December 31, 2004 and $5,889,000 at December 31, 2003.
3. Investment Securities
The amortized cost and estimated fair value of securities available for sale
are as follows:
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
DECEMBER 31, 2004
U.S. Government agency securities $ 51,351,000 $ 103,000 $ (993,000) $ 50,461,000
Obligations of states and political subdivisions 42,639,000 1,371,000 (133,000) 43,877,000
Mortgage-backed securities and
collateralized mortgage obligations 5,585,000 100,000 (95,000) 5,590,000
Total debt securities 99,575,000 1,574,000 (1,221,000) 99,928,000
Equity securities 653,000 124,000 -- 777,000
Total securities available for sale $100,228,000 $1,698,000 $(1,221,000) $100,705,000
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
DECEMBER 31, 2003
U.S. Government agency securities $ 59,837,000 $ 331,000 $(753,000) $ 59,415,000
Obligations of states and political subdivisions 44,332,000 1,614,000 (145,000) 45,801,000
Mortgage-backed securities and
collateralized mortgage obligations 9,434,000 233,000 (71,000) 9,596,000
Total debt securities 113,603,000 2,178,000 (969,000) 114,812,000
Equity securities 653,000 99,000 -- 752,000
Total securities available for sale $114,256,000 $2,277,000 $(969,000) $115,564,000
F-8
Notes to Consolidated Financial Statements
No securities available for sale were sold in 2004. Proceeds from sales
of securities available for sale during 2003, and 2002 were $20,343,000, and
$10,336,000, respectively. Gross gains and gross losses realized on sales and
calls of securities were as follows:
2004 2003 2002
Gross realized gains $14,000 $344,000 $ 15,000
Gross realized losses -- (37,000) (16,000)
Net security gains (losses) $14,000 $307,000 $ (1,000)
The amortized cost and estimated fair value of debt securities available
for sale at December 31, 2004, by remaining period to contractual maturity,
are shown in the following table. 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
Cost Fair Value
Within one year $11,067,000 $11,116,000
One to five years 15,765,000 16,084,000
Five to ten years 39,474,000 40,278,000
Over ten years 33,269,000 32,450,000
Total $99,575,000 $99,928,000
Substantially all mortgage-backed securities and collateralized mortgage
obligations are securities guaranteed by Freddie Mac or Fannie Mae, which are
U.S. government-sponsored entities. Securities available for sale with an
estimated fair value of $45,507,000 and $35,900,000 at December 31, 2004 and
2003 respectively, were pledged to secure public funds on deposit and for
other purposes.
The amortized cost and estimated fair value of securities held to
maturity are as follows:
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
DECEMBER 31, 2004
Obligations of states and political subdivisions $5,957,000 $ 95,000 $ (54,000) $5,998,000
DECEMBER 31, 2003
Obligations of states and political subdivisions $5,916,000 $157,000 $(126,000) $5,947,000
There were no sales of securities held to maturity in 2004, 2003, or
2002.
The amortized cost and estimated fair value of these securities at
December 31, 2004, by remaining period to contractual maturity, are shown in
the following table. Actual maturities will differ from contractual
maturities because certain issuers have the right to call or prepay their
obligations.
Amortized Estimated
Cost Fair Value
Within one year $3,101,000 $3,117,000
One to five years 1,939,000 1,976,000
Five to ten years 917,000 905,000
Total $5,957,000 $5,998,000
F-9
Notes to Consolidated Financial Statements
Gross unrealized losses on investment securities and the fair value of
the related securities, aggregated by investment category and length of time
that individual securities have been in a continuous unrealized loss
position, at December 31, 2004 were as follows:
Less Than 12 Months 12 Months or More Total
Estimated Unrealized Estimated Unrealized Estimated Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
AVAILABLE FOR SALE
U.S. Government agency securities $18,697,000 $332,000 $18,313,000 $661,000 $37,010,000 $ 993,000
Obligations of states and
political subdivisions 4,630,000 45,000 2,878,000 88,000 7,508,000 133,000
Mortgage-backed securities and
collateralized mortgage obligations 348,000 8,000 2,534,000 87,000 2,882,000 95,000
$23,675,000 $385,000 $23,725,000 $836,000 $47,400,000 $1,221,000
HELD TO MATURITY
Obligations of states and
political subdivisions $ 612,000 $ 1,000 $ 912,000 $ 53,000 $ 1,524,000 $ 54,000
At December 31, 2003 there were $969,000 in unrealized losses on
available for sale securities with an estimated fair value of $44,441,000
that had been in a continuous unrealized loss position for less than 12
months. There were no available for sale securities that had been in a
continuous unrealized loss position for 12 months or more at December 31,
2003.
At December 31, 2003 there were $61,000 in unrealized losses on held to
maturity securities with an estimated fair value of $221,000 that had been in
a continuous unrealized loss position for less than 12 months and $65,000 in
unrealized losses on held to maturity securities with an estimated fair value
of $998,000 that head been in a continuous unrealized loss position for 12
months or more.
The unrealized losses on securities at December 31, 2004 and 2003 were
caused by increases in market interest rates. The contractual terms of the
U.S. Government agency securities and the obligations of states 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 GNMA, FNMA,
and FHLMC. Because the Company has the ability and intent to hold these
securities until a market price recovery or possibly to maturity, these
investments are not considered other-than-temporarily impaired at December
31, 2004 and 2003.
F-10
Notes to Consolidated Financial Statements
4. Loans
The major classifications of loans are as follows at December 31:
2004 2003
REAL ESTATE LOANS
Residential $ 83,340,000 $ 78,339,000
Commercial 75,357,000 59,799,000
Home equity 21,127,000 18,337,000
Farm land 3,727,000 2,872,000
Construction 4,524,000 4,102,000
188,075,000 163,449,000
OTHER LOANS
Commercial loans 21,317,000 17,157,000
Consumer installment loans 14,116,000 15,350,000
Other consumer loans 1,345,000 1,488,000
Agricultural loans 338,000 403,000
37,116,000 34,398,000
Total loans 225,191,000 197,847,000
Unearned discounts (955,000) (1,172,000)
Allowance for loan losses (3,645,000) (3,569,000)
Total loans, net $220,591,000 $193,106,000
The Company originates residential and commercial real estate loans, as
well as commercial, consumer and agricultural loans, 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.
Periodically, the Company purchases loans from other financial institutions
that are in markets outside of Sullivan County.
Nonperforming loans are summarized as follows at December 31:
2004 2003 2002
Nonaccrual loans $ 724,000 $1,359,000 $3,162,000
Loans past due 90 days or more and still accruing interest 1,412,000 1,764,000 57,000
Total nonperforming loans $2,136,000 $3,123,000 $3,219,000
Nonperforming loans as a percentage of total loans 1.0% 1.6% 1.9%
Nonaccrual loans had the following effect on interest income for the
years ended December 31:
2004 2003 2002
Interest contractually due at original rates $ 90,000 $166,000 $ 278,000
Interest income recognized (29,000) (37,000) (140,000)
Interest income not recognized $ 61,000 $129,000 $ 138,000
F-11
Notes to Consolidated Financial Statements
Changes in the allowance for loan losses are summarized as follows for
the years ended December 31:
2004 2003 2002
Balance at beginning of the year $3,569,000 $3,068,000 $2,614,000
Provision for loan losses 360,000 620,000 900,000
Loans charged-off (433,000) (488,000) (662,000)
Recoveries 149,000 369,000 216,000
Balance at end of year $3,645,000 $3,569,000 $3,068,000
As of December 31, 2004 and 2003, the recorded investment in loans that
were considered to be impaired under SFAS No. 114 totaled $375,000 and
$948,000, respectively. There was no allowance for loan impairment under SFAS
No. 114 at December 31, 2004 and December 31, 2003, primarily due to prior
charge-offs and the adequacy of collateral values on these loans. During
2004, 2003, and 2002, the average recorded investment in impaired loans was
approximately $705,000, $1,102,000, and $1,050,000, respectively. Interest
income on impaired loans recognized on the cash basis during the period of
impairment was not significant in any year. There are no commitments to lend
additional funds on the above noted non-performing loans.
5. Premises and Equipment
The major classifications of premises and equipment were as follows at
December 31:
2004 2003
Land $ 387,000 $ 387,000
Buildings 2,790,000 2,711,000
Furniture and fixtures 116,000 106,000
Equipment 2,739,000 2,457,000
Building and leasehold improvements 1,099,000 920,000
Construction in progress -- 175,000
7,131,000 6,756,000
Less accumulated depreciation and amortization (4,262,000) (3,693,000)
Total premises and equipment, net $ 2,869,000 $ 3,063,000
Depreciation and amortization expense was $640,000, $730,000, and
$781,000 in 2004, 2003, and 2002, respectively.
6. Time Deposits
The following is a summary of time deposits at December 31, 2004 by remaining
period to contractual maturity:
Within one year $ 79,555,000
One to two years 13,137,000
Two to three years 4,970,000
Three to four years 3,467,000
Four to five years 3,048,000
Over five years --
Total time deposits $104,177,000
Time deposits of $100,000 or more totaled $24,532,000 at December 31,
2004 and $22,863,000 at December 31, 2003. Interest expense related to time
deposits over $100,000 was $514,000, $441,000, and $587,000 for 2004, 2003,
and 2002, respectively.
F-12
Notes to Consolidated Financial Statements
7. Federal Home Loan Bank Borrowings
The following is a summary of FHLB advances outstanding at December 31:
2004 2003
Amount Rate Amount Rate
Variable rate advances maturing within one year $ -- -- $ 5,000,000 1.20%
Fixed rate advances maturing in 2004 -- -- 3,500,000 4.40%
Fixed rate advances maturing in 2005 3,500,000 4.86% 3,500,000 4.86%
Fixed rate advances maturing in 2008 10,000,000 5.02% 10,000,000 5.02%
Fixed rate advances maturing in 2009 5,000,000 5.45% 5,000,000 5.45%
Total FHLB advances $18,500,000 5.11% $27,000,000 4.29%
Borrowings are secured by the Bank's investment in FHLB stock and by a
blanket security agreement. This agreement requires the Bank to maintain as
collateral certain qualifying assets (principally residential mortgage loans)
not otherwise pledged. The carrying value of the total qualifying residential
mortgage loan and security collaterals at December 31, 2004 were $10.6
million and $28.1 million respectively, which satisfied the collateral
requirements of the FHLB.
8. Short-Term Borrowings
Short-term borrowings at December 31, 2004 and 2003 are primarily comprised
of overnight FHLB borrowings. The Bank, as a member of the FHLB, has access
to a line of credit program with a maximum borrowing capacity of $35.5
million and $31.9 million as of December 31, 2004 and 2003, respectively.
Borrowings under the overnight program at December 31, 2004, were $8.0
million at a rate of 2.38%. Borrowings under the overnight program at
December 31, 2003, were $5.0 million at a rate of 1.04%. The Bank has pledged
mortgage loans and FHLB stock as collateral on these borrowings. During 2004,
the maximum month-end balance was $8.0 million, the average balance was $1.1
million, and the average interest rate was 1.72%. During 2003, the maximum
month-end balance was $23.0 million, the average balance was $4.5 million,
and the average interest rate was 1.19%. Short-term borrowings at December
31, 2004 and 2003 also included $424,000 and $521,000, respectively of
treasury, tax and loan notes.
9. Income Taxes
The components of income tax expense are as follows for the years ended
December 31:
2004 2003 2002
CURRENT TAX EXPENSES
Federal $2,115,000 $2,159,000 $2,068,000
State 325,000 327,000 339,000
Deferred tax benefit (223,000) (502,000) (184,000)
Total income tax expense $2,217,000 $1,984,000 $2,223,000
Not included in the above table is net deferred income tax (benefit)
expense of $(354,000), $(685,000), and $879,000, in 2004, 2003, and 2002,
respectively, associated with the unrealized gain or loss on securities
available for sale and a minimum pension liability, which are recorded
directly in stockholders' equity as components of accumulated other
comprehensive (loss) income.
F-13
Notes to Consolidated Financial Statements
The reasons for the differences between income tax expense and taxes
computed by applying the statutory Federal tax rate of 34% to income before
income taxes are as follows:
2004 2003 2002
Tax at statutory rate $2,852,000 $2,623,000 $2,538,000
State taxes, net of Federal tax benefit 186,000 152,000 201,000
Tax-exempt interest (683,000) (660,000) (418,000)
Interest expense allocated to tax-exempt securities 38,000 37,000 30,000
Net earnings from cash surrender value
of bank-owned life insurance (168,000) (182,000) (129,000)
Other adjustments (8,000) 14,000 1,000
Income tax expense $2,217,000 $1,984,000 $2,223,000
The tax effects of temporary differences and tax credits that give rise
to deferred tax assets and liabilities at December 31 are presented below:
2004 2003
DEFERRED TAX ASSETS
Allowance for loan losses in excess of tax bad debt reserve $1,271,000 $1,241,000
Interest on nonaccrual loans 2,000 7,000
Retirement benefits 1,166,000 896,000
Deferred compensation 84,000 91,000
Depreciation 328,000 304,000
Other real estate owned 90,000 143,000
Total deferred tax assets 2,941,000 2,682,000
DEFERRED TAX LIABILITIES
Prepaid expenses (329,000) (294,000)
Other taxable temporary differences (5,000) (4,000)
Total deferred tax liabilities (334,000) (298,000)
Net deferred tax asset $2,607,000 $2,384,000
In addition to the deferred tax assets and liabilities described above,
the Company also has a deferred tax liability of $202,000 at December 31,
2004 related to the net unrealized gain on securities available for sale as
of December 31, 2004 and a deferred tax asset of $492,000 related to a
minimum pension liability as of December 31, 2004. In addition to the
deferred tax assets and liabilities described above, the Company also has a
deferred tax liability of $535,000 at December 31, 2003 related to the net
unrealized gain on securities available for sale as of December 31, 2003 and
a deferred tax asset of $478,000 related to a minimum pension liability as of
December 31, 2003.
In assessing the realizability of the Company's total deferred tax
assets, management considers whether it is more likely than not that some
portion or all of those assets will not be realized. Based upon management's
consideration of historical and anticipated future pre-tax income, as well as
the reversal period for the items giving rise to the deferred tax assets and
liabilities, a valuation allowance for deferred tax assets was not considered
necessary at December 31, 2004 and 2003.
F-14
Notes to Consolidated Financial Statements
10. Other Non-interest Expenses
The major components of other non-interest expenses are as follows for the
years ended December 31:
2004 2003 2002
Stationery and supplies $ 287,000 $ 348,000 $ 283,000
Director expenses 277,000 227,000 244,000
ATM and credit card processing fees 582,000 469,000 462,000
Professional services 581,000 406,000 247,000
Other expenses 1,464,000 1,386,000 1,378,000
Other non-interest expenses $3,191,000 $2,836,000 $2,614,000
11. Regulatory Capital Requirements
National banks are required to maintain minimum levels of regulatory capital
in accordance with regulations of the Office of the Comptroller of the
Currency (OCC). The Federal Reserve Board (FRB) imposes similar requirements
for consolidated capital of bank holding companies. The OCC and FRB
regulations require a minimum leverage ratio of Tier 1 capital to total
adjusted assets of 4.0%, and minimum ratios of Tier I and total capital to
risk-weighted assets of 4.0% and 8.0%, respectively.
Under its prompt corrective action regulations, the OCC is required to
take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized bank. Such actions could have a
direct material effect on a bank's financial statements. The regulations
establish a framework for the classification of banks into five categories:
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Generally, a bank is
considered well capitalized if it has a leverage (Tier I) capital ratio of at
least 5.0%, a Tier 1 risk-based capital ratio of at least 6.0%, and a total
risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the regulators
about capital components, risk weightings and other factors.
Management believes that, as of December 31, 2004 and 2003, the Bank and
the Parent Company met all capital adequacy requirements to which they are
subject. Further, the most recent OCC notification categorized the Bank as a
well-capitalized bank under the prompt corrective action regulations. There
have been no conditions or events since that notification that management
believes have changed the Bank's capital classification.
F-15
Notes to Consolidated Financial Statements
The following is a summary of the actual capital amounts and ratios as of
December 31, 2004 and 2003 for the Bank and the Parent Company
(consolidated), compared to the required ratios for minimum capital adequacy
and for classification as well-capitalized:
Actual Required Ratios
Minimum Classification
Capital as Well
Amount Ratio Adequacy Capitalized
DECEMBER 31, 2004
BANK
Leverage (Tier 1) capital $36,981,000 10.2% 4.0% 5.0%
Risk-based capital:
Tier 1 36,981,000 16.0 4.0 6.0
Total 39,872,000 17.3 8.0 10.0
CONSOLIDATED
Leverage (Tier 1) capital $39,370,000 10.9% 4.0%
Risk-based capital:
Tier 1 39,370,000 16.9 4.0
Total 42,261,000 18.2 8.0
DECEMBER 31, 2003
BANK
Leverage (Tier 1) capital $32,478,000 9.2% 4.0% 5.0%
Risk-based capital:
Tier 1 32,478,000 15.7 4.0 6.0
Total 35,082,000 16.9 8.0 10.0
CONSOLIDATED
Leverage (Tier 1) capital $35,013,000 10.3% 4.0%
Risk-based capital:
Tier 1 35,013,000 16.7 4.0
Total 37,617,000 17.9 8.0
12. Stockholders' Equity
DIVIDEND RESTRICTIONS
Dividends paid by the Bank are the primary source of funds available to the
Parent Company for payment of dividends to its stockholders and for other
working capital needs. Applicable Federal statutes, regulations and
guidelines impose restrictions on the amount of dividends that may be
declared by the Bank. Under these restrictions, the dividends declared and
paid by the Bank to the Parent Company may not exceed the total amount of the
Bank's net profit retained in the current year plus its retained net profits,
as defined, from the two preceding years. The Bank's retained net profits
(after dividend payments to the Parent Company) for 2004 and 2003 totaled
$13,282,000 and $8,972,000, respectively.
PREFERRED STOCK PURCHASE RIGHTS
On July 9, 1996, the board of directors declared a dividend distribution of
one purchase right ("Right") for each outstanding share of Parent Company
common stock ("Common Stock"), to stockholders of record at the close of
business on July 9, 1996. The Rights have a 10-year term.
The Rights become exercisable (i) 10 days following a public announcement
that a person or group has acquired, or obtained the right to acquire,
beneficial ownership of 20% or more of the outstanding shares of Common
Stock, or (ii) 10 days following the commencement of a tender offer or
exchange offer that, if successful, would result in an acquiring person or
group beneficially owning 30% or more of the outstanding Common Stock (unless
such tender or exchange offer is predicated upon the redemption of the
Rights).
F-16
Notes to Consolidated Financial Statements
When the Rights become exercisable, a holder is entitled to purchase one
one-hundredth of a share, subject to adjustment, of Series A Preferred Stock
of the Parent Company or, upon the occurrence of certain events described
below, Common Stock of the Parent Company or common stock of an entity that
acquires the Company. The purchase price per one one-hundredth of a share of
Series A Preferred Stock (Purchase Price) will equal the board of directors'
judgment as to the "long-term investment value" of one share of Common Stock
at the end of the 10-year term of the Rights.
Upon the occurrence of certain events (including certain acquisitions of
more than 20% of the Common Stock by a person or group), each holder of an
unexercised Right will be entitled to receive Common Stock having a value
equal to twice the Purchase Price of the Right. Upon the occurrence of
certain other events (including acquisition of the Parent Company in a merger
or other business combination in which the Parent Company is not the
surviving corporation), each holder of an unexercised Right will be entitled
to receive common stock of the acquiring person having a value equal to twice
the Purchase Price of the Right.
The Parent Company may redeem the Rights (to the extent not exercised) at
any time, in whole but not in part, at a price of $0.01 per Right.
13. Comprehensive (Loss) Income
Comprehensive (loss) income represents the sum of net income and items of
"other comprehensive (loss) income" which are reported directly in
stockholders' equity, such as the net unrealized gain or loss on securities
available for sale and minimum pension liability adjustments. The Company has
reported its comprehensive (loss) income for 2004, 2003, and 2002 in the
consolidated statements of changes in stockholders' equity.
The Company's other comprehensive (loss) income consisted of the
following components for the years ended December 31:
2004 2003 2002
Net unrealized holding (losses) gains arising during the
year, net of taxes of $327,000 in 2004, $688,000 in 2003,
and ($1,276,000) in 2002 $(490,000) $(998,000) $1,848,000
Reclassification adjustment for net realized (gains) losses
included in income, net of taxes of $6,000 in 2004,
$125,000 in 2003, and $0 in 2002 (8,000) (182,000) 1,000
Minimum pension liability adjustment, net of taxes of
$21,000 in 2004, ($128,000) in 2003, and $397,000 in 2002 (37,000) 186,000 (576,000)
Other comprehensive (loss) income $(535,000) $(994,000) $1,273,000
14. Related Party Transactions
Certain directors and executive officers of the Company, as well as certain
affiliates of these directors and officers, have engaged in loan transactions
with the Company. Such loans were made in the ordinary course of business at
the Company's normal terms, including interest rates and collateral
requirements, and do not represent more than normal risk of collection.
Outstanding loans to these related parties are summarized as follows at
December 31:
2004 2003
Directors $1,102,000 $ 961,000
Executive offices
(nondirectors) 216,000 266,000
$1,318,000 $1,227,000
During 2004, total advances to these directors and officers were
$2,884,000 and total payments made on these loans were $2,793,000. These
directors and officers had unused lines of credit with the Company of
$730,000 at December 31, 2004.
F-17
Notes to Consolidated Financial Statements
15. Employee Benefit Plans
PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company has a noncontributory defined benefit pension plan covering
substantially all of its employees. The benefits are based on years of
service and the employee's average compensation during the five consecutive
years in the last ten years of employment affording the highest such average.
The Company's funding policy is to contribute annually an amount sufficient
to satisfy the minimum funding requirements of ERISA, but not greater than
the maximum amount that can be deducted for Federal income tax purposes.
Contributions are intended to provide not only for benefits attributed to
service to date, but also for benefits expected to be earned in the future.
The Company also sponsors a postretirement medical and life insurance
benefit plan for retirees in the pension plan. Effective in 2004, employees
with a minimum of 10 years of service, attainment of age 60 or later, and
whose age plus service is greater than or equal to 85 are eligible for
medical benefits. The plans are noncontributory, except that the retiree must
pay the full cost of spouse medical coverage. Both of the plans are unfunded.
The Company accounts for the cost of these postretirement benefits in
accordance with SFAS No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions. Accordingly, the cost of these benefits is
recognized on an accrual basis as employees perform services to earn the
benefits. The Company adopted SFAS No. 106 as of January 1, 1993 and elected
to amortize the accumulated benefit obligation at that date (transition
obligation) into expense over the allowed period of 20 years.
In December 2004, the Medicare Prescription Drug, Improvement and
Modernization Act of 2004 (Medicare Act) was signed into law. The Medicare
Act introduced both a Medicare prescription-drug benefit and a federal
subsidy to sponsors of retiree health-care plans that provide a benefit at
least "actuarially equivalent" to the Medicare benefit. These provisions of
the Medicare Act will affect accounting measurements under SFAS No. 106.
Accordingly, the FASB staff has issued guidance allowing companies to
recognize or defer recognizing the effects of the Medicare Act in annual
financial statements for fiscal years ending after enactment of the Medicare
Act. The Company has elected to defer recognizing the effects of the Medicare
Act in its December 31, 2004 consolidated financial statements. Accordingly,
the reported measures of the accumulated postretirement benefit obligation
and net periodic postretirement benefit cost do not include the effects of
the Medicare Act. When issued, the specific authoritative literature on
accounting for the federal subsidy could require the Company to revise its
previously reported information.
The Company expects to contribute $341,000 to its pension plan and
$73,000 to its other postretirement benefit plan in 2005. The pension
benefits expected to be paid in each year from 2005-2009 are $234,000,
$241,000, $243,000, $324,000, and $332,000, respectively. The aggregate
pension benefits expected to be paid in the five years from 2010-2014 are
$2,428,000. The expected benefits are based on the same assumptions used to
measure the Company's benefit obligation at September 30 and include
estimated future employee service. The other postretirement benefits expected
to be paid in each year from 2005-2009 are $107,000, $113,000, $122,000,
$129,000 and $146,000, respectively. The aggregate other postretirement
benefits expected to be paid in the five years from 2010-2014 are $1,119,000.
The expected benefits are based on the same assumptions used to measure the
Company's benefit obligation at December 31 and include estimated future
employee service.
F-18
Notes to Consolidated Financial Statements
The following is a summary of changes in the benefit obligations and plan
assets for the pension plan as of a September 30 measurement date and the
other postretirement benefit plan as of a December 31 measurement date,
together with a reconciliation of each plan's funded status to the amounts
recognized in the consolidated balance sheets:
Pension Benefits Postretirement Benefits
2004 2003 2004 2003
CHANGES IN BENEFIT OBLIGATION
Beginning of year $ 6,049,000 $ 5,624,000 $ 3,604,000 $ 2,272,000
Service cost 266,000 253,000 242,000 151,000
Interest cost 375,000 339,000 209,000 146,000
Actuarial (gain) loss 547,000 53,000 (7,000) 1,070,000
Benefits paid (249,000) (220,000) (49,000) (43,000)
Plan Amendments -- -- (906,000) --
Contributions by plan participants -- -- 11,000 8,000
End of year 6,988,000 6,049,000 3,104,000 3,604,000
CHANGES IN FAIR VALUE OF PLAN ASSETS
Beginning of year 4,222,000 3,180,000 -- --
Actual return on plan assets 416,000 511,000 -- --
Employer contributions 488,000 751,000 38,000 35,000
Contributions by plan participants -- -- 10,000 8,000
Benefits paid (249,000) (220,000) (48,000) (43,000)
End of year 4,877,000 4,222,000 -- --
Underfunded status at end of year (2,111,000) (1,827,000) (3,104,000) (3,604,000)
Unrecognized net transition (asset) obligation (6,000) (10,000) -- 166,000
Unrecognized net actuarial loss 2,520,000 2,202,000 1,370,000 1,437,000
Unrecognized prior service cost (benefit) 236,000 262,000 (758,000) --
Net amount recognized $ 639,000 $ 627,000 $(2,492,000) $(2,001,000)
AMOUNTS RECOGNIZED IN THE
CONSOLIDATED BALANCE SHEET
CONSIST OF
Prepaid (accrued) benefit cost $ 639,000 $ 627,000 $(2,492,000) $(2,001,000)
Additional minimum liability (1,465,000) (1,433,000) -- --
Intangible asset 236,000 262,000 -- --
Accumulated other comprehensive loss
(pre-tax basis) 1,229,000 1,171,000 -- --
Net amount recognized $ 639,000 $ 627,000 $(2,492,000) $(2,001,000)
The accumulated benefit obligation for the pension plan was $5,705,000 and
$5,028,000 at September 30, 2004 and 2003, respectively.
F-19
Notes to Consolidated Financial Statements
The components of the net periodic benefit cost for these plans were as
follows:
Pension Benefits
2004 2003 2002
Service cost $ 266,000 $ 253,000 $ 249,000
Interest cost 375,000 339,000 334,000
Expected return on plan assets (321,000) (278,000) (271,000)
Amortization of prior service cost 25,000 25,000 25,000
Amortization of transition asset (4,000) (4,000) (4,000)
Recognized net actuarial loss 135,000 110,000 114,000
Net periodic benefit cost $ 476,000 $ 445,000 $ 447,000
Postretirement Benefits
2004 2003 2002
Service cost $242,000 $151,000 $186,000
Interest cost 209,000 146,000 181,000
Amortization of transition obligation 18,000 18,000 18,000
Recognized net actuarial loss 60,000 8,000 42,000
Net periodic benefit cost $529,000 $323,000 $427,000
Assumptions used to determine benefit obligations for the pension plan as
of a September 30 measurement date and for the other postretirement benefits
plan as of a December 31 measurement date were as follows:
Pension Benefits Postretirement Benefits
2004 2003 2004 2003
Discount rate 5.75% 5.85% 5.75% 5.85%
Rate of compensation increase 3.75 3.85 -- --
Assumptions used to determine net periodic benefit cost were as follows:
Pension Benefits Postretirement Benefits
2004 2003 2004 2003
Discount rate 5.85% 6.50% 5.85% 6.50%
Expected long-term rate of return on plan assets 7.50 8.25 -- --
Rate of compensation increase 3.85 4.50 -- --
The Company's expected long-term rate of return on plan assets reflects
long-term earnings expectations and was determined based on historical
returns earned by existing plan assets adjusted to reflect expectations of
future returns as applied to plan's targeted allocation of assets.
In 2004, the Postretirement plan was amended from retiree eligibility of
attainment of age 60 with a minimum of 10 years of service to of attainment
of age 60 with a minimum of 10 years of service and whose age plus service is
greater than or equal to 85. This changed from the requirement that employees
must retire after age 60 with at least 10 years of service to be eligible for
medical benefits. In addition, retiree contributions for ages 65 and over
changed to retiree pays 25% of the special Medicare Supplement premium if
single coverage is selected and 40% of the special Medicare Supplement
premium otherwise, from the previous provision of retiree pays 25% of the
active premium or the special Medicare Supplement premium for any coverage
selected.
The assumed health care cost trend rate for retirees under age 65 which
was used to determine the benefit obligation for the other postretirement
benefits plan at December 31, 2004 was 10.0%, declining gradually to 5.0% in
2010 and remaining
F-20
Notes to Consolidated Financial Statements
at that level thereafter. The assumed health care cost trend rate for
retirees over age 65 which was also used to determine the benefit obligation
for the other postretirement benefits plan at December 31, 2004 was 9.0%,
declining gradually to 4.0% in 2010 and remaining at that level thereafter.
Increasing the assumed health care cost trend rates by one percentage point
in each year would increase the benefit obligation at December 31, 2004 by
approximately $610,000 and the net periodic benefit cost for the year by
approximately $100,000; a one percentage point decrease would decrease the
benefit obligation and benefit cost by approximately $471,000 and $77,000,
respectively.
The Company's pension plan asset allocation at September 30, 2004 and
2003, by asset category is as follows:
2004 2003
ASSET CATEGORY
Equity securities 50% 49%
Debt securities 37 37
Other 13 14
Total 100% 100%
Plan assets are invested in six diversified investment funds of
Massachusetts Mutual Life Insurance Company (Mass Mutual). The investment
funds include three equity funds, two bond funds and one money market fund.
Mass Mutual has been given discretion by the Company to determine the
appropriate strategic asset allocation as governed by the Company's
Discretionary Asset Management Investment Policy Statement which provides
specific targeted asset allocations for each investment fund as follows:
Allocation Range
MASS MUTUAL INVESTMENT FUNDS
Core Value Equity 25% - 35%
Small Cap Equity 5% - 15%
International Equity 5% - 15%
Core Bond 15% - 30%
Short Duration Bond 0% - 30%
Money Market 5% - 25%
TAX-DEFERRED SAVINGS PLAN
The Company maintains a qualified 401(k) plan for all employees, which
permits tax-deferred employee contributions up to 15% of salary and provides
for matching contributions by the Company. The Company matches 100% of
employee contributions up to 4% of the employee's salary and 25% of the next
2% of the employee's salary. The Company continues to match 25% of employee
contributions beyond 6% of the employee's salary until the total matching
contribution reaches $1,500 or 15%. The Company contributed $133,000 in 2004,
$144,000 in 2003, and $130,000 in 2002.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
In 2003, the Company established a Supplemental Executive Retirement Plan for
certain executive officers primarily to restore benefits cutback in certain
employee benefit plans due to Internal Revenue Service regulations. The
benefits accrued under this plan totaled $186,000 at December 31, 2004 and
are unfunded. The Company recorded an expense of $83,000 and $103,000
relating to this plan during the years ended December 31, 2004 and 2003
respectively.
DIRECTOR RETIREMENT PLAN
In 2003, the Company established a Director Retirement Plan in order to
provide certain retirement benefits to participating directors. Generally,
each participating director receives an annual retirement benefit of sixty to
eighty percent of their average annual cash compensation during the three
calendar years preceding their retirement date, as defined in the plan. This
annual retirement benefit is payable until death and may not exceed $40,000
per year. The benefits accrued under this plan totaled $187,000 at December
31, 2004 and are unfunded. The Company recorded an expense of $107,000 and
$80,000 relating to this plan during the years ended December 31, 2004 and
2003 respectively.
16. Commitments and Contingent Liabilities
LEGAL PROCEEDINGS
The Parent Company and the Bank are, from time to time, defendants in legal
proceedings relating to the conduct of their business. In the best judgment
of management, the consolidated financial position of the Company will not be
affected materially by the outcome of any pending legal proceedings.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
The Company is a party to certain financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These are limited to commitments to extend credit and
standby letters of credit which involve, to varying degrees, elements of
credit risk in
F-21
Notes to Consolidated Financial Statements
excess of the amounts recognized in the consolidated balance sheets. The
contract amounts of these instruments reflect the extent of the Company's
involvement in particular classes of financial instruments.
The Company's maximum exposure to credit loss in the event of
nonperformance by the other party to these instruments represents the
contract amounts, assuming that they are fully funded at a later date and any
collateral proves to be worthless. The Company uses the same credit policies
in making commitments as it does for on-balance-sheet extensions of credit.
Contract amounts of financial instruments that represent agreements to
extend credit are as follows at December 31:
2004 2003
Loan origination commitments and
unused lines of credit:
Mortgage loans $ 9,211,000 $10,121,000
Commercial loans 15,430,000 13,034,000
Credit card lines 4,998,000 3,044,000
Home equity lines 9,727,000 7,011,000
Other revolving credit 4,587,000 2,157,000
43,953,000 35,367,000
Standby letters of credit 808,000 630,000
$44,761,000 $35,997,000
These agreements to extend credit have been granted to customers within
the Company's lending area described in note 4 and relate primarily to
fixed-rate loans.
Loan origination commitments and lines of credit are agreements to lend
to a customer as long as there is no violation of any condition established
in the contract. These agreements generally have fixed expiration dates or
other termination clauses and may require payment of a fee by the customer.
Since commitments and lines of credit may expire without being fully drawn
upon, the total contract amounts do not necessarily represent future cash
requirements.
The Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral, if any, required by the Company upon the
extension of credit is based on management's credit evaluation of the
customer. Mortgage commitments are secured by a first lien on real estate.
Collateral on extensions of credit for commercial loans varies but may
include accounts receivable, equipment, inventory, livestock, and
income-producing commercial property.
FASB Interpretation No. 45 (FIN No. 45), Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others; an Interpretation of FASB Statements No. 5, 57, and
107 and rescission of FASB Interpretation No. 34, requires certain
disclosures and liability-recognition for the fair value at issuance of
guarantees that fall within its scope. Under FIN No. 45, 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 conditional
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 $808,000 and
$630,000 at December 31, 2004 and 2003, 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 December 31, 2004 and
2003 was not significant.
F-22
Notes to Consolidated Financial Statements
17. Fair Values of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires
that the Company disclose estimated fair values for its on- and
off-balance-sheet financial instruments. SFAS No. 107 defines fair value as
the amount at which a financial instrument could be exchanged in a current
transaction between parties other than in a forced sale or liquidation.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holding of a particular
financial instrument, nor do they reflect possible tax ramifications or
transaction costs. Because no market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected net cash flows, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment, and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of anticipated
future business or the value of nonfinancial assets and liabilities. In
addition, there are significant unrecognized intangible assets that are not
included in these fair value estimates, such as the value of "core deposits"
and the Company's branch network.
The following is a summary of the net carrying values and estimated fair
values of the Company's financial assets and liabilities (none of which were
held for trading purposes) at December 31:
2004 2003
Net Net
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
FINANCIAL ASSETS
Cash and due from banks $ 14,040,000 $ 14,040,000 $ 15,992,000 $ 15,992,000
Securities available for sale 100,705,000 100,705,000 115,564,000 115,564,000
Securities held to maturity 5,957,000 5,998,000 5,916,000 5,947,000
Loans, net 220,591,000 222,140,000 193,106,000 195,627,000
Accrued interest receivable 2,085,000 2,085,000 2,301,000 2,301,000
FHLB stock 2,175,000 2,175,000 1,600,000 1,600,000
FINANCIAL LIABILITIES
Demand deposits (non-interest bearing) 65,208,000 65,208,000 59,189,000 59,189,000
Interest-bearing deposits 227,886,000 227,886,000 221,038,000 221,038,000
FHLB advances 18,500,000 19,159,000 27,000,000 28,113,000
Short-term borrowings 8,424,000 8,424,000 5,521,000 5,521,000
Accrued interest payable 232,000 232,000 224,000 224,000
The specific estimation methods and assumptions used can have a
substantial impact on the estimated fair values. The following is a summary
of the significant methods and assumptions used by the Company to estimate
the fair values shown in the preceding table:
SECURITIES
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. The fair values of longer-term securities are estimated
based on bid prices published in financial newspapers or bid quotations
received from securities dealers. The fair values of certain state and
municipal securities are not readily available through market sources;
accordingly, fair value estimates are based on quoted market prices of
similar instruments, adjusted for any significant differences between the
quoted instruments and the instruments being valued.
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
F-23
Notes to Consolidated Financial Statements
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.
The fair values of nonperforming loans are based on recent external
appraisals and discounted cash flow analyses. Estimated cash flows are
discounted using a rate commensurate with the risk associated with the
estimated cash flows. Assumptions regarding credit risk, cash flows and
discount rates are judgementally determined using available market
information and specific borrower information.
DEPOSIT LIABILITIES
The fair values of deposits with no stated maturity (such as checking,
savings and money market deposits) equal the carrying amounts payable on
demand. The fair values of time deposits are based on the discounted value of
contractual cash flows (but are not less than the net amount at which
depositors could settle their accounts). The discount rates are estimated
based on the rates currently offered for time deposits with similar remaining
maturities.
FHLB ADVANCES
The fair value was estimated by discounting scheduled cash flows through
maturity using current market rates.
OTHER FINANCIAL INSTRUMENTS
The fair values of cash and cash equivalents, FHLB stock, accrued interest
receivable, accrued interest payable and short-term debt approximated their
carrying values at December 31, 2004 and 2003.
The fair values of the agreements to extend credit described in note 16
are estimated based on the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
present creditworthiness of the counterparties. For fixed rate loan
commitments, fair value estimates also consider the difference between
current market interest rates and the committed rates. At December 31, 2004
and 2003, the fair values of these financial instruments approximated the
related carrying values which were not significant.
18. Condensed Parent Company Financial Statements
The following are the condensed parent company only financial statements for
Jeffersonville Bancorp:
BALANCE SHEETS
December 31, 2004 2003
ASSETS
Cash $ 292,000 $ 112,000
Securities available for sale 736,000 711,000
Investment in subsidiary 37,137,000 33,377,000
Premises and equipment, net 963,000 1,024,000
Other assets 570,000 605,000
Total assets $39,698,000 $35,829,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ 52,000 $ 43,000
Stockholders' equity 39,646,000 35,786,000
Total liabilities and stockholders' equity $39,698,000 $35,829,000
F-24
Notes to Consolidated Financial Statements
STATEMENTS OF INCOME
Years Ended December 31, 2004 2003 2002
Dividend income from subsidiary $1,800,000 $ 700,000 $1,100,000
Dividend income on securities available for sale 23,000 48,000 92,000
Rental income from subsidiary 313,000 313,000 313,000
Other non-interest income 7,000 -- 3,000
2,143,000 1,061,000 1,508,000
Occupancy and equipment expenses 110,000 108,000 108,000
Other non-interest expenses 134,000 154,000 68,000
244,000 262,000 176,000
Income before income taxes and undistributed
income of subsidiary 1,899,000 799,000 1,332,000
Income tax expense 38,000 38,000 91,000
Income before undistributed income of subsidiary 1,861,000 761,000 1,241,000
Equity in undistributed income of subsidiary 4,310,000 4,971,000 4,001,000
Net income $6,171,000 $5,732,000 $5,242,000
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004 2003 2002
OPERATING ACTIVITIES
Net income $ 6,171,000 $ 5,732,000 $ 5,242,000
Equity in undistributed income of subsidiary (4,310,000) (4,971,000) (4,001,000)
Depreciation and amortization 61,000 62,000 62,000
Other adjustments, net 34,000 (2,000) 46,000
Net cash provided by operating activities 1,956,000 821,000 1,349,000
INVESTING ACTIVITIES
Proceeds from calls of securities available for sale 150,000 598,000 402,000
Purchase of securities available for sale (150,000) (376,000) (3,000)
Cash provided by investing activities -- 222,000 399,000
FINANCING ACTIVITIES
Cash dividends paid (1,776,000) (1,449,000) (1,331,000)
Net cash used in financing activities (1,776,000) (1,449,000) (1,331,000)
Net increase (decrease) in cash 180,000 (406,000) 417,000
Cash at beginning of year 112,000 518,000 101,000
Cash at end of year $ 292,000 $ 112,000 $ 518,000
F-25