JEFFERSONVILLE BANCORP - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - JEFFERSONVILLE BANCORP	Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - JEFFERSONVILLE BANCORP	v310453_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - JEFFERSONVILLE BANCORP	v310453_ex31-2.htm
EX-32.2 - EXHIBIT 32.2 - JEFFERSONVILLE BANCORP	v310453_ex32-2.htm
EX-31.1 - EXHIBIT 31.1 - JEFFERSONVILLE BANCORP	v310453_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarter Ended March 31, 2012

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

For the transition period from _______ to _______

Commission file number: 0-19212

JEFFERSONVILLE BANCORP

(Exact name of registrant as specified in its charter)

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

	4866 State Rte. 52, Jeffersonville, New York		12748
	(Address of principal executive offices)		(Zip Code)

(845) 482-4000

(Registrant’s telephone number, including area code)

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

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

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

None

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

Yes x No ¨

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

Yes x No ¨

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

Large accelerated filer ¨

Accelerated filer

Non-accelerated filer

Smaller reporting company

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

Yes ¨ No x

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

	Class		Outstanding at May 11, 2012
	Common Stock, $0.50 par value per share		4,234,505 shares

INDEX TO FORM 10-Q

			Page

PART 1		Financial Information

	Item 1.	Financial Statements

		Consolidated Interim Financial Statements (Unaudited)

		Consolidated Balance Sheets at March 31, 2012 and December 31, 2011	3

		Consolidated Statements of Income for the three months ended March 31, 2012 and 2011	4

		Consolidated Statements Comprehensive Income for the three months ended March 31, 2012 and 2011	5

		Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011	6

		Notes to Unaudited Consolidated Interim Financial Statements	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	26

	Item 4T.	Controls and Procedures	26

PART 2		Other Information

	Item 1.	Legal Proceedings	27

	Item 1A.	Risk Factors	27

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27

	Item 3.	Defaults Upon Senior Securities	27

	Item 4.	Mine Safety Disclosure	27

	Item 5.	Other Information	27

	Item 6.	Exhibits	27

		Signatures	28

Jeffersonville Bancorp and Subsidiary

Consolidated Balance Sheets

(In thousands, except share and per share data)

	As of March 31,			As of December 31,
	2012			2011
	(Unaudited)			(Unaudited)
ASSETS
Cash and cash equivalents	$	33,206		$	11,776
Securities available for sale, at fair value		113,252			107,428
Securities held to maturity, estimated fair value of $6,557 at March 31, 2012 and $6,989 at December 31, 2011		6,203			6,613
Loans, net of allowance for loan losses of $5,056 at March 31, 2012 and $4,712 at December 31, 2011		266,004			271,926
Accrued interest receivable		2,247			1,797
Bank-owned life insurance		14,463			15,342
Foreclosed real estate		1,948			2,954
Premises and equipment, net		5,422			5,500
Restricted investments		2,420			2,420
Other assets		7,963			7,756
Total Assets	$	453,128		$	433,512

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits:
Demand deposits (non-interest bearing)	$	64,934		$	61,441
NOW and super NOW accounts		54,520			45,693
Savings and insured money market deposits		109,838			102,180
Time deposits		150,810			150,395
Total Deposits		380,102			359,709

Federal Home Loan Bank long-term borrowings		15,000			15,000
Other liabilities		8,082			9,388
Total Liabilities		403,184			384,097

Stockholders’ equity
Series A preferred stock, no par value;
2,000,000 shares authorized, none issued		—			—
Common stock, $0.50 par value; 11,250,000 shares
authorized, 4,767,786 shares issued with 4,234,505
outstanding at both March 31, 2012 and December 31, 2011		2,384			2,384
Paid-in capital		6,483			6,483
Treasury stock, at cost; 533,281 shares at both March 31, 2012 and December 31, 2011		(4,965	)		(4,965	)
Retained earnings		45,377			44,862
Accumulated other comprehensive income		665			651
Total Stockholders’ Equity		49,944			49,415
Total Liabilities and Stockholders’ Equity	$	453,128		$	433,512

See accompanying notes to unaudited consolidated interim financial statements.

Jeffersonville Bancorp and Subsidiary

Consolidated Statements of Income

(In thousands, except per share data)


For the three months ended March 31,	2012		2011
	(Unaudited)		(Unaudited)
INTEREST AND DIVIDEND INCOME
Loan interest and fees	$	4,280	$	4,308
Securities:
Taxable		335		391
Tax-exempt		641		589
Interest bearing deposits		8		7
Total Interest and Dividend Income		5,264		5,295

INTEREST EXPENSE
Deposits		488		709
Federal Home Loan Bank borrowings		150		149
Other		—		1
Total Interest Expense		638		859

Net interest income		4,626		4,436
Provision for loan losses		600		600
Net Interest Income after Provision for Loan Losses		4,026		3,836

NON-INTEREST INCOME
Service charges		345		361
Fee income		243		239
Earnings on bank-owned life insurance		107		114
Life insurance benefit		93		—
Net gain on sale of securities		33		—
Other non-interest income		29		28
Total Non-Interest Income		850		742

NON-INTEREST EXPENSES
Salaries and employee benefits		1,995		2,010
Occupancy and equipment expenses		496		579
Foreclosed real estate expense, net		140		39
Other non-interest expenses		1,036		1,232
Total Non-Interest Expenses		3,667		3,860

Income before income tax expense		1,209		718
Income tax expense		144		14
Net Income	$	1,065	$	704

Basic earnings per common share	$	0.25	$	0.17
Average common shares outstanding		4,235		4,235
Cash dividends declared per share	$	0.13	$	0.13

See accompanying notes to unaudited consolidated interim financial statements.

Jeffersonville Bancorp and Subsidiary

Consolidated Statements of Comprehensive Income

(In thousands)

For the three months ended March 31,				2012					2011
				(Unaudited)					(Unaudited)

Net Income				$	1,065				$	704

Other comprehensive income:
Securities available for sale:
Net unrealized holding gains arising during the period	$	16				$	180
Income tax (expense) benefit		(6	)				(72	)
Net unrealized holding gains arising during the period, net of tax					10					108

Reclassification adjustment for net realized gains included in income		(33	)				-
Income tax expense		13					-
Reclassification adjustment for net realized gains included in income, net of tax					20					-

Amortization of pension and post retirement liabilities’ gains		40					22
Income tax expense		(16	)				(10	)
Amortization of pension and post retirement liabilities’ gains, net of tax					24					12

Other comprehensive income, net of tax					14					120
Comprehensive income				$	1,079				$	824

See accompanying notes to unaudited consolidated interim financial statements.

Jeffersonville Bancorp and Subsidiary

Consolidated Statements of Cash Flows

(In thousands)


For the three months ended March 31,	2012			2011
	(Unaudited)			(Unaudited)
OPERATING ACTIVITIES:
Net income	$	1,065		$	704
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses		600			600
Depreciation and amortization		188			186
Net (gain) loss on revaluation and sale of foreclosed real estate		22			(99	)
Earnings on bank-owned life insurance		(107	)		(114	)
Life insurance benefit		(93	)		—
Net gain on sale of securities		(33	)		—
Deferred income taxes		45			458
Increase in accrued interest receivable		(450	)		(230	)
Increase in other assets		(283	)		(454	)
Decrease in other liabilities		(1,266	)		(514	)
Net Cash Provided by (Used in) Operating Activities		(312	)		537

INVESTING ACTIVITIES:
Proceeds from maturities and calls:
Securities available for sale		3,965			5,699
Securities held to maturity		410			326
Proceeds from sales of securities available for sale		235			—
Purchases:
Securities available for sale		(10,007	)		(6,392	)
Securities held to maturity		—			(715	)
Disbursement for loan (originations), net of principal collections		4,787			3,532
Proceeds from cash surrender value of bank-owned life insurance		1,079			—
Purchase of restricted investments		—			(207	)
Redemption of restricted investments		—			616
Purchases of premises and equipment		(110	)		(86	)
Proceeds from sales of foreclosed real estate		1,540			494
Net Cash Provided by Investing Activities		1,899			3,267

FINANCING ACTIVITIES:
Net increase in deposits		20,393			21,818
Net decrease in short-term debt		—			(9,122	)
Cash dividends paid		(550	)		(550	)
Net Cash Provided by Financing Activities		19,843			12,146

Net Increase in Cash and Cash Equivalents		21,430			15,950
Cash and Cash Equivalents at Beginning of Year		11,776			7,518
Cash and Cash Equivalents at End of Year	$	33,206		$	23,468

SUPPLEMENTAL INFORMATION:
Cash paid for interest	$	659		$	869
Cash paid for income taxes		433			130
Transfer of loans to foreclosed real estate		535			1,200

See accompanying notes to unaudited consolidated interim financial statements.

Jeffersonville Bancorp and Subsidiary

Notes to Consolidated Interim Financial Statements

March 31, 2012

(Unaudited)

A. Financial Statement Presentation

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

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

B. Earnings per Share

Basic earnings per share amounts were calculated based on weighted average common shares outstanding. For the three month periods ended March 31, 2012 and 2011, the weighted average common shares outstanding were 4,234,505 for both periods. There were no dilutive securities outstanding during either period.

C. Accumulated Other Comprehensive Income

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

	March 31,			December 31,
Accumulated Other Comprehensive Income, Net of Tax	2012			2011
Supplemental executive retirement plan	$	(582	)	$	(604	)
Postretirement benefits		2,471			2,512
Defined benefit pension liability		(4,361	)		(4,420	)
Net unrealized holding gains on securities available for sale		3,580			3,597
Accumulated other comprehensive income, before tax		1,108			1,085
Income taxes related to accumulated other comprehensive income		(443	)		(434	)
Total	$	665		$	651

D. New Accounting Pronouncements

In November 2008, the SEC released a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards (IFRS). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (“IASB”) and is being worked on in a joint project with the Financial Accounting Standards board (FASB). The joint project currently has several items out in Exposure Drafts of which the proposed provisions for accounting for leases may impact the Company. At this time the impact of the proposed lease accounting would be to treat qualifying leased property as a right-of-use asset and a liability representing an obligation to make lease payments. The Company is currently assessing the impact that this potential change would have on its consolidated financial statements and it will continue to monitor the development of the potential implementation of IFRS.

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

E. Loans

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

Loans, Net	2012			2011
Commercial
Commercial real estate loans:
Commercial mortgage	$	93,343		$	94,799
Farm land		6,254			6,336
Construction		1,584			1,873
Total commercial real estate loans		101,181			103,008
Other commercial loans:
Commercial loans		23,884			24,715
Agricultural loans		2,039			1,806
Total other commercial loans		25,923			26,521
Total commercial loans		127,104			129,529
Consumer
Consumer real estate loans:
Residential mortgage		105,593			107,316
Home equity		30,139			31,081
Construction		2,025			2,107
Total residential real estate loans		137,757			140,504
Other consumer loans:
Consumer installment loans		4,547			5,250
Other consumer loans		1,652			1,355
Total other loans		6,199			6,605
Total consumer loans		143,956			147,109
Total gross loans		271,060			276,638
Allowance for loan losses		(5,056	)		(4,712	)
Total loans, net	$	266,004		$	271,926

Included in the above loan amounts are deferred loan fees and origination costs of $303,000 and $313,000 as of March 31, 2012 and December 31, 2011, respectively.

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

Nonperforming Loans

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

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

			Commercial		Commercial		Residential		Consumer
Nonperforming Loans	Total Loans		Real Estate		Other		Real Estate		Other
March 31, 2012:
Nonaccrual loans	$	7,638	$	4,460	$	1,033	$	2,002	$	143
Trouble debt restructures		1,216		411		103		702		—
Total nonaccrual loans		8,854		4,871		1,136		2,704		143
Loans past due 90 days or more and still accruing interest		1,784		657		—		1,123		4
Total nonperforming loans	$	10,638	$	5,528	$	1,136	$	3,827	$	147

December 31, 2011:
Nonaccrual loans	$	7,950	$	5,221	$	1,109	$	1,477	$	143
Trouble debt restructures		1,132		412		106		614		—
Total nonaccrual loans		9,082		5,633		1,215		2,091		143
Loans past due 90 days or more and still accruing interest		1,148		135		8		1,004		1
Total nonperforming loans	$	10,230	$	5,768	$	1,223	$	3,095	$	144

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

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

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

			Commercial		Commercial		Residential
Impaired Loans	Total Loans		Real Estate		Other		Real Estate
March 31, 2012:
Unpaid principal balance	$	9,040	$	6,915	$	1,356	$	769
Recorded investment		7,562		5,753		1,136		673
Average balance		7,814		5,965		1,147		702
Interest income for the three months ended:
Interest contractually due at original rates		112		86		24		2
Interest income recognized		79		55		15		9

Impaired loans:
Loans with no allowance	$	6,332	$	4,970	$	689	$	673
Loans with an allowance recorded		1,230		783		447		—
Related specific allowance	$	402	$	204	$	198	$	—

March 31, 2011:
Unpaid principal balance	$	10,003	$	8,632	$	1,371
Recorded investment		8,369		7,168		1,201
Average balance		11,424		9,957		1,467
Interest income for the three months ended:
Interest contractually due at original rates		182		165		17
Interest income recognized		186		159		27

Impaired loans:
Loans with no allowance	$	6,285	$	5,580	$	705
Loans with an allowance recorded		2,084		1,588		496
Related specific allowance	$	311	$	239	$	72

December 31, 2011:
Unpaid principal balance	$	9,513	$	7,328	$	1,416	$	769
Recorded investment		8,147		6,271		1,201		675
Average balance		11,493		9,238		1,491		764

Impaired loans:
Loans with no allowance	$	6,342	$	4,978	$	689	$	675
Loans with an allowance recorded		1,805		1,293		512		—
Related specific allowance	$	328	$	205	$	123	$	—

Loans restructured under the guidelines of ASC 310-40 Receivables Troubled Debt Restructures by Creditors are disclosed below as of March 31, 2012 and 2011 (in thousands):

	March 31, 2012								December 31, 2011
			Pre-Mod-		Post-Mod-						Pre-Mod-		Post-Mod-
			ification		ification		Current				ification		ification		Current
Trouble Debt			Recorded		recorded		recorded				recorded		recorded		recorded
Restructure	No.		investment		investment		investment		No.		investment		investment		investment
Commercial:
Real estate		2	$	417	$	430	$	411		2	$	417	$	430	$	412
Commercial loans		1		110		119		103		1		110		119		106
Consumer:
Real estate		3		580		649		601		3		580		649		614

A loan is classified as a troubled debt restructuring (“TDR”) when a concession that the Bank would not otherwise have considered is granted to a borrower experiencing financial difficulty. Most of the Bank’s TDRs involve the restructuring of loan terms to reduce the total payment amount in order to assist those borrowers who are experiencing temporary financial difficulty. In a TDR, the Bank may also increase loan balances for unpaid interest and fees or acquire additional collateral to secure its position. For the three months ended March 31, 2012 and March 31, 2011, the Bank had no new loans that qualified as a TDR. As of March 31, 2012, the Bank had $39,000 allocated in specific reserves on TDRs with a recorded investment of $103,000 and had charged off $26,000 to borrowers whose loan terms have been modified as TDRs. At March 31, 2012 and December 31, 2011, the Bank had a total of $1,113,000 and $1,026,000, respectively, in TDRs which did not require a specific reserve. The specific reserve component was determined by using fair value of the underlying collateral obtained through independent appraisals and internal evaluations, or by discounting the total expected future cash flows. The Bank has not committed to lend any additional funds to customers whose loans are classified as a TDR as of March 31, 2012. The Bank evaluates TDRs that are over 60 days past due to determine whether or not they are in default. However, all TDRs over 90 days past due are reported as “in default." At March 31, 2012, there were no TDRs considered to be in default.

Management reviews risk ratings on a monthly basis and the following illustrates total loans by credit risk profiles based on internally assigned grades and category as at March 31, 2012 and December 31,2011 (in thousands):

			Commercial				Consumer
Loans by Risk Ratings	Total		Real Estate		Other		Real Estate		Installment		Other

March 31, 2012:
Pass	$	44,672	$	34,117	$	10,555
Pass watch		51,458		40,189		11,269
Special mention		9,208		8,088		1,120
Substandard		19,980		18,035		1,945
Doubtful		394		124		270
Non-reviewed		145,348		628		764	$	137,757	$	4,547	$	1,652
Total	$	271,060	$	101,181	$	25,923	$	137,757	$	4,547	$	1,652

December 31, 2011:
Pass	$	49,110	$	37,683	$	11,427
Pass watch		49,170		38,391		10,779
Special mention		8,408		7,197		1,211
Substandard		21,495		19,209		2,286
Doubtful		190		142		48
Non-reviewed		148,265		386		770	$	140,504	$	5,250	$	1,355
Total	$	276,638	$	103,008	$	26,521	$	140,504	$	5,250	$	1,355

The following table illustrates the aging of past due loans by category as at March 31, 2012 and December 31, 2011 (in thousands):

					Greater								Over 90
	30-59 Days		60-89 Days		than		Total				Total		and
Category of loans	past due		past due		90 Days		past due		Current		loans		accruing

March 31, 2012:
Commercial real estate	$	1,370	$	1,209	$	3,853	$	6,432	$	94,749	$	101,181	$	657
Commercial other		764		266		—		1,030		24,893		25,923		—
Residential real estate		3,203		2,926		1,894		8,023		129,734		137,757		1,123
Consumer installment		86		170		4		260		4,287		4,547		4
Other consumer		3		—		—		3		1,649		1,652		—
Total	$	5,426	$	4,571	$	5,751	$	15,748	$	255,312	$	271,060	$	1,784

December 31, 2011:
Commercial real estate	$	1,858	$	1,736	$	3,250	$	6,844	$	96,164	$	103,008	$	135
Commercial other		435		203		131		769		25,752		26,521		8
Residential real estate		3,700		2,210		1,335		7,245		133,259		140,504		1,004
Consumer installment		121		103		145		369		4,881		5,250		1
Other consumer		5		—		—		5		1,350		1,355		—
Total	$	6,119	$	4,252	$	4,861	$	15,232	$	261,406	$	276,638	$	1,148

As of March 31, 2012 and December 31, 2011, nonaccrual loans included $4.9 million and $5.4 million of loans, respectively, which are paying currently but have not met the specific criteria to be placed on accrual status.

F. Allowance for Loan Losses

The allowance for loan losses is a valuation allowance that management has determined to be necessary to absorb probable incurred credit losses inherent in the loan portfolio. The allowance is established through provisions for losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management evaluates the allowance quarterly using past loan loss experience to establish base allowance pool rates for commercial real estate, other commercial loans, residential real estate loans, consumer installment, and other consumer loans. Reviewed and Pass-rated commercial mortgage/loan pool rates are determined based on adjusted pool rates, which include weighted three-year average loss percentages adjusted for the eight risk factors as discussed below.

Special mention and substandard pool rates are determined by the greater of the Bank’s average historical loss rolling average of the prior eight quarters or the weighted three-year average loss percentages. The method used in this calculation collects all commercial loans from one year ago, observes their status and rating at the current time, and computes the average loss for these rating categories by comparing the losses experienced by those particular loans to the loans in the different rating categories from one year ago. These allowance pool rates are then adjusted based on management’s current assessment of eight risk factors. These risk factors are:

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

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

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

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

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

Changes in the quality of the Bank’s loan review system and the degree of oversight by the Bank’s board of directors.

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

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

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation. Several specific factors are believed to have more impact on a loan’s risk rating, such as those related to national and local economic trends, lending management and staff, volume of past dues and nonaccruals, and concentrations of credit. Therefore, due to the increased risk inherent in criticized and classified loans, the values of these specific factors are increased proportionally. Management believes these increased factors provide adequate coverage for the additional perceived risk. Doubtful loans by definition have inherent losses in which the precise amounts are dependent on likely future events. These particular loans are reserved at higher pool rates (25%) unless specifically reviewed and deemed impaired as described below. An unallocated component of the allowance for loan losses has been established to reflect the inherent imprecision involved in calculating the allowance for loan losses.

The commercial portfolio segment is comprised of commercial real estate and other commercial loans. This segment is subject to all of the risk factors considered in management’s assessment of the allowance. Examples of specific risks applicable to the entire segment include changes in economic conditions that reduce business and consumer spending leading to a loss of revenue, concentrations of credit in business categories that are disproportionately impacted by current economic conditions, the quality of the Bank’s loan review system and its ability to identify potential problem loans, and the availability of acceptable new loans to replace maturing, amortizing, and refinanced loans. In addition, risks specific to commercial mortgages and secured commercial loans would include economic conditions that lead to declines in property and other collateral values. Prior to applying the allowance pool rate, commercial real estate and other commercial loans in nonaccrual status or those with a minimum substandard rating and loan relationships of $500,000 or more and all trouble debt restructures (“TDR”) are individually considered for impairment. Loans that are considered individually for impairment and not determined to be impaired are returned to their original pools for allowance purposes. If a loan is determined to be impaired, it is evaluated under guidance which dictates that a creditor shall measure impairment based on either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent. If the measure of the impaired loan, such as the collateral value, is less than the recorded investment in the loan, a specific reserve is established in the allowance for loan losses. An uncollectible loan is charged off after all reasonable means of collection are exhausted and the recovery of the principal through the disposal of the collateral is not reasonably expected to cover the costs. Commercial real estate and other commercial loans with an original principal balance under $10,000 for unsecured loans or under $25,000 for secured loans are also not individually considered for impairment. Instead, the appropriate allowance pool rate is applied to the aggregate balance of these pools.

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

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

Changes in the allowance for loan losses and the related loans evaluated for credit losses are summarized as follows for the periods ended March 31, 2012 and 2011 and December 31, 2011 (in thousands):

				Commercial						Consumer
Allowance for Loan Losses	Total			Real Estate			Other			Real Estate			Installment			Other			Unallocated
March 31, 2012:
Beginning balance January 1	$	4,712		$	2,646		$	557		$	1,244		$	70		$	61		$	134
Charge-offs		(297	)		(20	)		—			(187	)		(67	)		(23	)		—
Recoveries		41			—			7			6			12			16			—
Provision		600			67			65			226			68			14			160
Ending balance March 31	$	5,056		$	2,693		$	629		$	1,289		$	83		$	68		$	294
Ending balance as related to loans:
Evaluated collectively [general reserve]	$	4,654		$	2,489		$	431		$	1,289		$	83		$	68		$	294
Evaluated individually [specific reserve]		402			204			198			—			—			—			—

Total loans	$	271,060		$	101,181		$	25,923		$	137,757		$	4,547		$	1,652
Loans evaluated for impairment
Loans evaluated collectively		263,498			95,428			24,787			136,924			4,547			1,652
Loans evaluated individually		7,562			5,753			1,136			673			—			—
March 31, 2011:
Beginning balance January 1	$	4,335		$	2,160		$	622		$	1,213		$	106		$	61		$	173
Charge-offs		(831	)		(627	)		(62	)		(100	)		(19	)		(23	)		—
Recoveries		42			10			3			—			19			10			—
Provision		600			610			(51	)		119			(12	)		16			(82	)
Ending balance March 31	$	4,146		$	2,153		$	512		$	1,232		$	94		$	64		$	91
Ending balance as related to loans:
Evaluated collectively [general reserve]	$	3,835		$	1,914		$	440		$	1,232		$	94		$	64		$	91
Evaluated individually [specific reserve]		311			239			72			—			—			—			—

Total loans	$	276,626		$	101,907		$	27,419		$	140,034		$	5,832		$	1,434
Loans evaluated for impairment
Loans evaluated collectively		268,257			94,739			26,218			140,034			5,832			1,434
Loans evaluated individually		8,369			7,168			1,201			—			—			—

December 31, 2011:
Beginning balance January 1	$	4,335		$	2,160		$	622		$	1,213		$	106		$	61		$	173
Charge-offs		(1,943	)		(1,404	)		(129	)		(223	)		(80	)		(107	)		—
Recoveries		120			10			13			7			51			39			—
Provision		2,200			1,880			51			247			(7	)		68			(39	)
Ending balance December 31	$	4,712		$	2,646		$	557		$	1,244		$	70		$	61		$	134
Ending balance as related to loans:
Evaluated collectively [general reserve]	$	4,384		$	2,441		$	434		$	1,244		$	70		$	61		$	134
Evaluated individually [specific reserve]		328			205			123			—			—			—			—

Total loans	$	276,638		$	103,008		$	26,521		$	140,504		$	5,250		$	1,355
Loans evaluated for impairment
Loans evaluated collectively		268,491			96,737			25,320			139,829			5,250			1,355
Loans evaluated individually		8,147			6,271			1,201			675			—			—

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

G. Investment Securities

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

March 31, 2012	Amortized		Gross unrealized					Estimated
Investment Securities	cost		gains		losses			fair value
Securities Available for Sale:
Government Sponsored Enterprises (GSE)	$	2,707	$	1	$	—		$	2,708
Obligations of states and political subdivisions – New York State		67,180		2,496		(16	)		69,660
Mortgage-backed securities and collateralized mortgage obligations – GSE residential		27,835		1,089		(14	)		28,910
Corporate debt – financial services industry		11,232		58		(38	)		11,252
Certificates of deposit – financial services industry		98		—		—			98
		109,052		3,644		(68	)		112,628
Equity securities – financial services industry		620		10		(6	)		624
Total securities available for sale	$	109,672	$	3,654	$	(74	)	$	113,252
Securities Held to Maturity – Obligations of states and political subdivisions	$	6,203	$	354		$—		$	6,557

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

Securities Held to Maturity – Obligations of states and political subdivisions	$	6,613	$	376	$	—		$	6,989

Proceeds from sale, gross gains and gross losses realized on sales of securities available for sale were as follows for the three months ended March 31, 2012 (in thousands). There were no sales for the three months ended March 31, 2011 and there were no sales of securities held to maturity during the three months ended March 31, 2012 or March 31, 2011.

Net Security Gains	2012
Gross proceeds	$	235

Gross realized gains	$	33
Gross realized losses		—
Net gain on sale of securities	$	33

The amortized cost and estimated fair value of securities available for sale and held to maturity at March 31, 2012, by remaining period to contractual maturity, are shown in the following table (in thousands). Actual maturities will differ from contractual maturities because of security prepayments and the right of certain issuers to call or prepay their obligations.

	Amortized		Estimated
Investment Securities	cost		fair value
Within one year	$	29,248	$	29,484
One to five years		32,461		33,506
Five to ten years		25,021		26,494
Over ten years		689		791
		87,419		90,275
Mortgage-backed securities		27,835		28,910
Equity securities		620		624
Total Investment Securities	$	115,874	$	119,809

Investment securities in a continuous unrealized loss position are reflected in the following table which groups individual securities by length of time that they have been in a continuous unrealized loss position, and then details by investment category the number of instruments aggregated with their gross unrealized losses and the fair values at March 31, 2012 and December 31, 2011 (dollars in thousands):

	Less than 12 months						12 months or more						Total
March 31, 2012			Estimated		Unrealized				Estimated		Unrealized				Estimated		Unrealized
Investment Securities	No.		fair value		losses		No.		fair value		losses		No.		fair value		losses
Securities Available for Sale:
Debt Securities:
Obligations of states and political subdivisions – New York State		8	$	1,609	$	16		—	$	—	$	—		8	$	1,609	$	16
Mortgage-backed securities and collateralized mortgage obligations – GSE residential		2		1,674	$	14		—		—		—		2		1,674	$	14
Corporate debt – financial services industry		8		6,594		38		—		—		—		8		6,594		38
Total debt securities		18		9,877		68		—		—		—		18		9,877		68
Equity securities – financial services industry		3		269		6		—		—		—		3		269		6
Total securities available for sale		21	$	10,146	$	74		—	$	—	$	—		21	$	10,146	$	74

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

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

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

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

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

As of March 31, 2012, management believes that none of the unrealized losses on debt securities at March 31, 2012 are due to the underlying credit quality of the issuers of the securities, but instead are primarily related to market interest rates, and the full value of the securities will be realized upon maturity. Additionally, the Company does not intend to sell the securities and it is more-likely-than-not that the Company will not be required to sell the securities before recovery of their amortized cost. Therefore, no impairment was recognized on these securities. As there was no credit loss, no impairment charge was recorded for the three month periods ended March 31, 2012 or March 31, 2011. Management believes the unrealized losses related to the three equity securities held at March 31, 2012 do not represent other-than-temporary impairment as losses are believed to be due to market fluctuations and not credit concerns with regard to the issuers.

H. Restricted Investments

Restricted investments include stock held in correspondent banks, the Federal Reserve Bank, and trust preferred stock. The trust preferred stock represents the Bank’s investment in the Sullivan County Senior Housing partnership and cannot be sold to a third party. The stock is valued at par of $1,000,000 and is fully secured by an investment grade bond. The trust preferred stock is evaluated quarterly for impairment and the Company believes that there was no impairment on this trust preferred stock for the periods ended March 31, 2012 or March 31, 2011. The investment in the stock of the correspondent banks totaled $210,000 as of March 31, 2012 and March 31, 2011. As a member of the Federal Home Loan Bank of New York (FHLB), the Company is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements. This stock is restricted in that it can only be sold to the FHLB or to another member institution and all sales of FHLB stock must be at par value. As a result of these restrictions, FHLB stock is unlike the Company’s other investment securities insofar as there is no trading market for FHLB stock and the transfer price is determined by FHLB membership rules, not by market participants. As of March 31, 2012 and December 31, 2011, our FHLB stock totaled $1,210,000 and $1,210,000, respectively, and is included as a part of restricted investments on the consolidated balance sheets.

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

its operating performance;

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

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

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

its liquidity and funding position.

After evaluating all of these considerations, the Company concluded that the par value of its investment in FHLB stock will be recovered. Accordingly, no impairment charge was recorded on these securities during the three months ended March 31, 2012 or March 31, 2011. Our evaluation of the factors described above, in future periods, could result in the recognition of impairment charges on FHLB stock.

I. Pension and Other Postretirement Benefits

The Company has a noncontributory defined benefit pension plan covering substantially all of its employees. The Company also sponsors a postretirement medical, dental and life insurance benefit plan for qualifying pension plan retirees as disclosed in the 2011 Annual Report on Form 10-K.

The components of the net periodic benefit cost (benefit) for the three months ended March 31, for these plans were as follows (in thousands):

Net Periodic Benefit Cost (Benefit)	Pension benefit						Postretirement benefit
For the quarter ended March 31,	2012			2011			2012			2011
Net periodic benefit cost:
Service cost	$	82		$	86		$	11		$	13
Interest cost		138			141			17			24
Expected return on plan assets		(156	)		(151	)		—			—
Amortization of prior service cost		—			—			(39	)		(39	)
Recognized net actuarial loss		59			35			(1	)		—
Net amount recognized	$	123		$	111		$	(12	)	$	(2	)

The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2011, that it expected to contribute $852,000 to its pension plan and $91,000 to its other postretirement benefits plan in 2012. As of March 31, 2012, a contribution of $852,000 was made to the pension plan and $44,000 of contributions had been made to the other postretirement benefits plan. It is expected that the Company will make the expected contribution this year. No further contributions to the pension plan are expected this year.

J. Guarantees

The Company does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit. The Company has issued unconditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under standby letters of credit totaled $618,000 and $693,000 at March 31, 2012 and December 31, 2011, respectively, and represent the maximum potential future payments the Company could be required to make. Typically, these instruments have terms of twelve months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on-balance-sheet instruments. Company policies governing loan collateral apply to standby letters of credit at the time of credit extension. Loan-to-value ratios are generally consistent with loan-to-value requirements for other commercial loans secured by similar types of collateral. The fair value of the Company’s standby letters of credit at March 31, 2012 and December 31, 2011 was not significant.

K. Fair Values of Financial Instruments

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

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

Level 1:

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

Level 2:

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

Level 3 :

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

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, an asset’s or liability’s level is based on the lowest level of input that is significant to the fair value measurement.

For assets measured at fair value on a recurring and non-recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2012 and December 31, 2011, respectively are as follows (in thousands):

			(Level 1)
			Quoted
			Prices in		(Level 2)
			Active		Significant		(Level 3)
Fair Value Hierarchy			Markets for		Other		Significant
For Assets Valued on a			Identical		Observable		Unobservable
Recurring and Non-recurring Basis	Total		Assets		Inputs		Inputs
March 31, 2012:
Recurring:
Available for sale securities
Government sponsored enterprises (“GSE”) ^(a)	$	2,708	$	—	$	2,708	$	—
Obligations of state and political subdivisions – New York state ^(a)		69,660		—		69,660		—
Mortgage backed securities and collateralized mortgage obligations – GSE residential ^(a)		28,910		—		28,910		—
Corporate debt – financial services industry		11,252		—		11,252		—
Certificates of deposit – financial services industry		98		98		—		—

Equity securities – financial services industry		624		624		—		—
	$	113,252	$	722	$	112,530	$	—
Non-recurring:
Foreclosed real estate	$	400	$	—	$	—	$	400
Impaired loans		828		—		—		828
	$	1,228	$	—	$	—	$	1,228
December 31, 2011:
Recurring:
Available for sale securities
Government sponsored enterprises (“GSE”) ^(a)	$	2,261	$	—	$	2,261	$	—
Obligations of state and political subdivisions – New York state ^(a)		68,447		—		68,447		—
Mortgage backed securities and collateralized mortgage obligations – GSE residential ^(a)		28,635		—		28,635		—
Corporate debt – financial services industry		7,529		—		7,529		—
Certificates of deposit – financial services industry		98		98		—		—
Equity securities – financial services industry		458		458		—		—
	$	107,428	$	556	$	106,872	$	—
Non-recurring:
Foreclosed real estate	$	831	$	—	$	—	$	831
Impaired loans		1,477		—		—		1,477
	$	2,308	$	—	$	—	$	2,308

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

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

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

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

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

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at March 31, 2012 and December 31, 2011:

Cash and Cash Equivalents

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

Securities

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

Loans

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

Impaired Loans

Impaired loans, which are predominately commercial real estate loans where it is probable that the Bank will be unable to collect all amounts due per the contractual terms of the loan agreement, are those in which the Bank has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, liquidation value or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. Impaired loans are transferred out of the Level 3 fair value hierarchy when payments reduce the outstanding loan balance below the fair value of the loan’s collateral or the loan is foreclosed upon. If the financial condition of the borrower improves such that collectability of all contractual amounts due is probable, and payments are current for nine months, the loan is transferred out of impaired status. As of March 31, 2012 and December 31, 2011, the fair values of collateral-dependent impaired loans were calculated using an outstanding balance of $1,230,000 and $1,805,000, less a valuation allowance of $402,000 and $328,000, respectively. Impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.

Accrued Interest Receivable and Payable

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

Bank-Owned Life Insurance

The carrying amount of bank-owned life insurance represents the net cash surrender value of the underlying insurance policies, should these policies be terminated. Management believes that the carrying value approximates fair value.

Restricted Investments

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

Deposit Liabilities

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

Short-Term Debt

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

Federal Home Loan Bank Borrowings

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

Off-Balance-Sheet Financial Instruments

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

For fixed rate loan commitments, fair value estimates also consider the difference between current market interest rates and the committed rates. At March 31, 2012 and December 31, 2011, the fair values of these financial instruments approximated the related carrying values which were not significant.

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

Fair value

Valuation

Unobservable

Nonrecurring Assets

estimate

techniques

input

Range

Foreclosed real estate

400

Appraisal of

Appraisal

collateral ^(a)

adjustments ^(b)

0% to -10

Liquidation

expenses ^(b)

0% to -20

Impaired loans

828

Appraisal of

Appraisal

collateral ^(a)

adjustments ^(b)

0% to -10

Liquidation

expenses ^(b)

0% to -20

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

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

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

	March 31, 2012				December 31, 2011
	Net carrying		Estimated		Net carrying		Estimated
Financial Assets and Liabilities (in thousands)	amount		fair value		amount		fair value
Financial assets:
Cash and cash equivalents	$	33,206	$	33,182	$	11,776	$	11,776
Securities available for sale		113,252		113,252		107,428		107,428
Securities held to maturity		6,203		6,557		6,613		6,989
Loans, net		226,004		225,520		271,926		270,801
Accrued interest receivable		2,247		2,247		1,797		1,797
Bank owned life insurance		14,463		14,463		15,342		15,342
Restricted investments		2,420		2,420		2,420		2,420
Financial liabilities:
Savings, money market and checking accounts		229,292		229,292		209,314		209,314
Time deposits		150,810		151,318		150,395		150,922
Accrued interest payable		189		189		210		210
Federal Home Loan Bank borrowings		15,000		15,387		15,000		15,489

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

The following table presents financial assets and financial liabilities that were disclosed at fair value on a recurring and nonrecurring basis by level within the fair value hierarchy as of March 31, 2012.

			(Level 1)
			Quoted
			Prices in		(Level 2)
			Active		Significant		(Level 3)
			Markets for		Other		Significant
			Identical		Observable		Unobservable
Financial Assets and Liabilities (in thousands)	Total		Assets		Inputs		Inputs
Financial assets:
Cash and cash equivalents	$	33,182	$	33,182	$	—	$	—
Securities available for sale		113,252		722		112,530		—
Securities held to maturity		6,557		—		6,557		—
Loans, net		225,520		—		—		225,520
Accrued interest receivable		2,247		2,247		—		—
Bank owned life insurance		14,463		14,463		—		—
Restricted investments		2,420		2,420		—		—
Financial liabilities:
Savings, money market and checking accounts		229,292		229,292		—		—
Time deposits		151,318		—		151,318		—
Accrued interest payable		189		189		—		—
Federal Home Loan Bank borrowings		15,387		—		15,387		—

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

Forward-Looking Statements

In addition to historical information, this report includes certain forward-looking statements with respect to the financial condition, results of operations and business of the Company based on current management’s expectations. Economic circumstances, the Company's operations and the Company’s actual results could differ significantly from those discussed in the forward-looking statements. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations, changes in interest rates, deposit flows, the cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of the Company’s loan and securities portfolios, changes in accounting principles, and other economic, competitive, governmental, and technological factors affecting the Company's operations, markets, products, services and prices. Some of these and other factors are discussed in the Company’s annual and quarterly reports filed with the Securities and Exchange Commission. Such developments could have an adverse impact on the Company’s financial position and results of operations.

A. Overview – Financial Condition

During the period from December 31, 2011 to March 31, 2012, total assets increased $19.6 million or 4.5%. The increase was primarily due to a net $21.4 million increase in cash and cash equivalents to $33.2 million and a $5.8 million or 5.4% increase to $113.3 million in available for sale securities partially offset by a $5.9 million or 2.2% decrease in net loans to $266.0 million at March 31, 2012 and a $1.0 million or 34.1% decrease in foreclosed real estate. The net increase in total assets was funded by deposit growth.

Total deposits increased $20.4 million or 5.7% to $380.1 million at March 31, 2012. NOW and super NOW accounts increased $8.8 million or 19.3% to $54.5 million, and savings and insured money market deposits increased $7.7 million or 7.5% to $109.8 million all due to seasonal influences, such as tax revenues received by government entities which hold deposits at the Bank, and the Bank’s enhanced sales initiative. Core non-interest bearing deposits increased $3.5 million or 5.7% to $64.9 million at March 31, 2012. In addition, depositors have increasingly brought deposits to the Bank, possibly due to a lack of other investment opportunities and uncertainty in the stock market.

Total stockholders’ equity increased $529,000 or 1.1% from $49.4 million at December 31, 2011 to $49.9 million at March 31, 2012. This increase was the result of net income of $1,065,000 plus an increase of $14,000 in accumulated other comprehensive income, partially offset by the payment of cash dividends of $550,000.

Loans

Various statistics follow for the periods ended March 31, 2012 and 2011 and December 31, 2011:

	Three months			Three months
	ended			ended			Year ended
	March 31,			March 31,			December 31,
	2012			2011			2011
Annualized net charge-offs as a percentage of average outstanding loans		0.37	%		1.13	%		0.66	%
Allowance for loan losses to:
Total loans		1.87	%		1.50	%		1.70	%
Total non-performing loans		47.5	%		39.3	%		46.1	%

The allowance for loan losses was $5.1 million at March 31, 2012, $4.1 million at March 31, 2011 and $4.7 million at December 31, 2011. Total nonperforming loans were $10.7 million at March 31, 2012 and $10.2 million at December 31, 2011, an increase of $408,000. Net loan charge-offs decreased to $256,000 for the three months ended March 31, 2012 from $789,000 in the same period of 2011 and gross charge-offs decreased to $297,000 in 2012 from $831,000 in 2011. The provision for loan losses was $600,000 for both the three months ended March 31, 2012 and March 31, 2011. The allowance’s coverage on nonperforming loans was 47.4% at March 31, 2012, 46.1% at December 31, 2011 and 39.3% at March 31, 2011. The increase in the allowance for loan losses reflects the increased average historical rolling loss, which factors into the allowance calculations. The Bank’s loans remain well collateralized, and based on management’s analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate. However, Federal regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management.

B. Capital

Under the Federal Reserve’s risk-based capital rules at March 31, 2012, the Bank’s Tier I risk-based capital was 16.7 % and total risk-based capital was 18.0% of risk-weighted assets. These risk-based capital ratios are well above the minimum regulatory requirements of 4.0% for Tier I capital and 8.0% for total risk-based capital. The Bank’s leverage ratio (Tier I capital to average assets) of 10.6% is well above the 4.0% minimum regulatory requirement.

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

	March 31,			December 31,
	2012			2011
Tier I Capital
Banks’ equity, excluding the after-tax net of accumulated other comprehensive income	$	47,064		$	46,476
Tier II Capital
Allowance for loan losses ⁽¹⁾	$	3,543		$	3,557
Total risk-based capital	$	50,607		$	50,033
Risk-weighted assets ⁽²⁾	$	281,936		$	283,369
Average assets	$	445,364		$	434,113
Ratios
Tier I risk-based capital (minimum 4.0%)		16.7	%		16.4	%
Total risk-based capital (minimum 8.0%)		18.0	%		17.7	%
Leverage (minimum 4.0%)		10.6	%		10.7	%

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

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

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

DISTRIBUTION OF ASSETS, LIABILITIES & STOCKHOLDERS’ EQUITY:
INTEREST RATES & INTEREST DIFFERENTIAL

The following schedule presents the condensed average consolidated balance sheets for quarters ended March 31, 2012 and 2011. The total dollar amount of interest income from earning assets and the resultant yields are calculated on a tax equivalent basis. The interest paid on interest-bearing liabilities, expressed in dollars and rates, are also presented with dollars in thousands.

For the Quarters Ended March 31,	2012							2011
			Interest		Average					Interest		Average
	Average		Earned		yield/			Average		Earned		yield/
	balance		paid		rate			balance		paid		rate
ASSETS
Interest bearing deposits	$	17,740	$	8		0.25	%	$	11,022	$	7		0.25	%
Securities available for sale and held to maturity: ⁽¹⁾
Taxable securities		39,851		335		3.36			44,602		391		3.50
Tax-exempt securities ⁽²⁾		74,814		970		5.19			65,489		890		5.44
Total securities		114,665		1,305		4.55			110,091		1,281		4.65
Short-term investments		42		—		0.00			40		—		0.01
Loans
Real estate mortgages		198,779		3,143		6.32			199,772		3,095		6.20
Home equity loans		30,484		427		5.60			31,511		444		5.64
Time and demand loans		26,013		320		4.92			29,849		328		4.40
Installment and other loans		18,246		390		8.55			17,825		441		9.90
Total loans ⁽³⁾		273,522		4,280		6.26			278,957		4,308		6.18
Total interest earning assets		405,969		5,593		5.51			400,110		5,596		5.59
Other non-interest bearing assets		42,451							39,904
Total assets	$	448,420						$	440,014

LIABILITIES AND STOCKHOLDERS’ EQUITY
NOW and Super NOW deposits	$	58,621		13		0.09	%	$	45,342	$	28		0.25	%
Savings and insured money market deposits		103,924		67		0.26			98,517		120		0.49
Time deposits		149,996		408		1.09			158,467		561		1.42
Total interest bearing deposits		312,541		488		0.62			302,326		709		0.94
Federal funds purchased and other short-term debt		16		—		1.25			1,260		1		0.32
Long-term debt		15,000		150		4.02			15,000		149		3.97
Total interest bearing liabilities		327,557		638		0.78			318,586		859		1.08
Demand deposits		62,225							65,011
Other non-interest bearing liabilities		8,308							6,715
Total liabilities		398,090							390,312
Stockholders’ equity		50,330							49,702
Total liabilities and stockholders’ equity	$	448,420						$	440,014
Net interest bearing assets	$	78,412						$	81,524
Net interest income – tax effected				4,955							4,737
Less: Tax gross up on exempt securities				329							301
Net interest income per statement of income			$	4,626						$	4,436
Net interest spread						4.73	%						4.52	%
Net interest margin ⁽⁴⁾						4.88	%						4.74	%

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

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

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

⁴

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

VOLUME AND RATE ANALYSIS

The following schedule sets forth, for each major category of interest earning assets and interest bearing liabilities, the dollar amount of interest income (calculated on a tax equivalent basis) and interest expense, and changes therein for the quarter ended March 31, 2012 as compared to 2011. The increase and decrease in interest income and expense due to both rate and volume have been allocated to the two categories of variances (volume and rate) based on percentage relationships of such variance to each other, with dollars in thousands.

	March 31, 2012 compared to 2011
	increase (decrease) due to change in
	Average			Average
	Volume			Rate			Total
Interest Income
Interest bearing deposits	$	1		$	—		$	1
Total securities ⁽¹⁾		53			(29	)		24
Loans		(99	)		71			(28	)
Total interest income		(45	)		42			(3	)

Interest Expense
NOW and Super NOW deposits		8			(23	)		(15	)
Savings and insured money market deposits		7			(60	)		(53	)
Time deposits		(30	)		(123	)		(153	)
Federal funds purchased and other short-term debt		(1	)		—			(1	)
Long-term debt		—			1			1
Total interest expense		(16	)		(205	)		(221	)
Net interest income	$	(29	)	$	247		$	218

Fully taxable-equivalent basis.

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

LIQUIDITY

The objective of maintaining adequate liquidity is to assure the ability of the Company and its subsidiary to meet their financial obligations. These obligations include the payment of interest on deposits, borrowings, withdrawal of deposits on demand or at their contractual maturity, the repayment of borrowings as they mature, the ability to fund new and existing loan commitments, and the ability to take advantage of new business opportunities. The Company and its subsidiary achieve liquidity by maintaining a strong base of core customer funds, maturing short-term assets, the ability to sell securities, the availability of lines of credit, and access to capital markets.

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

The primary source of liquidity for the parent Company is dividends from the Bank. OCC regulations prohibit the Bank to pay a dividend without prior OCC approval if the total amount of all dividends declared during the calendar year, including the proposed dividend, exceeds the sum of its retained net income to date during the calendar year and its retained net income over the preceding two years. As of March 31, 2012, the Bank is permitted to pay a dividend without prior OCC approval.

For the three months ended March 31, 2012, cash used in operating activities amounted to $312,000, cash provided by financing activities was $19.8 million and cash provided by investing activities amounted to $1.9 million, resulting in a net increase in cash and cash equivalents of $21.4 million to $33.2 million at March 31, 2012. See the Consolidated Statements of Cash Flows for additional information.

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

	Maturity of Time Deposits
	Of $100,000 or More				FHLB Borrowings
As of	March 31, 2012		December 31, 2011		March 31, 2012		December 31, 2011
Due three months or less	$	21,745	$	21,641	$	5,000	$	—
Over three months through six months		15,589		15,350		—		5,000
Over six months through twelve months		9,636		12,360		5,000		5,000
Over twelve months		17,390		13,983		5,000		5,000
Total	$	64,360	$	63,334	$	15,000	$	15,000

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

Results of Operations

Net income for the first three months of 2012 increased $361,000 or 51.3% to $1,065,000 from $704,000 for the same period in 2011. Net interest income after provision for loan losses increased $190,000 or 5.0% to $4,026,000. This increase is primarily due to a $221,000 decrease in interest expense on deposits. Non-interest income increased $108,000 and non-interest expenses decreased $193,000 resulting in an increase in income before income tax expense of $491,000. Partially offsetting the net increases, the provision for income taxes increased $130,000. The Company’s annualized return on average assets was 1.0% for the three months ended March 31, 2012, up from 0.6% for the same period last year. The annualized return on average stockholders’ equity was 8.5% for the three months ended March 31, 2012 and 5.7% for the same period in 2011.

Total net interest income after provision for loan losses increased $190,000 or 5.0% to $4,026,000 for the quarter ended March 31, 2012 up from $3,836,000 from the same period in 2011, of which, $221,000 was the result of a decrease in interest expense on deposits from $709,000 for the three months ended March 31, 2011 to $488,000 for the same period in 2012. This decrease of $221,000 was attributable to higher yielding time deposits having been replaced at lower current market rates and lower yields on savings and insured money market deposits. In addition, interest income on tax-exempt securities increased $52,000 or 8.8% to $641,000 for the three months ended March 31, 2012. Partially offsetting the increases, interest income on taxable investment securities decreased $56,000 or 14.3% to $335,000 and interest on loans decreased $28,000 or 0.6% to $4.3 million for the quarter ended March 31, 2012. The shift in interest income on taxable versus tax-exempt investment securities was due to slightly higher yields in the municipal market.

The provision for loan losses was $600,000 for both the three months ended March 31, 2012 and 2011. Management believes the provision to be adequate.

Non-interest income increased to $850,000 for the first three months of 2012 compared to $742,000 for the same period in 2011, a change of $108,000 or 14.6%. This increase was primarily the result of a $93,000 life insurance benefit and a $33,000 increase in net security gains. Net security gains increased as no securities were sold during the first quarter of 2011. Partially offsetting these increases was a decrease of $16,000 or 4.4% in income on service charges. Non-interest expenses decreased $193,000 or 5.0% primarily due to a $196,000 decrease in other non-interest expense, an $83,000 decrease in occupancy and equipment expenses and a $15,000 decrease in salaries and employee benefits partially offset by a $101,000 increase in foreclosed real estate expense. The decrease in occupancy and equipment expense was primarily due to a $35,000 reduction in maintenance costs and a $24,000 reduction in insurance expense. Other non-interest expenses decreased due to a reduction of $108,000 in costs associated with the protection of the Bank’s interest in pre-foreclosure properties, a $26,000 reduction in professional fees, and a $52,000 decrease in FDIC charges.

Income tax expense was $144,000 for the three month period ended March 31, 2012 compared to $14,000 for the corresponding period in 2011, an increase of $130,000. The Company’s effective tax rates were 11.9% and 1.9% for the three month periods ended March 31, 2012 and 2011, respectively. The increase in effective tax rates was due to tax exempt interest and earnings on bank-owned life insurance being a lower percentage of income before income tax expense in 2012 as compared to 2011.

Throughout the following discussion, net interest income and its components are expressed on a tax equivalent basis which means that, where appropriate, tax exempt income is shown as if it were earned on a fully taxable basis. The discussion is based on the comparison of the three month average balance and yields, and year to date interest income and expense for the periods ended March 31, 2012 and 2011. Tax equivalent net interest spread increased 21 basis points to 4.73% at March 31, 2012 from 4.52% at March 31, 2011. Net interest margin increased 14 basis points, to 4.88% in the first quarter of 2012 from 4.74% in the same quarter of 2011. Tax equivalent net interest income increased $218,000 to $4,955,000 for the first three months of 2012 compared to $4,737,000 for the same period in 2011. The total average balance for net interest earning assets was $78,412,000 for the three month period ended March 31, 2012 compared to $81,524,000 for the same three month period in 2011, a decrease of $3,112,000 or 3.8%. Average interest bearing liabilities increased $8,971,000 or 2.8% with a 30 basis point decrease in yield, which was partially offset by average interest earning assets increasing by $5,859,000 or 1.5% with an 8 basis point decrease in yield for the three months ended March 31, 2012 versus the same period in 2011. The increase in average interest bearing liabilities was primarily due to average total deposits increasing $10,215,000 or 3.4% to $312,541,000 for the three months ended March 31, 2012 with a corresponding decrease in yield of 32 basis points. This increase was primarily in average NOW and Super NOW accounts which increased $13,279,000 or 29.3% and average savings and insured money market deposits which increased $5,407,000 or 5.5% from the three months ended March 31, 2011 to the same period in 2012. Average time deposits decreased $8,471,000 or 5.5% for the same periods. The increase in deposits was due in part to our continued sales initiative and deposit gains in our most recently open branches as they continue to gain momentum in their respective communities and seasonal influences. The yields on all deposit products decreased as higher yielding deposits matured and were replaced with lower yielding products. Average interest earning assets increased primarily in deposits held in an interest bearing account at the Federal Reserve Bank [“FED”] for $6,718,000 or 61.0% and average tax-exempt securities of $9,325,000 or 14.3% with a 25 basis point decrease in yield. Partially offsetting these increases, average taxable securities decreased $4,751,000 or 10.7% with a decrease of 14 basis points in yield. As tax-exempt securities continue to provide better returns in this low yield environment, the Bank continues to shift investments to this market. Deposits held at the “FED” will be used for liquidity in the coming months to repay maturing Federal Home Loan Bank advances and to fund future loan growth as market conditions improve. Average total loans decreased $5,435,000 or 1.9% with a net increase in yield of 8 basis points. Average loans decreased $3,836,000, $1,027,000 and $993,000 in time and demand loans, home equity loans and real estate mortgages respectively. Average loans decreased as demand was down. The yields on time and demand loans and real estate mortgages increased 52 basis points and 12 basis points. The yield on real estate mortgages increased as a previously classified non-accrual loan reverted to the accrual basis impacting the yields for the three months ended March 31, 2012. The increase in yield on time and demand loans was due to increased use of commercial lines of credit.

Critical Accounting Policies

Management of the Company considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the inherent uncertainty in evaluating the levels of the allowance required to cover credit losses in the portfolio and the material effect that such judgments can have on the results of operations. The allowance for loan losses is maintained at a level deemed adequate by management based on an evaluation of such factors as economic conditions in the Company’s market area, past loan loss experience, the financial condition of individual borrowers, and underlying collateral values based on independent appraisals. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions and values of real estate particularly in Sullivan County. Collateral underlying certain real estate loans could lose value which could lead to future additions to the allowance for loan losses. See Item 2B Management’s Discussion and Analysis/ Allowance for Loan Losses for further discussion. In addition, Federal regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management.

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

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

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s most significant form of market risk is interest rate risk, as the majority of the assets and liabilities are sensitive to changes in interest rates. There have been no material changes in the Company’s interest rate risk position since December 31, 2011. Other types of market risk, such as foreign exchange rate risk and commodity price risk, do not arise in the normal course of the Company’s business activities.

ITEM 4T. CONTROLS AND PROCEDURES

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) or 15d-15(f). The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements. Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, an evaluation of the effectiveness of internal controls over financial reporting was conducted, based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the evaluation under the framework in Internal Control – Integrated Framework, management concluded that the internal controls over financial reporting were effective as of March 31, 2012.

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

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors as previously disclosed in response to Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

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

Not Applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable.

ITEM 4. MINE SAFETY DISCLOSURE

Not Applicable.

ITEM 5.      OTHER INFORMATION

Not Applicable.

ITEM 6. EXHIBITS

31.1         Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002

31.2         Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002

32.1         Written Statement of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002

32.2         Written Statement of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002



ITEM 7. MISCELLANEOUS

Under the Banks program of giving annual years-of-service awards to Bank employees, the Bank purchased 72 shares at an average price of $11.35 per share in a non public open-market transaction on April 2, 2012. This purchase satisfied the program for this year.

27

SIGNATURES

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

JEFFERSONVILLE BANCORP

(Registrant)

/s/ Wayne V. Zanetti

Wayne V. Zanetti

President and Chief Executive Officer

/s/ John A. Russell

John A. Russell

Treasurer and Chief Financial Officer

May 15, 2012

28

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