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JXSB > SEC Filings for JXSB > Form 10-Q on 9-May-2013All Recent SEC Filings

Show all filings for JACKSONVILLE BANCORP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for JACKSONVILLE BANCORP, INC.


9-May-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of the Company. The information contained in this section should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes thereto.

Forward Looking Statements

This Form 10-Q contains certain "forward-looking statements" which may be identified by the use of words such as "believe," "expect," "anticipate," "should," "planned," "estimated," and "potential." Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors that could cause actual results to differ materially from these estimates and most other statements that are not historical in nature. These factors include, but are not limited to, the effect of the current state of the financial markets and the United States government programs introduced to restore stability and liquidity of the financial markets, changes in interest rates, general economic conditions and the weak state of the United States economy, deposit flows, demand for mortgage and other loans, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing of products and services.

Critical Accounting Policies and Use of Significant Estimates

In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in preparing our financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. Management believes the following discussion addresses our most critical accounting policies and significant estimates, which are those that are most important to the portrayal of our financial condition and results and require management's most difficult, subjective and complex judgements, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Allowance for Loan Losses - The Company believes the allowance for loan losses is the critical accounting policy that requires the most significant judgments and assumptions used in the preparation of the consolidated financial statements. The allowance for loan losses is a material estimate that is particularly susceptible to significant changes in the near term and is established through a provision for loan losses. The allowance is based upon past loan experience and other factors which, in management's judgement, deserve current recognition in estimating loan losses. The evaluation includes a review of all loans on which full collectibility may not be reasonably assured. Other factors considered by management include the size and character of the loan portfolio, concentrations of loans to specific borrowers or industries, existing economic conditions and historical losses on each portfolio category. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties, which collateralize loans. Management uses the available information to make such determinations. If circumstances differ substantially from the assumptions used in making determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be affected. While we believe we have established our existing allowance for loan losses in conformity with accounting principles generally accepted in the United States of America, there can be no assurance that regulators, in reviewing the Company's loan portfolio, will not request an increase in the allowance for loan losses. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary if loan quality deteriorates.


Other Real Estate Owned - Other real estate owned acquired through loan foreclosures are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the subjective nature of establishing fair value when the asset is acquired, the actual fair value of the other real estate owned could differ from the original estimate. If it is determined that fair value declines subsequent to foreclosure, the asset is written down through a charge to non-interest expense. Operating costs associated with the assets after acquisition are also recorded as non-interest expense. Gains and losses on the disposition of other real estate owned are netted and posted to non-interest expense.

Deferred Income Tax Assets/Liabilities - Our net deferred income tax asset arises from differences in the dates that items of income and expense enter into our reported income and taxable income. Deferred tax assets and liabilities are established for these items as they arise. From an accounting standpoint, deferred tax assets are reviewed to determine that they are realizable based upon the historical level of our taxable income, estimates of our future taxable income and the reversals of deferred tax liabilities. In most cases, the realization of the deferred tax asset is based on our future profitability. If we were to experience net operating losses for tax purposes in a future period, the realization of our deferred tax assets would be evaluated for a potential valuation reserve.

Impairment of Goodwill - Goodwill, an intangible asset with an indefinite life, was recorded on our balance sheet in prior periods as a result of acquisition activity. Goodwill is evaluated for impairment annually, unless there are factors present that indicate a potential impairment, in which case, the goodwill impairment test is performed more frequently.

Mortgage Servicing Rights - Mortgage servicing rights are very sensitive to movements in interest rates as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be greatly reduced by prepayments. Prepayments usually increase when mortgage interest rates decline and decrease when mortgage interest rates rise.

Fair Value Measurements - The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Company estimates the fair value of financial instruments using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, the Company estimates fair value. Other factors such as model assumptions and market dislocations can affect estimates of fair value.

The above listing is not intended to be a comprehensive list of all our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States of America, with no need for management's judgement in their application. There are also areas in which management's judgement in selecting any available alternative would not produce a materially different result.


Financial Condition

March 31, 2013 Compared to December 31, 2012

Total assets decreased by $4.9 million, or 1.5%, to $316.5 million at March 31, 2013 from $321.4 million at December 31, 2012. Net loans decreased $5.6 million, or 3.2%, to $168.2 million at March 31, 2013 from $173.8 million at December 31, 2012. The decrease in loans is primarily due to decreases of $3.3 million in commercial business loans and $2.1 million in agricultural business loans reflecting seasonal payments on lines of credit. Investment securities decreased $3.0 million, or 4.8%, to $60.4 million at March 31, 2013 from $63.4 million at December 31, 2012. Cash and cash equivalents increased $4.0 million, or 55.3%, to $11.3 million at March 31, 2013 from $7.3 million at December 31, 2012, reflecting funds from loan payments and short-term investment of deposits.

Total deposits increased $3.4 million, or 1.3%, to $261.9 million at March 31, 2013, primarily due to a $7.8 million increase in transaction accounts. Transaction accounts have continued to grow as customers have preferred to maintain short-term, liquid deposits in the current low-rate environment. Deposit growth reflects customer preference for insured deposits versus alternative investments. Other borrowings, which consisted of overnight repurchase agreements, decreased $8.9 million, or 70.2%, to $3.8 million at March 31, 2013. The decrease reflects the withdrawal of seasonal funds from our agricultural business customers.

Stockholders' equity increased $73,000, or 0.2%, to $44.2 million at March 31, 2013. The increase in stockholders' equity was the result of net income of $1.0 million, which was partially offset by the payment of $143,000 in dividends and $859,000 in other comprehensive loss. Other comprehensive loss consisted of a decrease in unrealized gains, net of tax, on available-for-sale securities reflecting changes in market prices for securities in our portfolio. Other comprehensive income does not include changes in the fair value of other financial instruments included on the balance sheet.

Results of Operations

Comparison of Operating Results for the Three Months Ended March 31, 2013 and 2012

General: Net income for the three months ended March 31, 2013 was $1,012,000, or $0.54 per common share, basic and diluted, compared to net income of $915,000, or $0.49 per common share, basic and diluted, for the three months ended March 31, 2012. The $97,000 increase in net income was due to an increase $382,000 in non-interest income and a decrease of $50,000 in provision for loan loss expense, partially offset by a decrease of $195,000 in net interest income and increases of $68,000 in non-interest expense and $72,000 in income taxes.

Interest Income: Total interest income for the three months ended March 31, 2013 decreased $330,000, or 10.1%, to $3.0 million from $3.3 million for the same period of 2012. The decrease in interest income reflected decreases of $195,000 in interest income on loans, $90,000 in interest income on investment securities, and $45,000 in interest income on mortgage-backed securities.

Interest income on loans decreased $195,000 to $2.4 million for the first quarter of 2013 due to a decrease in the average yield of loans, partially offset by an increase in the average balance of loans. The average yield decreased 54 basis points to 5.44% for the first quarter of 2013, compared to 5.98% for the first quarter of 2012. The decrease in the average yield reflected lower market rates of interest and the competitive lending environment. The average balance of the loan portfolio increased $2.6 million to $172.6 million during the first quarter of 2013. The increase in the average balance of the loan portfolio primarily reflected an increase in agricultural real estate loans.

Interest income on investment securities decreased $90,000 to $434,000 for the first quarter of 2013 from $524,000 for the first quarter of 2012. The decrease reflected decreases in both the average yield and balance of the investment securities portfolio during the first quarter of 2013. The average yield of investment securities decreased to 3.09% during the first quarter of 2013 from 3.56% during the first quarter of 2012. The average yield does not reflect the benefit of the higher tax-equivalent yield of our municipal bonds, which is reflected in income tax expense. The average balance of investment securities decreased $2.7 million to $56.2 million during the first quarter of 2013, compared to $58.9 million during the first quarter of 2012. The decrease in the average balance of investment securities reflects the use of funds for loan originations as the average balance of loans increased $2.6 million during this same time frame.


Interest income on mortgage-backed securities decreased $45,000 to $160,000 for the first quarter of 2013, compared to $205,000 for the first quarter of 2012. The decrease reflected a 71 basis point decrease in the average yield of mortgage-backed securities to 1.26% for the first quarter of 2013, compared to 1.97% for the first quarter of 2012. The average yield was impacted by higher premium amortization resulting from faster national prepayment speeds on mortgage-backed securities. The amortization of premiums on mortgage-backed securities, which reduces the average yield, increased $79,000 to $245,000 during the first quarter of 2013, compared to $166,000 during the first quarter of 2012. The decrease in the average yield was partially offset by a $9.1 million increase in the average balance of mortgage-backed securities to $50.8 million during the first quarter of 2013, compared to $41.7 million during the same period of 2012.

Interest income on other interest-earning assets, which consisted of interest-earning demand and time deposit accounts and federal funds sold, totaled $12,000 during the first quarters of 2013 and 2012. The average balance of these accounts decreased $4.1 million to $11.6 million for the three months ended March 31, 2013 compared to $15.7 million for the three months ended March 31, 2012. The decrease in the average balance reflected a decrease in the average balance of federal funds sold. The average yield on other interest-earning assets increased to 0.40% during the first quarter of 2013 from 0.29% during the first quarter of 2012, reflecting the decrease in the lower-yielding federal funds sold during this same time frame.

Interest Expense: Total interest expense decreased $135,000, or 22.3%, to $472,000 for the three months ended March 31, 2013 compared to $607,000 for the three months ended March 31, 2012. The lower interest expense reflects a $135,000 decrease in the cost of deposits.

Interest expense on deposits decreased $135,000 to $469,000 for the three months ended March 31, 2013 compared to $604,000 for the three months ended March 31, 2012. The decrease in interest expense on deposits was primarily due to a 23 basis point decrease in the average rate paid to 0.80% during the first quarter of 2013 from 1.03% during the first quarter of 2012. The decrease reflected ongoing low short-term market interest rates during the first quarter of 2013, as well as a change in the composition of our deposits. The average balance of deposits decreased $1.1 million to $234.7 million for the first quarter of 2013. The decrease reflected an $11.8 million decrease in the average balance of time deposit accounts, partially offset by a $10.7 million increase in the average balance of lower cost transaction accounts.

Interest paid on borrowed funds, which consisted of overnight repurchase agreements, totaled $3,000 for the first quarters of 2013 and 2012. The average rate paid on borrowed funds increased to 0.26% during the first quarter of 2013 compared to 0.25% during the first quarter of 2012. The average balance of borrowed funds decreased to $4.1 million during the first quarter of 2013 from $4.5 million during the same period of 2012.

Net Interest Income: As a result of the changes in interest income and expense above, net interest income decreased by $195,000, or 7.3%, to $2.5 million for the three months ended March 31, 2013 from $2.7 million for the three months ended March 31, 2012. During the prolonged period of low interest rates, we have experienced a contraction in our net interest margin. Our net interest margin decreased to 3.41% for the first quarter of 2013 from 3.74% for the first quarter of 2012. Our interest rate spread decreased to 3.26% during the first quarter of 2013 from 3.57% during the first quarter of 2012. Our ratio of interest earning assets to interest bearing liabilities was 1.22x and 1.19x at March 31, 2013 and March 31, 2012, respectively.

Provision for Loan Losses: The provision for loan losses is determined by management as the amount needed to replenish the allowance for loan losses, after net charge-offs have been deducted, to a level considered adequate to absorb inherent losses in the loan portfolio, in accordance with accounting principles generally accepted in the United States of America. The following table shows the activity in the allowance for loan losses for the three months ended March 31, 2013 and 2012.


                                                  Three Months Ended
                                          March 31, 2013       March 31, 2012

        Balance at beginning of period   $      3,339,464     $      3,296,607
        Charge-offs:
        Home equity                                     -               46,744
        Consumer                                   45,759                2,964
        Total                                      45,759               49,708

        Recoveries:
        One-to-four family residential             14,631                1,625
        Commercial real estate                     87,882                    -
        Commercial business                             -                  316
        Home equity                                13,025                  525
        Consumer                                    6,726                1,546
        Total                                     122,264                4,012
        Net loan charge-offs                      (76,505 )             45,696
        Provisions charged to expense              30,000               80,000
        Balance at end of period         $      3,445,969     $      3,330,911

The provision for loan losses totaled $30,000 during the first quarter of 2013, compared to $80,000 during the first quarter of 2012. The decrease in the provision for loan losses reflected the decline in loan volume and the level of net recoveries during the first quarter of 2013. The allowance for loan losses increased $107,000 during 2013 to $3.4 million at March 31, 2013. The increase in the allowance for loan losses reflected recoveries of $122,000 during 2013, resulting in net recoveries of $77,000 during the three months ended March 31, 2013. Loans delinquent 30 days or more decreased $456,000 to $2.4 million, or 1.39% of total loans, as of March 31, 2013, from $2.8 million, or 1.61% of total loans, as of December 31, 2012.

Provisions for loan losses have been made to bring the allowance for loan losses to a level deemed adequate following management's evaluation of the repayment capacity and collateral protection afforded by each problem credit. This review also considered the local economy and the level of bankruptcies and foreclosures in our market area. The following table sets forth information regarding nonperforming assets at the dates indicated.


                                                                                  December 31,
                                                              March 31, 2013          2012
Non-accruing loans:
One-to-four family residential                               $      1,267,996     $  1,203,328
Commercial real estate                                                312,500          560,073
Commercial business                                                    47,639           51,436
Home equity                                                           251,585          276,877
Consumer                                                               54,555          122,064
Total                                                        $      1,934,275     $  2,213,778

Accruing loans delinquent more than 90 days:
Total                                                        $              -     $          -

Foreclosed assets:
Commercial real estate                                                137,193          137,193
Total                                                        $        137,193     $    137,193

Total nonperforming assets                                   $      2,071,468     $  2,350,971

Total nonperforming assets as a percentage of total assets               0.65 %           0.73 %

Nonperforming assets decreased $280,000 to $2.1 million, or 0.65% of total assets, as of March 31, 2013, compared to $2.4 million, or 0.73% of total assets, as of December 31, 2012. The decrease in nonperforming assets was due to a $270,000 decrease in nonperforming loans, primarily due to the payoff of a $201,000 nonaccrual loan secured by commercial real estate. The following table shows the aggregate principal amount of potential problem credits on the Company's watch list at March 31, 2013 and December 31, 2012. All non-accruing loans are automatically placed on the watch list. The decrease in substandard credits was primarily due to the payoff of the commercial real estate loan discussed above.

                                     March 31, 2013       December 31, 2012

         Special Mention credits    $      1,468,799     $         1,846,851
         Substandard credits               5,731,800               5,945,570
         Total watch list credits   $      7,200,599     $         7,792,421

Non-Interest Income: Non-interest income increased $382,000, or 34.6%, to $1.5 million for the three months ended March 31, 2013 from $1.1 million for the same period in 2012. The increase in non-interest income resulted primarily from increases of $359,000 in gains on the sale of available-for-sale securities and $63,000 in commission income, partially offset by a decrease of $47,000 in income from mortgage banking operations. The increased gains on the sale of securities reflected a higher volume of $14.4 million in sales during the first quarter of 2013, compared to $10.1 million in sales during the first quarter of 2012. The sales during 2013 were primarily made to reduce the volatility to interest rate changes in municipal bonds and eliminate faster-paying mortgage-backed securities. The increase in commission income reflected changing market conditions and account rollover activity. The decrease in mortgage banking income was due to a lower volume of loan sales in 2013 reflecting an increase in mortgage rates. We sold $7.8 million of loans in the secondary market during the first quarter of 2013, compared to $12.9 million during the same period of 2012.


Non-Interest Expense: Total non-interest expense increased $68,000, or 2.8%, to $2.5 million for the three months ended March 31, 2013. The increase in non-interest expense consisted mainly of increases of $34,000 in professional fees and $28,000 in compensation and benefits expense. The increase in professional fees is due to increased legal expenses. The increase in compensation and benefits expense is primarily due to higher expenses related to the funding of benefit plans.

Income Taxes: The provision for income taxes increased $72,000 to $439,000 during the first quarter of 2013 compared to the same period of 2012. The increase in the income tax provision reflected an increase in taxable income due to higher income levels, partially offset by an increase in tax-exempt income. The effective tax rate was 30.2% and 28.6% for the first quarters of 2013 and 2012, respectively.

Liquidity and Capital Resources

The Company's most liquid assets are cash and cash equivalents. The levels of these assets are dependent on the Company's operating, financing, and investing activities. At March 31, 2013 and December 31, 2012, cash and cash equivalents totaled $11.3 million and $7.3 million, respectively. The Company's primary sources of funds include principal and interest repayments on loans (both scheduled payments and prepayments), maturities of investment securities and principal repayments from mortgage-backed securities (both scheduled payments and prepayments). During the past three months, the most significant sources of funds have been growth in deposits, calls and sales of investment securities, and principal repayments on loans and mortgage-backed securities. These funds have been used primarily for purchases of investment and mortgage-backed securities.

While scheduled loan repayments and proceeds from maturing investment securities and principal repayments on mortgage-backed securities are relatively predictable, deposit flows and prepayments are more influenced by interest rates, general economic conditions, and competition. The Company attempts to price its deposits to meet asset-liability objectives and stay competitive with local market conditions.

Liquidity management is both a short- and long-term responsibility of management. The Company adjusts its investments in liquid assets based upon management's assessment of (i) expected loan demand, (ii) projected purchases of investment and mortgage-backed securities, (iii) expected deposit flows, (iv) yields available on interest-earning deposits, and (v) liquidity of its asset/liability management program. Excess liquidity is generally invested in interest-earning overnight deposits and other short-term U.S. agency obligations. If the Company requires funds beyond its ability to generate them internally, it has the ability to borrow funds from the FHLB. The Company may borrow from the FHLB under a blanket agreement which assigns all investments in FHLB stock as well as qualifying first mortgage loans equal to 150% of the outstanding balance as collateral to secure the amounts borrowed. This borrowing arrangement is limited to a maximum of 30% of the Company's total assets or twenty times the balance of FHLB stock held by the Company. At March 31, 2013, the Company had no outstanding FHLB advances and approximately $22.3 million remaining available to it under the above-mentioned borrowing arrangement.

The Company maintains minimum levels of liquid assets as established by the Board of Directors. The Company's liquidity ratios at March 31, 2013 and December 31, 2012 were 44.8% and 43.5%, respectively. This ratio represents the volume of short-term liquid assets as a percentage of net deposits and borrowings due within one year.

The Company must also maintain adequate levels of liquidity to ensure the availability of funds to satisfy loan commitments. The Company anticipates that it will have sufficient funds available to meet its current commitments principally through the use of current liquid assets and through its borrowing capacity discussed above. The following table summarizes these commitments at March 31, 2013 and December 31, 2012.


                                      March 31, 2013       December 31, 2012

         Commitments to fund loans   $     42,620,513     $        34,748,383
         Standby letters of credit            368,390                 368,390

Quantitative measures established by regulation to ensure capital adequacy . . .

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