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JXSB > SEC Filings for JXSB > Form 10-Q on 7-Aug-2013All Recent SEC Filings

Show all filings for JACKSONVILLE BANCORP, INC.

Form 10-Q for JACKSONVILLE BANCORP, INC.


7-Aug-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 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 disruptions in the financial markets, changes in interest rates, general economic conditions and the current 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, including the Dodd-Frank Act and the elimination of the Office of Thrift Supervision; 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.

Foreclosed Assets - Foreclosed assets primarily consist of real estate owned. 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 of an asset 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

June 30, 2013 Compared to December 31, 2012

Total assets decreased by $8.2 million, or 2.6%, to $313.2 million at June 30, 2013 from $321.4 million at December 31, 2012. Net loans (excluding loans held for sale) decreased $4.9 million, or 2.8%, to $168.9 million at June 30, 2013 from $173.8 million at December 31, 2012. The decrease in loans is primarily due to a decrease of $4.6 million in commercial business loans reflecting payments on lines of credit. The loan portfolio continues to be affected by low loan demand. Available-for-sale investment and mortgage-backed securities decreased $5.5 million, or 4.7%, to $109.9 million at June 30, 2013. This decrease is primarily due to a decrease of $6.4 million in unrealized gains on these investments due to changes in market rates. The tax effect of this decrease in unrealized gains on available-for-sale investments contributed to the $2.2 million increase in deferred income taxes. At June 30, 2013 and December 31, 2012, goodwill totaled $2.7 million. At these dates, our goodwill was not impaired.

Total deposits decreased $136,000, or 0.1%, to $258.4 million at June 30, 2013 from $258.5 million at December 31, 2012. The decrease reflects a $6.0 million decrease in time deposits, partially offset by a $5.9 million increase in lower-cost transaction accounts. Transaction accounts have continued to grow as customers have preferred to maintain short-term, liquid deposits in the current low-rate environment. Other borrowings, which consisted of overnight repurchase agreements, decreased $5.6 million, or 44.3%, to $7.1 million at June 30, 2013. The repurchase agreements are a cash management service provided to our commercial deposit customers. This decrease reflects the withdrawal of seasonal deposits from our agricultural business customers.

Stockholders' equity decreased $2.8 million, or 6.5%, to $41.3 million at June 30, 2013. The decrease in stockholders' equity was the result of a change of $4.3 million in other comprehensive loss, the payment of $284,000 in dividends and $209,000 in stock repurchases, which was partially offset by net income of $1.8 million. 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 June 30, 2013 and 2012

General: Net income for the three months ended June 30, 2013 was $760,000, or $0.41 per common share, basic and diluted, compared to net income of $847,000, or $0.45 per common share, basic and diluted, for the three months ended June 30, 2012. The $87,000 decrease in net income was due to decreases of $170,000 in net interest income and $158,000 in non-interest income, partially offset by decreases of $170,000 in the provision for loan losses, $43,000 in non-interest expense, and $28,000 in income taxes.

Interest Income: Total interest income for the three months ended June 30, 2013 decreased $303,000, or 9.4%, to $2.9 million from $3.2 million for the same period of 2012. The decrease in interest income reflected decreases of $162,000 in interest income on loans, $60,000 in interest income on investment securities, and $81,000 in interest income on mortgage-backed securities. As noted below, the changes in the composition of our interest-earning assets reflects the investment in investment and mortgage-backed securities during a time when satisfactory loan origination opportunities were lacking.

Interest income on loans decreased $162,000 to $2.3 million for the second quarter of 2013 due to decreases in the average yield and average balance of loans. The average yield decreased 33 basis points to 5.37% for the second quarter of 2013, compared to 5.70% for the second 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 decreased $1.4 million to $171.3 million during the second quarter of 2013. The decrease in the average balance of the loan portfolio reflected a decrease in the average balance of residential real estate loans, reflecting the volume of loans refinanced and subsequently sold into the secondary market.

Interest income on investment securities decreased $60,000 to $442,000 for the second quarter of 2013 compared to the second quarter of 2012. The decrease reflected a decrease in the average yield of investment securities to 2.95% during the second quarter of 2013 from 3.43% during the second quarter of 2012. The majority of our investment portfolio consists of municipal bonds which are exempt from federal taxation, resulting in a higher tax-equivalent yield. The decrease in the average yield was partially offset by an increase of $1.3 million in the average balance of the investment securities portfolio to $59.9 million during the second quarter of 2013, compared to $58.6 million for the second quarter of 2012.

Interest income on mortgage-backed securities decreased $81,000 to $172,000 for the second quarter of 2013, compared to $253,000 for the second quarter of 2012. The decrease reflected an 82 basis point decrease in the average yield of mortgage-backed securities to 1.37% for the second quarter of 2013, compared to 2.19% for the second quarter of 2012. The average yield was impacted by higher premium amortization resulting from faster prepayment speeds on mortgage-backed securities. The amortization of premiums on mortgage-backed securities, which reduces the average yield, increased to $225,000 during the second quarter of 2013, compared to $164,000 during the second quarter of 2012. The decrease in the average yield was partially offset by a $4.0 million increase in the average balance of mortgage-backed securities to $50.2 million during the second quarter of 2013.

Interest income on other interest-earning assets, consisting of interest-earning demand and time deposit accounts and federal funds sold, totaled $12,000 during the second quarters of 2013 and 2012. The average balance of these accounts decreased $2.2 million to $10.5 million for the three months ended June 30, 2013 compared to $12.7 million for the three months ended June 30, 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 0.46% during the second quarter of 2013 from 0.39% during the second quarter of 2012, reflecting the decrease in the lower-yielding federal funds sold during this same time frame.

Interest Expense: Total interest expense decreased $133,000, or 22.7%, to $454,000 for the three months ended June 30, 2013 compared to $587,000 for the three months ended June 30, 2012. The lower interest expense was primarily due to a $132,000 decrease in the cost of deposits.

Interest expense on deposits decreased $132,000 to $452,000 for the second quarter of 2013 compared to $584,000 for the second quarter of 2012. The decrease in interest expense on deposits was primarily due to a 21 basis point decrease in the average rate paid on deposits to 0.77% during the second quarter of 2013 from 0.98% during the second quarter of 2012. The decrease reflected ongoing low short-term market interest rates during 2013, as well as a change in the composition of our deposits. The average balance of deposits decreased $3.9 million to $233.6 million for the second quarter of 2013. The decrease reflected a $16.1 million decrease in the average balance of time deposit accounts, partially offset by a $12.2 million increase in the average balance of lower cost transaction accounts.

Interest paid on borrowed funds decreased $1,000 to $3,000 for the second quarter of 2013 due to a decrease in the average cost of borrowings. The average rate paid on borrowed funds decreased to 0.17% during the second quarter of 2013 compared to 0.29% during the second quarter of 2012. The average balance of borrowed funds was $6.0 million for the second quarter of 2013 compared to $5.4 million for the second quarter of 2012.

Net Interest Income. As a result of the changes in interest income and interest expense noted above, net interest income decreased by $170,000, or 6.5%, to $2.5 million for the three months ended June 30, 2013 from $2.6 million for the three months ended June 30, 2012. During the prolonged period of low interest rates, we have experienced a continuing contraction in our net interest margin. Our net interest margin decreased 25 basis points to 3.39% for the second quarter of 2013 from 3.64% for the second quarter of 2012. Our interest rate spread decreased by 23 basis points to 3.25% during the second quarter of 2013 from 3.48% during the second quarter of 2012. Our ratio of interest earning assets to interest bearing liabilities was 1.22x and 1.19x at June 30, 2013 and June 30, 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.

No provision for loan losses was made during the second quarter of 2013, compared to $170,000 during the second quarter of 2012. The decrease in the provision for loan losses reflected the decline in loan volume and the level of net recoveries during 2013. Net recoveries equaled $27,000 during the second quarter of 2013 compared to net charge-offs of $370,000 during the second quarter of 2012.

The allowance for loan losses increased $342,000 to $3.5 million at June 30, 2013 from $3.1 million at June 30, 2012. Loans delinquent 30 days or more decreased $826,000 to $2.0 million, or 1.19% of total loans, as of June 30, 2013, from $2.8 million, or 1.61% of total loans, as of December 31, 2012. Loans delinquent 30 days or more totaled $1.8 million, or 1.02% of total loans at June 30, 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. During the recent quarter, management has also considered the expected impact the severe drought in our area will have on our agricultural borrowers and the potential adverse effect it will have in our market area economy. The following table sets forth information regarding nonperforming assets at the dates indicated.

                                            June 30, 2013       December 31, 2012

   Non-accruing loans:
   One-to-four family residential          $     1,326,814     $         1,203,328
   Commercial real estate                          386,637                 560,073
   Commercial business                              44,253                  51,436
   Home equity                                     226,870                 276,877
   Consumer                                         41,580                 122,064
   Total                                   $     2,026,154     $         2,213,778

   Accruing loans delinquent more than 90 days:
   One-to-four family residential                   75,011                       -
   Total                                   $        75,011     $                 -

   Real estate owned:
   Commercial real estate                          137,193                 137,193
   Total                                   $       137,193     $           137,193

   Total nonperforming assets              $     2,238,358     $         2,350,971

   Total as a percentage of total assets              0.71 %                  0.73 %

Nonperforming assets decreased $113,000 to $2.2 million, or 0.71% of total assets, as of June 30, 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 decrease in nonperforming loans, as real estate owned remained steady. Nonperforming loans decreased to $2.1 million as of June 30, 2013, from $2.2 million at December 31, 2012. The decrease in nonperforming loans primarily reflected 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 June 30, 2013 and December 31, 2012. All non-accruing loans are automatically placed on the watch list. The decrease in Substandard credits reflected the payoff of the commercial real estate loan noted above. The decrease in Special Mention credits primarily reflected the improvement and upgrade of several smaller borrowers totaling $382,000.

                                      June 30, 2013       December 31, 2012

          Special Mention credits    $     1,396,857     $         1,846,851
          Substandard credits              5,790,806               5,945,570
          Total watch list credits   $     7,187,663     $         7,792,421

Non-Interest Income: Non-interest income decreased $158,000, or 13.3%, to $1.0 million for the three months ended June 30, 2013 from $1.2 million for the same period in 2012. The decrease in non-interest income resulted primarily from decreases of $197,000 in gains on the sale of available-for-sale securities and $21,000 in net income from mortgage banking operations, partially offset by an increase of $24,000 in commission income. The decrease in gains on the sale of securities reflected changing market conditions and a lower volume of securities sold as $3.6 million were sold during the second quarter of 2013 compared to $4.7 million during the same period of 2012. The decrease in mortgage banking income was due to a lower volume of loan sales, reflecting an increase in mortgage rates. We sold $7.4 million of loans to the secondary market during the second quarter of 2013, compared to $9.8 million during the same period of 2012. The increase in commission income reflected improved market conditions.

Non-Interest Expense: Total non-interest expense decreased $43,000, or 1.7%, to $2.5 million for the three months ended June 30, 2013. The decrease in non-interest expense consisted mainly of decreases of $23,000 in real estate owned expense and $17,000 in compensation and benefits expense. The decrease in real estate owned expense is primarily due to a smaller number of properties to maintain during the second quarter of 2013. The decrease in compensation and benefits expense resulted primarily from lower employee costs and reduced expenses related to benefit plans during this same period.

Income Taxes: The provision for income taxes decreased $28,000 to $271,000 during the second quarter of 2013 compared to the same period of 2012. The decrease in the income tax provision reflected a decrease in taxable income. The effective tax rate was 26.25% and 26.07% during the three months ended June 30, 2013 and 2012, respectively.

Comparison of Operating Results for the Six Months Ended June 30, 2013 and 2012

General: Net income for the six months ended June 30, 2013 was $1,773,000, or $0.95 per common share, basic and diluted, compared to net income of $1,762,000, or $0.93 per common share, basic and diluted, for the six months ended June 30, 2012. The $11,000 increase in net income was due to a decrease of $220,000 in the provision for loan losses and an increase of $224,000 in non-interest income, partially offset by a decrease of $364,000 in net interest income and increases of $25,000 in non-interest expense and $44,000 in income taxes.

Interest Income: Total interest income for the six months ended June 30, 2013 decreased $633,000, or 9.7%, to $5.9 million from $6.5 million for the same period of 2012. The decrease in interest income reflected decreases of $357,000 in interest income on loans, $150,000 in interest income on investment securities, and $126,000 in interest income on mortgage-backed securities.

Interest income on loans decreased $357,000 to $4.6 million for the first half of 2013, compared to $5.0 million for the first half of 2012. The decrease in interest income on loans was primarily due to a decrease in the average yield of loans. The average yield on loans decreased 44 basis points to 5.40% during the first six months of 2013 from 5.84% during the first six months 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 to $172.0 million for the first six months of 2013 from $171.3 million for the first six months of 2012.

Interest income on investment securities decreased $150,000 to $876,000 for the first half of 2013 from the same period of 2012. The decrease in interest income reflects decreases in the average yield and average balance of investment securities. The average yield of investment securities decreased 46 basis points to 3.02% during the first six months of 2013 from 3.48% for the first six months of 2012 due to purchases of newer securities at lower interest rates. The majority of our investment portfolio consists of municipal bonds which are exempt from federal taxation, resulting in a higher tax-equivalent yield. The average balance of the investment securities portfolio decreased to $58.1 million during the first six months of 2013, compared to $58.8 million for the first six months of 2012.

Interest income on mortgage-backed securities decreased $126,000 to $332,000 for the first half of 2013, compared to $458,000 for the first half of 2012. The decrease reflected a 76 basis point decrease in the average yield of mortgage-backed securities to 1.32% for the first half of 2013, compared to 2.08% for the first half of 2012. The average yield was impacted by higher premium amortization resulting from faster prepayment speeds on mortgage-backed securities. The amortization of premiums on mortgage-backed securities, which reduces the average yield, increased $140,000 to $470,000 during the first six months of 2013, compared to $330,000 during the first six months of 2012. The decrease in interest income on mortgage-backed securities was partially offset by an increase of $6.5 million in the average balance of mortgage-backed securities to $50.5 million during the first half of 2013.

Interest income on other interest-earning assets, consisting of interest-earning demand and time deposit accounts and federal funds sold, totaled $24,000 during the first half of 2013 and 2012. The average balance of these accounts decreased $3.1 million to $11.1 million for the six months ended June 30, 2013 compared to $14.2 million for the six months ended June 30, 2012. The average yield on other interest-earning assets increased to 0.43% during the first half of 2013 from 0.33% during the first half of 2012.

Interest Expense: Total interest expense decreased $269,000, or 22.5%, to $926,000 for the six months ended June 30, 2013 compared to $1.2 million for the six months ended June 30, 2012. The lower interest expense was primarily due to a $267,000 decrease in the cost of deposits.

Interest expense on deposits decreased $267,000 to $921,000 for the six months ended June 30, 2013 compared to $1.2 million for the six months ended June 30, 2012. The decrease in interest expense on deposits was primarily due to a 21 basis point decrease in the average rate paid to 0.79% during the first half of 2013 from 1.00% during the first half of 2012. The decrease reflected low short-term market interest rates which continued during 2013, as well as a change in the composition of our deposits. The average balance of deposits decreased $2.4 million to $234.2 million for the first half of 2013 compared to $236.6 million for the first half of 2012.

Interest paid on borrowed funds decreased $2,000 to $5,000 for the first half of 2013 due to a decrease in the average cost of borrowings. The average rate paid on borrowed funds decreased to 0.21% during the first six months of 2013 compared to 0.27% during the first six months of 2012. The average balance of borrowed funds was $5.0 million during the first six months of 2013 compared to $4.9 million during the same period of 2012.

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