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JXSB > SEC Filings for JXSB > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for JACKSONVILLE BANCORP, INC.

Form 10-Q for JACKSONVILLE BANCORP, INC.


8-Nov-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; 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 judgments, 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 judgment, deserve current recognition in estimating loan losses. The evaluation includes a review of all loans on which full collectability 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 judgment in their application. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result.

Basel III

On July 2, 2013, the Board of Governors of the Federal Reserve System announced its approval of the final rule to implement the Basel III regulatory capital reforms, among other changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Federal Deposit Insurance Corporation adopted the new rule on July 9, 2013. The approved rule includes a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%, as well as a common equity Tier 1 capital conservation buffer of 2.5 of risk-weighted assets. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking institutions. The phase-in for banking institutions such as Jacksonville Savings Bank will not begin until January 2015, while the phase-in for larger banks starts in January 2014. We are currently evaluating the impact of the implementation of the new capital standards.

Financial Condition

September 30, 2013 Compared to December 31, 2012

Total assets decreased by $772,000, or 0.2%, to $320.7 million at September 30, 2013 from $321.4 million at December 31, 2012. Net loans (excluding loans held for sale) increased $579,000, or 0.3%, to $174.3 million at September 30, 2013 from $173.8 million at December 31, 2012. The increase in loans reflects growth in commercial real estate loans, partially offset by a decrease in commercial business loans. The loan portfolio continues to be affected by low loan demand. Available-for-sale investment and mortgage-backed securities decreased $2.0 million, or 1.7%, to $113.4 million at September 30, 2013. This decrease is primarily due to a decrease of $5.3 million in unrealized gains on these investments due to increases in market interest rates, which reduce the principal value of such securities in our portfolio. The tax effect of this decrease in unrealized gains on available-for-sale investments contributed to the $1.8 million increase in deferred income taxes. At September 30, 2013 and December 31, 2012, goodwill totaled $2.7 million. At these dates, our goodwill was not impaired.

Total deposits decreased $10.9 million, or 4.2%, to $247.7 million at September 30, 2013 from $258.5 million at December 31, 2012. The decrease primarily reflects a $10.4 million decrease in time deposits. Other borrowings, which consisted of $15.5 million in overnight FHLB advances and $9.4 million in overnight repurchase agreements, increased a total of $12.2 million at September 30, 2013. The FHLB advances have been used as a low-cost, short-term source of funding. The repurchase agreements are a cash management service provided to our commercial deposit customers.

Stockholders' equity decreased $2.2 million, or 5.0%, to $41.9 million at September 30, 2013. The decrease in stockholders' equity was the result of accumulated other comprehensive income of $2.9 million at December 31, 2012 becoming other comprehensive loss of $603,000 at September 30, 2013, $1.0 million in stock repurchases, and the payment of $421,000 in dividends, which was partially offset by net income of $2.6 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 September 30, 2013 and 2012

General: Net income for the three months ended September 30, 2013 was $786,000, or $0.43 per common share, basic, and $0.42 per common share, diluted, compared to net income of $1.0 million, or $0.55 per common share, basic and diluted, for the three months ended September 30, 2012. The $244,000 decrease in net income was due to a decrease of $349,000 in non-interest income and an increase of $159,000 in non-interest expense, partially offset by an increase of $8,000 in net interest income and decreases of $110,000 in provision for loan losses and $146,000 in income taxes.

Interest Income: Total interest income for the three months ended September 30, 2013 decreased $130,000, or 4.1%, to $3.1 million from $3.2 million for the same period of 2012. The decrease in interest income reflected decreases of $151,000 in interest income on loans and $13,000 in interest income on investment securities, partially offset by an increase of $35,000 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 $151,000 to $2.4 million for the third quarter of 2013 due to decreases in the average yield and average balance of loans. The average yield decreased 31 basis points to 5.37% for the third quarter of 2013, compared to 5.68% for the third 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 $1.0 million to $176.2 million during the third quarter of 2013. The decrease in the average balance of the loan portfolio was due to 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 $13,000 to $465,000 for the third quarter of 2013 compared to the third quarter of 2012. The decrease reflected a decrease in the average yield of investment securities to 2.93% during the third quarter of 2013 from 3.33% during the third 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 $6.0 million in the average balance of the investment securities portfolio to $63.4 million during the third quarter of 2013, compared to $57.4 million for the third quarter of 2012.

Interest income on mortgage-backed securities increased $35,000 to $222,000 for the third quarter of 2013, compared to $187,000 for the third quarter of 2012. The increase reflected a 13 basis point increase in the average yield of mortgage-backed securities to 1.73% for the third quarter of 2013, compared to 1.60% for the third quarter of 2012. The average yield benefitted from lower premium amortization resulting from slower prepayment speeds on mortgage-backed securities during the third quarter of 2013. The amortization of premiums on mortgage-backed securities, which reduces the average yield, decreased $48,000 to $178,000 during the third quarter of 2013, compared to $226,000 during the third quarter of 2012. Interest income on mortgage-backed securities also increased due to a $4.7 million increase in the average balance of mortgage-backed securities to $51.3 million during the third quarter of 2013.

Interest income on other interest-earning assets, consisting of interest-earning demand and time deposit accounts and federal funds sold, decreased $1,000 to $10,000 during the third quarter of 2013 compared to the same quarter of 2012. The average balance of these accounts decreased $3.6 million to $4.8 million for the three months ended September 30, 2013 compared to $8.3 million for the three months ended September 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 0.86% during the third quarter of 2013 from 0.52% during the third quarter of 2012, reflecting the decrease in the lower-yielding federal funds sold during the comparative periods.

Interest Expense: Total interest expense decreased $138,000, or 23.9%, to $440,000 for the three months ended September 30, 2013 compared to $578,000 for the three months ended September 30, 2012. The lower interest expense reflects a $138,000 decrease in the cost of deposits.

Interest expense on deposits decreased $138,000 to $436,000 for the third quarter of 2013 compared to $574,000 for the third quarter of 2012. The decrease in interest expense on deposits was primarily due to a 22 basis point decrease in the average rate paid on deposits to 0.76% during the third quarter of 2013 from 0.98% during the third 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 $5.5 million to $229.6 million for the third quarter of 2013. The decrease reflected a $17.3 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 equaled $4,000 for the third quarters of 2013 and 2012. The average rate paid on borrowed funds decreased to 0.10% during the third quarter of 2013 compared to 0.25% during the third quarter of 2012. The average balance of borrowed funds increased $9.2 million to $15.7 million for the third quarter of 2013 compared to $6.5 million for the third quarter of 2012.

Net Interest Income: As a result of the changes in interest income and interest expense noted above, net interest income increased by $8,000, or 0.3%, to $2.6 million for the three months ended September 30, 2013 from the same period of 2012. Our interest rate spread decreased by 3 basis points to 3.42% during the third quarter of 2013 from 3.45% during the third quarter of 2012. Our net interest margin decreased 6 basis points to 3.55% for the third quarter of 2013 from 3.61% for the third quarter of 2012.

Provision for Loan Losses: The provision for loan losses is determined by management as the amount needed to maintain the allowance for loan losses, after net charge-offs have been deducted, at a level considered adequate to absorb inherent losses in the loan portfolio following management's evaluation of the repayment capacity and collateral protection afforded by each problem credit and in accordance with accounting principles generally accepted in the United States of America.

The provision for loan losses totaled $10,000 during the third quarter of 2013, compared to $120,000 during the third quarter of 2012. Net charge-offs increased to $218,000 during the third quarter of 2013, compared to net charge-offs of $99,000 during the third quarter of 2012. The allowance for loan losses increased $113,000 to $3.3 million at September 30, 2013 from $3.2 million at September 30, 2012. Loans delinquent 30 days or more decreased $1.1 million to $1.8 million, or 0.99% of total loans, as of September 30, 2013, from $2.8 million, or 1.61% of total loans, as of December 31, 2012. Loans delinquent 30 days or more totaled $2.3 million, or 1.32% of total loans at September 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. The following table sets forth information regarding nonperforming assets at the dates indicated.

                                                 September 30, 2013        December 31, 2012

Non-accruing loans:
 One-to-four family residential                $           1,241,382     $          1,203,328
 Commercial real estate                                      216,923                  560,073
 Commercial business                                          41,087                   51,436
 Home equity                                                 158,850                  276,877
 Consumer                                                     30,824                  122,064
   Total                                       $           1,689,066     $          2,213,778

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

Real estate owned:
 One-to-four family residential                $              77,600     $                  -
 Commercial real estate                                      149,193                  137,193
   Total                                       $             226,793     $            137,193

Total nonperforming assets                     $           1,915,859     $          2,350,971

Total as a percentage of total assets                           0.60 %                   0.73 %

Nonperforming assets decreased $435,000 to $1.9 million, or 0.60% of total assets, as of September 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 $525,000 decrease in nonperforming loans and a $90,000 increase in real estate owned. Nonperforming loans decreased to $1.7 million as of September 30, 2013, from $2.2 million at December 31, 2012. The decrease in nonperforming loans primarily reflected the payoff of approximately $400,000 in nonaccrual loans and $170,000 in charge-offs.

The following table shows the aggregate principal amount of potential problem credits on the Company's watch list at September 30, 2013 and December 31, 2012. All non-accruing loans are automatically placed on the watch list. Total watch list credits decreased $800,000 during 2013 to $7.0 million at September 30, 2013. The decrease in Substandard credits reflected payoffs totaling approximately $580,000 and charge-offs of $212,000. The decrease in Special Mention credits primarily reflected payoffs of approximately $160,000 and charge-offs of $49,000.

                                   September 30, 2013       December 31, 2012

       Special Mention credits    $          1,255,272     $         1,846,851
       Substandard credits                   5,736,752               5,945,570
       Total watch list credits   $          6,992,024     $         7,792,421

Non-Interest Income: Non-interest income decreased $349,000, or 25.7%, to $1.0 million for the three months ended September 30, 2013 from $1.4 million for the same period in 2012. The decrease in non-interest income resulted primarily from decreases of $229,000 in gains on the sale of available-for-sale securities and $136,000 in net income from mortgage banking operations, partially offset by an increase of $12,000 in commission income. The decrease in gains on the sale of securities reflected changing market conditions and a lower volume of securities sold as $7.2 million were sold during the third quarter of 2013 compared to $8.3 million during the same period of 2012. The decrease in mortgage banking income was due to a lower volume of loan sales, reflecting decreased loan demand mortgage rates increased. We sold $5.6 million of loans to the secondary market during the third quarter of 2013, compared to $14.4 million during the same period of 2012. The increase in commission income reflected improved market conditions.

Non-Interest Expense: Total non-interest expense increased $159,000, or 6.6%, to $2.6 million for the three months ended September 30, 2013. The increase in non-interest expense consisted mainly of increases of $129,000 in other non-interest expense and $50,000 in data processing and telecommunications expense. The increase in other non-interest expense is primarily due to a one-time charge of $74,000 related to the sale of our former main office building. Future occupancy expense should be lower as a result of the sale of this facility. The increase in data processing expense reflects non-recurring consulting expenses related to software upgrades and training.

Income Taxes: The provision for income taxes decreased $146,000 to $272,000 during the third 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 25.7% and 28.9% during the three months ended September 30, 2013 and 2012, respectively, reflecting the impact of tax-exempt income.

Comparison of Operating Results for the Nine Months Ended September 30, 2013 and 2012

General: Net income for the nine months ended September 30, 2013 was $2.6 million, or $1.37 per common share, basic and diluted, compared to net income of $2.8 million, or $1.48 per common share, basic and diluted, for the nine months ended September 30, 2012. The $233,000 decrease in net income reflects decreases of $357,000 in net interest income and $126,000 in non-interest income and an increase of $183,000 in non-interest expense, partially offset by decreases of $330,000 in the provision for loan losses and $103,000 in income taxes.

Interest Income: Total interest income for the nine months ended September 30, 2013 decreased $763,000, or 7.9%, to $8.9 million from $9.7 million for the same period of 2012. The decrease in interest income reflected decreases of $508,000 in interest income on loans, $163,000 in interest income on investment securities, and $91,000 in interest income on mortgage-backed securities.

Interest income on loans decreased $508,000 to $7.0 million for the first nine months of 2013, compared to $7.5 million for the same period 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 39 basis points to 5.39% during the first nine months of 2013 from 5.78% during the first nine 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 equaled $173.4 million and $173.3 million for the first nine months of 2013 and 2012, respectively.

Interest income on investment securities decreased $163,000 to $1.3 million for the first nine months of 2013 from the same period of 2012. The decrease in interest income reflects a decrease in the average yield, partially offset by an increase in the average balance of investment securities. The average yield of investment securities decreased 45 basis points to 2.99% during the first nine months of 2013 from 3.44% for the first nine 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 increased to $59.9 million during the first nine months of 2013, compared to $58.3 million for the first nine months of 2012.

Interest income on mortgage-backed securities decreased $91,000 to $554,000 for the first nine months of 2013, compared to $645,000 for the same period of 2012. The decrease reflected a 46 basis point decrease in the average yield of mortgage-backed securities to 1.46% for the first nine months of 2013, compared to 1.92% for the same period of 2012. The average yield was impacted by higher premium amortization resulting from faster prepayment speeds on mortgage-backed securities during 2013. The amortization of premiums on mortgage-backed securities, which reduces the average yield, increased $92,000 to $648,000 during the first nine months of 2013, compared to $556,000 during the first nine months of 2012. The decrease in interest income on mortgage-backed securities was partially offset by an increase of $5.9 million in the average balance of mortgage-backed securities to $50.7 million during the nine months of 2013 as compared to the same period in 2012.

Interest income on other interest-earning assets, consisting of interest-earning demand and time deposit accounts and federal funds sold, decreased to $34,000 during the first nine months of 2013 from $35,000 during the same period of 2012. The average balance of these accounts decreased $3.2 million to $9.0 million for the nine months ended September 30, 2013 compared to $12.2 million for the nine months ended September 30, 2012. The average yield on other interest-earning assets increased to 0.51% during the first nine months of 2013 from 0.38% during the first nine months of 2012.

Interest Expense: Total interest expense decreased $407,000, or 22.9%, to $1.4 million for the nine months ended September 30, 2013 compared to $1.8 million . . .

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