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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period 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 000-30248

 

 

JACKSONVILLE BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Florida   59-3472981

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

100 North Laura Street, Suite 1000, Jacksonville, Florida 32202
(Address of principal executive offices)

(904) 421-3040

(Registrant’s telephone number)

 

 

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 the 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   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of April 30, 2012, the latest practicable date, 5,889,822 of the Registrant’s common shares, $.01 par value, were issued and outstanding.

 

 

 

 


Table of Contents

JACKSONVILLE BANCORP, INC.

TABLE OF CONTENTS

 

   

Page

PART I - FINANCIAL INFORMATION

 

Item 1.

  Financial Statements   3
  Consolidated Balance Sheets   3
  Consolidated Statements of Operations   4
  Consolidated Statements of Changes in Shareholders’ Equity   5
  Consolidated Statements of Cash Flows   6
  Notes to Consolidated Financial Statements   8

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations   37

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk   53

Item 4.

  Controls and Procedures   54

PART II - OTHER INFORMATION

 

Item 1.

  Legal Proceedings   55

Item 1A.

  Risk Factors   55

Item 6.

  Exhibits   56

SIGNATURES

  57

EXHIBIT INDEX

  58

CERTIFICATIONS

 

Certification of Price W. Schwenck under Section 302 of the Sarbanes-Oxley Act of 2002

 

Certification of Valerie A. Kendall under Section 302 of the Sarbanes-Oxley Act of 2002

 

Certification under Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

2.


Table of Contents

JACKSONVILLE BANCORP, INC.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

     March 31,
2012
    December 31,
2011
 

ASSETS

    

Cash and due from financial institutions

   $ 12,093      $ 9,955   

Federal funds sold

     11,043        —     
  

 

 

   

 

 

 

Cash and cash equivalents

     23,136        9,955   

Securities available-for-sale

     78,768        63,140   

Loans, net of allowance for loan losses of $13,082 in 2012 and $13,024 in 2011

     446,039        449,583   

Premises and equipment, net

     6,950        6,978   

Bank-owned life insurance

     9,622        9,541   

Federal Home Loan Bank stock, at cost

     2,770        2,707   

Real estate owned, net

     7,667        7,968   

Accrued interest receivable

     2,514        2,598   

Prepaid regulatory assessments

     619        782   

Goodwill

     3,137        3,137   

Other intangible assets, net

     1,642        1,774   

Other assets

     2,969        3,262   
  

 

 

   

 

 

 

Total assets

   $ 585,833      $ 561,425   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits

    

Noninterest bearing

   $ 80,802      $ 82,852   

Money market, NOW and savings deposits

     211,064        199,070   

Time deposits

     221,647        191,985   
  

 

 

   

 

 

 

Total deposits

     513,513        473,907   

Loans from related parties

     3,000        3,000   

FHLB advances and other borrowings

     20,209        36,811   

Subordinated debentures

     16,042        16,026   

Accrued expenses and other liabilities

     2,267        2,337   
  

 

 

   

 

 

 

Total liabilities

     555,031        532,081   

SHAREHOLDERS’ EQUITY

    

Preferred stock, $.01 par value; 10,000,000 shares authorized; none issued

     —          —     

Common stock, $.01 par value, 40,000,000 shares authorized, 5,889,822 and 5,888,809 shares issued and outstanding, respectively

     59        59   

Additional paid–in capital

     55,401        55,383   

Retained earnings (deficit)

     (25,928     (27,216

Accumulated other comprehensive income

     1,270        1,118   
  

 

 

   

 

 

 

Total shareholders’ equity

     30,802        29,344   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 585,833      $ 561,425   
  

 

 

   

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

3.


Table of Contents

JACKSONVILLE BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

    

Three Months Ended

March 31,

 
     2012      2011  

Interest and dividend income

     

Loans, including fees

   $ 6,180       $ 7,259   

Taxable securities

     284         211   

Tax-exempt securities

     190         242   

Federal funds sold and other

     17         28   
  

 

 

    

 

 

 

Total interest income

     6,671         7,740   

Interest expense

     

Deposits

   $ 988       $ 1,518   

Federal Reserve and other borrowings

     66         29   

FHLB advances

     89         97   

Subordinated debt

     213         220   
  

 

 

    

 

 

 

Total interest expense

     1,356         1,864   
  

 

 

    

 

 

 

Net interest income

     5,315         5,876   

Provision for loan losses

     72         1,929   
  

 

 

    

 

 

 

Net interest income after provision for loan losses

     5,243         3,947   

Noninterest income

     

Service charges on deposit accounts

     202         235   

Other income

     235         161   
  

 

 

    

 

 

 

Total noninterest income

     437         396   

Noninterest expense

     

Salaries and employee benefits

     2,049         1,708   

Occupancy and equipment

     578         660   

Regulatory assessment

     225         322   

Data processing

     292         398   

Advertising and business development

     117         98   

Professional fees

     198         198   

Telephone expense

     92         76   

Other real estate owned expense

     377         252   

Other

     464         538   
  

 

 

    

 

 

 

Total noninterest expense

     4,392         4,250   
  

 

 

    

 

 

 

Income before income taxes

     1,288         93   

Income tax benefit

     —           (346
  

 

 

    

 

 

 

Net income

   $ 1,288       $ 439   
  

 

 

    

 

 

 

Weighted average:

     

Common shares

     5,889,822         5,888,809   

Dilutive stock options and warrants

     867         1,497   
  

 

 

    

 

 

 

Dilutive shares

     5,890,689         5,890,306   
  

 

 

    

 

 

 

Basic earnings per common share

   $ .22       $ .07   
  

 

 

    

 

 

 

Diluted earnings per common share

   $ .22       $ .07   
  

 

 

    

 

 

 

(Dollar amounts in thousands)

Other comprehensive income components and related tax effects were as follows:

 

     Three Months Ended  
     March 31,
2012
     March 31,
2011
 

Net income

   $ 1,288       $ 439   

Other comprehensive income:

     

Unrealized holding gains on available-for-sale securities

     56         647   

Net unrealized derivative (losses) on cash flow hedge

     96         90   
  

 

 

    

 

 

 

Other comprehensive income

     152         737   

Tax effect

     —           (277
  

 

 

    

 

 

 

Other comprehensive income

     152         460   
  

 

 

    

 

 

 

Comprehensive income

   $ 1,440       $ 899   
  

 

 

    

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

4.


Table of Contents

JACKSONVILLE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands)

 

 

 

     Common Stock      Additional      Retained            Accumulated Other        
     Outstanding      Paid-In      Earnings     Treasury Stock      Comprehensive        
     Shares      Amount      Capital      (Deficit)     Amount      Income (Loss)     Total  

Balance at January 1, 2011

     5,888,809       $ 59       $ 55,307       $ (3,157   $ —         $ (350   $ 51,859   

Comprehensive income:

                  

Net income

              439             439   

Change in unrealized gain on securities available-for-sale, net of tax effects

                   403        403   

Net unrealized gain on cash flow hedge, net of tax effects

                   57        57   
                  

 

 

 

Total comprehensive income

                     899   

Share-based compensation expense

           26                26   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Balance at March 31, 2011

     5,888,809       $ 59       $ 55,333       $ (2,718   $ —         $ 110      $ 52,784   

Balance at January 1, 2012

     5,889,822       $ 59       $ 55,383       $ (27,216   $ —         $ 1,118      $ 29,344   

Comprehensive income:

                  

Net income

              1,288             1,288   

Change in unrealized gain on securities available-for-sale, net of tax effects

                   56        56   

Net unrealized loss on cash flow hedge, net of tax effects

                   96        96   
                  

 

 

 

Total comprehensive income

                     1,440   

Share-based compensation expense

           18                18   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Balance at March 31, 2012

     5,889,822       $ 59       $ 55,401       $ (25,928   $ —         $ 1,270      $ 30,802   

 

 

See accompanying notes to unaudited consolidated financial statements.

5.


Table of Contents

JACKSONVILLE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

 

 

     Three Months Ended
March 31,
 
     2012     2011  

Cash flows from operating activities

    

Net income

   $ 1,288      $ 439   

Adjustments to reconcile net income to net cash from operating activities:

    

Depreciation and amortization

     143        158   

Net amortization of deferred loan fees

     8        (55

Provision for loan losses

     72        1,929   

Premium amortization for securities, net of accretion

     177        164   

Net accretion of purchase accounting adjustments

     (472     (628

Net gain on sale of real estate owned

     (13     (1

Loss on write-down of real estate owned

     250        100   

Earnings on bank-owned life insurance

     (81     (55

Loss on disposal of premises and equipment

     —          8   

Share-based compensation

     18        26   

Deferred income tax benefit

     —          (698

Net change in accrued interest receivable and other assets

     538        490   

Net change in accrued expenses and other liabilities

     26        (234
  

 

 

   

 

 

 

Net cash from operating activities

     1,954        1,643   

Cash flows from investing activities

    

Purchases of securities available-for-sale

     (18,921     (4,991

Proceeds from maturities, calls and paydown of securities available-for-sale

     3,172        2,641   

Proceeds from bulk loan sale

     0        13,910   

Loan (originations) payments, net

     3,100        8,028   

Proceeds from sale of real estate owned

     890        2,243   

Additions to premises and equipment, net

     (115     (94

Purchase of Federal Home Loan Bank stock, net of redemptions

     (63     —     
  

 

 

   

 

 

 

Net cash from (used for) investing activities

     (11,937     21,737   

Cash flows from financing activities

    

Net change in deposits

     39,764        (32,276

Net change in overnight FHLB advances

     (18,600     —     

Proceeds from related party transactions

     —          1,200   

Proceeds from FHLB fixed-rate advances

     10,000        —     

Repayment of FHLB fixed-rate advances

     (8,000     —     
  

 

 

   

 

 

 

Net cash from financing activities

     23,164        (31,076
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     13,181        (7,696

Cash and cash equivalents at beginning of period

     9,955        20,297   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 23,136      $ 12,601   
  

 

 

   

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

6.


Table of Contents

JACKSONVILLE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)

 

     Three Months Ended
March 31,
 
     2012      2011  

Supplemental disclosures of cash flow information

     

Cash paid during the period for

     

Interest

   $ 1,530       $ 2,156   

Income taxes

     —           —     

Supplemental schedule of noncash investing activities acquisition of real estate owned

   $ 737       $ 152   

Supplemental schedule of noncash financing activities loan participation on agreements classified as secured borrowings

   $ —         $ 3,438   

 

 

See accompanying notes to unaudited consolidated financial statements.

7.


Table of Contents

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

NOTE 1 – BASIS OF PRESENTATION

Nature of Operations and Principles of Consolidation: Jacksonville Bancorp, Inc. (“Bancorp”) is a financial holding company headquartered in Jacksonville, Florida. The consolidated financial statements include the accounts of Jacksonville Bancorp, Inc. and its wholly-owned, primary operating subsidiary, The Jacksonville Bank, and one of The Jacksonville Bank’s wholly-owned subsidiaries, Fountain Financial, Inc. The consolidated entity is referred to as the “Company,” and The Jacksonville Bank and Fountain Financial, Inc. are collectively referred to as the “Bank.” The Company’s financial condition and operating results principally reflect those of the Bank. All intercompany transactions and balances are eliminated in consolidation.

The Company currently provides financial services through its eight full-service branches in Duval County, Florida, as well as its virtual branch. Its primary business segment is community banking and consists of attracting deposits from the general public and using such deposits and other sources of funds to originate commercial business loans, commercial real estate loans, residential mortgage loans and a variety of consumer loans. Substantially all loans are secured by specific items of collateral, including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. There are no significant concentrations of loans to any one industry or customer. However, the customers’ ability to repay their loans is dependent on the real estate and general economic conditions in the area. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 30, 2012.

The accounting and reporting policies of the Company reflect banking industry practice and conform to U.S. generally accepted accounting principles (“U.S. GAAP”). In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported asset and liability balances and revenue and expense amounts, and the disclosure of contingent assets and liabilities. Actual results could differ significantly from those estimates.

The consolidated financial information included herein as of and for the periods ended March 31, 2012 and 2011 is unaudited. Accordingly, it does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. However, such information reflects all adjustments which are, in the opinion of management, necessary for a fair statement of results for the interim periods. The December 31, 2011 consolidated balance sheets was derived from the Company’s December 31, 2011 audited consolidated financial statements and has been adjusted for additional information related to the fair value of Assets and Liabilities acquired.

Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, and allowance for loan losses. Interest income is accrued on the unpaid principal balance of the loans. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.

 

 

See accompanying notes to unaudited consolidated financial statements.

8.


Table of Contents

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 1 – BASIS OF PRESENTATION (Cont.)

 

Interest income on a loan in any of our portfolio segments is discontinued at the time the loan is 90 days delinquent unless the loan is well secured and in process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All unsecured loans in our consumer and other portfolio segment are charged off once they reach 90 days delinquent. This is the only portfolio segment that the Company charges off loans solely based on the number of days of delinquency. For real estate mortgage, commercial loan and the secured consumer and other portfolio segments, the charge-off policy is that a loan is fully or partially charged off when, based on management’s assessment, it has been determined that it is highly probable that the Company would not collect all principal and interest payments according to the contractual terms of the loan agreement. This assessment is determined based on a detailed review of all substandard and doubtful loans each month. This review considers such criteria as the value of the underlying collateral, financial condition and reputation of the borrower and guarantors and the amount of the borrower’s equity in the loan. The Company’s charge-off policy has remained materially unchanged for all periods presented.

At times, the Company will charge off a portion of a nonperforming or impaired loan versus recording a specific reserve. The decision to charge off a portion of the loan is based on specific facts and circumstances unique to each loan. General criteria considered are: the probability that the Company will foreclose on the property, the value of the underlying collateral compared to the principal amount outstanding on the loan and the personal guarantees associated with the loan. For the period ended March 31, 2012, partial charge-offs were $3 on $115 of nonperforming loans and impaired loans. For the year ended December 31, 2011, partial charge-offs were $6,645 on $25,269 of nonperforming loans and impaired loans.

Partial charge-offs impact the Company’s credit loss metrics and trends, in particular a reduction in the coverage ratio, by decreasing substandard loan balances, decreasing capital and increasing the historical loss factor used in the calculation of the allowance for loan losses. However, the impact of the historical loss factor on the allowance for loan losses would be slightly offset by the fact that the charge-off reduces the overall loan balance.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Overdrawn customer checking accounts are reclassified as consumer loans and are evaluated on an individual basis for collectability. The balances, which totaled $95 and $524 at March 31, 2012 and December 31, 2011, respectively, are included in the estimate of allowance for loan losses and are charged off when collectability is considered doubtful.

Certain Purchased Loans: As part of our merger with Atlantic BancGroup, Inc. (“ABI”), the Company purchased individual loans and groups of loans, some of which have shown evidence of credit deterioration since origination. These purchased loans are recorded at fair value, such that there is no carryover of the seller’s allowance for loan losses. Fair values are preliminary and subject to refinement for up to one year after the closing date of the merger as new information relative to the closing date fair value becomes available. After acquisition, losses are recognized by an increase in the allowance for loan losses if the reason for the loss was due to events and circumstances that did not exist as of the acquisition date. If the reason for the loss was due to events and circumstances that existed as of the acquisition date due to new information obtained during the measurement period (i.e., 12 months from date of acquisition), that, if known, would have resulted in the recognition of additional deterioration, the additional deterioration is recorded as additional carrying discount with a corresponding increase to goodwill.

 

 

See accompanying notes to unaudited consolidated financial statements.

9.


Table of Contents

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 1 – BASIS OF PRESENTATION (Cont.)

 

Such purchased loans are accounted for individually or aggregated into pools of loans based on common risk characteristics, such as credit score, loan type, and date of origination. The Company estimates the amount and timing of expected cash flows for each purchased loan or pool, and the expected cash flows in excess of amount paid are recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded (non-accretable difference).

Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

Loans Held for Sale: Loans intended for sale to independent investors are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. 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 estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. 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.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as special mention, substandard or doubtful.

The Company’s policy for assessing loans for impairment is the same for all classes of loans and is included in our allowance for loan losses policy. The Company classifies a loan as impaired when it is probable that the Company will be unable to collect all amounts due, including both principal and interest, according to the contractual terms of the loan agreement. An impairment analysis is performed utilizing the following general factors: substandard or doubtful loan, loan amount greater than $100,000 and the loan is 90 days past due or more. In addition, the Company also considers the following: financial condition of the borrower, the Company’s best estimate of the direction and magnitude of any future changes in the borrower’s financial condition, fair value of collateral if the loan is collateral dependent, loan’s observable market price, expected future cash flow and, if a purchased loan, the amount of the remaining unaccreted carrying discount. For loans acquired in the acquisition of ABI, if events occur within the measurement period (i.e., 12 months from date of acquisition) that cause a deterioration of the loan that is more than the deterioration estimated at acquisition, we evaluate whether the events and circumstances that existed as of the acquisition date are due to new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of additional deterioration. If so, the additional deterioration is recorded as additional carrying discount with a corresponding increase in goodwill. If not, the additional deterioration is recorded as additional provision expense with a corresponding increase in the allowance for loan losses. After the measurement period, any additional impairment above the current carrying discount is recorded as additional provision expense with a corresponding increase in the allowance for loan losses.

 

 

See accompanying notes to unaudited consolidated financial statements.

10.


Table of Contents

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 1 – BASIS OF PRESENTATION (Cont.)

 

If a loan is impaired, a portion of the allowance for loan losses may be allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the sale of the collateral. If an impaired loan is on nonaccrual, then recognition of interest income would follow our nonaccrual policy, which is to not accrue interest and account for any interest received on the cash-basis or cost recovery method until qualifying for return to accrual. If an impaired loan is not on nonaccrual, then recognition of interest income would accrue on the unpaid principal balance based on the contractual terms of the loan. All impaired loans are reviewed on a quarterly basis for changes in the measurement of impairment. For impaired loans measured using the present value of expected cash flows method, any change to the previously recognized impairment loss is recognized as a change in the allowance for loan loss account and recorded in the consolidated statement of operations as a component of the provision for loan losses.

Loans, for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Troubled debt restructurings are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. Key factors that the Company considers at the time a loan is restructured to determine whether the loan should accrue interest include if the loan is less than 90 days past due and if the loan is in compliance with the modified terms of the loan. The Company determines that the loan has been restructured to be reasonably assured of repayment and of performance according to the modified terms by performing an analysis that documents exactly how the loan is expected to perform under the modified terms. Once loans become troubled debt restructurings, they remain troubled debt restructurings until they become collateral-impaired, mature or are paid off in the normal course of business.

The general component covers all other loans not identified as impaired and is based on historical losses with consideration given to current factors. The historical loss component of the allowance is determined by losses recognized by each portfolio segment over the preceding five years with the most recent years carrying more weight. This is supplemented by the risks for each portfolio segment. In calculating the historical component of our allowance, we aggregate our loans into one of three portfolio segments: Real Estate Mortgage loans, Commercial loans, and Consumer and Other loans. Risk factors impacting loans in each of the portfolio segments include broad deterioration of property values, reduced consumer and business spending as a result of continued high unemployment and reduced credit availability and lack of confidence in a sustainable recovery. Actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: the concentration of watch and substandard loans as a percentage of total loans, levels of loan concentration within a portfolio segment or division of a portfolio segment and broad economic conditions.

 

 

See accompanying notes to unaudited consolidated financial statements.

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JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 1 – BASIS OF PRESENTATION (Cont.)

(Dollar amounts in thousands except per share data)

 

Adoption of New Accounting Standards: In September 2011, the Financial Accounting Standard Board (“FASB”) amended guidance on the annual goodwill impairment test performed by the Company. Under the amended guidance, the Company will have the option to first assess qualitative factors to determine whether it is necessary to perform a two-step impairment test. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than the carrying value, the quantitative impairment test is required. If the Company believes the fair value of a reporting unit is greater than the carrying value, no further testing is required. A company can choose to perform the qualitative assessment on some or none of its reporting entities. The Amended guidance includes examples of events and circumstances that might indicate that a reporting unit’s fair value is less than its carrying amount. These include macro-economic conditions such as deterioration in the entity’s operating environment, entity-specific events such as declining financial performance, and other events such as an expectation that a reporting unit will be sold. The amended guidance is effective for annual and interim goodwill impairment test performed for fiscal years beginning after December 15, 2011. However, an entity can choose to early adopt even if its annual test date is before the issuance of the final standard, provided that the entity has not yet performed its 2011 annual impairment test or issued its financial statements. The adoption of this guidance did not have a material impact on our consolidated financial statements.

In May 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and international accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. This update clarifies the application of existing fair value measurement requirements, changes certain principles in existing guidance and requires additional fair value disclosures. The update permits measuring financial assets and liabilities on a net credit risk basis, if certain criteria are met, increases disclosures surrounding company determined market prices of (level 3) financial instruments, and also requires the fair value hierarchy disclosure of financial assets and liabilities that are not recognized at fair value in the financial statements, but are included in disclosures at fair value. The amendments in this guidance are effective during interim and annual periods beginning after December 15, 2011. The adoption of this guidance did not have a material impact on our consolidated financial statements.

In September 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in shareholder’s equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in a two separate consecutive statement approach and changes the presentation of reclassification items out of other comprehensive income to net income. In December 2011, the FASB deferred certain provisions related to the reclassifications of items out of accumulated other comprehensive income and the presentation of the reclassification items. The adoption of the amendment changed to presentation of the components of comprehensive income for the Company as part of the consolidated statement of shareholders’ equity effective January 1, 2012, with the components of comprehensive income presented in a separate statement.

 

 

See accompanying notes to unaudited consolidated financial statements.

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JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 2 - INVESTMENT SECURITIES

(Dollar amounts in thousands except per share data)

The following table summarizes the amortized cost and fair value of the available-for-sale and held-to-maturity investment securities portfolio at March 31, 2012 and December 31, 2011 and the corresponding amounts of unrealized gains and losses recognized in accumulated other comprehensive income (loss):

 

00000000 00000000 00000000 00000000
(Dollars in thousands)    Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
    Fair
Value
 

March 31, 2012

          

Available-for-sale

          

U.S. government-sponsored entities and agencies

   $ 5,369       $ 13       $ —        $ 5,382   

State and political subdivisions

     16,580         1,462         (1     18,041   

Corporate bonds

     1,036         4         —          1,040   

Mortgage-backed securities—residential

     34,030         1,523         (17     35,536   

Collateralized mortgage obligations—residential

     18,753         211         (195     18,769   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

   $ 75,768       $ 3,213       $ (213   $ 78,768   
  

 

 

    

 

 

    

 

 

   

 

 

 
(Dollars in thousands)    Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
    Fair
Value
 

December 31, 2011

          

Available-for-sale

          

U.S. government-sponsored entities and agencies

   $ 3,093       $ 6       $ (6   $ 3,093   

State and political subdivisions

     16,574         1,317         (10     17,881   

Corporate bonds

     —           —           —          —     

Mortgage-backed securities—residential

     31,601         1,451         —          33,052   

Collateralized mortgage obligations—residential

     8,929         185         —          9,114   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

   $ 60,197       $ 2,959       $ (16   $ 63,140   
  

 

 

    

 

 

    

 

 

   

 

 

 

The proceeds from sales of available-for-sale securities and the associated gains and losses are listed below:

 

     March 31, 2012      December 31, 2011  

Gross gains

   $ —         $ 86   

Gross losses

     —           (29
  

 

 

    

 

 

 

Net gain

   $ —         $ 57   
  

 

 

    

 

 

 

Proceeds

   $ —         $ 4,599   
  

 

 

    

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

13.


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JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 2 - INVESTMENT SECURITIES (Cont.)

(Dollar amounts in thousands except per share data)

 

The amortized cost and fair value of the investment securities portfolio are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities and collateralized mortgage obligations, are shown separately.

 

     March 31, 2012  
     Amortized
Cost
     Fair
Value
 

Maturity

     

Available-for-sale

     

Within one year

   $ —         $ —     

One to five years

     1,241         1,259   

Five to ten years

     3,893         4,065   

Beyond ten years

     17,851         19,139   

Mortgage-backed securities

     34,030         35,536   

Collateralized mortgage obligations

     18,753         18,769   
  

 

 

    

 

 

 

Total

   $ 75,768       $ 78,768   
  

 

 

    

 

 

 

The following table summarizes the investment securities with unrealized losses at March 31, 2012 and December 31, 2011 by aggregated major security type and length of time in a continuous unrealized loss position:

 

     Less Than 12 Months     12 Months or Longer      Total  
     Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

March 31, 2012

                

Available-for-sale

                

State and political subdivisions

     219         (1     —           —           219         (1

Corporate Bonds

     —           —          —           —           —           —     

Mortgage-backed securities—residential

     4,151         (17     —           —           4,151         (17

Collateralized mortgage obligations—residential

     10,180         (195     —           —           10,180         (195
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 14,550       $ (213   $ —         $ —         $ 14,550       $ (213
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

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JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 2 - INVESTMENT SECURITIES (Cont.)

(Dollar amounts in thousands except per share data)

 

     Less Than 12 Months     12 Months or Longer      Total  
    

Fair

Value

    

Unrealized

Losses

   

Fair

Value

    

Unrealized

Losses

    

Fair

Value

    

Unrealized

Losses

 

December 31, 2011

                

Available-for-sale

                

U.S. government-sponsored entities and agencies

   $ 994       $ (6   $ —         $ —         $ 994       $ (6

State and political subdivisions

     210         (10     —           —           210         (10
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 1,204       $ (16   $ —         $ —         $ 1,204       $ (16
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Other-Than-Temporary-Impairment

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.

In determining OTTI for debt securities, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial conditions and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

In order to determine OTTI for purchased beneficial interests that, on the purchase date, were rated below AA, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows. It is not the Bank’s policy to purchase securities rated below AA.

When OTTI occurs for either debt securities or purchased beneficial interests that, on the purchase date, were rated below AA, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

 

 

See accompanying notes to unaudited consolidated financial statements.

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JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 2 - INVESTMENT SECURITIES (Cont.)

(Dollar amounts in thousands except per share data)

 

As of March 31, 2012 and December 31, 2011, the Company’s security portfolio consisted of $78,768 and $63,140, respectively, of available-for-sale securities, of which $14,550 and $1,204 were in an unrealized loss position for the related periods. The unrealized losses are related to the Company’s U.S. agency securities, state and political securities, mortgage baked securities, and collateralized mortgage obligation securities as discussed below:

U.S. Agency Securities

All of the U.S. agency securities held by the Company were issued by U.S government-sponsored entities and agencies. At March 31, 2012 and December 31, 2011 there were none and 1, respectively, with unrealized losses. At March 31, 2012 and December 31, 2011 these securities had depreciated 0% and 0.57%, respectively from the Company’s amortized cost basis. The decline in fair value is attributable to changes in interest rates, not credit quality.

State and Political Securities

All of the state and political securities (“Municipal Bonds”) held by the Company were issued by a city or other local government. The municipal bonds are general obligations of the issuer and are secured by specified revenues. At March 31, 2012 and December 31, 2011 there were 1 and 1, respectively, with unrealized losses. At March 31, 2012 and December 31, 2011 these securities had depreciated 0.48% and 4.64%, respectively from the Company’s amortized cost basis. The decline in fair value at March 31, 2012 was primarily attributable to changes in interest rates rather than the ability or willingness of the municipality to repay.

Mortgage Baked Securities

All of the mortgage backed securities held by the Company were issued by US government sponsored entities and agencies. At March 31, 2012 and December 31, 2011 there were 4 and none, respectively, with unrealized losses. At March 31, 2012 and December 31, 2011 these securities had depreciated 0.40% and 0%, respectively from the Company’s amortized cost basis. The decline in fair value is attributable to changes in interest rates, not credit quality.

Collateralized Mortgage Obligations

All of the collateralized mortgage obligation securities held by the Company were issued by US government sponsored entities and agencies. At March 31, 2012 and December 31, 2011 there were 4 and none, respectively, with unrealized losses. At March 31, 2012 and December 31, 2011 these securities had depreciated 1.88% and 0%, respectively from the Company’s amortized cost basis. The decline in fair value is attributable to changes in interest rates, not credit quality

For the three-month period ended March 31, 2012, there were no credit losses recognized in earnings related to investment securities.

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES

(Dollar amounts in thousands except per share data)

Loans at March 31, 2012 and December 31, 2011, excluding loans classified as held-for-sale, were as follows:

 

     2012     2011  

Commercial

   $ 33,417      $ 35,714   

Real estate:

    

Residential

     113,481        115,814   

Commercial

     262,441        261,468   

Construction and land

     46,685        45,891   

Consumer

     3,340        3,955   
  

 

 

   

 

 

 

Subtotal

     459,364        462,842   

Less: Net deferred loan fees

     (243     (235

Allowance for loan losses

     (13,082     (13,024
  

 

 

   

 

 

 

Loans, net

   $ 446,039      $ 449,583   
  

 

 

   

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

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JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (Cont.)

(Dollar amounts in thousands except per share data)

 

Loans acquired as a result of the merger with “ABI” were recorded at fair value on the date of acquisition. The amounts reported in the table above are net of the fair value adjustments. The table below reflects the contractual amount less the discount to principal balances remaining from these fair value adjustments by class of loan as of March 31, 2012 and December 31, 2011. This discount will be accreted into interest income as deemed appropriate over the remaining term of the related loans:

 

     Gross Contractual
Amount Receivable
     Discount      Carrying
Balance
 

March 31, 2012

        

Commercial

   $ 3,869       $ 252       $ 3,617   

Real estate:

        

Residential

     39,691         3,806         35,885   

Commercial

     59,206         5,190         54,016   

Construction and land

     19,510         3,461         16,049   

Consumer

     1,018         32         986   
  

 

 

    

 

 

    

 

 

 

Total

   $ 123,294       $ 12,741       $ 110,553   
  

 

 

    

 

 

    

 

 

 

 

     Gross Contractual
Amount Receivable
     Discount      Carrying
Balance
 

December 31, 2011

        

Commercial

   $ 4,718       $ 261       $ 4,457   

Real estate:

        

Residential

     41,820         4,229         37,591   

Commercial

     61,439         5,344         56,095   

Construction and land

     19,572         3,498         16,074   

Consumer

     1,515         137         1,378   
  

 

 

    

 

 

    

 

 

 

Total

   $ 129,064       $ 13,469       $ 115,595   
  

 

 

    

 

 

    

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

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Table of Contents

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (Cont.)

(Dollar amounts in thousands except per share data)

 

Activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2012 and 2011 was as follows:

 

     Three Months Ended
March 31,
 
     2012     2011  

Allowance at beginning of period

   $ 13,024      $ 13,069   

Charge-offs:

    

Commercial loans

     —          81   

Real estate loans

     124        3,684   

Consumer and other loans

     7        9   
  

 

 

   

 

 

 

Total Charge-offs

     131        3,774   
  

 

 

   

 

 

 

Recoveries:

    

Commercial loans

     1        1   

Real estate loans

     103        105   

Consumer and other loans

     13        1   
  

 

 

   

 

 

 

Total Recoveries

     117        107   
  

 

 

   

 

 

 

Net charge-offs

     14        3,667   
  

 

 

   

 

 

 

Provision for loan losses charged to operating expenses:

    

Commercial loans

     68        35   

Real estate loans

     43        1,897   

Consumer and other loans

     (39     (3
  

 

 

   

 

 

 

Total provision

     72        1,929   
  

 

 

   

 

 

 

Allowance at end of period

   $ 13,082        11,331   
  

 

 

   

 

 

 

The Company has divided the loan portfolio into three portfolio segments, each with different risk characteristics and methodologies for assessing risk. The portfolio segments identified by the Company are as follows:

 

 

See accompanying notes to unaudited consolidated financial statements.

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JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (Cont.)

(Dollar amounts in thousands except per share data)

 

Real Estate Mortgage Loans

Real estate mortgage loans are typically segmented into three classes: commercial real estate, residential real estate and construction and land real estate. Commercial real estate loans are secured by the subject property and are underwritten based upon standards set forth in the policies approved by Bancorp’s board of directors (the “Board”). Such standards include, among other factors, loan-to-value limits, cash flow coverage and general creditworthiness of the obligors. Residential real estate loans are underwritten in accordance with policies set forth and approved by the Board, including repayment capacity and source, value of the underlying property, credit history and stability. Construction loans to borrowers are to finance the construction of owner-occupied and lease properties. These loans are categorized as construction loans during the construction period, later converting to commercial or residential real estate loans after the construction is complete and amortization of the loan begins. Real estate development and construction loans are approved based on an analysis of the borrower and guarantor, the viability of the project and on an acceptable percentage of the appraised value of the property securing the loan. Real estate development and construction loan funds are disbursed periodically based on the percentage of construction completed. The Bank carefully monitors these loans with on-site inspections and requires the receipt of lien waivers prior to advancing funds. Development and construction loans are typically secured by the properties under development or construction, and personal guarantees are typically obtained. Further, to assure that reliance is not placed solely on the value of the underlying property, the Bank considers the market conditions and feasibility of proposed projects, the financial condition and reputation of the borrower and guarantors, the amount of the borrower’s equity in the project, independent appraisals, cost estimates and pre-construction sale information. The Bank also makes loans on occasion for the purchase of land for future development by the borrower. Land loans are extended for the future development for either commercial or residential use by the borrower. The Bank carefully analyzes the intended use of the property and the viability thereof.

Repayment of real estate loans is primarily dependent upon the personal income or business income generated by the secured property of the borrowers, which can be impacted by the economic conditions in their market area. Risk is mitigated by the fact that the properties securing the Company’s real estate loan portfolio are diverse in type and spread over a large number of borrowers.

Commercial Loans

Commercial loans are primarily underwritten on the basis of the borrowers’ ability to service such debt from income. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. As a general practice, we take as collateral a security interest in any available real estate, equipment, or other chattel, although loans may also be made on an unsecured basis. Collateralized working capital loans typically are secured by short-term assets whereas long-term loans are primarily secured by long-term assets.

 

 

See accompanying notes to unaudited consolidated financial statements.

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JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (Cont.)

(Dollar amounts in thousands except per share data)

 

Consumer and Other Loans

Consumer and other loans are extended for various purposes, including purchases of automobiles, recreational vehicles, and boats. We also offer home improvement loans, lines of credit, personal loans, and deposit account collateralized loans. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Loans to consumers are extended after a credit evaluation, including the creditworthiness of the borrower(s), the purpose of the credit, and the secondary source of repayment. Consumer loans are made at fixed and variable interest rates and may be made on terms of up to ten years. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

 

 

See accompanying notes to unaudited consolidated financial statements.

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Table of Contents

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (Cont.)

(Dollar amounts in thousands except per share data)

 

Average of impaired loans and related interest income and cash-basis interest income recognized during impairment for the three months ended March 31, 2012 and 2011 were as follows:

 

    

Three Months Ended

March 31, 2012

 
     Average
Impaired Loans
     Interest
Income
     Cash-Basis  

Commercial

   $ 634       $ —         $ —     

Real estate:

        

Residential

     13,184         —           —     

Commercial

     20,739         31         36   

Construction and land

     16,551         —           —     

Consumer

     15         —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 51,123       $ 31       $ 36   
  

 

 

    

 

 

    

 

 

 

 

    

Three Months Ended

March 31, 2011

 
     Average
Impaired Loans
     Interest
Income
     Cash-Basis  

Commercial

   $ —         $ —         $ —     

Real estate:

        

Residential

     13,932         16         16   

Commercial

     14,657         58         58   

Construction and land

     12,881         65         82   

Consumer

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 41,470       $ 139       $ 156   
  

 

 

    

 

 

    

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

21.


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JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (Cont.)

(Dollar amounts in thousands except per share data)

 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2012 and December 31, 2011:

 

     March 31, 2012  
     Commercial      Real Estate      Consumer
and Other
     Total  

Allowance for loan losses:

           

Ending allowance balance attributable to loans:

           

Individually evaluated for impairment

   $ 10       $ 3,148       $ —         $ 3,158   

Collectively evaluated for impairment

     446         9,119         86         9,651   

Loans acquired with deteriorated credit quality

     0         37         —           37   

Loans acquired without deteriorated credit quality

     200         36         —           236   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 656       $ 12,340       $ 86       $ 13,082   
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

           

Loans individually evaluated for impairment

   $ 948       $ 37,752       $ 0       $ 38,700   

Loans collectively evaluated for impairment

     28,853         278,905         2,353         310,111   

Loans acquired with deteriorated credit quality

     478         38,836         15         39,329   

Loans acquired without deteriorated credit quality

     3,138         67,114         972         71,224   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 33,417       $ 422,607       $ 3,340       $ 459,364   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     Commercial      Real Estate      Consumer
and Other
     Total  

Allowance for loan losses:

           

Ending allowance balance attributable to loans:

           

Individually evaluated for impairment

   $ —         $ 1,747       $ —         $ 1,747   

Collectively evaluated for impairment

     587         10,566         119         11,272   

Loans acquired with deteriorated credit quality

     —           4         —           4   

Loans acquired without deteriorated credit quality

     —           1         —           1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 587       $ 12,318       $ 119       $ 13,024   
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

           

Loans individually evaluated for impairment

   $ 456       $ 36,914       $ —         $ 37,370   

Loans collectively evaluated for impairment

     30,801         276,498         2,577         309,876   

Loans acquired with deteriorated credit quality

     483         39,668         19         40,170   

Loans acquired without deteriorated credit quality

     3,974         70,093         1,359         75,426   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 35,714       $ 423,173       $ 3,955       $ 462,842   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

22.


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JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (Cont.)

(Dollar amounts in thousands except per share data)

 

The following tables present loans individually evaluated for impairment, by class of loans as of March 31, 2012 and December 31, 2011:

 

     March 31, 2012  
     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance for
Loan Losses
Allocated
 

With no related allowance recorded:

        

Real estate—residential

   $ 9,102       $ 9,064       $ —     

Real estate—commercial

     5,411         4,955         —     

Real estate—construction and land

     4,069         2,390         —     

Commercial

        937      

Consumer and other

     —           —           —     

With an allowance recorded:

        

Real estate—residential

     3,119         2,479         481   

Real estate—commercial

     14,613         12,072         2,224   

Real estate—construction and land

     8,608         6,793         443   

Commercial

     11         10         10   

Consumer and other

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 44,933       $ 38,700       $ 3,158   
  

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance for
Loan Losses
Allocated
 

With no related allowance recorded:

        

Real estate—residential

   $ 11,517       $ 10,574       $ —     

Real estate—commercial

     9,527         7,443         —     

Real estate—construction and land

     12,365         8,885         —     

Commercial

     470         457      

With an allowance recorded:

        

Real estate—residential

     247         236         21   

Real estate—commercial

     10,314         9,479         1,665   

Real estate—construction and land

     304         296         61   

Consumer and other

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 44,744       $ 37,370       $ 1,747   
  

 

 

    

 

 

    

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

23.


Table of Contents

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (Cont.)

(Dollar amounts in thousands except per share data)

 

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of:

 

     March 31, 2012  
     Nonaccrual      Loans Past Due
over 90 Days
Still on Accrual
 

Commercial

   $ 1,261       $ —     

Real estate mortgage loans:

     

Commercial

     18,051         —     

Residential

     13,190         —     

Construction and land

     16,549         —     

Consumer

     15         —     
  

 

 

    

 

 

 

Total

   $ 49,066       $ —     
  

 

 

    

 

 

 

 

     December 31, 2011  
     Nonaccrual      Loans Past Due
over 90 Days
Still on Accrual
 

Commercial

   $ 1,168       $ —     

Real estate mortgage loans:

     

Commercial

     17,081         —     

Residential

     13,684         —     

Construction and land

     14,953         —     

Consumer

   $ 18       $ —     
  

 

 

    

 

 

 

Total

   $ 46,904       $ —     
  

 

 

    

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

24.


Table of Contents

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Cont.)

(Dollar amouants in thousands except per share data)

 

The following tables present the aging of the recorded investment in past due loans by class of loans, as of:

 

     March 31, 2012  
     30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days Past
Due and Greater
     Total Past
Due
     Loans Not
Past Due
     Total  

Commercial

   $ 340       $ 15       $ 288       $ 643       $ 32,774       $ 33,417   

Real estate:

                 

Residential

     553         428         7,134         8,115         105,366         113,481   

Commercial

     9,237         973         29,255         39,465         222,976         262,441   

Construction and land

     —           169         5,638         5,807         40,878         46,685   

Consumer

     42         259         2         303         3,037         3,340   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,172       $ 1,844       $ 42,317       $ 54,333       $ 405,031       $ 459,364   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days Past
Due and Greater
     Total Past
Due
     Loans Not
Past Due
     Total  

Commercial

   $ 40       $ 90       $ 200       $ 330       $ 35,384       $ 35,714   

Real estate:

                 

Residential

     1,061         393         13,203         14,657         101,157         115,814   

Commercial

     2,041         6,050         9,724         17,815         243,653         261,468   

Construction and land

     296         1,974         14,510         16,780         29,111         45,891   

Consumer

     277         17         5         299         3,656         3,955   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,715       $ 8,524       $ 37,642       $ 49,881       $ 412,961       $ 462,842   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Included in the past due loan tables above are loans acquired in the merger with ABI. As of March 31, 2012 and December 31, 2011, the amounts are as follows:

 

     March 31,
2012
     December 31,
2011
 

30-59 Days Past Due

   $ 3,965       $ 2,759   

60-89 Days Past Due

     939         4,213   

Greater than 90 Days Past Due

     12,440         10,346   
  

 

 

    

 

 

 

Total

   $ 17,344       $ 17,318   
  

 

 

    

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

25.


Table of Contents

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (Cont.)

(Dollar amounts in thousands except per share data)

 

Troubled Debt Restructurings

As of March 31, 2012 and December 31, 2011 respectively, $15,961 and $15,384 of net loans were considered troubled debt restructurings. The Company has allocated $2,313 and $1,726 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2012 and December 31, 2011 respectively. Of the $2,313 and $1,786 specific reserve as of March 31, 2012 and December 31, 2011 respectively, $1,695 and $1,538 was allocated to customers whose loans are collateral dependent with collateral shortfalls. The Company has not committed to lend additional amounts as of March 31, 2012 and December 31, 2011 to customers with outstanding loans that are classified as troubled debt restructurings.

During the three months ended March 31, 2012, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan, an allowance for customers to make interest only payments for a limited period of time, or there was a court ordered fixed payment amount. All borrowers whose loans were modified in troubled debt restructurings were experiencing financial difficulties.

The following tables represent loans by class modified as troubled debt restructurings that occurred during the three months ended March 31, 2012:

 

            Three Months Ended March 31, 2012  
     Number of Loans      Pre-Modification
Outstanding Recorded
Investment
     Post-Modification
Outstanding Recorded
Investment
 

Troubled Debt Restructurings:

        

Real estate: Commercial

     1       $ 1,895       $ 1,895   

Real estate: Construction and land

     —           —           —     
     

 

 

    

 

 

 

Total

      $ 1,895       $ 1,895   
     

 

 

    

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

26.


Table of Contents

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (Cont.)

(Dollar amounts in thousands except per share data)

 

There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the three months ended March 31, 2012. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

The terms of certain other loans that did not meet the definition of a troubled debt restructuring were modified during the three months ended March 31, 2012. These loans have a total recorded investment of $13,519 for the three months ended March 31, 2012. The modification of these loans involved either a modification of the terms of the loan to borrowers who were not experiencing financial difficulties, such as allowing them to make interest only payments for a limited period of time (generally 18 months or less), adjusting the interest rate to a market interest rate for the remaining term of the loan or allowing a delay in payment that was considered to be insignificant.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

Certain loans which were modified during the three months ended March 31, 2012 and did not meet the definition of a troubled debt restructuring as the modification was a delay in payment that was considered to be insignificant.

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.

The Company analyzes loans individually by classifying the loans as to credit risk. Loans classified as substandard or special mention are reviewed quarterly by the Company for further deterioration or improvement to determine if they are appropriately classified and whether there is any impairment. All loans are graded upon initial issuance. Further, commercial loans are typically reviewed at least annually to determine the appropriate loan grading. In addition, during the renewal process of any loan, as well as if a loan becomes past due, the Company will determine the appropriate loan grade.

 

 

See accompanying notes to unaudited consolidated financial statements.

27.


Table of Contents

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (Cont.)

(Dollar amounts in thousands except per share data)

 

Loans excluded from the review process above are generally classified as pass credits until: (a) they become past due; (b) management becomes aware of a deterioration in the creditworthiness of the borrower; or (c) the customer contacts the Company for a modification. In these circumstances, the loan is specifically evaluated for potential classification as to special mention, substandard or even charged off. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. As of March 31, 2012 and December 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

March 31, 2012

 

     Pass      Special Mention      Substandard      Doubtful      Total  

Commercial

   $ 29,311       $ 2,902       $ 1,204       $ —         $ 33,417   

Real estate:

              

Residential

     85,931         8,057         19,493         —           113,481   

Commercial

     207,341         18,006         37,094         —           262,441   

Construction and land

     19,279         5,576         21,830         —           46,685   

Consumer

     3,040         266         34         —           3,340   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 344,902       $ 34,807       $ 79,655       $ —         $ 459,364   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

28.


Table of Contents

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (Cont.)

(Dollar amounts in thousands except per share data)

 

December 31, 2011

 

     Pass      Special Mention      Substandard      Doubtful      Total  

Commercial

   $ 31,836       $ 2,978       $ 900       $ —         $ 35,714   

Real estate:

              

Residential

     88,947         7,324         19,543         —           115,814   

Commercial

     209,325         22,427         29,716         —           261,468   

Construction and land

     18,316         9,136         18,439         —           45,891   

Consumer

     3,687         250         18         —           3,955   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 352,111       $ 42,115       $ 68,616       $ —         $ 462,842   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Included in the risk category of loans by class of loans tables above are loans acquired in the merger with ABI. As of March 31, 2012 and December 31, 2011, the amounts are as follows:

 

     March 31,
2012
     December 31,
2011
 

Special Mention

   $ 9,550       $ 9,674   

Substandard

     27,322         26,797   

Doubtful

     —           —     
  

 

 

    

 

 

 

Total

   $ 36,872       $ 36,471   
  

 

 

    

 

 

 

Purchased loans:

The Company has purchased loans for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amounts of these loans are as follows as of March 31, 2012 and December 31, 2011:

 

     March 31,
2012
     December 31,
2011
 

Commercial

   $ 555       $ 676   

Real estate mortgage loans:

     

Residential

     12,852         14,892   

Commercial

     18,527         18,519   

Construction and land

     15,147         15,207   

Consumer

     17         121   
  

 

 

    

 

 

 

Unpaid principal balance

   $ 47,098       $ 48,915   
  

 

 

    

 

 

 

Carrying amount

   $ 39,329       $ 40,170   
  

 

 

    

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

29.


Table of Contents

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (Cont.)

(Dollar amounts in thousands except per share data)

 

Accretable yield, or income expected to be collected, is as follows:

 

Balance at December 31, 2010

   $ 33,910   

New loans purchased, including loans classified as held-for-sale

     —     

Accretion of income

     (3,957

Reduction for loans sold and other

     (13,610

Reclassifications from nonaccretable difference

     —     

Disposals

     —     
  

 

 

 

Balance at December 31, 2011

   $ 16,343   
  

 

 

 

New loans purchased, including loans classified as held-for-sale

     —     

Accretion of income

     (731

Reclassifications from nonaccretable difference

     —     

Disposals

     —     
  

 

 

 

Balance at March 31, 2012

   $ 15,612   
  

 

 

 

For those purchased loans disclosed above, the Company increased the allowance for loan losses by $269 and $4 as of March 31, 2012 and December 31, 2011, respectively. Additionally, no allowance for loan losses was reversed during the three-months ended March 31, 2011 or 2012.

Income is not recognized on certain purchased loans if the Company cannot reasonably estimate cash flows expected to be collected. The carrying amounts of such loans were $13,098 at March 31, 2012 and are included in our nonaccrual loan balance as of March 31, 2012.

 

 

See accompanying notes to unaudited consolidated financial statements.

30.


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JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 4 - SHORT-TERM BORROWING AND FEDERAL HOME LOAN BANK ADVANCES

(Dollar amounts in thousands except share data)

At March 31, 2012 and December 31, 2011, advances from the Federal Home Loan Bank (FHLB) were as follows:

 

     2012      2011  

Advances maturing May 21, 2012 at a daily variable interest rate of 0.36% at March 31, 2012

   $ —         $ 18,600   

Advances maturing January 9, 2015 at a fixed rate of 0.88%

     4,000         —     

Advances maturing January 9, 2017 at a fixed rate of 1.40%

     4,000         —     

Advances maturing July 15, 2014 at a fixed rate of 2.42%

     2,500         2,500   

Advances maturing March 2, 2015 at a fixed rate of 0.76%

     2,000         —     

Advances maturing January 9, 2012 at a fixed rate of 2.30%

     —           8,002   

Advances maturing July 15, 2016 at a fixed rate of 2.81%

     2,500         2,500   

Advances maturing May 29, 2012 at a fixed rate of 2.11%

     5,000         5,000   
  

 

 

    

 

 

 
   $ 20,000       $ 36,602   
  

 

 

    

 

 

 

Each advance is payable at its maturity date, with a prepayment penalty for early termination. The advances are collateralized by a blanket lien arrangement of the Company’s first mortgage loans, second mortgage loans and commercial real estate loans. Based upon this collateral and the Company’s holdings of FHLB stock, the Company is eligible to borrow up to a total of $40,885 at March 31, 2012.

The Company has a “Borrower in Custody” line of credit with the Federal Reserve by pledging collateral. The amount of this line at March 31, 2012 was $28,594, all of which was available on that date.

Also included in FHLB advances and other borrowings on the Company’s consolidated balance sheets at March 31, 2012 was $209 that relates to certain loan participation agreements that are classified as secured borrowings as they do not qualify for sale accounting treatment. A corresponding amount is recorded as an asset within Loans on the Company’s consolidated balance sheets.

NOTE 5 - DERIVATIVE FINANCIAL INSTRUMENT

(Dollar amounts in thousands except share data)

On July 7, 2009, the Company entered into an interest rate swap transaction with SunTrust Bank to mitigate interest rate risk exposure. Under the terms of the agreement, which relates to the subordinated debt issued to Jacksonville Bancorp, Inc. Statutory Trust III in the amount of $7,550, the Company has agreed to pay a fixed rate of 7.53% for a period of ten years in exchange for the original floating rate contract (90-day LIBOR plus 375 basis points). This derivative instrument is recognized on the balance sheet in other liabilities at its fair value of $1,054 on March 31, 2012.

Credit risk may result from the inability of the counterparties to meet the terms of their contracts. The Company’s exposure is limited to the replacement value of the contracts rather than the notional amount.

 

 

See accompanying notes to unaudited consolidated financial statements.

31.


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JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 6 - CAPITAL ADEQUACY

(Dollar amounts in thousands except share data)

Federal banking regulators have established certain capital adequacy standards required to be maintained by banks and bank holding companies. The minimum requirements established in the regulations are set forth in the table below, along with the actual ratios for the Company at March 31, 2012 and December 31, 2011. Management and the Board have committed to maintain Total Risk-Based Capital at 10% and Tier 1 Capital to Average Assets at 8% at the Bank.

 

     Actual     For Capital
Adequacy
Purposes
    To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

March 31, 2012

               

Total capital to risk weighted assets

               

Consolidated

   $ 46,732         9.99   $ 37,431         8.00     N/A         N/A   

Bank

     47,987         10.28        37,343         8.00      $ 46,679         10.00

Tier 1 (Core) capital to risk weighted assets

               

Consolidated

     33,550         7.17        18,715         4.00        N/A         N/A   

Bank

     42,063         9.01        18,672         4.00        28,007         6.00   

Tier 1 (Core) capital to average assets

               

Consolidated

     33,550         5.95        22,561         4.00        N/A         N/A   

Bank

     42,063         7.48        22,494         4.00        28,117         5.00   
     Actual     For Capital
Adequacy
Purposes
    To Be Adequately
Capitalized Under
Prompt Corrective
Action Provisions
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

December 31, 2011

               

Total capital to risk weighted assets

               

Consolidated

   $ 45,312         9.63   $ 37,645         8.00     N/A         N/A   

Bank

     46,119         9.85        37,466         8.00      $ 46,832         8.00

Tier 1 (Core) capital to risk weighted assets

               

Consolidated

     31,679         6.73        18,822         4.00        N/A         N/A   

Bank

     40,176         8.58        18,733         4.00        28,099         4.00   

Tier 1 (Core) capital to average assets

               

Consolidated

     31,679         5.38        23,551         4.00        N/A         N/A   

Bank

     40,176         6.88        23,367         4.00        29,209         4.00   

 

 

See accompanying notes to unaudited consolidated financial statements.

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JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 7 - FAIR VALUE

(Dollar amounts in thousands except share data)

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (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. There are three levels of inputs that may be used to measure fair value:

Level I: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level II: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level III: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

The fair values of securities available for sale is determined by obtaining quoted prices on nationally recognized securities exchanges (Level I inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level II inputs).

The fair value of impaired loans with specific allocations of the allowance for loan losses and other real estate owned is based on recent real estate appraisals less estimated costs of sale. For residential real estate impaired loans and other real estate owned (“OREO”), appraised values are based on the comparative sales approach. For commercial and commercial real estate impaired loans and other real estate owned, appraisers may use either a single valuation approach or a combination of approaches such as comparative sales, cost or the income approach. A significant unobservable input in the income approach is the estimated income capitalization rate for a given piece of collateral. At March 31, 2012, the range of capitalization rates utilized to determine the fair value of the underlying collateral ranged from 8% to 10%. Adjustments to appraisals may be made by the appraiser to reflect local market conditions or other economic factors and may result in changes in the fair value of a given asset over time. As such, the fair value of impaired loans and OREO are considered a Level III in the fair value hierarchy.

The Company recovers the carrying value of other real estate owned through the sale of the property. The ability to affect future sales prices is subject to market conditions and factors beyond our control and may impact the estimated fair value of a property.

Appraisals for impaired loans and OREO are performed by certified general appraisers whose qualifications and licenses have been reviewed and verified by the Company. Once reviewed, a member of the appraisal department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparisons to independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustments, if any, should be made to the appraisal value to arrive at fair value. Based on our most recent analysis, no discounts to current appraisals have been warranted.

 

 

See accompanying notes to unaudited consolidated financial statements.

33.


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JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 7 - FAIR VALUE (Cont.)

(Dollar amounts in thousands except share data)

 

The following assets and liabilities are measured on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option:

 

            Fair Value Measurements Using  
     Total      Quoted Prices in
Active Markets for
Identical Assets
(Level I)
     Significant  Other
Observable
Inputs

(Level II)
     Significant
Unobservable

Inputs
(Level III)
 

Assets:

           

(Dollars in thousands)

           

March 31, 2012

           

Available-for-sale

           

U.S. government-sponsored entities and agencies

   $ 5,382         —         $ 5,382         —     

State and political subdivisions

     18,041         —           18,041         —     

Corporate Bonds

     1,040            1,040      

Mortgage-backed securities—Residential

     35,536         —           35,536         —     

Collateralized mortgage obligations—residential

     18,769         —           18,769         —     

Liabilities:

           

Derivative liability

     1,054         —           1,054         —     

(Dollars in thousands)

           

December 31, 2011

           

Available-for-sale

           

U.S. government-sponsored entities and agencies

   $ 3,093         —         $ 3,093         —     

State and political subdivisions

     17,881         —           17,881         —     

Mortgage-backed securities—residential

     33,052         —           33,052         —     

Collateralized mortgage obligations—residential

     9,114         —           9,114         —     

Liabilities:

           

Derivative liability

     1,151         —           1,151         —     

There were no significant transfers between Level I and Level II during 2012.

 

 

See accompanying notes to unaudited consolidated financial statements.

34.


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JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 7 - FAIR VALUE (Cont.)

(Dollar amounts in thousands except share data)

 

Assets measured at fair value on a non-recurring basis are summarized below:

 

            Fair Value Measurements Using  
     Total      Quoted Prices in Active
Markets for Identical
Assets (Level I)
     Significant
Other
Observable
Inputs (Level II)
     Significant
Unobservable
Inputs (Level III)
 

March 31, 2012

           

Impaired loans:

           

Real estate mortgage loans:

           

Residential

   $ 1,998         —           —         $ 1,998   

Commercial

     4,001         —           —           4,001   

Construction and land

     2,677         —           —           2,677   

Other real estate owned:

           

Real estate mortgage loans:

           

Residential

     900         —           —           900   

Commercial

     3,552         —           —           3,552   

Construction and land

     3,215         —           —           3,215   

December 31, 2011

           

Impaired loans:

           

Real estate mortgage loans:

           

Residential

   $ 215         —           —         $ 215   

Commercial

     3,489         —           —           3,489   

Construction and land

     236         —           —           236   

Other real estate owned:

           

Real estate mortgage loans:

           

Residential

   $ 1,095         —           —         $ 1,095   

Commercial

     3,340         —           —           3,340   

Construction and land

     3,533         —           —           3,533   

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $11,223 with a valuation allowance of $2,547 at March 31, 2012 compared to a carrying amount of $5,500 with a valuation allowance of $1,560 at December 31, 2011.

OREO, which is measured using the collateral values less costs to sell or outstanding commitments from third-party investors, had a net carrying amount of $7,667 made up of an outstanding balance of $9,658 net of a valuation allowance of $1,991, resulting in net write-downs of $29 for the period ending March 31, 2012. At December 31, 2011, OREO had a net carrying amount of $7,968, made up of an outstanding balance of $9,957, net of a valuation allowance of $1,989 resulting in a net write-down of $1,347 for the year ended December 31, 2011.

Transfers of assets and liabilities between levels within the fair value hierarchy are recognized when an event or change in circumstances occurs. There have been no transfers between fair value levels for 2012 and 2011.

 

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JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 7 - FAIR VALUE (Cont.)

(Dollar amounts in thousands except share data)

 

The carrying amount and estimated fair values of financial instruments at March 31, 2012 and December 31, 2011 were as follows:

 

     March 31, 2012      December 31, 2011  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Financial assets

           

Cash and cash equivalents

   $ 23,136       $ 23,136       $ 9,955       $ 9,955   

Securities available-for-sale

     78,768         78,768         63,140         63,140   

Loans, net

     446,039         453,697         449,583         461,210   

Federal Home Loan Bank stock

     2,770         n/a         2,707         n/a   

Non-marketable equity security

     178         n/a         178         n/a   

Accrued interest receivable

     2,514         2,514         2,598         2,598   
     March 31, 2012      December 31, 2011  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Financial liabilities

           

Deposits

   $ 513,513       $ 513,560       $ 473,907       $ 474,161   

Other borrowings

     23,209         23,469         39,811         40,121   

Subordinated debentures

     16,042         8,244         16,026         8,723   

Accrued interest payable

     291         291         305         305   

Interest rate swap

     1,054         1,054         1,151         1,151   

Cash and cash equivalents

The carrying amounts of cash and cash equivalents approximate the fair value and are classified as either Level 1 or Level II in the fair value hierarchy. At March 31, 2012 the breakdown of cash and cash equivalents between level I and level II was $21,891 and $1,245, respectively.

Loans, net

The fair value of variable rate loans that reprice frequently and with no significant change in credit risk is based on the carrying value and results in a classification of Level III within the fair value hierarchy. Fair value for other loans are estimated using discounted cash flows analysis using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level III classification in the fair value hierarchy. The methods used to estimate the fair value of loans do not necessarily represent an exit price.

Nonmarketable equity securities

Nonmarketable equity securities include Federal Home Loan Bank Stock and other non-marketable equity securities. It is not practicable to determine the fair value of nonmarketable equity securities due to restrictions placed on their transferability.

Deposits

The fair value of demand deposits (e.g. interest and non-interest bearing, savings and certain types of money market accounts) are, by definition, equal to the amount payable in demand at the reporting date (i.e. carrying value) resulting in a Level II classification in the fair value hierarchy. The carrying amounts of variable rate, fixed-term money market accounts and certificate of deposits approximates their fair value at the reporting date in Level II classification in the fair value hierarchy. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level II classification.

Federal Home Loan Advances

The fair value of Federal Home Loan Bank Advances is estimated using a discounted cash flow analysis based on the current borrowing rates for similar types of borrowings and are classified as a Level II in the fair value hierarchy.

Accrued interest receivable/payable

The carrying amounts of accrued interest receivable approximate fair value resulting in a Level III classification. The carrying amounts of accrued interest payable approximate fair value resulting in a Level II classification.

Off-balance-sheet instruments

The fair value of off-balance-sheet instruments is based on the current fees that would be charged to enter into or terminate such arrangements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

Derivatives:

The fair value of derivatives is based on valuation models using observable market data as of the market date resulting in a Level II classification.

Subordinated debt:

The fair value of subordinated debt, where a market quote is not available, is based on discounted cash flows, using rate appropriate to the instrument and the term of the issue and are classified as level II in the fair value hierarchy.

 

 

See accompanying notes to unaudited consolidated financial statements.

36.


Table of Contents

JACKSONVILLE BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

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

General

Jacksonville Bancorp, Inc. (“Bancorp”) was incorporated on October 24, 1997 and was organized to conduct the operations of The Jacksonville Bank (the “Bank”). The Bank is a Florida state-chartered commercial bank that opened for business on May 28, 1999, and its deposits are insured by the Federal Deposit Insurance Corporation. The Bank provides a variety of community banking services to businesses and individuals in the greater Jacksonville area of Northeast Florida. During 2000, the Bank formed Fountain Financial, Inc., a wholly owned subsidiary. The primary business activities of Fountain Financial, Inc. consist of referral of our customers to third parties for the sale of insurance products. Bancorp, the Bank, and Fountain Financial, Inc. are collectively referred to herein as the “Company.”

Forward-Looking Statements

All statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q regarding our estimates, expectations, beliefs, intentions, projections or strategies for the future, results of operations, financial position, prospects and plans and objectives of management for future operations may be “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995, as amended. We have based these forward-looking statements on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements can be identified by the use of terms and phrases such as “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like, and/or future-tense or conditional constructions (“will,” “may,” “could,” “should,” etc.). Items contemplating or making assumptions about actual or potential future operating results also constitute forward-looking statements. The Company cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, including changes in local economic conditions, changes in regulatory requirements, fluctuations in interest rates, demand for products, and competition, and, therefore, actual results could differ materially from those contemplated by the forward-looking statements. In addition, the Company assumes no duty to update forward-looking statements to reflect events or circumstances after the date of such statements.

Business Strategy

Our primary business segment is community banking and consists of attracting deposits from the general public and using such deposits and other sources of funds to originate commercial business loans, commercial real estate loans, residential mortgage loans and a variety of consumer loans. We also invest in securities backed by the United States government, and agencies thereof, as well as municipal tax-exempt bonds. Our profitability depends primarily on our net interest income, which is the difference between the income we receive from our loan and securities investment portfolios and costs incurred on our deposits, the Federal Home Loan Bank (“FHLB”) advances, Federal Reserve borrowings and other sources of funding. Net interest income is also affected by the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income is generated as the relative amounts of interest-earning assets grow in relation to the relative amounts of interest-bearing liabilities. In addition, the level of noninterest income earned and noninterest expenses incurred also affects profitability. Included in noninterest income are service charges earned on deposit accounts and increases in cash surrender value of Bank-Owned Life Insurance (“BOLI”). Included in noninterest expense are costs incurred for salaries and employee benefits, occupancy and equipment expenses, data processing expenses, marketing and advertising expenses, federal deposit insurance premiums, legal and professional fees, and other real estate owned (“OREO”) expenses.

 

37.


Table of Contents

JACKSONVILLE BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont.)

 

Our goal is to sustain profitable, controlled growth by focusing on increasing our loan and deposit market share in the Northeast Florida market by developing new financial products, services and delivery channels; closely managing yields on interest-earning assets and rates on interest-bearing liabilities; focusing on noninterest income opportunities; controlling the growth of noninterest expenses; and maintaining strong asset quality. Our current strategy is to grow organically and through acquisition if price, culture and market fit within our strategies. We have initiated programs to expand our scope of services and achieve these goals. This was demonstrated through our acquisition of Atlantic BancGroup, Inc. (“ABI”) and its wholly owned subsidiary, Oceanside Bank, in November 2010. The Bank has adopted a philosophy of seeking out and retaining the best available personnel for positions of responsibility which we believe will provide us with a competitive edge in the local banking industry.

Our operations are influenced by the local economic conditions and by policies of financial institution regulatory authorities. Fluctuations in interest rates, due to factors such as competing financial institutions as well as the Federal Reserve’s decisions on changes in interest rates, impact interest-earning assets and our cost of funds and, thus, our net interest margin. In addition, the local economy and real estate market of Northeast Florida, and the demand for our products and loans, impact our margin. The local economy and viability of local businesses can also impact the ability of our customers to make payments on loans, thus impacting our loan portfolio. The Company evaluates these factors when valuing its allowance for loan losses. The Company also believes its underwriting procedures are relatively conservative and, as a result, the Company is not being any more affected than the overall market in the current economic downturn.

On November 16, 2010, Bancorp acquired ABI pursuant to an agreement and plan of merger that provided for the merger of ABI with and into Bancorp. The merger agreement also included the consolidation of ABI’s wholly owned subsidiary, Oceanside Bank, into the Bank. Under the terms of the merger agreement, ABI shareholders received 0.2 shares of Bancorp common stock and $0.67 in cash for each share of ABI common stock. A total of 249,483 shares were issued to ABI shareholders. The ABI merger increased our branch locations from five full-service branches to eight full-service branches as well as expanded our geographic footprint in the Jacksonville Beach market. In addition, we acquired approximately $158.0 million in net loans, $62.8 million in cash and cash equivalents and securities, $231.3 million in deposits and $9.5 million in borrowings in the ABI merger. We initially recorded $12.5 million in goodwill and $2.5 million in core deposit intangibles as a result of the ABI merger. At December 31, 2011, the Company updated its annual impairment test and concluded there was an impairment of $11.1 million.

 

38.


Table of Contents

JACKSONVILLE BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont.)

 

Introduction

On the following pages, management presents an analysis of the financial condition of the Company as of March 31, 2012 compared to December 31, 2011, and the results of operations for the three months ended March 31, 2012 compared with the same period in 2011. This discussion is designed to provide a more comprehensive review of the operating results and financial position than could be obtained from an examination of the financial statements alone. This analysis should be read in conjunction with the interim financial statements and related footnotes included herein.

Comparison of Financial Condition at March 31, 2012 and December 31, 2011

Total assets increased $24.4 million, or 4.3%, from $561.4 million at December 31, 2011 to $585.8 million at March 31, 2012. As the primary driver of the increase in assets, the Company experienced a significant increase in securities available for sale, of $15.6 million, or 24.8%, and cash of $13.2 million or 132.4% during the three months ended March 31, 2012. The increase is offset primarily by a reduction in net loans of $3.5 million in the first quarter of 2012.

Total cash and cash equivalents increased by $13.2 million, or 132.4%, from $9.9 million at December 31, 2011 to $23.1 million at March 31, 2012. Investment securities available-for-sale increased $15.6 million to $78.8 million at March 31, 2012. During the three months ended March 31, 2012, we purchased $12.8 million GNMA and FNMA securities, $3 million in SBA bonds, and $1 million in corporate bonds. In addition, we received $3.2 million in proceeds from principal repayments, maturities and calls.

Total deposits increased $39.6 million, or 8.4%, from $473.9 million at December 31, 2011 to $513.5 million at March 31, 2012. During the three months ended March 31, 2012, noninterest-bearing deposits decreased $2.0 million, or 2.5%, from $82.9 million at December 31, 2011 to $80.8 million at March 31, 2012; money market, NOW and savings deposits increased $12.0 million, or 6.0%, from $199.1 million at December 31, 2011 to $211.1 million at March 31, 2012; and time deposits increased $29.7 million, or 15.5%, from $192.0 million at December 31, 2011 to $221.6 million at March 31, 2012. The increase in time deposits, money market, NOW and savings deposits was driven primarily by the $30 million increase in National CDs. It is the Company’s current strategy to maintain our brokered CD’s at their current level.

Federal Home Loan Bank advances and other borrowings decreased by $16.6 million at March 31, 2012 from December 31, 2011. Loans from related parties remained constant at $3.0 million at December 31, 2011 and for the three months ended March 31, 2012.

Total shareholders’ equity increased by $1.5 million from $29.3 million at December 31, 2011 to $30.8 million at March 31, 2012. The increase is mainly attributable to net income of $1.3 million and a net increase of $152 thousand for net unrealized gains on securities and cash flow hedge. The Company had 40,000,000 authorized shares of $.01 par value common stock, of which 5,889,822 shares were issued and outstanding.

 

39.


Table of Contents

JACKSONVILLE BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont.)

 

Comparison of Operating Results for the Three Months Ended March 31, 2012 and 2011

Net Income

The Company had net income for the first three months of 2012 of $1.3 million, compared to a $439 thousand net income in the first three months of 2011. On a diluted per share basis, net income was $0.22 for the three months ended March 31, 2012, compared to a net income of $0.07 per diluted share for the same period in 2011. The increase in net income for the first three months of 2012 was driven primarily by the reduction in our provision expense.

Net Interest Income

Net interest income, the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities, was $5.3 million for the three months ended March 31, 2012, compared to $5.9 million for the same period in 2011. The average yield on interest-earning assets for the first three months of 2012 was 4.98%, a decrease from the 5.35% yield earned during the first three months of 2011.

Interest income decreased $1.1 million when compared to the first three months of the prior year. This decrease was driven by a decrease in average earning assets, in particular loan balances which declined by $57.3 million when compared to the prior year. This was offset by an decrease in the loan yield to 5.41% for the three-month period ended March 31, 2012 from the 5.70% recognized during the three months ended March 31, 2011. The decrease in the loan yield was driven primarily by the decrease in the accretion recognized on acquired loans when compared to the same period in the previous year.

The average cost of interest-bearing liabilities decreased 30 basis points from 1.50% in the first three months of 2011 to 1.20% in the comparable period in 2012. The average cost of interest-bearing deposits and all interest-bearing liabilities reflect the ongoing reduction in interest rates paid on deposits as a result of the repricing of deposits in the current market environment. Additionally, noninterest-bearing deposits increased $8.6 million over the previous year, which further reduced our overall funding costs.

The net interest margin decreased by 9 basis points from 4.06% to 3.97% when comparing the first three months of 2012 to the same period last year. The Company closely monitors its liquidity needs in conjunction with the cost of its funding sources and has taken action to reduce costs through reductions in the rates paid on its core deposits.

 

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Table of Contents

JACKSONVILLE BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont.)

 

Average Balance Sheet; Interest Rates and Interest Differential. The following table sets forth the average daily balances for each major category of assets, liabilities and shareholders’ equity as well as the amounts and average rates earned or paid on each major category of interest-earning assets and interest-bearing liabilities.

 

     Three Months Ended March 31,  
   2012     2011  
   Average
Balance
     Interest      Average
Rate
    Average
Balance
     Interest      Average
Rate
 
(Dollars in thousands)                                         

Interest-earning assets:

                

Loans (1)

   $ 459,166       $ 6,180         5.41   $ 516,477       $ 7,259         5.70

Securities (2)

     70,427         474         2.71        65,048         453         2.82   

Other interest-earning assets (3)

     8,741         17         0.78        5,342         28         2.13   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     538,334         6,671         4.98        586,867         7,740         5.35   
     

 

 

         

 

 

    

Noninterest-earning assets (4)

     30,184              45,951         
  

 

 

         

 

 

       

Total assets

   $ 568,518            $ 632,818         
  

 

 

         

 

 

       

Interest-bearing liabilities:

                

Savings deposits

   $ 11,043       $ 12         .44   $ 12,546       $ 28         .91

NOW deposits

     22,221         7         .13        18,271         7         .16   

Money market deposits

     170,329         346         .82        175,479         435         1.01   

Time deposits

     208,161         623         1.20        256,715         1,048         1.66   

FHLB advances

     23,499         89         1.52        24,897         97         1.58   

Federal Reserve and other borrowings(8)

     3,011         66         8.82        1,189         29         9.89   

Subordinated debt

     16,033         213         5.34        15,968         220         5.59   

Other interest-bearing liabilities (5)

     316         —           —          95         —           —     
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     454,613         1,356         1.20        505,160         1,864         1.50   
  

 

 

    

 

 

         

 

 

    

Noninterest-bearing liabilities

     84,400              75,363         

Shareholders’ equity

     29,505              52,295         
  

 

 

         

 

 

       

Total liabilities and shareholders’ equity

   $ 568,518            $ 632,818         
  

 

 

         

 

 

       

Net interest income

      $ 5,315            $ 5,876      
     

 

 

         

 

 

    

Interest rate spread (6)

           3.78           3.85
        

 

 

         

 

 

 

Net interest margin (7)

           3.97           4.06
        

 

 

         

 

 

 

 

(1) 

Average loans include nonperforming loans and loans classified as held-for-sale. Interest on loans includes deferred loan fees.

(2) 

Interest income and rates do not include the effects of a tax equivalent adjustment using a federal tax rate of 34% in adjusting tax-exempt interest on tax-exempt investment securities to a fully taxable basis.

(3) 

Includes federal funds sold.

(4) 

For presentation purposes, the BOLI acquired by the Bank has been included in noninterest-earning assets.

(5) 

Includes federal funds purchased.

(6) 

Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(7) 

Net interest margin is net interest income divided by average interest-earning assets.

(8) 

Federal Reserve and other borrowings include loans from related parties that pay an annual rate of interest equal to 8% on a quarterly basis of the amount outstanding.

 

41.


Table of Contents

JACKSONVILLE BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont.)

 

Rate/Volume Analysis. The following table sets forth the effect of changes in volumes, changes in rates, and changes in rate/volume on tax-equivalent interest income, interest expense and net interest income.

 

     Three Months Ended March 31,
2012 Versus 2011 (1)
 
   Increase (decrease) due to changes in:  
   Volume     Rate     Net
Change
 
(Dollars in thousands)                   

Interest income:

      

Loans

   $ (781   $ (298   $ (1,079

Securities

     37        (17     20   

Other interest-earning assets

     12        (22     (10
  

 

 

   

 

 

   

 

 

 

Total interest income

     (732     (337     (1,069
  

 

 

   

 

 

   

 

 

 

Interest expense:

      

Savings deposits

     (3     (13     (16

NOW deposits

     1        (1     —     

Money market deposits

     (12     (77     (89

Time deposits

     (176     (249     (425

FHLB advances

     (5     (3     (8

Federal Reserve and other borrowings

     40        (2     38   

Subordinated debt

     1        (8     (7

Other interest-bearing liabilities

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Total interest expense

     (154     (353     (507
  

 

 

   

 

 

   

 

 

 

Increase in net interest income

   $ (578   $ 16      $ (562
  

 

 

   

 

 

   

 

 

 

 

(1) 

The change in interest due to both rate and volume has been allocated to the volume and rate components in proportion to the relationship of the dollar amounts of the absolute change in each.

Critical Accounting Policies

A critical accounting policy is one that is both very important to the portrayal of the Company’s financial condition and requires management’s most difficult, subjective or complex judgments. The circumstances that make these judgments difficult, subjective or complex have to do with the need to make estimates about the effect of matters that are inherently uncertain. Based on this definition, the Company’s primary critical accounting policies are as follows:

Allowance for Loan Loss

The allowance for loan loss is established through a provision for loan loss charged to expense. Loans are charged against the allowance for loan loss when management believes that the collectability of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb probable incurred credit losses on existing loans that may become uncollectible based on evaluations of the collectability of the loans. The evaluations take into consideration such objective factors as changes in the nature and volume of the loan portfolio and historical loss experience. The evaluation also considers certain subjective factors such as overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrowers’ ability to pay. The level of allowance for loan loss is also impacted by increases and decreases in loans outstanding, because either more or less allowance is required as the amount of the Company’s credit exposure changes. To the extent actual loan losses differ materially from management’s estimate of these subjective factors, loan growth/run-off accelerates, or the mix of loan types changes, the level of provision for loan loss, and related allowance can, and will, fluctuate.

 

42.


Table of Contents

JACKSONVILLE BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont.)

 

Other Real Estate Owned (“OREO”)

OREO includes real estate acquired through foreclosure or deed taken in lieu of foreclosure. These amounts are recorded at estimated fair value, less costs to sell the property, with any difference between the fair value of the property and the carrying value of the loan being charged to the allowance for loan losses. Subsequent changes in fair value are reported as adjustments to the carrying amount, not to exceed the initial carrying value of the assets at the time of transfer. Those subsequent changes, as well as any gains or losses recognized on the sale of these properties, are included in noninterest expense.

Deferred Income Taxes

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. From an accounting standpoint, deferred tax assets are reviewed to determine if a valuation allowance is required based on both positive and negative evidence currently available. Positive evidence includes the historical levels of our taxable income, estimates of our future taxable income, including tax planning strategies as applicable, the reversals of deferred tax liabilities and taxes available in carry-back years. Negative evidence primarily includes a cumulative three-year loss for financial reporting purposes. Additionally, current and future economic and business conditions are considered. Based on these criteria, the Company determined that it was necessary to establish a valuation allowance against our deferred tax asset at December 31, 2011. The Company performed an analysis at March 31, 2012 and determined the need for a valuation allowance still existed. To the extent that we generate taxable income in a given quarter, the valuation allowance may be reduced to fully or partially offset the corresponding income tax expense. Any remaining deferred tax asset valuation allowance may be reversed through income tax expense once the Company can demonstrate a sustainable return to profitability and conclude that it is more likely than not the deferred tax asset will be utilized prior to expiration.

Additional information with regard to the Company’s methodology and reporting of its critical accounting policies is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the SEC on March 30, 2012.

 

43.


Table of Contents

JACKSONVILLE BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont.)

 

Asset Quality

The Company has identified certain assets as risk elements. These assets include nonperforming loans, loans that are contractually past due 90 days or more as to principal or interest payments and still accruing, troubled debt restructurings, and foreclosed real estate. Loans are placed on nonaccrual status when management has concerns regarding the Company’s ability to collect the outstanding loan principal and interest amounts and typically when such loans are more than 90 days past due. These loans present more than the normal risk that the Company will be unable to eventually collect or realize their full carrying value. The Company’s risk elements at March 31, 2012 and December 31, 2011, excluding loans classified as held-for-sale, were as follows:

 

     March 31,
2012
    December 31,
2011
 
     (Dollars in thousands)  

Nonperforming loans:

    

Commercial real estate

   $ 18,051      $ 17,081   

Residential real estate

     13,190        13,684   

Construction and land real estate

     16,549        14,953   

Commercial

     1,261        1,168   

Consumer loans and other

     15        18   

Loans past due over 90 days still on accrual

     —          —     
  

 

 

   

 

 

 

Total nonperforming loans (1)

     49,066        46,904   

Foreclosed assets, net

     7,667        7,968   
  

 

 

   

 

 

 

Total nonperforming assets

     56,733        54,872   
  

 

 

   

 

 

 

Performing Loans classified as troubled debt restructuring

     2,731        2,727   

Nonperforming loans classified as troubled debt restructuring

     13,230        12,657   
  

 

 

   

 

 

 

Total loans classified as troubled debt restructuring

   $ 15,961      $ 15,384   
  

 

 

   

 

 

 

Nonperforming loans as a percent of gross loans (2)

     10.69     10.13
  

 

 

   

 

 

 

Nonperforming loans and foreclosed assets as a percent of total assets (2)

     9.68     9.77
  

 

 

   

 

 

 

 

(1) 

There were no loans classified as held-for-sale as of December 31, 2011 or March 31, 2012.

 

(2) 

Nonperforming loans and total loans exclude amounts classified as loans held-for-sale.

The Company has loan balances of $16.0 million for customers whose loans are classified as troubled debt restructuring and such loans are included in the impaired loan balance of $51.8 million at March 31, 2012. Of the $16.0 million, $5.2 million is classified as troubled debt restructurings with collateral shortfalls. There are no additional funds committed to customers whose loans are classified as troubled debt restructuring. Most of these loans were modified to suspend principal payments for a period of time less than or equal to 13 months, the interest rate was modified, or there was a court ordered fixed payment amount. Of the $3.4 million allowance for loan losses reserved for impaired loans, the Company has allocated $1.7 million to customers whose loan terms have been modified as troubled debt restructurings with collateral shortfalls and $618,000 to the remaining troubled debt restructurings. As of March 31, 2012, $13.3 of troubled debt restructurings were on nonaccrual with the remaining $2.7 million still accruing interest.

The terms of certain other loans were modified during the period ended March 31, 2012 that did not meet the definition of a troubled debt restructuring. These loans have a total recorded investment as of March 31, 2012 of $13.5 million. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties, such as allowing them to make interest only payments for a limited period of time (generally 18 months or less), adjusting the interest rate to a market interest rate for the remaining term of the loan or allowing a delay in payment that was considered to be insignificant.

 

44.


Table of Contents

JACKSONVILLE BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont.)

 

Nonperforming loans increased during the three-month period ended March 31, 2012 from $46.9 million at December 31, 2011 to $49.1 million at March 31, 2012. Nonperforming assets increased by $1.9 million from December 31, 2011 to March 31, 2012. The increase in nonperforming assets at March 31, 2012 is primarily driven by an increase in nonaccrual commercial real estate and construction and land real estate loans. General economic conditions and the real estate market continue to be challenging in the Bank’s geographic market.

Loans past due still accruing interest at March 31, 2012, are categorized as follows:

 

(Dollars in thousands)                            
     30-59 Days
Past Due
     60-89 Days
Past Due
     Greater than
90 Days Past
Due
     Total Past
Due Still
Accruing
 

Commercial

   $ 340       $ —         $ —         $ 340   

Real estate:

           

Residential

     528         597         —           1,125   

Commercial

     8,384         —           —           8,384   

Construction and land

     606         170         —           776   

Consumer

     42         250         —           292   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,900       $ 1,017       $ —         $ 10,917   
  

 

 

    

 

 

    

 

 

    

 

 

 

The increase in total loans past due 30-89 days still accruing interest from $7.7 million at December 31, 2011 to $10.9 million at March 31, 2012 is driven by the continued softening of the economy.

The Bank has experienced an increase in adversely classified loans from $68.6 million at December 31, 2011 to $79.7 million at March 31, 2012. Of the $79.7 million at March 31, 2012, $27.3 million were adversely classified loans from the merger with ABI. The $27.3 million adversely classified ABI loans are net of a fair value adjustment of $5.4 million, or 19.7% of the gross contractual amount receivable as of March 31, 2012. In addition, of the $79.7 million at March 31, 2012, $51.8 million was listed as impaired. All adversely classified loans are monitored closely and the majority of these loans are collateralized by real estate.

Loans are impaired when it is considered probable that the Company will not collect the outstanding loan principal and interest amounts according to the loan’s contractual terms. At March 31, 2012, impaired loans increased by $3.1 million to $51.8 million, compared to $48.7 million at December 31, 2011. Of the $51.8 million impaired loans at March 31, 2012, $49.1 million are nonperforming loans. Included in the $51.8 million impaired loan balance at March 31, 2012 are acquired loans with credit deteriorations.

The Company critically evaluates all requests for additional funding on classified loans to determine whether the borrower has the capacity and willingness to repay. Any requests of this nature require concurrence by the Loan Committee of the Bank’s board of directors.

 

45.


Table of Contents

JACKSONVILLE BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont.)

 

The Company purchased loans in its acquisition of ABI, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. Loans acquired with deteriorated credit quality are included in our various disclosures of credit quality to include: loans on nonaccrual; loans past due; special mention loans; substandard loans; and doubtful loans. The table below discloses the total loans for the Company, total loans acquired in the acquisition of ABI, the loans acquired with deteriorated credit quality and the percent of loans acquired with deteriorated credit quality to total loans for the Company for each credit metric:

 

Period ending March 31, 2012

 
(Dollars in thousands)                            
     Total      Loans Acquired
from ABI
     Loans Acquired
with Deteriorated
Credit Quality
from ABI
     % of Total  

Nonaccrual

   $ 49,066       $ 13,098       $ 12,404         25.3
  

 

 

    

 

 

    

 

 

    

Past Due

     54,335         17,345         13,079         24.1
  

 

 

    

 

 

    

 

 

    

Special Mention

     34,807         9,550         8,551         24.6

Substandard

     79,665         27,322         23,994         30.1

Doubtful

     0         0         0         0.0
  

 

 

    

 

 

    

 

 

    

Total

   $ 114,472       $ 36,872       $ 32,545         28.4
  

 

 

    

 

 

    

 

 

    

Period ending December 31, 2011

 
     Total      Loans Acquired
from ABI
     Loans Acquired
with Deteriorated
Credit Quality
from ABI
     % of Total  

Nonaccrual

   $ 46,904       $ 11,472       $ 11,242         24.0
  

 

 

    

 

 

    

 

 

    

Past Due

     49,881         17,318         14,324         28.7
  

 

 

    

 

 

    

 

 

    

Special Mention

     42,115         9,674         8,740         20.8

Substandard

     68,616         26,797         23,770         34.6

Doubtful

     0         0         0         0.0
  

 

 

    

 

 

    

 

 

    

Total

   $ 110,731       $ 36,471       $ 32,510         29.4
  

 

 

    

 

 

    

 

 

    

The credit metrics from the table above that were most heavily impacted by the Company’s acquisition of loans with deteriorated credit quality for the period ended March 31, 2012 were our substandard and past due loans. This is due to the continuing deterioration of collateral values as well as the current difficult economic environment that is impacting our customers’ ability to meet their loan obligations. When comparing the percentage of special mention, substandard and doubtful loans as of December 31, 2011 to March 31, 2012, the percentages have remained relatively unchanged from 29.4% at December 31, 2011 to 28.4% at March 31, 2012.

 

46.


Table of Contents

JACKSONVILLE BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont.)

 

Our credit quality as compared to our internally defined peer group, specifically the percentage of nonaccrual loans to total loans, has shown an overall steady decline from December 31, 2011 to March 31, 2012. This is due to the current difficult economic environment in the geographic region in which the Company operates that is impacting our customers’ ability to meet their loan obligations. Of the total $38.7 million of non-accrual loans at March 31, 2012, $6.2 million had been charged off in prior periods.

The same criteria used for all Company loans greater than 90 days and accruing applies to loans acquired with deteriorated credit quality. Loans acquired with deteriorated credit quality will be placed on nonaccrual status if the amount and timing of future cash flows cannot be reasonably estimated or if repayment of the loan is expected to be from collateral that has become deficient. As of March 31, 2012, there were no loans acquired with deteriorated credit quality that were greater than 90 days past due and accruing interest. There were, however, loans acquired with deteriorated credit quality on nonaccrual in the amount of $12.4 million as the amount and timing of future cash flows could not be reasonably estimated or the repayment of the loan was expected from the collateral that has become deficient.

Allowance and Provision for Loan Losses

The allowance for loan losses increased by $100 thousand during the first three months of 2012, amounting to $13.1 million at March 31, 2012, as compared to $13.0 million at December 31, 2011. The allowance represented approximately 2.85% of total loans at March 31, 2012 and 2.82% at December 31, 2011.

 

     March 31, 2012     March 31, 2011  
(Dollars in thousands)             

Allowance at beginning of period

   $ 13,024      $ 13,069   

Charge-offs:

    

Commercial loans

     —          81   

Real estate loans

     124        3,684   

Consumer and other loans

     7        9   
  

 

 

   

 

 

 

Total charge-offs

     131        3,774   
  

 

 

   

 

 

 

Recoveries:

    

Commercial loans

     1        1   

Real estate loans

     103        105   

Consumer and other loans

     13        1