Attached files

file filename
EX-31.2 - EXHIBIT 31.2 - Jacksonville Bancorp, Inc.t83428_ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - Jacksonville Bancorp, Inc.t83428_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - Jacksonville Bancorp, Inc.t83428_ex31-1.htm

 

 

 

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 September 30, 2015  

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  
  For the transition period of _________ to _________  

 

Commission File Number 001-34821

 

Jacksonville Bancorp, Inc.
(Exact name of registrant as specified in its charter)

 

Maryland 36-4670835
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification Number)

 

1211 West Morton Avenue    
Jacksonville, Illinois 62650  
(Address of principal executive office) (Zip Code)  

 

Registrant’s telephone number, including area code: (217) 245-4111

 

Indicate by check whether issuer (1) has filed all reports required to be filed by Sections 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.

x  Yes            ¨  No

 

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

x  Yes            ¨  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 definition of “accelerated filer, large accelerated filer, and smaller reporting company” in Rule 12b-2 of the Exchange Act.

¨  Large Accelerated Filer ¨  Accelerated Filer
¨  Non-Accelerated Filer x  Smaller Reporting Company

 

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

¨  Yes            x  No

 

As of November 1, 2015, there were 1,790,123 shares of the Registrant’s common stock issued and outstanding.

 

 

 

 

 

 

JACKSONVILLE BANCORP, INC.

 

FORM 10-Q

 

September 30, 2015
TABLE OF CONTENTS

 

    Page
PART I FINANCIAL INFORMATION  
     
Item 1. Financial Statements
     
  Condensed Consolidated Balance Sheets 1
     
  Condensed Consolidated Statements of Income 2
     
  Condensed Consolidated Statements of Comprehensive Income 3
     
  Condensed Consolidated Statement of Stockholders’ Equity 4
     
  Condensed Consolidated Statements of Cash Flows 5
     
  Notes to the Condensed Consolidated Financial Statements 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 39
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 54
     
Item 4 Controls and Procedures 56
     
PART II OTHER INFORMATION 57
     
Item 1. Legal Proceedings 57
Item 1.A. Risk Factors 57
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 57
Item 3. Defaults Upon Senior Securities 57
Item 4. Mine Safety Disclosures 57
Item 5. Other Information 57
Item 6. Exhibits 58
     
  Signatures 59
     
EXHIBITS    
     
  Section 302 Certifications  
  Section 906 Certification  
  XBRL Instance Document  
  XBRL Taxonomy Extension Schema Document  
  XBRL Taxonomy Calculation Linkbase Document  
  XBRL Taxonomy Extension Definition Linkbase Document  
  XBRL Taxonomy Label Linkbase Document  
  XBRL Taxonomy Presentation Linkbase Document  

 

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

JACKSONVILLE BANCORP, INC.
ITEM 1. FINANCIAL STATEMENTS
 
CONDENSED CONSOLIDATED BALANCE SHEETS

 

   September 30,   December 31, 
  2015   2014 
ASSETS  (Unaudited)     
Cash and cash equivalents  $3,646,964   $9,611,638 
Interest-earning time deposits in banks   2,474,000    - 
Investment securities - available for sale   60,848,276    55,264,976 
Mortgage-backed securities - available for sale   27,109,131    41,419,921 
Federal Home Loan Bank stock   1,113,800    1,113,800 
Other investment securities   63,809    73,766 
Loans held for sale - net   823,000    235,600 
Loans receivable - net of allowance for loan losses of $2,917,588 and $2,956,264 as of September 30, 2015 and December 31, 2014   189,512,107    184,718,612 
Premises and equipment - net   4,786,446    4,945,983 
Cash surrender value of life insurance   7,050,725    6,912,917 
Accrued interest receivable   2,728,566    1,713,243 
Goodwill   2,726,567    2,726,567 
Capitalized mortgage servicing rights, net of valuation allowance of $50,992 and $56,969 as of September 30, 2015 and December 31, 2014   599,145    632,634 
Real estate owned   339,554    176,671 
Income taxes receivable   82,241    - 
Deferred income taxes   1,461,159    1,486,206 
Other assets   943,631    892,118 
           
Total Assets  $306,309,121   $311,924,652 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
Deposits  $233,343,288   $245,941,562 
Other borrowings   19,656,929    13,821,730 
Advance payments by borrowers for taxes and insurance   509,728    962,762 
Accrued interest payable   127,900    166,052 
Deferred compensation payable   4,431,210    4,252,720 
Income taxes payable   -    200,781 
Other liabilities   1,528,809    1,562,947 
Total liabilities   259,597,864    266,908,554 
           
Commitments and contingencies   -    - 
          
Preferred stock, $0.01 par value - authorized 10,000,000 shares; none issued and outstanding   -    - 
Common stock, $0.01 par value - authorized 25,000,000 shares; issued 1,789,523 shares as of September 30, 2015 and 1,799,483 shares as of December 31, 2014   17,895    17,995 
Additional paid-in-capital   13,632,675    13,900,743 
Retained earnings   32,533,811    30,635,787 
Less: Unallocated ESOP shares   (232,720)   (249,910)
Accumulated other comprehensive income   759,596    711,483 
Total stockholders' equity   46,711,257    45,016,098 
           
Total Liabilities and Stockholders' Equity  $306,309,121   $311,924,652 

 

See accompanying notes to the condensed consolidated financial statements.

 

 1 

 

 

JACKSONVILLE BANCORP, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2015   2014   2015   2014 
   (Unaudited)   (Unaudited) 
INTEREST INCOME:                    
Loans  $2,274,184   $2,309,657   $6,962,546   $6,874,987 
Investment securities   426,780    437,853    1,201,216    1,331,414 
Mortgage-backed securities   118,735    198,287    405,107    762,952 
Other   10,413    415    22,313    1,112 
Total interest income   2,830,112    2,946,212    8,591,182    8,970,465 
                     
INTEREST EXPENSE:                    
Deposits   259,514    350,705    856,589    1,106,033 
Other borrowings   7,919    2,837    18,036    8,201 
Total interest expense   267,433    353,542    874,625    1,114,234 
                     
NET INTEREST INCOME   2,562,679    2,592,670    7,716,557    7,856,231 
                     
PROVISION FOR LOAN LOSSES   45,000    30,000    110,000    90,000 
                     
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES   2,517,679    2,562,670    7,606,557    7,766,231 
                     
NON-INTEREST INCOME:                    
Fiduciary activities   64,637    62,181    212,075    208,527 
Commission income   356,520    276,132    1,065,309    932,037 
Service charges on deposit accounts   181,751    195,200    507,481    538,344 
Mortgage banking operations, net   38,066    45,541    133,594    107,787 
Net realized gains on sales of available-for-sale securities   55,125    138,253    267,201    299,835 
Loan servicing fees   85,936    90,164    258,897    272,739 
ATM and bank card interchange income   128,316    125,434    386,224    373,532 
Other   81,275    91,183    259,590    236,497 
Total non-interest income   991,626    1,024,088    3,090,371    2,969,298 
                     
NON-INTEREST EXPENSE:                    
Salaries and employee benefits   1,653,826    1,590,225    4,915,666    4,764,860 
Occupancy and equipment   251,957    243,558    751,271    738,785 
Data processing and telecommunications   145,438    122,118    434,803    396,706 
Professional   45,296    100,205    141,906    469,611 
Postage and office supplies   61,134    55,822    175,577    176,623 
ATM and bank card expense   96,930    70,380    213,827    220,305 
Other   325,079    287,815    893,580    897,451 
Total non-interest expense   2,579,660    2,470,123    7,526,630    7,664,341 
                     
INCOME  BEFORE INCOME TAXES   929,645    1,116,635    3,170,298    3,071,188 
INCOME TAXES   230,247    260,619    848,240    750,406 
                     
NET INCOME  $699,398   $856,016   $2,322,058   $2,320,782 
                     
NET INCOME PER COMMON SHARE - BASIC  $0.40   $0.48   $1.31   $1.29 
NET INCOME PER COMMON SHARE - DILUTED  $0.39   $0.47   $1.30   $1.29 
DIVIDENDS DECLARED PER SHARE  $0.08   $0.08   $0.24   $0.24 

 

See accompanying notes to the condensed consolidated financial statements.

 

 2 

 

 

JACKSONVILLE BANCORP, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2015   2014   2015   2014 
   (Unaudited)   (Unaudited) 
                 
Net Income  $699,398   $856,016   $2,322,058   $2,320,782 
                     
Other Comprehensive Income (Loss)                    
Unrealized appreciation on available- for-sale securities, net of taxes of $283,814 and $46,030 for the three months ended September 30, 2015 and 2014, respectively, and $115,634 and $1,092,959 for the nine months ended September 30, 2015 and 2014, respectively.   550,934    89,352    224,466    2,121,626 
Less:  reclassification adjustment for realized gains included in net income, net of taxes of $18,742 and $47,006, for the three months ended September 30, 2015 and 2014, respectively, and $90,848 and $101,944 for the nine months ended September 30, 2015 and 2014, respectively.   36,383    91,247    176,353    197,891 
    514,551    (1,895)   48,113    1,923,735 
                     
Comprehensive Income  $1,213,949   $854,121   $2,370,171   $4,244,517 

 

See accompanying notes to condensed consolidated financial statements.

 

 3 

 

 

JACKSONVILLE BANCORP, INC.
 
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

 

                   Accumulated     
       Additional           Other   Total 
   Common   Paid-in   Retained   Unallocated   Comprehensive   Stockholders' 
(Unaudited)  Stock   Capital   Earnings   ESOP Shares   Income   Equity 
                         
BALANCE, DECEMBER 31, 2014  $17,995   $13,900,743   $30,635,787   $(249,910)  $711,483   $45,016,098 
                               
Net Income   -    -    2,322,058    -    -    2,322,058 
                               
Other comprehensive income   -    -    -    -    48,113    48,113 
                               
Stock repurchases   (269)   (623,769)   -    -    -    (624,038)
                               
Exercise of stock options   169    261,195    -    -    -    261,364 
Tax benefit of non-qualified options   -    4,138    -    -    -    4,138 
Vesting options expense   -    67,437    -    -    -    67,437 
                               
Shares held by ESOP, committed to be released   -    22,931    -    17,190    -    40,121 
                               
Dividends ($0.24 per share)   -    -    (424,034)   -    -    (424,034)
                               
BALANCE, SEPTEMBER 30, 2015  $17,895   $13,632,675   $32,533,811   $(232,720)  $759,596   $46,711,257 

 

See accompanying notes to condensed consolidated financial statements.

 

 4 

 

 

JACKSONVILLE BANCORP, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Nine Months Ended 
   September 30, 
   2015   2014 
   (Unaudited) 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income  $2,322,058   $2,320,782 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation, amortization and accretion:          
Premises and equipment   289,342    288,269 
Amortization of investment premiums and discounts, net   536,566    554,335 
Accretion of loan discounts   (388)   (388)
Net realized gains on sales of available-for-sale securities   (267,201)   (299,835)
Provision for loan losses   110,000    90,000 
Mortgage banking operations, net   (133,594)   (107,787)
Loss (gain) on sale of real estate owned   (37,389)   5,220 
Shares held by ESOP commited to be released   40,121    35,494 
Tax benefit related to stock options exercised   4,138    3,513 
Stock option compensation expense   67,437    67,437 
Changes in income taxes payable   (283,022)   179,017 
Changes in assets and liabilities   (1,075,343)   721,006 
Net cash provided by operations before loan sales   1,572,725    3,857,063 
Origination of loans for sale to secondary market   (13,216,125)   (10,052,228)
Proceeds from sales of loans to secondary market   12,789,270    10,067,718 
Net cash provided by operating activities   1,145,870    3,872,553 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchases of investment and mortgage-backed securities   (24,167,069)   (22,621,089)
Purchases of time deposits in other banks   (2,474,000)   - 
Maturity or call of investment securities available-for-sale   1,500,000    725,000 
Sale of investment securities available-for-sale   26,502,890    22,940,767 
Principal payments on mortgage-backed and investment securities   4,705,159    4,909,215 
Proceeds from sale of real estate owned   191,992    109,715 
Net increase in loans   (5,236,894)   (1,535,324)
Additions to premises and equipment   (129,805)   (95,588)
           
Net cash provided by investing activities   892,273    4,432,696 

 

(Continued)

 

 5 

 

 

JACKSONVILLE BANCORP, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

 

   Nine Months Ended 
   September 30, 
   2015   2014 
   (Unaudited) 
CASH FLOWS FROM FINANCING ACTIVITIES:          
Net decrease in deposits  $(12,598,274)  $(10,950,025)
Net increase in other borrowings   5,835,199    1,873,499 
Increase in advance payments by borrowers for taxes and insurance   (453,034)   (366,270)
Exercise of stock options   261,364    230,978 
Stock repurchases   (624,038)   (610,848)
Dividends paid - common stock   (424,034)   (429,185)
           
Net cash used in financing activities   (8,002,817)   (10,251,851)
           
NET DECREASE IN CASH AND CASH EQUIVALENTS   (5,964,674)   (1,946,602)
           
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR   9,611,638    6,098,870 
           
CASH AND CASH EQUIVALENTS, END OF PERIOD  $3,646,964   $4,152,268 
           
ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION:          
Cash paid during the year for:          
Interest on deposits  $895,278   $1,143,068 
Interest on other borrowings   17,499    8,536 
Income taxes paid   1,131,000    572,000 
           
NONCASH INVESTING AND FINANCING ACTIVITIES:          
Real estate acquired in settlement of loans  $340,325   $252,465 
Loans to facilitate sales of real estate owned   -    145,000 

 

See accompanying notes to condensed consolidated financial statements.

 

 6 

 

 

JACKSONVILLE BANCORP, INC.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.FINANCIAL STATEMENTS

 

The accompanying interim condensed consolidated financial statements include the accounts of Jacksonville Bancorp, Inc. and its wholly-owned subsidiary, Jacksonville Savings Bank (the “Bank”) and its wholly-owned subsidiary, Financial Resources Group, Inc. collectively (the “Company”). All significant intercompany accounts and transactions have been eliminated.

 

In the opinion of management, the preceding unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial condition of the Company as of September 30, 2015 and the results of its operations for the three and nine month periods ended September 30, 2015 and 2014. The results of operations for the three and nine month periods are not necessarily indicative of the results which may be expected for the entire year, or any other interim period. The condensed consolidated balance sheet of the Company as of December 31, 2014 has been derived from the audited consolidated balance sheet of the Company as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2014 filed as an exhibit to the Company’s Form 10-K filed in March 2015. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (GAAP) and to prevailing practices within the industry.

 

Certain amounts included in the 2014 consolidated statements have been reclassified to conform to the 2015 presentation.

 

2.NEW ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The update provides a five-step revenue recognition model for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers (unless the contracts are included in the scope of other standards). The guidance requires an entity to recognize the revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. For public entities, the guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and must be applied either retrospectively or using the modified retrospective approach. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date, which provides a one-year deferral of ASU 2014-09. Management is evaluating the new guidance, but does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements. Early adoption would be permitted, but not before the original public entity effective date.

 

 7 

 

 

In June 2014, the FASB issued ASU No. 2014-11, Transfers and Servicing (Topic 860) – Repurchase to Maturity Transactions, Repurchase Financings, and Disclosures. ASU No. 2014-11 aligns the accounting for repurchase to maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. Going forward, these transactions would all be accounted for as secured borrowings. ASU 2014-11 was effective for the first interim or annual period beginning after December 15, 2014. In addition, the disclosure of certain transactions accounted for as a sale was effective for the first interim or annual period beginning on or after December 15, 2014, and the disclosure for transactions accounted for as secured borrowings is required for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. The Company adopted ASU 2014-11 and included additional disclosures. The Company does not expect the adoption of ASU No. 2014-11 to have a significant impact on its financial statements.

 

In April 2015, the FASB issued ASU No. 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing agreement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. ASU No. 2015-05 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company’s current method of accounting for fees paid in a cloud computing arrangement is consistent with the accounting guidance provided by ASU No. 2015-05. Therefore, the adoption of ASU No. 2015-05 is not expected to have a material impact on the Company’s consolidated financial statements.

 

3.EARNINGS PER SHARE

 

Earnings Per Share - Basic earnings per share is determined by dividing net income for the period by the weighted average number of common shares. Diluted earnings per share considers the potential effects of the exercise of the outstanding stock options under the Company’s stock option plans. Average shares outstanding exclude unallocated ESOP shares.

 

The following reflects earnings per share calculations for basic and diluted methods:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2015   2014   2015   2014 
Net income available to common shareholders  $699,398   $856,016   $2,322,058   $2,320,782 
                     
Basic average shares outstanding   1,765,873    1,795,252    1,771,810    1,795,007 
                     
Diluted potential common shares:                    
Stock option equivalents   16,960    14,126    14,760    9,136 
Diluted average shares outstanding   1,782,833    1,809,378    1,786,570    1,804,143 
                     
Basic earnings per share  $0.40   $0.48   $1.31   $1.29 
                     
Diluted earnings per share  $0.39   $0.47   $1.30   $1.29 

 

 8 

 

 

4.STOCK–BASED COMPENSATION

 

In connection with our 2010 second step conversion and related stock offering, the ESOP purchased an additional 41,614 shares for the exclusive benefit of eligible employees. The ESOP borrowed funds from the Company in an amount sufficient to purchase the 41,614 shares (approximately 4% of the common stock issued in the offering). The loan is secured by the shares purchased and will be repaid by the ESOP with funds from contributions made by the Bank and dividends received by the ESOP, with funds from any contributions on ESOP assets. Contributions will be applied to repay interest on the loan first, and the remainder will be applied to principal. The loan is expected to be repaid over a period of up to 20 years. Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants in proportion to their compensation, relative to total compensation of all active participants. Participants will vest on a pro-rata basis and reach 100% vesting in the accrued benefits under the ESOP after six years. Vesting is accelerated upon retirement, death, or disability of the participant or a change in control of the Bank. Forfeitures will be reallocated to remaining plan participants. Benefits may be payable upon retirement, death, disability, separation from service, or termination of the ESOP. Since the Bank’s annual contributions are discretionary, benefits payable under the ESOP cannot be estimated.

 

The Company is accounting for its ESOP in accordance with ASC Topic 718, “Employers Accounting for Employee Stock Ownership Plans.” Accordingly, the debt of the ESOP is eliminated in consolidation and the shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheet. Contributions to the ESOP shall be sufficient to pay principal and interest currently due under the loan agreement. As shares are committed to be released from the collateral, the Company reports compensation expense equal to the average market price of the shares for the respective period, and the shares become outstanding for earnings per share computations. Dividends, if any, on unallocated shares are recorded as a reduction of debt and accrued interest.

 

A summary of ESOP shares at September 30, 2015 and 2014 is shown below.

 

   September 30, 2015   September 30, 2014 
Unearned shares   21,553    25,392 
Shares committed for release   1,719    1,683 
Allocated shares   57,535    56,222 
Total ESOP shares   80,807    83,297 
           
Fair value of unearned shares  $562,252   $603,773 

 

On April 24, 2012, our shareholders approved the 2012 Stock Option Plan. On this same date, the compensation committee of the board of directors approved the awards of 104,035 options to purchase Company common stock. The stock options vest over a five-year period and expire ten years after issuance. Apart from the vesting schedule, there are no performance-based conditions or any other material conditions applicable to the options issued.

 

 9 

 

 

The following table summarizes stock option activity for the nine months ended September 30, 2015.

 

           Weighted     
       Weighted   Average     
       Average   Remaining   Aggregate 
       Exercise   Contractual   Instrinsic 
   Options   Price/Share   Life (in years)   Value 
                 
Outstanding, December 31, 2014   85,835   $15.65           
Granted   -    -           
Exercised   (16,965)   15.65           
Forfeited   -    -           
                     
Outstanding, September 30, 2015   68,870   $15.65    6.50   $586,084 
                     
Exercisable, September 30, 2015   26,785   $15.65    6.50   $227,940 

 

Intrinsic value for stock options is defined as the difference between the current market value and the exercise price. The value is based upon a closing price of $24.16 per share on September 30, 2015.

 

 10 

 

 

5.LOAN PORTFOLIO COMPOSITION

 

At September 30, 2015 and December 31, 2014, the composition of the Company’s loan portfolio is shown below.

 

   September 30, 2015   December 31, 2014 
   Amount   Percent   Amount   Percent 
Real estate loans:                    
One-to-four family residential  $46,136,293    24.3%  $44,561,089    24.2%
Commercial   42,832,513    22.6    40,474,855    21.9 
Agricultural   42,704,641    22.5    40,119,130    21.7 
Home equity   11,580,161    6.1    11,283,264    6.1 
Total real estate loans   143,253,608    75.5    136,438,338    73.9 
                     
Commercial loans   22,496,792    11.9    26,813,880    14.5 
Agricultural loans   13,322,205    7.0    11,844,973    6.4 
Consumer loans   13,379,117    7.1    12,587,101    6.8 
Total loans receivable   192,451,722    101.5    187,684,292    101.6 
                     
Less:                    
Net deferred loan fees   22,027    0.0    9,416    0.0 
Allowance for loan losses   2,917,588    1.5    2,956,264    1.6 
Total loans receivable, net  $189,512,107    100.0%  $184,718,612    100.0%

 

The Company believes that originating or purchasing sound loans are a necessary and desirable means of employing funds available for investment. Recognizing the Company’s obligations to its depositors and to the communities it serves, authorized personnel are expected to seek to develop and make sound, profitable loans that resources permit and that opportunity affords. The Company maintains lending policies and procedures in place designed to focus lending efforts on the types, locations, and duration of loans most appropriate for the business model and markets. The Company’s principal lending activities include the origination of one-to four-family residential mortgage loans, multi-family loans, commercial real estate loans, agricultural loans, home equity lines of credits, commercial business loans, and consumer loans. The primary lending market includes the Illinois counties of Morgan, Macoupin and Montgomery. Generally, loans are collateralized by assets, primarily real estate, of the borrowers and guaranteed by individuals. The loans are expected to be repaid from cash flows of the borrowers or from proceeds from the sale of selected assets of the borrowers.

 

Loan originations are derived from a number of sources such as real estate broker referrals, existing customers, builders, attorneys and walk-in customers. Upon receipt of a loan application, a credit report is obtained to verify specific information relating to the applicant’s employment, income, and credit standing. In the case of a real estate loan, an appraisal of the real estate intended to secure the proposed loan is undertaken by an independent appraiser approved by the Company. A loan application file is first reviewed by a loan officer in the loan department who checks applications for accuracy and completeness, and verifies the information provided. The financial resources of the borrower and the borrower’s credit history, as well as the collateral securing the loan, are considered an integral part of each risk evaluation prior to approval. The board of directors has established individual lending authorities for each loan officer by loan type. Loans over an individual officer’s lending limit must be approved by the officers’ loan committee consisting of the chairman of the board, president, chief lending officer and all lending officers, which meets three times a week, and has lending authority up to $750,000 depending on the type of loan. Loans to borrowers with an aggregate principal balance over this limit, up to $1.0 million, must be approved by the directors’ loan committee, which meets weekly and consists of the chairman of the board, president, senior vice president, chief lending officer and at least two outside directors, plus all lending officers as non-voting members. The board of directors approves all loans to borrowers with an aggregate principal balance over $1.0 million. The board of directors ratifies all loans that are originated. Once the loan is approved, the applicant is informed and a closing date is scheduled. Loan commitments are typically funded within 30 days.

 

 11 

 

 

If the loan is approved, the borrower must provide proof of fire and casualty insurance on the property serving as collateral which insurance must be maintained during the full term of the loan; flood insurance is required in certain instances. Title insurance or an attorney’s opinion based on a title search of the property is generally required on loans secured by real property.

 

One-to-Four Family Mortgage Loans - Historically, the Bank’s primary lending origination activity has been one-to-four family, owner-occupied, residential mortgage loans secured by property located in the Company’s market area. The Company generates loans through marketing efforts, existing customers and referrals, real estate brokers, builders and local businesses. Generally, one-to-four family loan originations are limited to the financing of loans secured by properties located within the Company’s market area.  

 

Fixed rate one-to-four family residential mortgage loans are generally conforming loans, underwritten according to secondary market guidelines. The Company generally originates both fixed and adjustable rate mortgage loans in amounts up to the maximum conforming loan limits established by the Federal Housing Finance Agency.

 

The Company originates for resale to Freddie Mac and the Federal Home Loan Bank fixed-rate one-to-four family residential mortgage loans with terms of 15 years or more. The fixed-rate mortgage loans amortize monthly with principal and interest due each month. Residential real estate loans often remain outstanding for significantly shorter periods than their contractual terms because borrowers may refinance or prepay loans at their option. The Company offers fixed-rate one-to-four family residential mortgage loans with terms of up to 30 years without prepayment penalty.

 

The Company currently offers adjustable-rate mortgage loans for terms ranging up to 30 years. They generally offer adjustable-rate mortgage loans that adjust between one and five years on the anniversary date of origination. Interest rate adjustments are up to two hundred basis points per year, with a cap of up to six hundred basis points on interest rate increases over the life of the loan. In a rising interest rate environment, such rate limitations may prevent adjustable-rate mortgage loans from repricing to market interest rates, which would have an adverse effect on the net interest income. In the low interest rate environment that has existed over the past five years, the adjustable-rate portfolio has repriced downward resulting in lower interest income from this portion of the loan portfolio. In addition, during this period borrowers have shown a preference for fixed-rate loans. The Company has used different interest indices for adjustable-rate mortgage loans in the past such as the average yield on U.S. Treasury securities, adjusted to a constant maturity of one-year, three-years or five-years. The origination of fixed-rate mortgage loans versus adjustable-rate mortgage loans is monitored on an ongoing basis and is affected significantly by the level of market interest rates, customer preference, interest rate risk position and competitors’ loan products.

 

Adjustable-rate mortgage loans make the loan portfolio more interest rate sensitive and provide an alternative for those borrowers who meet the underwriting criteria, but are unable to qualify for a fixed-rate mortgage. However, as the interest income earned on adjustable-rate mortgage loans varies with prevailing interest rates, such loans do not offer predictable cash flows in the same manner as long-term, fixed-rate loans. Adjustable-rate mortgage loans carry increased credit risk associated with potentially higher monthly payments by borrowers as general market interest rates increase. It is possible that during periods of rising interest rates that the risk of delinquencies and defaults on adjustable-rate mortgage loans may increase due to the upward adjustment of interest costs to the borrower, resulting in increased loan losses.

 

 12 

 

 

Residential first mortgage loans customarily include due-on-sale clauses, which gives the Company the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the underlying real property serving as collateral for the loan. Due-on-sale clauses are a means of imposing assumption fees and increasing the interest rate on mortgage portfolio during periods of rising interest rates.

 

When underwriting residential real estate loans, the Company reviews and verifies each loan applicant’s income and credit history. Management believes that stability of income and past credit history are integral parts in the underwriting process. Generally, the applicant’s total monthly mortgage payment, including all escrow amounts, is limited to 28% of the applicant’s total monthly income. In addition, total monthly obligations of the applicant, including mortgage payments, generally should not exceed 38% of total monthly income. Written appraisals are generally required on real estate property offered to secure an applicant’s loan. For one-to-four family real estate loans with loan to value ratios of over 80%, private mortgage insurance is generally required. Fire and casualty insurance is also required on all properties securing real estate loans. Title insurance, or an attorney’s title opinion, may be required, as circumstances warrant.

 

The Company does not offer an “interest only” mortgage loan product on one-to-four family residential properties (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan). They also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. The Company does not offer a “subprime loan” program (loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (traditionally defined as loans having less than full documentation).

 

Commercial Real Estate Loans - The Company originates and purchases commercial real estate loans. Commercial real estate loans are secured primarily by improved properties such as multi-family residential, retail facilities and office buildings, restaurants and other non-residential buildings. The maximum loan-to-value ratio for commercial real estate loans originated is generally 80%. Commercial real estate loans are generally written up to terms of five years with adjustable interest rates. The rates are generally tied to the prime rate and generally have a specified floor. Many of the fixed-rate commercial real estate loans are not fully amortizing and therefore require a “balloon” payment at maturity. The Company purchases from time to time commercial real estate loan participations primarily from outside the Company’s market area. All participation loans are approved following a review to ensure that the loan satisfies the underwriting standards.

 

Underwriting standards for commercial real estate loans include a determination of the applicant’s credit history and an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan. The income approach is primarily utilized to determine whether income generated from the applicant’s business or real estate offered as collateral is adequate to repay the loan. There is an emphasis on the ratio of the property’s projected net cash flow to the loan’s debt service requirement (generally requiring a minimum ratio of 120%). In underwriting a loan, the value of the real estate offered as collateral in relation to the proposed loan amount is considered. Generally, the loan amount cannot be greater than 80% of the value of the real estate. Written appraisals are usually obtained from either licensed or certified appraisers on all commercial real estate loans in excess of $250,000. Creditworthiness of the applicant is assessed by reviewing a credit report, financial statements and tax returns of the applicant, as well as obtaining other public records regarding the applicant.

 

 13 

 

 

Loans secured by commercial real estate generally involve a greater degree of credit risk than one-to-four family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the effects of general economic conditions on income producing properties and the successful operation or management of the properties securing the loans. Furthermore, the repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related business and real estate property. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.

 

Agricultural Real Estate Loans - The Company originates and purchases agricultural real estate loans. The maximum loan-to-value ratio for agricultural real estate loans we originate is generally 80%. Our agricultural real estate loans are generally written up to terms of five years with adjustable interest rates.  The rates are generally tied to the average yield on U.S. Treasury securities, adjusted to a constant maturity of one-year, three-years, or five-years and generally have a specified floor. Many of our fixed-rate agricultural real estate loans are not fully amortizing and therefore require a “balloon” payment at maturity. We purchase from time to time agricultural real estate loan participations primarily from other local institutions within our market area. All participation loans are approved following a review to ensure that the loan satisfies our underwriting standards.

 

Underwriting standards for agricultural real estate include a determination of the applicant’s credit history and an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan. The income approach is primarily utilized to determine whether income generated from the applicant’s farm operation or real estate offered as collateral is adequate to repay the loan. We emphasize the ratio of the property’s projected cash flow to the loan’s debt service requirement (generally requiring a minimum ratio of 120%). In underwriting a loan, we consider the value of the real estate offered as collateral in relation to the proposed loan amount. Generally, the loan amount cannot be greater than 80% of the value of the real estate. We usually obtain written appraisals from either licensed or certified appraisers on all agricultural real estate loans in excess of $250,000. We assess the creditworthiness of the applicant by reviewing a credit report, financial statements and tax returns of the applicant, as well as obtaining other public records regarding the applicant.

 

Loans secured by agricultural real estate generally involve a greater degree of credit risk than one-to-four family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the effects of general economic and market conditions on farm operations and the successful operation or management of the properties securing the loans. The repayment of loans secured by agricultural estate is typically dependent upon the successful operation of the farm and real estate property. If the cash flow is reduced, the borrower’s ability to repay the loan may be impaired.

 

Home Equity Loans – The Company originates home equity loans and lines of credit, which are generally secured by the borrower’s principal residence. The maximum amount of a home equity loan or line of credit is generally 95% of the appraised value of a borrower’s real estate collateral less the amount of any existing mortgages or related liabilities. Home equity loans and lines of credit are approved with both fixed and adjustable interest rates which we determine based upon market conditions. Such loans may be fully amortized over the life of the loan or have a balloon feature. Generally, the maximum term for home equity loans is 10 years.

 

Underwriting standards for home equity loans include a determination of the applicant’s credit history and an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment, and additionally from any verifiable secondary income. We also consider the length of employment with the borrower’s present employer as well as the amount of time the borrower has lived in the local area. Creditworthiness of the applicant is of primary consideration; however, the underwriting process also includes a comparison of the value of the collateral in relation to the proposed loan amount.

 

 14 

 

 

Home equity loans entail greater risks than one-to-four family residential mortgage loans, which are secured by first lien mortgages. In such cases, collateral repossessed after a default may not provide an adequate source of repayment of the outstanding loan balance because of damage or depreciation in the value of the property or loss of equity to the first lien position. Further, home equity loan payments are dependent on the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Finally, the application of various Federal and state laws, including Federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans in the event of a default.

 

Commercial Business Loans - The Company originates commercial business loans to borrowers located in the Company’s market area which are secured by collateral other than real estate or which can be unsecured. Commercial business loan participations are also purchased from other lenders, which may be made to borrowers outside the Company’s market area. Commercial business loans are generally secured by equipment and inventory and generally are offered with adjustable rates tied to the prime rate or the average yield on U.S. Treasury securities, adjusted to a constant maturity of either one-year, three-years or five-years and various terms of maturity generally from three years to five years. Unsecured business loans are originated on a limited basis in those instances where the applicant’s financial strength and creditworthiness has been established. Commercial business loans generally bear higher interest rates than residential loans, but they also may involve a higher risk of default since their repayment is generally dependent on the successful operation of the borrower’s business. Personal guarantees are generally obtained from the borrower or a third party as a condition to originating its business loans.  

 

Underwriting standards for commercial and agricultural business loans include a determination of the applicant’s ability to meet existing obligations and payments on the proposed loan from normal cash flows generated in the applicant’s business. The financial strength of each applicant is assessed through the review of financial statements and tax returns provided by the applicant. The creditworthiness of an applicant is derived from a review of credit reports as well as a search of public records. Business loans are periodically reviewed following origination. Financial statements are requested at least annually and review them for substantial deviations or changes that might affect repayment of the loan. Loan officers also visit the premises of borrowers to observe the business premises, facilities, and personnel and to inspect the pledged collateral. Underwriting standards for business loans are different for each type of loan depending on the financial strength of the applicant and the value of collateral offered as security.

 

Agricultural Business Loans - The Company originates agricultural business loans to borrowers located in our market area which are secured by collateral other than real estate or which can be unsecured. Agricultural business loans are generally secured by equipment and blanket security agreements on all farm assets. These loans are generally offered with fixed rates with terms up to five years. Agricultural business loans generally bear lower interest rates than residential loans due to competitive market pressures. The repayment of agricultural business loans is generally dependent on the successful operation of the farm operation. Personal guarantees are generally obtained from the borrower as a condition to originating agricultural business loans.

 

Underwriting standards for agricultural business loans include a determination of the applicant’s ability to meet existing obligations and payments on the proposed loan from normal cash flows generated in the applicant’s business. The financial strength of each applicant is assessed through the review of financial statements, pro-forma cash flow statements, and tax returns provided by the applicant. The creditworthiness of an applicant is derived from a review of credit reports as well as a search of public records. Financial statements are requested at least annually and reviewed for substantial deviations or changes that might affect repayment of the loan. Loan officers may also visit the premises of borrowers to observe the operation, facilities, equipment, and personnel and to inspect the pledged collateral. Underwriting standards for agricultural business loans are different for each type of loan depending on the financial strength of the applicant and the value of collateral offered as security.

 

 15 

 

 

The repayment of agricultural business loans generally is dependent on the successful operation of a farm and can be adversely affected by fluctuations in crop prices, increase in interest rates, and changes in weather conditions. These developments may result in smaller harvests and less income for farmers which may adversely affect such borrower’s ability to repay a loan, and potentially result in an increase in the level of problem loans and loan losses in our agricultural portfolio. While not required, the majority of our agricultural business loans are covered by crop insurance, which provides protection against loss due to lower crop yields as a result of unfavorable weather conditions.

 

Consumer Loans – The Company originates consumer loans, including automobile loans, loans secured by deposit accounts, unsecured loans and mobile home loans. Consumer loans are generally offered on a fixed-rate basis. Automobile loans are offered with maturities of up to 60 months for new automobiles. Loans secured by used automobiles will have maximum terms which vary depending upon the age of the automobile. Automobile loans are generally originated with a loan-to-value ratio below the greater of 80% of the purchase price or 100% of NADA loan value. In the case of a new car loan, the loan-to-value ratio may be greater or less depending on the borrower’s credit history, debt to income ratio, home ownership and other banking relationships with us.

 

Underwriting standards for consumer loans include a determination of the applicant’s credit history and an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment, and additionally from any verifiable secondary income. We also consider the length of employment with the borrower’s present employer as well as the amount of time the borrower has lived in the local area. Creditworthiness of the applicant is of primary consideration; however, the underwriting process also includes a comparison of the value of the collateral in relation to the proposed loan amount.

 

Consumer loans entail greater risks than one-to-four family residential mortgage loans, particularly consumer loans secured by rapidly depreciating assets such as automobiles or loans that are unsecured. In such cases, collateral repossessed after a default may not provide an adequate source of repayment of the outstanding loan balance because of damage, loss or depreciation. Further, consumer loan payments are dependent on the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Such events would increase our risk of loss on unsecured loans. Finally, the application of various Federal and state laws, including Federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans in the event of a default.

 

 16 

 

 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of and for the periods ended September 30, 2015, September 30, 2014, and December 31, 2014.

 

   September 30, 2015 
       Commercial   Agricultural                         
   1-4 Family   Real Estate   Real Estate   Home Equity   Commercial   Agricultural   Consumer   Unallocated   Total 
Allowance for Loan Losses:                                             
Beginning Balance, July 1, 2015  $930,733   $847,424   $213,810   $158,101   $391,994   $125,062   $175,105   $80,817   $2,923,046 
Provision charged to expense   (22,183)   84,756    (4,601)   925    (22,387)   5,474    12,641    (9,625)   45,000 
Losses charged off   (56,149)   -    -    (5,707)   -    -    (12,881)   -    (74,737)
Recoveries   20,075    1,441    -    525    -    -    2,238    -    24,279 
Ending balance, September 30, 2015  $872,476   $933,621   $209,209   $153,844   $369,607   $130,536   $177,103   $71,192   $2,917,588 
                                              
Beginning Balance, January 1, 2015  $999,260   $855,463   $195,546   $205,577   $421,809   $57,934   $167,319   $53,356   $2,956,264 
Provision charged to expense   (5,339)   89,090    13,663    (56,089)   (52,313)   72,602    30,550    17,836    110,000 
Losses charged off   (161,267)   (27,464)   -    (5,707)   -    -    (26,133)   -    (220,571)
Recoveries   39,822    16,532    -    10,063    111    -    5,367    -    71,895 
Ending balance, September 30, 2015  $872,476   $933,621   $209,209   $153,844   $369,607   $130,536   $177,103   $71,192   $2,917,588 
                                              
Ending balance:                                             
individually evaluated for impairment  $179,667   $415,306   $-   $9,982   $138,606   $-   $-   $-   $743,561 
Ending balance:                                             
collectively evaluated for impairment  $692,809   $518,315   $209,209   $143,862   $231,001   $130,536   $177,103   $71,192   $2,174,027 
                                              
Loans:                                             
Ending balance  $46,136,293   $42,832,513   $42,704,641   $11,580,161   $22,496,792   $13,322,205   $13,379,117   $-   $192,451,722 
Ending balance:                                             
individually evaluated for impairment  $664,602   $1,606,230   $862,765   $56,589   $211,169   $411,979   $791   $-   $3,814,125 
Ending balance:                                             
collectively evaluated for impairment  $45,471,691   $41,226,283   $41,841,876   $11,523,572   $22,285,623   $12,910,226   $13,378,326   $-   $188,637,597 

 

 17 

 

 

   September 30, 2014 
       Commercial   Agricultural                         
   1-4 Family   Real Estate   Real Estate   Home Equity   Commercial   Agricultural   Consumer   Unallocated   Total 
Allowance for Loan Losses:                                             
Beginning Balance, July 1, 2014  $1,000,765   $771,332   $175,703   $175,475   $738,336   $50,240   $184,845   $244,571   $3,341,267 
Provision charged to expense   70,451    (15,227)   20,307    36,969    (29,166)   7,990    33,016    (94,340)   30,000 
Losses charged off   (70,319)   -    -    (5,403)   (285,410)   -    (20,278)   -    (381,410)
Recoveries   300    -    -    525    -    -    782    -    1,607 
Ending balance, September 30, 2014  $1,001,197   $756,105   $196,010   $207,566   $423,760   $58,230   $198,365   $150,231   $2,991,464 
                                              
Beginning Balance, January 1, 2014  $856,144   $745,760   $175,028   $201,993   $1,034,189   $52,798   $184,848   $155,674   $3,406,434 
Provision charged to expense   244,112    103,651    20,982    9,401    (325,050)   5,432    36,915    (5,443)   90,000 
Losses charged off   (100,319)   (93,474)   -    (5,403)   (285,410)   -    (25,781)   -    (510,387)
Recoveries   1,260    168    -    1,575    31    -    2,383    -    5,417 
Ending balance, September 30, 2014  $1,001,197   $756,105   $196,010   $207,566   $423,760   $58,230   $198,365   $150,231   $2,991,464 
                                              
Ending balance:                                             
individually evaluated for impairment  $193,882   $298,693   $-   $10,000   $165,446   $-   $12,500   $-   $680,521 
Ending balance:                                             
collectively evaluated for impairment  $807,315   $457,412   $196,010   $197,566   $258,314   $58,230   $185,865   $150,231   $2,310,943 
                                              
Loans:                                             
Ending balance  $44,314,136   $37,558,015   $40,401,858   $11,599,732   $25,860,867   $12,066,418   $13,036,397   $-   $184,837,423 
Ending balance:                                             
individually evaluated for impairment  $732,567   $1,574,826   $1,199,949   $41,340   $252,161   $420,382   $92,433   $-   $4,313,658 
Ending balance:                                             
collectively evaluated for impairment  $43,581,569   $35,983,189   $39,201,909   $11,558,392   $25,608,706   $11,646,036   $12,943,964   $-   $180,523,765 

 

 18 

 

 

   December 31, 2014 
       Commercial   Agricultural                         
   1-4 Family   Real Estate   Real Estate   Home Equity   Commercial   Agricultural   Consumer   Unallocated   Total 
Allowance for Loan Losses:                                             
Beginning Balance, December 31, 2013  $856,144   $745,760   $175,028   $201,993   $1,034,189   $52,798   $184,848   $155,674   $3,406,434 
Provision charged to expense   241,875    392,009    20,518    5,887    (327,057)   5,136    3,950    (102,318)   240,000 
Losses charged off   (100,319)   (287,474)   -    (5,403)   (285,411)   -    (25,781)   -    (704,388)
Recoveries   1,560    5,168    -    3,100    88    -    4,302    -    14,218 
Ending balance, December 31, 2014  $999,260   $855,463   $195,546   $205,577   $421,809   $57,934   $167,319   $53,356   $2,956,264 
                                              
Ending balance:                                             
individually evaluated for impairment  $183,196   $348,240   $-   $9,982   $154,089   $-   $-   $-   $695,507 
Ending balance:                                             
collectively evaluated for impairment  $816,064   $507,223   $195,546   $195,595   $267,720   $57,934   $167,319   $53,356   $2,260,757 
                                              
Loans:                                             
Ending balance  $44,561,089   $40,474,855   $40,119,130   $11,283,264   $26,813,880   $11,844,973   $12,587,101   $-   $187,684,292 
Ending balance:                                             
individually evaluated for impairment  $713,962   $1,690,251   $1,009,889   $37,531   $240,805   $258,140   $8,469   $-   $3,959,047 
Ending balance:                                             
collectively evaluated for impairment  $43,847,127   $38,784,604   $39,109,241   $11,245,733   $26,573,075   $11,586,833   $12,578,632   $-   $183,725,245 

 

Management’s opinion as to the ultimate collectability of loans is subject to estimates regarding future cash flows from operations and the value of property, real and personal, pledged as collateral.  These estimates are affected by changing economic conditions and the economic prospects of borrowers.

 

The allowance for loan losses is maintained at a level that, in management’s judgment, is adequate to cover probable credit losses inherent in the loan portfolio at the balance sheet date. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.

 

 19 

 

 

A loan is considered impaired when, based on current information and events, it is probable that the scheduled payments of principal or interest will not be able to be collected when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and agricultural loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

 

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, individual consumer and residential loans are not separately identified for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

 

The general component covers non-classified loans and is based on historical charge-off experience and expected loss given the internal risk rating process. The loan portfolio is stratified into homogeneous groups of loans that possess similar loss characteristics and an appropriate loss ratio adjusted for other qualitative factors is applied to the homogeneous pools of loans to estimate the incurred losses in the loan portfolio.  

 

There have been no changes to the Company’s accounting policies or methodology from the prior periods.

 

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. This analysis is performed on all loans at origination. In addition, lending relationships over $500,000, new commercial and commercial real estate loans, and watch list credits are reviewed annually by our loan review department in order to verify risk ratings. 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.

 

 20 

 

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans.

 

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of September 30, 2015 and December 31, 2014. There were no loans classified as Doubtful on these dates.

 

   1-4 Family   Commercial Real Estate   Agricultural Real Estate   Home Equity 
   September 30,   December 31,   September 30,   December 31,   September 30,   December 31,   September 30,   December 31, 
   2015   2014   2015   2014   2015   2014   2015   2014 
Rating:                                        
Pass  $42,816,813   $41,530,699   $39,738,007   $38,122,972   $41,841,876   $39,109,241   $11,199,982   $10,833,853 
Special Mention   1,346,214    655,049    945,520    53,750    862,765    887,048    71,208    162,103 
Substandard   1,973,266    2,375,341    2,148,986    2,298,133    -    122,841    308,971    287,308 
Total  $46,136,293   $44,561,089   $42,832,513   $40,474,855   $42,704,641   $40,119,130   $11,580,161   $11,283,264 

 

   Commercial   Agricultural   Consumer   Total 
   September 30,   December 31,   September 30,   December 31,   September 30,   December 31,   September 30,   December 31, 
   2015   2014   2015   2014   2015   2014   2015   2014 
Rating:                                        
Pass  $22,222,969   $26,563,823   $12,421,451   $11,586,833   $13,091,774   $12,386,412   $183,332,872   $180,133,833 
Special Mention   55,651    -    900,754    258,140    66,168    80,544    4,248,280    2,096,634 
Substandard   218,172    250,057    -    -    221,175    120,145    4,870,570    5,453,825 
Total  $22,496,792   $26,813,880   $13,322,205   $11,844,973   $13,379,117   $12,587,101   $192,451,722   $187,684,292 

 

The following tables present the Company’s loan portfolio aging analysis as of September 30, 2015 and December 31, 2014.

 

   September 30, 2015 
   30-59 Days   60-89 Days   Greater than 90   Total           Total Loans >90 
   Past Due   Past Due   Days Past Due   Past Due   Current   Total Loans   Days & Accruing 
                             
One-to-four family residential  $127,277   $70,890   $621,421   $819,588   $45,316,705   $46,136,293   $- 
Commercial real estate   -    -    784,348    784,348    42,048,165    42,832,513    - 
Agricultural real estate   -    -    -    -    42,704,641    42,704,641    - 
Home equity   76,008    27,536    95,247    198,791    11,381,370    11,580,161    - 
Commercial   -    -    -    -    22,496,792    22,496,792    - 
Agricultural   12,036    -    -    12,036    13,310,169    13,322,205    - 
Consumer   106,252    43,673    2,203    152,128    13,226,989    13,379,117    - 
Total  $321,573   $142,099   $1,503,219   $1,966,891   $190,484,831   $192,451,722   $- 

 

 21 

 

 

   December 31, 2014 
   30-59 Days   60-89 Days   Greater than 90   Total           Total Loans >90 
   Past Due   Past Due   Days Past Due   Past Due   Current   Total Loans   Days & Accruing 
                             
One-to-four family residential  $420,086   $286,622   $613,534   $1,320,242   $43,240,847   $44,561,089   $- 
Commercial real estate   -    794,110    39,023    833,133    39,641,722    40,474,855    - 
Agricultural real estate   -    -    122,841    122,841    39,996,289    40,119,130    - 
Home equity   96,971    11,561    58,360    166,892    11,116,372    11,283,264    - 
Commercial   -    -    -    -    26,813,880    26,813,880    - 
Agricultural   -    -    -    -    11,844,973    11,844,973    - 
Consumer   90,558    5,531    16,560    112,649    12,474,452    12,587,101    - 
Total  $607,615   $1,097,824   $850,318   $2,555,757   $185,128,535   $187,684,292   $- 

 

The accrual of interest on loans is generally discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal and interest is considered doubtful.

 

All interest accrued but not collected for loans that are placed on non-accrual or charged-off are reversed against interest income. The interest on these 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 principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

The Company actively seeks to reduce its investment in impaired loans. The primary tools to work through impaired loans are settlement with the borrowers or guarantors, foreclosure of the underlying collateral, or restructuring.

 

The Company will restructure loans when the borrower demonstrates the inability to comply with the terms of the loan, but can demonstrate the ability to meet acceptable restructured terms. Restructurings generally include one or more of the following restructuring options; reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection. Restructured loans in compliance with modified terms are classified as impaired.

 

 22 

 

 

The following tables present impaired loans at or for the three and nine months ended September 30, 2015 and for the year ended December 31, 2014.

 

   Three Months Ended September 30, 2015 
               Average       Interest 
       Unpaid       Impairment in   Interest   Income 
   Recorded   Principal   Specific   Impaired   Income   Recognized 
   Balance   Balance   Allowance   Loans   Recognized   Cash Basis 
Loans without a specific allowance:                              
One-to-four family residential  $115,791   $115,791   $-   $210,213   $3,050   $3,054 
Commercial real estate   502,635    502,635    -    539,074    7,184    7,280 
Agricultural real estate   862,765    862,765    -    862,764    10,897    - 
Home equity   46,607    46,607    -    41,496    814    758 
Agricultural   411,979    411,979    -    401,995    4,093    - 
Consumer   791    791    -    980    16    17 
Loans with a specific allowance:                              
One-to-four family residential   548,811    548,811    179,667    561,545    7,124    5,556 
Commercial real estate   1,103,595    1,103,595    415,306    1,116,160    16,970    14,854 
Commercial   211,169    211,169    138,606    266,973    722    4,111 
Home equity   9,982    9,982    9,982    9,982    204    181 
Total:                              
One-to-four family residential   664,602    664,602    179,667    771,758    10,174    8,610 
Commercial real estate   1,606,230    1,606,230    415,306    1,655,234    24,154    22,134 
Agricultural real estate   862,765    862,765    -    862,764    10,897    - 
Commercial   211,169    211,169    138,606    266,973    5,722    4,111 
Agricultural   411,979    411,979    -    401,995    4,093    - 
Home equity   56,589    56,589    9,982    51,478    1,018    939 
Consumer   791    791    -    980    16    17 
Total  $3,814,125   $3,814,125   $743,561   $4,011,182   $56,074   $35,811 

 

 23 

 

 

   Nine Months Ended September 30, 2015 
               Average       Interest 
       Unpaid       Impairment in   Interest   Income 
   Recorded   Principal   Specific   Impaired   Income   Recognized 
   Balance   Balance   Allowance   Loans   Recognized   Cash Basis 
Loans without a specific allowance:                              
One-to-four family residential  $115,791   $115,791   $-   $212,527   $9,234   $9,008 
Commercial real estate   502,635    502,635    -    709,290    27,088    27,604 
Agricultural real estate   862,765    862,765    -    865,699    32,451    30,345 
Home equity   46,607    46,607    -    41,504    2,454    2,394 
Agricultural   411,979    411,979    -    268,777    7,245    - 
Consumer   791    791    -    1,334    67    71 
Loans with a specific allowance:                              
One-to-four family residential   548,811    548,811    179,667    571,398    23,641    18,224 
Commercial real estate   1,103,595    1,103,595    415,306    1,119,919    50,598    25,383 
Commercial   211,169    211,169    138,606    275,280    11,119    10,228 
Home equity   9,982    9,982    9,982    9,982    555    542 
Total:                              
One-to-four family residential   664,602    664,602    179,667    783,925    32,875    27,232 
Commercial real estate   1,606,230    1,606,230    415,306    1,829,209    77,686    52,987 
Agricultural real estate   862,765    862,765    -    865,699    32,451    30,345 
Commercial   211,169    211,169    138,606    275,280    11,119    10,228 
Agricultural   411,979    411,979    -    268,777    7,245    - 
Home equity   56,589    56,589    9,982    51,486    3,009    2,936 
Consumer   791    791    -    1,334    67    71 
Total  $3,814,125   $3,814,125   $743,561   $4,075,710   $164,452   $123,799 

 

 24 

 

 

   Year Ended December 31, 2014 
               Average       Interest 
       Unpaid       Impairment in   Interest   Income 
   Recorded   Principal   Specific   Impaired   Income   Recognized 
   Balance   Balance   Allowance   Loans   Recognized   Cash Basis 
Loans without a specific allowance:                              
One-to-four family residential  $129,272   $129,272   $-   $220,541   $12,818   $13,076 
Commercial real estate   564,610    564,610    -    757,616    19,826    18,816 
Agricultural real estate   1,009,889    1,009,889    -    1,037,661    58,253    149,159 
Agricultural business   258,140    258,140    -    358,529    13,723    1,046 
Home equity   27,549    27,549    -    29,505    2,881    2,939 
Consumer   8,469    8,469    -    12,285    951    964 
Loans with a specific allowance:                              
One-to-four family residential   584,690    584,690    183,196    604,031    28,722    26,783 
Commercial real estate   1,125,641    1,125,641    348,240    1,134,401    66,864    60,012 
Commercial   240,805    240,805    154,089    319,812    14,425    16,554 
Home equity   9,982    9,982    9,982    9,993    247    187 
Total:                              
One-to-four family residential   713,962    713,962    183,196    824,572    41,540    39,859 
Commercial real estate   1,690,251    1,690,251    348,240    1,892,017    86,690    78,828 
Agricultural real estate   1,009,889    1,009,889    -    1,037,661    58,253    49,159 
Commercial   240,805    240,805    154,089    319,812    14,425    16,554 
Agricultural business   258,140    258,140    -    358,529    13,723    1,046 
Home equity   37,531    37,531    9,982    39,498    3,128    3,126 
Consumer   8,469    8,469    -    12,285    951    964 
Total  $3,959,047   $3,959,047   $695,507   $4,484,374   $218,710   $189,536 

 

Included in certain loan categories in the impaired loans are troubled debt restructurings (TDRs), where economic concessions have been granted to borrowers who have experienced financial difficulties, that were classified as impaired. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. TDRs are considered impaired at the time of restructuring and typically are returned to accrual status after considering the borrower’s sustained repayment performance for a reasonable period of time, usually at least six months.

 

When loans are modified into a TDR, the Company evaluates any possible impairment similar to other impaired loans based on the present value of expected cash flows, discounted at the contractual interest rate of the original loan agreement, or based upon on the current fair value of the collateral, less selling costs for collateral dependent loans. If the Company determined that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, the Company evaluates all TDRs, including those that have payment defaults, for possible impairment and recognizes impairment through the allowance.

 25 

 

 

The following table presents the recorded balance, at original cost, of TDRs, as of September 30, 2015 and December 31, 2014.

 

   September 30, 2015   December 31, 2014 
         
One-to-four family residential  $727,322   $747,470 
Commercial real estate   1,188,395    1,265,079 
Agricultural real estate   -    - 
Home equity   15,354    15,379 
Commercial loans   67,656    212,579 
Agricultural loans   -    - 
Consumer loans   100,366    42,786 
           
Total  $2,099,093   $2,283,293 

 

The following table presents the recorded balance, at original cost, of TDRs, which were performing according to the terms of the restructuring, as of September 30, 2015 and December 31, 2014.

 

   September 30, 2015   December 31, 2014 
         
One-to-four family residential  $535,559   $747,470 
Commercial real estate   404,047    1,265,079 
Agricultural real estate   -    - 
Home equity   12,216    15,379 
Commercial loans   67,656    212,579 
Agricultural loans   -    - 
Consumer loans   98,727    42,786 
           
Total  $1,118,205   $2,283,293 

 

The following tables present loans modified as TDRs during the three and nine months ended September 30, 2015 and 2014.

 

   Three Months Ended   Nine Months Ended 
   September 30, 2015   September 30, 2015 
   Number of   Recorded   Number of   Recorded 
   Modifications   Investment   Modifications   Investment 
                 
One-to-four family residential   -   $-    1   $100,492 
Commercial real estate   -    -    -    - 
Agricultural real estate   -    -    -    - 
Home equity   -    -    1    1,996 
Commercial loans   -    -    -    - 
Agricultural loans   -    -    -    - 
Consumer loans   -    -    2    65,978 
                     
Total   -   $-    4   $168,466 

 

 26 

 

 

   Three Months Ended   Nine Months Ended 
   September 30, 2014   September 30, 2014 
   Number of   Recorded   Number of   Recorded 
   Modifications   Investment   Modifications   Investment 
                 
One-to-four family residential   -   $-    -   $- 
Commercial real estate   -    -    -    - 
Agricultural real estate   -    -    -    - 
Home equity   -    -    -    - 
Commercial loans   -    -    -    - 
Agricultural loans   -    -    -    - 
Consumer loans   -    -    1    17,428 
                     
Total   -   $-    1   $17,428 

 

2015 Modifications

The Company modified one residential real estate loan with a recorded investment of $100,492. The modification was made to consolidate and restructure a delinquent loan into a workout. The modification did not result in a write-off of the principal balance.

 

The Company modified one home equity loan with a recorded investment of $1,996. The modification was made to extend the term to lower the payment amount. The modification did not result in a write-off of the principal balance.

 

The Company modified two consumer loans with a recorded investment of $65,978. The modifications were made to extend the payment schedule three and four months, respectively. The modifications did not result in a write-off of the principal balance.

 

Management considers the level of defaults within the various portfolios when evaluating qualitative adjustments used to determine the adequacy of the allowance for loan losses. During the nine month period ended September 30, 2015, three residential real estate loans of $191,763, one commercial real estate loan of $784,348 and one home equity loan of $3,138 were considered defaulted TDRs as they were more than 90 days past due at September 30, 2015. Default occurs when a loan is 90 days or more past due, transferred to nonaccrual or charged-off, and is within twelve months of restructuring.

 

2014 Modifications

The Company modified one consumer loan with a recorded investment of $17,428. The modification was made to change the payment schedule to interest-only for three months. The modification did not result in a write-off of the principal balance.

 

Management considers the level of defaults within the various portfolios when evaluating qualitative adjustments used to determine the adequacy of the allowance for loan losses. During the nine month period ended September 30, 2014, one home equity loan of $3,455 and one consumer loan of $694 were considered defaulted TDRs as they were more than 90 days past due at September 30, 2014. Default occurs when a loan is 90 days or more past due, transferred to nonaccrual or charged-off, and is within twelve months of restructuring.

 

The following table presents the Company’s nonaccrual loans at September 30, 2015 and December 31, 2014. This table excludes performing troubled debt restructurings.

 

 27 

 

 

   September 30, 2015   December 31, 2014 
         
One-to-four family residential  $913,850   $994,855 
Commercial real estate   864,422    932,578 
Agricultural real estate   -    122,841 
Home equity   117,232    120,698 
Commercial loans   12,856    22,438 
Agricultural loans   -    - 
Consumer loans   189,651    70,643 
           
Total  $2,098,011   $2,264,053 

 

6.INVESTMENTS

 

The amortized cost and approximate fair value of securities, all of which are classified as available-for-sale, are as follows:

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized     
   Cost   Gains   Losses   Fair Value 
September 30, 2015:                    
U.S. government and agencies  $14,030,762   $89,943   $(41,882)  $14,078,823 
Mortgage-backed securities (government-sponsored enterprises - residential)   26,731,605    419,994    (42,468)   27,109,131 
Municipal bonds   46,044,137    1,142,148    (416,832)   46,769,453 
   $86,806,504   $1,652,085   $(501,182)  $87,957,407 
                     
December 31, 2014:                    
U.S. government and agencies  $10,031,683   $65,328   $(138,738)  $9,958,273 
Mortgage-backed securities (government-sponsored enterprises - residential)   41,196,695    433,757    (210,531)   41,419,921 
Municipal bonds   44,378,515    1,457,977    (529,789)   45,306,703 
   $95,606,893   $1,957,062   $(879,058)  $96,684,897 

 

The amortized cost and fair value of available-for-sale securities at September 30, 2015, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   Amortized   Fair 
   Cost   Value 
Within one year  $735,352   $743,643 
More than one year to five years   9,759,557    10,023,269 
More than five years to ten years   30,675,846    30,988,301 
After ten years   18,904,144    19,093,063 
    60,074,899    60,848,276 
Mortgage-backed securities (government-sponsored enterprises - residential)   26,731,605    27,109,131 
   $86,806,504   $87,957,407 

 

 28 

 

 

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $21,325,000 at September 30, 2015 and $21,122,000 at December 31, 2014.

 

The carrying value of securities sold under agreement to repurchase amounted to $10,634,000 at September 30, 2015 and $9,165,000 at December 31, 2014. At September 30, 2015, we had $6,538,000 of repurchase agreements secured by mortgage backed securities, $1,131,000 in repurchase agreements secured by U.S. government agency bonds, and $988,000 in repurchase agreements secured by time deposits in other banks. All of our repurchase agreements mature overnight. The right of offset for a repurchase agreement resembles a secured borrowing, whereby the collateral pledged by the Company would be used to settle the fair value of the repurchase agreement should the Company be in default. The collateral is held by the Company in a segregated custodial account. In the event the collateral fair value falls below stipulated levels, the Company will pledge additional securities. The Company closely monitors collateral levels to ensure adequate levels are maintained.

 

Gross gains of $55,000 and $138,000 and gross losses of $0 resulting from sales of available-for-sale securities were realized during the three months ended September 30, 2015 and 2014, respectively. Gross gains of $299,000 and $320,000 and gross losses of $32,000 and $20,000 resulting from sales of available-for-sale securities were realized during the nine months ended September 30, 2015 and 2014, respectively.

 

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at September 30, 2015 and December 31, 2014 were $28,398,000, and $40,587,000, respectively, which were approximately 32% and 42% of the Company’s available-for-sale investment portfolio.

 

Management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

 

The following table shows the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous loss position, at September 30, 2015 and December 31, 2014.

 

 29 

 

 

   Less Than Twelve Months   Twelve Months or More   Total 
   Gross       Gross       Gross     
   Unrealized   Fair   Unrealized   Fair   Unrealized   Fair 
   Losses   Value   Losses   Value   Losses   Value 
September 30, 2015:                              
U.S. government agencies  $(29,654)  $1,866,246   $(12,228)  $3,593,422   $(41,882)  $5,459,668 
Mortgage-backed securities (government sponsored enterprises - residential)   (36,097)   4,517,474    (6,371)   2,262,601    (42,468)   6,780,075 
Municipal bonds   (260,234)   6,492,453    (156,598)   9,666,253   $(416,832)  $16,158,706 
Total  $(325,985)  $12,876,173   $(175,197)  $15,522,276   $(501,182)  $28,398,449 
                               
December 31, 2014:                              
U.S. government agencies  $(28,208)  $2,955,829   $(110,530)  $3,949,940   $(138,738)  $6,905,769 
Mortgage-backed securities (government sponsored enterprises - residential)   (13,358)   2,061,203    (197,173)   13,725,099    (210,531)   15,786,302 
Municipal bonds   (44,654)   3,953,168    (485,135)   13,942,169    (529,789)   17,895,337 
Total  $(86,220)  $8,970,200   $(792,838)  $31,617,208   $(879,058)  $40,587,408 

 

The unrealized losses on the Company’s investments in municipal bonds, U.S. government agencies, and mortgage-backed securities were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2015 and December 31, 2014.

 

7.ACCUMULATED OTHER COMPREHENSIVE INCOME

 

The components of accumulated other comprehensive income, included in stockholders’ equity, are as follows:

 

   September 30, 2015   December 31, 2014 
Net unrealized gains on securities available-for-sale  $1,150,903   $1,078,004 
Tax effect   (391,307)   (366,521)
Net-of-tax amount  $759,596   $711,483 

 

8.CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (AOCI) BY COMPONENT

 

Amounts reclassified from AOCI and the affected line items in the statements of income during the three and nine months ended September 30, 2015 and 2014, were as follows:

 

 30 

 

 

   Amounts Reclassified    
   from AOCI    
   Three Months Ended   Affected Line Item in the
   September 30, 2015   September 30, 2014   Statements of Income
Unrealized gains on securities available-for-sale securities  $55,125   $138,253   Net realized gains on sales of available-for-sale securities
    55,125    138,253    
Tax effect   (18,742)   (47,006)  Income taxes
Total reclassification out of AOCI  $36,383   $91,247   Net reclassified amount

 

   Amounts Reclassified    
   from AOCI    
   Nine months ended   Affected Line Item in the
   September 30, 2015   September 30, 2014   Statements of Income
Unrealized gains on securities available-for-sale securities  $267,201   $299,835    Net realized gains on sales of available-for-sale securities
    267,201    299,835    
Tax effect   (90,848)   (101,944)  Income taxes
Total reclassification out of AOCI  $176,353   $197,891   Net reclassified amount

 

9.DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

 

Level 1        Quoted prices in active markets for identical assets or liabilities

 

Level 2        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 for substantially the full term of the assets or liabilities

 

Level 3        Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

 

Recurring Measurements

The following table presents the fair value measurements of assets recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2015 and December 31, 2014:

 

 31 

 

 

       September 30, 2015 
       Fair Value Measurements Using 
       Quoted Prices         
       in Active   Significant     
       Markets  for   Other   Significant 
       Identical   Observable   Unobservable 
       Assets   Inputs   Inputs 
   Fair Value   (Level 1)   (Level 2)   (Level 3) 
U.S. Government and agencies  $14,078,823   $-   $14,078,823   $- 
Mortgage-backed securities (Government sponsored enterprises - residential)   27,109,131    -    27,109,131    - 
Municipal bonds   46,769,453    -    46,769,453    - 

 

       December 31, 2014 
       Fair Value Measurements Using 
       Quoted Prices         
       in Active   Significant     
       Markets  for   Other   Significant 
       Identical   Observable   Unobservable 
       Assets   Inputs   Inputs 
   Fair Value   (Level 1)   (Level 2)   (Level 3) 
U.S. Government and agencies  $9,958,273   $-   $9,958,273   $- 
Mortgage-backed securities (Government sponsored enterprises - residential)   41,419,921    -    41,419,921    - 
Municipal bonds   45,306,703    -    45,306,703    - 

 

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the nine month period ended September 30, 2015.

 

Available-for-Sale Securities - Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections, and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

 

Nonrecurring Measurements

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2015 and December 31, 2014:

 

 32 

 

 

       September 30, 2015 
       Fair Value Measurements Using 
       Quoted Prices         
       in Active   Significant     
       Markets  for   Other   Significant 
       Identical   Observable   Unobservable 
       Assets   Inputs   Inputs 
   Fair Value   (Level 1)   (Level 2)   (Level 3) 
Impaired loans (collateral dependent)  $991,639   $-   $-   $991,639 
Foreclosed assets   339,554    -    -    339,554 

 

 

       December 31, 2014 
       Fair Value Measurements Using 
       Quoted Prices         
       in Active   Significant     
       Markets  for   Other   Significant 
       Identical   Observable   Unobservable 
       Assets   Inputs   Inputs 
   Fair Value   (Level 1)   (Level 2)   (Level 3) 
Impaired loans (collateral dependent)  $1,147,400   $-   $-   $1,147,400 

 

 

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

 

Impaired Loans (Collateral Dependent) - The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.

 

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary. Appraisals are reviewed for accuracy and consistency. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral.

 

Foreclosed Assets – The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.

 

 33 

 

 

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary. Appraisals are reviewed for accuracy and consistency. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral.

 

Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements (dollars in thousands).

 

   Fair Value at
9/30/15
   Valuation
Technique
  Unobservable Inputs  Range (Weighted
Average)
              
Foreclosed assets  $339,554   Market comparable properties  Comparability adjustments (%)  30%
               
Collateral-dependent impaired loans   991,639   Market comparable properties  Marketability discount  25% – 50% (40%)
 

 

   Fair Value at
12/31/14
   Valuation
Technique
  Unobservable Inputs  Range (Weighted
Average)
               
Collateral-dependent impaired loans   1,147,400   Market comparable properties  Marketability discount  20% – 30% (25%)
 

 

 34 

 

 

Fair Value of Financial Instruments

The following table presents estimated fair values of the Company’s other financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2015 and December 31, 2014:

 

       September 30, 2015 
       Fair Value Measurements Using 
       Quoted Prices   Significant     
       in Active   Other   Significant 
       Markets for   Observable   Unobservable 
   Carrying   Identical Assets   Inputs   Inputs 
   Amount   (Level 1)   (Level 2)   (Level 3) 
Financial Assets                    
Cash and cash equivalents  $3,646,964   $3,646,964   $-   $- 
Interest-earning time deposits   2,474,000    -    2,474,000    - 
Other investments   63,809    -    63,809    - 
Loans held for sale   823,000    -    823,000    - 
Loans, net of allowance for loan losses   189,512,107    -    -    189,267,501 
Federal Home Loan Bank stock   1,113,800    -    1,113,800    - 
Interest receivable   2,728,566    -    2,728,566    - 
Financial Liabilities                    
Deposits   233,343,288    -    150,752,422    84,019,957 
Short-term borrowings   19,656,929    -    14,656,929    4,998,917 
Advances from borrowers for taxes and insurance   509,728    -    509,728    - 
Interest payable   127,900    -    127,900    - 
Unrecognized financial instruments (net of contract amount)                    
Commitments to originate loans   -    -    -    - 
Letters of credit   -    -    -    - 
Lines of credit   -    -    -    - 

 

 35 

 

 

       December 31, 2014 
       Fair Value Measurements Using 
       Quoted Prices   Significant     
       in Active   Other   Significant 
       Markets for   Observable   Unobservable 
   Carrying   Identical Assets   Inputs   Inputs 
   Amount   (Level 1)   (Level 2)   (Level 3) 
Financial Assets                    
Cash and cash equivalents  $9,611,638   $9,611,638   $-   $- 
Other investments   73,766    -    73,766    - 
Loans held for sale   235,600    -    235,600    - 
Loans, net of allowance for loan losses   184,718,612    -    -    184,573,401 
Federal Home Loan Bank stock   1,113,800    -    1,113,800    - 
Interest receivable   1,713,243    -    1,713,243    - 
Financial Liabilities                    
Deposits   245,941,562    -    151,341,999    96,956,400 
Short-term borrowings   13,821,730    -    8,821,730    4,996,109 
Advances from borrowers for taxes and insurance   962,762    -    962,762    - 
Interest payable   166,052    -    166,052    - 
Unrecognized financial instruments (net of contract amount)                    
Commitments to originate loans   -    -    -    - 
Letters of credit   -    -    -    - 
Lines of credit   -    -    -    - 

 

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying condensed consolidated balance sheets at amounts other than fair value.

 

Cash and Cash Equivalents, Interest-Earning Time Deposits in Banks, Interest Receivable, Federal Home Loan Bank Stock, and Other Investments - The carrying amount approximates fair value.

 

Loans Held for Sale - For homogeneous categories of loans, such as mortgage loans held for sale, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics.

 

Loans - The fair value of loans is estimated by discounting the future cash flows using the market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations.

 

Deposits - Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

 

Short-term Borrowings, Interest Payable, and Advances from Borrowers for Taxes and Insurance - The carrying amount approximates fair value.

 

 36 

 

 

Commitments to Originate Loans, Letters of Credit, and Lines of Credit - The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.

 

10.MORTGAGE SERVICING RIGHTS

 

Activity in the balance of mortgage servicing rights, measured using the amortization method, for the nine month period ended September 30, 2015 and the year ended December 31, 2014 was as follows:

 

   September 30, 2015   December 31, 2014 
Balance, beginning of period  $632,634   $673,576 
Servicing rights capitalized   57,431    53,859 
Amortization of servicing rights   (96,897)   (111,224)
Change in valuation allowance   5,977    16,423 
Balance, end of period  $599,145   $632,634 

 

Activity in the valuation allowance for mortgage servicing rights for the nine month period ended September 30, 2015 and the year ended December 31, 2014 was as follows:

 

   September 30, 2015   December 31, 2014 
Balance, beginning of period  $56,969   $73,392 
Additions   -    - 
Reductions   (5,977)   (16,423)
Balance, end of period  $50,992   $56,969 

 

11.INCOME TAXES

 

A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense for the nine months ended September 30, 2015 and 2014 is shown below.

 

   September 30, 2015   September 30, 2014 
Computed at the statutory rate (34%)  $1,077,901   $1,044,204 
Increase (decrease) resulting from          
Tax exempt interest   (332,888)   (382,400)
State income taxes, net   147,443    137,370 
Increase in cash surrender value   (45,055)   (47,904)
Other, net   839    (864)
           
Actual tax expense  $848,240   $750,406 

 

 37 

 

 

12.COMMITMENTS AND CONTINGENCIES

 

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers in the way of commitments to extend credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. Substantially all of the Company's loans are to borrowers located in Cass, Morgan, Macoupin, Montgomery, and surrounding counties in Illinois.

 

 38 

 

 

JACKSONVILLE BANCORP, INC.

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

 

Forward Looking Statements

This Form 10-Q contains certain “forward-looking statements” which may be identified by the use of words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors that could cause actual results to differ materially from these estimates and most other statements that are not historical in nature. These factors include, but are not limited to, the effect of disruptions in the financial markets, changes in interest rates, general economic conditions, deposit flows, demand for mortgage and other loans, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation, including the Dodd-Frank Act; and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing of products and services. We caution readers not to place undue reliance on forward-looking statements. The Company disclaims any obligation to revise or update any forward-looking statements contained in this Form 10-Q to reflect future events or developments.

 

Critical Accounting Policies and Use of Significant Estimates

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

 

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

 

 39 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

Basel III

On July 2, 2013, the Board of Governors of the Federal Reserve System announced its approval of the final rule to implement the Basel III regulatory capital reforms, among other changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Federal Deposit Insurance Corporation adopted the new rule on July 9, 2013. The approved rule includes a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%, as well as a capital conservation buffer of 2.5% of risk-weighted assets. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking institutions. The new rule became applicable to Jacksonville Savings Bank beginning in January 2015. The capital conservation buffer will be phased in beginning in the first quarter of 2016 at 0.625% and will be fully phased in beginning in the first quarter of 2019.

 

 40 

 

 

Financial Condition

 

September 30, 2015 Compared to December 31, 2014

 

Total assets at September 30, 2015 were $306.3 million, a decrease of $5.6 million, or 1.8%, from $311.9 million at December 31, 2014. The decrease in total assets was primarily due to decreases of $14.3 million in mortgage-backed securities and $6.0 million in cash and cash equivalents, partially offset by increases of $5.6 million in investment securities and $4.8 million in net loans.

 

Cash and cash equivalents decreased $6.0 million to $3.6 million at September 30, 2015, from $9.6 million at December 31, 2014. Investment and mortgage-backed securities were $88.0 million at September 30, 2015, a decrease of $8.7 million, or 9.0%, from $96.7 million at December 31, 2014. The decrease was primarily due to a decrease of $14.3 million in mortgage-backed securities. As cash was received from sales and payments on investment and mortgage-backed securities, a portion of the funds were used to fund deposit withdrawals.

 

Net loans receivable (excluding loans held for sale) increased $4.8 million, or 2.6%, to $189.5 million at September 30, 2015 from $184.7 million at December 31, 2014. The increase in loans was due to increases of $2.6 million in agricultural real estate loans, $2.4 million in commercial real estate loans, and $1.6 million in residential real estate loans. The increase in net loans was partially offset by a decrease of $4.3 million in commercial business loans, reflecting payments on lines of credit.

 

At September 30, 2015 and December 31, 2014, goodwill totaled $2.7 million. At these dates, our goodwill was not impaired.

 

Total deposits decreased $12.6 million, or 5.1%, to $233.3 million at September 30, 2015 from $245.9 million at December 31, 2014. The decrease was primarily due to a $12.0 million decrease in time deposits, reflecting an industry wide trend as customers have withdrawn funds or shown a preference for shorter-term deposits. Other borrowings, which consisted of $11.0 million in short-term FHLB advances and $8.7 million in overnight repurchase agreements at September 30, 2015, increased a total of $5.8 million, or 42.2%, from December 31, 2014. The FHLB advances have been used as a low-cost, short-term source of funding. The repurchase agreements are a cash management service provided to our commercial deposit customers.

 

Total stockholders’ equity increased $1.7 million, or 3.8%, to $46.7 million at September 30, 2015, compared to $45.0 million at December 31, 2014. The increase in stockholders’ equity was the result of $2.3 million in net income, partially offset by $624,000 in stock repurchases and the payment of $424,000 in cash dividends. Accumulated other comprehensive income increased $48,000 primarily due to an increase in unrealized gains, net of tax, on available-for-sale securities reflecting changes in market prices for securities in our portfolio due to a decrease in market interest rates. Accumulated other comprehensive income does not include changes in the fair value of other financial instruments included in the condensed consolidated balance sheet.

 

Results of Operations

 

Comparison of Operating Results for the Three Months Ended September 30, 2015 and 2014

 

General: Net income for the three months ended September 30, 2015 was $699,000, or $0.40 per common share, basic, and $0.39 per common share, diluted, compared to net income of $856,000, or $0.48 per common share, basic and $0.47 per common share, diluted, for the three months ended September 30, 2014. The $157,000 decrease in net income during the third quarter of 2015, as compared to the third quarter of 2014, reflected decreases of $30,000 in net interest income and $32,000 in noninterest income and increases of $110,000 in noninterest expense and $15,000 in provision for loan losses, partially offset by a decrease of $30,000 in income taxes.

 

 41 

 

 

Interest Income: Total interest income for the three months ended September 30, 2015 decreased $116,000, or 3.9%, to $2.8 million from $2.9 million during the same period of 2014. The decrease in interest income reflected decreases of $35,000 in interest income on loans, $11,000 in interest income on investment securities, and $80,000 in interest income on mortgage-backed securities, partially offset by an increase of $10,000 in interest income on other interest-earning assets.

 

Interest income on loans decreased $35,000 to $2.3 million during the third quarter of 2015, as compared to the third quarter of 2014, primarily due to a decrease in the average yield of loans. The average yield decreased 38 basis points to 4.76% during the third quarter of 2015, compared to 5.14% during the third quarter of 2014, due to the continuing low interest rate environment. The average balance of the loan portfolio increased $11.3 million to $190.9 million during the third quarter of 2015, as compared to the third quarter of 2014. The increase in the average balance of the loan portfolio reflected increases in the average balance of agricultural real estate and commercial real estate loans due to an increase in new loan originations.

 

Interest income on investment securities decreased $11,000 to $427,000 during the third quarter of 2015 compared to the third quarter of 2014. The decrease reflected an 11 basis points decrease in the average yield of investment securities to 2.87% during the third quarter of 2015 from 2.98% during the third quarter of 2014, due to the continuing low interest rate environment. The majority of our investment portfolio consists of municipal bonds which are exempt from federal taxation, resulting in a higher tax-equivalent yield. The decrease in the average yield was partially offset by a $745,000 increase in the average balance of the investment securities portfolio to $59.5 million during the third quarter of 2015, compared to $58.7 million during the third quarter of 2014 due to increased purchases of municipal bonds.

 

Interest income on mortgage-backed securities decreased $80,000 to $119,000 during the third quarter of 2015, compared to the third quarter of 2014. The decrease reflected a $16.5 million decrease in the average balance of mortgage-backed securities to $30.3 million during the third quarter of 2015, compared to $46.8 million during the third quarter of 2014. The decrease in the average balance of mortgage-backed securities reflected the use of sales and payment proceeds to fund new loan originations and the decrease in deposits during this same time period. The average yield of mortgage-backed securities decreased 12 basis points to 1.57% during the third quarter of 2015, compared to 1.69% during the third quarter of 2014.

 

Interest income on other interest-earning assets, consisting of interest-earning demand and time deposit accounts and federal funds sold, increased $10,000 during the third quarter of 2015, compared to the third quarter of 2014. The average yield on other interest-earning assets increased 87 basis points to 0.94% during the third quarter of 2015 from 0.07% during the third quarter of 2014. The average balance of these accounts increased $2.0 million to $4.4 million for the three months ended September 30, 2015 compared to $2.4 million for the three months ended September 30, 2014. The increase in the average yield and average balance reflected an increase in the average balance of higher-yielding time deposit accounts with other banks during this same time frame.

 

Interest Expense: Total interest expense decreased $86,000, or 24.4%, to $267,000 during the three months ended September 30, 2015 compared to $353,000 during the three months ended September 30, 2014. The lower interest expense reflected a $91,000 decrease in the cost of deposits, partially offset by a $5,000 increase in the cost of other borrowings.

 

Interest expense on deposits decreased $91,000 to $260,000 during the third quarter of 2015 compared to $351,000 during the third quarter of 2014. The decrease in interest expense on deposits was due to decreases in the average balance and average rate paid on our deposits during the third quarter of 2015. The average balance of deposits decreased $14.6 million to $206.4 million during the third quarter of 2015, compared to $221.0 million during the third quarter of 2014. The decrease reflected a $16.8 million decrease in the average balance of time deposit accounts, partially offset by a $2.2 million increase in the average balance of lower cost transaction accounts. The average rate paid on deposits decreased 13 basis points to 0.50% during the third quarter of 2015 from 0.63% during the third quarter of 2014. The decrease reflected the low rate environment, as well as a change in the composition of our deposits to lower-cost transaction accounts from higher-cost time deposits.

 

 42 

 

 

Interest paid on borrowed funds, which consisted of overnight repurchase agreements and FHLB advances, increased $5,000 to $8,000 during the third quarter of 2015. The average balance of borrowed funds increased $7.2 million to $18.2 million during the third quarter of 2015 compared to $11.0 million during the third quarter of 2014, reflecting the use of overnight FHLB advances during 2015. The average rate paid on borrowed funds increased to 0.17% during the third quarter of 2015 compared to 0.10% during the third quarter of 2014.

 

Net Interest Income. As a result of the changes in interest income and interest expense noted above, net interest income decreased by $30,000, or 1.2%, to $2.6 million during the three months ended September 30, 2015, compared to the three months ended September 30, 2014. Our net interest margin decreased to 3.59% during the third quarter of 2015 from 3.61% during the third quarter of 2014. Our interest rate spread remained stable at 3.49% during the third quarters of 2015 and 2014. Our ratio of interest earning assets to interest bearing liabilities was 1.27x and 1.24x during the three months ended September 30, 2015 and 2014, respectively.

 

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

 

The provision for loan losses increased $15,000 to $45,000 during the third quarter of 2015, compared to $30,000 during the third quarter of 2014, reflecting growth in the loan portfolio. The allowance for loan losses decreased $39,000 to $2.9 million at September 30, 2015 from $3.0 million at December 31, 2014. Net charge-offs decreased to $50,000 during the third quarter of 2015, compared to $380,000 during the third quarter of 2014. Loans delinquent 30 days or more decreased to $2.0 million, or 1.02% of total loans, as of September 30, 2015, from $2.5 million, or 1.36% of total loans, as of December 31, 2014. Loans delinquent 30 days or more totaled $2.7 million, or 1.47% of total loans at September 30, 2014.

 

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

 

 43 

 

 

   September 30, 2015   December 31, 2014 
Non-accruing loans:          
One-to-four family residential  $913,850   $994,855 
Commercial real estate   864,422    932,578 
Agricultural real estate   -    122,841 
Commercial business   12,856    22,438 
Home equity   117,232    120,698 
Consumer   189,651    70,643 
Total  $2,098,011   $2,264,053 
           
Accruing loans delinquent more than 90 days:          
Total  $-   $- 
           
Foreclosed assets:          
One-to-four family residential   225,674    39,478 
Commercial real estate   113,880    137,193 
Total  $339,554   $176,671 
           
Total nonperforming assets  $2,437,565   $2,440,724 
           
Total nonperforming loans as a percentage of total loans   1.09%   1.21%
Total nonperforming assets as a percentage of total assets   0.80%   0.78%

 

Nonperforming assets decreased $3,000 to $2.4 million, or 0.80% of total assets, as of September 30, 2015, compared to $2.4 million, or 0.78% of total assets, as of December 31, 2014. The slight decrease in nonperforming assets was due to a decrease of $166,000 in nonperforming loans, offset by an increase of $163,000 in foreclosed assets.

 

The following table shows the aggregate principal amount of potential problem credits on the Company’s watch list at September 30, 2015 and December 31, 2014. All nonaccrual loans are automatically placed on the watch list. The $2.1 million increase in Special Mention credits during 2015 reflected the addition of four borrowers who are all performing as agreed. The decrease in Substandard credits reflected payoffs of $338,000 and transfers to foreclosed assets of $209,000 with related charge-offs of $129,000 during the nine months ended September 30, 2015.

 

   September 30, 2015   December 31, 2014 
           
Special Mention credits  $4,248,280   $2,096,634 
Substandard credits   4,870,570    5,453,825 
Total watch list credits  $9,118,850   $7,550,459 

 

 44 

 

 

Non-Interest Income: Non-interest income decreased $32,000, or 3.2%, to $992,000 during the three months ended September 30, 2015 from $1.0 million during the same period in 2014. The decrease in non-interest income resulted primarily from decreases of $83,000 in gains on the sales of available-for-sale securities and $13,000 in service charges on deposits, partially offset by an increase of $80,000 in commission income. The decrease in gains on the sales of securities reflected a lower volume of sales of $6.8 million during the third quarter of 2015 compared to $9.6 million during the same period of 2014. Securities sold during the third quarter of 2015 were lower yielding bonds which generated smaller gains as compared to those sold during the third quarter of 2014. The decrease in service charges on deposits reflected a decrease in fees related to nonsufficient funds. Commission income benefitted from a growth in accounts and improved market conditions.

 

Non-Interest Expense: Total non-interest expense increased $110,000, or 4.4%, to $2.6 million for the three months ended September 30, 2015. The increase was primarily due to increases of $64,000 in compensation and benefits expense, $27,000 in ATM and bank card expense, $23,000 in data processing and telecommunications expense, and $37,000 in other noninterest expense, partially offset by a decrease of $55,000 in professional fees. The increase in salaries and benefits expense reflected normal cost increases. The increase in ATM and bank card expense reflected processing fees related to a higher transaction volume and our conversion to chip cards during the third quarter of 2015. Data processing fees were impacted by non-recurring expenses related to the redesign of our company website. The decrease in professional fees was due to a decrease in non-recurring legal and consulting expenses incurred during the three months ended September 30, 2014.

 

Income Taxes: The provision for income taxes decreased $30,000 to $230,000 during the third quarter of 2015 compared to the same period of 2014. The decrease in the income tax provision reflected a decrease in taxable income. The effective tax rate was 24.8% and 23.3% during the three months ended September 30, 2015 and 2014, respectively.

 

Comparison of Operating Results for the Nine Months Ended September 30, 2015 and 2014

 

General: Net income during the nine months ended September 30, 2015 was $2,322,000, or $1.31 per common share, basic, and $1.30 per common share, diluted, compared to net income of $2,321,000, or $1.29 per common share, basic and diluted, during the nine months ended September 30, 2014. The $1,000 increase in net income reflected an increase of $121,000 in noninterest income and a decrease of $138,000 in noninterest expense, offset by a decrease of $140,000 in net interest income and increases of $20,000 in the provision for loan losses and $98,000 in income taxes.

 

Interest Income: Total interest income during the nine months ended September 30, 2015 decreased $379,000, or 4.2%, to $8.6 million from $9.0 million during the same period of 2014. The decrease in interest income reflected decreases of $358,000 in interest income on mortgage-backed securities and $130,000 in interest income on investment securities, partially offset by increases of $88,000 in interest income on loans and $21,000 in interest income on other interest-earnings assets.

 

Interest income on loans increased $88,000 to $7.0 million during the nine months ended September 30, 2015, compared to the same period of 2014. The increase in interest income on loans was primarily due to an increase in the average balance of loans. The average balance of the loan portfolio increased $8.8 million to $188.3 million during the first nine months of 2015 from $179.5 million during the first nine months of 2014. The increase in the average balance of the loan portfolio reflected increases in the average balance of agricultural real estate loans and commercial real estate loans due to an increase in new loan originations. The average yield on loans decreased to 4.93% during the first nine months of 2015 from 5.11% during the first nine months of 2014. The decrease in the average yield on loans reflected lower market rates of interest and the competitive lending environment.

 

Interest income on investment securities decreased $130,000 to $1.2 million during the nine months ended September 30, 2015 from the same period of 2014. The decrease in interest income reflected a $4.5 million decrease in the average balance of the investment portfolio to $55.2 million during the first nine months of 2015, as compared to the prior year period. The decrease in the average balance of investment securities reflected the use of investment proceeds to fund new loan originations and deposit withdrawals. The average yield of investment securities decreased to 2.90% during the first nine months of 2015 from 2.98% for the first nine months of 2014. The majority of our investment portfolio consists of municipal bonds which are exempt from federal taxation, resulting in a higher tax-equivalent yield.

 

 45 

 

 

Interest income on mortgage-backed securities decreased $358,000 to $405,000 during the nine months ended September 30, 2015, compared to the same period of 2014. The decrease reflected decreases in the average balance and average yield of mortgage-backed securities. The average balance of mortgage-backed securities decreased $14.9 million to $33.5 million during the first nine months of 2015, reflecting the use of sales and payment proceeds for the origination of new loans and to fund deposit withdrawals. The average yield of mortgage-backed securities decreased 49 basis points to 1.61% for the first nine months of 2015, compared to 2.10% for the first nine months of 2014. The average yield of mortgage-backed securities was negatively impacted by higher premium amortization resulting from faster national prepayment speeds on mortgage-backed securities.

 

Interest income on other interest-earning assets, consisting of interest-earning demand and time deposit accounts and federal funds sold, increased $21,000 to $22,000 during the first nine months of 2015, compared to the same period of 2014. The average yield on other interest-earning assets increased 36 basis points to 0.42% during the first nine months of 2015 from 0.06% during the first nine months of 2014. The average balance of other interest-earning assets increased $4.6 million to $7.1 million during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. The increase in the average yield and average balance reflected an increase in the average balance of higher-yielding time deposits with other banks during this same time frame.

 

Interest Expense: Total interest expense decreased $239,000, or 21.5%, to $875,000 during the nine months ended September 30, 2015 compared to $1.1 million during the nine months ended September 30, 2014. The lower interest expense reflected a $249,000 decrease in the cost of deposits, partially offset by an increase of $10,000 in the cost of other borrowings.

 

Interest expense on deposits decreased $249,000 to $857,000 for the nine months ended September 30, 2015 compared to $1.1 million for the nine months ended September 30, 2014. The decrease in interest expense on deposits was primarily due to a decrease of $13.7 million in the average balance of deposits to $210.3 million for the first nine months of 2015 compared to $224.0 million for the first nine months of 2014. The decrease reflected a $16.2 million decrease in the average balance of time deposit accounts, partially offset by a $2.5 million increase in the average balance of lower cost transaction accounts. The average rate paid on deposits decreased 12 basis points to 0.54% during the first nine months of 2015 from 0.66% during the first nine months of 2014, as a result of the low interest rate environment. The decrease also reflected lower average deposit balances, as well as a change in the composition of our deposits to lower-cost transaction accounts from higher-cost time deposits.

 

Interest paid on borrowed funds, which consisted of overnight repurchase agreements and FHLB advances, increased $10,000 to $18,000 during the first nine months of 2015, compared to the same period of 2014. The average balance of borrowed funds increased $2.7 million to $12.2 million during the first nine months of 2015 reflecting the use of overnight funds from the FHLB, compared to the same period of 2014. The average rate paid on borrowed funds increased to 0.20% during the first nine months of 2015 compared to 0.12% during the first nine months of 2014.

 

Net Interest Income. As a result of the changes in interest income and interest expense noted above, net interest income decreased by $140,000, or 1.8%, to $7.7 million for the nine months ended September 30, 2015 from $7.9 million for the nine months ended September 30, 2014. Our net interest margin increased to 3.51% for the first nine months of 2015 from 3.49% for the first nine months of 2014. Our interest rate spread increased to 3.62% during the first nine months of 2015 from 3.61% during the first nine months of 2014.

 

Provision for Loan Losses: The provision for loan losses is determined by management as the amount needed to replenish the allowance for loan losses, after net charge-offs have been deducted, to a level considered adequate to absorb inherent losses in the loan portfolio, in accordance with accounting principles generally accepted in the United States of America. The following table shows the activity in the allowance for loan losses for the nine months ended September 30, 2015 and 2014.

 

 46 

 

 

   Nine Months Ended 
   September 30, 2015   September 30, 2014 
         
Balance at beginning of period  $2,956,264   $3,406,434 
Charge-offs:          
One-to-four family residential   161,267    100,319 
Commercial real estate   27,464    93,474 
Commercial business   -    285,410 
Home equity   5,707    5,403 
Consumer   26,133    25,781 
Total   220,571    510,387 
Recoveries:          
One-to-four family residential   39,822    1,260 
Commercial real estate   16,532    168 
Commercial business   111    31 
Home equity   10,063    1,575 
Consumer   5,367    2,383 
Total   71,895    5,417 
Net loan charge-offs   148,676    504,970 
Additions charged to operations   110,000    90,000 
Balance at end of period  $2,917,588   $2,991,464 

 

The allowance for loan losses decreased $74,000 to $2.9 million at September 30, 2015, from $3.0 million at September 30, 2014. The provision increased $20,000 to $110,000 during the first nine months of 2015, compared to $90,000 during the first nine months of 2014. Net charge-offs equaled $149,000 during the first nine months of 2015, compared to $505,000 during the first nine months of 2014.

 

Non-Interest Income: Non-interest income increased $121,000, or 4.1%, to $3.1 million for the nine months ended September 30, 2015. The increase in non-interest income resulted primarily from increases of $133,000 in commission income and $26,000 in net income from mortgage banking operations, partially offset by decreases of $33,000 in gains on the sales of securities and $31,000 in service charges on deposits. The increase in commission income reflected improved market conditions and account activity during 2015. Net income on mortgage banking operations increased due to a higher volume of loan sales during 2015, as we sold $12.8 million of one-to-four family residential real estate loans to the secondary market during the first nine months of 2015, compared to $10.1 million during the same period of 2014. The higher volume of sales reflected an increased volume of mortgage originations, which are affected by changes in market interest rates. Gains on the sales of securities decreased due to the sale of lower yielding bonds during the first nine months of 2015, which generated smaller gains as compared to those sold during the same period of 2014. The decrease in service charges on deposits reflected a decrease in fees related to nonsufficient funds.

 

Non-Interest Expense: Total non-interest expense decreased $138,000, or 1.8%, to $7.5 million for the nine months ended September 30, 2015 compared to the same period of 2014. The decrease in non-interest expense consisted primarily of a decrease of $328,000 in professional fees, partially offset by increases of $151,000 in salaries and benefits expense and $39,000 in data processing and telecommunications expense. The decrease in professional fees reflected a decrease in non-recurring legal and consulting expenses incurred during the nine months ended September 30, 2014. Data processing fees were impacted by non-recurring expenses related to the redesign of our company website. The increase in salaries and benefits expense reflected normal cost increases.

 

 47 

 

 

Income Taxes: The provision for income taxes increased $98,000 to $848,000 during the first nine months of 2015 compared to the same period of 2014. The increase in the income tax provision reflected a higher level of taxable income. The effective tax rate was 26.8% and 24.4% during the nine months ended September 30, 2015 and 2014, respectively.

 

Liquidity and Capital Resources

 

The Company’s most liquid assets are cash and cash equivalents. The levels of these assets are dependent on the Company’s operating, financing, and investing activities. At September 30, 2015 and December 31, 2014, cash and cash equivalents totaled $3.6 million and $9.6 million, respectively. The Company’s primary sources of funds include principal and interest repayments on loans (both scheduled payments and prepayments), maturities of investment securities and principal repayments from mortgage-backed securities (both scheduled payments and prepayments). During the nine months ended September 30, 2015, the most significant sources of funds have been calls and sales of investment securities, principal repayments on loans and mortgage-backed securities, and other borrowings. These funds have been used primarily for purchases of U.S. Agency, municipal and mortgage-backed securities and the funding of new loans.

 

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

 

Liquidity management is both a short- and long-term responsibility of management. The Company adjusts its investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) projected purchases of investment and mortgage-backed securities, (iii) expected deposit flows, (iv) yields available on interest-earning deposits, and (v) liquidity of its asset/liability management program. Excess liquidity is generally invested in interest-earning overnight deposits and other short-term U.S. agency obligations. If the Company requires funds beyond its ability to generate them internally, it has the ability to borrow funds from the FHLB. The Company may borrow from the FHLB under a blanket agreement which assigns all investments in FHLB stock as well as qualifying first mortgage loans equal to 150% of the outstanding balance as collateral to secure the amounts borrowed. This borrowing arrangement is limited to a maximum of 30% of the Company’s total assets or twenty times the balance of FHLB stock held by the Company. At September 30, 2015, the Company had $11.0 million in outstanding FHLB advances and approximately $75.0 million available to it under the above-mentioned borrowing arrangement.

 

The Company maintains minimum levels of liquid assets as established by the Board of Directors. The Company’s liquidity ratios at September 30, 2015 and December 31, 2014 were 33.2% and 37.6%, respectively. This ratio represents the volume of short-term liquid assets as a percentage of net deposits and borrowings due within one year.

 

The Company must also maintain adequate levels of liquidity to ensure the availability of funds to satisfy loan commitments. The Company anticipates that it will have sufficient funds available to meet its current commitments principally through the use of current liquid assets and through its borrowing capacity discussed above. The following table summarizes these commitments at September 30, 2015 and December 31, 2014.

 

   September 30, 2015   December 31, 2014 
         
Commitments to fund loans  $42,510,600   $34,733,962 
Standby letters of credit   110,000    255,340 

 

Quantitative measures established by applicable regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total, common equity, and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and Tier 1 capital (as defined) to average assets (as defined). Management believes that at September 30, 2015, the Bank met all its capital adequacy requirements.

 

 48 

 

 

Under Illinois law, Illinois-chartered savings banks are required to maintain a minimum core capital to total assets ratio of 3%. The Illinois Commissioner of Savings and Residential Finance (the “Commissioner”) is authorized to require a savings bank to maintain a higher minimum capital level if the Commissioner determines that the savings bank’s financial condition or history, management or earnings prospects are not adequate. If a savings bank’s core capital ratio falls below the required level, the Commissioner may direct the savings bank to adhere to a specific written plan established by the Commissioner to correct the savings bank’s capital deficiency, as well as a number of other restrictions on the savings bank’s operations, including a prohibition on the declaration of dividends by the savings bank’s board of directors. At September 30, 2015, the Bank’s core capital ratio was 13.22% of total average assets, which substantially exceeded the required amount.

 

The Bank is also required to maintain regulatory capital requirements imposed by the Federal Deposit Insurance Corporation. At September 30, 2015, minimum requirements and the Bank's actual ratios were as follows:

 

   September 30, 2015   Minimum 
   Actual   Required 
Tier 1 Capital to Average Assets   13.22%   4.00%
Common Equity Tier to Risk-Weighted Assets   18.47%   4.50%
Tier 1 Capital to Risk-Weighted Assets   18.47%   6.00%
Total Capital to Risk-Weighted Assets   19.72%   8.00%

 

Effect of Inflation and Changing Prices

 

The condensed consolidated financial statements and related financial data presented herein have been prepared in accordance with GAAP which require the measurement of financial position and operating results in terms of historical dollars, without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

 

 49 

 

 

The following table sets forth the average balances and interest rates (costs) on the Company’s assets and liabilities during the periods presented.

 

Consolidated Average Balance Sheet and Interest Rates 
(Dollars in thousands) 
   Three Months Ended September 30, 
   2015   2014 
   Average           Average         
   Balance   Interest   Yield/Cost   Balance   Interest   Yield/Cost 
                         
Interest-earnings assets:                              
Loans  $190,912   $2,274    4.76%  $179,576   $2,310    5.14%
Investment securities   59,494    427    2.87%   58,749    438    2.98%
Mortgage-backed securities   30,316    119    1.57%   46,864    198    1.69%
Other   4,430    10    0.94%   2,437    -    0.07%
Total interest-earning assets   285,152    2,830    3.97%   287,626    2,946    4.10%
                               
Non-interest earnings assets   20,971              21,007           
Total assets  $306,123             $308,633           
                               
Interest-bearing liabilities:                              
Interest-bearing checking  $38,153   $13    0.14%  $37,472   $14    0.15%
Savings accounts   40,021    20    0.20%   37,233    20    0.22%
Certificates of deposit   84,710    198    0.94%   101,515    287    1.13%
Money market savings   34,372    25    0.29%   35,955    26    0.29%
Money market deposits   9,163    3    0.15%   8,810    3    0.15%
Total interest-bearing deposits   206,419    259    0.50%   220,985    350    0.63%
Federal Home Loan Bank advances   9,687    6    0.24%   3,303    2    0.17%
Short-term borrowings   8,541    2    0.10%   7,708    1    0.07%
Total borrowings   18,228    8    0.17%   11,011    3    0.10%
Total interest-bearing liabilities   224,647    267    0.48%   231,996    353    0.61%
                               
Non-interest bearing liabilities   35,403              32,241           
Stockholders' equity   46,073              44,396           
                               
Total liabilities/stockholders' equity  $306,123             $308,633           
                               
Net interest income       $2,563             $2,593      
                               
Interest rate spread (average yield earned minus average rate paid)             3.49%             3.49%
                               
Net interest margin (net interest income divided by average interest-earning assets)             3.59%             3.61%

 

 50 

 

 

The following table sets forth the changes in rate and changes in volume of the Company’s interest earning assets and liabilities for the comparative three month periods.

 

Analysis of Volume and Rate Changes 
(In thousands) 
Three Months Ended September 30, 
   2015 Compared to 2014 
   Increase(Decrease) Due to 
   Rate   Volume   Net 
             
Interest-earnings assets:            
Loans  $(176)  $141   $(35)
Investment securities   (16)   5    (11)
Mortgage-backed securities   (14)   (66)   (80)
Other   9    1    10 
Total net change in income on interest-earning assets   (197)   81    (116)
                
Interest-bearing liabilities:               
Interest-bearing checking   (1)   -    (1)
Savings accounts   (2)   2    - 
Certificates of deposit   (45)   (44)   (89)
Money market savings   -    (1)   (1)
Money market deposits   -    -    - 
Total interest-bearing deposits   (48)   (43)   (91)
Federal Home Loan Bank advances   -    4    4 
Short-term borrowings   1    -    1 
Total borrowings   1    4    5 
Total net change in expense on interest-bearing liabilities   (47)   (39)   (86)
                
Net change in net interest income  $(150)  $120   $(30)

 

 51 

 

 

The following table sets forth the average balances and interest rates (costs) on the Company’s assets and liabilities during the periods presented.

 

Consolidated Average Balance Sheet and Interest Rates 
(Dollars in thousands) 
   Nine Months Ended September 30, 
   2015   2014 
   Average           Average         
   Balance   Interest   Yield/Cost   Balance   Interest   Yield/Cost 
                         
Interest-earnings assets:                              
Loans  $188,335   $6,963    4.93%  $179,561   $6,875    5.11%
Investment securities   55,169    1,201    2.90%   59,641    1,331    2.98%
Mortgage-backed securities   33,469    405    1.61%   48,398    763    2.10%
Other   7,129    22    0.42%   2,521    1    0.06%
Total interest-earning assets   284,102    8,591    4.03%   290,121    8,970    4.12%
                               
Non-interest earnings assets   20,427              20,823           
Total assets  $304,529             $310,944           
                               
Interest-bearing liabilities:                              
Interest-bearing checking  $38,740   $38    0.13%  $38,040   $40    0.14%
Savings accounts   39,829    59    0.20%   37,312    61    0.22%
Certificates of deposit   88,618    675    1.02%   104,812    910    1.16%
Money market savings   34,978    75    0.29%   35,666    85    0.32%
Money market deposits   8,175    9    0.15%   8,198    10    0.15%
Total interest-bearing deposits   210,340    856    0.54%   224,028    1,106    0.66%
Federal Home Loan Bank advances   6,562    14    0.29%   3,930    5    0.16%
Short-term borrowings   5,656    4    0.09%   5,540    3    0.08%
Total borrowings   12,218    18    0.20%   9,470    8    0.12%
Total interest-bearing liabilities   222,558    874    0.52%   233,498    1,114    0.64%
                               
Non-interest bearing liabilities   36,088              34,197           
Stockholders' equity   45,883              43,249           
                               
Total liabilities/stockholders' equity  $304,529             $310,944           
                               
Net interest income       $7,717             $7,856      
                               
Interest rate spread (average yield earned minus average rate paid)             3.51%             3.49%
                               
Net interest margin (net interest income divided by average interest-earning assets)             3.62%             3.61%

 

 52 

 

 

The following table sets forth the changes in rate and changes in volume of the Company’s interest earning assets and liabilities for the comparative nine month periods.

 

Analysis of Volume and Rate Changes 
(In thousands) 
Nine Months Ended September 30, 
   2015 Compared to 2014 
   Increase(Decrease) Due to 
   Rate   Volume   Net 
             
Interest-earnings assets:               
Loans  $(241)  $329   $88 
Investment securities   (32)   (98)   (130)
Mortgage-backed securities   (154)   (204)   (358)
Other   16    5    21 
Total net change in income on interest-earning assets   (411)   32    (379)
                
Interest-bearing liabilities:               
Interest-bearing checking   (3)   1    (2)
Savings accounts   (5)   4    (1)
Certificates of deposit   (104)   (131)   (235)
Money market savings   (8)   (2)   (10)
Money market deposits   (1)   -    (1)
Total interest-bearing deposits   (121)   (128)   (249)
Federal Home Loan Bank advances   5    4    9 
Short-term borrowings   -    1    1 
Total borrowings   5    5    10 
Total net change in expense on interest-bearing liabilities   (116)   (123)   (239)
                
Net change in net interest income  $(295)  $155   $(140)

 

 53 

 

 

JACKSONVILLE BANCORP, INC.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company’s policy in recent years has been to reduce its interest rate risk by better matching the maturities of its interest rate sensitive assets and liabilities, selling its long-term fixed-rate residential mortgage loans with terms of 15 years or more to the secondary market, originating adjustable rate loans, and balloon loans with terms ranging from three to five years and originating consumer and commercial business loans, which typically are for a shorter duration and at higher rates of interest than one-to-four family residential loans. Our portfolio of mortgage-backed securities also provides monthly cash flow. The remaining investment portfolio has been structured to better match the maturities and rates of its interest-bearing liabilities. With respect to liabilities, the Company has attempted to increase its savings and transaction deposit accounts, which management believes are more resistant to changes in interest rates than certificate accounts. The Board of Directors appoints the Asset-Liability Management Committee (ALCO), which is responsible for reviewing the Company’s asset and liability policies. The ALCO meets quarterly to review interest rate risk and trends, as well as liquidity and capital ratio requirements.

 

The Company uses a comprehensive asset/liability software package provided by a third-party vendor to perform interest rate sensitivity analysis for all product categories. The primary focus of the Company’s analysis is on the effect of interest rate increases and decreases on net interest income. Management believes that this analysis reflects the potential effects on current earnings of interest rate changes. Call criteria and prepayment assumptions are taken into consideration for investment securities and loans. All of the Company’s interest rate sensitive assets and liabilities are analyzed by product type and repriced based upon current offering rates. The software performs interest rate sensitivity analysis by performing rate shocks of plus or minus 300 basis points in 100 basis point increments.

 

The following table shows projected results at September 30, 2015 and December 31, 2014 of the impact on net interest income from an immediate change in interest rates, as well as the benchmarks established by the ALCO. The results are shown as a dollar and percentage change in net interest income over the next twelve months.

 

   (Dollars in thousands) 
   September 30, 2015   December 31, 2014   ALCO 
Rate Shock:  $ Change   % Change   $ Change   % Change   Benchmark 
 + 300 basis points   (372)   -3.27%   (167)   -1.47%   > (20.00)%
 + 200 basis points   (249)   -2.19%   (116)   -1.02%   > (12.50)%
 + 100 basis points   (105)   -0.92%   (46)   -0.40%   > (12.50)%
  - 100 basis points   (53)   -0.47%   (180)   -1.59%   > (20.00)%

 

The table above indicates that as of September 30, 2015, in the event of a 200 basis points increase in interest rates, we would experience a 2.19% decrease in net interest income. In the event of a 100 basis points decrease in interest rates, we would experience a 0.47% decrease in net interest income.

 

The foregoing computations are based upon numerous assumptions, including relative levels of market interest rates, prepayments, and deposit mix. The computed estimates should not be relied upon as a projection of actual results. Despite the limitations on precision inherent in these computations, management believes that the information provided is reasonably indicative of the effect of changes in interest rate levels on the net earning capacity of the Company’s current mix of interest earning assets and interest bearing liabilities. Management continues to use the results of these computations, along with the results of its computer model projections, in order to maximize current earnings while positioning the Company to minimize the effect of a prolonged shift in interest rates that would adversely affect future results of operations.

 

 54 

 

 

At the present time, the most significant market risk affecting the Company is interest rate risk. Other market risks such as foreign currency exchange risk and commodity price risk do not occur in the normal business of the Company. The Company also is not currently using trading activities or derivative instruments to control interest rate risk.

 

 55 

 

 

JACKSONVILLE BANCORP, INC.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13(a)-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls

 

There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by Rule 13(a)-15(e) that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 56 

 

 

PART II - OTHER INFORMATION

 

Item 1.                  Legal Proceedings

 

At September 30, 2015, the Company is not involved in any pending legal proceedings other than non-material legal proceedings undertaken in the normal course of business.

 

Item 1.A.              Risk Factors

 

There have been no material changes in the Company’s risk factors from those disclosed in its annual report on Form 10-K.

 

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

 

The following table sets forth the issuer purchases of equity securities during the prior three months.

 

  Total
number
of shares
purchased
Average
price paid
per share
Total number of
shares purchased
under publicly
announced plan
Maximum number of
shares that may be
purchased under the
repurchase plan (1)
July 1 – July 31 - - - 23,758
August 1 – August 31 - - - 23,758
September 1 – September 30 - - - 23,758

 

(1)On October 16, 2013, the Company announced the adoption of a stock repurchase program under which the Company can repurchase up to 92,018 shares of its common stock, or approximately 5% of the then current outstanding shares. The program provides for repurchases through open market or private transactions, through block trades, and pursuant to any trading plan adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. The Company has completed the repurchase of 68,260 shares permitted under the program.

 

Item 3.                  Defaults Upon Senior Securities

 

None.

 

Item 4.                  Mine Safety Disclosures

 

None.

 

Item 5.                 Other Information

 

None.

 

 57 

 

 

Item 6.                  Exhibits

 

31.1 - Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)

31.2 - Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)

32.1 - Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101 INS - XBRL Instance Document

101 SCH - XBRL Taxonomy Extension Schema Document

101 CAL - XBRL Taxonomy Calculation Linkbase Document

101 DEF - XBRL Taxonomy Extension Definition Linkbase Document

101 LAB - XBRL Taxonomy Label Linkbase Document

101 PRE - XBRL Taxonomy Presentation Linkbase Document

 

 58 

 

 

SIGNATURES

 

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

 

  JACKSONVILLE BANCORP, INC.
  Registrant
   
Date:  11/05/2015   /s/ Richard A. Foss
  Richard A. Foss
  President and Chief Executive Officer
   
  /s/ Diana S. Tone
  Diana S. Tone
  Chief Financial Officer

 

 59 

 

 

EXHIBITS